UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended November 30, 2003
or
For the transition period from to
Commission file number 0-17988
Neogen Corporation
(Exact name of registrant as specified in its charter)
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices including zip code)
(517) 372-9200
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B – 2 of the Exchange Act). YES x NO ¨
As of January 2, 2004, there were 7,960,000 outstanding shares of Common Stock.
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Interim Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets –
November 30, 2003 and May 31, 2003
Consolidated Statements of Income –
Three months and six months ended November 30, 2003 and 2002
Consolidated Statements of Stockholders’ Equity –
Six months ended November 30, 2003
Consolidated Statements of Cash Flows –
Six months ended November 30, 2003 and 2002
Notes to Interim Consolidated Financial Statements – November 30, 2003
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II. Other Information
Item 1.Legal Proceedings
Item 2.Changes in Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Submission of Matters to a Vote of Security Holders
Item 5.Other Information
Item 6.Exhibits and Reports on Forms 8-K
Signatures
CEO Certification
CFO Certification
Section 906 Certification
PART I – FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash
Marketable securities
Accounts receivable, less allowance of of $ 624 and $ 611
Inventories
Deferred income taxes
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
NET PROPERTY AND EQUIPMENT
OTHER ASSETS
Goodwill and other non amortizable intangible assets
Other non-current assets, net of accumulated amortization of $ 721 and $ 860
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accruals
TOTAL CURRENT LIABILITIES
DEFERRED INCOME TAXES
BANK LINE OF CREDIT
OTHER LONG-TERM LIABILITIES
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
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
TOTAL STOCKHOLDERS’ EQUITY
See notes to interim consolidated financial statements
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months
Ended
November 30,
Six Months
(In thousands, except
per share amounts)
Sales
Cost of goods sold
GROSS MARGIN
OPERATING EXPENSES
Sales and marketing
General and administrative
Research and development
OPERATING INCOME
OTHER INCOME
Interest income
Other
INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME
NET INCOME PER SHARE:
Basic
Diluted
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Balance, June 1, 2003
Exercise of options and warrants
Comprehensive income:
Net income for the six months ended November 30, 2003
Foreign currency translation adjustments
Total comprehensive income
Balance, November 30, 2003
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NEOGEN CORPORATION SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities
Purchases of marketable securities
Purchases of property and equipment and other assets
Acquisitions
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowing on line of credit
Net payments for repurchase of common stock
Net proceeds from issuance of common stock
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
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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 period ended November 30, 2003 is 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:
Raw materials
Work-in-process
Finished goods
3. NET INCOME PER SHARE
The following table presents the calculation of net income per share:
November 30
(In thousands, except share
and per share amounts)
Numerator for basic and diluted net income per share:
Denominator:
Denominator for basic net income per share-weighted average shares
Effect of dilutive stock options and Warrants
Denominator for diluted net income per share
Net income per share:
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.
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4. STOCK REPURCHASE
The Company’s Board of Directors has authorized the purchase of up to 1,000,000 shares of the Company’s Common Stock. As of November 30, 2003, the Company has purchased 697,000 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, 2003 and 2002 was as follows:
Corporateand
Eliminations(1)
Fiscal 2004
Net sales to external customers
Operating income
Fiscal 2003
Total assets
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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:
(In thousands except
Net income:
As reported
Deduct-compensation expense based on fair value method
Pro forma
Basic net income per share:
Diluted net income per share:
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 and $912,000 in the three and six month periods ended November 30, 2003, respectively, and $386,000 and $789,000 in the three and six month periods ended November 30, 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 pay contingent consideration based on future annual revenue levels. As of November 30, 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 Company could pay $450,000 of additional consideration. As this acquisition is not material, no pro forma information is presented.
On November 21, 2003, Neogen Corporation purchased 100% of the common stock of HACCO, Inc. and of Hess & Clark, Inc. from United Agri Products, Inc. a then wholly owned subsidiary of ConAgra, Inc. HACCO 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 million in cash plus the assumption of $1.0 million of liabilities. On a preliminary basis, 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 HACCO and Hess & Clark had taken place on June 1, 2002 is as follows:
Three months
ended
Six months
Revenue
Diluted net income per share
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10. LINE OF CREDIT
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). 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.
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.
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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 a value determined based on projected discounted cash flows using a discount rate commensurate with the risk inherent in the Company’s current business model. Any impairment identified in this computation is given current recognition in any unissued financial statements.
