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NEOG > SEC Filings for NEOG > Form 10-Q on 28-Mar-2013All Recent SEC Filings

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Form 10-Q for NEOGEN CORP


28-Mar-2013

Quarterly Report


Item 2. 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 does not provide forecasts of future performance. While management is optimistic about the Company's long-term prospects, historical financial information may not be indicative of future financial performance.

Safe Harbor and Forward-Looking Statements

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company's reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation's results to differ materially from those indicated by such forward-looking statements, including those detailed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."

In addition, any forward-looking statements represent management's views only as of the day this Quarterly Report on Form 10-Q was first filed with the Securities and Exchange Commission and should not be relied upon as representing management's views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company's financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including those related to receivable allowances, inventories, accruals, goodwill and other 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.

There were no significant changes to our contractual obligations or contingent liabilities and commitments disclosed in the Company's Annual Report or Form 10-K for the fiscal year ended May 31, 2012.

There have been no material changes to the critical accounting policies and estimates disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2012.


Table of Contents

Executive Overview

Neogen Corporation revenues for the third quarter ended February 28, 2013 were $51.1 million, an increase of $6.1 million, or 13.7%, compared to the same period in the prior year. For the year-to-date period ended February 28, 2013 revenues were $151.5 million, an increase of $16.0 million, or 11.8%, compared to the prior year. Food Safety revenues increased by 15.5% and 15.3% for the comparative quarter and nine-month period ended February 28, 2013, respectively. Animal Safety revenues increased by 12.0% and 8.4%, respectively, for the same comparative periods. Overall organic sales growth was 8.8% for both the third quarter and the nine-month period ended February 28, 2013. The remainder of growth consisted of revenues from the following acquisitions: Igenity (May 2012), Macleod Pharmaceuticals (October 2012), and Scidera Genomics (January 2013).

Neogen Europe sales increased by 18.3% for the third quarter and 22.4% on a year-to-date basis compared to the same period in the prior year. The revenue increase was primarily from increased sales of meat speciation kits due to the meat labeling scandal in Europe, a recovery in sales to EU distributors, a DON outbreak in Europe earlier in the current year, and certain genomics revenues from a number of European customers. Neogen do Brasil continued its growth with sales up 32.2% and 44.6%, for the quarter and year-to-date respectively, albeit on a small base. Mycotoxin and drug residue test kits were the most significant growth drivers in these periods. Neogen Latinoamerica sales increased by 41.8% for the third quarter but are down 2.1% year-to-date. For the comparative quarter, mycotoxin and allergen test kits were the primary contributors to the revenue increase. The year-to-date decrease is due to opportunistic sales that occurred in the first six months of the prior year that were not repeated in the current year.

Gross margins increased from 51.0% for the February 2012 quarter to 53.5% for the February 2013 quarter and increased from 50.6% to 53.5% on a year-to-date basis. The increase in margin percentage for each comparative period was largely the result of a shift towards diagnostic products in the Food Safety segment, which have higher margins. Additionally, margins improved within the Animal Safety segment due to increased sales of small animal supplements, higher volume at GeneSeek, and the products acquired in the Macleod acquisition, which are higher margin products within that segment. Also, on a year-to-date basis, increased sales of rodenticides contributed to the improved gross margin. To a lesser extent, gross margins improved for each comparative period due to manufacturing efficiencies. Operating margins increased for the comparative quarter and nine-month periods from 16.8% to 18.9% and 18.5% to 20.1%, respectively. The increases were due to the improved gross margins in both the quarter and year-to-date periods, offset somewhat by increased operating expenses relative to sales.


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Revenues

Three and nine months ended February 28/29, 2013 and 2012:



                                                          Three Months ended February 28/29,
                                                                              Increase/
                                                   2013          2012         (Decrease)         %
                                                                    (In thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues        $  12,670     $  10,568     $      2,102        19.9 %
Bacteria & General Sanitation                        6,493         5,868              625        10.7 %
Dehydrated Culture Media & Other                     6,148         5,487              661        12.0 %

                                                 $  25,311     $  21,923     $      3,388        15.5 %
Animal Safety
Life Science & Other                             $   1,892     $   2,018     $       (126 )      (6.2 %)
Vaccines                                               718           646               72        11.1 %
Rodenticides & Disinfectants                         6,248         6,436             (188 )      (2.9 %)
Veterinary Instruments & Other                      11,114         9,072            2,042        22.5 %
DNA Testing                                          5,772         4,817              955        19.8 %

                                                 $  25,744     $  22,989     $      2,755        12.0 %

Total Revenues                                   $  51,055     $  44,912     $      6,143        13.7 %


