We are
NEOGEN
A N N U A L R E P O R T | 2 0 1 8
Dedicated to food and animal safety
The mission of
Neogen Corporation
is to be the leading company
in the development and marketing
of solutions for food and animal safety
Financial Highlights .......................................................... 1
A Message from Management .......................................... 2
We are Neogen ........................................................... 4
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................ 10
Consolidated Balance Sheets .......................................... 18
Consolidated Statements of Income ................................ 19
Consolidated Statements of Comprehensive Income ......... 20
Consolidated Statements of Equity .................................. 20
Consolidated Statements of Cash Flows .......................... 21
Notes to Consolidated Financial Statements ..................... 22
Reports of Independent Registered
Public Accounting Firms ................................................. 32
Management’s Report on Internal Control
Over Financial Reporting ................................................. 32
Comparison of Five Year Cumulative Total Return
and Stock Profile Activity ................................................ 34
Financial Highlights
Amounts in thousands, except per share
Year Ended May 31
Operations:
Total Revenues
Food Safety Sales
Animal Safety Sales
Operating Income
2018
2017
2016
2015
2014
$
402,252 $
361,594 $
321,275
$
283,074 $
247,405
196,047
206,205
70,194
171,325
190,269
64,945
146,421
174,854
56,386
131,479
151,595
53,118
116,290
131,115
43,391
28,158
0.58
0.57
49,689
Net Income Attributable to Neogen
Basic Net Income Per Share*
Diluted Net Income Per Share*
$
$
$
63,145 $
43,793 $
36,564
$
33,526 $
1.23 $
1.21 $
0.87 $
0.86 $
0.73
$
0.72 $
0.68 $
0.67 $
Average Diluted Shares Outstanding*
52,149
51,165
50,500
49,926
*Restated for 2014–2017 due to December 2017 stock split
TOTAL REVENUES
Dollars in thousands
NET INCOME
Dollars in thousands
TOTAL ASSETS
Dollars in thousands
$ 450,000
$ 65,000
$ 650,000
400,000
350,000
300,000
250,000
200,000
150,000
55,000
45,000
35,000
25,000
15,000
5,000
550,000
450,000
350,000
250,000
150,000
50,000
2014
2015
2016
2017 2018
2014
2015
2016
2017 2018
2014
2015
2016
2017 2018
In thousands
Year Ended May 31
Financial Strength:
2018
2017
2016
2015
2014
Cash and Marketable Securities
$
210,810 $
143,635 $
107,796
$
114,164 $
76,496
Working Capital
Total Assets
Long-Term Debt
Equity
337,101
618,009
–
256,959
528,409
–
219,628
449,940
–
205,739
392,181
–
163,779
345,301
–
560,175
471,757
404,161
350,963
306,300
1
James L. Herbert
Executive Chairman
John E. Adent
President
Chief Executive Officer
To our stockholders, employees and friends:
We are Neogen. As Executive Chairman and Chief Executive, we present
our 2018 fiscal year results as representatives for all of Neogen’s 1,600
global employees. Together, we are scientists, engineers, veterinarians,
and business professionals of all types who share one goal: to develop
and market products and services that will keep food and animals safe —
wherever in the world that may be.
Revenues exceed our goal of $400 million
It’s with great pride that we report to you that our 2018 fiscal year marked
another big milestone in Neogen’s continued growth. This year is the fourth
time in the past 20 years that we have doubled revenues in a five-year span.
Back in 1998 when our revenues were under $20 million, we set the goal of
a message from
MANAGEMENT
reaching the $40 million mark in five years — and we did it with ease. We
then challenged ourselves to double our revenues again, and reach $100
million in the next five years. And, sure enough, we did with a little over $102
million in 2008. Frankly, this self-challenging was becoming more difficult,
but we set the goal of reaching $200 million by 2013 — and we did it.
Five years ago this self-challenging had become a pretty serious game, but
we believed we could do it again by reaching $400 million in revenues by
2018. We are very pleased to report to you that our revenues for our 2018
fiscal year were slightly over $402 million.
The fourth quarter of our 2018 year marked the 105th of the past 110 quar-
ters that Neogen reported revenue increases as compared to the previous
year. That record now spans more than 27 years.
Net income increases 44% to $63 million, or $1.21 per share
Without some explanation, our net income performance in 2018 may seem
a bit unexpected. Net income for the full 2018 fiscal year increased 44%
to $63,145,000, compared to the prior year’s $43,793,000. Adjusted for
a 4-for-3 stock split effective Dec. 29, 2017, earnings per share for the full
2018 fiscal year were $1.21, compared to the prior year’s $0.86 per share.
We had a few helpers to reach that net income increase of 44%. In the year,
Neogen benefitted from U.S. corporate tax reform enacted in December
2017, changes in the recognition of excess tax benefits from employee stock
2
option exercises, and the successful conclusion of an IRS examination. The
end result was an effective tax rate of 14% for the year, as compared to 34%
in our 2017 fiscal year.
As you would expect, revenues and income for the 2018 fiscal year
established new all-time highs for our 36-year-old company.
Balance sheet remains strong
Our fiscal 2018 was another excellent year for us in generating cash and
further strengthening our balance sheet. We continue to be debt-free, and
we added approximately 19% to shareholder equity during the year. These
results allow us to continue to make investments in our business, including
the acquisitions of complementary businesses and technology, and
infrastructure improvements to solidify our foundation to help drive future
growth.
We continue as a market consolidator
Our 2018 fiscal year featured many advancements in existing product lines
and those that we have recently brought to the marketplace. Of special note
in the year was Neogen’s continuing ability to seize great opportunities in
the integration of international and domestic businesses that have similar
products and similar customer bases.
Perhaps the best example of our benefitting from our role of market consol-
idator is our worldwide Neogen Genomics program. We began this program
with our acquisition of GeneSeek in 2010, which at the time had revenues of
$12 million. We then built onto that foundation by adding a similar genom-
ics lab at our Neogen Europe operations in Scotland to cover the European
Union countries. In 2016, we acquired the largest animal genomics lab in
Brazil, and then in September 2017 we completed our presence in world-
wide coverage through the acquisition of an animal genomics laboratory in
Australia. Our company operations in Canada, Latin America and China also
feed samples into our four genomics labs. In 2018, we had revenues of
approximately $62 million from the worldwide genomics business — a 22%
increase compared to the prior year.
Another example of Neogen’s role as market consolidator is the harmonization
of our worldwide culture media business. We entered the culture media
business with the acquisition of U.S.-based Acumedia in 2000, and then
expanded our product offerings and customer base with our acquisition of
England-based Lab M in 2015. Our strategy was to fully combine the two
culture media businesses. In June 2018, we announced that our Acumedia
and Lab M product lines are being combined and rebranded as Neogen
Culture Media, culminating more than a year of work to provide a global
brand and media harmonization for worldwide use. The two businesses together
were producing over 400 different products when we started; we have pared that
down to about 200. When consolidated, the businesses did approximately $27
million in revenue for 2018, compared to $23 million in 2017, a 19% increase.
We also believe that increased integration in our cleaner and disinfectant business-
es offers great opportunity as we look ahead. This business currently struggles
with raw material costs, but we think consolidation is going to be a big help. We
have three manufacturing sites in the U.S., a significant operation near Manches-
ter, England, and our current biosecurity plant in Brazil.
Our path forward
While we are very pleased to report our 2018 results, as we write this, we are well
into our 2019 fiscal year, and looking forward. Both of us are in agreement that the
four drivers that have made Neogen successful over the past 36 years continue
to be very viable.
The first driver is the growth of our markets — and our share of those markets. A
number of regulations continue to drive our markets, for example, the Food Safety
Modernization Act from 2011. This Act is still having impact as companies of all
sizes work to comply. The market for our animal genomics testing is getting larger,
and we think we are taking some market share. The idea of testing a week-old
dairy heifer calf to pick the right replacement for the milking herd two years out is
now becoming more popular. These are but two examples among many.
The second driver for growth is developing new products. Most of our new
products, especially the most profitable ones, are the ones we develop internally,
manufacture and market ourselves. These new products are not just high-tech,
biotech-type products, but extend all the way to new, more effective disinfectants
and better ways to control rodents. On the Food Safety side, there is another
group of new products that are just beginning to reach the market this year. Our
Listeria Right Now test detects that dangerous bacteria in a matter of minutes,
rather than conventional methods requiring two or more days. On the genomics
side, there are also several exciting new products for the commercial beef and
dairy cattle markets.
Our genomics business is a good example of how we have grown using acquisi-
tions — our third driver for the growth strategy. Since 2000 we have completed
37 acquisitions that have all been successful, some spectacularly so. This success
has been mostly due to our ability to integrate the acquired business into our
existing businesses.
We will continue to use three hard rules to make sure we know what we are going
to do with the business the morning after we write the check. Our three cardinal
rules are first, we must understand the technology and its application. Secondly,
we must be able to manufacture the product ourselves, and third, we must have
access to the market.
Our fourth driver for growth continues to be international expansion. Revenues
from international sources this last year were 37.6% of total revenue, and were
up about 17% compared to the prior year. We both believe about two-thirds of
Neogen’s growth potential exists outside the U.S. Neogen is truly a global company
with sales into 145 countries, and locations in the U.S., Canada, Mexico, Brazil,
Scotland, England, India, China, and now Australia.
