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NEOG > SEC Filings for NEOG > Form 10-Q on 30-Sep-2013All Recent SEC Filings

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Form 10-Q for NEOGEN CORP


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 on Form 10-K for the fiscal year ended May 31, 2013.

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, 2013.

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Executive Overview

Neogen Corporation revenues for the first quarter ended August 31, 2013 were $58.5 million, an increase of $8.8 million, or 17.7%, compared to the same period in the prior year. Food Safety revenues increased by 14.5% and Animal Safety revenues increased by 21.3%. Overall, organic sales growth for the quarter was 12.5%, with the remainder of the growth coming from the following acquisitions: Macleod Pharmaceuticals (October 2012), Scidera Genomics (January 2013) and Syrvet (July 2013).

International sales were 42.3% of total sales in the first quarter, compared to 41.7% of total sales in the prior year. Neogen Europe sales increased 53.7% compared to the same period last year, primarily from increased sales of meat speciation kits, the result of mislabeled meat products, distributor stocking for a potential aflatoxin issue in Eastern Europe and genomics revenues from a number of European customers. Neogen Latinoamerica and Neogen do Brasil continued to expand their market presence and recorded revenue gains of 33.5% and 54.4%, respectively. Neogen Latinoamerica's increases were broad-based across all categories while Neogen do Brasil's growth was primarily driven by sales of drug residue tests for dairy antibiotics and genomics services.

Service revenue was $7.2 million, an increase of 46.5% compared to the prior year. The increase was due to customer acceptance of new custom chips developed primarily for the beef and dairy cattle and pork industries and increased sales to international customers, particularly in Europe and Brazil.

Gross margins were 51.9% for the first quarter, compared to 53.3% for the August 2012 quarter. The decrease in margin percentage was primarily the result of a higher percentage of Animal Safety sales in the first quarter, which have lower margins than Food Safety sales. Also, within each segment, material margins declined slightly due to product mix changes. Expressed as a percentage of revenues, operating margins increased from 20.8% in the prior year to 21.2% in the quarter ended August 31, 2013, as operating expenses overall went up less than the increase in revenues. Recent acquisitions in the Animal Safety segment have been complementary to existing product lines and have been integrated with minimal incremental costs. General and administrative costs increased $1.1 million for the quarter, primarily due to amortization of certain intangible assets from recent acquisitions and higher compensation expenses. Other expense of $552,000 in the first quarter was largely the result of currency losses recorded at the foreign subsidiaries as the Brazilian Real and Mexican Peso devalued against the U.S. dollar during the quarter.

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Three months ended August 31, 2013 and 2012:

                                                          Three Months ended August 31,
                                                 2013          2012         (Decrease)         %
                                                                  (In thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues      $ 15,875      $ 14,340      $      1,535        10.7 %
Bacteria & General Sanitation                     6,071         5,524               547         9.9 %
Dehydrated Culture Media & Other                  8,052         6,331             1,721        27.2 %

                                               $ 29,998      $ 26,195      $      3,803        14.5 %
Animal Safety
Life Sciences                                  $  1,918      $  1,876      $         42         2.2 %
Veterinary Instruments & Disposables              4,832         3,577             1,255        35.1 %
Animal Care & Other                               8,335         6,271             2,064        32.9 %
Rodenticides & Disinfectants                      7,707         7,307               400         5.5 %
DNA Testing                                       5,758         4,503             1,255        27.9 %

                                               $ 28,550      $ 23,534      $      5,016        21.3 %

Total Revenues                                 $ 58,548      $ 49,729      $      8,819        17.7 %

The Company's Food Safety segment revenues were $29,998,000 in the first quarter of fiscal 2014, 14.5% higher than the same period in the prior year, with increases in each major product category. Natural Toxins, Allergens and Drug Residues increased 10.7% in the first quarter of 2014 compared to the prior year. Increases in this category were led by meat speciation test sales in Europe and continuing strong growth of allergen test kits, especially gliadin, based on market demand. Aflatoxin test kits and readers were up, primarily in Eastern Europe, due to increased testing resulting from last year's contaminated crop, as well as stockpiling for anticipated outbreaks due to current crop concerns. Within this category, sales of test kits to detect drug residues in milk were down 3%, due primarily to order timing from a large international distributor.

Bacterial and General Sanitation increased 10% for the quarter, compared to the prior year. Accupoint Samplers had a strong quarter, particularly in the UK, due to increased sales and marketing focus. Sales of filters and ampoule media products were 39.1% higher in the quarter, the result of increased penetration in the beverage market.

The Dehydrated Culture Media and Other category increased 27.2% in the quarter ended August 31, 2013 compared to the same period in the prior year. Contributions from genomics service revenues to European customers, resulting from increased sales staffing and the introduction of new service offerings, led the growth in this category. Dehydrated culture media increased 16.1% in the first quarter, due primarily to incremental business at a number of larger customers.

The Company's Animal Safety segment revenues were $28,550,000, an increase of $5,016,000, or 21.3%, in the quarter ended August 31, 2013 compared to the same period in the prior year. The segment achieved increases in all major product categories. Life Sciences increased 2.2% in the first quarter, led by strong sales of forensic kits. This was partially offset by a decrease in racing kits, as this industry continues to contract; additionally, state testing labs serving the racing industry continue to consolidate.

Veterinary Instruments and Disposables increased 35.1% in the period. This category experienced strong growth, particularly in international sales, due in part to the acquisition of Syrvet, a distributor of veterinary products, at the beginning of July. Additionally, the Company entered into a packaging arrangement for disposable gloves with a large distributor. The Animal Care and Other category recorded an increase of 32.9% in the first quarter of fiscal 2014 compared to the prior year. Within this category, the Company benefited from sales of the veterinary antibiotic, Uniprim, from the Macleod Pharmaceuticals acquisition in October 2012 and incremental products from the Syrvet acquisition. This category also recorded increased sales of antibiotics resulting from international outbreaks of disease in the swine industry and strong sales of a wound care product, due to a supply disruption in the market.

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Rodenticides and Disinfectants increased 5.5% in the first quarter compared to the prior year. Leading this category were sales of cleaners and disinfectants, particularly to international customers, resulting from outbreaks of disease, such as avian influenza. Offsetting this was a decrease in rodenticides, primarily due to lower vole infestations.

DNA Testing increased by 27.9% compared to the first quarter a year ago. Increases were primarily from new business generated by the development of new genomic service offerings, customized primarily for the beef, dairy and pork markets. To a lesser extent, the Scidera acquisition also contributed to the growth.

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Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of the Company was $84,375,000 at August 31, 2013, compared to $85,369,000 at May 31, 2013. Approximately $5,508,000 in cash was generated from operations during the first three months of fiscal 2014. Net cash proceeds of $3,806,000 were realized from the exercise of stock options and issuance of shares under the Company's Employee Stock Purchase Plan during the first three months of FY-14. In July 2013, the Company completed the asset purchase of Syrvet Inc. for $10,012,000 net cash (see Note 7). The Company also spent $2,041,000 for property, equipment and other non-current assets in the first three months of 2014.

Accounts receivable increased by $4,912,000 due primarily to the increase in revenues; $747,000 resulted from the Syrvet acquisition. Inventory levels increased by $5,442,000 compared to May 31, 2013; $2,195,000 of the increase is the result of the Syrvet acquisition. Each of these items increased, on a percentage basis, by less than the rate of growth in revenues.

Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to 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 August 31, 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.

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