Neogen reports second quarter results

December 19, 2013

Press Release
CONTACT: Steve Quinlan, Vice President & CFO, 517.372.9200

LANSING, Mich., Dec. 19, 2013 — Neogen Corporation (NASDAQ: NEOG) announced today that its revenues for the second quarter of FY 2014, which ended Nov. 30, increased 17% to $59,599,000, from the previous year's second quarter revenues of $50,737,000. This increase was aided in part by two acquisitions the company completed this year. Year to date, FY 2014 revenues increased 18% to $118,147,000 from FY 2013's $100,467,000.  

Second quarter net income was $6,207,000, compared to the prior year's $6,793,000. Adjusted for a 3-for-2 stock split effective Oct. 31, 2013, earnings per share in the current quarter were $0.17, compared to $0.19 a year ago. Current year-to-date net income was $14,045,000, or $0.38 per share, compared to $13,507,000, or $0.37 per share, for the same period a year ago.

The second quarter was the 87th of the past 92 quarters that Neogen reported revenue increases as compared with the previous year — including all consecutive quarters in the last eight years.

"We are pleased to report strong second quarter revenue increases, the result of broad-based organic sales growth throughout our worldwide markets, and the efficient integration of recent acquisitions into our operations," said James Herbert, Neogen's chief executive officer and chairman. "While pleased with our revenue growth, some investments made in the quarter to accelerate future growth impacted current quarter earnings."

"Last year in the second quarter, our revenues and gross margins were driven sharply higher by aflatoxin and DON outbreaks in the US and EU grain harvests, as well as a substantial opportunity to fill a market need for a small animal supplement," said Steve Snyder, Neogen's president and chief operating officer. "With clean crops this year and the product mix change, our gross margins were adversely impacted this quarter. These decreases in crop tests could impact our comparative results, but new products and growth in existing products should help fill this void."

Neogen's gross margin was 49.5% of sales in its second quarter, compared to 53.8% of sales for FY 2013's second quarter. This decrease was largely the result of product mix shifts within each of the company's operating segments. On the Food Safety side, lower sales of mycotoxin test kits, which have higher gross margins, adversely impacted margin percentages. Strong growth in the remainder of the Food Safety product lines more than overcame lost mycotoxin revenues, albeit at lower gross margins. Within the Animal Safety segment, the incremental product revenues from the SyrVet® and Prima Tech® acquisitions resulted in a lower gross margin percentage. However, each of these businesses is expected to make healthy contributions to income once fully integrated into the company, since they are "bolt-ons" to existing operations. These acquisitions, when combined with the company's existing strong presence in the veterinary instrument market, gives the company a leading position in the market.

Operating expenses totaled $19.8 million for the quarter, an increase of 18% over last year's second quarter. Sales and marketing expenses increased during the period by 12% due to increases in personnel, marketing and advertising activity, and shipping expenses. General and administrative expenses rose by 28%; the largest components of this increase were amortization of intangible assets and other related expenses from recent acquisitions, higher stock-based compensation expense, personnel-related costs, and legal fees. Of these expenses, approximately $200,000 are not expected to recur. Research and development costs rose 15%, as the company continued to invest in new products and product improvements. Overall, operating expenses rose $3 million for the quarter, while gross margins increased $2.2 million, resulting in lower operating income for the period.

"As can be seen from the growth in our operating expenses, we continue to make the investments in people and products that we believe are necessary to achieve our goals for growth," said Steve Quinlan, Neogen's chief financial officer. "Our balance sheet remains strong, with no debt and the financial strength to allow us to continue to reinvest in the business while pursuing a number of growth strategies moving forward."

Second quarter revenue growth of 9% in the Food Safety segment included increases in sales of instruments and disposables associated with Neogen's Soleris® test system used to detect spoilage organisms and the AccuPoint® general sanitation test system, which helped offset the decline in sales of tests to detect natural toxins. Revenues from Neogen's Scotland-based subsidiary increased 24% in the current quarter, as it continued to show strong performance in a number of categories, including sales of mycotoxin tests to Eastern Europe, food allergen and meat speciation tests, and an increase in animal genomic testing services. For both the quarter and year-to-date period, Neogen also achieved double-digit increases in sales of food and animal safety products from its Mexican and Brazilian subsidiaries.

Sales of Neogen's innovative rapid tests for food allergens continued their strong advance, improving approximately 25% in the current quarter compared to the prior year's second quarter. This performance was in part the result of strengthening acceptance of the company's new Reveal® 3-D test kits. The test format offers a rapid time to results, easy extraction, and a third line on the test device to indicate when a very high level of target food allergen is present, instead of simply the presence or absence of that allergen.