We continue to feel good about Neogen’s direction as we move into 2019. We
continue to be well positioned in our growing markets with the right people,
developing the right products, manufacturing them efficiently, and then marketing
them to our customers around the world.
EQUITY
Dollars in thousands
2014
2015
2016
2017 2018
OPERATING INCOME
Dollars in thousands
$ 600,000
500,000
400,000
300,000
200,000
100,000
50,000
$ 75,000
65,000
55,000
45,000
35,000
25,000
15,000
James L. Herbert
Executive Chairman
John E. Adent
President and CEO
2014
2015
2016
2017 2018
A quick summary of Neogen as it exists
in 2018 would be something like this:
Neogen is a 36-year-old, publicly traded
(NASDAQ: NEOG), Michigan-based
corporation dedicated
to developing
and marketing food and animal safety
solutions with about 1,600 employees,
and annual revenues of $402 million
and net income of $63 million.
But, Neogen is so much more than a
snapshot of how we exist in any one
moment. We are the sum of all the
potential that exists in our current
employees — and the countless many
more that will join us. We are the sum
of all the possibilities that exist in our
laboratories and manufacturing plants,
and opportunities that exist through
our numerous partnerships with our
customers, business partners, and other
food and animal safety professionals in
the more than 140 countries that we do
business.
We are
the proven management
teams, directors, and advisors who
have successfully guided Neogen from
only a concept to 22 unbroken years
of success and profitability. We are the
scientists, engineers and researchers
who have successfully guided innovation
after innovation from the drawing board
through development, and into the hands
of our global customers. We are the sales,
technical service and communication
professionals who have successfully
guided our countless customers in the
best use of our innovative products and
services. We are the countless many
throughout Neogen’s organization who
do things right to earn our customers’
repeat business.
4
We are animal genomics
We are the unquestioned global leader in animal genomics.
Our Neogen Genomics operations began when we acquired
Lincoln, Neb.-based GeneSeek in 2010, and our business has
grown steadily since — to now include additional genomics
laboratories in Scotland, Brazil and Australia to better satisfy the
rapidly accelerating demand.
farmers, ranchers, and numerous breed
We work with
associations all around the world as they seek to choose the best
animals for their breeding programs, be they beef or dairy cattle,
pigs, sheep, goats, chickens, dogs, fish or other animals. In each
case, Neogen works to help producers select the animals with
superior genetic traits to produce enhanced, healthier breeds.
We are molecular geneticists who sequence the genomes of
numerous animal breeds, and the biostatisticians who predict
what those sequences mean in real-world animal traits. We work
with university and government researchers, and others, to both
expand the reach of our genomics capabilities, and enhance the
predictive accuracy of our bioinformatics.
In the past year, we developed a new genomics product to help
Nellore cattle breeders in Brazil select replacement heifers to go
into their herds to produce superior offspring. We also developed
a program aimed to help veterinarians provide personalized care
for dogs by identifying the genetic component of various canine
diseases and conditions.
We are food safety genomics
We have expanded our genomics capabilities to produce next
generation sequencing services for the food industry, which
enables food companies to accurately identify all bacteria in a
sample with a single genomics test.
We work with food production companies to provide genomics
testing services that will provide a new and deeper level of
information that was previously not accessible through traditional
testing methods. Our NeoSeek™ genomics services utilize a
novel application of 16S metagenomics to determine bacteria
in a sample, without introducing biases from culture media, and
without the need to generate a bacterial isolate for each possible
microbe in a sample.
Accurately and definitively determining the bacteria responsible
for a food spoilage issue, and where it may be located in a facility,
can help the food industry identify and eliminate food quality and
safety concerns before they occur.
The addition of 16S metagenomics to NeoSeek built our portfolio
of food safety genomics services, which also includes Salmonella
serotyping, Shiga toxin-producing E. coli (STEC) confirmation
services, and meat species identification.
We are food pathogen rapid diagnostics
Since we acquired our first foodborne bacterial pathogen (e.g.,
Salmonella, Listeria and E. coli O157:H7) testing technology in 1994,
we have worked to make our tests for these potentially deadly food
contaminants even quicker and easier to use.
Despite advancements in testing technology and food safety
initiatives across the global food industry, the impact of foodborne
illness remains tragically high. The U.S. Centers for Disease Control
and Prevention (CDC) estimates that 50 million Americans are
5
Our dedicated team of skilled employees
with expertise and experience in a wide
range of food and animal safety disciplines
has led to our unbroken record of success.
sickened by the food they eat per year, of which approximately
128,000 require hospitalization and 3,000 die.
annual agro-food industry supplier fair held in France that showcases
the latest developments in food industry technology.
We are microbiologists, immunologists, chemists and molecular
geneticists who have partnered with other food safety professionals
to develop the next generation of rapid tests to detect pathogens
well before they can leave food production facilities and reach
consumers.
Our new Listeria Right Now™ test system can detect all species of
Listeria, including the pathogenic L. monocytogenes, in under 60
minutes through their ribosomal RNA — as compared to the 24 to
48 hours needed by competitive systems. Contamination of Listeria
in the environment can now be detected, and cleaned as necessary,
before food production begins.
The Listeria Right Now system’s revolutionary technology was
recently honored with the 2018 CFIA innovation trophy. The CFIA
(Carrefour des Fournisseurs de l’Industrie Agroalimentaire) is an
6
We are the broadest range of food safety solutions
In addition to our tests to detect foodborne pathogens, we offer
the widest range of rapid on-site tests to detect potential hazards
in food and animal feed, ranging from small local grain elevators
to the largest, best-known food and feed processors in the world,
and numerous regulatory agencies. No other company offers the
comprehensive line of food and feed diagnostics that we do.
We are scientists and food industry experts who are continuously
seeking to improve the technology and techniques of food safety, to
further minimize the risk of a contaminant reaching a dinner plate.
Our full suite of food safety solutions includes tests for:
• Mycotoxins. Grain producers and processors of all types and
sizes use our rapid tests around the world to accurately detect
the presence of mycotoxins, including aflatoxin, deoxynivalenol,
fumonisin, ochratoxin, zearalenone and T-2/HT-2 toxin, to help
ensure product safety and quality in food and animal feed.
• Food allergens. The world’s largest producers of cookies, crackers,
candy, ice cream and many other processed foods use our rapid
testing products for food allergens to help protect their food-allergic
customers from the inadvertent contamination of products with food
allergens, such as peanut, milk, egg, almond, gluten, soy and tree
nut residues.
• Drug residues. Dairy processors are the primary users our BetaStar®
diagnostic tests to detect the presence of veterinary antibiotics in
milk. The presence of these drugs in milk is a public health hazard
and an economic risk to processors as it limits the milk’s further
processing. We also offer tests to detect other drugs in food, such
as the steroid ractopamine in pork and antibiotic chloramphenicol in
shrimp.
• Spoilage microorganisms. Our Soleris® products are used by
food processors to identify the presence of spoilage organisms (e.g.,
yeast and mold) and other microbiological contamination in food.
The sensitivity of the systems allows detection in a fraction of the
time needed for traditional methods, with less labor and handling
time.
• Sanitation monitoring. We manufacture and market our AccuPoint®
Advanced rapid sanitation test to detect the presence of adenosine
triphosphate (ATP), a chemical found in all living cells. Our worldwide
customer base for ATP sanitation testing products includes food and
beverage processors, the food service and healthcare industries, as
well as many other users.
• Seafood contaminants. Our specialty products for the seafood
market include tests for histamine, a highly allergenic substance that
occurs when certain species of fish begin to decay, and shellfish toxins.
We are globally harmonized culture media
We entered the culture media business in 2000 with our acquisition of
U.S.-based Acumedia®, and expanded that effort with our acquisition of
England-based Lab M® in 2015. Our culture media products are used
by leading scientists and researchers around the world in a variety of
applications, including food safety and the production of vaccines.
In June 2018, we announced that our Acumedia and Lab M products
are being combined and rebranded as Neogen Culture Media to create
a global brand of media harmonized for world-wide use. The global
harmonization of the products means that our customers will receive
the exact same formulation for the same product, wherever in the
world they may be.
Instead of manufacturing Acumedia products in the United States
and Lab M products in England, we will provide the same products
around the world. This will allow us to simplify and shorten the shipping
process for our many global customers.
7
We are biosecurity
We understand that enhancing the quantity
and quality of food produced at livestock
operations often relies upon raising livestock in
environments secure from biological threats —
that is, enhancing the animals’ biosecurity.
We are biosecurity experts who have produced
and market a comprehensive line of agricultural
products, including rodenticides that contain
a variety of potent formulations to target a
range of rodents; insecticides developed to
effectively control flying and crawling insects
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.
We are constantly working with our partners
to provide products of even more use to the
animal safety industry. For example, in the past
year we worked with the prestigious Pirbright
Institute, an England-based research institution
dedicated to the study of infectious diseases
in farm animals, to prove the effectiveness
of one our products, Synergize®, against the
devastating foot-and-mouth disease in cattle,
pigs, sheep, and other livestock. The validation
adds to the list of bacteria, fungi, and viruses
where Synergize has been proven effective.
