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NEOG > SEC Filings for NEOG > Form 10-Q on 4-Apr-2014All Recent SEC Filings

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Form 10-Q for NEOGEN CORP


4-Apr-2014

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, 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

Revenues for the Company for the third quarter ended February 28, 2014 were $62.0 million, an increase of $10.9 million, or 21.4%, compared to the same period in the prior year. For the year-to-date ended February 28, 2014 revenues were $180.1 million, an increase of $28.6 million, or 18.9%, compared to the prior year. Food Safety revenues increased by 10.7% and 11.5%, respectively, for the comparative quarter and nine-month periods ended February 28, 2014; all of that growth was organic. Animal Safety revenues rose by 32.0% and 26.7%, respectively, for the same comparative periods. Overall organic sales growth was 5.9% for the third quarter and 9.8% for the year to date, each compared to the same period in the prior year. The remainder of growth came from the following acquisitions: Macleod Pharmaceuticals (October 2012), Scidera Genomics (January 2013), Syrvet (July 2013), Prima Tech (November 2013), and Chem-Tech (January 2014).

International sales were $22.6 million, or 36.4% of total sales, in the third quarter, compared to $20.1 million, or 39.4% of total sales, in the prior year. For the nine months ended February 28, 2014, international sales were 39.2% of total sales compared to 39.5% of total sales for the same period in the prior year. Neogen Europe sales increased 22.0% for the third quarter and 32.4% for the year-to-date period. Neogen do Brasil and Neogen Latinoamerica continued to expand in their markets and recorded revenue gains in the third quarter of 31.3% and 30.7%, respectively. On a year-to-date basis, Neogen do Brasil sales increased 46.8% while Neogen Latinoamerica increased sales by 24.6%.

Service revenue was $7.4 million in the third quarter, an increase of 6.4% compared to the prior year. For the nine-month period, service revenue was $20.9 million, or 30.1% higher than the comparable prior year period. The increase for the year-to-date period was driven by sales of new proprietary service offerings introduced in the third quarter of the prior year.

Gross margin was 49.5% for the third quarter compared to 53.5% for the February 2013 quarter. The decrease in gross margin percentage for the comparative quarter was almost entirely due to the shift in overall company revenues towards Animal Safety products, due to the three acquisitions the Company has completed this fiscal year. On a year-to-date basis, gross margin was 50.3%, compared to 53.5% in the prior fiscal year. The decrease in gross margin on a year-to-date basis is due to shifts in product mix within each segment, and an overall shift in total revenues towards Animal Safety products, the result of the acquisitions. It is expected that the revenue mix will approximate its current proportion for the near term, and could affect our comparative results for the remainder of the fiscal year.

Selling, general and administrative expenses rose by 15.7% for the quarter and by 14.8 % for the year-to-date period. Operating margin decreased from 18.9% in the February 2013 quarter to 16.6% in the February 2014 quarter. On a year-to-date basis, operating margin was 18.0% compared to 20.1% in the same period of the prior year. For both the quarter and year-to-date, the decline in operating margin percentage was due to the decrease in gross margin percentage.


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Revenues

Three and nine months ended February 28, 2014 and 2013:



                                                           Three Months ended February 28,
                                                                              Increase/
                                                 2014           2013          (Decrease)           %
                                                                    (In thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues      $  13,919      $  13,299      $        620           4.7 %
Bacteria & General Sanitation                      6,312          5,504               808          14.7 %
Dehydrated Culture Media & Other                   7,789          6,508             1,281          19.7 %

                                               $  28,020      $  25,311      $      2,709          10.7 %
Animal Safety
Life Sciences                                  $   1,650      $   1,892      $       (242 )       -12.8 %
Veterinary Instruments & Disposables               8,655          4,373             4,282          97.9 %
Animal Care & Other                                9,654          7,459             2,195          29.4 %
Rodenticides, Disinfectants & Insecticides         8,037          6,248             1,789          28.6 %
DNA Testing Service                                5,980          5,772               208           3.6 %

                                               $  33,976      $  25,744      $      8,232          32.0 %

Total Revenues                                 $  61,996      $  51,055      $     10,941          21.4 %


                                                            Nine Months ended February 28,
                                                                              Increase/
                                                 2014           2013          (Decrease)           %
                                                                    (In thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues      $  44,739      $  42,419      $      2,320           5.5 %
Bacteria & General Sanitation                     18,313         15,907             2,406          15.1 %
Dehydrated Culture Media & Other                  23,365         19,211             4,154          21.6 %

                                               $  86,417      $  77,537      $      8,880          11.5 %
Animal Safety
Life Sciences                                  $   5,448      $   5,589      $       (141 )        -2.5 %
Veterinary Instruments & Disposables              19,815         11,619             8,196          70.5 %
Animal Care & Other                               26,676         21,336             5,340          25.0 %
Rodenticides, Disinfectants & Insecticides        24,498         21,607             2,891          13.4 %
DNA Testing Service                               17,289         13,834             3,455          25.0 %

                                               $  93,726      $  73,985      $     19,741          26.7 %

Total Revenues                                 $ 180,143      $ 151,522      $     28,621          18.9 %