The second quarter also saw a 15% increase in the sales of Neogen's line of dairy antibiotic tests, which was aided by a strong sales increase of the line in Brazil. Increased sales of the product line, when compared to FY 2013's second quarter, was also due to continued market acceptance of Neogen's BetaStar® Combo product, which simply and accurately detects both beta-lactam and tetracycline antibiotics.

The Animal Safety segment recorded revenue increases of 26% for the quarter, aided by the recent acquisitions of SyrVet and Prima Tech; each of these acquisitions is focused on veterinary instruments and related supplies. Organic growth for this segment was 13% for the quarter. GeneSeek, the company's genomics service laboratory, increased revenues more than 50%, as the subsidiary's new genomics tests for the beef and dairy cattle markets continue to gain market share.

Other strong animal safety segment performers for the quarter included a double-digit increase in sales of veterinary biologics, including a proprietary equine botulism vaccine, and a significant increase in sales of Neogen's proprietary detectable veterinary needles. Neogen's forensic test kit revenues were up 33% in the second quarter compared with the prior year quarter, in part due to increasing international sales of the product line. Also notable in the second quarter of Neogen's FY 2014 was a 27% increase over the prior year quarter in sales of the company's line of agricultural cleaners and disinfectants.

Neogen Corporation develops and markets products dedicated to food and animal safety. The company's Food Safety Division markets dehydrated culture media and diagnostic test kits to detect foodborne bacteria, natural toxins, food allergens, drug residues, plant diseases and sanitation concerns. Neogen's Animal Safety Division is a leader in the development of animal genomics along with the manufacturing and distribution of a variety of animal healthcare products, including diagnostics, pharmaceuticals, veterinary instruments, wound care and disinfectants.

(In thousands, except for per share and percentages)
  Quarter ended Nov. 30 Six months ended Nov. 30
  2013 2012 2013 2012
 Food Safety $28,399 $26,030 $58,398 $52,225
 Animal Safety 31,200 24,707 59,749 48,242
Total revenue 59,599 50,737 118,147 100,467
Cost of sales 30,108 23,431 58,292 46,667
Gross margin 29,491 27,306 59,855 53,800
Operating expenses
 Sales & Marketing 11,219 9,941 21,543 19,698
 Administrative 6,280 4,895 11,815 9,377
 Research & Development 2,303 1,993 4,390 3,920
Total operating expenses 19,802 16,829 37,748 32,995
Operating income 9,689 10,477 22,107 20,805
Other income (expense) 39 78 (483) 150
Income before tax 9,728 10,555 21,624 20,955
Income tax 3,500 3,800 7,700 7,500
Net income $6,228 $6,755 $13,924 $13,455
Net loss (income) attributable to non-controlling interest (21) 38 121 52
Net income attributable to Neogen Corp $6,207 $6,793 $14,045 $13,507
Net income attributable to Neogen Corp per diluted share $0.17 $0.19 $0.38 $0.37
Other information
 Shares to calculate per share 37,374 36,401 37,241 36,347
 Deprecation & amortization $2,185 $1,763 $4,214 $3,405
 Interest income 28 43 59 81
 Gross margin (% of sales) 49.5% 53.8% 50.7% 53.5%
 Operating income (% of sales) 16.3% 20.6% 18.7% 20.7%
 Revenue increase vs. FY 2013 17.5%   17.6%  
 Net income increase vs. FY 2013 -8.6%   4.0%  

(1) Reflects effect of Oct. 31, 2013, 3-for-2 stock split

(In thousands)
  Nov. 30
May 31
  (Unaudited) (Audited)
Current Assets
 Cash & investments $79,092 $85,369
 Accounts receivable 45,800 38,737
 Inventory 47,330 38,315
 Other current assets 6,634 6,026
Total current assets 178,856 168,447
Property & equipment 38,233 34,345
Goodwill & other assets 102,624 87,766
Total assets $319,713 $290,558
Liabilities & Equity
Current liabilities $23,290 $17,719
Other long-term liabilities 14,613 14,552
Equity: Shares outstanding
 36,598 in Nov. & 36,084 in May (1) 281,810 258,287
Total liabilities & equity $319,713 $290,558

(1) Reflects effect of Oct. 31, 2013, 3-for-2 stock split

Certain portions of this news release that do not relate to historical financial information constitute forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties. Actual future results and trends may differ materially from historical results or those expected depending on a variety of factors listed in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's most recently filed Form 10-K.


Category: Earnings