Shared
Vision
A N N U A L
R E P O R T
2 0 1 7
ADVANCING THE SCIENCE OF FOOD SECURITY WORLDWIDE
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
Shared Vision .................................................... 4
Management’s Discussion and Analysis of Financial
Condition and Results of Operations................................ 10
Consolidated Balance Sheets.......................................... 17
Consolidated Statements of Income ................................ 18
Consolidated Statements of Comprehensive Income......... 18
Consolidated Statements of Equity .................................. 19
Consolidated Statements of Cash Flows .......................... 20
Notes to Consolidated Financial Statements..................... 21
Reports of Independent Registered
Public Accounting Firms ................................................. 30
Management’s Report on Internal Control
Over Financial Reporting................................................. 31
Comparison of Five Year Cumulative Total Return
and Stock Profile Activity ................................................ 32
Financial Highlights
Amounts in thousands, except per share
Year Ended May 31
Operations:
Total Revenues
Food Safety Sales
Animal Safety Sales
Operating Income
Net Income Attributable to Neogen
Basic Net Income Per Share*
Diluted Net Income Per Share*
Average Diluted Shares Outstanding*
*Restated for 2013 due to stock split
2017
2016
2015
2014
2013
$
361,594
$
321,275
$
283,074
$
247,405
$
171,325
190,269
64,945
43,793
1.16
1.14
38,374
$
$
$
146,421
174,854
56,386
36,564
0.98
0.97
37,875
$
$
$
131,479
151,595
53,118
33,526
0.91
0.90
37,444
$
$
$
116,290
131,115
43,391
28,158
0.77
0.76
37,267
$
$
$
$
$
$
207,528
106,158
101,370
40,706
27,190
0.76
0.75
36,491
Total Revenues
Dollars in thousands
Net Income
Dollars in thousands
Total Assets
Dollars in thousands
$ 400,000
350,000
300,000
250,000
200,000
150,000
100,000
$ 45,000
35,000
25,000
15,000
5,000
$ 600,000
500,000
400,000
300,000
200,000
100,000
2013
2014
2015
2016 2017
2013
2014
2015
2016 2017
2013
2014
2015
2016 2017
In thousands
Year Ended May 31
Financial Strength:
2017
2016
2015
2014
2013
Cash and Marketable Securities
$
143,635
$
107,796
$
114,164
$
76,496
$
85,369
Working Capital
Total Assets
Long-Term Debt
Equity
256,959
528,409
–
219,628
449,940
–
205,739
392,181
–
163,779
345,301
–
150,728
290,558
–
471,757
404,161
350,963
306,300
258,287
Message from
Management
Shared Vision
To Our Stockholders, Employees and Friends:
Thirty five years ago we thought we could see big changes coming to
food production and processing as a growing population would demand
an increased quantity and quality of food, and a worldwide food logistics
system would occur. At the same time we could see greater issues
around safety of food and all the sciences around biotechnology avail-
able to protect food quality and improve animal protein. As the years
ensued our vision became more widely shared. It was shared by pros-
pects who became customers, new scientists who became employees,
and investors that believed the vision would provide high share prices.
The growth of this vision has enabled Neogen to be the only company
offering a true investment play carrying food safety and quality from
back inside the farm gate all the way to the dinner plate. As the market
expanded to embrace issues such as animals raised without antibiotics,
growth of organic foods, food allergen labels, and assurance against
drug residues, Neogen’s vision has continued to propel the company’s
growth. Our last quarter marked the 101st of the past 106 quarters
that Neogen reported revenue increases as compared with the previous
year—a record now spanning over 26 years.
2
Neogen reports record 2017 results
Neogen’s net income for the 2017 fiscal year increased 20% to
$43,793,000, or $1.14 per share compared to the prior year’s
$36,564,000, or $0.97 per share. Revenues for fiscal 2017 increased
13% to $361,594,000 from the prior year’s $321,275,000. This in-
crease was achieved despite adverse top line currency adjustments of
approximately $7.2 million for the year that resulted from the strength
of the U.S. dollar in Neogen’s international market.
Our operating income of almost $65 million in 2017 was 18% of sales
compared to 17.6% a year earlier. Our balance sheet continues to be
solid with nice asset growth; cash generation was strong. Shareholder
equity improved by 17% compared to the beginning of the year.
Neogen’s market cap grew by 28% from the year’s start to the end.
Neogen grows internationally through expansion
and acquisitions
Because of Neogen’s shared vision with its customers and worldwide
food markets, we have been able to identify market niches and products
within our mission that fit our organizational capabilities. For example,
the vision identified the previously unfulfilled area of biosecurity for the
animal protein market back inside the farm gate. Cleaners, disinfec-
tants, insecticides, and rodenticides protect
animals and help produce higher quality milk,
eggs, and meat.
We were already producing these products
for U.S. locations and shipping many of
them internationally. However, we got a step
closer to the market in December when we
acquired Quat-Chem, a well-established
agriculture cleaner and disinfectant company
located in central England. Later in the year
we acquired Rogama, an insecticide and
rodenticide company located in Brazil. These
acquisitions augmented our worldwide
biosecurity strategy, and
furthered our
international presence and growth. Both
are bolted to strong management teams in
Neogen Europe and Neogen do Brasil.
A few years back, our shared vision with
the industry identified genomics as a key
technology. Our Lincoln, Nebraska facility
is the largest commercial animal genomics
testing laboratory in the world. However, in
April 2016 we expanded our reach through
the acquisition of Deoxi, the leading animal
genomics testing lab in Brazil. Also during
the 2016 year we completed our genomic
testing lab at our Neogen Europe operations
in Ayr, Scotland to help service the EU market.
Just as this annual report was going to print
we announced the acquisition of the largest
animal genomics laboratory in Australia. This
gives us a worldwide string of four laborato-
ries to aid in optimum animal selection and
provide new cutting edge tools for the detec-
tion of harmful food pathogens.
In total, Neogen’s international sales for the
2017 year were $129.3 million or 35.8%
of total revenues—up about 20% from the
previous year.
Equity
Dollars in thousands
$ 500,000
400,000
300,000
200,000
100,000
2013
2014
2015
2016 2017
Operating Income
Dollars in thousands
$ 65,000
55,000
45,000
35,000
25,000
2013
2014
2015
Neogen grows through research and development
breakthroughs
Our team of over 75 scientists working in several of our locations pro-
duced numerous new products and services for both the food and ani-
mal safety market. Our genomics laboratory created a breakthrough in
food safety testing. Our sequencing services for the food industry are
enabling food companies to accurately identify all bacteria that might
be in a sample. In the early part of the year we introduced genomic
serotyping for pathogens to help food producers and processors better
detect problems and isolate their sources.
A shared vision with customers around the world has always helped us
in the quest for better diagnostic test products. We have made great
strides in making these tests faster, easier to use and more afford-
able for the industry. One example is our new test for Listeria that is
faster than anything in the industry and gives almost instant results.
This allows producers to take action to prevent
contaminated product from leaving the plant, and
also quickly identifies where contamination might
exist. In the past these tests required two or more
days and did not enable rapid decisions.
Neogen strengthens top management
Neogen’s shared vision with the worldwide mar-
kets, its customers and its own employees pro-
vides endless opportunities for strategic growth.
Effective management and execution of these
ideas are critical in maintaining our strong growth.
In July we announced John Adent as the compa-
ny’s new Chief Executive Officer. Before joining
Neogen, Adent served as CEO of a $3.3 billion
animal health distributor and one of Neogen’s
largest customers. Adent began his career with
that company when it was much smaller and saw
its revenues more than quadruple under his lead-
ership over the past decade.
James Herbert, Neogen’s CEO and only employee
on June 1, 1982, has now passed on part of his
role to Adent but will continue to serve in the ca-
pacity of Executive Chairman. It is not surprising
that Adent and Herbert’s visions for the future are
similar since they both spent time in production
agriculture, food processing, and strong sales
and marketing management. Under Herbert’s di-
rection for the past 35 years, Neogen has grown
to more than 1,500 employees with business in
114 countries and a market capitalization of over
$2.5 billion.
Neogen’s vision is bigger and broader
2016 2017
Though Neogen’s vision of 35 years ago has be-
come bigger and broader than we might have
imagined, our growth strategy remains the same.
As the markets for our products continue to
grow we continue to find ways to capture bigger
shares of those growing markets. Our seasoned
research and development teams continue to find opportunities for new
products or improvements to our current product lines. Though we have
done 50 acquisitions throughout our history, we are still finding syner-
gistic and affordable acquisitions that bolt on to our current operations
and utilize our outstanding management teams. We continue to improve
our position in important countries around the world to keep the inter-
national growth going.
As we begin our 2018 fiscal year we once again thank our stockhold-
ers, employees, customers, and friends for sharing our vision. We are
still having fun managing this growth, and certainly have the best and
strongest organization in our history.
James L. Herbert
Executive Chairman
John E. Adent
CEO
All successful relationships rely upon a shared vision.
In business, these relationships include a company’s
relationships with its investors, customers, employees, and
local communities.
Since its founding in 1982, Neogen’s success has been
driven by its ability to share its vision with all those who
have had, and will continue to have, successful relationships
with the company.
Neogen was founded when senior officials at Michigan
State University approached Ted Doan, a former CEO at
Dow Chemical, who was building a venture capital fund for
investment in mid-America. The officials shared a vision with
Mr. Doan of using the new biotechnologies that were being
practiced at Michigan State to create an entrepreneurial
company.
Mr. Doan thought the vision for the new company could
work and approached businessman James Herbert to
become Neogen’s first CEO, and drive the company forward.
Mr. Herbert, too, shared the vision of the new company, and
in June 1982 Neogen was in business.
Since its founding, Neogen has successfully shared its vision
with numerous investors who have provided the company
the capital required to turn innovative ideas into marketable
products. Neogen’s vision has also attracted and retained a
solid core of researchers and business professionals who
have created, and continue to efficiently operate a modern,
innovative, global biotechnology company.
Critically, Neogen has been able to develop successful
relationships with its customers in the various Food Safety
and Animal Safety markets it serves. Neogen’s ability to
develop these relationships has been due to the company’s
ability to create a shared vision with its customers — a
vision of using Neogen’s products, services and expertise to
produce the best and safest products possible.
4
Shared
Vision
Neogen’s animal
genomics business
shares the vision of
livestock producers
to choose only their
best animals.
Using genomics to produce the best, healthiest animals
In 2017, livestock ranchers and farmers around the world operate
with very little margin for error. Choosing the best animals for breed-
ing programs is critical to producing a profit from modern livestock
operations. Choosing well can result in animal populations that are
safer, healthier and more environmentally and financially efficient to
manage.
Neogen’s animal genomics business, including GeneSeek and Igenity,
shares the vision of livestock producers to choose only their best
animals. Neogen’s state-of-the-art genomics and bioinformatics,
plus its work with leading scientists, drive the company’s world
leadership as it has become the world’s largest animal genomics
testing lab.
For example from a small piece of tissue or hair, Neogen can provide
a cattle producer with test results that can predict that animal’s per-
formance in the herd on such traits as the ability to gain weight, mus-
cling and tenderness of its offspring, pregnancy rate, calving ease,
and susceptibility to disease. Neogen provides veterinary genomic
solutions for cattle, both beef and dairy, swine, sheep and poultry, as
well as companion animals, such as dogs, cats, and horses.