8
We are a wide range of animal safety solutions
In addition to our biosecurity products, we offer a wide range of products to maintain and
improve the health of animals inside the farm gate and companion animals.
We work directly with veterinarians, clinics and universities, and market through
established distributors to reach 35,000 plus veterinarians. To reach the retail market,
we work with a large network of animal health distributors including marketing groups,
traditional distributors, and large retail chains. Our animal safety solutions include:
• Veterinary instruments. We offer a broad line of veterinary instruments and animal
health delivery systems, many of which are used to administer animal health products,
such as antibiotics and vaccines. Our D3® Needles are stronger than conventional
veterinary needles and are uniquely detectable by metal detectors in meat processing
facilities. Our Prima® products are highly accurate devices used by farmers, ranchers
and veterinarians to inject animals, and provide topical and oral applications.
• Veterinary healthcare products. Our veterinary healthcare products include
PanaKare™, a digestive aid that serves as a replacement therapy for exocrine pancreatic
insufficiency. Our Natural Vitamin E-AD aids in the prevention and treatment of vitamin
deficiencies in swine, cattle and sheep; and RenaKare™ supplements potassium
deficiency in cats and dogs. We also offer Uniprim®, a leading veterinary antibiotic.
• Veterinary OTC products. The products we offer to the retail over-the-counter (OTC)
market include veterinary instruments packaged for the retail market. OTC products
also include Stress-Dex®, an oral electrolyte replacer for performance horses, and Fura-
Zone®, for the prevention and treatment of surface bacterial infections in wounds, burns
and cutaneous ulcers. We also offer hoof care, disposables and artificial insemination
supplies.
• Veterinary biologics. Our BotVax® B vaccine has successfully protected thousands
of high-value horses and foals against Type B botulism (a.k.a., Shaker Foal Syndrome).
The product is the only USDA-approved vaccine for the prevention of Type B botulism in
horses, and is sold world-wide. Our EqStim® immunostimulant is a safe and effective
veterinarian-administered adjunct to conventional treatment of equine bacterial and
viral respiratory infections.
We are everywhere
We maintain company-owned locations outside of the United
States to provide a direct presence in regions of particular
importance to us, including Canada, Mexico, Brazil, European
Union, Australia, India and China. In areas where we do not
have a direct presence, we maintain an extensive network of
distributors.
We use our own sales managers in both the Food Safety and
Animal Safety segments to work closely with and coordinate
the efforts of a network of approximately 150 distributors
in more than 100 countries. The distributors provide local
training and technical support, perform market research
and promote company products within designated countries
around the world. Sales to customers outside the United
States accounted for over 37% of our total revenues in our
2018 fiscal year.
We are Neogen and we are never satisfied
Our dedicated team of skilled employees with expertise
and experience in a wide range of food and animal safety
disciplines has led to our unbroken record of success.
We believe that we are now perfectly positioned to continue
to advance global food security, and help meet the increasing
demand for higher quality food.
9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information
and forward-looking statements. Neogen’s management does not provide forecasts of future financial performance. While we are optimistic about our long-
term prospects, historical financial information may not be indicative of our 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 in item 1A. RISK FACTORS in this Form 10-K and 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 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 we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabili-
ties. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible
assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the consolidated financial
statements.
Revenue Recognition
Revenue from products and services is recognized when the product has been shipped or the service performed, the sales price is fixed and 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, considering
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 net realizable value
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. Custom-
er-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while
all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review 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 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 expense
based on their fair value at grant date. The fair market value of options granted under our stock option plans was estimated on the date of grant using the
Black-Scholes option-pricing model with 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 us can 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 our 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
We account 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 carryforwards 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.
Our wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Deoxi Biotecnologia Ltda, Rogama
Industria e Comercio Ltda, Acumedia do Brasil, Neogen Latinoamérica, Neogen Bio-Scientific Technology Co (Shanghai), Neogen Food and Animal Security
(India), Neogen Canada, and Neogen Australasia Pty Limited. Based on historical experience, as well as our future plans, earnings from these subsidiaries
are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced
sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate 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, 2018, unremitted
earnings of our foreign subsidiaries were $43,784,000.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law making significant changes to the Internal Revenue Code.
Changes include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international
taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. On De-
cember 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant does not
have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income
tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the
remeasurement of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the
mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded
to current tax expense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed.
RESULTS OF OPERATIONS
Executive Overview
• Consolidated revenues were $402.3 million in fiscal 2018, an increase of 11% compared to $361.6 million in fiscal 2017. Organic sales increased 8%.
• Food Safety segment sales were $196.0 million in fiscal 2018, an increase of 14% compared to $171.3 million in fiscal 2017. Organic sales increased
9%, with the acquisitions of Quat-Chem and Rogama, both in December 2016, contributing the remainder of the growth.
• Animal Safety segment sales were $206.2 million in fiscal 2018, an increase of 8% compared to $190.3 million in fiscal 2017. Organic sales increased
7%, with the September 2017 acquisition of Neogen Australasia contributing the remainder of the growth.
• International sales were 37.6% of total sales in fiscal 2018 compared to 35.8% of total sales in fiscal 2017.
• On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the Tax Act), which included a reduction in the U.S. federal statutory
tax rate from 35% to 21% and a transition to a modified territorial system. As a result of the enactment of the Tax Act, we recorded a gain of $6.0 million
related to the revaluation of deferred tax assets and liabilities and a charge of $1.2 million related to a transition tax on unrepatriated earnings at our
international operations in fiscal 2018. The net gain of $4.8 million resulted in a $0.09 increase to diluted earnings per share.
• Results for fiscal 2018 also reflect a benefit of $4.8 million to our provision for income taxes for share-based payment awards resulting from the current
year adoption of ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”.
This benefit contributed $0.09 to diluted earnings per share in fiscal 2018.
• Net income was $63.1 million, or $1.21 per diluted share, an increase of 44% compared to $43.8 million, or $0.86 per share, in the prior year.
• Cash generated from operating activities in fiscal 2018 was $69.1 million, compared to $60.3 million in fiscal 2017.
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Neogen’s results reflect a 17% increase in international sales in fiscal 2018 compared to the prior year. We continue to focus on increasing our presence
and market share throughout the world, while also integrating our recent international acquisitions into our product portfolio. Sales increases for fiscal 2018
compared to the prior year are as follows for each of our international locations:
Neogen Europe (including Lab M & Quat-Chem)
Neogen do Brasil (including Deoxi & Rogama)
Neogen Latinoamérica
Neogen China
Neogen India
Revenue % Increase USD
23%
54%
13%
18%
18%
Revenue % Increase Local Currency
16%
56%
9%
14%
14%
Currency translation had a positive impact of approximately $3.7 million on revenues recorded in foreign currencies during fiscal 2018. At Neogen Europe, a
31% increase in genomics revenues and a 29% increase in sales of culture media manufactured at Lab M offset an 8% decrease in natural toxin test kit sales,
as last year’s deoxynivalenol (DON) outbreak in corn crops in western Europe did not repeat in the current year. The organic revenue increase in Brazil was
primarily due to a large Rogama sale to a government health organization that will not recur in fiscal 2019. Sales of test kits to detect aflatoxin also increased
over 200% in Brazil as we gained new business testing for aflatoxin in corn. These increases were partially offset by a 39% decrease in sales of forensic test
kits resulting from increased competition and customer losses caused by conversion to different testing methods.
Service revenue was $66.7 million in fiscal 2018, an increase of 21% over prior fiscal year sales of $55.1 million, aided by the September 2017 acquisition
of Neogen Australasia. The growth was led by increases in sales to the global beef and dairy cattle and companion animal markets, and increased testing
volumes with a large poultry customer.
REVENUES
(Dollars in thousands)
Food Safety:
Natural Toxins, Allergens & Drug Residues
Bacterial & General Sanitation
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, 2018
$
72,962
38,155
45,842
23,821
15,267
196,047
10,411
47,748
32,719
68,553
46,774
206,205
$ 402,252
Increase/
(Decrease)
Year Ended
May 31, 2017
Increase/
(Decrease)
May 31, 2016
3%
10%
13%
75%
34%
14%
7%
15%
11%
(2)%
18%
8%
11%
$
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
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
Year Ended May 31, 2018 Compared to Year Ended May 31, 2017
FOOD SAFETY:
Natural Toxins, Allergens & Drug Residues – Sales in this category increased 3% in fiscal 2018 compared to the prior year. For the allergens and dairy drug
residues product lines, test kit sales increased 12% and 13%, respectively, for the year. These increases were partially offset by a 26% decrease in sales of
deoxynivalenol (DON) test kits, as prior year outbreaks of DON in corn crops in the U.S., Canada and Europe did not recur in fiscal 2018.
Bacterial & General Sanitation – Sales in this category increased 10% in fiscal 2018, led by strong sales of our AccuPoint sanitation monitoring product line
which increased 18% on strength in both reader equipment and consumable supplies. Sales of test kits to detect pathogens increased 16%, led by growth in
Listeria products, including our new Listeria Right Now test kit that launched earlier in the fiscal year. Additionally, sales of our product line to detect spoilage
organisms in processed foods increased 2%.
