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 |
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28,August 31, 2003 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________to _________to
Commission file number 0-17988
Neogen Corporation
(Exact name of registrant as specified in its charter)
Michigan | ||
(State or other jurisdiction of incorporation or organization) | 38-2364843 (IRS Employer Identification Number) |
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices including zip code)
(517) 372-9200
(Registrant'sRegistrant’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)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]x NO [ ],¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B – 2 of the Exchange Act). YES x NO ¨
As of AprilOctober 1, 2003, there were 6,144,0006,279,968 outstanding shares of Common Stock.
NEOGEN CORPORATION AND SUBSIDIARIES
PART I. Financial Information | Page No. | |
Item 1. Interim Consolidated Financial Statements (unaudited) | ||
Consolidated Balance Sheets | 1 | |
2 | ||
3 | ||
4 | ||
Notes to Interim Consolidated Financial Statements | 5 | |
7 | ||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 9 | |
10 | ||
PART II. Other Information | ||
11 | ||
11 | ||
11 | ||
Item | 11 | |
11 | ||
11 | ||
CEO Certification | ||
CFO Certification | ||
| ||
PART I --– FINANCIAL INFORMATION
ITEM 1. Interim Consolidated Financial Statements
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share and per share data)
February 28, May 31,
2003 2002
------------ ------------
ASSETS
- ------------------------------------
CURRENT ASSETS
Cash................................................ $ 2,882 $ 2,012
Marketable securities............................... 5,397 4,341
Accounts receivable, less allowances of $681 and $53 7,262 6,462
Inventories......................................... 8,767 8,683
Other current assets................................ 1,714 1,751
------------ ------------
TOTAL CURRENT ASSETS................. 26,022 23,249
PROPERTY AND EQUIPMENT, NET............................. 4,343 3,741
GOODWILL AND INTANGIBLE AND OTHER ASSETS
Goodwill............................................ 11,260 11,214
Intangible and other assets......................... 2,255 1,700
------------ ------------
$ 43,880 $ 39,904
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable.................................... $ 1,688 $ 2,329
Other accrued liabilities........................... 2,544 1,635
------------ ------------
TOTAL CURRENT LIABILITIES............ 4,232 3,964
LONG-TERM LIABILITIES................................... 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, 6,107,000 shares
issued and outstanding at February 28, 2003;
6,108,000 shares issued and outstanding at May 31, 977 977
Additional paid-in capital.......................... 23,981 23,779
Retained earnings................................... 14,296 10,790
------------ ------------
39,254 35,546
------------ ------------
$ 43,880 $ 39,904
============ ============
August 31, 2003 | May 31, 2003 | |||||
(In thousands, except share and per share amounts) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash | $ | 540 | $ | 1,061 | ||
Marketable securities | 8,092 | 7,836 | ||||
Accounts receivable, less allowance of of $ 637 and $ 611 | 7,172 | 7,499 | ||||
Inventories | 10,303 | 9,840 | ||||
Deferred income taxes | 694 | 694 | ||||
Prepaid expenses and other current assets | 1,332 | 1,041 | ||||
TOTAL CURRENT ASSETS | 28,133 | 27,971 | ||||
NET PROPERTY AND EQUIPMENT | 4,767 | 4,640 | ||||
OTHER ASSETS | ||||||
Goodwill and other non amortizable intangible assets | 13,665 | 13,665 | ||||
Other non-current assets, net of accumulated amortization of $ 676 and $ 860 | 1,651 | 1,760 | ||||
$ | 48,216 | $ | 48,036 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable | $ | 1,960 | $ | 3,273 | ||
Accruals | 2,539 | 2,490 | ||||
TOTAL CURRENT LIABILITIES | 4,499 | 5,763 | ||||
DEFERRED INCOME TAXES | 405 | 405 | ||||
OTHER LONG-TERM LIABILITIES | 466 | 466 | ||||
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, 6,269,635 shares issued and outstanding at August 31, 2003; 6,200,486 shares issued and outstanding at May 31, 2003 | 1,003 | 992 | ||||
Additional paid-in capital | 24,954 | 24,830 | ||||
