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 February 29, 2012.

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 March 1, 2012, there were 23,553,508 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 – February 29, 2012 and May 31, 2011      2   
  Consolidated Statements of Income – Three and nine months ended February 29, 2012 and February 28, 2011      3   
  Consolidated Statement of Equity – Nine months ended February 29, 2012      4   
  Consolidated Statements of Cash Flows – Nine months ended February 29, 2012 and February 28, 2011      5   
  Notes to Interim Consolidated Financial Statements – February 29, 2012      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      15   

Item 4.

  Controls and Procedures      15   
PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings      16   

Item 1A.

  Risk Factors      16   

Item 6.

  Exhibits      16   
Signatures      17   

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

 

     February 29,     May 31,  
     2012     2011  
     (In thousands, except share
and per share amounts)
 
     (Unaudited)     (Audited)  

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 42,698      $ 35,844   

Marketable securities

     18,637        20,239   

Accounts receivable, less allowance of $800 and $800

     34,332        28,634   

Inventories

     36,313        31,994   

Deferred income taxes

     1,044        1,044   

Prepaid expenses and other current assets

     3,170        4,747   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     136,194        122,502   

NET PROPERTY AND EQUIPMENT

     29,502        22,340   

OTHER ASSETS

    

Goodwill

     51,704        51,584   

Other non-amortizable intangible assets

     5,166        5,166   

Customer based intangibles, net of accumulated amortization of $6,689 and $5,431

     10,748        12,006   

Other non-current assets, net of accumulated amortization of $3,385 and $2,789

     7,033        6,064   
  

 

 

   

 

 

 
     74,651        74,820   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 240,347      $ 219,662   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 7,708      $ 8,516   

Accrued compensation

     2,698        2,715   

Income taxes

     2,604        0   

Other accruals

     4,426        6,566   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     17,436        17,797   

DEFERRED INCOME TAXES

     8,347        8,347   

OTHER LONG-TERM LIABILITIES

     4,580        4,540   
  

 

 

   

 

 

 
     12,927        12,887   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     30,363        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, 23,553,508 and 23,290,604 shares issued and outstanding at February 29, 2012 and May 31, 2011, respectively

     3,768        3,727   

Additional paid-in capital

     86,107        81,248   

Accumulated other comprehensive loss

     (773     (394

Retained earnings

     120,580        104,064   
  

 

 

   

 

 

 

Total Neogen Corporation Stockholders’ Equity

     209,682        188,645   

Noncontrolling interest

     302        333   
  

 

 

   

 

 

 

TOTAL EQUITY

     209,984        188,978   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 240,347      $ 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
February 29/28,
    Nine Months Ended
February 29/28,
 
     2012      2011     2012      2011  
     (In thousands, except per share amounts)  

Net sales

   $ 44,912       $ 42,235      $ 135,501       $ 129,088   

Cost of goods sold

     22,020         21,647        66,975         63,245   
  

 

 

    

 

 

   

 

 

    

 

 

 

GROSS MARGIN

     22,892         20,588        68,526         65,843   

OPERATING EXPENSES

          

Sales and marketing

     8,929         7,044        25,662         22,060   

General and administrative

     4,660         3,677        12,846         11,253   

Research and development

     1,754         1,802        4,976         5,240   
  

 

 

    

 

 

   

 

 

    

 

 

 
     15,343         12,523        43,484         38,553   
  

 

 

    

 

 

   

 

 

    

 

 

 

OPERATING INCOME

     7,549         8,065        25,042         27,290   

OTHER INCOME (EXPENSE)

          

Interest income

     30         13        78         70   

Change in purchase consideration

     180         (218     180         (618

Other income (expense)

     385         (17     285         (164
  

 

 

    

 

 

   

 

 

    

 

 

 
     595         (222     543         (712
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     8,144         7,843        25,585         26,578   

INCOME TAXES

     2,900         2,900        9,100         9,700   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

     5,244         4,943      $ 16,485       $ 16,878   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME PER SHARE

