Neogen 2016 Annual Report

2016 Where Annual Report wantwe to be The mission of Neogen® Corporation is to be the leading company in the development and marketing of solutions for food and animal safety Contents Financial Highlights .......................................................... 1 Consolidated Statements of Equity .................................. 19 A Message from Management .......................................... 2 Consolidated Statements of Cash Flows .......................... 20 Where we want to be ............................................4 Notes to Consolidated Financial Statements ..................... 21 Management’s Discussion and Analysis of Financial Reports of Independent Registered Condition and Results of Operations ................................ 10 Public Accounting Firms ................................................. 30 Consolidated Balance Sheets .......................................... 17 Management’s Report on Internal Control Over Financial Reporting ................................................. 31 Consolidated Statements of Income ................................ 18 Comparison of Five Year Cumulative Total Return Consolidated Statements of Comprehensive Income ......... 18 and Stock Profile Activity ................................................ 32 Financial Highlights Amounts in thousands, except per share Years Ended May 31 2016 2015 2014 2013 2012 Operations: Total Revenues $ 321,275 $ 283,074 $ 247,405 $ 207,528 $ 184,046 Food Safety Sales 145,841 131,479 116,290 106,158 91,104 Animal Safety Sales 175,434 151,595 131,115 101,370 92,942 Operating Income 56,386 53,118 43,391 40,706 33,739 Net Income Attributable to Neogen $ 36,564 $ 33,526 $ 28,158 $ 27,190 $ 22,513 Basic Net Income Per Share* $ 0.98 $ 0.91 $ 0.77 $ 0.76 $ 0.64 Diluted Net Income Per Share* $ 0.97 $ 0.90 $ 0.76 $ 0.75 $ 0.62 Average Diluted Shares Outstanding* 37,875 37,444 37,267 36,491 36,029 *Restated for the years 2012–2013 due to stock split Total Revenues Net Income Total Assets Dollars in thousands Dollars in thousands Dollars in thousands $350,000 $40,000 $500,000 300,000 400,000 30,000 250,000 300,000 200,000 20,000 150,000 200,000 100,000 10,000 100,000 50,000 5 5 5 4 4 4 1 1 1 1 1 1 2016 2016 2016 2012 2013 20 20 2012 2013 20 20 2012 2013 20 20 In thousands Year Ended May 31 2016 2015 2014 2013 2012 Financial Strength: Cash and Marketable Securities $ 107,796 $ 114,164 $ 76,496 $ 85,369 $ 68,645 Working Capital 221,403 205,739 163,779 150,728 123,962 Total Assets 451,715 392,181 345,301 290,558 251,600 Long-Term Debt – – – – – Equity 404,161 350,963 306,300 258,287 219,054 Neogen Corporation | 2016 Annual Report 1 Message from Management To Our Stockholders, Employees and Friends: Growth through acquisition Where we want to be. In one sense, the theme for this year’s Annual Neogen now has more than 1,200 employees. This dedicated team has Report can be interpreted to mean that we are pleased with where we are, been responsible for our growth, as they develop new products and financially and operationally, after our 34 years in business. But, in another increase Neogen’s share of growing markets. Our growth this year was sense, it can be interpreted to mean that this report is intended to provide also aided by five strategic acquisitions. the investment community a vision of where we want to be in the future. It’s In June 2015, we acquired the assets of Sterling Test House, a leading both — where we are and where we are going. commercial food testing laboratory based in southwest India, which Revenues for our 2016 fiscal year, which ended May 31, were up 13% to will serve as a base for our new operations in India. Much as we did in $321.3 million — a $38 million increase. Net income for the year was $36.6 China, this acquisition is intended to bolster our long-term strategy of million, up 9%, compared to the prior year’s $33.5 million. Earnings per accelerating our revenue growth in critical global food safety markets. share in the current year were $0.97 compared to $0.90 a year ago. Both In August, we acquired United Kingdom-based Lab M®, a developer, revenues and net income were new all-time highs for the company. manufacturer and supplier of microbiological culture media and The fourth quarter was the 97th quarter in the past 102 quarters that diagnostic systems. The combination of Lab M’s products with our Neogen reported revenue increases as compared with the previous year. Acumedia® product line will make Neogen a leading global company in We believe this performance consistency over almost 26 years is important the traditional microbiology market, as well as give us new tools we can to Neogen investors. incorporate into our food safety diagnostics to enhance our products. Our level of revenue growth has traditionally brought a commensurate Equity Operating Income increase in net income, or as was the case in fiscal 2015, an increase Dollars in thousands Dollars in thousands in net income that exceeds our revenue growth. In the current year, we $500,000 $60,000 were adversely impacted by currency fluctuations, as the strength of the 50,000 U.S. dollar resulted in comparatively lower values in currencies important 400,000 to our business — including the euro, the British pound, the Brazilian real, and the Mexican peso. The adverse currency effect resulted in us reporting 40,000 300,000 approximately $0.08 per share of earnings less than we would have reported in a neutral currency environment. 