UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2003February 29, 2004
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-17988
Neogen Corporation
(Exact name of registrant as specified in its charter)
Michigan | 38-2364843 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices including zip code)
(517) 372-9200
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YESx NO¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B – 2 of the Exchange Act). YESx NO¨
As of January 2,April 1, 2004, there were 7,960,0008,009,000 outstanding shares of Common Stock.
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. Interim Consolidated Financial Statements (Unaudited)
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
November 30, 2003 | May 31, 2003 | |||||||||||
(In thousands, except share and per share amounts) | February 29, 2004 | May 31, 2003 | ||||||||||
(In thousands, except share and per share amounts) | ||||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash | $ | 1,739 | $ | 1,061 | $ | 1,597 | $ | 1,061 | ||||
Marketable securities | 306 | 7,836 | — | 7,836 | ||||||||
Accounts receivable, less allowance of of $ 624 and $ 611 | 7,933 | 7,499 | ||||||||||
Accounts receivable, less allowance of $ 572 and $ 611 | 9,533 | 7,499 | ||||||||||
Inventories | 12,005 | 9,840 | 12,445 | 9,840 | ||||||||
Deferred income taxes | 694 | 694 | 694 | 694 | ||||||||
Prepaid expenses and other current assets | 1,433 | 1,041 | 1,375 | 1,041 | ||||||||
TOTAL CURRENT ASSETS | 24,110 | 27,971 | 25,644 | 27,971 | ||||||||
NET PROPERTY AND EQUIPMENT | 7,596 | 4,640 | 10,375 | 4,640 | ||||||||
OTHER ASSETS | ||||||||||||
Goodwill and other non amortizable intangible assets | 19,787 | 13,665 | ||||||||||
Other non-current assets, net of accumulated amortization of $ 721 and $ 860 | 2,753 | 1,760 | ||||||||||
Goodwill and other non-amortizable intangible assets | 20,812 | 13,665 | ||||||||||
Other non-current assets, net of accumulated amortization of $ 767 and $ 860 | 1,496 | 1,760 | ||||||||||
$ | 54,246 | $ | 48,036 | |||||||||
$ | 58,327 | $ | 48,036 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | $ | 2,030 | $ | 3,273 | $ | 2,776 | $ | 3,273 | ||||
Accruals | 3,352 | 2,490 | 3,557 | 2,490 | ||||||||
TOTAL CURRENT LIABILITIES | 5,382 | 5,763 | 6,333 | 5,763 | ||||||||
LONG-TERM DEBT | 4,600 | — | ||||||||||
DEFERRED INCOME TAXES | 405 | 405 | 405 | 405 | ||||||||
BANK LINE OF CREDIT | 3,100 | — | ||||||||||
OTHER LONG-TERM LIABILITIES | 458 | 466 | 454 | 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, 6,359,115 shares issued and outstanding at November 30, 2003; 6,200,486 shares issued and outstanding at May 31, 2003 | 1,017 | 992 | ||||||||||
Common stock, $.16 par value, 20,000,000 shares authorized, 8,008,472 shares issued and outstanding at February 29, 2004; 7,750,608 shares issued and outstanding at May 31, 2003 | 1,281 | 992 | ||||||||||
Additional paid-in capital | 25,385 | 24,830 | 25,524 | 24,830 | ||||||||
Accumulated other comprehensive income | 77 | 3 | 125 | 3 | ||||||||
Retained earnings | 18,422 | 15,577 | 19,605 | 15,577 | ||||||||
TOTAL STOCKHOLDERS’ EQUITY | 44,901 | 41,402 | 46,535 | 41,402 | ||||||||
$ | 54,246 | $ | 48,036 | $ | 58,327 | $ | 48,036 | |||||
See notes to interim unaudited consolidated financial statements
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended February 29/28, | Nine Months Ended Note 1 | |||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
(In thousands, except per share amounts) | (In thousands, except per share amounts) | |||||||||||||||||||||||||
Sales | $ | 13,246 | $ | 12,592 | $ | 25,479 | $ | 23,755 | $ | 14,717 | $ | 11,403 | $ | 40,196 | $ | 35,158 | ||||||||||
Cost of goods sold | 6,243 | 5,553 | 12,216 | 10,633 | 7,791 | 5,361 | 20,007 | 16,006 | ||||||||||||||||||
GROSS MARGIN | 7,003 | 7,039 | 13,263 | 13,122 | 6,926 | 6,042 | 20,189 | 19,152 | ||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||||
Sales and marketing | 2,803 | 3,129 | 5,726 | 5,958 | 3,001 | 2,957 | 8,727 | 8,903 | ||||||||||||||||||