The Company's Food Safety segment revenues were $28,020,000 in the third quarter of fiscal 2014, 10.7% higher than the same period in the prior year. On a year-to-date basis, Food Safety revenues were $86,417,000, 11.5% higher than the comparable period of the prior year. Natural Toxins, Allergens and Drug Residues increased 4.7% in the third quarter and 5.5% on a year-to-date basis, both compared to the same periods of the prior year. Allergen sales, including meat speciation kits, increased 16.5% and 23.9% for the quarter and year-to-date periods, respectively, due to increased consumer demand. Drug Residues sales growth was 5.3% for the third quarter and 4.7% for the year-to-date, both compared to the prior year. Sales of Natural Toxins test kits were down 2.2% and 2.4% for the quarter and year-to-date periods. This was due to relatively clean crops in the grain harvest in the current fiscal year and strong sales in the prior year resulting from aflatoxin and DON outbreaks in both the US and Europe.


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Bacteria and General Sanitation increased 14.7% for the quarter and 15.1% for the year, both compared to the same period in the prior year, primarily due to focused marketing programs for products in this category. The Soleris product line had sales growth of 16.9% for the quarter and 22.3% for the year while the AccuPoint line increased 11.1% and 20.2% for the same periods. Pathogen sales were up 8.3% for the third quarter compared to the prior year as the new product line ANSR gains traction. For the year-to-date, Pathogen sales were down 3.8%, primarily due to large equipment orders in the prior year.

The Dehydrated Culture Media and Other category increased 19.7% in the third quarter and 21.6% for the year-to-date period. 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 13.4% and 15.2% for the quarter and year-to-date periods, respectively, due to incremental sales at a number of larger customers, the capture of new business and targeted marketing programs.

The Company's Animal Safety segment revenues were $33,976,000, an increase of $8,232,000, or 32.0% for the quarter ended February 28, 2014, compared to the same period in the prior year. On a year-to-date basis, Animal Safety revenues were $93,726,000, 26.7% higher than the comparable period of the prior year. Each comparative period benefitted from the five acquisitions that the Company has completed since the beginning of fiscal 2013. Organic growth for the Animal Safety segment was 1.1% and 8.1% for the three and nine month periods, respectively.

Life Sciences decreased by 12.8% for the February 2014 quarter and 2.5% for the year, both compared to the same periods in the prior year. Within this category, forensic kit sales increased 19.7% for the quarter and 19.6% for the year-to-date period primarily due to new international business and increased business from labs in the US. Offsetting these increases were the loss of some revenues transferred to Neogen Europe for improved sales support and the loss of business by a Chinese distributor for residues.

Veterinary Instruments and Disposables increased 97.9% in the third quarter and 70.5% on a year-to-date basis. These increases reflect the acquisitions of Syrvet, in July, and Prima Tech, in November; each of these businesses' focus is on veterinary instruments. Organically, the Company increased sales in this category 9.6% for the February 2014 quarter and 9.0% on a year-to-date basis, due primarily to strong performance in detectable needles. Animal Care and Other revenues increased 29.4% and 25.0% for the quarter and year-to-date periods, respectively. Sales from the fiscal 2014 acquisitions are also included in this category; growth excluding the Syrvet and Prima Tech acquisitions was 9.9% for the third quarter ended February 28, 2014 and 14.2% for the year-to-date period, compared to the same periods in the prior year. In the third quarter, there was strong growth from sales of a Botulism vaccine for horses and the Company's recently acquired Uniprim line, an antibiotic for horses, as the equine market begins to rebound and there are more foals. The Company also benefitted from strong sales of a wound care product. Partially offsetting these gains was a decline in the small animal supplements line; last year's revenues in this product line were strong due to a supply disruption in the market, the result of a competitor shutdown.

Rodenticides, Disinfectants and Insecticides increased 28.6% in the third quarter and 13.4% on a year-to-date basis, each compared to the prior year. Sales of Chem-Tech products, the Company's January 2014 acquisition, are included in this category. Excluding these revenues, sales decreased 10.9% for the third quarter and increased 1.9% on a year-to-date basis. Factors contributing to the decrease were weak rodenticide sales, due to weather, and order timing from distributors for disinfectants.

DNA Testing Service revenues increased 3.6% for the third quarter and 25.0% on a year-to-date basis, both compared to the prior year. Cattle and canine parentage tests contributed to the increase in the third quarter. This was offset by bovine customers switching to a new lower density proprietary offering that has a lower sales price than previously available technology. For the year-to-date period, increases were from new business generated by the development of a proprietary service offering launched in the third quarter of the prior year. To a lesser extent, the Scidera acquisition, completed in January 2013, also contributed to the growth.

