10-Q 1 d262964d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2011.

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number 0-17988

 

 

Neogen Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Michigan   38-2367843

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

620 Lesher Place

Lansing, Michigan 48912

(Address of principal executive offices, including zip code)

(517) 372-9200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

YES   ¨     NO   x

As of December 1, 2011, there were 23,526,643 shares of Common Stock outstanding.

 

 

 


Table of Contents

NEOGEN CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

         Page No.  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Interim Consolidated Financial Statements (unaudited)      2   
  Consolidated Balance Sheets – November 30, 2011 and May 31, 2011      2   
  Consolidated Statements of Income – Three and six months ended November 30, 2011 and 2010      3   
  Consolidated Statement of Equity – Six months ended November 30, 2011      4   
  Consolidated Statements of Cash Flows – Six months ended November 30, 2011 and 2010      5   
  Notes to Interim Consolidated Financial Statements – November 30, 2011      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      10   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      13   

Item 4.

  Controls and Procedures      13   
PART II. OTHER INFORMATION      14   

Item 1.

  Legal Proceedings      14   

Item 1A.

  Risk Factors      14   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      14   

Item 3.

  Defaults Upon Senior Securities      14   

Item 4.

  Removed and Reserved      14   

Item 5.

  Other Information      14   

Item 6.

  Exhibits      14   
Signatures      15   

CEO Certification

  

CFO Certification

  

Section 906 Certification

  

 

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Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Interim Consolidated Financial Statements

NEOGEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     November 30,     May 31,  
     2011     2011  
     (In thousands, except share
and per share amounts)
 
     (Unaudited)     (Audited)  

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 36,972      $ 35,844   

Marketable securities

     18,634        20,239   

Accounts receivable, less allowance of $800 and $800

     31,869        28,634   

Inventories

     36,425        31,994   

Deferred income taxes

     1,044        1,044   

Prepaid expenses and other current assets

     5,474        4,747   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     130,418        122,502   

NET PROPERTY AND EQUIPMENT

     28,888        22,340   

OTHER ASSETS

    

Goodwill

     51,634        51,584   

Other non-amortizable intangible assets

     5,166        5,166   

Customer based intangibles, net of accumulated amortization of $6,241 and $5,431

     11,196        12,006   

Other non-current assets, net of accumulated amortization of $3,152 and $2,789

     7,016        6,064   
  

 

 

   

 

 

 
     75,012        74,820   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 234,318      $ 219,662   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 9,611      $ 8,516   

Accrued compensation

     2,536        2,715   

Income taxes

     1,588        0   

Other accruals

     4,674        6,566   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     18,409        17,797   

DEFERRED INCOME TAXES

     8,347        8,347   

OTHER LONG-TERM LIABILITIES

     4,436        4,540   
  

 

 

   

 

 

 
     12,783        12,887   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     31,192        30,684   

EQUITY

    

Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding

     0        0   

Common stock, $.16 par value, 60,000,000 shares authorized, 23,526,643 and 23,290,604 shares issued and outstanding at November 30, 2011 and May 31, 2011, respectively

     3,764        3,727   

Additional paid-in capital

     84,794        81,248   

Accumulated other comprehensive loss

     (1,070     (394

Retained earnings

     115,312        104,064   
  

 

 

   

 

 

 

Total Neogen Corporation Stockholders’ Equity

     202,800        188,645   

Noncontrolling interest

     326        333   
  

 

 

   

 

 

 

TOTAL EQUITY

     203,126        188,978   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 234,318      $ 219,662   
  

 

 

   

 

 

 

See notes to interim consolidated financial statements

 

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NEOGEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended
November 30
    Six Months Ended
November 30
 
     2011     2010     2011     2010  
     (In thousands, except per share amounts)  

Net sales

   $ 44,891      $ 43,931      $ 90,588      $ 86,853   

Cost of goods sold

     22,234        21,443        44,954        41,598   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     22,657        22,488        45,634        45,255   