General and administrative | 1,268 | 1,032 | 2,055 | 2,092 | 1,368 | 1,049 | 3,423 | 3,141 | ||||||||||||||||||
Research and development | 652 | 842 | 1,328 | 1,497 | 792 | 621 | 2,120 | 2,118 | ||||||||||||||||||
4,723 | 5,003 | 9,109 | 9,547 | 5,161 | 4,627 | 14,270 | 14,162 | |||||||||||||||||||
OPERATING INCOME | 2,280 | 2,036 | 4,154 | 3,575 | 1,765 | 1,415 | 5,919 | 4,990 | ||||||||||||||||||
OTHER INCOME | ||||||||||||||||||||||||||
Interest income | 20 | 25 | 43 | 46 | 2 | 24 | 45 | 70 | ||||||||||||||||||
Interest expense | (32 | ) | — | (32 | ) | — | ||||||||||||||||||||
Other | 44 | 96 | 129 | 203 | 7 | 91 | 136 | 294 | ||||||||||||||||||
64 | 121 | 172 | 249 | (23 | ) | 115 | 149 | 364 | ||||||||||||||||||
INCOME BEFORE INCOME TAXES | 2,344 | 2,157 | 4,326 | 3,824 | 1,742 | 1,530 | 6,068 | 5,354 | ||||||||||||||||||
INCOME TAXES | 801 | 756 | 1,481 | 1,348 | 559 | 500 | 2,040 | 1,848 | ||||||||||||||||||
NET INCOME | $ | 1,543 | $ | 1,401 | $ | 2,845 | $ | 2,476 | $ | 1,183 | $ | 1,030 | $ | 4,028 | $ | 3,506 | ||||||||||
NET INCOME PER SHARE: | ||||||||||||||||||||||||||
NET INCOME PER SHARE – Note 3: | ||||||||||||||||||||||||||
Basic | $ | .20 | $ | .18 | $ | .36 | $ | .32 | $ | .15 | $ | .14 | $ | .51 | .46 | |||||||||||
Diluted | $ | .19 | $ | .18 | $ | .34 | $ | .31 | $ | .14 | $ | .13 | $ | .48 | $ | .44 | ||||||||||
See notes to interim unaudited consolidated financial statements
NEOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total | |||||||||||||||||||||||||||
Shares | Amount | Total | Shares | Amount | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||||||||||||||||||||
Balance, June 1, 2003 | 6,200 | $ | 992 | $ | 24,830 | $ | 3 | $ | 15,577 | $ | 41,402 | 6,200 | $ | 992 | $ | 24,830 | $ | 3 | $ | 15,577 | $ | 41,402 | |||||||||||||
5 for 4 stock split – Note 3 | 1,591 | 255 | (255 | ) | |||||||||||||||||||||||||||||||
Exercise of options and warrants | 159 | 25 | 555 | 580 | 217 | 34 | 949 | 983 | |||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||
Net income for the six months ended November 30, 2003 | 2,845 | 2,845 | |||||||||||||||||||||||||||||||||
Net income for the nine months ended February 29, 2004 | 4,028 | 4,028 | |||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | 74 | 74 | 122 | 122 | |||||||||||||||||||||||||||||||
Total comprehensive income | 2,919 | 4,150 | |||||||||||||||||||||||||||||||||
Balance, November 30, 2003 | 6,359 | $ | 1,017 | $ | 25,385 | $ | 77 | $ | 18,422 | $ | 44,901 | ||||||||||||||||||||||||
Balance, February 29, 2004 | 8,008 | $ | 1,281 | $ | 25,524 | $ | 125 | $ | 19,605 | $ | 46,535 | ||||||||||||||||||||||||
See notes to interim unaudited consolidated financial statements
NEOGEN CORPORATION SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended November 30, | Nine Months Ended February 29/28, | |||||||||||||||
2003 | 2002 | 2004 | 2003 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 2,845 | $ | 2,476 | $ | 4,028 | $ | 3,506 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 618 | 625 | 907 | 945 | ||||||||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||||||
Accounts receivable | (312 | ) | (410 | ) | (1,912 | ) | (800 | ) | ||||||||
Inventories | (712 | ) | (364 | ) | (1,152 | ) | (84 | ) | ||||||||
Prepaid expenses and other current assets | (337 | ) | (51 | ) | (278 | ) | 37 | |||||||||
Accounts payable | (1,243 | ) | (644 | ) | (497 | ) | (641 | ) | ||||||||
Accruals | (424 | ) | 979 | (171 | ) | 909 | ||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 435 | 2,611 | 925 | 3,872 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Sales of marketable securities | 39,044 | 16,155 | 39,378 | 30,022 | ||||||||||||
Purchases of marketable securities | (31,514 | ) | (17,686 | ) | (31,542 | ) | (31,078 | ) | ||||||||
Purchases of property and equipment and other assets | (933 | ) | (1,693 | ) | (3,774 | ) | (2,148 | ) | ||||||||
Acquisitions | (10,034 | ) | — | (10,034 | ) | — | ||||||||||
NET CASH USED IN INVESTING ACTIVITIES | (3,437 | ) | (3,224 | ) | (5,972 | ) | (3,204 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from borrowing on line of credit | 3,100 | — | 4,600 | — | ||||||||||||