Neogen’s expanding, and fully integrated, animal genomics laborato-
ries in United States, Scotland, Australia, and Brazil provide livestock
producers and companion animal breeders with easy access to world-
class genomics solutions and expertise, wherever they may be.
Using biosecurity solutions to stop the spread of
disease…
Operators of even the best livestock operations know that all their
biosecurity efforts can be threatened by something as seemingly
uncontrollable as the flyover of migratory birds or whatever a truck’s
tires may have rolled over on its way to the farm. Once a dead-
ly pathogen, such as avian flu or porcine epidemic diarrhea virus,
somehow finds its way onto a farm, its consequences can devastate
a livestock operation.
5
Neogen has a shared vision with the
poultry producer who is seeking to
produce a premium product through
the use of superior biosecurity
products and practices.
Neogen’s biosecurity experts literally share a vision with livestock
operators of all possible routes of disease transmission within a
livestock operation, including birds, vehicles, equipment, rodents,
insects, and farm employees and visitors. Using Neogen’s compre-
hensive array of biosecurity solutions, its experts can help stop the
spread of a devastating disease before it can start.
The company’s biosecurity products include rodenticides that con-
tain a variety of potent formulations to target a range of rodents;
insecticides developed to effectively control flying and crawling in-
sects of nearly endless variation; and cleaners and disinfectants with
formulations that range from those necessary to clean and disinfect
the most challenging of agricultural environments, to those needed
to disinfect water supplies.
In Neogen’s 2017 fiscal year, the company solidified its foundation
as an important global developer and supplier of biosecurity exper-
tise and products with the acquisitions of England-based Quat-Chem
and Brazil-based Rogama. These companies’ product development
activities and manufacturing capabilities provide a complementary
fit to Neogen’s expanding biosecurity business.
…and support the poultry industry’s raised without
antibiotics initiative
Nowhere is the need to follow stringent biosecurity measures more
critical than with the suppliers of major food restaurants and retailers
who are increasingly demanding poultry products that are certified
to be from chickens that were raised without antibiotics. Just one
biosecurity breach can force poultry producers to treat their flocks
with antibiotics, and sell their birds at a reduced cost to an alternative
buyer.
Neogen has a shared vision with the poultry producer who is seeking
to produce a premium product through the use of superior biosecu-
rity products and practices.
Providing effective and cost-efficient animal care
Veterinarians and other animal care providers depend upon quality
instruments to provide effective, affordable care to their animals.
Since the company acquired Ideal Instruments in 1985, Neogen has
stood with animal care providers to develop and offer products they
can afford — and that actually work in fields and barns. Neogen
now offers veterinary instruments, pharmaceuticals, supplements,
wound care, vaccines, topicals, and diagnostic products to help en-
sure the health of the animals. Healthy animals require less medica-
tion and are more resistant to disease.
Neogen’s products and services also include safety solutions for
performance and companion animals. The company manufactures
and markets pharmaceuticals, vaccines, and diagnostic products
for these animals. Neogen’s equine health line includes EqStim®, a
proven, safe immunostimulant, which boosts the immune response
of horses to help combat respiratory ailments.
The company’s BotVax® B vaccine has protect-
ed millions of horses against Clostridium botuli-
num type B. Neogen also produces a number of
products to treat or protect cats and dogs.
Using quick and accurate tests to
protect and detect…
The safety and quality of the global food sup-
ply is challenged by contaminants on every
step of its journey from inside the farm gate to
the dinner plate. Contamination can occur in a
farmer’s field, such as sprouts being contami-
nated with E. coli or corn with a mycotoxin, or
anywhere in the processing, distribution or retail
process, such as with Listeria or a food allergen
in a production environment. Regardless of how
the contamination occurs, food companies and
consumers face potentially severe consequenc-
es should the contaminated product ever reach
a dinner plate.
Whether food products originate from a ranch,
farm, field, orchard, sea, or other location,
Neogen’s testing products and services contin-
ue to help enhance their quantity, quality and
safety throughout their processing — whether
that process is minimal or extensive.
Neogen’s shared vision with the food industry
has produced a comprehensive line of simple
and quick food diagnostic tests to ensure the
continuing safety and quality of food products
throughout processing and distribution.
…food allergens
While the well-being of most consumers would
be unaffected by the presence of an uninten-
tional, unlabeled food allergen residue in a
product, millions of food allergic people world-
wide face dire consequences should they acci-
dentally ingest the food allergen.
Since 1998, Neogen has worked with the food
industry and researchers at the University
of Nebraska’s Food Allergen Research and
Resource Program (FARRP) to develop quick
and accurate tests to detect unintentional
food allergens in food products and facilities.
Neogen’s rapid tests for food allergens have
set the world-wide standard for simple and
quick detection of these potentially dangerous
residues.
Neogen’s shared
vision with the
food industry
has produced a
comprehensive
line of simple
and quick food
diagnostic tests
to ensure the
continuing safety
and quality of
food products.
7
Neogen’s screening and quantitative food allergen tests can detect
residues of peanuts, egg, gluten, milk, shellfish, soy, almond, tree
nut and other residues. The company’s simplest food allergen tests
screen samples and detect the presence of allergens in the parts per
million in mere minutes.
…mycotoxins
Mycotoxins are naturally occurring toxins produced by molds or fun-
gi in grain while in the field or during storage. Typically triggered by
weather extremes, these toxins can cause severe adverse effects on
people and livestock who consume them. One mycotoxin, aflatox-
in, is considered the world’s most potent organic carcinogen and is
strictly regulated in most developed countries in the world.
In 1985, Neogen developed its first rapid test for aflatoxin, and has
since worked with global grain experts to develop the quickest, and
most accurate and useful tests available. Neogen’s comprehensive
line of tests for mycotoxins in grains and animal feeds helps protect
the health of poultry, swine, and dairy cattle — and the quality and
safety of the food products for human consumption derived from
numerous commodity grains.
The company offers tests for six mycotoxins in several different for-
mats, including incredibly easy tests that function like home preg-
nancy stick tests, and can deliver definitive, easy-to-interpret results
in as few as two minutes. The almost immediate results mean that
grain elevator staff, and quality control personnel in the food and
feed industries, can obtain results in minutes, and reject contaminat-
ed ingredients before they can even enter the food chain.
…foodborne pathogens
Because of the severe consequences they can cause, protecting
consumers from the presence of foodborne pathogens, including
Salmonella, Listeria and E. coli, is a critical mission for the food
industry.
Neogen has worked with the food industry for more than 20 years
honing pathogen test technology and procedures to produce supe-
rior pathogen tests. The company’s ANSR® test system is the quick-
est and easiest testing method to definitively detect pathogen DNA
in food and environmental samples — providing results in as few
as 20 minutes. Neogen’s simple Reveal® line of pathogen tests are
easy to use and interpret.
In July 2017, Neogen launched the groundbreaking Listeria Right
Now™ test system, which detects Listeria in environmental samples
in under 60 minutes — without the need to enrich samples. The
advanced technology in Listeria Right Now truly changes everything
about testing the environment for Listeria. Contamination of Listeria
in the environment can now be determined, and quickly cleaned as
necessary, before food production begins and the quality and safety
of a food product is compromised.
In June 2017, Neogen launched a new NeoSeek™ next generation
sequencing service for the food industry, which will enable food
8
companies to accurately identify all bacteria in a sample with a sin-
gle genomic test. The new service utilizes a novel application of 16s
metagenomics to determine all bacteria in a sample, without intro-
ducing biases from culture media, and without the need to generate
a bacterial isolate for each possible microbe in a sample.
…spoilage organisms
While products contaminated with spoilage organisms, such as
yeast and mold, do not carry consequences of the severity of patho-
gen contamination, spoilage organisms can drastically shorten prod-
uct shelf-lives, and produce a variety of unwanted effects in food
products (e.g., an “off” taste or an unsightly film).
Neogen’s vision of food safety
starting back inside the farm gate
and going all the way to the dinner
plate is now shared worldwide.
Neogen’s Soleris® and BioLumix® technology is 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 few as 48 hours, compared to five days
for conventional methods.
…sanitation issues
The food industry’s work to produce the safest, highest quality prod-
ucts can be undone by contamination of the products by residue that
remains after an incomplete cleaning and disinfection effort.
Neogen’s shared vision with the food industry has led to the compa-
ny’s AccuPoint® Advanced ATP (adenosine triphosphate) Sanitation
Verification System. The system is a valuable tool throughout the
food industry, including at food service providers, caterers and gro-
cery delis, and manufacturers of soft drinks and bottled water, to
ensure effective sanitation programs.
In May 2017, Neogen launched its NeoNet™ cloud-based software
platform, an innovative software system that allows food safety
directors immediate access to their facilities’ AccuPoint Advanced
sanitation test results — no matter the number, or where in the
world their facilities may be. Especially for organizations that have
multiple, far-flung facilities, the challenge has been to efficiently col-
lect and interpret that data company-wide in a timely fashion. Neo-
Net greatly simplifies that process by easily presenting the collected
data graphically without having to conduct extensive data analysis.
…drug residues
Health officials around the world have increasingly highlighted the
many adverse effects that drug residues in meat products can have
on human health, while reducing the ongoing effectiveness of ex-
isting antibiotics, and consumers are increasingly demanding meat
products that are proven to be drug-free. But, livestock producers
often have no other alternative than to use antibiotics to quickly and
effectively treat disease (e.g., using a beta-lactam antibiotic to treat
mastitis in dairy cattle).
Neogen shares the vision of health officials, consumers and livestock
producers for meat and milk products to be proven to be drug-free
before they reach the dinner plate. Neogen’s drug residue tests pro-
vide the food industry with verification tools for raised without anti-
biotics (RWA), certified responsible antibiotic use, or other drug-free
programs. The company also offers a full suite of testing products
for beta-lactam antibiotic testing in milk to ensure supplies are safe
for human consumption.
Since its founding in 1982, Neogen’s vision
has gotten bigger, brighter and broader,
but it’s the same as it was in the beginning:
to provide solutions for food and animal
safety. That vision has been successfully
shared by thousands of employees,
investors and customers.
Neogen has completed 46 acquisitions and counting — each of
which fits its vision and has shared in its growth. The products,
employees and market opportunities that these acquisitions brought
have continued to help drive the company’s growth.
Neogen’s vision of food safety starting back inside the farm gate and
going all the way to the dinner plate is now shared worldwide — and
it is clear that it is the right vision to continue to provide safe, high
quality food for the world’s rapidly growing population.
9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information
and forward-looking statements. Neogen Corporation management does not provide forecasts of future financial performance. While management is optimistic
about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing,
the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements.
There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food
production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other
risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to
differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Report on Form 10-K was first filed with the Securities and
Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update
forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that man-
agement 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, invento-
ries 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 determinable,
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 approximately 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 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 uncol-
lectible, that amount is charged against 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 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. Amortiz-
able intangible assets are amortized on either an accelerated or a straight-line basis, generally 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 by per-
forming 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 impairment when-
ever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated
separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the 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.