OPERATING EXPENSES

        

Sales and marketing

     8,631        7,504        16,734        15,016   

General and administrative

     4,173        3,714        8,185        7,576   

Research and development

     1,710        1,641        3,221        3,438   
  

 

 

   

 

 

   

 

 

   

 

 

 
     14,514        12,859        28,140        26,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     8,143        9,629        17,494        19,225   

OTHER INCOME (EXPENSE)

        

Interest income

     26        28        48        57   

Change in purchase consideration

     —          (100     —          (400

Other income (expense)

     (32     (47     (101     (147
  

 

 

   

 

 

   

 

 

   

 

 

 
     (6     (119     (53     (490
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     8,137        9,510        17,441        18,735   

INCOME TAXES

     2,900        3,400        6,200        6,800   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

     5,237        6,110      $ 11,241      $ 11,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME PER SHARE

        

Basic

   $ 0.22      $ 0.27      $ 0.48      $ 0.52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.22      $ 0.26      $ 0.47      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim consolidated financial statements

 

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Table of Contents

NEOGEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

 

     Common Stock      Additional
Paid-in
Capital
     Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
     Noncontrolling
Interest
    Total  
                 
                 
     Shares      Amount               
     (In thousands)  

Balance, June 1, 2011

     23,291       $ 3,727       $ 81,248       $ (394   $ 104,064       $ 333      $ 188,978   

Issuance of shares of common stock under equity compensation plans, and share based compensation, including $1,364 of excess income tax benefit

     229         36         3,325                3,361   

Issuance of shares under employee stock purchase plan

     6         1         221                222   

Comprehensive income:

                  

Net income (loss) for the six months ended November 30, 2011

                11,248         (7     11,241   

Foreign currency translation adjustments

              (676          (676
                  

 

 

 

Total comprehensive income ($12,794 in the six months ended November 30, 2010)

                     10,565   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, November 30, 2011

     23,526       $ 3,764       $ 84,794       $ (1,070   $ 115,312       $ 326      $ 203,126   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

See notes to interim consolidated financial statements

 

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NEOGEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six Months Ended  
     November 30,  
     2011     2010  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 11,241      $ 11,935   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     2,911        2,584   

Share based compensation

     1,072        1,240   

Excess income tax benefit from the exercise of stock options

     (1,364     (322

Changes in operating assets and liabilities, net of business acquisitions:

    

Accounts receivable

     (3,235     (215

Inventories

     (4,411     213   

Prepaid expenses and other current assets

     (726     292   

Accounts payable, accruals and other

     686        3,832   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     6,174        19,559   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment and other assets

     (8,897     (3,423

Proceeds from the sale of marketable securities

     39,804        13,034   

Purchases of marketable securities

     (38,199     (30,345

Payments for business acquisitions

     (813     0   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (8,105     (20,734

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Increase (decrease) in other long-term liabilities

     (854     257   

Net proceeds from issuance of common stock

     2,511        4,871   

Excess income tax benefit from the exercise of stock options

     1,364        322   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     3,021        5,450   

EFFECT OF EXCHANGE RATE ON CASH

     38        0   

INCREASE IN CASH

     1,128        4,275   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     35,844        22,806   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 36,972      $ 27,081   
  

 

 

   

 

 

 

See notes to interim consolidated financial statements

 

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NEOGEN CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the six month period ended November 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2012. For more complete financial information, these consolidated financial statements should be read in conjunction with the May 31, 2011 audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended May 31, 2011.