Net payments for repurchase of common stock | — | (485 | ) | — | (485 | ) | ||||||||||
Net proceeds from issuance of common stock | 580 | 232 | 983 | 687 | ||||||||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 3,680 | (253 | ) | |||||||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 5,583 | 202 | ||||||||||||||
INCREASE (DECREASE) IN CASH | 678 | (866 | ) | |||||||||||||
INCREASE IN CASH | 536 | 870 | ||||||||||||||
CASH AT BEGINNING OF PERIOD | 1,061 | 2,012 | 1,061 | 2,012 | ||||||||||||
CASH AT END OF PERIOD | $ | 1,739 | $ | 1,146 | $ | 1,597 | $ | 2,882 | ||||||||
See notes to interim unaudited consolidated financial statements
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENT (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 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 month periodand nine month periods ended November 30, 2003 isFebruary 29, 2004 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2004. For more complete financial information, these consolidated financial statements should be read in conjunction with the May 31, 2003 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, 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. 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:follow:
November 30, 2003 | May 31, 2003 | February 29, 2004 | May 31, 2003 | |||||||||
(In thousands) | (In thousands) | |||||||||||
Raw materials | $ | 4,010 | $ | 3,231 | $ | 4,362 | $ | 3,231 | ||||
Work-in-process | 445 | 422 | 386 | 422 | ||||||||
Finished goods | 7,550 | 6,187 | 7,697 | 6,187 | ||||||||
$ | 12,005 | $ | 9,840 | $ | 12,445 | $ | 9,840 | |||||
3. NET INCOME PER SHARE
The following table presents the calculation of net income per share:share follows:
Three Months Ended November 30 | Six Months Ended November 30 | |||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | Three Months Ended February 29/28 | Nine Months Ended February 29/28 | |||||||||||||||||||
(In thousands, except share and per share amounts) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||
Numerator for basic and diluted net income per share: | ||||||||||||||||||||||||
Net income | $ | 1,543 | $ | 1,401 | $ | 2,845 | $ | 2,476 | ||||||||||||||||
(In thousands, except share and per share amounts) | ||||||||||||||||||||||||
Numerator for basic and diluted | ||||||||||||||||||||||||
net income per share: | ||||||||||||||||||||||||
net income | $ | 1,183 | $ | 1,030 | $ | 4,028 | $ | 3,506 | ||||||||||||||||
Denominator: | ||||||||||||||||||||||||
Denominator for basic net income per share-weighted average shares | 7,879 | 7,648 | 7,828 | 7,647 | 7,979 | 7,629 | 7,878 | 7,641 | ||||||||||||||||
Effect of dilutive stock options and Warrants | 423 | 298 | 432 | 304 | ||||||||||||||||||||
Effect of dilutive stock options and warrants | 533 | 353 | 467 | 319 | ||||||||||||||||||||
Denominator for diluted net income per share | 8,302 | 7,946 | 8,260 | 7,951 | 8,512 | 7,982 | 8,345 | 7,960 | ||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | .20 | $ | .18 | $ | .36 | $ | .32 | $ | .15 | $ | .14 | $ | .51 | $ | .46 | ||||||||
Diluted | $ | .19 | $ | .18 | $ | .34 | $ | .31 | $ | .14 | $ | .13 | $ | .48 | $ | .44 | ||||||||
On January 2, 2004, the Company paid a 5 for 4 stock split in the form of a stock dividend. All income per share amounts have been retroactively restated to reflect the split as if it took place at the beginning of all periods presented.
4. STOCK REPURCHASE
The Company’s Board of Directors has authorized the purchase of up to 1,000,0001,250,000 shares of the Company’s Common Stock. As of November 30, 2003,February 29, 2004, the Company has purchased 697,000871,000 shares in negotiated and open market transactions. Shares purchased under this buy-back program were retired.
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. Additionally the Animal Safety segment produces and markets a line of rodenticides to assist in the control of rats and mice in and around agricultural, food production and other facilities.