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation ex-
pense 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 most 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 number provided by the model applied and
the inputs used. Further information on the Company’s equity compensation plans, including inputs used to determine the 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 determined
based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carry forwards and are measured using the
enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred
income tax assets and liabilities during the year.
The Company’s wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Neogen Bio-Scientific
Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Acumedia do Brasil, Deoxi Biotecnologia Ltda, and Rogama Industria
e Comercio, Ltda; Neogen owns 90% of Neogen Latinoamérica. Based on historical experience, as well as the Company’s future plans, earnings from these
subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’s domestic operations have
historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, the Company evaluates the current
business environment and whether any new events or other external changes might require a re-evaluation of the decision to indefinitely re-invest foreign
earnings. At May 31, 2017, unremitted earnings of the foreign subsidiaries were $35,281,000.
RESULTS OF OPERATIONS
Executive Overview
Total consolidated revenue for Neogen Corporation in fiscal 2017 was $361.6 million, an increase of 13% compared to revenue of $321.3 million in fiscal
2016. Net income attributable to Neogen rose 20% to $43.8 million, or $1.14 per fully diluted share, compared to $36.6 million, or $0.97 per fully diluted
share, in fiscal 2016. Cash flow from operations for fiscal 2017 was $60.3 million compared to $35.3 million in fiscal 2016.
The Company’s Food Safety segment revenues were $171.3 million in fiscal 2017, an increase of 17%, and Animal Safety segment revenues were $190.3
million, an increase of 9%, each compared to the prior fiscal year. Recent acquisitions of Lab M (August 2015), Virbac (December 2015), Deoxi (April 2016),
Preserve (May 2016), Quat-Chem (December 2016) and Rogama (December 2016) contributed $27.7 million of revenue in fiscal 2017; overall organic sales
growth was 4%.
International sales were $129.3 million in fiscal 2017, or 35.8% of total revenues, compared to $107.7 million, or 33.5% of total revenues, in the prior year.
The increase in international sales as a percentage of total sales was due to recent international acquisitions and strength in the pre-existing international oper-
ations. For the year, revenues at Neogen Europe increased 13% (32% increase in local currency) due primarily to strong sales of deoxynivalenol (DON) test kits
resulting from outbreaks of contaminated corn crops in western Europe, and increases in genomics revenues resulting from strong demand for these services
in Europe and the addition of an in-house genomics lab in Ayr. Neogen do Brasil revenues increased 65% for the year (46% increase in local currency), with
sales of forensic and diagnostic test kits leading the growth. Revenues at Neogen Latinoamérica declined by 7% (6% increase in local currency) due to adverse
currency translations and the termination of a distribution agreement for certain of its cleaners and disinfectants in the 4th quarter of fiscal 2017. Neogen
China revenues rose 24% (32% increase in local currency) and Neogen India sales increased 67% (70% increase in local currency), each off of small bases.
Service revenue was $55.1 million in fiscal 2017, an increase of $7.4 million, or 15%, compared to fiscal 2016. The increase was primarily due to higher
genomics revenues due to continued market penetration in U.S. beef and dairy cattle markets, strong demand in Europe and additional genomics capacity
resulting from laboratory facilities constructed at our Scotland-based operation, and incremental ongoing business with a large customer in the poultry industry.
Revenues were also enhanced, to a lesser extent, by the April 2016 acquisition of Deoxi Laboratories, an agricultural genomics lab in Brazil.
Gross margin was 47.6% in both fiscal years 2017 and 2016. In the current year, acquisitions of businesses with gross margins which are lower than the
Company’s historical average, and the adverse margin impact resulting from currency translation, were entirely offset by favorable product mix shifts on exist-
ing products and higher genomics margins, resulting in gross margins that were flat compared to the prior year.
Sales and marketing expenses were $62.4 million, an increase of $4.8 million, or 8%, compared to the prior fiscal year. Increases in this category were pri-
marily the result of increased personnel related costs such as salaries, commissions and travel; shipping and royalty expenses also rose due to the increased
volume. General and administrative expenses were $34.2 million, an increase of $5.0 million, or 17%. Incremental ongoing operating expenses from the most
recent four acquisitions, which continued to operate from their existing locations, and related amortization expense accounted for $2.6 million of the increase.
Other increases in this category resulted from investments in information technology personnel and infrastructure and increased salary and benefit expenses
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
across the organization. Research and development expenses increased 5% to $10.4 million, primarily due to increased personnel related expenses and new
product development activities, partially offset by lower contracted outside services.
Operating margin in fiscal 2017 was 18.0% compared to 17.6% in the prior fiscal year. The improvement in operating margin resulted from the revenue
increases, flat gross margins, and growth in operating expenses which was less than the rate of the revenue increase.
Other income of $1.7 million in fiscal 2017 included $838,000 of net interest income, a $660,000 gain recorded as the result of the settlement of a licensing
agreement, $171,000 of royalty income, and a loss of $40,000 from currency translations. Fiscal 2016 other expense of $873,000 included a $1,338,000
loss from currency translations, partially offset by interest income of $322,000 and royalty income of $217,000.
The effective income tax rate for fiscal 2017 was 34.0%, compared to 34.2% in the prior fiscal year.
REVENUES
(Dollars in thousands)
Food Safety:
Natural Toxins, Allergens & Drug Residues
Bacterial & General Sanitation
Dehydrated Culture Media & Other
Rodenticides, Insecticides & Disinfectants
Genomics Services
Animal Safety:
Life Sciences
Veterinary Instruments & Disposables
Animal Care & Other
Rodenticides, Insecticides & Disinfectants
Genomics Services
Total Revenue
May 31, 2017
$
70,926
34,706
40,658
13,620
11,415
171,325
9,704
41,693
29,495
69,825
39,552
190,269
361,594
$
Increase/
(Decrease)
Year Ended
May 31, 2016
Increase/
(Decrease)
May 31, 2015
12%
2%
9%
223%
47%
17%
24%
(1%)
(19%)
31%
13%
9%
13%
$
$
63,269
33,899
37,285
4,213
7,755
146,421
7,815
42,028
36,494
53,490
35,027
174,854
321,275
4%
15%
27%
(8%)
4%
11%
(10%)
1%
32%
17%
27%
15%
13%
$
$
60,561
29,492
29,423
4,568
7,435
131,479
8,715
41,740
27,606
45,857
27,677
151,595
283,074
Year Ended May 31, 2017 Compared to Year Ended May 31, 2016
The Company’s Food Safety segment revenues in fiscal 2017 were $171.3 million compared to $146.4 million in fiscal 2016, an increase of 17%. Organic
growth for the segment was 9%, with the acquisitions of Lab M (August 2015), Deoxi (April 2016), Quat-Chem (December 2016) and Rogama (December
2016) contributing the remainder of the growth. Adverse currency conditions, resulting from the strength of the U.S. dollar, reduced overall growth and organic
growth within the segment for the comparative period. In a neutral currency environment, overall Food Safety growth for the year was 22% and organic growth
was 14%.
Natural Toxins, Allergens & Drug Residues sales increased by 12% to $70.9 million in fiscal 2017. Within this category, sales of natural toxin test kits increased
19%, led by sales of test kits and related equipment to detect the mycotoxin deoxynivalenol (DON), due to outbreaks of DON in corn crops in the midwest
U.S., Canada and western Europe. Allergen test kit revenues rose 16% for the year, as increases in product recalls relating to allergenic contamination of food
continued to expand the market. The largest increases in this product line were test kits to detect milk, gliadin, tree nut, hazelnut and peanut contamination.
Partially offsetting these increases, sales of test kits to detect drug residues were down 4%, due primarily to market losses in Europe caused by delays in the
launch of new products, and, to a lesser extent, currency translations, as this product is sold in euros, which declined 2% against the dollar in fiscal 2017. A
number of new and improved drug residue detection products are expected to be available for sale in the first half of fiscal 2018.
Bacterial & General Sanitation revenues rose 2%, compared to the prior fiscal year, led by a 4% increase in sales of the Company’s line of automated equip-
ment and consumable vials to detect spoilage microorganisms (e.g. yeast and mold), and an 11% increase in sales of Salmonella test kits for the year as
the Company gained market share with its ANSR product line. These increases were partially offset by lower sales of a distributed product that the Company
discontinued in fiscal 2017. The Company’s line of AccuPoint readers and samplers to monitor environmental sanitation rose 4% for the year, with samplers
increasing 7%, while equipment was flat compared to fiscal 2016. Dehydrated Culture Media & Other sales increased 9% in fiscal 2017, aided in part by the
acquisition of Lab M; organic sales in this category increased 6%. Within this category, there was a significant increase in sales of forensic test kits through
the Company’s Brazilian subsidiary. Demand for these kits from commercial labs located in Brazil has increased dramatically due to a new requirement for
drug testing of commercial truck drivers. Partially offsetting this increase was an 11% decrease in sales of the Company’s Acumedia line of dehydrated culture
media sold into traditional domestic markets; the first half of fiscal 2016 had strong sales resulting from a research project, which did not recur.
Rodenticides, Insecticides & Disinfectants sales into the Company’s Food Safety segment increased 223%, almost entirely due to the acquisitions of Rogama
(Brazil), which reports through Neogen do Brasil, and Quat-Chem (U.K.), which reports through Neogen Europe; each was purchased in December 2016. Ex-
cluding these acquisitions, growth in this category was 3%, primarily from rodenticide and disinfectant sales into Mexico and Central America by the Company’s
Mexican subsidiary. Genomics revenues into Food Safety increased 47%, primarily due to strong demand of genomics testing in Europe and expanded capabil-
ities at the Company’s operation in Ayr, Scotland to better serve the growing European market; the Deoxi acquisition in April 2016 also contributed to the growth.
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenues for the Company’s Animal Safety segment were $190.3 million in fiscal 2017, an increase of 9% compared to prior year revenues of $174.9 million.
The revenue growth resulted from the acquisitions of Virbac (December 2015) and Preserve (May 2016). In the first quarter of fiscal 2017, the Company lost
the ability to sell its popular canine thyroid replacement product after the FDA approved a new drug application for a competitor, which gave the competitor
exclusive marketing rights to the product. The Company will be unable to sell this product, which had sales of $6.2 million in fiscal 2016, in the U.S. until similar
regulatory approval is granted; this approval is currently expected to occur in fiscal 2019. Additionally, in January 2017, the Company’s agreement to distribute
certain cleaners and disinfectants was canceled, resulting in the loss of $1.3 million of sales in the 4th quarter of fiscal 2017. Excluding these products, this
segment had overall organic growth of 5% for the year. Currency translations had minimal effect on revenues in this segment.
Life Sciences sales increased 24% in fiscal 2017, compared to the prior year. This growth was primarily due to increased volume to U.S. commercial labs to
meet new requirements for drug testing of commercial truck drivers in Brazil. Veterinary Instruments & Disposables revenues decreased 1%, due to lower sales
of disposable syringes, which had increased sales in the prior year due to a competitor’s backorder situation, and marking products. Partially offsetting this
were gains in the sales of the Company’s proprietary detectable needles and durable speed needles, with both gains due to strong demand from customers.
Animal Care & Other sales decreased 19% due to the loss of the ability to sell the Company’s popular thyroid replacement product, mentioned above. Partially
offsetting this was an increase in revenues for vitamin injectable products due to increased market share and price increases.