                                                          Nine Months ended February 28/29,
                                                                              Increase/
                                                   2013          2012         (Decrease)         %
                                                                    (In thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues        $  40,387     $  34,031     $      6,356        18.7 %
Bacteria & General Sanitation                       18,954        18,142              812         4.5 %
Dehydrated Culture Media & Other                    18,196        15,074            3,122        20.7 %

                                                 $  77,537     $  67,247     $     10,290        15.3 %
Animal Safety
Life Science & Other                             $   5,589     $   6,089     $       (500 )      (8.2 %)
Vaccines                                             1,886         1,985              (99 )      (5.0 %)
Rodenticides & Disinfectants                        21,607        20,166            1,441         7.1 %
Veterinary Instruments & Other                      31,069        27,499            3,570        13.0 %
DNA Testing                                         13,834        12,515            1,319        10.5 %

                                                 $  73,985     $  68,254     $      5,731         8.4 %

Total Revenues                                   $ 151,522     $ 135,501     $     16,021        11.8 %

Food Safety revenues increased by 15.5% for the quarter ended February 28, 2013 and 15.3% on a year-to-date basis compared to the prior year. Sales of Natural Toxins, Allergens & Drug Residues products increased 19.9% for the third quarter and 18.7% for the year-to-date, respectively. The increase was led by sales of aflatoxin test kits, readers, and accessories, resulting from an outbreak in the United States during the fall harvest season. Allergen test kit revenues continued to achieve solid growth with increases of 23.1% for the quarter and 18.9% for the year-to-date, as companies prepare for compliance with provisions of the Food Safety Modernization Act, which specifically addresses requirements for testing of food allergens. In the third quarter, the Allergens growth was led by increased demand for meat speciation kits primarily in Europe due to increased awareness of mislabeling of meat and fish products. Sales of milk and gliadin allergen test kits also contributed to the increase. Drug Residues were up 15.1% in the third quarter due to order timing for a large international distributor and increased market penetration in Brazil; on a year-to-date basis, revenues were flat.


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Bacteria and General Sanitation sales were up 10.7% and 4.5% for the three and nine-month periods ended February 28, 2013, respectively. Soleris revenues were up 13.6% in the third quarter, due to increased equipment placements and related consumables sales compared to the prior year. Filters and ampoule media also contributed to the growth in this category for both the quarter and year-to-date periods due to increased penetration in the beverage market segment. The Company's new ANSR pathogen detection system continued to gain traction in the third quarter, assisted by the launch of a focused marketing program for this product line.

Dehydrated Culture Media and Other Sales increased 12.0% for the third quarter and 20.7% on a year-to-date basis compared to the prior year, primarily due to the contributions from certain genomics revenues, which are recorded in the Other category, to a number of European customers. Sales of Acumedia products to the traditional and international markets experienced 4.5% growth in the current quarter and were flat on a year-to-date basis. Tests for histamine contamination in harvested fish were up 21.0% and 13.1% for the three and nine-month periods, respectively, due to increased testing. Contributing to the year-to-date growth, customers affected by the aflatoxin outbreak significantly increased purchases of miscellaneous lab supplies necessary for processing samples in the first nine months of the year.

Overall Animal Safety revenues increased by 12.0% in the third quarter and 8.4% for the year-to-date period ended February 28, 2013. Life Science and Other sales declined 6.2% for the quarter, primarily due to lower ractopamine kit sales into China and a one-time equipment sale in the prior year. On a year-to-date basis, Life Science and Other sales were down 8.2%. In addition to the previously mentioned items, drug detection kit sales to the racing market declined 23.9% for the year-to-date period due to a number of state lab closures during the year and lower testing levels. These declines were partially offset by higher sales to the forensics market, which are up 6.0%. Vaccine sales increased 11.1% for the quarter ended February 28, 2013 mainly due to order timing from a large international distributor; for the year-to-date period, revenues are 5.0% lower than the prior year.

Rodenticide and Disinfectant revenues decreased 2.9% for the third quarter ended February 28, 2013 compared to the prior year. Cleaners and disinfectants distributed by Neogen decreased 28.9% for the quarter, due to increased competition from lower priced generics, timing of orders to international customers, and weak demand due primarily to lack of disease outbreaks. Offsetting this shortfall of lower-margin sales was a 19.3% increase in rodenticide sales, which have a much higher margin. The Rodenticide revenue increase was due to several factors, including a marketing campaign during the third quarter, seasonal conditions, and a prior year which was negatively affected by EPA labeling changes. On a year-to-date basis, overall Rodenticide and Disinfectant revenues are up 7.1%, driven by strong rodenticide sales.