Accumulated other comprehensive income | 10 | 3 | ||||
Retained earnings | 16,879 | 15,577 | ||||
TOTAL STOCKHOLDERS’ EQUITY | 42,846 | 41,402 | ||||
$ | 48,216 | $ | 48,036 | |||
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 Nine Months Ended
February 28, 2003 February 28, 2003
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
SALES............................... $ 11,102 $ 9,655 $ 34,272 $ 30,085
Cost of goods sold.................. 5,361 5,038 16,006 14,903
----------- ----------- ----------- -----------
GROSS MARGIN................ 5,741 4,617 18,266 15,182
----------- ----------- ----------- -----------
OPERATING EXPENSES
Sales and marketing............... 2,656 2,142 8,017 6,549
General and administrative........ 1,049 929 3,141 3,106
Research and development.......... 621 438 2,118 1,491
----------- ----------- ----------- -----------
4,326 3,509 13,276 11,146
----------- ----------- ----------- -----------
OPERATING INCOME............ 1,415 1,108 4,990 4,036
----------- ----------- ----------- -----------
OTHER INCOME
Interest income................... 24 26 70 108
Interest expense.................. -- (1) -- (3)
Other............................. 91 97 294 257
----------- ----------- ----------- -----------
115 122 364 362
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES.. 1,530 1,230 5,354 4,398
INCOME TAXES........................ 500 404 1,848 1,565
----------- ----------- ----------- -----------
NET INCOME.................. $ 1,030 $ 826 $ 3,506 $ 2,833
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic............................ $ 0.17 $ 0.13 $ 0.57 $ 0.47
=========== =========== =========== ===========
Diluted.......................... $ 0.16 $ 0.13 $ 0.55 $ 0.45
=========== =========== =========== ===========
Three Months Ended August 31, | ||||||
2003 | 2002 | |||||
(In thousands, except per share amounts) | ||||||
Sales | $ | 12,233 | $ | 11,163 | ||
Cost of goods sold | 5,973 | 5,080 | ||||
GROSS MARGIN | 6,260 | 6,083 | ||||
OPERATING EXPENSES | ||||||
Sales and marketing | 2,923 | 2,829 | ||||
General and administrative | 787 | 1,060 | ||||
Research and development | 676 | 655 | ||||
4,386 | 4,544 | |||||
OPERATING INCOME | 1,874 | 1,539 | ||||
OTHER INCOME | ||||||
Interest income | 23 | 21 | ||||
Other | 85 | 107 | ||||
108 | 128 | |||||
INCOME BEFORE INCOME TAXES | 1,982 | 1,667 | ||||
INCOME TAXES | 680 | 592 | ||||
NET INCOME | $ | 1,302 | $ | 1,075 | ||
NET INCOME PER SHARE: | ||||||
Basic | $ | .21 | $ | .18 | ||
Diluted | $ | .20 | $ | .17 | ||
See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY (UNAUDITED)(In thousands, except share amounts)
Common stock Additional
---------------------- paid-in Retained
Shares Amount capital Earnings Total
---------- ---------- ----------- ------------- ------------
Balance, June 1, 2002................. 6,108,000 $ 977 $ 23,779 $ 10,790 $ 35,546
Exercise of options and warrants...... 40,000 6 681 -- 687
Repurchase of common stock............ (41,000) (6) (479) -- (485)
Net income for the nine months
ended February 28, 2003............ -- -- -- 3,506 3,506
---------- ---------- ----------- ------------- ------------
Balance, February 28, 2003............ 6,107,000 $ 977 $ 23,981 $ 14,296 $ 39,254
========== ========== =========== ============= ============
Common Stock | Additional paid-in capital | Accumulated Other Comprehensive Income | Retained Earnings | Total | |||||||||||||
Shares | Amount | ||||||||||||||||
(In thousands) | |||||||||||||||||
Balance, June 1, 2003 | 6,200 | $ | 992 | $ | 24,830 | $ | 3 | $ | 15,577 | $ | 41,402 | ||||||
Exercise of options and warrants | 70 | 11 | 124 | 135 | |||||||||||||
Comprehensive income: | |||||||||||||||||
Net income for the three months ended August 31, 2003 | 1,302 | 1,302 | |||||||||||||||
Foreign currency translation adjustments | 7 | 7 | |||||||||||||||
Total comprehensive income | 1,309 | ||||||||||||||||
Balance, August 31, 2003 | 6,270 | $ | 1,003 | $ | 24,954 | $ | 10 | $ | 16,879 | $ | 42,846 | ||||||
See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)
Nine Months Ended
February 28,
------------------------
2003 2002
----------- -----------
OPERATING ACTIVITIES:
Net income............................................. $ 3,506 $ 2,833