Culture Media & Other – Sales in this category increased 13% in fiscal 2018 compared to fiscal 2017. Sales of Neogen Culture Media, formerly marketed
as the Acumedia and Lab M brands, increased 19%, due to continued strength in products manufactured at Lab M in the U.K. and a large non-recurring order
from a U.S. customer. This category also includes sales of forensic test kits sold through our Brazilian subsidiary, which decreased by 39% in fiscal 2018.
Demand in the prior year was extremely high, due to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have
decreased in the current year due to increased competition and customer losses caused by conversion to different testing methods.
Rodenticides, Insecticides & Disinfectants – Sales of products in this category sold through our Food Safety operations increased 75% in fiscal 2018;
excluding the December 2016 acquisitions of Quat-Chem and Rogama, organic growth was 2%. The increase was primarily due to a large sale at Rogama to
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
a government health organization that will not recur in fiscal 2019. Cleaner and disinfectants sold through Food Safety operations were negatively impacted
by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $859,000 in fiscal 2018.
Genomics Services – Sales of genomics services sold through our Food Safety operations increased 34% in fiscal 2018 compared to the same period in the
prior year, primarily due to market share increases, particularly in the beef and dairy cattle markets, and incremental business with a large poultry producer,
in Europe.
ANIMAL SAFETY:
Life Sciences – Sales in this category increased 7% in fiscal 2018 compared to fiscal 2017, due to increased volumes of forensic test kits sold to commercial
labs in the U.S.
Veterinary Instruments & Disposables – Revenues in this category increased 15% in fiscal 2018, led by a 20% increase in sales of syringes, as we gained
new customers in the retail and custom solutions markets. Sales of our patented detectable needles increased 23%, aided by strong sales to customers in
Europe, including Russia.
Animal Care & Other – Sales of these products increased 11% in fiscal 2018, due to higher sales of PanaKare, our pancreatic replacement therapy, which
benefitted from competitor backorders in fiscal 2018. Additionally, results from fiscal 2017 included sales credits totaling $1.1 million in the first quarter as
we removed our canine thyroid product from the market, after the FDA approved a new drug application for a competitive product.
Rodenticides, Insecticides & Disinfectants – Sales in this category decreased 2% in fiscal 2018, compared to the same period in the prior year. The Janu-
ary 2017 termination of a distribution agreement with a manufacturer of cleaners and disinfectants resulted in lost sales of those distributed products totaling
$4.7 million within this category. Partially offsetting this loss, sales of rodenticides increased 11% due to market share gains in the U.S.
Genomics Services – Sales in this category increased 18% in fiscal 2018; excluding the September 2017 acquisition of Neogen Australasia, organic growth
was 11%. The growth was led by increases in sales to the global beef and dairy cattle and companion animal markets and higher volumes from a large poultry
customer.
Year Ended May 31, 2017 Compared to Year Ended May 31, 2016
FOOD SAFETY:
Overall 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) contrib-
uting the remainder of the growth. Adverse currency conditions, resulting from 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 in this category increased 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 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 nuts, 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.
Bacterial & General Sanitation – Revenues of these products rose 2%, compared to the prior fiscal year, led by a 4% increase in sales of our line of auto-
mated equipment 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 we gained market share with our ANSR product line. These increases were partially offset by lower sales of a distributed product that was discontinued
in fiscal 2017. Our 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.
Culture Media & Other – Sales in this category 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 our Brazilian subsidiary. Demand for these kits from commercial
labs located in Brazil 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 our 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 of rodenticides, insecticides and disinfectants into our 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. Excluding these acquisitions, growth in this category was 3%, primarily from rodenticide and disinfectant sales into Mexico
and Central America by our Mexican subsidiary.
Genomics Services – Genomics revenues sold through the Food Safety segment increased 47%, primarily due to strong demand of genomics testing in
Europe and expanded capabilities at our operation in Ayr, Scotland to better serve the growing European market; the Deoxi acquisition in April 2016 also
contributed to the growth.
ANIMAL SAFETY:
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, we lost the ability
to sell our popular canine thyroid replacement product after the FDA approved a new drug application for a competitor, which gave the competitor exclusive
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
marketing rights to the product. We 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. Additionally, in January 2017, our agreement with a manufacturer 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 in this category 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 in this category decreased 1%, the result of 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 our proprietary de-
tectable needles and durable speed syringes, with both gains due to strong demand from customers.
Animal Care & Other – Sales in this category decreased 19% due to the loss of our ability to sell our 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 – Sales in this category increased 31% in fiscal 2017, 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.
Genomics Services – Genomics Services revenues reported within the Animal Safety segment increased 13% in fiscal 2017, compared to fiscal 2016. The
increase was primarily due 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.
Cost of Revenues
(Dollars in thousands)
Cost of Revenues
2018
$ 212,000
Increase
12%
2017
$ 189,626
Increase
13%
2016
$ 168,211
Cost of revenues increased 12% in fiscal 2018 and 13% in fiscal 2017 in comparison with the prior years. This compares with revenue increases of 11% in
fiscal 2018 and 13% in fiscal 2017. Expressed as a percentage of sales, cost of revenues was 52.7%, 52.4% and 52.4% in fiscal years 2018, 2017 and
2016, respectively.
Fiscal 2018 – Improvements in Animal Safety gross margins, resulting from raw material cost reductions and favorable mix were offset by higher product costs
in the Food Safety segment resulting from lower sales of our mycotoxin test kits, which have higher gross margins, and a change in mix caused by the Quat-
Chem and Rogama acquisitions. These businesses have product lines with gross margins lower than the average gross margins in this segment. Depreciation
expense, resulting from the investment of machinery and equipment at several manufacturing locations, increased $872,000 in fiscal 2018.
Fiscal 2017 – Improvements in Animal Safety gross margins, resulting from lower raw material costs in the genomics business and increased higher margin
forensics test 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.
Food Safety Gross Margins:
Food Safety gross margins were 52.8%, 55.3% and 56.7% in fiscal years 2018, 2017 and 2016, respectively.
Fiscal 2018 – Our fiscal 2018 results reflect the full year impact of lower gross margins from revenues contributed by the recent acquisitions of Quat-Chem
and Rogama. Excluding these businesses, Food Safety gross margins would have been 330 basis points higher in fiscal 2018. Additionally, the decrease in
sales of higher margin forensic test kits through our Brazilian subsidiary, due to increased competition, and lower sales of mycotoxin test kits, due to a DON
outbreak in the prior year which did not recur in fiscal 2018, adversely impacted gross margins in this segment.
Fiscal 2017 – During fiscal 2017, we 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 we
operate, 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 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.
Animal Safety Gross Margins:
Animal Safety gross margins were 42.0%, 40.6% and 40.1% in fiscal years 2018, 2017 and 2016, respectively.
Fiscal 2018 – The improvement in gross margin percentage from fiscal 2017 to fiscal 2018 was primarily due to raw material cost reductions in our genomics
business. We also benefitted from increased sales of forensic test kits and other higher margin products and decreased sales of lower margin distributed
cleaners and disinfectants resulting from the termination of a distribution agreement in January 2017.
Fiscal 2017 – Improvements in raw material costs, 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 we were required to stop selling
at the end of fiscal 2016.
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating Expenses
(Dollars in thousands)
Sales and Marketing
General and Administrative
Research and Development
Total Operating Expense
$
2018
70,909
38,294
10,855
Increase
14%
12%
5%
$
2017
62,424
34,214
10,385
$ 120,058
12%
$ 107,023
Increase
8%
17%
5%
11%
$
2016
57,599
29,189
9,890
96,678
Overall operating expenses increased by 12% in fiscal 2018 and 11% in fiscal 2017, each compared to the prior year. These increases compare to revenue
increases of 11% and 13%, respectively, in each comparative period.
Sales and Marketing:
Sales and marketing expenses increased by 14% in fiscal 2018 and 8% in fiscal 2017, each compared to the prior year. As a percentage of sales, sales and
marketing expense was 17.6%, 17.3% and 17.9% in fiscal years 2018, 2017 and 2016, respectively.
Fiscal 2018 – Salaries and commissions expense rose 9% in fiscal 2018, while travel expense increased 12%. Other significant increases include shipping
expense, distributor support and promotion programs, federal and state product registrations and royalty expense. Approximately $1.2 million of the increase
in sales and marketing expense resulted from the Quat-Chem, Rogama and Neogen Australasia acquisitions.
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%, 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, approxi-
mately $2.2 million resulted from our recent acquisitions.
General and Administrative:
General and administrative expenses rose 12% in fiscal 2018 compared to fiscal 2017 and by 17% in fiscal 2017 compared to fiscal 2016. As a percentage
of sales, general and administrative expense was 9.5%, 9.5% and 9.1% in fiscal years 2018, 2017 and 2016, respectively. In both fiscal years, the increase
is 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 our recent acquisitions, also contributed to the increase in each comparative period.
Research and Development:
Research and development expenses increased 5% in fiscal 2018 and 5% in fiscal 2017, each compared to the prior year.
