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 August 31,November 30, 2002 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)
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices including zip code)
(517) 372-9200
(517) 372-9200
(Registrant's telephone number, including area code)
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 [ ]],
As of OctoberJanuary 1, 2002,2003, there were 6,123,0006,107,000 outstanding shares of Common Stock.
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Interim | |
| Consolidated Balance Sheets - | |
| Consolidated Statements of Operations - Three months and six months ended | |
| Consolidated Statements of Stockholders' Equity - | |
| Consolidated Statements of Cash Flows - | |
| Notes to Interim Consolidated Financial Statements - | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. Controls and Procedures | |
| PART II. Other Information | |
| Item 1. Legal Proceedings | |
| Item 2: Changes in Securities and Use of Proceeds | |
| Item 3: Defaults Upon Senior Securities | |
| Item 4: Submission of Matters to a Vote of Security Holders | |
| Item 5: Other Information | |
| Item 6. Exhibits and Reports on Form 8-K | |
| Signatures | |
| CEO Certification | |
| CFO Certification | |
PART I -- FINANCIAL INFORMATION
ITEM 1. Interim ConsolidatedCondensed Financial Statements
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share and per share data)
August 31,November 30, May 31,
2002 2002
------------ ------------
ASSETS
- ------
CURRENT ASSETS
Cash......................................................Cash.......................................... $ 1,625,0001,146 $ 2,012,0002,012
Marketable securities..................................... 3,857,000 4,341,000securities......................... 5,872 4,341
Accounts receivable, net.................................. 6,912,000 6,462,000
Inventories............................................... 8,949,000 8,683,000net...................... 6,872 6,462
Inventories................................... 9,047 8,683
Other current assets...................................... 1,872,000 1,751,000assets.......................... 1,802 1,751
------------ ------------
TOTAL CURRENT ASSETS....................... 23,215,000 23,249,000ASSETS........... 24,739 23,249
PROPERTY AND EQUIPMENT, NET................................... 4,172,000 3,741,000NET....................... 4,106 3,741
GOODWILL AND INTANGIBLE ASSETS AND OTHER ASSETS
Goodwill.................................................. 11,260,000 11,214,000Goodwill...................................... 11,260 11,214
Intangible and other assets............................... 2,417,000 1,700,000assets................... 2,356 1,700
------------ ------------
$ 41,064,00042,461 $ 39,904,00039,904
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable..........................................payable.............................. $ 2,246,0001,685 $ 2,329,0002,329
Other accrued liabilities................................. 1,758,000 1,635,000liabilities..................... 2,613 1,635
------------ ------------
TOTAL CURRENT LIABILITIES.................. 4,004,000 3,964,000LIABILITIES...... 4,298 3,964
LONG-TERM LIABILITIES......................................... 394,000 394,000LIABILITIES............................. 394 394
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 100,000
shares authorized, none issued and outstanding
Common stock, $.16 par value,
20,000,000 shares authorized, 6,123,0006,097,000 shares
issued and outstanding at August 31,November 30, 2002;
6,108,000 shares issued and outstanding at
May 31, 2002........... 980,000 977,0002002 976 977
Additional paid-in capital................................ 23,821,000 23,779,000capital.................... 23,527 23,779
Retained earnings......................................... 11,865,000 10,790,000earnings............................. 13,266 10,790
------------ ------------
36,666,000 35,546,00037,769 35,546
------------ ------------
$ 41,064,00042,461 $ 39,904,00039,904
============ ============
See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share data)
Three Months Ended August 31,Six Months Ended
November 30, November 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
SALES............................... $10,897,000 $ 9,732,00012,273 $ 10,699 $ 23,170 $ 20,431
Cost of goods sold.................. 5,080,000 4,840,0005,565 5,026 10,645 9,866
----------- ----------- ----------- -----------
GROSS MARGIN................ 5,817,000 4,892,0006,708 5,673 12,525 10,565
----------- ----------- ----------- -----------
OPERATING EXPENSES
Sales and marketing............... 2,563,000 2,147,0002,798 2,259 5,361 4,406
General and administrative........ 1,060,000 998,0001,032 1,179 2,092 2,177
Research and development.......... 655,000 512,000842 541 1,497 1,053
----------- ----------- 4,278,000 3,657,000----------- -----------
4,672 3,979 8,950 7,636
----------- ----------- ----------- -----------
OPERATING INCOME............ 1,539,000 1,235,0002,036 1,694 3,575 2,929
----------- ----------- ----------- -----------
OTHER INCOME