2. INVENTORIES

Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. The components of inventories follow:

 

     November 30,
2011
     May 31,
2011
 
     (In thousands)  

Raw materials

   $ 15,475       $ 12,125   

Work-in-process

     2,718         2,192   

Finished and purchased goods

     18,232         17,677   
  

 

 

    

 

 

 
   $ 36,425       $ 31,994   
  

 

 

    

 

 

 

3. NET INCOME PER SHARE

The calculation of net income per share follows:

 

     Three Months Ended
November 30,
     Six Months Ended
November 30,
 
     2011      2010      2011      2010  

Numerator for basic and diluted net income per share:

           

Net income

   $ 5,237       $ 6,110       $ 11,241       $ 11,935   

Denominator:

           

Denominator for basic net income per share:

           

Weighted average shares

     23,418         22,926         23,369         22,802   

Effect of dilutive stock options and warrants

     556         803         632         797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted net income per share

     23,974         23,729         24,001         23,599   

Net income per share:

           

Basic

   $ 0.22       $ 0.27       $ 0.48       $ 0.52   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.26       $ 0.47       $ 0.51   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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4. SEGMENT INFORMATION

The Company has two reportable segments: Food Safety and Animal Safety. The Food Safety segment produces and markets 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 production and marketing of products dedicated to animal health, including a complete line of consumable products marketed to veterinarians and animal health product distributors; the segment also provides genetic identification services. Additionally, Animal Safety produces and markets rodenticides and disinfectants to assist in control of rodents and disease in and around agricultural, food production and other facilities.

Segment information for the three months ended November 30, 2011 and 2010 follows:

 

     Food
Safety
     Animal
Safety
     Corporate and
Eliminations (1)
    Total  
            (In thousands)        

Fiscal 2012

          

Net sales to external customers

   $ 22,042       $ 22,849       $ 0      $ 44,891   

Operating income (reduction)

     5,679         2,933         (469     8,143   

Total assets

     84,719         101,341         48,258        234,318   

Fiscal 2011

          

Net sales to external customers

   $ 21,341       $ 22,590       $ 0      $ 43,931   

Operating income (reduction)

     6,264         3,775         (410     9,629   

Total assets

     76,790         87,914         38,971        203,675   

Segment information for the six months ended November 30, 2011 and 2010 follows:

 

     Food
Safety
     Animal
Safety
     Corporate and
Eliminations (1)
    Total  
            (In thousands)        

Fiscal 2012

          

Net sales to external customers

   $ 45,324       $ 45,264       $ 0      $ 90,588   

Operating income (reduction)

     12,843         5,676         (1,025     17,494   

Fiscal 2011

          

Net sales to external customers

   $ 43,593       $ 43,260       $ 0      $ 86,853   

Operating income (reduction)

     13,237         6,886         (898     19,225   

 

(1) Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities, deferred assets and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions.

 

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5. EQUITY COMPENSATION PLANS

Options are generally granted under the employee and director stock option plan for 5 year periods and become exercisable in equal annual installments during that period. Certain non-qualified options are granted for 10 year periods. A summary of stock option activity during the six months ended November 30, 2011 follows:

 

     Shares     Weighted-Average
Exercise Price
 

Options outstanding at June 1, 2011

     1,574,000      $ 17.77   

Granted

     313,000        34.60   

Exercised

     (229,000     11.59   

Forfeited

     (31,000     14.88   
  

 

 

   

Options outstanding at November 30, 2011

     1,627,000        21.94   

During the three and six month periods ended November 30, 2011 and 2010, the Company recorded $472,000 and $564,000 and $1,072,000 and $1,240,000, respectively, of compensation expense related to its share-based awards.

The weighted-average fair value of stock options granted during FY-2012 and 2011, estimated on the date of grant using the Black-Scholes option pricing model was $10.42 and $8.60 respectively, per option. The fair value of stock options granted was estimated using the following weighted-average assumptions.

 

     FY-12     FY-11  

Risk-free interest rate

     1.17     1.7

Expected dividend yield

     0     0

Expected stock price volatility

     36.4     35.8

Expected option life

     4.0 years        4.0 years   

The Company has an Employee Stock Purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is expensed as of the date of purchase.

6. NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued an accounting standards update titled Presentation of Comprehensive Income. This update eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, must be displayed under either alternative. The new disclosure requirements are effective for fiscal years beginning after December 15, 2011.