Veterinary Instruments and Other revenues increased 22.5% in the third quarter of FY-13 compared to FY-12. Within this category, the Company benefitted from sales of the newly-acquired veterinary antibiotic, Uniprim, and a 153.6% increase in the small animal supplements line due to new business captured on canine thyroid replacement products. Offsetting gains in this category was a 42.0% decrease in hoof and leg care sales, due to lower animal counts, difficult financial conditions in the dairy industry and timing of large orders. On a year-to-date basis, Veterinary Instruments and Other product sales increased 13.0% compared to the prior year. This increase was led by sales of Uniprim and increases in the small animal supplements line. These gains were partially offset by lower sales of vitamin injectable products; sales in FY-12 were unusually high due to a supplier shutdown in FY-11, resulting in significant backorder conditions, which were filled in early FY-12. Also offsetting the gains was the loss of the needle and syringe business of a large customer in the second quarter of FY-12.

Revenues at GeneSeek (DNA Testing) increased 19.8% for the third quarter of FY-13 compared to the prior year. The Company gained new business resulting from the Igenity and Scidera acquisitions and had strong market acceptance of new products for cattle testing. For the year-to-date, GeneSeek sales were 10.5% higher than the prior year, due to the acquisitions and newly released products, partially offset by lower average selling prices, due to a customer shift towards products with lower genomic content.

Gross margins increased from 51.0% in the third quarter of FY-12 to 53.5% in the third quarter of FY-13, and for the year-to-date, from 50.6% in FY-12 to 53.5% in FY-13. Gross margins increased in the Animal Safety segment due to a shift in product mix resulting from higher sales of small animal supplements, rodenticides, and the new Uniprim product line acquired from Macleod. Additionally, GeneSeek has benefitted from higher margins due to the Igenity acquisition. On a year-to-date basis, the Company benefitted from the increases in gross margins from the Animal Safety revenues as well as having a greater proportion of Food Safety revenues, which have higher gross margins, to overall sales.

Operating margins increased to 18.9% for the third quarter compared to 16.8% for the same period in the prior year, primarily the result of the improved gross margins and partially offset by higher operating expenses. Overall operating expenses in the third quarter increased by 15.0%, primarily reflecting investments made in sales and marketing personnel and programs, begun in FY-12 and continuing in FY-13. The Company also experienced increases in shipping charges and royalties, due to increased sales, higher stock option expenses and a 12.9% increase in research and development costs. For the year-to-date, operating margins increased to 20.1% from 18.5%, the result of improved gross margins, partially offset by increased operating expenses, which were up 16.5%, primarily due to an 18.0% increase in sales and marketing costs. General and administrative expenses rose 12.9%, due to higher levels of stock option expenses, legal fees, systems depreciation and amortization of patents. Research and development expenses rose by 18.6% for the year-to-date, reflecting increased levels of validation and approvals required to support the new products launched during the year.


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Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of the Company was $74,566,000 at February 28, 2013, compared to $68,645,000 at May 31, 2012. Approximately $19,719,000 in cash was generated from operations during the first nine months of 2013. Net cash proceeds of $4,612,000 were realized from the exercise of stock options and issuance of shares under the Company's Employee Stock Purchase Plan during the first nine months of FY-13. In October 2012, the Company purchased the stock of Macleod Pharmaceuticals for $9,918,000 net cash and purchased the assets of Scidera Genomics for $3,400,000 in cash in January 2013 (see Note 7). The Company spent $6,802,000 for property, equipment and other non-current assets in the first nine months of 2013. Included in that number is the December 2012 purchase of Oswald Hall, a 36,000 square foot building in Ayr, Scotland, for approximately $1,500,000. This facility will be used to accommodate future growth for the Company's Neogen Europe subsidiary.

Accounts receivable increased by $2,607,000 due to the increase in revenues. Inventory levels increased by $4,851,000 compared to May 31, 2012, primarily to support the increase in revenues; $1,171,000 of the increase is the result of the Macleod acquisition.

Inflation and changing prices are not expected to have a material effect on operations, as management believes it has and will be successful in offsetting increased input costs with price increases and/or cost efficiencies.

Management believes that the Company's existing cash and marketable securities balances at February 28, 2013, along with available borrowings under its credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and borrowing capacity may not be sufficient to meet the Company's cash requirements to commercialize products currently under development or its plans to acquire other organizations, technologies or products that fit within the Company's mission statement. Accordingly, the Company may choose to issue equity securities or enter into other financing arrangements for a portion of its future financing needs.


Table of Contents

PART I - FINANCIAL INFORMATION

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