Interest income................... 21,000 53,00025 29 46 82
Interest expense.................. -- (1,000)(1) -- (2)
Other............................. 107,000 76,00096 83 203 159
----------- ----------- 128,000 128,000----------- -----------
121 111 249 239
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES.. 1,667,000 1,363,0002,157 1,805 3,824 3,168
INCOME TAXES........................ 592,000 501,000756 660 1,348 1,161
----------- ----------- ----------- -----------
NET INCOME.................. $ 1,075,0001,401 $ 862,0001,145 $ 2,476 $ 2,007
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic............................ $ 0.180.23 $ 0.140.19 $ 0.40 $ 0.34
=========== =========== =========== ===========
Diluted.......................... $ 0.170.22 $ 0.140.18 $ 0.39 $ 0.32
=========== =========== =========== ===========
See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands except share amounts)
Common stock Additional
---------------------- paid-in Retained
Shares Amount capital Earnings Total
---------- ---------- ----------- ------------- ------------
Balance, June 1, 2002................. 6,108,0006,108,468 $ 977,000 $23,779,000977 $ 10,790,00023,779 $ 35,546,00010,790 $ 35,546
Exercise of options and warrants...... 29,000 5,000 219,00029,906 5 227 -- 224,000232
Repurchase of common stock............ (14,000) (2,000) (177,000)(41,750) (6) (479) -- (179,000)(485)
Net income for the threesix months
ended August 31, 2002..............November 30, 2002............ -- -- -- 1,075,000 1,075,0002,476 2,476
---------- ---------- ----------- ------------- ------------
Balance, August 31, 2002.............. 6,123,000November 30, 2002............ 6,096,624 $ 980,000 $23,821,000976 $ 11,865,00023,527 $ 36,666,00013,266 $ 37,769
========== ========== =========== ============= ============
See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
ThreeSix Months Ended
August 31,November 30,
------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income............................................. $ 1,075,0002,476 $ 862,0002,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 300,000 269,000625 498
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................................. (450,000) 223,000(410) (511)
Inventories......................................... (266,000) 344,000(364) 390
Other current assets................................ (121,000) 129,000(51) 205
Accounts payable.................................... (83,000) 249,000(644) 5
Other accrued liabilities........................... 123,000 (754,000)979 (542)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 578,000 1,322,0002,611 2,052
INVESTING ACTIVITIES:
Sales of marketable securities......................... 8,819,000 8,142,00016,155 12,088
Purchases of marketable securities..................... (8,335,000) (5,386,000)(17,686) (10,640)
Purchases of property and equipment
and other assets...................................... (1,494,000) (756,000)(1,693) (902)
Acquisitions........................................... -- (3,587,000)(3,587)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................ (1,010,000) (1,587,000)(3,224) (3,041)
FINANCING ACTIVITIES:
Payments on long-term borrowings....................... -- (12,000)(24)
Net payments for repurchase of common stock............ (179,000) --(485) (315)
Net proceeds from issuance of common stock............. 224,000 128,000232 982
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ 45,000 116,000ACTIVITIES.. (253) 643
----------- -----------
DECREASE IN CASH........................................... (387,000) (149,000)(866) (346)
Cash at beginning of period................................ 2,012,000 848,0002,012 848
----------- -----------
CASH AT END OF PERIOD...................................... $ 1,625,0001,146 $ 699,000502
=========== ===========
See accompanying notes to theinterim consolidated unaudited financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - 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 accruals) considered necessary for a fair presentation have been included. The results of operations for the three and six month periodperiods ended August 31,November 30, 2002 isare not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2003. For more complete financial information, these consolidated financial statements should be read in conjunction with the May 31, 2002 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, 2002.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. The components of inventories are as follows:
August 31,November 30, May 31,
2002 2002
----------- -----------
(In thousands)
Raw materials............................. $ 3,323,0003,309 $ 2,969,0002,969
Work-in-process........................... 616,000 589,000644 589
Finished goods............................ 5,010,000 5,125,0005,094 5,125
----------- -----------
$ 8,949,0009,047 $ 8,683,0008,683
=========== ===========
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS
The allocation of goodwill and other intangible assets following SFAS 142 as of May 31, 2002 and August 31,November 30, 2002 is summarized in the following table:
Balance Balance
May 31, 2002 Additions Deletions August 31,November 30, 2002
-------------- ------------- ------------ ----------- ---------- --------------------------------
(In thousands)
Goodwill:
Food Safety........................ $ 4,217,0004,217 $ 46,00046 $ -- $ 4,263,0004,263
Animal Safety...................... 6,997,0006,997 -- -- 6,997,0006,997
------------ ------------ ----------- ---------- --------------------------
Total......................... 11,214,000 46,00011,214 46 -- 11,260,00011,260
Intangible assets with indefinite lives. 415,000 30,000415 30 -- 445,000445
Intangible assets with finite lives:
Licenses........................... 709,000 332,000709 649 -- 1,041,0001,358
Covenants not to compete........... 415,000 35,000415 35 -- 450,000450
Patents............................ 348,000 40,000348 40 -- 388,000388
Other.............................. 1,000 42,000 -- 43,0001 52 33 20
------------ ------------ ----------- ---------- --------------
1,473,000 449,000 -- 1,922,000
============ =========== ========== ==============------------
$ 1,473 $ 776 $ 33 $ 2,216
NOTE D - EARNINGSNET INCOME PER SHARE
The following table presents the calculation of earningsnet income per share:
Three Months Ended August 31,Six Months Ended
November 30, November 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(In thousands except per share data)
Basic and Diluted - EarningsNet Income per Share
Numerator - Net Income................. $ 1,075,0001,401 $ 862,0001,145 $ 2,476 $ 2,007
=========== =========== =========== ===========
Denominator:
For basic earningsNet Income per share-
Weighted average shares............. 6,116,000 5,950,0006,119 5,956 6,117 5,919
Effect of dilutive securities-
Stock options and warrants.......... 249,000 322,000238 447 244 409
----------- ----------- ----------- -----------
For diluted earningsNet Income per share-
Adjusted weighted average shares
and assumed conversions........... 6,365,000 6,272,0006,357 6,403 6,361 6,328
=========== =========== =========== ===========
Basic EarningsNet Income per Share..................Share................ $ 0.23 $ 0.19 $ 0.40 $ 0.34
=========== =========== =========== ===========
Diluted Net Income per Share.............. $ 0.22 $ 0.18 $ 0.140.39 $ 0.32
=========== ===========
Diluted Earnings per Share................ $ 0.17 $ 0.14 =========== ===========
NOTE E - STOCK REPURCHASE
The Company's Board of Directors has authorized the purchase of up to 1,000,000 shares of the Company's Common Stock. As of August 31,November 30, 2002, the Company had purchased 669,000697,000 shares in negotiated and open market transactions. Shares purchased under this buy-back program will be retired and used to satisfy future issuance of common stock upon the exercise of outstanding stock options and warrants.
NOTE F - 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, drug residues, foodborne bacteria, food allergens, pesticide residues, disease infections and levels of general sanitation. The Animal Safety segment is primarily engaged in the production and marketing of products dedicated to animal health, including 250 different veterinary instruments and a complete line of consumable products marketed to veterinarians and animal health product distributors.
These segments are managed separately because they represent strategic business units that offer different products and require different marketing strategies. The Company evaluates performance based on total sales and operating income of the respective segments.
Segment information for the three months ended August 31,November 30, 2002 and 2001 was as follows:
Corporate
Food Animal and
Safety Safety Elimination(1) Total
----------- ----------- ----------- -----------
(In thousands)
2002
Net sales to external customers. $ 5,850,0006,821 $ 5,047,0005,452 $ -- $10,897,000$ 12,273
Operating income................ 1,236,000 525,000 (222,000) 1,539,0001,523 682 (169) 2,036
Total assets.................... 18,018,000 18,408,000 4,638,000 41,064,00017,410 18,397 6,654 42,461
2001
Net sales to external customers. $ 4,949,0005,290 $ 4,783,0005,409 $ -- $ 9,732,00010,699
Operating income................ 906,000 545,000 (216,000) 1,235,0001,007 915 (228) 1,694
Total assets.................... 14,647,000 16,230,000 3,962,000 34,839,00014,286 16,927 5,267 36,480
Segment information for the six months ended November 30, 2002 and 2001 was as follows:
Corporate
Food Animal and
Safety Safety Elimination(1) Total
----------- ----------- ----------- -----------
(In thousands)
2002
Net sales to external customers. $ 12,671 $ 10,499 $ -- $ 23,170
Operating income................ 2,754 1,207 (386) 3,575
Total assets.................... 17,410 18,397 6,654 42,461
2001
Net sales to external customers. $ 10,239 $ 10,192 $ -- $ 20,431
Operating income................ 1,913 1,460 (444) 2,929
Total assets.................... 14,286 16,927 5,267 36,480
(1) Includes corporate assets, consisting principally of marketable securities, and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions and minority interests.