Rodenticides, Insecticides & Disinfectants revenues increased 31% for the current fiscal year, due to the acquisitions of Virbac (December 2015) and Preserve
(May 2016); organic sales in this category were flat. The Preserve acquisition added $15.5 million of revenue in fiscal 2017, primarily to the domestic swine,
poultry, dairy and food processing markets. Rodenticide sales increased 1% with strong sales in the custom solutions, retail and distribution markets offset by
lower sales in the northwest U.S. after the prior year rodent outbreak subsided. Cleaners and disinfectant sales were 8% lower on an organic basis, due to the
early termination of a distribution agreement for certain cleaners and disinfectants in the second half of the fiscal year; it is expected that there will be some
offset of these lost revenues in fiscal 2018 by substitution of similar products from the planned transition to the Preserve product line.
Genomics Services revenues reported within the Animal Safety segment increased 13% in fiscal 2017, compared to fiscal 2016. The increase was due pri-
marily to increased market share in the beef and dairy markets from new product offerings and focused sales efforts in these markets; also contributing to the
increase was expanded business with a large customer in the poultry market.
Year Ended May 31, 2016 Compared to Year Ended May 31, 2015
The Company’s Food Safety segment revenues were $146.4 million in fiscal 2016, an 11% increase compared to the prior year. The increase, predominantly
volume related, from organic sales was 6%, with revenues from the BioLumix (October 2014), Lab M (August 2015) and Deoxi (April 2016) acquisitions con-
tributing the remainder of the growth. Sales of Natural Toxins, Allergens & Drug Residues increased 4% in fiscal year 2016 compared to fiscal 2015. Natural
toxin sales were flat with a 10% increase in aflatoxin sales offset by a 3% decrease in DON sales, due to outbreaks in the prior year which were not repeated
in fiscal 2016. Allergen sales increased 20%, as increased consumer awareness continued to grow demand for these products, while sales of drug residue
test kits decreased 5%, caused by currency conversions, as the majority of these sales are invoiced in euros.
Bacterial & General Sanitation revenues increased 15% in fiscal 2016, aided by $1.9 million in sales from the October 2014 BioLumix acquisition. Excluding
BioLumix sales, the organic increase in these products was 9% over the prior year. The AccuPoint sanitation monitoring product line recorded an increase
of 18% due to the continued successful introduction of an improved, next generation product line. Sales of the Soleris and BioLumix product lines, which
detect spoilage organisms, increased 23% for the year (5% organic growth), with revenue increases in both equipment and disposable vials. Pathogen sales
increased 4% in fiscal 2016 as compared to the prior year, primarily due to an increase in sales of Listeria test kits to the commercial lab market.
Dehydrated Culture Media & Other sales increased 27% in fiscal 2016. This category includes $4.8 million of Lab M revenues, a business which was acquired
in August 2015; excluding the impact of these revenues, the organic increase was 10%. Sales of Acumedia products into the food safety market increased
10% while sales into traditional domestic media markets increased 16%. Rodenticides, Insecticides & Disinfectants revenues decreased 8% in U.S. dollars,
due to the strength of the dollar, poor economic conditions in a number of international markets and order timing from large distributors. Genomics service
revenues in the Company’s international operations increased 4%.
The Company’s Animal Safety segment revenues were $174.9 million in fiscal 2016, a 15% increase, predominantly volume related, over fiscal 2015. Life
Sciences sales decreased 10% in fiscal 2016 after a strong 16% increase in 2015. Sales of forensic kits to commercial labs declined as new testing require-
ments in Brazil for commercial drivers, originally anticipated to go into effect in late fiscal 2015, were delayed until the 4th quarter of fiscal 2016. Veterinary
Instruments & Disposables increased 1%, as market share gains in disposable syringes, up 25%, and animal marking products, up 14%, were almost entirely
offset by an 8% decrease in detectable needles, due to large orders in the prior year which did not recur, and an 11% decline in hoof and leg products, due
to lower sales of these products to customers in the retail market.
Animal Care & Other product sales rose 32% in fiscal 2016, with the increase primarily the result of a new distribution agreement with a large manufacturer
and supplier of dairy equipment, and strong sales of the Company’s line of thyroid replacement therapy for companion animals. Also contributing to growth in
the Animal Care product category were increased sales of wound care products, as a key active ingredient which had been on backorder for much of fiscal
2015, became available in fiscal 2016, and veterinary antibiotics, due to a competitor exiting the business. During the fourth quarter of fiscal 2016, the Com-
pany was notified that a competitor had been granted approval on a new drug application for a competitive thyroid replacement product, effectively giving them
exclusive rights to sell the product. As a result, the Company is unable to sell its product into the domestic market effective July 2016, until it is granted similar
regulatory approval; this approval is expected in fiscal 2019. Sales of this product in fiscal 2016 were $6.2 million.
The Company’s line of Rodenticides, Insecticides & Disinfectants rose 17% in fiscal 2016, compared to the prior year, led by a 58% increase in sales of roden-
ticides. This increase was in large part the result of an expansion of the Company’s contract manufacturing business with a large marketer of rodenticides to
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
the commercial and residential markets. Additionally, the Company successfully introduced a number of new products into the retail agricultural market, and
also benefitted from the continued vole outbreak in the northwestern U.S. Cleaners and disinfectant revenues declined 9% compared to fiscal 2015, primarily
due to lower sales to international customers as the strength of the U.S. dollar made the Company’s products less competitive internationally; poor economic
conditions in a number of the Company’s key international markets also adversely impacted sales. The Company’s line of insecticides rose 3% in fiscal 2016,
as incremental revenues from new product launches were almost entirely offset by lower sales of existing products due to timing of orders and backorders
caused by a vendor issue.
Genomics Services revenues increased 27% in fiscal 2016 compared to the same period in the prior year. Incremental business with a large poultry producer,
earned in fiscal 2015, was the primary driver of the growth. The Company also continued to gain market share in fiscal 2016 with its proprietary chip technol-
ogy, primarily to cattle and pig producers, and grew sample volume particularly with its largest customers. In addition, the canine testing service business grew
17% as the Company successfully commercialized new service offerings, developed in the prior fiscal year.
Cost of Revenues
(Dollars in thousands)
Cost of Revenues
2017
189,626
$
Increase
13%
2016
168,211
$
Increase
17%
2015
143,389
$
Cost of revenues increased 13% in fiscal 2017 and 17% in fiscal 2016 in comparison with the prior years. This compares with revenue increases of 13% in
both fiscal years. Expressed as a percentage of revenues, cost of revenues was 52.4%, 52.4% and 50.7% in fiscal years 2017, 2016 and 2015, respectively.
In fiscal 2017, improvements in Animal Safety gross margins, resulting from lower raw material costs in the genomics business and increased higher margin
forensic kit sales into the commercial laboratory market, and strong growth in sales of higher margin mycotoxin and allergen test kits in the Food Safety
segment, overcame the lower gross margins resulting from the Quat-Chem and Rogama acquisitions, and the continued strength of the U.S. dollar, which
negatively impacted both top line revenue and gross margins. For fiscal 2016, the strength of the U.S. dollar, which adversely impacted revenue with no cor-
responding decline in product cost, had the largest impact on the decline in gross margins compared to fiscal 2015. In addition, shifts in product mix within
the Food Safety segment, in part the result of acquisitions completed in fiscal years 2015 and 2016, towards products which have lower gross margins than
the segment average, and a shift in the proportion of Animal Safety revenues to the overall revenue of the Company, resulted in the decline in gross margins.
Food Safety gross margins were 55.3%, 56.7% and 59.7% in fiscal years 2017, 2016 and 2015, respectively. During fiscal 2017, the Company purchased
the Quat-Chem and Rogama businesses, which generated gross margins lower than historical averages for this segment. These acquisitions, and the full
year impact of the prior year acquisitions of Lab M and Deoxi resulted in a 140 basis point decline in Food Safety gross margins. In addition, gross margins
were also negatively impacted by the strength of the U.S. dollar relative to the international currencies in which the Company operates, primarily in Europe and
Mexico, where the pound and peso declined in value against the U.S. dollar by 14% and 12%, respectively. These international operations report in through the
Food Safety segment. Partially offsetting these negative impacts to gross margins were favorable shifts in product mix towards higher margin diagnostic test
kits for mycotoxins and allergens. In fiscal 2016, lower gross margins resulted primarily from the strength in the U.S. dollar, which resulted in lower revenues
and gross margins when international sales were converted from local currencies to the dollar. All currencies the Company operates in weakened against the
dollar in fiscal 2016, pressuring margins in this segment. Additionally, revenues from the acquisition of Lab M, which were at lower average gross margins
than the rest of the segment, standard cost adjustments at Neogen Latinoamerica, and other product mix shifts within the segment, negatively impacted gross
margins in Food Safety.
Animal Safety gross margins were 40.6%, 40.1% and 40.4% in fiscal years 2017, 2016 and 2015, respectively. For fiscal 2017, improvements in raw material
costs and favorable product mix in the genomics business and strong sales of forensic kits to commercial labs in the U.S. more than offset the loss of high
margin revenues from the thyroid replacement product for companion animals which the Company was required to stop selling at the end of fiscal 2016. For
fiscal 2016, improved gross margins from the 58% increase in sales of rodenticides, which have higher than average gross margins within the segment, were
somewhat offset by lower gross margins on revenues from the dairy distribution business initiated in August 2015, lower gross margins at GeneSeek due to
the significant increase in poultry business, which has lower than average gross margins within the genomics product line, and other product mix shifts within
the segment.
Operating Expenses
(Dollars in thousands)
Sales and Marketing
General and Administrative
Research and Development
Total Operating Expense
$
2017
62,424
34,214
10,385
$
107,023
Increase
8%
17%
5%
11%
$
2016
57,599
29,189
9,890
96,678
Increase
11%
16%
3%
12%
$
2015
51,757
25,233
9,577
86,567
Overall operating expenses increased by 11% in fiscal 2017 and 12% in fiscal 2016, each compared to the prior year. These increases compare to revenue
increases of 13% in each comparative period. Sales and marketing expenses increased by 8% in fiscal 2017 and 11% in fiscal 2016, each compared with
the prior year. As a percentage of sales, sales and marketing expense was 17.3%, 17.9% and 18.3% in fiscal years 2017, 2016 and 2015, respectively. For
fiscal 2017, salaries and commissions within the sales and marketing function, which is also comprised of technical service, customer service and product
management personnel, rose 10%, primarily due to increased staffing and the increase in revenue, while travel expenses rose 7%. Other significant expense
increases were domestic shipping expense, up 11% and in line with the revenue increase, and royalty expense, which rose 35% due to increased sales in
fiscal 2017 and a one-time credit in the prior year resulting from a retroactive rate reduction on a royalty agreement. Of the $4.8 million increase in expenses,
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
approximately $2.2 million resulted from the Company’s recent acquisitions. For fiscal 2016, salaries, commissions and travel expenses rose 13%, primarily
on increases in staffing and higher revenue. Other significant expense increases were sales promotions and allowances, based on higher levels of sales to
the Company’s largest distributors, shipping expense, up 13% and in line with the revenue increase, and shows and exhibits, which rose 22% on increased
Company participation in trade shows.