          

Basic

   $ 0.22       $ 0.21      $ 0.70       $ 0.74   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.21      $ 0.69       $ 0.71   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to interim consolidated financial statements

 

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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 $1,432 of excess income tax benefit

     249         39         4,377                4,416   

Issuance of shares under employee stock purchase plan

     14         2         482                484   

Comprehensive income:

                  

Net income (loss) for the nine months ended February 29, 2012

                16,516         (31     16,485   

Foreign currency translation adjustments

              (379          (379
                  

 

 

 

Total comprehensive income ($18,030 in the nine months ended February 28, 2011)

                     16,106   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance, February 29, 2012

     23,554       $ 3,768       $ 86,107       $ (773   $ 120,580       $ 302      $ 209,984   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

See notes to interim consolidated financial statements

 

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NEOGEN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine Months Ended  
     February 29/28,  
     2012     2011  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 16,485      $ 16,878   

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

    

Depreciation and amortization

     4,489        3,941   

Share based compensation

     1,757        1,824   

Excess income tax benefit from the exercise of stock options

     (1,432     (461

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

    

Accounts receivable

     (5,695     (1,460

Inventories

     (4,363     383   

Prepaid expenses and other current assets

     1,564        331   

Accounts payable, accruals and other

     430        2,525   
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     13,235        23,961   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment and other assets

     (10,820     (5,353

Proceeds from the sale of marketable securities

     55,883        27,253   

Purchases of marketable securities

     (54,281     (44,695

Payments for business acquisitions

     (813     0   
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (10,031     (22,795

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Increase (decrease) in other long-term liabilities

     (750     301   

Net proceeds from issuance of common stock

     3,024        5,451   

Excess income tax benefit from the exercise of stock options

     1,432        461   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     3,706        6,213   

EFFECT OF EXCHANGE RATE ON CASH

     (56     0   

INCREASE IN CASH

     6,854        7,379   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     35,844        22,806   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 42,698      $ 30,185   
  

 

 

   

 

 

 

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 nine month period ended February 29, 2012 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:

 

     February 29,
2012
     May 31,
2011
 
     (In thousands)  

Raw materials

   $ 14,161       $ 12,125   

Work-in-process

     2,650         2,192   

Finished and purchased goods

     19,502         17,677   
  

 

 

    

 

 

 
   $ 36,313       $ 31,994   
  

 

 

    

 

 

 

3. NET INCOME PER SHARE

The calculation of net income per share follows:

 

     Three Months Ended
February 29/28,
     Nine Months Ended
February 29/28,
 
     2012      2011      2012      2011  

Numerator for basic and diluted net income per share:

           

Net income

   $ 5,244       $ 4,943       $ 16,485       $ 16,878   

Denominator:

           

Denominator for basic net income per share:

           

Weighted average shares

     23,541         23,149         23,428         22,923   

Effect of dilutive stock options and warrants

     447         785         571         797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted net income per share

     23,988         23,934         23,999         23,720   

Net income per share:

           

Basic

   $ 0.22       $ 0.21       $ 0.70       $ 0.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.21       $ 0.69       $ 0.71   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 February 29/28, 2012 and 2011 follows:

 

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

Fiscal 2012

          

Net sales to external customers

   $ 21,923       $ 22,989       $ 0      $ 44,912   

Operating income (reduction)

     5,119         3,174         (744     7,549   

Total assets

     83,053         103,262         54,032        240,347   

Fiscal 2011

          

Net sales to external customers

   $ 20,634       $ 21,601       $ 0      $ 42,235   

Operating income (reduction)

     5,516         3,063         (514     8,065   

Total assets

     77,179         89,771         42,207        209,157   

Segment information for the nine months ended February 29/28, 2012 and 2011 follows:

 

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

Fiscal 2012

          

Net sales to external customers

   $ 67,247       $ 68,254       $ 0      $ 135,501   

Operating income (reduction)

     17,961         8,851         (1,770     25,042   

Fiscal 2011

          