NOTE G - LEGAL PROCEEDINGS
The Company is involved in several legal proceedings, none of which, in the opinion of Management, is material to the financial statements.
NOTE H - SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Three Months Ended August 31,Six Months End
November 30, November 30,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ------------
(In thousands)
Cash Paid For:
Income Taxes......... $ 400,000-- $ 250,000708 $ 400 $ 1,908
Interest............. -- 1,0001 -- 2
NOTE I - ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 144
AND STATUS OF OTHER RECENT STATEMENTS
Effective July 1, 2002, the Company adopted FAS Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS Statement No. 144 includes more stringent requirements for classifying assets available for disposal and expands the scope of activities that will require discontinued operations reporting. The adoption of this standard did not have a material effect on the Company's financial position or results of operations.
Other recently issued FAS statements are currently under review by management, but are not expected to have a material effect on the Company's financial position or results of operations upon implementation.
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.
The words "anticipate", "believe", "potential", "expect", and similar expressions used herein are intended to identify forward-looking statements. Forward-looking statements involve certain risks and uncertainties. Various 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 may cause actual results to differ materially from those contained in the forward-looking statements.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. Management believes the critical accounting policies and areas that require the most significant judgements and estimates to be used in the preparation of the consolidated financial statements are revenue recognition, allowance for doubtful accounts, inventory valuation, and the assessment of the possible impairment of Goodwill and other intangible assets.
Revenue Recognition
Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. This is generally at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect expected returns based on historical experience.
Allowances for Doubtful Accounts Receivable
Allowances for doubtful accounts receivable are maintained based on historical payment patterns, aging of accounts receivable and actual write- offwrite-off history. Management attempts to minimize credit risk by reviewing customers' credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information.
The Company writes down its inventory for estimated obsolescence equal to the cost of the inventory. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Intangible Assets
Management assesses goodwill and intangible assets for possible impairment on no less often than an annual basis. In the event of changes in circumstances which indicate the carrying value of these assets may not be recoverable, this assessment may take place at any time. Factors that could cause an impairment review to take place would include:
--- Significant underperformanceunder-performance relative to expected historical or projected future operating results.
--- Significant changes in the use of acquired assets or strategy of the Company.
--- Significant negative industry or economic trends.
When management determines that the carrying value of intangible assets may not be recoverable based on the existence of one or more of the above indicators of impairment, the carrying value is compared to a value determined based on projected discounted cash flows using a discount rate commensurate with the risk inherent in the Company's current business model. Any impairment identified in this computation is given current recognition in any unissued financial statements.
Three and Six Months Ended August 31,November 30, 2002 Compared to Three Months and Six Months Ended August 31, 2001November 30, 2001.
Total revenues increased $1,165,000 or 12% in the August 2002 quarter compared to the August 2001 quarter. Revenues from sales of products dedicated to Food Safety were up 18% and revenues from sales of Animal Safety products were up 6%. Exclusive of the effects of sales of products from businesses purchased in the August 2001 quarter, total sales increased 11.4%.
The increase in Food Safety revenue of $901,000 came from increases in sales of test kits for the detection of harmful bacteria such asE. coli O157:H7,Salmonella, andListeria which increased 25% in the quarter. Sales of test kits for the detection of allergens in foodnaturally occurring mycotoxins, such as aflatoxin, and DON (vomitoxin), increased 46%. While markets56% for both of these products are growing, Management believes that a substantial amountthe quarter and 30% for the six-month period ended November 30, 2002 as compared to the same periods of the growth has come from additional market penetration.