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 November 30,February 29, 2004 and February 28, 2003 and 2002 was as follows:follow:
Food Safety | Animal Safety | Corporate Eliminations(1) | Total | Food Safety | Animal Safety | Corporate and | Total | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||
Fiscal 2004 | ||||||||||||||||||||||||||
Net sales to external customers | $ | 7,130 | $ | 6,116 | $ | — | $ | 13,246 | $ | 6,741 | $ | 7,976 | $ | — | $ | 14,717 | ||||||||||
Operating income | 1,673 | 880 | (273 | ) | 2,280 | 615 | 1,256 | (106 | ) | 1,765 | ||||||||||||||||
Fiscal 2003 | ||||||||||||||||||||||||||
Net sales to external customers | $ | 7,079 | $ | 5,513 | $ | — | $ | 12,592 | $ | 6,446 | $ | 4,957 | $ | — | $ | 11,403 | ||||||||||
Operating income | 1,523 | 682 | (169 | ) | 2,036 | 1,151 | 458 | (194 | ) | 1,415 | ||||||||||||||||
Segment information for the six months ended November 30, 2003 and 2002 was as follows: | ||||||||||||||||||||||||||
Food Safety | Animal Safety | Corporate Eliminations(1) | Total | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||
Fiscal 2004 | ||||||||||||||||||||||||||
Net sales to external customers | $ | 14,028 | $ | 11,451 | $ | — | $ | 25,479 | ||||||||||||||||||
Operating income | 2,807 | 1,484 | (137 | ) | 4,154 | |||||||||||||||||||||
Total assets | 22,846 | 30,371 | 1,029 | 54,246 | ||||||||||||||||||||||
Fiscal 2003 | ||||||||||||||||||||||||||
Net sales to external customers | $ | 13,150 | $ | 10,605 | $ | — | $ | 23,755 | ||||||||||||||||||
Operating income | 2,754 | 1,207 | (386 | ) | 3,575 | |||||||||||||||||||||
Total assets | 17,410 | 18,397 | 6,654 | 42,461 |
Segment information for the nine months ended February 29, 2004 and February 28, 2003 follow:
Food Safety | Animal Safety | Corporate and | Total | ||||||||||
(In thousands) | |||||||||||||
Fiscal 2004 | |||||||||||||
Net sales to external customers | $ | 20,770 | $ | 19,426 | $ | — | $ | 40,196 | |||||
Operating income | 3,422 | 2,740 | (243 | ) | 5,919 | ||||||||
Total assets | 25,492 | 31,778 | 1,057 | 58,327 | |||||||||
Fiscal 2003 | |||||||||||||
Net sales to external customers | $ | 19,608 | $ | 15,550 | $ | — | $ | 35,158 | |||||
Operating income | 3,905 | 1,665 | (580 | ) | 4,990 | ||||||||
Total assets | 19,474 | 18,228 | 6,178 | 43,880 |
(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. |
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 recognized because the exercise price of the Company’s stock options equals the market price of underlying stock on the date of grant. Had compensation expense for the Company’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. 123,Accounting for Stock-Based Compensation, the Company’s net income and net income per share would have been as follows:
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended February 29/28, | Nine Months Ended February 29/28, | |||||||||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
(In thousands except per share amounts) | (In thousands except per share amounts) | |||||||||||||||||||||||||||||||
Net income: | ||||||||||||||||||||||||||||||||
As reported | $ | 1,543 | $ | 1,401 | $ | 2,845 | $ | 2,467 | $ | 1,183 | $ | 1,030 | $ | 4,028 | $ | 3,506 | ||||||||||||||||
Deduct-compensation expense based on fair value method | (214 | ) | (180 | ) | (394 | ) | (323 | ) | (249 | ) | (187 | ) | (643 | ) | (509 | ) | ||||||||||||||||
Pro forma | $ | 1,329 | $ | 1,221 | $ | 2,451 | $ | 2,144 | $ | 934 | $ | 843 | $ | 3,385 | $ | 2,997 | ||||||||||||||||
Basic net income per share: | ||||||||||||||||||||||||||||||||
As reported | $ | .20 | $ | .18 | $ | .36 | $ | .32 | $ | .15 | $ | .14 | $ | .51 | $ | .46 | ||||||||||||||||
Pro forma | $ | .17 | $ | .16 | $ | .31 | $ | .28 | $ | .12 | $ | .11 | $ | .43 | $ | .39 | ||||||||||||||||
Diluted net income per share: | ||||||||||||||||||||||||||||||||
As reported | $ | .19 | $ | .18 | $ | .34 | $ | .31 | $ | .14 | $ | .13 | $ | .48 | $ | .44 | ||||||||||||||||
Pro forma | $ | .16 | $ | .15 | $ | .30 | $ | .26 | $ | .11 | $ | .11 | $ | .41 | $ | .38 |
7. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings in the normal course of business that, in the opinion of Management, will not have a material effect on its future results of operations or financial position.