Net sales to external customers

   $ 64,226       $ 64,862       $ 0      $ 129,088   

Operating income (reduction)

     18,753         9,949         (1,412     27,290   

 

(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 nine months ended February 29, 2012 follows:

 

     Shares     Weighted-Average
Exercise Price
 

Options outstanding at June 1, 2011

     1,574,000      $ 17.77   

Granted

     316,000        34.59   

Exercised

     (249,000     11.86   

Forfeited

     (28,000     15.30   
  

 

 

   

Options outstanding at February 29, 2012

     1,613,000        22.03   

During the three and nine month periods ended February 29, 2012 and February 28, 2011, the Company recorded $685,000 and $584,000 and $1,757,000 and $1,824,000, 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

     1.2     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. 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. During the three and nine months ended February 29, 2012 and February 28, 2011 the Company recorded approximately $180,000 and $130,000 and ($218,000) and ($618,000), respectively, within other income (expense), representing the change in fair market value of the secondary payment liability. As of February 29, 2012 the balance of secondary payment liability was approximately $2,653,000. 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. The potential secondary payment was based on VeroMara being awarded a contract in FY 12, which did not occur. 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

The Company has a financing agreement in place with a bank (no amounts drawn at February 29, 2012 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 the terms of the agreement was 1.24% at February 29, 2012). 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 February 29, 2012.

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 February 29, 2012 and May 31, 2011, 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, should not have a material effect on its future results of operations or financial position.

 

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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 February 29, 2012, 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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PART I – FINANCIAL INFORMATION

 

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.

Results of Operations

Executive Overview

Neogen Corporation revenues increased by 6.3% in the third quarter to $44.9 million and by 5.0% to $135.5 million for the nine-month period ended February 29, 2012, compared to the prior year. Food Safety revenues increased by 6.2% and 4.7% in the quarter and the nine-month period ended February 29, 2012, respectively. Animal Safety revenues increased by 6.4% and 5.2% in the quarter and in the nine-month period ended February 29, 2012, respectively. Exclusive of the revenues from the VeroMara acquisition, which was made in June 2011, Food Safety revenue increases were 5.7% and 4.2% in the third quarter and year-to-date periods, respectively. Gross margins increased from 48.7% in the February 2011 quarter to 51.0% in the February 2012 quarter and decreased from 51.0% to 50.6% on a year-to-date basis. The change in margin percentage for the quarter was the result of a favorable shift in product mix and manufacturing efficiencies resulting from the increased product volume. Operating margins decreased in the comparative quarter and nine-month periods from 19.1% to 16.8% and from 21.1% to 18.5%, 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 should result in revenue gains and efficiencies in the future. International revenues were 40.7% of total revenues for the quarter and 40.7% for the nine month period ended February 29, 2012.

 

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Revenues

Three and nine months ended February 29, 2012 compared to three and nine months ended February 28, 2011:

 

     Three Months Ended February 29/28,  
     2012      2011      Increase /
(Decrease)
    %  
     (In thousands except percents)  

Food Safety

          

Natural Toxins, Allergens & Drug Residues

   $ 10,568       $ 9,945       $ 623        6.3   

Bacteria & General Sanitation

     5,868         5,871         (3     —     

Dehydrated Culture Media & Other

     5,487         4,818         669        13.9   
  

 

 

    

 

 

    

 

 

   
   $ 21,923       $ 20,634         1,289        6.2   

Animal Safety

          

Life Science & Other

     2,018         1,909         109        5.7   

Vaccines

     646         441         205        46.7   

Rodenticides & Disinfectants

     6,436         7,185         (749     (10.4

Veterinary Instruments & Other

     9,072         7,034         2,038        29.0   

DNA Testing

     4,817         5,032         (215     (4.3
  

 

 

    

 

 

    

 

 

   
     22,989         21,601         1,388        6.4   
  

 

 

    

 

 

    

 

 

   

Total Revenues

   $ 44,912       $ 42,235       $ 2,677        6.3   
  

 