General and administrative expenses rose 17% in fiscal 2017 compared to fiscal 2016 and by 16% in fiscal 2016 compared to fiscal 2015. The increases
in fiscal years 2017 and 2016, respectively, are primarily the result of higher salaries, due to additional headcount as well as compensation increases. Higher
legal and professional fees and additional amortization of intangible assets, due to the Company’s recent acquisitions, also contributed to the increase in each
comparative period.
Research and development expenses increased 5% in fiscal 2017 and 3% in fiscal 2016, each compared to the prior year. Higher salaries expense in each
fiscal year, resulting from increased headcount, was partially offset by lower levels of consulting and other outside services. As a percentage of revenue, these
expenses were 2.9% in fiscal year 2017, 3.1% in fiscal year 2016 and 3.4% in fiscal year 2015; the Company expects to spend 3% to 4% of total revenue
on research and development annually.
Operating Income
(Dollars in thousands)
Operating Income
2017
64,945
$
Increase
15%
2016
56,386
$
Increase
6%
2015
53,118
$
The Company’s operating income increased by 15% in fiscal 2017 compared to fiscal 2016, and by 6% in fiscal 2016 compared to fiscal 2015. Expressed as
a percentage of revenues, it was 18.0%, 17.6% and 18.8% in fiscal years 2017, 2016 and 2015, respectively.
The 15% increase in operating income for 2017 was due to the 13% increase in revenues and operating expense increases which were less than the revenue
growth rate, combined with gross margins which, at 47.6% of sales, were the same as the prior year.
The 6% increase in operating income in fiscal 2016 was due primarily to the 13% increase in revenues and lower rates of increases in operating expenses,
partially offset by the 170 basis point reduction in gross margin expressed as a percentage of revenues. The Company controlled its expense growth while
incurring additional amortization and other expenses relating to its recent acquisitions.
Other Income (Expense)
(Dollars in thousands)
Other Income (Expense)
2017
1,728
$
Increase
n/a
2016
(873)
$
Increase
n/a
2015
(1,042)
$
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 consideration liabilities relating to acquisitions, and other miscellaneous items.
Other Income of $1,728,000 in fiscal 2017 primarily consisted of net interest income of $838,000, a $660,000 gain recorded as the result of the set-
tlement of a licensing agreement, $171,000 of royalty income, a net gain of $18,000 resulting from contingent consideration payments made during the
year for prior year acquisitions, and a loss of $40,000 on foreign currency translations.
In fiscal 2016, Other Expense primarily consisted of losses on foreign currency translations of $1,338,000, the result of all foreign currencies in which we
operate devaluing against the U.S. dollar. In addition, the Company recognized interest income of $322,000, and royalty income of $217,000.
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 consisted 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 12 months of the Company’s ownership.
Provision for Income Taxes
(Dollars in thousands)
Provision for Income Taxes
2017
22,700
$
Increase
20%
2016
18,975
$
Increase
3%
2015
18,500
$
The effective tax rate was 34.0% of pretax income in fiscal 2017, 34.2% in fiscal 2016 and 35.5% in fiscal 2015. Differences in the tax rate from the 35%
U.S. statutory corporate rate were primarily due to increases from international taxes and the provision for state taxes, offset by tax deductions related
to domestic manufacturing and credits related to research and development activities. The fiscal 2017 effective tax rate of 34.0% includes benefit from
research and development credits, the Company’s domestic manufacturing deduction and reversal of a valuation allowance against net operating losses
in Brazil, which the Company is utilizing. The Company is currently under audit by the Internal Revenue Service for fiscal years 2014–2016.
The effective tax rate declined in fiscal 2016 due primarily to amendments filed for the fiscal 2012, 2013 and 2014 federal income tax returns and an
adjustment for fiscal 2015 relating to credits claimed for research and development activities. The Company engaged a third party in fiscal 2016 to perform
a study of its research and development activities, and credits originally claimed thereon, for these prior annual periods. Based on the results of the study,
the Company revised its calculations for its research and development activities for those periods, resulting in higher tax credits.
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Income and 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
2017
$ 43,793
1.16
1.14
Increase
20%
2016
$ 36,564
0.98
0.97
Increase
9%
2015
$ 33,526
0.91
0.90
Net income increased by 20% in fiscal 2017 and increased by 9% in fiscal 2016, each compared to the prior year. As a percentage of revenue, net income
was 12.1% in fiscal 2017, 11.4% in fiscal 2016 and 11.8% in fiscal 2015.
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, 2017, the Company had $77.6 million in cash and cash equivalents, $66.1 million in marketable securities and working capital of $257.0 million.
For the year ended May 31, 2017, cash generated from operating activities was $60.3 million, compared to $35.3 million generated in fiscal 2016; proceeds
from stock option exercises provided an additional $21.1 million of cash. For the same period, additions to property and equipment and business acquisitions
used cash of $14.6 million and $34.0 million, respectively. The Company has a financing agreement with a bank providing for an unsecured revolving line of
credit of $15.0 million, which expires on September 30, 2019. There were no advances against this line of credit during fiscal years 2017, 2016 and 2015,
and no balance outstanding at May 31, 2017 and 2016. The Company does have an outstanding borrowing of $1.2 million at its pesticide business in Brazil,
which originated prior to the Company’s purchase of the business. The terms of the borrowing allow for repayment of the principal only upon export shipment
of the associated inventory, which the Company believes will occur in the 2018 fiscal year.
Accounts receivable at May 31, 2017 were $68.6 million, compared to $67.6 million at May 31, 2016, primarily due to the increase in revenues. Days sales
outstanding, a measurement of the time it takes to collect receivables, decreased from 61 days at May 31, 2016 to 60 days at May 31, 2017. All customer
accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Inventory balances were $73.1 million at May 31, 2017, an increase of $8.7 million, or 14%, compared to $64.4 million at May 31, 2016. Approximately $2.2
million of the increase was from the acquisitions of Quat-Chem and Rogama, completed during fiscal 2017. The Company also increased inventory levels at a
number of its other operations to support the revenue growth and to ensure adequate safety stocks to minimize backorders. The Company continues to identify
and rationalize redundant product offerings resulting from recent acquisitions.
Neogen has been consistently profitable and has generated strong cash flow from operations during fiscal years 2015, 2016 and 2017. However, the Com-
pany’s cash on hand and current borrowing capacity 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 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 (1)
$
Total
1,195
1,150
48,831
$ 51,176
Less than
one year
1,195
$
591
43,402
$ 45,188
1–3 years
–
$
381
5,429
5,810
$
3–5 years
–
$
155
–
155
$
(1) Unconditional purchase obligations are primarily purchase orders for future inventory and capital equipment purchases.
New Accounting Pronouncements
See discussion of any New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.
16
$
More than
5 years
–
23
–
23
$
Neogen Corporation and Subsidiaries: Consolidated Balance Sheets
Assets (In thousands)
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance of $2,000 and $1,500 at May 31, 2017 and 2016, respectively
Inventories
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 intangible assets, net of accumulated amortization of
$20,846 and $17,277 at May 31, 2017 and 2016, respectively
Other non-current assets, net of accumulated amortization of
$9,931 and $7,530 at May 31, 2017 and 2016, respectively
Total Other Assets
Liabilities and Equity (In thousands, except share and per share)
Current Liabilities
Accounts payable
Accruals
Accrued compensation
Income taxes
Other accruals
Total Current Liabilities
Deferred Income Taxes
Other Non-Current 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; 38,199,367 and
37,567,689 shares issued and outstanding at May 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Neogen Corporation and Subsidiaries Stockholders’ Equity
Non-controlling interest
Total Equity
May 31
2017
2016
$
77,567
66,068
68,576
73,144
7,606
292,961
3,094
37,917
64,867
3,333
2,290
111,501
49,753
61,748
104,759
14,323
35,983
18,635
173,700
$
55,257
52,539
67,652
64,371
8,407
248,226
2,659
33,417
56,470
3,068
1,057
96,671
41,988
54,683
88,506
9,170
30,909
18,446
147,031
$
528,409
$
449,940
May 31
2017
2016
$
16,244
$
15,800
5,002
936
13,820
36,002
17,048
3,602
56,652
4,986
–
7,812
28,598
14,758
2,423
45,779
–
–
6,112
176,779
(7,203)
295,926
471,614
143
471,757
528,409
$
6,011
150,000
(3,946)
252,133
404,198
(37)
404,161
449,940
$
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
Total Operating Expenses
Operating Income
Other Income (Expense)
Interest income
Royalty income
Change in purchase consideration
Other, net
Total Other Income (Expense)
Income Before Income Taxes
Provision for Income Taxes
Net Income
Net (Income) Loss Attributable to Non-controlling Interest
Net Income Attributable to Neogen
Net Income Attributable to Neogen per Share
Basic
Diluted
Year ended May 31
2017
2016
2015
$
306,512
$
273,570
$
243,909
55,082
361,594
156,568
33,058
189,626
171,968
62,424
34,214
10,385
107,023
64,945
838
171
18
701
1,728
66,673
22,700
43,973
(180)
43,793
1.16
1.14
$
$
$
47,705
321,275
137,766
30,445
168,211
153,064
57,599
29,189
9,890
96,678
56,386
322
217
–
(1,412)
(873)
55,513
18,975
36,538
26
36,564
0.98
0.97
$
$
$
39,165
283,074
120,377
23,012
143,389
139,685
51,757
25,233
9,577
86,567
53,118
228
150
(297)
(1,123)
(1,042)
52,076
18,500
33,576
(50)
33,526
0.91
0.90
$
$
$
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries: Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss), net of tax: currency translation adjustments
Comprehensive income
Comprehensive (income) loss attributable to non-controlling interest
Year ended May 31
2017
2016
2015
$
43,973
$
36,538
$
33,576
(3,257)
40,716
(180)
(1,504)
35,034
26
(2,813)
30,763
(50)
Comprehensive income attributable to Neogen
$
40,536
$
35,060
$
30,713
See accompanying notes to consolidated financial statements.