8. SHIPPING EXPENSE
The Company classifies shipping expense with sales and marketing expense. Such expenses totaled $435,000$562,000 and $912,000$1,474,000 in the three and sixnine month periods ended November 30, 2003,February 29, 2004, respectively, and $386,000$424,000 and $789,000$1,213,000 in the three and sixnine month periods ended November 30, 2002,February 28, 2003, 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 companyCompany 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 pay contingent consideration based on future annual revenue levels. As of November 30, 2003,February 29, 2004, 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 Company could pay $450,000 of additional consideration. As this acquisition isIf consummated as of the beginning of fiscal 2003, operating results would not material, no pro forma information is presented.have been materially different from amounts previously reported.
On November 21, 2003, Neogen Corporation purchased 100% of the common stock of HACCO,Hacco, Inc. and of Hess & Clark, Inc. from United Agri Products, Inc. a then wholly owned subsidiary of ConAgra, Inc. HACCOHacco has principal offices in Randolph, Wisconsin, and is a producer of rodenticide products. The Hess & Clark acquisition was principally a product line acquisition in which the Company acquired lines of disinfectants and antibacterials.
Consideration for the acquisitions, subject to certain post closing adjustments, was $10.0$10,000,000 million in cash plus the assumption of $1.0approximately $1,000,000 million of liabilities. On a preliminary basis pending final asset valuation procedures, allocation of the purchase price included current assets of $2,000,000, property plant and equipment of $2,400,000, goodwill and other assets of $6,600,000.
Unaudited pro forma financial information, as if the acquisitions of HACCOHacco and Hess & Clark had taken place on June 1, 2002 is as follows:
Three months ended November 30 | Six months ended November 30 | Nine months ended February 29/28 | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2004 | 2003 | |||||||||||||
(In thousands except per share amounts) | (In thousands except per share amounts) | |||||||||||||||||
Revenue | $ | 17,110 | $ | 16,078 | $ | 31,879 | $ | 30,032 | $ | 46,440 | $ | 43,820 | ||||||
Net income | 1,958 | 1,750 | 3,442 | 3,052 | $ | 4,448 | $ | 4,180 | ||||||||||
Diluted net income per share | $ | .24 | $ | .22 | $ | .41 | $ | .38 | $ | .53 | $ | .53 |
10. LINE OF CREDITLONG TERM DEBT
On November 26, 2003, the Company entered into a new financing agreement with a bank providing for an unsecured revolving line of credit of $15,000,000 that replaced certain previously existing borrowing arrangements. Interest is at prime less 1.25% or Eurodollar prime equivalent, less 150 basis points at the Company’s option (rate elected was 2.50% at November 30, 2003)February 29, 2004). Financial covenants include maintaining current ratios and debt to earnings ratios (as defined) and specified levels of tangible net worth, all of which are complied with at the balance sheet date. The agreement matures September 1, 2005.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial performance.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made 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 “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form 10-Q was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
Critical Accounting Policies and Estimates
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 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 as follows:
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.
Allowance for Doubtful Accounts
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.
Inventory
Obsolete 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.
Valuation of Intangible Assets and Goodwill
Management assesses goodwill and other non-amortizable intangible assets for possible impairment at least annually. 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:
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 aestimated fair 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 SixNine Months Ended November 30, 2003February 29, 2004 Compared to Three and SixNine Months Ended November 30, 2002February 28, 2003
TotalExecutive Overview
On an overall basis the quarter had excellent increases in revenues compared to the same quarter in the prior year primarily as a result of revenue increases in the Animal Safety segment. The Animal Safety segment’s revenue increases came from the Company’s late November acquisitions of Hacco, Inc. and Hess & Clark, Inc. that were reported as new components of this segment in the current year. Additionally, Animal Safety segment revenues from continuing products increased 12% following a year in which the segment experienced little growth. Growth came as the result of economic improvements in certain markets and from implementation of the segment’s sales and marketing plans. Food Safety segment revenues increased by $654,000 or 5% with difficult revenue comparisons in the three-month period and $1,724,000 or 7%current year due to large weather related sales increases in the six-monthprior year. The segment had successes during the quarter in sales of test kits for Listeria, Salmonella, and allergens and had a large delivery of test kits for genetically modified organisms to Brazil. While total revenues were up 29%, net income was up 15% principally as a result of the effect of changes in product mix on overall gross margins and the effect of the integration costs of the Hacco and Hess & Clark acquisitions. While these costs will begin to abate in the Company’s fourth quarter, additional costs of the acquisition will continue to be incurred into early fiscal 2005.