In September 2011, the FASB issued an accounting standards update titled Intangibles — Goodwill and Other: Testing Goodwill for Impairment. This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, in some cases, skip the two-step impairment test. This standard is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted.

The above ASU’s issued by the FASB, upon adoption, are not expected by management to have a material effect on the Company’s consolidated financial statements.

 

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7. BUSINESS AND PRODUCT LINE ACQUISITIONS

On April 1, 2010, Neogen Corporation acquired GeneSeek, Inc. of Lincoln, Nebraska, a leading commercial agricultural genetic laboratory. GeneSeek’s technology employs high-resolution DNA genotyping for identity and trait analysis in a variety of important animal and agricultural plant species. Consideration for the purchase was $14,050,000 in cash and secondary payment obligations of up to $7,000,000. The allocation of the purchase price included accounts receivable of $1,923,000, inventory of $1,512,000, fixed assets of $847,000, current liabilities of $905,000, deferred tax liabilities of $2,530,000, secondary payment liabilities of $3,583,000, and the remainder to goodwill (not deductible for tax purposes) and other intangible assets (with estimated lives of 5-20 years). The allocation was generally based on the fair value of these assets determined using the income approach. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 fair value measurements. The secondary payment was based upon future operating results of the GeneSeek business through 2013, and payable annually over a three year period, measured at fair value, and is considered a Level 3 fair value measurement. The Company recorded a charge within other income (expense) of approximately $787,000 for the year ended May 31, 2011, representing the increase from its original estimate in fair value of the secondary payment liability. As of May 31, 2011, the balance of the secondary payment liability recorded was approximately $4,370,000. A payment of $1,856,000 was made in June, 2011 to the former owners of GeneSeek, comprised of $1,537,000 for the first year contingent payment and an additional $319,000 for inventory purchased post acquisition and settlement of other liabilities. The acquisition has been integrated into the Animal Safety segment.

On June 21, 2011, Neogen Corporation acquired the assets of VeroMara seafood testing laboratory for approximately $813,000 in cash and a potential secondary payment of approximately $200,000 from its parent company, GlycoMar Ltd. Based in Oban, Scotland, VeroMara offers testing services to the shellfish and salmon aquaculture industries. VeroMara’s services include testing for shellfish toxins, general foodborne pathogens, including E. coli , noroviruses, and salmon husbandry. VeroMara recorded revenues of approximately $800,000 (U.S.) in its most recently completed fiscal year. The purchase accounting for this transaction will be completed in fiscal year 2012. The acquisition is expected to provide a strong synergistic fit for the Company’s Food Safety segment.

8. LONG TERM DEBT AND LIABILITIES

The Company has a financing agreement in place with a bank (no amounts drawn at November 30, 2011 or May 31, 2011) which, through the first quarter of fiscal 2011, provided for an unsecured revolving line of credit of $10,000,000. Effective August 31, 2011, the Company extended the agreement by one year through November 30, 2013 and increased the total available credit to $12,000,000. The incremental credit is to provide for flexibility for potential foreign currency hedging strategies. The interest rate is at LIBOR plus 100 basis points (rate under terms of the agreement was 1.26% at November 30, 2011). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at November 30, 2011.

9. COMMITMENTS AND CONTINGENCIES

The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company is currently expensing annual costs of remediation, which have ranged from $50,000 to $105,000 per year over the past five years. The Company’s estimated liability for these costs of $916,000 at November 30, 2011 and 2010, measured on an undiscounted basis over an estimated period of 15 years, is recorded within other long term liabilities in the consolidated balance sheet.

The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, will not have a material effect on its future results of operations or financial position.

10. STOCK PURCHASE

In December 2008, the Company’s Board of Directors authorized a program to purchase, subject to market conditions, up to 750,000 shares of the Company’s common stock. As of November 30, 2011, 74,684 cumulative shares had been purchased in negotiated and open market transactions for a total price, including commissions, of approximately $923,000. Shares purchased under the program were retired. There have been no purchases in fiscal year 2012 and there were none in 2011.