18
Neogen Corporation and Subsidiaries: Consolidated Statements of Equity
(In thousands, except shares)
Shares
Amount
Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Non-controlling
Interest
Total
Equity
Balance, May 31, 2014
36,732,313
$
5,877
$ 118,070
$
371
$
182,043
$
(61)
$ 306,300
Exercise of options, share based
compensation and $2,475
income tax benefit
Issuance of shares under
employee stock purchase plan
Net income (loss) for 2015
Other comprehensive income (loss)
376,364
61
13,115
19,592
3
721
13,176
724
33,526
50
33,576
(2,813)
(2,813)
Balance, May 31, 2015
37,128,269
5,941
131,906
(2,442)
215,569
$
(11)
350,963
Exercise of options, share based
compensation and $2,945
income tax benefit
Issuance of shares under
employee stock purchase plan
Net income (loss) for 2016
Other comprehensive income (loss)
421,143
18,277
67
17,311
3
783
36,564
(26)
(1,504)
17,378
786
36,538
(1,504)
Balance, May 31, 2016
37,567,689
6,011
150,000
(3,946)
252,133
$
(37)
404,161
Exercise of options, share based
compensation and $3,922
income tax benefit
Issuance of shares under
employee stock purchase plan
Purchase of minority interest
Net income (loss) for 2017
Other comprehensive income (loss)
612,963
98
26,621
18,715
3
922
(764)
26,719
925
(764)
43,793
180
43,973
(3,257)
(3,257)
Balance, May 31, 2017
38,199,367
$
6,112
$ 176,779
$
(7,203)
$ 295,926
$
143
$ 471,757
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 assets
Accounts payable
Accruals and other changes
Net Cash From Operating Activities
Cash Flows Used In Investing Activities
Purchases of property, equipment and other non-current intangible 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
Net Cash From Financing Activities
Effect of Exchange Rate on Cash
Net Increase (Decrease) In Cash and Cash Equivalents
Cash And Cash Equivalents, Beginning of Year
Cash And Cash Equivalents, End of Year
Supplementary Cash Flow Information
Income taxes paid, net of refunds
Year ended May 31
2017
2016
2015
$
43,973
$
36,538
$
33,576
14,691
(292)
5,261
(3,922)
5,035
(6,970)
812
(1,691)
3,377
60,274
(14,578)
149,226
(162,755)
(34,029)
(62,136)
21,148
3,922
25,070
(898)
22,310
55,257
77,567
13,865
$
$
12,181
1,906
5,468
(2,945)
(6,002)
(9,427)
(3,836)
704
744
35,331
(14,222)
147,189
(151,625)
(42,491)
(61,149)
12,363
2,945
15,308
(294)
(10,804)
66,061
55,257
13,413
$
$
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
66,061
10,454
$
$
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
as of May 31, 2017, with the exception of Neogen Latinoamérica. Neogen Latinoamérica was 90% owned as of May 31, 2017 and 2016. The Company
made an additional capital contribution on December 31, 2013 which increased its ownership interest in Neogen Latinoamérica from 60% to 90%. Neogen do
Brasil was 100% and 90% owned as of May 31, 2017 and 2016, respectively. The Company purchased all shares owned by the two minority interest owners
on February 28, 2017, which increased its ownership interest in Neogen do Brasil to 100%. Non-controlling interest represents the non-controlling owner’s
proportionate share in the equity of these subsidiaries; the non-controlling owner’s proportionate share in the income or losses of the subsidiaries is subtracted
from, or added to, Company net income to calculate the net income attributable to Neogen Corporation.
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and as-
sumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Significant estimates impacting the accompanying consolidated financial statements include the allowance for uncollectible accounts receivable, inventory
valuation and intangible assets.
Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are
excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign cur-
rency 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 infor-
mation. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that
amount is charged against the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable at May 31, 2017 or 2016,
respectively. The activity in the allowance for doubtful accounts was as follows:
(In thousands)
Beginning Balance
Provision
Recoveries
Write-offs
Ending Balance
2017
1,500
645
25
(170)
2,000
$
$
Year ended May 31
2016
1,300
305
90
(195)
1,500
$
$
2015
1,200
337
92
(329)
1,300
$
$
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and
accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the 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
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 $77,567,000 and $55,257,000 at May 31, 2017 and 2016, 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 by foreign subsidiaries was $8,132,000 and
$5,320,000 at May 31, 2017 and 2016, respectively.
21
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at May 31, 2017, consisting of short-term domestic certificates of deposit of
$25,355,000 and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $40,713,000. Total outstanding marketable
securities at May 31, 2017 were $66,068,000; there were $52,539,000 in marketable securities outstanding at May 31, 2016. 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:
(In thousands)
Raw materials
Work-in-process
Finished goods
Year ended May 31
2017
33,190
4,831
35,123
73,144
$
$
2016
29,501
4,498
30,372
64,371
$
$
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 $2,000,000 and $1,550,000 at May 31, 2017 and 2016, respectively.
Property and Equipment
Property and equipment is stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense. Depre-
ciation 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 $8,783,000, $7,452,000 and $6,318,000
in fiscal years 2017, 2016 and 2015, 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 identi-
fiable 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, generally 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
by performing 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 11 and 12 years, respectively, at
May 31, 2017 and May 31, 2016.
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 impairment when-
ever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated
separately identifiable undiscounted cash flows over the remaining useful life of the asset are less than the carrying value of the asset. In such an event, fair
value is determined using discounted cash flows and if lower than the carrying value, impairment is recognized through a charge to operations.
Reclassifications
Certain amounts in the fiscal 2016 and 2015 financial statements have been reclassified to conform to the fiscal 2017 presentation.
See the Company’s discussion on Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, below for
information on reclassifications related to the adoption of this standard as of May 31, 2017.
Stock Options
At May 31, 2017, 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 2017, 2016 and 2015, estimated on the date of grant using the
Black-Scholes option pricing model, was $15.86, $13.11 and $11.91, respectively. The fair value of stock options granted was estimated using the following
weighted-average assumptions:
Risk-free interest rate
Expected dividend yield
Expected stock volatility
Expected option life
22
2017
1.2%
0.0%
35.2%
4.0 years
Year ended May 31
2016
1.2%
0.0%
33.3%
4.0 years
2015
1.2%
0.0%
36.2%
4.0 years
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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 determinable,
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 approximately 3% of reported net revenue
in fiscal years 2017, 2016 and 2015.
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 $10,185,000, $9,734,000 and $8,648,000 in fiscal years 2017, 2016 and
2015, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carry forwards and are measured using the
enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred
income tax assets and liabilities during the year.
The Company’s wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Neogen Bio-Scientific
Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Acumedia do Brasil, Deoxi Biotecnologia Ltda, and Rogama Industria
e Comercio, Ltda; Neogen owns 90% of Neogen Latinoamérica. Based on historical experience, as well as the Company’s future plans, earnings from these
subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’s domestic operations have
historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, the Company evaluates the current
business environment and whether any new events or other external changes might require a re-evaluation of the decision to indefinitely re-invest foreign
earnings. At May 31, 2017, unremitted earnings of the foreign subsidiaries were $35,281,000.
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.
Advertising Costs
Advertising costs are expensed as incurred and totaled $1,643,000, $1,463,000 and $1,371,000 in fiscal years 2017, 2016 and 2015, 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 are based
on the weighted average number of common shares and dilutive potential common shares outstanding. The Company’s dilutive potential common shares
outstanding during the years result entirely from dilutive stock options. The following table presents the net income per share calculations:
(In thousands, except per share)
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
2017
43,793
37,908
466
38,374
1.16
1.14
$
$
$
Year ended May 31
2016
36,564
37,402
473
37,875
0.98
0.97
$
$
$
2015
33,526
36,953
491
37,444
0.91
0.90
$
$
$
At May 31, 2017, 2016 and 2015, the market price of the common stock exceeded the option exercise price for all outstanding options; therefore, no shares
were excluded from the diluted net income per share computation.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers. The new standard outlines a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including indus-
try-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
23
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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. In April 2016,
the FASB issued Accounting Standards Update No. 2016-10— Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain
aspects of the guidance set forth in ASU 2014-09 related to identifying performance obligations and licensing. The guidance is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2017. The guidance permits two methods of adoption; a full retrospective method to each
prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial
application. The Company has formed a team to evaluate the impact of the adoption of this standard on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11—Inventory: Simplifying the Measurement of Inventory. The update requires inventory not measured using
either the last in, first out (LIFO) or the retail inventory methods to be measured at the lower of cost and net realizable value. Net realizable value is the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The update is effective for fiscal
years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The Company will adopt
this standard on June 1, 2017 and does not expect the adoption will have a material impact on its consolidated financial condition and results of operations.
In September 2015, the FASB issued ASU 2015-16—Simplifying the Accounting for Measurement—Period Adjustments. Changes to the accounting for mea-
surement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of
the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the
acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a
business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments,
and instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for public
companies for fiscal years beginning after December 15, 2015. The Company has adopted this standard; the adoption has not had a material impact on its
consolidated financial condition and results of operations.
The FASB issued ASU No. 2015-17—Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes as part of its Simplification Initiative. The
amendments eliminate the guidance in Topic 740, Income Taxes, that required an entity to separate deferred tax assets and liabilities between current and
non-current amounts in a classified balance sheet. Rather, deferred taxes will be presented as non-current under the new standard. This ASU is effective for
annual periods, including interim periods within those annual periods, beginning after December 15, 2016 for public companies. Early adoption is permitted.
The Company retrospectively adopted ASU 2015-17 as of May 31, 2017. On the May 31, 2016 balance sheet, the Company reclassified $1,775,000 of current
deferred tax assets to Deferred Income Taxes, within Non-current Liabilities. Total assets and total liabilities decreased by $1,775,000.
In February 2016, the FASB issued ASU No. 2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial
position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The
recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S.
GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospec-
tive application is permitted with certain practical expedients. Early adoption is permitted. The Company is in the process of evaluating its lessee and lessor
arrangements to determine the impact of this amendment on its consolidated financial condition and results of operations. This evaluation includes a review of
revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease arrangements at most of the Company’s facilities.
In March 2016, the FASB issued ASU No. 2016-09 — Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition
of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance
also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the
guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. This ASU is effective for annual periods, including
interim periods within those annual periods, beginning after December 15, 2016 with early adoption permitted. The Company will adopt this standard effective
June 1, 2017 and currently believes that tax benefits related to share-based payments will result in a lower effective tax rate in fiscal 2018.
In June 2016, the FASB issued ASU No. 2016-13 — Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit
losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity debt securities.
Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an
allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company
expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted
as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company does not believe the adoption of this guidance will have an
impact on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15— Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task
Force). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash
flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption during an interim period. The Company has not yet adopted this update and is currently evaluating the impact of ASU No. 2016-15 on its consolidated
financial statements.
24
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
In January 2017, the FASB issued ASU 2017-04 — Intangibles - Goodwill and Other (Topic 350). ASU 2017-04 simplifies the subsequent measurement of
goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying
amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An
entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment
should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has
adopted this amendment; the adoption has not had an impact on its consolidated financial statements.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Management has completed the annual impairment analysis of goodwill and intangible assets with indefinite lives using a quantitative assessment as of the
first day of the fourth quarter of fiscal years 2017, 2016 and 2015, 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, 2015
Goodwill acquired and/or adjusted
Balance, May 31, 2016
Goodwill acquired and/or adjusted (1)
Balance, May 31, 2017
(1) Represents final purchase price allocation adjustment
Food Safety
18,806
8,083
26,889
19,031
45,920
$
$
$
Animal Safety
51,313
$
10,304
61,617
(2,778)
58,839
$
$
Total
70,119
18,387
88,506
16,253
104,759
$
$
$
At May 31, 2017, non-amortizable intangible assets included licenses of $569,000, trademarks of $12,530,000 and other intangibles of $1,224,000. At
May 31, 2016, non-amortizable intangible assets included licenses of $569,000, trademarks of $7,377,000 and other intangibles of $1,224,000.
