LANSING (WWJ) — Neogen Corp. makes products that test for contamination and other biotech information in food and livestock. A year ago, amid outbreaks of food contamination, the company reported record profits. This year, for the second quarter of its fiscal year, which ended Nov. 30, the company reported lower net income despite higher sales due to what a top executive called a year of “clean crops.” Acquisition expenses also played a part.

Sales for Neogen (Nasdaq: NEOG) in the quarter were $59.6 million, up 15 percent from $50.7 million a year ago. Net income was $6.2 million or 17 cents a share, down from $7 million or 19 cents a year earlier.

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For the six months, revenue was $118.1 million, up 18 percent from the prior year’s $100.5 million. Net income was $14 million, or 38 cents a share, up from $13.5 million or 37 cents a share a year earlier.

Neogen chairman and CEO James Herbert said the revenue increase was “the result of broad-based organic sales growth throughout our worldwide markets, and the efficient integration of recent acquisitions into our operations. While pleased with our revenue growth, some investments made in the quarter to accelerate future growth impacted current quarter earnings.”

Added president and COO Steve Snyder: “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. 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 percent over last year’s second quarter. Sales and marketing expenses increased during the period by 12 percent due to increases in personnel, marketing and advertising activity, and shipping expenses. General and administrative expenses rose by 28 percent; 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 percent, 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.

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“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 CFO. “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 percent 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 percent 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 percent 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 percent 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 percent 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 percent for the quarter. GeneSeek, the company’s genomics service laboratory, increased revenues more than 50 percent, 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 percent 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 was a 27 percent increase over the prior year quarter in sales of the company’s line of agricultural cleaners and disinfectants.

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