Higher salaries expense in each fiscal year, resulting from increased headcount and compensation increases, was partially offset by lower levels of consulting
and other outside services. As a percentage of revenue, these expenses were 2.7% in fiscal year 2018, 2.9% in fiscal year 2017 and 3.1% in fiscal year 2016;
we expect to spend approximately 3% of total revenue on research and development annually.
Operating Income
(Dollars in thousands)
Operating Income
2018
70,194
$
Increase
8%
2017
64,945
$
Increase
15%
2016
56,386
$
Our operating income increased by 8% in fiscal 2018 compared to fiscal 2017, and by 15% in fiscal 2017 compared to fiscal 2016. Expressed as a percent-
age of revenues, operating income was 17.5%, 18.0% and 17.6% in fiscal years 2018, 2017 and 2016, respectively.
The 8% increase in operating income for fiscal 2018 was due to the 11% increase in sales, offset by slightly lower gross margins due to product mix shifts,
and operating expenses which rose by 12% over fiscal 2017.
The 15% increase in operating income for fiscal 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.
Other Income (Expense)
Other Income (Expense) for the previous three fiscal years consisted of the following:
(In thousands)
Interest income (net of expense)
Foreign currency transactions
Royalty income
Settlement of licensing agreement
Quat-Chem contingent consideration
Deoxi contingent consideration
Neogen India contingent consideration
Other
Total Other Income (Expense)
2018
2,043
274
147
–
255
(42)
–
594
3,271
$
$
2017
838
(40)
171
660
–
(14)
32
81
1,728
$
$
$
$
2016
322
(1,338)
217
–
–
–
–
(74)
(873)
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The increases in interest income in both fiscal years 2018 and 2017 compared to the prior years is the result of higher cash balances and rising interest rates
during the two-year period. Other income resulting from foreign currency translations is primarily the result of changes in the value of foreign currencies relative
to the dollar in countries in which we operate. Other Income in fiscal 2018 also included the adjustment of Quat-Chem and Deoxi contingent consideration
based on the level of achievement of revenue targets for the acquired businesses. In fiscal 2017, we terminated a licensing agreement and recognized a gain
of $660,000.
Provision for Income Taxes
(Dollars in thousands)
Provision for Income Taxes
2018
$
10,250
Increase
(55)%
2017
Increase
2016
$
22,700
20%
$
18,975
Income tax expense for fiscal 2018 was $10.3 million, an effective tax rate of 14%, compared to prior year income tax expense of $22.7 million, an effective
tax rate of 34%. We recorded favorable tax adjustments totaling $4.8 million during the year as the result of U.S. tax reform passed in December 2017. The
tax reform reduced the U.S. statutory income tax rate from 35% to 21%, and also resulted in other adjustments to income tax expense. We computed our
income tax for the fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. As required by generally accepted accounting principles, we
revalued our net deferred tax liabilities during the year to reflect the lower rate, resulting in a credit to income tax expense of $6.0 million. In addition, we have
calculated our cumulative unrepatriated foreign earnings and profits and calculated tax owed on those earnings and profits. This tax was estimated at $1.2
million and was recorded as federal income tax expense; payment of this tax is permitted over an eight-year period.
Additionally, during the year we recorded incremental credits of $4.8 million to federal income tax expense for excess tax benefits from the exercise of stock
options, due to the adoption of ASU 2016-09; refer to Note 6 of our Consolidated Financial Statements for further information. In the second quarter of fiscal
2018, an IRS examination of our federal income tax returns for fiscal years 2014, 2015 and 2016 was concluded. As a result of the favorable outcome of the
audit, we reversed a total of $1.0 million from our reserve for uncertain tax positions, which had been accrued in prior fiscal years, with a corresponding credit
to federal income tax expense.
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
2018
$ 63,145
1.23
1.21
Increase
2017
Increase
2016
44%
$ 43,793
20%
$ 36,564
0.87
0.86
0.73
0.72
Net income increased by 44% in fiscal 2018, significantly aided by U.S. tax reform enacted in December 2017 and a change in accounting for stock-based
compensation, and increased by 20% in fiscal 2017, each compared to the prior year. As a percentage of revenue, net income was 15.7% in fiscal 2018,
12.1% in fiscal 2017 and 11.4% in fiscal 2016.
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 our ability to successfully implement various strategies, including:
• developing, manufacturing and marketing new products with new features and capabilities, and having those new products successfully accepted in the
marketplace;
• expanding our markets by fostering increased use of our products by customers;
• maintaining or increasing gross and net operating margins in changing cost environments;
• strengthening operations and 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, 2018, we had $83.1 million in cash and cash equivalents, $127.7 million in marketable securities and working capital of $337.1 million. For the
year ended May 31, 2018, cash generated from operating activities was $69.1 million, compared to $60.3 million generated in fiscal 2017; proceeds from
stock option exercises provided an additional $22.8 million of cash. For the same period, additions to property and equipment and business acquisitions used
cash of $20.9 million and $468,000, respectively. We have 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 2018, 2017 and 2016, and no balance
outstanding at May 31, 2018 and 2017.
Accounts receivable at May 31, 2018 were $79.1 million, compared to $68.6 million at May 31, 2017, primarily due to the increase in revenues. Days sales
outstanding, a measurement of the time it takes to collect receivables, was 60 days at both May 31, 2018 and May 31, 2017. All customer accounts are
actively managed and no losses in excess of amounts reserved are currently expected.
16
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Inventory balances were $76.0 million at May 31, 2018, an increase of $2.9 million, or 4.0%, compared to $73.1 million at May 31, 2017. This past year,
we were successful in controlling inventory while ensuring adequate safety stocks to minimize backorders. We continue 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 each of the past three fiscal years. However, our cash
on hand and current borrowing capacity may not be sufficient to meet our cash requirements to commercialize products currently under development or our
potential plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to
issue equity securities or enter into other financing arrangements for a portion of our future capital needs.
We are 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 our results of operations or financial position.
Contractual Obligations
As of May 31, 2018, we have the following contractual obligations due by period:
(In thousands)
Long-Term Debt
Operating Leases
Unconditional Purchase Obligations (1)
Total
Less than
one year
$
–
$
–
906
54,339
$ 55,245
498
54,061
$ 54,559
$
1–3 years
–
194
278
472
$
$
3–5 years
–
214
–
214
$
$
More than
5 years
–
–
–
–
$
(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.
17
Neogen Corporation and Subsidiaries: Consolidated Balance Sheets
ASSETS (In thousands)
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance of $1,550 and $2,000 at May 31, 2018 and 2017, 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
$24,579 and $20,846 at May 31, 2018 and 2017, respectively
Other non-current assets, net of accumulated amortization of
$12,470 and $9,931 at May 31, 2018 and 2017, respectively
Total Other Assets
Total 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; 51,735,732 and
50,932,489 shares issued and outstanding at May 31, 2018 and 2017, 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
2018
2017
$
83,074
127,736
79,086
76,005
9,888
375,789
4,730
44,008
74,911
3,568
2,654
129,871
56,802
73,069
99,558
14,938
$
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
31,841
35,983
22,814
169,151
18,635
173,700
$ 618,009
$ 528,409
May 31
2018
2017
$
20,750
$
16,244
6,065
165
11,708
38,688
14,103
5,043
57,834
5,002
936
13,820
36,002
17,048
3,602
56,652
–
–
8,278
202,572
(9,746)
359,071
560,175
–
560,175
$ 618,009
8,149
174,742
(7,203)
295,926
471,614
143
471,757
$ 528,409
18
See accompanying notes to consolidated financial statements.
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, net
Royalty income
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
2018
2017
2016
$ 335,554
$ 306,512
$ 273,570
66,698
402,252
55,082
361,594
174,067
37,933
212,000
156,568
33,058
189,626
47,705
321,275
137,766
30,445
168,211
190,252
171,968
153,064
70,909
38,294
10,855
62,424
34,214
10,385
120,058
107,023
70,194
64,945
2,043
147
1,081
3,271
73,465
10,250
63,215
(70)
838
171
719
1,728
66,673
22,700
43,973
(180)
57,599
29,189
9,890
96,678
56,386
322
217
(1,412)
(873)
55,513
18,975
36,538
26
$
63,145
$
43,793
$
36,564
$
$
1.23
1.21
$
$
0.87
0.86
$
$
0.73
0.72
See accompanying notes to consolidated financial statements.
19
Neogen Corporation and Subsidiaries: Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss), net of tax: currency translations
Comprehensive income
Comprehensive (income) loss attributable to non-controlling interest
Year ended May 31
2018
2017
2016
$
63,215
$
43,973
$
36,538
(2,543)
60,672
(70)
(3,257)
40,716
(180)
(1,504)
35,034
26
Comprehensive income attributable to Neogen
$
60,602
$
40,536
$
35,060
See accompanying notes to consolidated financial statements.