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 945 813
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable................................. (800) (583)
Inventories......................................... (84) 246
Other current assets................................ 37 (10)
Accounts payable.................................... (641) (109)
Other accrued liabilities........................... 909 (445)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 3,872 2,745
INVESTING ACTIVITIES:
Sales of marketable securities......................... 30,022 19,019
Purchases of marketable securities..................... (31,078) (17,366)
Purchases of property and equipment
and other assets...................................... (2,148) (1,398)
Acquisitions........................................... -- (3,587)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................ (3,204) (3,332)
FINANCING ACTIVITIES:
Payments on long-term borrowings....................... -- (28)
Net payments for repurchase of common stock............ (485) (315)
Net proceeds from issuance of common stock............. 687 1,164
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 202 821
----------- -----------
INCREASE IN CASH........................................... 870 234
Cash at beginning of period................................ 2,012 848
----------- -----------
CASH AT END OF PERIOD...................................... $ 2,882 $ 1,082
=========== ===========
Three Months Ended August 31, | ||||||||
2003 | 2002 | |||||||
(In thousands) | ||||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 1,302 | $ | 1,075 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 302 | 300 | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | 327 | (450 | ) | |||||
Inventories | (463 | ) | (266 | ) | ||||
Prepaid expenses and other current assets | (291 | ) | (121 | ) | ||||
Accounts payable | (1,313 | ) | (83 | ) | ||||
Accruals | 49 | 123 | ||||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (87 | ) | 578 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Sales of marketable securities | 18,113 | 8,819 | ||||||
Purchases of marketable securities | (18,369 | ) | (8,335 | ) | ||||
Purchases of property and equipment and other assets | (313 | ) | (1,494 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (569 | ) | (1,010 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net payments for repurchase of common stock | — | (179 | ) | |||||
Net proceeds from issuance of common stock | 135 | 224 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 135 | 45 | ||||||
DECREASE IN CASH | (521 | ) | (387 | ) | ||||
Cash at beginning of period | 1,061 | 2,012 | ||||||
CASH AT END OF PERIOD | $ | 540 | $ | 1,625 | ||||
See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSSTATEMENT (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 accruals) considered necessary for a fair presentation have been included. The results of operations for the three and nine month periodsperiod ended February 28,August 31, 2003 areis not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2003.2004. For more complete financial information, these consolidated financial statements should be read in conjunction with the May 31, 20022003 audited consolidated financial statements and the notes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended May 31, 2002.2003.
The Company previously classified shipping revenue as an offset to the related expense in sales and marketing in the consolidated statements of income. Beginning June 1, 2003, these amounts have been classified as revenue. Previously reported fiscal year 2003 revenue and sales and marketing expense balances have been reclassified to conform with fiscal year 2004 presentation.
2. SUBSEQUENT EVENTINVENTORIES
On March 6, 2003, Neogen Corporation completed the purchase of 100% of the common stock of Adgen Ltd., a privately held company located in Ayre, Scotland. Adgen is a producer and marketer of diagnostic testing products. Since its founding in 1994, Adgen has been a distributor of Neogen products in Europe. Consideration included net cash of $1,850,000 and 32,000 shares of common stock. Additionally, the Company agreed to pay contingent consideration based upon future revenue levels.