 

    

 

 

    

 

 

   
     Nine Months Ended February 29/28,  
     2012      2011      Increase /
(Decrease)
    %  
     (In thousands except percents)  

Food Safety

  

Natural Toxins, Allergens & Drug Residues

   $ 34,031       $ 32,615       $ 1,416        4.3   

Bacteria & General Sanitation

     18,142         16,614         1,528        9.2   

Dehydrated Culture Media & Other

     15,074         14,997         77        0.5   
  

 

 

    

 

 

    

 

 

   
   $ 67,247       $ 64,226         3,021        4.7   

Animal Safety

          

Life Science & Other

     6,089         5,862         227        3.9   

Vaccines

     1,985         1,769         216        12.3   

Rodenticides & Disinfectants

     20,166         20,747         (581     (2.8

Veterinary Instruments & Other

     27,499         22,103         5,396        24.4   

DNA Testing

     12,515         14,381         (1,866     (13.0
  

 

 

    

 

 

    

 

 

   
     68,254         64,862         3,392        5.2   
  

 

 

    

 

 

    

 

 

   

Total Revenues

   $ 135,501       $ 129,088       $ 6,413        5.0   
  

 

 

    

 

 

    

 

 

   

 

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Food Safety revenues increased 6.2% in the third quarter and 4.7% in the first nine months of FY-12, each compared to the prior year periods. Exclusive of the VeroMara acquisition, revenues increased by 5.7% and 4.2% in the quarter and nine month periods, in comparison to the same periods of the prior year. Sales of Natural Toxin, Allergen and Drug Residue products increased by 6.3% in the quarter and by 4.3% for the year-to-date in comparison with FY-11. Within this product group, mycotoxin revenues increased 11.1% in the third quarter, mainly the result of increased testing by corn and grain processors, and market acceptance of the new quantitative lateral flow devices introduced during the quarter. For the year to date, this product line was 1.0% lower than the same period in FY-11, due primarily to unusually high sales of deoxynivalenol (DON) test kits in the prior years caused by unusual weather conditions. Allergen Test Kit revenues increased by 11.6% in the third quarter and by 4.4% for the first nine months of the fiscal year. Bacteria and General Sanitation product revenues remained unchanged from the prior third fiscal quarter but increased by 9.2% for the first nine months of FY-12 compared to FY-11 primarily due to higher sales earlier in the year of disposable test kits used in detecting spoilage organisms and microbial contamination. Despite the loss of a couple of significant customers in the early part of the fiscal year, one due to credit issues, the other the result of a plant closure, Dehydrated Culture Media and Other product revenues increased by 13.9% in the quarter and 0.5% for the year-to-date period. For the comparative quarter, growth includes certain genomics revenues to a number of European customers. The Company’s international operations contributed to the overall Food Safety revenue gains for the quarter and year-to-date. Neogen Europe recorded revenue increases of 18.3% in the fiscal third quarter and 7.0% for the first nine months of FY-2012; sales of genomic testing services and incremental sales of other products in the United Kingdom offset continued weakness in a number of European Union countries. Neogen Latino America and Neogen do Brazil continued to expand their selling and marketing efforts; combined revenues for these subsidiaries increased by 17.3% for the quarter and 57.3% for the year to date period, albeit from small bases.