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, 2015
49,504,359
$
7,921
$ 129,926
$
(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)
561,524
89
17,288
24,369
4
782
17,377
786
36,564
(26)
36,538
(1,504)
(1,504)
Balance, May 31, 2016
50,090,252
8,014
147,996
(3,946)
252,133
$
(37)
404,160
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)
Balance, May 31, 2017
Exercise of options, share based
compensation
Issuance of shares under
employee stock purchase plan
Purchase of minority interest
Net income (loss) for 2018
Other comprehensive income (loss)
817,284
131
26,589
24,953
4
921
(764)
26,720
925
(764)
43,793
180
43,973
(3,257)
(3,257)
50,932,489
8,149
174,742
(7,203)
295,926
$
143
471,757
781,116
125
26,992
22,127
4
1,048
(210)
27,117
1,052
(423)
(213)
63,145
70
63,215
(2,543)
(2,543)
Balance, May 31, 2018
51,735,732
$ 8,278
$ 202,572
$
(9,746) $ 359,071
$
–
$ 560,175
See accompanying notes to consolidated financial statements.
20
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 and other
Excess income tax benefit from the exercise of stock options
Purchase of minority interest
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
2018
2017
2016
$
63,215
$
43,973
$
36,538
17,058
(2,996)
4,909
–
(10,233)
(2,647)
(2,275)
4,381
(2,281)
69,131
(20,946)
299,751
(361,419)
(468)
(83,082)
23,261
–
(423)
22,838
(3,380)
5,507
77,567
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
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
$
83,074
$
77,567
$
55,257
$
11,800
$
13,865
$
13,413
See accompanying notes to consolidated financial statements.
21
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, all of which are wholly-owned as of May 31, 2018.
Neogen Latinoamérica was 100% and 90% owned as of May 31, 2018 and 2017. We purchased all shares owned by the minority interest owner on December
31, 2017, which increased our ownership in Neogen Latinoamérica to 100%. For Neogen do Brasil, we purchased the 10% owned by the two minority interest
owners on February 28, 2017, which increased our ownership interest to 100%. Non-controlling interest represents the non-controlling owners’ proportionate
share in the equity of these subsidiaries; the non-controlling owners’ proportionate share in the income or losses of the subsidiaries is subtracted from, or
added to, our net income to calculate the net income attributable to Neogen Corporation.
All intercompany accounts and transactions have been eliminated in consolidation.
Share and per share amounts reflect the December 29, 2017 4-for-3 stock split as if it took place at the beginning of the period presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and 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 us to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize
credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful
accounts on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is
charged against the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable at May 31, 2018 or 2017, respectively.
The activity in the allowance for doubtful accounts was as follows:
Year ended May 31
(In thousands)
Beginning Balance
Provision
Recoveries
Write-offs
Ending Balance
2018
2,000
152
40
(642)
1,550
$
$
2017
1,500
645
25
(170)
2,000
$
$
2016
1,300
305
90
(195)
1,500
$
$
Fair Value of Financial Instruments
The carrying amounts of our 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 are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transac-
tion between market participants exclusive of any transaction costs. We utilize a fair value hierarchy based upon the observability of inputs used in valuation
techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
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 $83,074,000 and $77,567,000 at May 31, 2018 and 2017, respectively. The carrying value of these assets
approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria. Cash held by foreign subsidiaries was $7,101,000 and
$8,132,000 at May 31, 2018 and 2017, respectively.
22
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Marketable Securities
We have marketable securities held by banks or broker-dealers at May 31, 2018, consisting of short-term domestic certificates of deposit of $27,400,000
and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $100,336,000. Total outstanding marketable securities at May
31, 2018 was $127,736,000; there were $66,068,000 in marketable securities outstanding at May 31, 2017. These securities are classified as available for
sale. The primary objective of our 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 or net realizable value, determined on the first-in, first-out method. The components of inventories were as follows:
(In thousands)
Raw materials
Work-in-process
Finished goods
Year ended May 31
2018
36,702
5,993
33,310
76,005
$
$
2017
33,190
4,831
35,123
73,144
$
$
Our 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 $2,200,000 and $2,000,000 at May 31, 2018 and 2017, 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 $10,315,000, $8,783,000 and $7,452,000
in fiscal years 2018, 2017 and 2016, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable
intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants not-to-compete and patents. Amortiz-
able intangible assets are amortized on either an accelerated or a straight-line basis, generally over 5 to 25 years. We review 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 com-
parison 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 intangibles was 11 years, at both May 31, 2018 and May 31, 2017, respectively.
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 2017 and 2016 financial statements have been reclassified to conform with the fiscal 2018 presentation.
Stock Options
At May 31, 2018, we 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 2018, 2017 and 2016, estimated on the date of grant using the
Black-Scholes option pricing model, was $14.47, $11.89 and $9.83, 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
2018
1.6%
0.0%
27.7%
4.0 years
Year ended May 31
2017
1.2%
0.0%
35.2%
4.0 years
2016
1.2%
0.0%
33.3%
4.0 years
The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant.
Expected stock price volatility is based on historical volatility of our 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. Prior to the fiscal 2017 grants, we recognized the fair value
23
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
of stock options using the accelerated method over their requisite service periods which we have determined to be the vesting periods; for options granted in
fiscal years 2017 and 2018, we recognized the fair value of stock options using the straight-line method.
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 2018, 2017 and 2016.
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 Neogen
are recorded in sales and marketing expense; these expenses totaled $12,147,000, $10,185,000 and $9,734,000 in fiscal years 2018, 2017 and 2016,
respectively.
Income Taxes
We account 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 carryforwards 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.
Our wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Deoxi Biotecnologia Ltda, Rogama
Industria e Comercio Ltda, Acumedia do Brasil, Neogen Latinoamérica, Neogen Bio-Scientific Technology Co (Shanghai), Neogen Food and Animal Security
(India), Neogen Canada, and Neogen Australasia Pty Limited. Based on historical experience, as well as our future plans, earnings from these subsidiaries
are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced
sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate 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, 2018, unremitted
earnings of our foreign subsidiaries were $43,784,000.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law, making significant changes to the Internal Revenue Code. Chang-
es include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation
from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. On December
22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant does not have the
necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects
of the Tax Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the remeasurement
of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the mandatory deemed
repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded to current tax ex-
pense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed.
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 $1,699,000, $1,643,000 and $1,463,000 in fiscal years 2018, 2017 and 2016, respectively.
Net Income Attributable to Neogen per Share
Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is based on
the weighted average number of common shares and dilutive potential common shares outstanding. Our 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
24
2018
63,145
51,358
791
52,149
Year ended May 31
2017
43,793
50,544
$
621
51,165
1.23
1.21
$
$
0.87
0.86
2016
36,564
49,869
631
50,500
0.73
0.72
$
$
$
$
$
$
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
At May 31, 2018, 2017 and 2016, 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 (Topic 606). 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, includ-
ing industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures.
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. Our internal task force identified all revenue streams at each significant subsidiary and reviewed contracts to evaluate the impact
of adopting the new standard on our revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements
and related disclosures. In our review of contracts in each revenue stream, we noted no material impact in the implementation of the standard. We have de-
termined the impact of adopting the standard on our control framework and noted minimal, insignificant changes to our system and other controls processes.
We adopted this standard on June 1, 2018 using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our
prior year financial statements. We are finalizing the impact of this ASU on the disclosures for our financial statement footnotes and expect the disclosures to
be enhanced in the first quarter of fiscal 2019.
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; early adoption is
permitted. Modified retrospective application is permitted with certain practical expedients. We will adopt this ASU on June 1, 2019 and are currently in the
process of evaluating our lessee and lessor arrangements to determine the impact of this amendment on our 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 our facilities.
In March 2016, the FASB issued ASU No. 2016-09 — Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Ac-
counting 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. We adopted this standard effective June 1, 2017. Adoption
of this ASU decreased income tax expense by $4,816,000 in fiscal 2018; refer to Note 6 of our Consolidated Financial Statements for further information.
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. We do not believe adoption of this guidance will have an impact on our
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. We will adopt this ASU on June 1, 2019 and are currently evaluating its impact on our consolidated financial statements.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Management has completed the annual impairment analysis of goodwill and intangible assets with indefinite lives using a quantitative assessment as of the
first day of the fourth quarter of fiscal years 2018, 2017 and 2016, respectively, and determined that recorded amounts were not considered impaired and
that no write-down was necessary.
25
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
The following table summarizes goodwill by reportable segment:
(In thousands)
Balance, May 31, 2016
Goodwill acquired
Goodwill adjustments and/or currency (1)
Balance, May 31, 2017
Goodwill acquired
Goodwill adjustments and/or currency (1)
Balance, May 31, 2018
(1) Includes final purchase price allocation adjustment.
Food Safety
26,889
$
19,051
(20)
45,920
–
$
(5,919)
40,001
$
$
Animal Safety
61,617
–
(2,778)
58,839
757
(39)
59,557
$
$
$
Total
88,506
19,051
(2,798)
$ 104,759
757
(5,958)
99,558
$
At May 31, 2018, non-amortizable intangible assets included licenses of $569,000, trademarks of $12,989,000 and other intangibles of $1,224,000.
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.