3. 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:
February 28, May 31, 2003 2002 ------------ ------------ (In thousands) Raw materials........................... $ 3,267 $ 2,969 Work-in-process......................... 592 589 Finished goods.......................... 4,908 5,125 ------------ ------------ $ 8,767 $ 8,683 ============ ============
August 31, 2003 | May 31, 2003 | |||||
(In thousands) | ||||||
Raw materials | $ | 3,997 | $ | 3,231 | ||
Work-in-process | 409 | 422 | ||||
Finished goods | 5,897 | 6,187 | ||||
$ | 10,303 | $ | 9,840 | |||
4. GOODWILL AND INTANGIBLE ASSETS
The allocation of goodwill and other intangible assets following SFAS 142 as of May 31, 2002 and February 28, 2003 is summarized in the following table:
Balance Balance February 28, May 31, 2002 Additions Deletions 2003 ------------ ------------ ----------- ------------ (In thousands) Goodwill: Food Safety........................ $ 4,217 $ 46 $ -- $ 4,263 Animal Safety...................... 6,997 -- -- 6,997 ------------ ------------ ----------- ------------ Total......................... 11,214 46 -- 11,260 Intangible assets with indefinite lives. 415 30 (4) 441 Intangible assets with finite lives: Licenses........................... 709 673 (90) 1,292 Covenants not to compete........... 415 35 -- 450 Patents............................ 348 40 -- 388 Other.............................. 1 113 (33) 81 ------------ ------------ ----------- ------------ 1,473 861 (123) 2,211
The following table presents the calculation of net income per share:
Three Months Ended Nine Months Ended February 28, 2003 February 28, 2003 ------------------------ ------------------------ 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Basic and Diluted - Net Income per Share Numerator - Net Income................. $ 1,030 $ 826 $ 3,506 $ 2,833 =========== =========== =========== =========== Denominator: For basic net income per share- Weighted average shares............. 6,104 6,067 6,113 5,968 Effect of dilutive securities- Stock options and warrants.......... 282 374 255 397 ----------- ----------- ----------- ----------- For diluted net income per share- Adjusted weighted average shares and assumed conversions........... 6,386 6,441 6,368 6,365 =========== =========== =========== =========== Basic Net Income per Share................ $ 0.17 $ 0.13 $ 0.57 $ 0.47 =========== =========== =========== =========== Diluted Net Income per Share.............. $ 0.16 $ 0.13 $ 0.55 $ 0.45 =========== =========== =========== ===========
6.
Three Months Ended August 31 | ||||||
2003 | 2002 | |||||
(In thousands, except share and per share amounts) | ||||||
Numerator for basic and diluted net income per share: | ||||||
Net income | $ | 1,302 | $ | 1,075 | ||
Denominator: | ||||||
Denominator for basic net income per share-weighted average shares | 6,222 | 6,116 | ||||
Effect of dilutive stock options and warrants | 347 | 249 | ||||
Denominator for diluted net income per share | 6,569 | 6,365 | ||||
Net income per share: | ||||||
Basic | $ | .21 | $ | 0.18 | ||
Diluted | $ | .20 | $ | 0.17 | ||
4. STOCK REPURCHASE
The Company'sCompany’s Board of Directors has authorized the purchase of up to 1,000,000 shares of the Company's common stock.Company’s Common Stock. As of February 28,August 31, 2003, the Company hadhas purchased 697,000 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.were retired.
7.
5. 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 February 28,August 31, 2003 and 2002 was as follows:
Corporate Food Animal and Safety Safety Eliminations(1) Total ----------- ----------- ------------ ----------- (In thousands) 2003 Net sales to external customers.. $ 6,205 $ 4,897 $ -- $ 11,102 Operating income................. 1,151 458 (194) 1,415 Total assets..................... 19,474 18,228 6,178 43,880 2002 Net sales to external customers.. $ 4,760 $ 4,895 $ -- $ 9,655 Operating income................. 753 437 (82) 1,108 Total assets..................... 16,176 17,754 3,537 37,467
Food Safety | Animal Safety | Corporate and Eliminations(1) | Total | ||||||||||
(In thousands) | |||||||||||||
2003 | |||||||||||||
Net sales to external customers | $ | 6,899 | $ | 5,334 | $ | — | $ | 12,233 | |||||
Operating income | 1,134 | 604 | 136 | 1,874 | |||||||||
Total assets | 21,574 | 18,550 | 8,092 | 48,216 | |||||||||
2002 | |||||||||||||
Net sales to external customers | $ | 6,071 | $ | 5,092 | $ | — | $ | 11,163 | |||||
Operating income | 1,236 | 525 | (222 | ) | 1,539 | ||||||||
Total assets | 18,018 | 18,408 | 4,638 | 41,064 |
Segment information for the nine months ended February 28, 2003 and 2002 was as follows:
Corporate Food Animal and Safety Safety Eliminations(1) Total ----------- ----------- ------------ ----------- (In thousands) 2003 Net sales to external customers.. $ 18,876 $ 15,396 $ -- $ 34,272 Operating income................. 3,905 1,665 (580) 4,990 Total assets..................... 19,474 18,228 6,178 43,880 2002 Net sales to external customers.. $ 14,998 $ 15,087 $ -- $ 30,085 Operating income................. 2,666 1,897 (527) 4,036 Total assets..................... 16,176 17,754 3,537 37,467
(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.