For the nine month period the results and the overall explanations thereof were much the same as for the third quarter with the revenue increases of the Animal Safety segment having the largest effect on overall sales increases for the Company. The Food Safety segment was affected by the same difficult weather related comparisons as in the prior year when sales were up 31% compared to the third quarter of the 2002 year.
See the discussions below for more detail analysis of the results of the Company’s operations for the three and nine month periods ended November 30, 2003 in comparison withFebruary 29, 2004 as compared to the same periods in 2002. Revenues from the sales of products dedicated to Food Safety were up $51,000 or 1% in the three-month period and $878,000 or 7% in the six-month period. Revenues from the sales of Animal Safety products increased by $603,000 or 11% in the three-month period ended November 30, 2003 and $846,000 or 8% in the six-month period.prior year.
Detail Revenue Changes
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
29-Feb-04 | 28-Feb-03 | 29-Feb-04 | 28-Feb-03 | |||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||
Food Safety | ||||||||||||||||||||||||||
Natural Toxins & Allergens | $ | 2,278 | $ | 2,798 | $ | (520 | ) | -18.6 | % | $ | 8,174 | $ | 8,462 | $ | (288 | ) | -3.4 | % | ||||||||
Bacteria & General Sanitation | 2,590 | 2,528 | 62 | 2.5 | % | 7,861 | 7,850 | 11 | 0.1 | % | ||||||||||||||||
Other | 1,873 | 1,120 | 753 | 67.2 | % | 4,735 | 3,296 | 1,439 | 43.7 | % | ||||||||||||||||
6,741 | 6,446 | 295 | 4.6 | % | 20,770 | 19,608 | 1,162 | 5.9 | % | |||||||||||||||||
Animal Safety | ||||||||||||||||||||||||||
Life Sciences & Other | 881 | 822 | 59 | 7.2 | % | 2,738 | 2,900 | (162 | ) | -5.6 | % | |||||||||||||||
Vaccines | 378 | 217 | 161 | 74.2 | % | 851 | 697 | 154 | 22.1 | % | ||||||||||||||||
Rodenticides & Disinfectants | 2,139 | — | 2,139 | 2,285 | — | 2,285 | ||||||||||||||||||||
Veterinary Instruments | 1,388 | 1,097 | 291 | 26.5 | % | 3,234 | 2,478 | 756 | 30.5 | % | ||||||||||||||||
Other | 3,190 | 2,821 | 369 | 13.1 | % | 10,318 | 9,475 | 843 | 8.9 | % | ||||||||||||||||
7,976 | 4,957 | 3,019 | 60.9 | % | 19,426 | 15,550 | 3,876 | 24.9 | % | |||||||||||||||||
Total Sales | $ | 14,717 | $ | 11,403 | $ | 3,314 | 29.1 | % | $ | 40,196 | $ | 35,158 | $ | 5,038 | 14.3 | % | ||||||||||
Within the Food Safety business segment, sales of products related to detection of pathogens and general sanitationnatural toxin test kits decreased by 5% and 3%24.4% in the three-month and six-month periods, respectively, as compared to the prior year. These decreases resulted from heavier levels of competitionperiod and decreased levels of testing for E.coli O157:H7. Other pathogen detection product sales, such as for Listeria and Salmonella, had increases in sales both8.3% in the quarter and the six month periods when compared the same periods of the prior year. Sales of products to detect natural toxins were down 21%nine-month period in the quarter and 6% in the six-month period following a large weather related spike in sales of these products incomparison with the prior year. A significant portion of the U.S. corn and sorghum crops weregrain crop was contaminated with aflatoxin in 2002 and the Company’s products were widely used in the identification of infected commodities and thereby the protection of consumers from exposure to this carcinogen. The 2003 crop was largely free of aflatoxin.uninfected. Sales of allergen detection products increased 36%30.4% in the three monththree-month period and 39%40.9% in the six-monthnine-month period as theended February 29, 2004. The Company continues to enjoy rapid market acceptance of these products.