Amortizable intangible assets consisted of the following and are included in customer-based intangible and other non-current assets within the consoli-
dated balance sheets:
(In thousands)
Licenses
Covenants not to compete
Patents
Customer-based intangibles
Other product and service-related intangibles
Balance, May 31, 2018
Licenses
Covenants not to compete
Patents
Customer-based intangibles
Other product and service-related intangibles
Balance, May 31, 2017
$
$
$
Gross
Carrying
Amount
9,491
801
9,693
56,420
15,299
91,704
5,989
1,208
9,304
56,829
12,065
Less
Accumulated
Amortization
$
2,523
483
5,013
24,579
4,451
37,049
2,011
309
4,601
20,846
3,010
$
$
$
$
$
Net
Carrying
Amount
6,968
318
4,680
31,841
10,848
54,655
3,978
899
4,703
35,983
9,055
$
85,395
$
30,777
$
54,618
Amortization expense for intangibles totaled $6,743,000, $5,908,000 and $4,730,000 in fiscal years 2018, 2017, and 2016, respectively. The esti-
mated amortization expense for each of the five succeeding fiscal years is as follows: $6,179,000 in 2019, $5,865,000 in 2020, $5,435,000 in 2021,
$5,048,000 in 2022 and $4,702,000 in 2023. 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 intangi-
bles, 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 either a straight-line or 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 our strategic platform for the
expansion of available product offerings.
Fiscal 2016
On June 1, 2015, we 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,
included 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 measurements. This business continues to operate in its current location and reports within the Food Safety segment. In July 2016, we 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, we charged the remaining contingent consideration accrual of $32,000 to Other Income because sales targets for the applicable
periods were not achieved.
On August 26, 2015, we acquired all 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
26
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
$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, we 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 cus-
tomer 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 our
production facility in Randolph, Wisconsin, and report within the Animal Safety segment. In fiscal 2016, we 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, we 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
allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $132,000, in-
ventory 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 current location and is managed by Neogen do Brasil, reporting within the Food Safety segment. In June 2017, we paid the former owners
$393,000 in contingent consideration based on the achievement of sales targets, and charged $14,000 to Other Expense. In June 2018, we agreed to pay
the former owners $122,000 in contingent consideration based on the achievement of sales targets and charged $42,000 to Other Expense; the funds
are currently in escrow awaiting settlement of a legal matter.
On May 1, 2016, we acquired the stock of Preserve International and its sister company, Tetradyne LLC, manufacturers and marketers of cleaners, disinfec-
tants 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.
Fiscal 2017
On December 1, 2016, we acquired the stock of Quat-Chem Ltd., a chemical company that manufactures biosecurity products, based in Rochdale, En-
gland. 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 final purchase price allocation, based upon the fair value of these assets and liabilities determined
using the income approach, included accounts receivable of $4,684,000, inventory of $1,243,000, land, property and equipment of $2,526,000, ac-
counts payable of $2,197,000, deferred tax liability of $1,758,000, contingent consideration accrual of $1,058,000, other current liabilities of $604,000,
non-amortizable intangible assets of $1,889,000, intangible assets of $6,900,000 (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. In January 2018, we paid the former owners $249,000 in contingent
consideration based on the achievement of sales targets in the first year, and recorded a credit of $255,000 to Other Income, reducing the contingent
consideration accrual by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. 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, we acquired the stock of Rogama Industria e Comercio, Ltda., a company that develops and manufactures rodenticides and
insecticides, based near São 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 final purchase price allocation, based upon the fair value of these
assets and liabilities determined using the income approach, included accounts receivable of $1,866,000, other non-current assets of $26,000, inventory
of $960,000, land, property and equipment of $4,734,000, current liabilities of $2,562,000, contingent consideration accrual of $213,000, deferred tax
liability of $2,034,000, non-amortizable intangible assets of $870,000, intangible assets of $5,112,000 (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. In April 2018, we paid the former owners $130,000
in contingent consideration based on the achievement of sales targets in the first year. The contingent consideration accrual was reduced by the same
amount; $83,000 remains accrued for contingent consideration payable at the end of the second year. This business continues to operate in its current
location and is managed by Neogen do Brasil, reporting within the Food Safety segment.
Fiscal 2018
On September 1, 2017, we acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near
Brisbane, Australia. This acquisition is intended to accelerate the growth of our animal genomics business in Australia and New Zealand. Consideration
27
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
for the purchase was $2,063,000; $468,000 has been paid in cash with the remainder due in annual installments over the next five years. The final
purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $19,000,
equipment of $419,000, non-current liabilities of $1,629,000, intangible assets of $902,000 (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. The new business, renamed Neogen Australasia, continues
to operate in its current location, reporting within the Animal Safety segment.
4. LONG-TERM DEBT
We have 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 2017 and 2018; there was no balance outstanding at May 31, 2018. Interest on any borrowings is at LIBOR plus 100
basis points (rate under the terms of the agreement was 3.14% at May 31, 2018). Financial covenants include maintaining specified levels of tangible net
worth, debt service coverage, and funded debt to EBITDA, each of which we were in compliance with at May 31, 2018.
5. EQUITY COMPENSATION PLANS
Qualified and non-qualified options to purchase shares of common stock may be granted to directors, officers and employees of Neogen under the terms
of our 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 1,913,000, 2,525,000 and 3,276,000 at May 31, 2018, 2017 and 2016, 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, 2015 (852 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2016 (875 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2017 (661 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2018 (508 exercisable)
Options
2,651
732
(569)
(39)
2,775
828
(827)
(77)
2,699
829
(821)
(208)
2,499
Weighted-Average
Exercise Price
$
Weighted-Average
Grant Date Fair Value
6.90
9.83
5.36
8.36
7.97
11.89
6.77
9.17
9.51
14.47
8.20
11.12
11.44
$
23.29
35.23
17.60
28.93
27.53
40.68
22.82
32.04
32.88
59.37
28.18
39.57
42.63
$
$
The following is a summary of stock options outstanding at May 31, 2018:
(Options in thousands)
$
Range of
Exercise price
8.27–30.03
30.04–37.26
37.27–40.91
40.92–59.78
59.79–68.96
Options Outstanding
Average Contractual
Life (in years)
1.5
3.2
3.8
6.0
4.5
3.5
$
Weighted-Average
Exercise Price
27.08
34.84
40.45
50.85
60.55
42.63
Options Exercisable
Number
226
179
90
13
–
508
$
Weighted Average
Exercise Price
24.78
34.00
40.44
42.19
–
31.23
Number
515
522
619
173
670
2,499
The weighted average exercise price of shares that were exercisable at May 31, 2018 and 2017 was $31.23 and $26.49, respectively.
Compensation expense related to share-based awards was $4,909,000, $5,261,000 and $5,468,000 in fiscal years 2018, 2017 and 2016, respectively.
Remaining compensation cost to be expensed in future periods for non-vested options was $15,367,000 at May 31, 2018, with a weighted average
expense recognition period of 3.5 years.
The aggregate intrinsic value of options outstanding and options exercisable was $82,649,000 and $22,572,000, respectively, at May 31, 2018,
$39,388,000 and $13,929,000 respectively, at May 31, 2017 and $26,344,000 and $12,912,000 respectively, at May 31, 2016. The aggregate intrinsic
value of options exercised during the year was $25,844,000 in fiscal 2018, $18,067,000 in fiscal 2017 and $12,980,000 in fiscal 2016.
Common stock totaling 332,000 of the 450,000 originally authorized shares are reserved for issuance under the terms of the 2011 Employee Stock Pur-
chase Plan. The plan gives eligible employees the option to purchase common stock at a 5% discount to the lower of the market value of the stock at the
beginning or end of each participation period; 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 22,127 in fiscal 2018, 24,953 in fiscal 2017 and 24,369 in fiscal 2016.
28
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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
2018
62,310
11,155
73,465
2018
10,129
3,066
(2,945)
10,250
$
$
$
$
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
Excess tax benefits on stock-based compensation
Release of FIN 48 reserve from closed tax years
Provision for state income taxes, net of federal benefit
Remeasurement of deferred taxes
Transition tax on foreign earnings and profits
Amended U.S. Federal tax returns FY12, FY13 & FY14
Tax credits and other
2018
21,459
(1,167)
(461)
816
(4,816)
(1,035)
975
(6,022)
1,223
–
(722)
10,250
$
$
Year ended May 31
2017
55,171
11,502
66,673
2017
20,259
2,514
(73)
22,700
2017
23,336
(1,057)
(1,247)
996
–
–
972
–
–
–
(300)
22,700
$
$
$
$
$
$
2016
50,662
4,851
55,513
2016
14,630
1,756
2,589
18,975
2016
19,429
(1,143)
(699)
1,049
–
–
779
–
–
(777)
337
18,975
$
$
$
$
$
$
Fiscal 2018 and 2017
On June 1, 2017, the Company adopted ASU No. 2016-09, which simplifies the accounting for share-based payments to employees. The guidance requires
the recognition of the income 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 a policy election to account for forfeitures as they occur, rather than on an estimated basis, and requires that excess tax benefits
be classified as an operating activity on the Statement of Cash Flows. The adoption of this decreased income tax expense by $4.8 million in fiscal 2018.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law, making significant changes to the Internal Revenue Code. Chang-
es include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S.
international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earn-
ings. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant
does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain
income tax effects of the Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the
remeasurement of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the
mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded
to current tax expense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed.