8. LEGAL PROCEEDINGS
6. STOCK OPTIONS
The Company follows Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, in accounting for its stock option plan. Under Opinion No. 25, no compensation expense is involved in no legal proceedings that inrecognized because the opinionexercise price of management will have a material effectthe Company’s stock options equals the market price of underlying stock on its resultsthe date of operations or financial position.
9. STATUS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002,grant. Had compensation expense for the Financial Accounting Standards Board (FASB) issuedCompany’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards (SFAS) No. 146,Accounting for Costs Associated withExit or Disposal Activities,which requires liabilities for costs associated with an exit or disposal activity to be recognized when the liability is incurred. SFAS No. 146 supersedes EITF Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, and was effective for the Company for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have an effect on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 changes current practice in accounting or, and disclosure of, guarantees. FIN 45 will require certain guarantees to be recorded at fair value on the Company's balance sheet, a change from current practice, which is generally to record a liability only when a loss is probable and reasonably estimable, as those terms are defined in SFAS No. 5,Accounting for Contingencies. FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote, which is another change from current practice. The disclosure requirements of FIN 45 are effective immediately. The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company expects that the new recognition and measurement provisions will not have a significant effect on the Company's future financial results and has determined that no initial disclosure or recognition is necessary.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation Transition and Disclosure - an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in interim financial statements regarding the method used on reported results for interim periods beginning after December 15, 2002. Company’s net income and net income per share would have been as follows:
Three Months Ended August 31, | ||||||||
2003 | 2002 | |||||||
(In thousands except per share amounts) | ||||||||
Net income: | ||||||||
As reported | $ | 1,302 | $ | 1,075 | ||||
Deduct-compensation expense based on fair value method | (180 | ) | (143 | ) | ||||
Pro forma | $ | 1,122 | $ | 932 | ||||
Basic net income per share: | ||||||||
As reported | $ | .21 | $ | .18 | ||||
Pro forma | $ | .18 | $ | .15 | ||||
Diluted net income per share: | ||||||||
As reported | $ | .20 | $ | .17 | ||||
Pro forma | $ | .17 | $ | .15 |
7. LEGAL PROCEEDINGS
The Company doesis subject to certain legal proceedings in the normal course of business that, in the opinion of Management, will not intendhave a material effect on its future results of operations or financial position.
8. SHIPPING EXPENSE
The Company classifies shipping expense with sales and marketing expense. Such expenses totaled $477,000 and $403,000 in the quarters ended August 31, 2003 and 2002, respectively.
9. BUSINESS ACQUISITIONS
As of February 28, 2003, the Company acquired, in a purchase business combination, the outstanding common stock of Adgen Ltd. of Ayr, Scotland, a company involved in the manufacture and sale of diagnostic test kits for the detection of plant diseases and the distribution of food safety diagnostic test kits. Consideration was net cash of $1,850,000 and 32,000 shares of common stock with a fair value of $341,000. Additionally, the Company is obligated to adopt a fair-valuepay contingent consideration based methodon future annual revenue levels. As of accounting for stock-based employee compensation until a final standard is issued byAugust 31, 2003, no additional consideration has been paid as such required revenue levels have not been achieved. If all revenue and net income levels are achieved, the FASB.Company could pay $450,000 of additional consideration.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information in this Management'sManagement’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'sCompany’s long-term prospects, historical financial information may not be indicative of future financial performance.
The
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 through out 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 "anticipate", "believe", "potential", "expect",“believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions used herein are intended to identify forward-looking statements. Forward-looking statements involve certain risks and uncertainties. VariousThere 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'sCompany’s reports on file at the Securities and Exchange Commission, maythat could cause actualNeogen Corporation’s results to differ materially from those containedindicated 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 forward-looking statements.future, it specifically disclaims any obligation to do so, even if its views change.
Critical Accounting Policies and Estimates
Management's
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the Company'sCompany’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 judgmentsjudgements 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 judgmentsjudgements 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
Allowance for Doubtful Accounts Receivable
Allowances for accounts receivable are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history.
Management attempts to minimize credit risk by reviewing customers'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.