Animal Safety revenues benefited from sales Sales of diagnostic tests for monitoring bacteria and general sanitation increased 2.4% in the Company’s new line of disposable needlesthree-month period and increased sales of D-3 needles that combined resulted in nearly a $250,000 increase in sales in this product category for the quarter and $500,000 for the six-month period. Revenues from the Company’s vaccine and p.acnes products were down $150,000 in comparisonequal to the prior year primarily in the six-monthnine-month period. The Company experienced heavier levels of competition and decreased levels of testing for E.coli by certain customers during the three and nine month periods. Sales of tests for the detection of Listeria and Salmonella increased by 28% and 8% in the three-month periods and 22% and 7% in the nine-month periods. Product sales for the general sanitation markets increased 16.3% in the three-month period and by 19.5% in the nine-month period. These increases were the result of increased market penetration and general acceptance of these product offerings. Other sales increased by 67.2% in the three-month period ended February 29, 2004 and 43.7% in the nine-month period. During the third quarter, Neogen shipped a substantial order of test kits to Brazil to detect soybeans that have been genetically modified to make them tolerant to Roundup herbicides. Brazil is a leading exporter of soybeans to the European market, which demands assurances that the commodity is GMO-free.
Within the Animal Safety business segment, sales of Life Sciences and other related products increased 7.2% in the three months ended February 2004 and decreased 5.6% in the nine-month period in comparison with the prior year. These product sales have remained reasonably consistent with the prior year, the testing market for drugs of abuse in race-horses and greyhounds, being a mature market, does not have the number of opportunities for growth and expansion as many of the Company’s other markets. Sales of Neogen’s vaccine for equine botulism increased by 74.2% in the three-month period and 22.2% in the nine-month period due to timing of certain international deliveries. The addition of Hacco’s rodenticides and Hess & Clark’s disinfectants in the November acquisition were a significant addition to the sales of the Animal Safety business segment. Sales of veterinary instruments in the three-month period ended February 2004 were up 26.5% and sales in the nine-month period were up 30.5% significantly from sales into the retail segment including the addition of 100 Petsmart locations and the important Midwestern farm and ranch retailer Mattoon Rural King. Other sales consisting primarily of Amvet Pharmaceutical products and Triple Crown products increased 13.1% in the three-month period and 8.9% in the nine-month period as the p.acnes product was used extensivelyCompany continues to boost immunity in horses against West Nile virus inpenetrate the first quarter of the 2002 year. Sales in the second quarter and the six-months were up $500,000 in comparison to the prior year from the sales of products for use as vascular dilators in horses and as antibiotics for the generalcompanion animal market. The characteristics of the customers and the sales base of these products are such that similar revenues may not be present in any single future quarter.markets.
Gross margins decreased from 55.9%53.0% to 52.9%47.1% in the three-month comparative period and decreased from 55.2%54.5% to 52.1%50.2% in the six-monthnine-month period ended November 30,February 28, 2003 in comparison with the prior year. These decreases in margins resulted from changes in product mix and the effect of the new manufacturing facility in Lansing that came on line in the first quarteraddition of the current year. This new facility will provide significantly expanded production capability for Food Safety diagnostic products.products of Hacco and Hess & Clark. These products have lower gross margins, somewhat offset by lower overall operating costs.
Sales and marketing expenses decreased $326,000increased $44,000 in the three-month period and $232,000decreased $176,000 in the six-monthnine-month period. As a percentage of revenues these expenses decreased from 25%26% of sales to 21%20% of sales in the three-month period and
decreased from 25% to 22% in the six-monthnine-month period. Cost control measures were responsible for the percentage decreases from the prior year.
General and administrative expenses increased $236,000$319,000 in comparison with the prior year three-month period ended November 30, 2003February 29, 2004 and decreased $37,000increased $282,000 when compared in the six-monthnine-month period of the prior year. The increase in secondthird quarter expenses arose primarily from the addition of subsidiary operations in Scotlandof Adgen and China,Hacco as well as expenses related to the increased levels of operations of the Company. During the six-monthnine-month period, administrative expenses decreased due to reimbursements made by third parties to the Company for legal costs for legal costs that were previously expensed related to two disputes that were settled in the first quarter of fiscal 2004. As a percentage of revenue these expenses increased from 8% to 10%remained at 9% in the comparable three-month period and decreased from 9% to 8% for the six-month period ended November 30, 2003.nine-month periods.
Research and development expenses decreasedincreased by $190,000$171,000 for the three-month period ended November 30, 2003February 29, 2004 as compared to the same period in the prior year and decreased $169,000increased $2,000 in the six-monthnine-month period in comparison with the same period in the prior year. As a percentage of revenue these expenses decreased from 7% toremained at 5% in the three-month period and decreased from 6% to 5% for the six-monthnine-month period ended November 30, 2003.February 29, 2004. 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 was substantially unchanged when comparing the fiscal 2004 three-month and six-monthnine-month periods with those of the prior year. Federal and state income tax rates used in the computation of income tax expense in the periods remained the same ascomparable to those in the prior year.