Animal Safety revenues increased by 6.4% in the third quarter and 5.2% for the year to date period ended February 29, 2012 in comparison with the prior year periods. Life Science and Other revenues were up 5.7% and 3.9% in the third quarter and the nine-month periods compared with the prior year; the launch of an improved substrate product led to an increase in sales of test reagents which Neogen offers to other test kit manufacturers. Vaccine revenues increased by 46.7% for the third quarter and increased by 12.3% in the first nine months of FY-12, due to timing of orders and the shipment of product to key large distributors. Rodenticide and Disinfectant product revenues decreased by 10.4% in the third quarter and 2.8% on a year-to-date basis. This product group declined in the quarter due primarily to a large stocking order of cleaners and disinfectants to Asian markets in the third quarter of prior year. For the year to date, rodenticides have 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 pulled revenues from FY-12 into FY-11, resulting in lower FY-2012 revenues. Veterinary Instruments and other product revenues increased by 29.0% and 24.4% in the quarter and nine months, respectively, in comparison with the prior year periods. 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. Animal Safety revenues for the third quarter decreased in DNA Testing by 4.3% and 13.0% for the year-to-date due primarily to lower pricing for testing services; sample volumes have increased for both comparative periods. While opportunities for the DNA testing business continue to grow, contract business is not necessarily consistent or predictable from period-to-period as to its timing or amount.

Gross margins increased from 48.7% in the third quarter of FY-11 to 51.0% in the third quarter of FY-12. This resulted principally from favorable shifts in product mix toward higher margin products in each segment and manufacturing efficiencies achieved due to the higher volumes in the quarter. For the year- to-date, gross margins were 50.6% compared to 51.0% in FY-11. The decrease was primarily due to product mix shift, particularly within the Animal Safety segment.

Operating margins decreased from 19.1% to 16.8% in the third quarter and from 21.1% to 18.5% in the first nine months of FY-12 as compared to the first nine months of FY-11. Sales and marketing expenses, expressed as a percentage of revenues, increased from 16.7% to 19.9% in the third quarter and increased from 17.1% to 18.9% 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 8.7% to 10.4% of revenues in the third quarter, and from 8.7% to 9.5% on a year to date basis. The change in general and administrative expense is due to increased personnel and related compensation costs, legal costs related to intellectual property, amortization of customer based intangibles from acquired businesses, and costs associated with increased governmental licensing and regulatory affairs. Research expense decreased from 4.3% to 3.9% in the third quarter and from 4.1% to 3.7% in the first nine 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% of revenues in support of existing products and for development of future products.

 

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The Company recorded $595,000 of other income in the third quarter and $543,000 in the first nine months of FY-12, including the reversal of a portion of the GeneSeek purchase consideration of $180,000 in the three and nine month periods. In the three and nine months ended February 28, 2011, the Company recorded charges of $218,000 and $618,000, respectively, to adjust the fair value of the secondary consideration for GeneSeek. Royalty income in the three and nine month periods of FY-12 were $165,000 and $283,000. In the comparative FY-11 periods the royalty income was $30,000 and $90,000, respectively.

Financial Condition and Liquidity

The overall cash and marketable securities position of the company was $61,335,000 at February 29, 2012, compared to $56,083,000 at May 31, 2011. Accounts receivable increased by $5,695,000 due to increases in revenues and in the timing of receipt of payments; inventories increased by $4,363,000, primarily the result of bulk purchases made to receive more favorable pricing, and to a lesser extent, inventory build ahead of a move to a new production facility.

Approximately $13,235,000 in cash was generated from operations during the nine months ended February 29, 2012. The Company spent $10,822,000 on property and equipment and other assets for the nine-months ended February 29, 2012. Included in this amount is the August 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. In June 2011, the Company closed its purchase of VeroMara for approximately $813,000. Net cash proceeds of $3,024,000 were realized from the exercise of stock options and issuance of shares under the Employee Stock Purchase Plan during the first nine months of FY-12.

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 February 29, 2012, 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. The Company has never paid a cash dividend and currently has no plans to do so.

 

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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 February 29, 2012 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 February 29, 2012 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 should not have a material effect on its future results of operations or financial position.

 

Item 6. Exhibits

 

(a) Exhibit Index

 

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. section 1350
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: March 30, 2012      
     

/s/ James L. Herbert

      James L. Herbert
      Chairman & Chief Executive Officer
      (Principal Executive Officer)
Dated: March 30, 2012      
     

/s/ Steven J. Quinlan

      Steven J. Quinlan
      Vice President & Chief Financial Officer
      (Principal Financial Officer and Principal Accounting Officer)

 

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