Animal Safety revenues increased $264,000 in comparisonprior year. In fiscal 2003 a significant portion of the U.S. corn and sorghum crop were contaminated with the revenues from the August 2001 quarter. Increases included a nearly 100% increaseaflatoxin. The Company's products were heavily used in the salesidentification of EqStim immunostimulant. EqStim is being used by veterinariansinfected commodities and thereby the protection of consumers from exposure to boost the immune response of horses infected with the West Nile virus.this carcinogen. Sales of Specialty Needles were down in comparison withtest kits for detection of pathogens such as E.coli O157:H7, Salmonella and Listeria increased 17% for the prior year by $204,000 or 60% due to two separate customers who placed large orders inquarter and 21% for the prior year and did not repeat these orders in the current year.six-month period. Sales of BotVax B were down by $194,000 or 56%. InE.coli O157:H7 products led this group with increases of 42% for the August 2001 quarter and 48% for the six-month period. The Company's continued investment in product development and sales were abnormally high as the Company was filling backorders from prior quarters.and marketing efforts have put it in a position to capitalize on greater public awareness of contamination of food products and to expand its market share of an expanding market. Sales of diagnostic and quantitative test kits to detect allergenic substances in food products increased 36% in the quarter and 41% in the six-month period. This relatively new product line has benefited from government regulation and consumer demand for food products that they are assured are properly labeled as free from common allergenic substances.
Sales of test kits for the detection of drugs of abuse in racing animals and animalLife Sciences products increased by $102,000 or 17%were up 19% in comparison withthe quarter and 20% for the six-month period ended November 30, 2002 as compared to the same periods of the prior year. This 17%These products continue to show good current growth. The Company's equine vaccine and immunostimulant products increased 28% for the quarter and 10% for the six-month period. The Company's immunostimulant product which was used in some areas in connection with West Nile Virus in horses was a significant contributor to the increase arose principally from increases in testingsales of meatthis category of products. Sales of products used for wound care that had grown rapidly in prior years experienced a decrease of $180,000 or 28% in the quarter and $170,000 or 12% for the six-month period. Several competitors have entered the market resulting in erosion of the Company's sales base. Continued difficulties in the beef cattle market have resulted in decreased demand for the Company's durable veterinary products including the D-3 needle that was introduced in the second quarter of the2002 fiscal year. Sales of durable veterinary products decreased $450,000 or 41% in the quarter and $425,000 or 30% in the six-month period. Management believes this to be a temporary issue that will be resolved with the improvement of the cattle market.
Gross marginsmargin in the AugustNovember 2002 quarter increased to 53%55% from 50%53% in the AugustNovember 2001 quarter.quarter and to 54% in the six months ended November 30, 2002 from 52% in 2001. Food Safety gross margins increased to 61% from 58%in the quarter and six-month periods as a result of product mix. The Animal Safety gross margins increased to 44% from 43%. These increasesmargin was nearly unchanged in margins resulted from changes in product mixthe quarter and the leverage from higher levels of production.six-month periods.
Sales and marketing expenses increased $416,000 to 24% of revenues when compared to 22% in the AugustNovember 2002 quarter increased $539,000 or 24% from the November 2001 quarter.quarter and $955,000 or 22% for the six-month period. These expenses rose duein relation to additional marketing efforts and expenditures in support of expected sales increases later in fiscal 2003.increases. As a percentage of revenues Food Safetysales, sales and marketing was 26% of salesexpenses rose from 21% to 23% in both periods, while Animal Safety increased from 18% to 21%.
Generalthe quarter and administrative expenses increased by $62,000 but remained at 10% of revenues. The percentage of revenue relationship reflects the generally fixed nature of general and administrative expenses.six-month periods. On a divisional basis, general and administrativesales expenses were generally comparable to the prior year.
ResearchGeneral and developmentadministrative expenses decreased $147,000 or 12% in the August 2002 quarter increased $143,000 to 6% of revenue from 5% in the August 2001 quarter. Although on a quarter to quarter basis, some fluctuations of research and development expense will occur, Management expects research and development expense to approximate 5% to 6% of revenues over time. These expenditures approximate 8% to 10% of revenues from products and product lines that are supported by research and development.
Other income decreased in the AugustNovember 2002 quarter as compared to the November 2001 quarter, and $85,000 or 4% for the six-month period. As a percentage of revenue, these expenses decreased from 11% to 8% in the quarter and from 11% to 9% for the six-month period. General and administrative expense by division was consistent with the prior year with savings resulting from reduced personnel and other corporate expenses as compared to the prior year quarters.