Financial Condition and Liquidity
At November 30, 2003,February 29, 2004, the Company had $2,045,000$1,597,000 in cash and marketable securities, working capital of $18,728,000$19,311,000 and stockholders’ equity of $44,901,000.$46,535,000. In addition, available bank lines totaled $11,900,000.$10,400,000. Cash and marketable securities decreased by $6,852,000$7,300,000 from May 31, 2003 primarily due to the use for the acquisition of HACCOHacco Inc. and Hess & Clark, Inc. during the second quarter as described in Note 9 to the interim unaudited consolidated financial statements.
Accounts receivable were $434,000$2,034,000 higher than at May 31, 2003 with $122,000 of receivable balances acquired in the acquisitions.2003. Days outstanding in account receivables decreased from 56 days at May 31, 2003 to 5355 days as of November 30, 2003.February 29, 2004. Management believes that the recorded allowances areallowance is adequate to provide for accounts that may become uncollectable. Inventories at November 30, 2003February 29, 2004 increased $2,165,000$2,605,000 with $1,750,000 resulting from the acquisitions of Hacco and Hess & Clark and the remainder resulting from the continued policy of maintaining adequate inventories to meet customer needs. The decreaseincrease of $381,000$570,000 in current liabilities results from the timing of payments.
At November 30, 2003During the Company had material commitments for the purchase of two pieces of property. Subsequent to thethird fiscal quarter, the Company purchased aan office, manufacturing and distribution facility in Lexington, Kentucky for approximately $1,900,000 and a facility in Lansing, Michigan for approximately $802,000.$800,000. It is expected that expenditures of up to $1,000,000 will be incurred to outfit the facilities to meet the Company’s needs. These facilities are expected to replace certain leased facilities and also towill be used in expanding the Company’s operations as the need arises.needs arise. The purchases were financed by drawings under the bank revolving line of credit.
Inflation and changing prices are not expected to have a material effect on operations.
Management believes that the Company’s existing cash and marketable securities as of November 30, 2003,February 29, 2004, along with its available bank revolving line 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 securitiesbank lines may not be sufficient to meet the Company’s cash requirements to commercialize products currently under development or its plans to acquire other organizations, technologies or products that fit within the Company’s mission statement. Accordingly, the Company may 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 is subject to market risk exposures of varying correlations and volatilities with regard tohas minimal interest rate and foreign exchange rate risks.
The Company’srisk exposure to market risk for changes in interest rates relates to its portfolio of marketable securities. The Company has not had significantand no fixed rate investments or borrowings. Interest rate risk is managed by investingGenerally sales are denominated in high-quality issuers and seeking to avoid principal loss of invested funds by limiting default risk and market risk. Default risk is managed by investing in only high-credit-quality securities and by responding appropriately to a significant reduction in credit rating of any
investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
BecauseU.S. dollars, however, because 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 the United States that are located primarily in Ayr, Scotland where the functional currency is the British Pound. The Company’sThis investment is its foreign subsidiary is considered long-term. Accordingly,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 evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was 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 necessary to permit an assessment of the need to disclose material developments and risks pertaining to the Company’s business in its periodic filings with the Securities and Exchange Commission. There have been no significant changes to the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.
The Company is subject to certain legal proceedings in the normal course of business that, in the opinion of the management,Management, will not have effect on its future results of operations or financial position.
The Annual Meetings of the Company were held on October 2, 2003 and October 9, 2002. The matters voted upon and the results of the vote follow:
THE MEETING HELD OCTOBER 2, 2003:
| ||||
| ||||
| ||||
Items2,3, and5Items 2,3,4 and 5 are not applicable and have been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
31.1 – Certification of Chief Executive Officer pursuant to Rule 13a – 14 (a).
31.2 – Certification of Chief Financial Officer pursuant to Rule 13 a – 14 (a).
32. – Certification pursuant to 18 U.S.C. section 1350
(b) Reports on Form 8-K Filed in Quarterly Period Ended February 29, 2004.
Form 8-K dated December 5, 2003
Item 2. |
Form 8-K dated September 25, 2003:December 15, 2003
Item 5. | Others Events - Reporting 5 for 4 Stock Split in the form of a dividend as of January 2, 2004. |
Form 8-K dated January 8, 2004
Item 7. | Financial Statements and Exhibits. |
Item 12. | Results of Operations and Financial |
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: | ||||||||
By: | ||||||||
/ | ||||||||
HERBERT | ||||||||
James L. Herbert
| ||||||||
President and Chief Executive Officer | ||||||||
Dated: | ||||||||
By: | ||||||||
/ | ||||||||
CURRENT | ||||||||
Richard R. Current | ||||||||
Vice President and Chief Financial Officer |
1214