Amortizable intangible assets consisted of the following and are included in customer-based intangible and other non-current assets within the consolidated
balance sheets:
(In thousands)
Licenses
Covenants not to compete
Patents
Customer-based intangibles
Other product and service-related intangibles
Balance, May 31, 2017
Licenses
Covenants not to compete
Patents
Customer-based intangibles
Other product and service-related intangibles
Balance, May 31, 2016
$
$
$
Gross
Carrying
Amount
5,989
1,208
9,304
56,829
12,065
85,395
5,189
491
8,040
48,186
12,256
$
74,162
Less
Accumulated
Amortization
2,011
$
309
4,601
20,846
3,010
30,777
$
$
$
1,782
193
3,631
17,277
1,924
24,807
$
$
$
Net
Carrying
Amount
3,978
899
4,703
35,983
9,055
54,618
3,407
298
4,409
30,909
10,332
$
49,355
Amortization expense for intangibles totaled $5,908,000, $4,730,000 and $4,331,000 in fiscal years 2017, 2016, and 2015, respectively. The estimated
amortization expense for each of the five succeeding fiscal years is as follows: $5,951,000 in 2018, $5,558,000 in 2019, $5,253,000 in 2020, $4,977,000
in 2021 and $4,646,000 in 2022. The amortizable intangible assets useful lives are 2 to 20 years for licenses, 5 to 13 years for covenants not to compete, 5 to
25 years for patents, 5 to 20 years for customer-based intangibles and 2 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-based 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.
Fiscal 2015
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
25
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
contaminants located in Ann Arbor, Michigan. Consideration for the purchase was $4,514,000 in cash. The final purchase price allocation, based upon the
fair value of these assets and liabilities determined using the income approach, included accounts receivable of $499,000, other receivable of $178,000,
inventory of $421,000, prepaid assets of $48,000, property and equipment of $159,000, current liabilities of $155,000, non-current liabilities of $780,000,
intangible assets of $2,090,000 (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 final purchase price allocation, based upon the fair value of these assets and liabilities determined
using the income approach, included inventory of $525,000, property and equipment of $64,000, intangible assets of $422,000 (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 has been integrated into
the Company’s subsidiary in China and reports within the Food Safety segment.
Fiscal 2016
On June 1, 2015, the Company acquired the assets of Sterling Test House, a commercial food testing laboratory based in India. Consideration for the purchase
was $1,118,000 in cash and approximately $102,000 of a contingent consideration liability, due in installments on the first two anniversary dates, based on
an excess sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, in-
cluded accounts receivable of $43,000, inventory of $14,000, property and equipment of $141,000, contingent consideration accrual of $102,000, intangible
assets of $345,000 (with an estimated life of 5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value mea-
surements. This business continues to operate in its current location and reports within the Food Safety segment. In July 2016, the Company paid the former
owner $70,000 for contingent consideration based on the achievement of sales targets, and reduced the recorded liability by a corresponding amount. In May
2016, the Company revised the remaining contingent consideration accrual to Other Income because sales targets for the applicable periods were not achieved.
On August 26, 2015, the Company acquired all of the stock of Lab M Holdings, a developer, manufacturer and supplier of microbiological culture media and
diagnostic systems located in the United Kingdom. Consideration for the purchase was $12,436,000 in cash. The final purchase price allocation, based upon
the fair value of these assets and liabilities determined using the income approach, included cash of $285,000, accounts receivable of $975,000, inventory
of $1,169,000, property and equipment of $3,337,000, other current assets of $309,000, current liabilities of $948,000, non-current deferred tax liability of
$784,000, intangible assets of $3,611,000 (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 continues to operate in its current location and reports within the Food Safety segment.
On December 22, 2015, the Company acquired the rodenticide assets of Virbac Corporation, the North American affiliate of the France-based Virbac group, a
global animal health company. The acquired assets include a rodenticide active ingredient that complements Neogen’s existing active ingredients, and more
than 40 regulatory approvals for a variety of formulations in the United States, Canada and Mexico. The acquired assets also include a large retail and OEM
customer base. Consideration for the purchase was $3,525,000 in cash and up to $300,000 of contingent consideration. The final purchase price allocation,
based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $317,000, property and equipment of
$60,000, current liabilities of $300,000, intangible assets of $1,759,000 (with an estimated life of 5-15 years), non-amortizable trademarks of $200,000 and
the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. The products are manufactured at the Company’s
production facility in Randolph, Wisconsin, and report within the Animal Safety segment. In fiscal 2016, the Company paid the former owner $300,000 of
contingent consideration based on the achievement of specific objectives, and reduced the recorded liability by a corresponding amount.
On April 26, 2016, the Company acquired the stock of Deoxi Biotecnologia Ltda., an animal genomics laboratory located in Aracatuba, Brazil. This acquisition
is intended to help accelerate the growth of Neogen’s animal genomics services in Brazil. Consideration for the purchase was $1,549,000 in cash and up to
$2,552,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The final purchase price alloca-
tion, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $132,000, inventory of
$89,000, other current assets of $9,000, property and equipment of $232,000, current liabilities of $266,000, contingent consideration accrual of $453,000,
non-current deferred tax liability of $184,000, non-amortizable trademarks of $193,000, intangible assets of $350,000 (with an estimated life of 5-10 years)
and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its cur-
rent location and is managed by Neogen do Brasil, reporting within the Food Safety segment. In June 2017, the Company paid the former owners $393,000
in contingent consideration based on the achievement of sales targets, and charged $14,000 to Other Income; $60,000 remains accrued for contingent
consideration at the end of the second year.
On May 1, 2016, the Company acquired the stock of Preserve International and its sister company, Tetradyne LLC, manufacturers and marketers of cleaners,
disinfectants and associated products to the swine, poultry, food processing and dairy markets. Preserve and Tetradyne have manufacturing locations in
Memphis, Tennessee and Turlock, California. Consideration for the purchase was $24,245,000 in cash. The final purchase price allocation, based upon the
fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,629,000, inventory of $1,964,000, other
current assets of $269,000, land, property and equipment of $1,625,000, current liabilities of $987,000, non-current liabilities of $660,000, intangible assets
of $11,950,000 (with an estimated life of 5-15 years), non-amortizable trademarks of $2,600,000, and the remainder to goodwill (partially deductible for tax
purposes). These values are Level 3 fair value measurements. This business continues to operate in its current locations and reports within the Animal Safety
segment.
26
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Fiscal 2017
On December 1, 2016, the Company acquired the stock of Quat-Chem Ltd., a chemical company that manufactures biosecurity products, based in Rochdale,
England. Consideration for the purchase was $21,606,000 in cash and up to $3,778,000 of contingent consideration, due at the end of each of the first two
years, based on an excess net sales formula. The preliminary purchase price allocation included accounts receivable of $4,684,000, inventory of $1,243,000,
land, property and equipment of $2,715,000, accounts payable of $2,197,000, deferred tax liability of $1,133,000, contingent consideration accrual of
$1,105,000, other current liabilities of $604,000, non-amortizable intangible assets of $1,637,000, intangible assets of $5,682,000 (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 continues to
operate in its current location and is managed by Neogen Europe, reporting within the Food Safety segment.
On December 27, 2016, the Company acquired the stock of Rogama Industria e Comercio, Ltda., a company that develops and manufactures rodenticides
and insecticides, based near Sao Paulo, Brazil. Consideration for the purchase was $12,423,000 in cash and up to $2,069,000 of contingent consideration,
due at the end of each of the first two years, based on an excess net sales formula. The preliminary purchase price allocation included accounts receivable of
$1,863,000, inventory of $1,026,000, property and equipment of $1,840,000, current liabilities of $2,177,000, contingent consideration accrual of $430,000,
non-current deferred tax liability of $1,307,000, non-amortizable intangible assets of $591,000, intangible assets of $3,252,000 (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 continues to operate
in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment.
4. LONG-TERM DEBT
The Company has a financing agreement with a bank providing for an unsecured revolving line of credit, which was amended on November 30, 2016 to
increase the line from $12,000,000 to $15,000,000, and extend the maturity from September 1, 2017 to September 30, 2019. There were no advances
against the line of credit during fiscal years 2016 and 2017; there was no balance outstanding at May 31, 2017. Interest on any borrowings is at LIBOR plus
100 basis points (rate under the terms of the agreement was 2.04% at May 31, 2017). 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, 2017.
5. EQUITY COMPENSATION PLANS
Qualified and non-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the Company under the terms
of the Company’s stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant.
Remaining shares available for grant under stock option plans were 1,894,000, 2,457,000 and 306,000 at May 31, 2017, 2016 and 2015, respectively.
Options vest ratably over three and five year periods and the contractual terms are generally five or ten years.
(Options in thousands)
Outstanding at May 31, 2014 (577 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2015 (639 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2016 (656 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2017 (496 exercisable)
The following is a summary of stock options outstanding at May 31, 2017:
Options
1,869
536
(380)
(37)
1,988
549
(427)
(29)
2,081
621
(620)
(58)
2,024
$
Weighted-Average
Exercise Price
25.69
39.79
16.69
33.55
31.04
46.98
23.47
38.57
36.71
54.24
30.42
42.72
43.84
$
Weighted-Average
Grant Date Fair Value
7.62
$
11.91
5.17
9.45
9.20
13.11
7.15
11.14
10.63
15.86
9.03
12.22
12.68
$
(Options in thousands)
$
Range of
Exercise price
11.02–36.26
36.27–40.87
40.88–49.68
49.69–54.55
54.56–65.71
Options Outstanding
Average Contractual
Life (in years)
1.8
2.8
4.1
4.7
7.7
3.5
$
Weighted-Average
Exercise Price
31.22
39.57
46.52
53.94
58.74
43.84
Options Exercisable
Number
268
113
115
–
–
496
$
Weighted Average
Exercise Price
29.16
39.54
45.12
–
–
35.23
Number
491
382
536
576
39
2,024
The weighted average exercise price of shares that were exercisable at May 31, 2017 and 2016 was $35.23 and $29.69, respectively.
27
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Compensation expense related to share-based awards was $5,261,000, $5,468,000 and $4,450,000 in fiscal years 2017, 2016 and 2015, respectively.
Remaining compensation cost to be expensed in future periods for non-vested options was $10,999,000 at May 31, 2017, with a weighted average expense
recognition period of 3.3 years.
The aggregate intrinsic value of options outstanding and options exercisable was $39,388,000 and $13,929,000, respectively, at May 31, 2017, $26,344,000
and $12,912,000 respectively, at May 31, 2016 and $31,204,000 and $14,201,000 respectively, at May 31, 2015. The aggregate intrinsic value of options
exercised during the year was $18,067,000 in fiscal 2017, $12,980,000 in fiscal 2016 and $10,690,000 in fiscal 2015.
Common stock totaling 8,725 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 employ-
ees 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;
the discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10% of compensation. Shares purchased
by employees were 18,715, 18,277 and 19,592 in fiscal years 2017, 2016 and 2015, respectively.
6. INCOME TAXES
Income before income taxes by source consists of the following amounts:
(In thousands)
U.S.