International sales were $22.6 million, or 36.4% of total sales in the third quarter, compared to $20.1 million, or 39.4% of total sales in the prior year. For the nine months ended February 28, 2014, international sales were 39.2% of total sales compared to 39.5% of total sales for the same period in the prior year. Neogen Europe sales increased 22.0% for the third quarter and 32.4% for the year-to-date period. For the third quarter, Neogen Europe's increase was driven by strong sales of Acumedia products, genomics and life sciences revenues from a number of European customers, and laboratory analysis testing for allergens and meat speciation. High demand for aflatoxin test kits in Eastern Europe and meat speciation kits throughout Europe also contributed to the revenue increase on a year-to-date basis. Neogen do Brasil and Neogen Latinoamerica continued to expand in their markets and recorded revenue gains in the third quarter of 31.3% and 30.7%, respectively. On a year-to-date basis, Neogen do Brasil sales increased 46.8% while Neogen Latinoamerica increased sales by 24.6%. Neogen do Brasil continued to penetrate the dairy market with sales of drug residue kits to detect the presence of dairy antibiotics, and also added a number of new customers for cleaners and disinfectants. On a year-to-date basis, genomics revenues have also contributed to its growth. Neogen Latinoamerica has had broad-based growth across all product categories throughout the year; additionally, sales of Soleris instruments, which are used to detect spoilage organisms in processed foods, contributed to its strong growth in the third quarter.


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Gross margin was 49.5% for the third quarter compared to 53.5% for the February 2013 quarter. The decrease in gross margin percentage for the comparative quarter was almost entirely due to the shift in overall company revenues towards Animal Safety products, due to the three acquisitions the Company has completed this fiscal year. On a year-to-date basis, gross margin was 50.3%, compared to 53.5% in the prior fiscal year. The decrease in gross margin on a year-to-date basis is due to shifts in product mix within each segment, and an overall shift in total revenues towards Animal Safety products, the result of the acquisitions. It is expected that the mix of revenues will remain close to its current proportion for the near term. For the year-to-date, Food Safety's gross margin percentage decreased, due primarily to lower aflatoxin test kit sales in the current year. The prior year had historically high sales of mycotoxin test kits due to several outbreaks in the US and Europe; this year's crops in the US were relatively clean, resulting in lower revenues for our kits, which are among our higher gross margin products. These conditions are likely to continue in the short term and impact our comparative results for the remainder of this fiscal year. The Animal Safety gross margin percentage declined for the quarter and year-to-date periods, due primarily to the effects of the incremental revenues, at lower margins, resulting from the acquisitions of SyrVet, Prima Tech, and Chem-Tech. This segment also benefitted in the prior year as it capitalized on a supply disruption in the market for a small animal supplement line caused by a competitor's shutdown. The competitor is now back in the market; we have retained some, but not all, of this higher margin business.

Sales and marketing expenses increased $1.5 million, or 13.8%, compared to the third quarter last year, and increased 10.9% for the year-to-date period. Increases in this category were primarily due to increased headcount, shipping, advertising and other marketing support costs. General and administrative costs increased $1.2 million for the quarter, or 23.1%, and were up 25.0% for the year-to-date period, primarily due to amortization of certain intangible assets from recent acquisitions, higher compensation and stock option expenses, and legal fees. Additional expenses from new locations in Colorado, North Carolina and Iowa, resulting from the acquisitions in the past year, also contributed to the increase. Research and development expenses were $2.1 million for the third quarter of FY2014, an increase of 6.3% over the same period a year ago. For the year-to-date, research and development expenses were 10.1% higher than last year, primarily due to outside contracted services expenses for various projects. Expressed as a percentage of sales, both sales and marketing and research and development expenses were less than the prior year for the quarter and year-to-date periods, respectively.

Operating margin decreased from 18.9% in the February 2013 quarter to 16.6% in the February 2014 quarter. On a year-to-date basis, operating margin was 18.0% compared to 20.1% in the same period of the prior year. For both the quarter and year-to-date, the decline in operating margin was due to the decrease in gross margin percentage.

On a year-to-date basis, other expense of $610,000 was largely the result of currency losses recorded at foreign subsidiaries as the Brazilian Real and Mexican Peso devalued against the U. S. dollar during the first half of fiscal 2014. For the quarter ended February 28, 2014, currency losses were minimal. Income tax expense in the prior year for the third quarter benefitted from the reinstatement of a federal research and development credit for calendar year 2013. This credit expired at the end of 2013, which has resulted in a higher effective income tax rate in the current quarter.


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Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of the Company was $68.8 million at February 28, 2014 compared to $85.4 million at May 31, 2013. Approximately $17.6 million was generated from operating activities during the first nine months of fiscal 2014. Net cash proceeds of $8.1 million 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 fiscal 2014. The Company completed asset purchases totaling $39.3 million in the first nine months of the year for three acquisitions (see Note 7 in the notes to Interim Consolidated Financial Statements). The Company also spent $7.8 million for property, equipment and other non-current assets in the first nine months of 2014.

Accounts receivable increased by $9.3 million, or 24.1%, for the first nine months of the year, due primarily to the increase in revenues. Inventory levels increased by $13.6 million, or 35.4%, compared to May 31, 2013 levels; at February 28, 2014, the inventory balances of the acquired SyrVet, Prima Tech and Chem-Tech businesses were $9.1 million. Management expects to rightsize inventory levels over the next few months, as product lines are rationalized and the businesses are more fully integrated into the Company.

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 February 28, 2014, 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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PART I - FINANCIAL INFORMATION

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