 

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Item 2. Management’s Discussion and Analysis of Financial Conditions 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 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.

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, 2011.

 

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Results of Operations

Executive Overview

Neogen Corporation revenues increased by 2.2% in the second quarter to $44.9 million and by 4.3% to $90.6 million for the six-month period ended November 30, 2011 each, when compared to the prior year. Food Safety revenues increased by 3.3% and 4.0% in the quarter and the six-month period ended November 30, 2011, respectively. Animal Safety revenues increased by 1.1% and 4.6% in the quarter and in the six-month period ended November 30, 2011, respectively. Exclusive of the revenues from the VeroMara acquisition, which was made in June 2011, Food Safety revenue increases were 2.8% and 3.4% in the second quarter and year-to-date periods, respectively. Gross margins decreased from 51.2% in the November 2010 quarter to 50.5% in the November 2011 quarter and decreased from 52.1% to 50.4% on a year-to-date basis. The change in margin percentage for the year to date period is primarily the result of shifts in product mix and increases in fixed manufacturing cost. Operating margins decreased in the comparative quarter and six-month periods from 21.9% to 18.1% and from 22.1% to 19.3%, respectively. The decreases were primarily the result of investments in sales and customer support personnel and infrastructure, part of a long-term strategy that management believes may result in revenue gains and efficiencies in the future.

Revenues

Three and six months ended November 30, 2011 compared to three and six months ended November 30, 2010:

 

     Three Months Ended November 30,  
     2011      2010      Increase /
(Decrease)
    %  
     (In thousands except percents)  

Food Safety

    

Natural Toxins, Allergens & Drug Residues

   $ 11,501       $ 11,192       $ 309        2.8   

Bacteria & General Sanitation

     5,839         5,393         446        8.3   

Dehydrated Culture Media & Other

     4,702         4,756         (54     (1.1
  

 

 

    

 

 

    

 

 

   
   $ 22,042       $ 21,341         701        3.3   

Animal Safety

          

Life Science & Other

     1,974         1,883         91        4.8   

Vaccines

     852         746         106        14.2   

Rodenticides & Disinfectants

     7,106         7,868         (762     (9.7

Veterinary Instruments & Other

     8,986         7,484         1,502        20.1   

DNA Testing

     3,931         4,609         (678     (14.7
  

 

 

    

 

 

    

 

 

   
     22,849         22,590         259        1.1   
  

 

 

    

 

 

    

 

 

   

Total Revenues

   $ 44,891       $ 43,931       $ 960        2.2   
  

 

 

    

 

 

    

 

 

   

 

     Six Months Ended November 30,  
     2011      2010      Increase /
(Decrease)
    %  
     (In thousands except percents)  

Food Safety

          

Natural Toxins, Allergens & Drug Residues

   $ 23,463       $ 22,671       $ 792        3.5   

Bacteria & General Sanitation

     12,274         10,743         1,531        14.3   

Dehydrated Culture Media & Other

     9,587         10,179         (592     (5.8
  

 

 

    

 

 

    

 

 

   
   $ 45,324       $ 43,593         1,731        4.0   

Animal Safety

          

Life Science & Other

     4,071         3,953         118        3.0   

Vaccines

     1,339         1,328         11        0.8   

Rodenticides & Disinfectants

     13,730         13,561         169        1.2   

Veterinary Instruments & Other

     18,427         15,069         3,358        22.3   

DNA Testing

     7,697         9,349         (1,652     (17.7
  

 

 

    

 

 

    

 

 

   
     45,264         43,260         2,004        4.6   
  

 

 

    

 

 

    

 

 

   

Total Revenues

   $ 90,588       $ 86,853       $ 3,735        4.3   
  

 

 

    

 

 

    

 

 

   

 