Inventory Valuation
The Company writes down its
Inventory
Obsolete inventory for estimated obsolescence equal to the cost of the inventory.is written off as it is identified. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill
Valuation of Long-lived and Other Intangible Assets and Goodwill
Management assesses goodwill and other non-amortizable intangible assets for possible impairment on no less often thanthat 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:
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—Significant under-performanceunderperformance relative to expected historical or projected future operating results.
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—Significant changes in the use of acquired assets or strategy of the Company.
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—Significant negative industry or economic trends.
If
When management determines that the carrying value of goodwill and other nonamortizable intangible assets ismay not be recoverable based uponon 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 analysis, such assets are reduced byusing a discount rate commensurate with the estimated shortfall of fair value to carrying value.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 Nine Months Ended February 28,August 31, 2003 Compared to Three Months and Nine Months Ended February 28,August 31, 2002
The Company's sales
Total revenues increased 15% for$1,070,000 or 10% in the quarter and 14% for the nine- month period ended February 28,August 2003 asquarter compared to the same periodsAugust 2002 quarter. Revenues from sales of products dedicated to Food Safety were up 14% and revenues from sales of Animal Safety products were up 5%. Exclusive of the prior year. By segment,effects of sales of products from businesses purchased in the February 2003 quarter, total sales increased 6%.
The increase in Food Safety sales were up 31% for the quarter and 26% year to date and Animal Safety sales were flat for the quarter and increased 2% year to date.
In the Food Safety segmentrevenue of $828,000 came from increases in sales of test kits for the detection of naturally occurring mycotoxinsharmful bacteria such asSalmonella andListeria that increased 53% for the quarter11% and 37% for the nine-month period ended February 28, 2003 as compared to the same periods of the prior year. In fiscal 2003 a significant portion of the U.S. corn and sorghum crop was contaminated with aflatoxin. The Company's products were heavily used26%, respectively in the identification of contaminated commodities and thereby protecting of consumers from exposure to this carcinogen. Additionally, salesquarter. Sales of test kits for the detection of pathogens such as E. coli O157:H7, Salmonella and Listeria, increased 16% for the quarter and 19% for the nine-month period. The Company's continued investment in product development and sales and marketing efforts have put it in a position to capitalize on greater awareness of contamination of food products and to expand its market share of an expanding market. Finally, sales of diagnostic test kits to detect allergenic substancesallergens in food increased 43%. While markets for these products increased 34% inare growing, management believes that a substantial amount of the quarter and 38% in the nine-month period. This relatively new product lineCompany’s growth has benefitedcome from government regulation and consumer demand for food products that they are assured are properly labeled and free from common allergenic substances.additional market penetration.
In the
Animal Safety segment sales of test kits for the detection of drugs of abuse in racing animals, forensics, and life science products were up 15% in the quarter and 18% for the nine-month period ended February 28, 2003,revenues increased $242,000 in comparison with the same periodsrevenues from the August 2002 quarter. Increased sales of instruments and other products into the over-the-counter market accounted for most of the prior year. The sales of forensic products were up over 100% to nearly $200,000 as the Company continues to penetrate this market. Life science sales revenues increased as customers have added research projects that make use of these products. Additionally, the Company's equine vaccine and immunostimulant products increased 1% for the quarter and 7% for the nine-month period. This slower growing, but high margin, product group was favorably affected in the early partincreases. Sales of the 2003 fiscal year by use ofCompany’s EqStim product decreased 45% as compared to the immunostimulant product to aidAugust 2002 quarter. EqStim was used in 2002 in connection with the prevention of West Nile virusVirus infections in horses. Also, sales of products usedEffective vaccination programs have reduced the need for wound care that had grown rapidly in prior years experienced a decrease of 33%the product’s use for this purpose.
Gross margins in the August 2003 quarter decreased to 51% from 54% in the August 2002 quarter. Food Safety gross margins decreased to 59% from 63% and 18% forAnimal Safety gross margins decreased to 41% from 45%. These decreases in margins resulted from changes in product mix and the nine-month period. Several competitors have entered the market resulting in erosioneffect of the Company's sales. Finally, sales of durable veterinary products increased by 22% for the quarternew manufacturing facility in comparison with the prior year but remain 2% less than the prior year for the nine-month period. Sales in this area have increased as the Company has continued to be successful in its retail strategy with the addition of new accountsLansing that came on line in the quarter.