Foreign
The provision for income taxes consisted of the following:
(In thousands)
Current:
U.S. Taxes
Foreign
Deferred
2017
55,171
11,502
66,673
2017
20,259
2,514
(73)
22,700
$
$
$
$
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as follows:
(In thousands)
Tax at U.S. statutory rate
Section 199 domestic production deduction
Foreign rate differential
Subpart F income
Tax credits and other
Provisions for state income taxes, net of federal benefit
Amended U.S. Federal tax returns, FY12, FY13 & FY14
2017
23,336
(1,057)
(1,247)
996
(300)
972
–
22,700
$
$
Year ended May 31
2016
50,662
4,851
55,513
2016
14,630
1,756
2,589
18,975
2016
19,429
(1,143)
(699)
1,049
337
779
(777)
18,975
$
$
$
$
$
$
2015
45,156
6,920
52,076
2015
15,269
1,364
1,867
18,500
2015
18,227
(1,067)
(949)
1,396
39
854
–
18,500
$
$
$
$
$
$
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax liabilities and assets are as follows:
(In thousands)
Deferred income tax liabilities
Indefinite and long-lived assets
Prepaid expenses
Brazil valuation allowance
Deferred income tax assets
Stock options
Inventories and accounts receivable
Tax loss carryforwards
Accrued expenses and other
Net deferred income tax liabilities
Year ended May 31
2017
$
(23,177)
$
(640)
–
(23,817)
2,604
2,603
436
1,126
6,769
(17,048)
$
$
2016
(19,296)
(824)
(542)
(20,662)
2,786
2,076
813
229
5,904
(14,758)
The Company had no accrual for unrecognized tax benefits at both May 31, 2017 and 2016. Should the accrual of any interest or penalties relative to
unrecognized tax benefits be necessary, such accruals will be reflected within income tax accounts. The Company is under audit by the Internal Revenue
Service for tax years 2014–2016.
28
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs
when such costs are determined to be probable and estimable. The Company expenses annual costs of remediation which have ranged from $38,000 to
$57,000 per year over the past five years. The Company’s estimated liability for these costs is $916,000 at both May 31, 2017 and 2016, measured on an
undiscounted basis over an estimated period of 15 years; $54,000 of the liability is recorded within current liabilities and the remainder is recorded within other
non-current 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, recorded in sales and marketing, under the terms of these agreements was $2,659,000, $1,969,000 and $2,189,000 for fiscal years 2017,
2016 and 2015, 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: 2018—$625,000, 2019—$659,000, 2020—$666,000, 2021—$674,000 and
2022—$597,000.
The Company leases office and manufacturing facilities under non-cancelable operating leases. Rent expense for fiscal years 2017, 2016 and 2015 was
$729,000, $662,000 and $736,000, respectively. Future fiscal year minimum rental payments for these leases over their remaining terms are as follows:
2018—$591,000, 2019—$292,000, 2020—$88,000, 2021 – $87,000 and 2022 later—$91,000.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material
effect on its future results of operations or financial position.
8. DEFINED CONTRIBUTION BENEFIT PLAN
The Company maintains a defined contribution 401(k) benefit plan covering substantially all employees. Employees are permitted to defer compensation 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 $1,259,000, $1,188,000, and $1,051,000 in fiscal years 2017, 2016 and 2015, 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, production and
marketing of diagnostic test kits and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens
and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal
safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides 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.
Neogen’s international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s Food Safety products, and each
of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company’s complete line of products and
services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and
genomics services. These additional products and services are managed and directed by existing management, and are reported through the Food Safety segment.
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 2017
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 2016
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)
$
$
155,795
15,530
171,325
33,971
7,088
190,895
10,332
133,743
12,678
146,421
28,984
5,609
143,303
9,192
$
$
150,717
39,552
190,269
34,841
7,603
210,927
4,246
139,827
35,027
174,854
30,978
6,572
215,374
5,030
$
$
–
–
–
(3,867)
–
126,587
–
–
–
–
(3,576)
–
91,263
–
$
$
Total
306,512
55,082
361,594
64,945
14,691
528,409
14,578
273,570
47,705
321,275
56,386
12,181
449,940
14,222
29
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Segment information, continued
(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
Food Safety
Animal Safety
Corporate and
Eliminations (1)
$
119,990
11,489
131,479
30,265
4,620
110,655
4,216
$
123,919
27,676
151,595
26,034
6,029
179,082
5,403
$
–
–
–
(3,181)
–
102,444
–
$
Total
243,909
39,165
283,074
53,118
10,649
392,181
9,619
(1) Includes corporate assets, including cash and cash equivalents, marketable securities, current and deferred tax accounts, and overhead expenses not allocated to specific business segments.
Also includes the elimination of intersegment transactions and noncontrolling interests.
Revenues to customers located outside the United States amounted to $129,322,000 or 35.8% of consolidated revenues in fiscal 2017, $107,680,000
or 33.5% in fiscal 2016 and $103,867,000 or 36.7% in fiscal 2015 and were derived primarily in Canada and various countries throughout Europe, 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 76% of the Company’s long-lived assets as of May 31, 2017 and 89% as of May 31, 2016.
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, 2017, 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 2017, 2016 or 2015. Shares purchased under the
program were retired.
11. SUMMARY OF QUARTERLY DATA (UNAUDITED)
(In thousands, except per share)
Total revenues
Gross margin
Net income
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
Net income attributable to Neogen
Basic net income per share
Diluted net income per share
August 2016
83,645
$
40,479
9,934
9,881
0.26
0.26
August 2015
74,860
$
37,792
9,289
9,323
0.25
0.25
Quarter Ended
$
November 2016
90,717
43,591
11,171
11,151
0.29
0.29
$
February 2017
88,385
40,880
10,377
10,287
0.27
0.27
Quarter Ended
$
November 2015
79,610
38,224
9,142
9,073
0.24
0.24
$
February 2016
76,725
35,196
8,289
8,311
0.22
0.22
$
$
May 2017
98,847
47,018
12,491
12,474
0.34
0.32
May 2016
90,080
41,852
9,818
9,857
0.27
0.26
Quarterly net income per share is based on weighted-average shares outstanding and potentially dilutive stock options for the specific period, and as a result,
will not necessarily aggregate to total net income per share as computed for the year as disclosed in the consolidated statements of income.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders • Neogen Corporation and Subsidiaries • Lansing, Michigan
We have audited the accompanying consolidated balance sheets of Neogen Corporation and Subsidiaries (the Company) as of May 31, 2017 and 2016, and
the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended May 31, 2017.
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 exam-
ining, 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.
30
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neogen Corporation and
Subsidiaries at May 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2017, 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 Subsid-
iaries’ internal control over financial reporting as of May 31, 2017, 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 28, 2017 expressed an unqualified opinion thereon.
BDO USA, LLP • Grand Rapids, Michigan • July 28, 2017
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 Executive Chairman of the Board and
Chief Financial Officer, an evaluation was conducted as to the effectiveness of internal control over financial reporting as of May 31, 2017, based on the frame-
work 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, 2017. The effectiveness of internal control
over financial reporting as of May 31, 2017, has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its attestation
report, which is included on the following page and is incorporated into this Item 9A by reference.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting were identified as having occurred during the year ended May 31, 2017 that have materially affected,
or are reasonably likely to materially affect, internal control over financial reporting.
James L. Herbert, Executive Chairman
Steven J. Quinlan, Vice President and CFO
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders • Neogen Corporation and Subsidiaries • Lansing, Michigan
We have audited Neogen Corporation and Subsidiaries’ internal control over financial reporting as of May 31, 2017, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Neogen Corpo-
ration and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting.” Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit prepa-
ration of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
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, 2017,
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, 2017 and 2016, and the related consolidated statements of income, comprehensive income, equity,
and cash flows for each of the three years in the period ended May 31, 2017, and our report dated July 28, 2017 expressed an unqualified opinion thereon.
BDO USA, LLP • Grand Rapids, Michigan • July 28, 2017
31
Neogen Corporation and Subsidiaries: Comparison of Five Year Cumulative
Total Return and Stock Profile Activity
The graph below 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 Neogen common stock and in each
index (with the reinvestment of all dividends) from May 31, 2012 to May 31, 2017.
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$300
250
200
150
100
50
0
May 2012
May 2013
May 2014
May 2015
May 2016
May 2017
May 31 of:
2012
2013
2014
2015
2016
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 100.00
100.00
100.00
$ 139.88
123.46
110.10
$ 145.57
155.08
114.40
$ 180.05
186.71
146.23
$ 190.18
183.49
155.20
2017
$ 243.80
231.19
204.07
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 reported on the NASDAQ Stock Market.
Year Ended May 31, 2017
Year Ended May 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
60.56
63.57
69.09
68.98
62.70
59.76
60.38
53.02
$
$
Low
49.30
50.53
61.25
59.51
44.90
43.00
45.00
43.79
Holders
As of June 30, 2017, there were approximately 281 stockholders of record of Common Stock and management believes there are a total of approximately
12,000 beneficial holders.
Dividends
Neogen has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future.
32
Neogen Corporation Officers and Directors
OFFICERS
James L. Herbert
Executive Chairman of the Board
John E. Adent
Chief Executive Officer
Richard E. Calk, Jr.
President
Chief Operating Officer
Steven J. Quinlan
Vice President
Chief Financial Officer and Secretary
Daniel D. Kephart, Ph.D.
Chief Science Officer
Stewart W. Bauck, DVM, Ph.D.
Vice President, Agrigenomics
Edward L. Bradley
Vice President, Food Safety
Joseph A. Corbett
Vice President, Animal Safety Sales
and Operations
Melissa K. Herbert
Vice President, Support Services
Kenneth V. Kodilla
Vice President, Manufacturing
Jason W. Lilly, Ph.D.
Vice President, Corporate Development
Terri A. Morrical
Vice President, Animal Safety
Dwight E. Schroedter
Vice President, Animal Safety Manufacturing
DIRECTORS
James L. Herbert
Neogen Corporation
Executive Chairman of the Board
William T. Boehm, Ph.D.
Kroger Company
Former Senior Vice President
President’s Council of Economic Advisors
Former Senior Economist
James C. Borel
E.I. DuPont de Nemours
Former Executive Vice President
Ronald D. Green, Ph.D.
University of Nebraska–Lincoln
Chancellor
G. Bruce Papesh
Dart, Papesh & Co.
President
Jack C. Parnell
Siller Brothers, Inc.
Chairman of the Board
Siller Helicopters, Inc.
Chairman of the Board
U.S. Department of Agriculture
Former Deputy Secretary
Former Acting Secretary
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
James P. Tobin
Monsanto
Former Vice President
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 5, 2017 at 10:00 a.m.
University Club at Michigan State University
3435 Forest Road
Lansing, MI 48910
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
Legal Counsel
Lowe Law Firm, P.C.
2375 Woodlake Drive
Suite 380
Okemos, MI 48864
© Neogen Corporation, 2017. AccuPoint, Acumedia, ANSR, BioLumix, BotVax, EqStim, GeneSeek, Igenity, Lab M, Prima Tech, Reveal, Soleris and SyrVet are registered trademarks and Chem-Tech, Ltd.,
Listeria Right Now, NeoNet, NeoSeek, Preserve International and Quat-Chem are trademarks of Neogen Corporation, 620 Lesher Place, Lansing, Michigan 48912 USA.
NC050-0817
620 Lesher Place, Lansing, MI 48912 USA
800-234-5333 (USA and Canada) or 517-372-9200
neogen-info@neogen.com • www.neogen.com
NASDAQ: NEOG