Three and Six Months Ended November 30, 2003 Compared to Three and Six Months Ended November 30, 2002
Total revenues increased by $654,000 or 5% in the three-month period and $1,724,000 or 7% in the six-month period ended November 30, 2003 in comparison with 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.
Within the Food Safety business segment sales of products related to detection of pathogens and general sanitation decreased by 5% and 3% in the three-month and six-month periods, respectively, as compared to the prior year. These decreases resulted from heavier levels of competition 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 both 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% in the quarter and 6% in the six-month period following a large weather related spike in sales of these products in the prior year. A significant portion of the U.S. corn and sorghum crops were 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. Sales of allergen detection products increased 36% in the three month period and 39% in the six-month period as the Company continues to enjoy rapid market acceptance of these products.
Animal Safety revenues benefited from sales of the Company’s new line of disposable needles 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 comparison to the prior year primarily in the six-month period as the p.acnes product was used extensively to boost immunity in horses against West Nile virus in 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 general 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.
Gross margins decreased from 55.9% to 52.9% in the three-month comparative period and decreased from 55.2% to 52.1% in the six-month period ended November 30, 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 quarter of the current year. This new facility will provide significantly expanded production capability for Food Safety diagnostic products.
Sales and marketing expenses decreased $326,000 in the three-month period and $232,000 in the six-month period. As a percentage of revenues these expenses decreased from 25% of sales to 21% of sales in the three-month period and
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decreased from 25% to 22% in the six-month period. Cost control measures were responsible for the percentage decreases from the prior year.
General and administrative expenses increased $236,000 in comparison with the prior year three-month period ended November 30, 2003 and decreased $37,000 when compared in the six-month period of the prior year. The increase in second quarter expenses arose primarily from the addition of subsidiary operations in Scotland and China, as well as expenses related to the increased levels of operations of the Company. During the six-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% in the three-month period and decreased from 9% to 8% for the six-month period ended November 30, 2003.
Research and development expenses decreased by $190,000 for the three-month period ended November 30, 2003 as compared to the same period in the prior year and decreased $169,000 in the six-month period in comparison with the same period in the prior year. As a percentage of revenue these expenses decreased from 7% to 5% in the three-month period and from 6% to 5% for the six-month period ended November 30, 2003. 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-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 as those in the prior year.
Financial Condition and Liquidity
At November 30, 2003, the Company had $2,045,000 in cash and marketable securities, working capital of $18,728,000 and stockholders’ equity of $44,901,000. In addition, available bank lines totaled $11,900,000. Cash and marketable securities decreased by $6,852,000 from May 31, 2003 primarily due to the acquisition of HACCO Inc. and Hess & Clark, Inc. during the second quarter as described in Note 9 to the interim consolidated financial statements.
Accounts receivable were $434,000 higher than at May 31, 2003 with $122,000 of receivable balances acquired in the acquisitions. Days outstanding in account receivables decreased from 56 days at May 31, 2003 to 53 days as of November 30, 2003. Management believes that the recorded allowances are adequate to provide for accounts that may become uncollectable. Inventories at November 30, 2003 increased $2,165,000 with $1,750,000 resulting from the acquisitions and the remainder resulting from the continued policy of maintaining adequate inventories to meet customer needs. The decrease of $381,000 in current liabilities results from the timing of payments.
At November 30, 2003 the Company had material commitments for the purchase of two pieces of property. Subsequent to the quarter, the Company purchased a facility in Lexington, Kentucky for approximately $1,900,000 and a facility in Lansing, Michigan for approximately $802,000. These facilities are expected to replace certain leased facilities and also to be used in expanding the Company’s operations as the need arises. The purchases were financed by drawings under the bank 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, along with its available bank 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 securities may not be sufficient to meet the Company’s cash requirements to commercialize products currently under development or its plans to acquire other organizations, technologies 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.
The Company 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 not had significant fixed rate borrowings. Interest rate risk is managed by investing 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
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investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
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’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.
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.
PART II. OTHER INFORMATION
The Company is subject to certain legal proceedings in the normal course of business that, in the opinion of the 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:
1)
I)
II)
Items2,3, and5 are not applicable and have been omitted.
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Form 8-K dated September 25, 2003:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEOGEN CORPORATION
(Registrant)
Dated: January 14, 2004
James L. Herbert
President and Chief Executive Officer
Richard R. Current
Vice President and Chief Financial Officer
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