30,000 200,000 While the relative strength of the U.S. dollar created temporary financial 20,000 challenges to our business, that strength also enabled us to buy British 100,000 and Brazilian companies in fiscal 2016 at discounts that had not previously 10,000 5 5 4 4 existed. As detailed below, we believe both companies present opportunities 1 1 1 1 2016 2016 to expand existing core strengths. 2012 2013 20 20 2012 2013 20 20 2 Neogen Corporation | 2016 Annual Report In December, we acquired the rodenticide assets of the France-based Growth through increased Virbac Group. Acquiring these assets expanded our ability to sell our regulatory activity comprehensive suite of biosecurity products. Virbac’s rodenticide products In the U.S., the Food Safety Modernization are proven in the marketplace, and provide Neogen access to an expanded Act (FSMA) was signed into law in January and important agricultural customer base. 2011, and now, five and a half years later, all In April 2016, we acquired Brazil-based Deoxi™ Biotecnologia Ltda, a seven elements of the law have finally been leading animal genomics laboratory in that country. The acquisition of Deoxi converted to regulations and officially released. will help accelerate the growth of Neogen’s GeneSeek® animal genomics The purpose of the law is to change the national focus in Brazil, which has the most cattle in the world, is only behind the from reacting to food safety recalls to preventing them. As United States in the production of beef, and is a leading producer of such, the new rules require food producers and processors to pork and chicken. look closely at their operations to ensure they are doing all they can to In May, we acquired the sister companies Preserve™ International and prevent unsafe food from entering the supply chain. We believe this implies Tetradyne™, which offer the livestock and food processing industries more food safety testing in the future. cleaners, disinfectants, and associated products. Adding Preserve’s Our view is the seven fuses have been lit, and going forward, we can expect products, complementary expertise and customer base has strengthened many more companies to come into compliance with the Act. Further, as our cleaner and disinfectant presence. Their sales channels were almost the U.S. and European Union raise food safety standards, the world will identical to our existing animal safety distribution, and represented an easy likely follow suit, and open up opportunities for Neogen for years to come. fit with our sales and marketing operations. Growth through changing consumer demand Growth through research and development Although motivated by very different drivers, Neogen is poised to seize In addition to the acquisitions, Neogen’s growth has also been spurred by opportunities presented by changing consumer demands in both the recent development and improvement of several important products. developing and developed nations. ® Sales of our AccuPoint Advanced Sanitation Monitoring System products In developing countries, consumers in rapidly expanding middle classes increased 18% in fiscal 2016, as our next generation product continues are expected to demand the high animal protein diets currently enjoyed in to gain traction. Originally launched in 2004, recent improvements have developed countries. For example, large populations and rapid economic made AccuPoint the most sensitive and consistent sanitation monitoring growth will likely result in China and India becoming the powerhouses of system available. middle class consumerism over the next two decades. Estimates vary, but Our food allergen diagnostic test kit line continues to lead the way in current projections point to more than one billion additional middle class revenue increases for our Food Safety Group. In fiscal 2016, we recorded consumers in just those two countries who will demand higher quality food. a 20% increase in this product line, led by increases in sales of our gluten In fully developed countries, consumer demands are now turning to how and soy tests. The line has also benefited from our newly developed food is produced and processed, including trends for more “organic” food, product to detect up to six tree nuts with a single test. and “antibiotic-free” meat products. These trends have led to an increasing In April, we launched a new line of Reveal® Q+ MAX mycotoxin tests that demand for the exact type of products and services offered by Neogen.

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