Overall gross margin in the FebruaryAugust 2003 quarter increased to 52% from 48% in the February 2002 quarter and to 53% in the nine-months ended February 28, 2003 from 50% in 2002 principally as a result of product mix. Marginsquarter. This new facility will provide significantly expanded production capability for all of the Food Safety and Animal Safety segments increased in the quarter and nine-month periods as a result of the same factors.diagnostic products.
Sales and marketing expenses increased $94,000 in the FebruaryAugust 2003 quarter increased $514,000 or 24% from the February 2002 quarter and $1,468,000 or 22% for the nine-month period.quarter. As a percentage of sales,revenues these expenses decreased to 24% of revenues from over 25% in the August 2002 quarter. As a percentage of revenues Food Safety sales and marketing expenses rose from 22%decreased to 24%27% in the August 2003 quarter and from 22%29% in 2002, while Animal Safety
decreased from 21% to 23%20%. In both divisions strong cost control measures were responsible for the nine-month period. The Company's continued investment in sales and marketing has supported overall sales increases and sales of higher margin products in a difficult economic environment. On a segment basis, sales expenses as a percent of sales were generally comparable to the prior year.percentage decreases.
General and administrative expenses increased $120,000 or 13%decreased by $273,000 in the February 2003 quarter as comparedprincipally from the effects of payments made by third parties to the FebruaryCompany for legal costs that were previously expensed related to two disputes that were settled in the quarter. Without these settlements, general and administrative expense would have been at approximately the same dollar level as the August 2002 quarter and $35,000 or 1% for the nine-month period. As a percentage of revenue these expenseswould have decreased from 10% to 9% in bothas a percentage of revenue. The relationship reflects the quarter and the nine-month periods. General and administrative expenses by division were consistent with the prior year. Controlgenerally fixed nature of general and administrative expense at the 9% to 10% of revenue level has been an objective of management over the past several quarters.expenses.
Research and development expenses increased $183,000 or 42% in the FebruaryAugust 2003 quarter increased $21,000 to 6% of revenue as compared to the FebruaryAugust 2002 quarter. Although on a quarter and $627,000 or 42% in the nine-month period. As a percentage of revenues, research and development expenses increased to 5.6% and 6.2% for the fiscal 2003-quarter and nine-month period, respectively. The increase is the result of several new research and development projects in each business segment. Management continues to maintain a goalquarter basis, some fluctuations of research and development spending in the range ofexpense will occur, management expects research and development expense to approximate 5% to 7%6% of total revenues and approximatelyover time. These expenditures approximate 8% to 10% of revenues offrom products and product lines that are the result of research efforts.
The provision for federal and state income taxes at 32.7% of income before income tax in the February 2003 quarter was substantially unchanged from the February 2002 quarter. For the nine-month period, the tax provision decreased to 34.5% from 35.6% in the same period of the prior year. The provision was favorably affectedsupported by the recognition of higher levels of foreign and research and development tax credits.development.
Other income was substantially unchanged when comparing the 2004 quarter to the comparable quarter of the prior year. Federal and state tax rates used in the February 2003computation of income tax expense in the first quarter and the nine-month period as compared withof fiscal year 2004 remained the same periods inas those of the prior year.
Financial Condition and Liquidity
At February 28,August 31, 2003, the Company had $8,279,000$8,600,000 in cash and marketable securities, working capital of $21,790,000$23,600,000, and stockholders'stockholders’ equity of $39,254,000.$42,800,000. In addition, the Company has unused bank lines totalingtotaled $10,000,000. Cash and marketable securities increaseddecreased by $265,000 in the nine monthsthree-month period ended February 28,August 31, 2003 with $135,000 of cash generatedfrom exercise of stock options offset by cash used in operations of $3,872,000.$87,000 and expenditures for acquisitions of intangible assets and property and equipment of $327,000.
Accounts receivable were $800,000 higher$300,000 lower at February 28,August 31, 2003 than at May 31, 2002 due primarily2003 with average days in net accounts receivable decreasing from 56 days to increases in sales during the period.54 days. Management believes that recorded allowances are adequate to provide for accounts that may become uncollectable. Inventories at August 31, 2003 increased $84,000 at February 28, 2003 compared to$500,000 from May 31, 2002. This increase,2003 as management continues the Company’s policy of maintaining inventories that was less than the rate at which the Company's sales are increasing, resulted from continued strong management of this asset.adequate to meet customer demands. The increasedecrease in current liabilities results from timing of payments.