Research and development expenses increased $301,000 or 56% in the November 2002 quarter as compared to the November 2001 quarter, and $444,000 or 42% for the six-month period. As a percentage of revenues, research and development expenses increased to 6.9% and 6.5% for the fiscal 2003 quarter and six-month periods, principally as arespectively. Management continues to maintain its goal of research and development spending in the range of 5% to 7% of total revenues and at approximately 10% of revenues of products that are the result of the reduction in interest income, as rates have decreased, and because of reductions in the level of cash available for investment, following the use of cash for acquisitions late in the first quarter of 2001.research efforts.
The provision for federal and state income taxes decreased to 35.1% of income before income tax rates in the firstNovember 2002 quarter of 2002from 36.5% in the November 2001 quarter. For the six-month period, the tax provision decreased to 35%35.2% from 37%36.7% in the first quartersame period of the prior year. The changes in tax rates reflectprovision was favorably affected by the timing of accounting recognition of higher levels of foreign and research and development and extraterritorialtax credits.
Other income was substantially unchanged in the November 2002 quarter as compared to the November 2001 quarter. The decrease in this category in the six months ended November 30, 2002 period as compared to the prior year was principally as the result of the reduction of interest rates early in the 2002 period as compared to 2001.
Financial Condition and Liquidity
At August 31,November 30, 2002, the Company had $5,500,000$7,018,000 in cash and marketable securities, working capital of $19,200,000,$20,440,000 and stockholders' equity of $36,700,000.$37,769,000. In addition, the Company has unused bank lines totaledtotaling $10,000,000. Cash and marketable securities decreasedincreased in the three-month periodsix months ended August 31,November 30, 2002, with cash generated by operations of $578,000, and $224,000 of cash from exercise of stock options offset by cash expended for the acquisitions of intangible assets and property and equipment.$2,611,000.
Accounts receivable were $450,000$410,000 higher at August 31,November 30, 2002 than at May 31, 2002 with average daysdue primarily to increases in net accounts receivable increasing from 51sales during the period. Inventories increased $364,000 at November 30, 2002 compared to 55 days. The increase in days outstanding is considered to be a normal fluctuation and Management believes that recorded allowances are adequate to provide for accounts that may become uncollectable. Inventories at August 31, 2002 decreased slightly from May 31, 2002. These increases, that were less then the rate at which the Company's sales are increasing, result from continued strong management of these assets. The increase in current liabilities results from the timing of payments.
At August 31,November 30, 2002, the Company had no material commitments for capital expenditures, withexpenditures. The estimated cost to complete the exception of approximately $400,000 committed to building improvements and furnishing of a new manufacturing facility adjacent to the Company'sfor Food Safety under construction in Lansing Michigan location. The expenditure will be financed with available cash.is $500,000. Inflation and changing prices are not expected to have a material effect on the Company's operations.
Management believes that the Company's existing cash and marketable securities at August 31,November 30, 2002, along with its available bank lines of credit and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and marketable securities 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 oracquireadditional technology and products that fit within the Company's mission statement. Accordingly, the Company may be required to issue equity securities or enter into other financing arrangements for a portion of the Company's future capital needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates to its portfolio of marketable securities. The Company has no significant borrowings. Interest rate risk is managed by investing in high-qualityhigh- quality issuers and seeking to avoid principal loss of invested funds by limiting default risk and market risk. The Company manages default risks by investing in only high-credit-quality securities and by responding appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
ITEM 4. CONTROLS AND PROCEDURES
Safe-harbor, forward-looking statements:
The discussion in items 2 and 3 above contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Neogen Corporation and subsidiaries. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements include:
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PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in several legal proceedings, none of which, in the opinion of the management, is material to the financial statements.
ITEMS2Items 2,, 3, 4 and 5 are not applicable and have been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit 99.1 - Certification by James L. Herbert pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification by Richard R. Current pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b)
The Company did not file any reports on Form 8-K in the quarterly period ended August 31,November 30, 2002.
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) |
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Dated: OctoberJanuary 14, 20022003
By: /s/ James L. Herbert James L. Herbert President & Chief Executive Officer |
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Dated: OctoberJanuary 14, 2002
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2003
By: /s/ Richard R. Current
Richard R. Current
Vice President & Chief Financial Officer
I, James L. Herbert, certify that:
/S/ James L. Herbert
James L. Herbert
President &
Chief Executive Officer
Neogen Corporation
Date:
OctoberJanuary 14,20022003/S/ Richard R. Current
Richard R. Current
Vice President &
Chief Financial Officer
Neogen Corporation