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Food Safety revenues increased 3.3% in the second quarter and 4.0% in the first six months of FY-12, each compared to the prior year. Exclusive of the VeroMara acquisition, revenues increased by 2.8% and 3.4% in the quarter and six month periods, in comparison to the same periods of the prior year. Sales of Natural Toxin, Allergen and Drug Residue products increased by 2.8% in the quarter and by 3.5% for the year-to-date in comparison with FY-11. Within this product group, BetaStar Kits to detect drug residues increased by 7.5% in the second quarter and by 17.0% for the first six months of the fiscal year. Mycotoxin second quarter revenues declined by 0.9%, and by 5.8% for the six- month period as there were fewer incidences of Aflatoxin and DON outbreaks during the summer and fall harvest season. Revenues from Food Allergen tests increased 2.1% in the second quarter and 1.1% for the six months ended November 2011. Bacteria and General Sanitation product revenues increased by 8.3% in the quarter and 14.3% for the first six months of FY-12 compared to FY-11 primarily due to placements of Soleris ® optical microbial detection systems in the current year. Dehydrated Culture Media and Other product revenues decreased by 1.1% and 5.8% in the quarter and in the six-month periods, respectively, primarily due to the loss of a significant customer due to credit issues and the closure of a plant by another significant customer.

Animal Safety revenues increased by 1.1% in the second quarter and 4.6% for the year to date period ended November 30, 2011 in comparison with the prior year. Life sciences and other revenue increased by 4.8% in the quarter and 3.0% in the six month periods, respectively. Forensic test kit revenues were up 12% in the second quarter compared with the prior year quarter and the launch of an improved substrate product led to an increase in sales of test reagents that Neogen offers to other test kit manufacturers. Vaccine revenues increased by 14.2% for the second quarter and increased by 0.8% in the first six months of FY-12, due to timing of orders and the shipment of product to large key distributors. Rodenticide and Disinfectant product revenues decreased by 9.7% in the second quarter but increased by 1.2% on a year-to-date basis. Rodenticides declined due to strong 4th quarter FY-2011 sales ahead of a June 2011 change in EPA rules regarding labeling of these products. The strong fourth quarter sales led to lower first and second quarter FY-2012 revenues. Sales of cleaners and disinfectants have increased in the comparative three and six months periods due to sales to international distributors. Veterinary Instrument and other product revenues increased by 20.1% and 22.3% in the quarter and six months, respectively, in comparison with the prior year. Increases were due to strong detectable needle revenues and significant sales increases in companion animal products, veterinary gloves and apparel products sold through key veterinary distribution channels. Revenues decreased at GeneSeek by 14.7% and 17.7% for the three months and six months ended November 30, 2011 compared to the same periods in the prior year, due primarily to business from new products and contracts earned in the prior year which were not achieved to the same extent, or did not occur, during the first half of FY2012. GeneSeek’s contract business is not necessarily predictable from period-to-period as to its timing or amount.

Gross margins decreased from 51.2% in the second quarter of FY-11 to 50.5% in the second quarter of FY-12, and from 52.1% in the first six months of FY-2011 to 50.4% in the same period of FY-12. This resulted principally from changes in product mix and increased manufacturing expenses.

Operating margins decreased from 21.9% to 18.1% in the second quarter and from 22.1% to 19.3% in the first six months of FY-12 as compared to the first six months of FY-11. Sales and marketing expenses as expressed as a percentage of revenues increased from 17.1% to 19.2% in the second quarter and increased from 17.3% to 18.5% on a year-to-date basis. The increase in sales and marketing expenses is the direct effect of additional sales, marketing and customer service representatives added during the year. These positions were added to help the company capture and support available market opportunities. General and administrative expenses increased from 8.5% to 9.3% of revenues in the second quarter, and from 8.7% to 9.0% on a year to date basis. The change in general and administrative expense is due to the increased compensation costs, amortization from acquired businesses, and costs associated with increased governmental licensing and regulatory affairs. Research expense increased from 3.7% to 3.8% in the second quarter and decreased from 4.0% to 3.6% in the first six months of FY-12. While these expenses vary on a quarter to quarter basis depending on the timing of new projects and the completion of existing projects, management expects that research and development efforts will range between 4% to 5% in support of existing products and for development of future products.