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 our deferred income tax liabilities and assets are as follows:
(In thousands)
Deferred income tax liabilities
Indefinite and long-lived assets
Prepaid expenses
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
2018
2017
$
(17,503)
(573)
(18,076)
$
(23,177)
(640)
(23,817)
1,489
1,593
134
757
3,973
(14,103)
$
2,604
2,603
436
1,126
6,769
(17,048)
$
29
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
We had no accrual for unrecognized tax benefits at both May 31, 2018 and 2017. Should the accrual of any interest or penalties relative to unrecognized
tax benefits be necessary, such accruals will be reflected within income tax accounts.
7. COMMITMENTS AND CONTINGENCIES
We are involved in environmental remediation and monitoring activities at our Randolph, Wisconsin manufacturing facility and accrue for related costs
when such costs are determined to be probable and estimable. We expense annual costs of remediation which have ranged from $38,000 to $74,000
per year over the past five years. Our estimated liability for these costs is $916,000 at both May 31, 2018 and 2017, measured on an undiscounted basis
over an estimated period of 15 years; $100,000 of the liability is recorded within current liabilities and includes $45,000 to perform an updated Corrective
Measures Study, per a request received in 2017 from the Wisconsin Department of Natural Resources and the remainder is recorded within other non-cur-
rent liabilities in the consolidated balance sheet.
We have 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 $2,876,000, $2,659,000 and $1,969,000 for fiscal years 2018, 2017 and
2016, respectively. Some of these agreements provide for guaranteed minimum royalty payments to be paid each fiscal year by the Company for cer-
tain technologies. Future minimum royalty payments are as follows: 2019—$634,000, 2020—$641,000, 2021—$649,000, 2022—$572,000 and
2023—$568,000.
We lease office and manufacturing facilities under non-cancelable operating leases. Rent expense for fiscal years 2018, 2017 and 2016 was $799,000,
$729,000 and $662,000, respectively. Future fiscal year minimum rental payments for these leases over their remaining terms are as follows:
2019—$498,000, 2020—$86,000, 2021—$108,000, 2022—$141,000, and 2023 and later—$73,000.
We are 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 our future results of operations or financial position.
8. DEFINED CONTRIBUTION BENEFIT PLAN
We maintain a defined contribution 401(k) benefit plan covering substantially all domestic employees. Employees are permitted to defer compensation up
to IRS limits, with Neogen matching 100% of the first 3% of deferred compensation and 50% of the next 2% deferred. Our expense under this plan was
$1,325,000, $1,259,000, and $1,188,000 in fiscal years 2018, 2017 and 2016, respectively.
9. SEGMENT INFORMATION
We have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and mar-
keting 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 sales and marketing of our Food Safety
products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of
products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, vet-
erinary 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 2018
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 2017
Product revenues to external customers
Service revenues to external customers
30
Food Safety
Animal Safety
$ 176,123
19,924
196,047
34,561
9,083
186,570
10,538
$ 159,431
46,774
206,205
39,529
7,975
220,629
10,408
Corporate and
Eliminations (1)
$
–
–
–
(3,896)
–
210,810
–
Total
$ 335,554
66,698
402,252
70,194
17,058
618,009
20,946
$ 155,795
15,530
$ 150,717
39,552
$
–
–
$ 306,512
55,082
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
(In thousands)
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
171,325
33,971
7,088
190,895
10,332
$ 133,743
12,678
146,421
28,984
5,609
143,303
9,192
Animal Safety
190,269
34,841
7,603
210,927
4,246
$ 139,827
35,027
174,854
30,978
6,572
215,374
5,030
Corporate and
Eliminations (1)
–
(3,867)
–
126,587
–
$
–
–
–
(3,576)
–
91,263
–
Total
361,594
64,945
14,691
528,409
14,578
$ 273,570
47,705
321,275
56,386
12,181
449,940
14,222
(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 non-controlling interests.
Revenues to customers located outside the United States amounted to $151,262,000 or 37.6% of consolidated revenues in fiscal 2018, $129,322,000
or 35.8% in fiscal 2017 and $107,680,000 or 33.5% in fiscal 2016 and were derived primarily in various countries throughout Europe, Canada, 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 U.S. based
operations represent 75% of the Company’s long-lived assets as of May 31, 2018 and 76% as May 31, 2017.
10. STOCK REPURCHASE
In December 2008, our Board of Directors authorized a program to purchase, subject to market conditions, up to 1,500,000 shares of our common stock.
As of May 31, 2018, 149,368 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 2018, 2017 or 2016. 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
Quarter Ended
August 2017
95,256
$
45,871
11,936
11,914
0.23
0.23
November 2017
$ 101,817
49,271
17,153
17,100
0.33
0.33
$
February 2018
95,892
45,521
16,581
16,586
0.32
0.32
Quarter Ended
August 2016
83,645
$
40,479
9,934
9,881
0.20
0.20
$
November 2016
90,717
43,591
11,171
11,151
0.22
0.22
$
February 2017
88,385
40,880
10,377
10,287
0.20
0.20
May 2018
$ 109,287
49,589
17,545
17,545
0.34
0.33
$
May 2017
98,847
47,018
12,491
12,474
0.25
0.24
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.
31
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Neogen Corporation
Lansing, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Neogen Corporation (the “Company”) and subsidiaries as of May 31, 2018 and 2017,
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,
2018, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at
May 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2018, in confor-
mity 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) (“PCAOB”), the Company’s
internal control over financial reporting as of May 31, 2018, 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 27, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
We have served as the Company’s auditor since 2014.
BDO USA, LLP
Grand Rapids, Michigan
July 27, 2018
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 our 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, 2018, based on the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, management concluded that internal control over financial reporting was effective as of May 31, 2018. The effectiveness of
internal control over financial reporting as of May 31, 2018, 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, 2018 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
32
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Neogen Corporation
Lansing, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Neogen Corporation’s (the “Company’s”) internal control over financial reporting as of May 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2018, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of the Company and subsidiaries as of May 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
equity, and cash flows for each of the three years in the period ended May 31, 2018, and the related notes and our report dated July 27, 2018 expressed
an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying “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 are a public accounting firm regis-
tered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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 re-
spects. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 nec-
essary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of 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.
BDO USA, LLP
Grand Rapids, Michigan
July 27, 2018
33
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 our common stock and
in each index (with the reinvestment of all dividends) from May 31, 2013 to May 31, 2018.
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$300
250
200
150
100
50
0
May 2013
May 2014
May 2015
May 2016
May 2017
May 2018
May 31 of:
2013
2014
2015
2016
2017
2018
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 100.00
100.00
100.00
$ 104.07
125.98
105.43
$ 128.71
151.80
134.12
$ 135.96
150.04
140.40
$ 174.29
189.31
184.56
$ 277.99
228.19
258.15
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, 2018
Year Ended May 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
52.28
63.25
62.86
76.13
44.76
47.47
50.92
51.43
$
$
Low
48.30
51.85
54.64
58.78
38.00
38.40
46.20
44.76
Neogen declared a 4-for-3 stock split effective on December 29, 2017. All share prices above have been adjusted as if the split had been in effect at the
beginning of the periods presented.
Holders
As of June 30, 2018, there were approximately 266 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.
34
Neogen Corporation Officers and Directors
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
Darci L. Vetter
Edelman
General Manager and Vice Chair for Food,
Agriculture and Trade
Former Chief Agricultural Negotiator for
the U.S. Trade Representative
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
OFFICERS
James L. Herbert
Executive Chairman of the Board
John E. Adent
President
Chief Executive Officer
Steven J. Quinlan
Vice President
Chief Financial Officer and Secretary
Stewart W. Bauck, DVM, Ph.D.
Vice President, Agrigenomics
Joseph A. Corbett
Vice President, Animal Safety Sales
and Operations
Robert S. Donofrio, Ph.D.
Vice President, Food Safety R&D
Shane M. Fitzwater
Vice President, Animal Safety Operations
Jerome L. Hagedorn
Vice President, Food Safety Operations
Melissa K. Herbert
Vice President, Support Services
Jason W. Lilly, Ph.D.
Vice President, Corporate Development
Terri A. Morrical
Vice President, Animal Safety
Dwight E. Schroedter
Vice President, Animal Safety Manufacturing
35
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:
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
Attention: Investor Relations
620 Lesher Place
Lansing, MI 48912
Annual Meeting
October 4, 2018 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
© Neogen Corporation, 2018. Neogen, AccuPoint, Acumedia, ANSR, BetaStar, BotVax, D3, EqStim, Fura-Zone, GeneSeek, Lab M, Preserve, Prima, Quat-Chem, Soleris, Stress-Dex, Synergize and UniPrim are registered trademarks
and Deoxi, Listeria Right Now, NeoSeek, PanaKare and RenaKare are trademarks of Neogen Corporation, 620 Lesher Place, Lansing, Michigan 48912 USA.
NC056-0818
620 Lesher Place, Lansing, MI 48912 USA
800-234-5333 • 517-372-9200 • Fax 517-372-0108
neogen-info@neogen.com • www.neogen.com
NASDAQ: NEOG