At February 28,August 31, 2003, the Company had no material commitments for capital expenditures. The estimated cost to complete the new manufacturing facility for Food Safety under renovation in Lansing, Michigan is $300,000. Inflation and changing prices are not expected to have a material effect on the Company's operations.
Management believes that the Company'sCompany’s existing cash and marketable securities at February 28,August 31, 2003, 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'sCompany’s cash requirements to commercialize products currently under development or its plans to acquireadditional technology andacquire other organizations, technologies or products that fit within the Company'sCompany’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'sCompany’s future capital needs.
ITEM 3.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company'sCompany is subject to market risk exposures of varying correlations and volatilities with regard to interest rate and foreign exchange rate risks.
The Company’s exposure to market risk for changes in interest rates relates to its portfolio of marketable securities. The Company has nonot had significant borrowings. Interest rate risk is managed by investing in high- quality issues with short-term maturities with active markets. The Company manageshigh-quality issuers and seeking to avoid principal loss of invested funds by limiting default risksrisk and market risk. Default risk is managed 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 PROCEDURESBecause the Company markets and sells its products throughout the world, it could be significantly affected by weak economic conditions in foreign markets that could reduce demand for its products.
The Company has assets, liabilities and operations outside of disclosure controlsthe United States that are located primarily in Ayr, Scotland where the functional currency is the British Pound. The Company’s investment is its foreign subsidiary is considered long-term. Accordingly, the Company does not hedge its net investment or engage in other foreign currency hedging activities due to the insignificance of the balances to the Company as a whole.
ITEM 4. | CONTROLS AND PROCEDURES |
Within the 90-day period preceding the date of this report, and procedures. The Company's chief executive officerevaluation of the effectiveness of the design and chief financial officer have concluded thatoperation of the Company'sCompany’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 (c)) are sufficiently effective to ensurewas carried out under the supervision and with the participation of the Company’s Chief Executive and Chief Financial Officers. Based on that evaluation, the certifying officers concluded that the Company’s management had the relevant information requirednecessary to be disclosed bypermit an assessment of the Company in the reports it files under the Exchange Act is gathered, analyzedneed to disclose material developments and disclosed with adequate timeliness, accuracy and completeness, based on an evaluation of such controls and procedures conducted within 90 days priorrisks pertaining to the date hereof.
Safe-harbor, forward-looking statements:evaluation.
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:
PART II. OTHER INFORMATION
PART II. -- OTHER INFORMATION
ITEM 1.
ITEM 1. | LEGAL PROCEEDINGS |
The Company is involvedsubject to certain legal proceedings in no legal proceedingsthe normal course of business that, in the opinion of the management, will not have a material effect on its future results of operations or financial position.
Items 2, 3, 42,3,4 and 5 are not applicable and have been omitted.
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit 99.1 -
31.1 – Certification by James L. Herbertof Chief Executive Officer pursuant to section 906Rule 13a – 14 (a).
31.2 – Certification of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification by Richard R. CurrentChief Financial Officer pursuant to Rule 13 a – 14 (a).
32. – Certification pursuant to 18 U.S.C. section 906 of the Sarbanes-Oxley Act of 2002.1350
(b) Reports on Form 8-K Filed in Quarterly Period Ended February 28,August 31, 2003.
The Company filed the following reports on
Form 8-K during the quarterly period ended February 28,dated July 22, 2003:
ITEM 7. Financial statement and exhibits - Press Release dated July 22, 2003 - The Company announced its financial results for the second quarter.
ITEM 9. Regulation D disclosure
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: April 14,
NEOGEN CORPORATION | ||||||||
(Registrant) | ||||||||
Dated: | October 15, 2003 | By: | /s/ JAMES L. HERBERT | |||||
James L. Herbert | ||||||||
President and Chief Executive Officer | ||||||||
Dated: | October 15, 2003 | By: | /s/ RICHARD R. CURRENT | |||||
Richard R. Current | ||||||||
Vice President and Chief Financial Officer |
11
By: /s/ James L. Herbert
James L. Herbert
President & Chief Executive Officer
Dated: April 14, 2003
By: /s/ Richard R. Current
Richard R. Current
Vice President & Chief Financial Officer
I, James L. Herbert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Neogen Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
I, Richard R. Current, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Neogen Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ Richard R. CurrentRichard R. CurrentVice President &Chief Financial OfficerNeogen Corporation