Financial Condition and Liquidity

The overall cash and marketable securities position of the company was $55,606,000 at November 30, 2011, compared to $56,083,000 at May 31, 2011. Approximately $6,174,000 in cash was generated from operations during the six months ended November 30, 2011. Net cash proceeds of $2,511,000 were realized from the exercise of stock options and issuance of shares under the Employee Stock Purchase Plan during the first six months of FY-12. Accounts receivable increased by $3,235,000 due to increases in revenues and in the timing of receipt of payments; inventories increased by $4,411,000 as a result of the build up for anticipated orders with large international customers and bulk purchases made to receive discounted pricing. In June, the Company closed its purchase of VeroMara for approximately $813,000. In August, the Company completed the purchase of a 128,000 square foot office and warehouse facility in Lexington, Kentucky for $4,950,000. This facility was purchased to accommodate the expansion of the company’s animal safety operations. 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.

Management believes that the Company’s existing cash and marketable securities balances at November 30, 2011, 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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company has interest rate and foreign exchange rate risk exposure and no long-term fixed rate investments or borrowings. Primary interest rate risk is due to potential fluctuations of exposure to interest rates for variable rate borrowings.

Foreign exchange risk exposure arises because the Company markets and sells its products throughout the world. The Company also could be affected by weak economic conditions in foreign markets that could reduce demand for its products. Additionally, revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. Dollar. The Company’s operating results are primarily exposed to changes in exchange rates between the U.S. Dollar, the British Pound Sterling and the Euro. When the U.S. Dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. Dollar strengthens, the opposite situation occurs. Additionally, previously recognized revenues in the course of collection can be affected positively or negatively by changes in exchange rates. The Company uses derivative financial instruments to help manage the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.

Neogen has assets, liabilities and operations outside of the United States, which are located in Scotland, Brazil and Mexico where the functional currency is the British Pound Sterling, Brazilian Real and Mexican Peso, respectively. The Company’s investments in foreign subsidiaries are considered to be long-term.

PART I – FINANCIAL INFORMATION

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of November 30, 2011 was carried out under the supervision and with the participation of the Company’s management, including the Chairman & Chief Executive Officer and the Vice President & Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls Over Financial Reporting

There was no change to the Company’s internal control over financial reporting during the quarter ended November 30, 2011 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is subject to certain legal and other proceedings in the normal course of business. In the opinion of management, the outcome of these matters will not have a material effect on its future results of operations or financial position.

 

Item 6. Exhibits

 

(a) Exhibit Index

 

3(i)            Restated Articles of Incorporation
31.1           Certification of Chief Executive Officer pursuant to Rule 13a – 14 (a).
31.2           Certification of Chief Financial Officer pursuant to Rule 13a – 14 (a).
32           Certification pursuant to 18 U.S.C. sections 1350.
99.1           Neogen Corporation 2011 Employee Stock Purchase Plan
99.2           Amended and Restated Neogen Corporation 2007 Stock Option Plan
101.INS           XBRL Instance Document
101.SCH           XBRL Taxonomy Extension Schema Document
101.CAL           XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF           XBRL Taxonomy Extension Definition Document
101.LAB           XBRL Taxonomy Extension Label Linkbase Document
101.PRE           XBRL Taxonomy Extension Presentation Linkbase Document

Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

NEOGEN CORPORATION

        (Registrant)

Dated: December 30, 2011    
    /s/ James L. Herbert
   

James L. Herbert

Chairman & Chief Executive Officer

(Principal Executive Officer)

Dated: December 30, 2011    
    /s/ Steven J. Quinlan
   

Steven J. Quinlan

Vice President & Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

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