Q3 2017 Real-Time Call Brief

Highlights

Net income for the third quarter of this 2017 fiscal year increased 24% to 10.3 million or $0.27 per fully diluted share that's an increase from last year's 8.3 million, which equated to $0.22 per share.

Current year-to-date income for the first nine months is approximately $31.3 million or $0.82 a share this compares to $0.71 a share last year.

Revenues for the third quarter increased 15% to 88.4 million this compares with the previous year's third quarter revenues of 76.7 million.

On a year-to-date basis, revenues for the first three quarters of the year increased 14% to 262.7 million.

A dedicated group of 1,500 employees around the world kept our success record going yet for another quarter.

Operating income for the quarter came in at 16.2% compared to 14.7% in the same quarter last year.

Gross margins which of course are major component of operating income settled down at 46.3% and that compared to last year's third quarter of 45.9%.

I think I can probably stop at this point by pointing out that our balance sheet continues to be solid with growing assets and no debt shareholder equity has improved by 12% when compared to where we were to be at the end of the year on June 1.

As stated in the press release, revenues of our Food Safety segment increased 24% during the third quarter compared to the prior year, now this was aided in part by the acquisitions of the Deoxi and Rogama, both of which reports to our Brazil subsidiary as well as Quat-Chem which reports to our Neogen Europe Group.

Organic growth for the Food Safety segment was 12% for the quarter.

Food Safety highlights for the quarter included a 29% increase in sales of our rapid test to detect natural toxins.

Sales of Neogen's rapid test for food allergens such as milk and gluten increased 14% in the quarter compared to the prior year.

One other food safety highlight was increasing sales of our rapid microbial test systems which were up 20% in the quarter.

The Animal Safety side of our business reported a revenue increase for the quarter of 8%.

Our sales of rapid test to detect drug residues and forensics samples increased 39% compared to the prior year quarter and this was due mainly to the lab business in the U.S. and Brazil.

The pound sterling is worth 15% less this quarter versus dollar than it was in last year's third quarter, with the decline primarily the result of the Brexit both in the UK last June and the accompanying uncertainty on how massive that exit maybe.

The Mexican peso is declined 14% relative to the U.S. dollar and has been volatile.

At one point during this quarter with all the noise regarding the wall and immigration, the peso felt almost 22 to the dollar before recovering somewhat to close to quarter at 19.8 to the dollar.

The Brazilian real on the other hand strengthened significantly during the quarter and was 23% higher than it was time last year, helping boost to be comparative revenues and earnings at our Brazilian operations.

Overall, the negative impact of the stronger dollars on our comparative revenues for the third quarter was $1.7 million and this was about $0.01 hit on the bottom line.

In constant currency, our overall growth was 17% versus the 15% we reported today and reported overall organic growth of 5% would have been 7%.

The reported 12% organic growth was actually 16% in constant currency.

The genomics testing business continue to develop nicely in the third quarter with worldwide growth of 20% and 24% for the year-to-date period.

A particular note, our new testing options offer to the commercial diary market allowing the producer to understand a heifer's genetic potential well before breeding. These tests which were developed in Lincoln and are sold through our Lexington Animal Safety field sales force have been well received in the marketplace with sales up 500% in this last quarter.

Looking now to corporate financial, our gross margins were 46.3% for the quarter compared to 45.9% in last year's third quarter.

For the year-to-date, our gross margins were 47.6% versus 48.1% last year.

Our operating expenses overall were up 11% for both the third quarter and year-to-date.

Sales and marketing expenses rose by 10% for each period with the largest components of this increase commissions, shipping and royalty expenses, all of which are based on revenue increases and higher salary expense, the result of increased staffing and compensation increases.

Our general and administrative expenses rose 13% for the quarter and have increased 19% for the year-to-date.

Research and development expense were 8% over the prior quarter and are up 6% for the year-to-date, as the Company continues to invest in its product development programs in both new products and enhancements to existing products, primarily in the Food Safety segment.

Operating income rose almost 28% to a total of $14.4 million or 16.2% of sales compared to $11.3 million or 14.7% recorded in the third quarter last year.

Other income for the third quarter was 1.1 million compared to the 264,000 in the prior year quarter.

The Company recorded a gain of 660,000 related to the settlement of a licensing agreement during the quarter and also recorded 440,000 of income related to net currency gains, primarily related to dollars denominated business in the UK.

Our effective income tax rate in the quarter was 34% and that compares to 29% in last year's third quarter.

For each year-to-date period, the effective rate was about 34%.

We generated $15.9 million in cash from operations during the quarter and invested about 2.6 million in property and equipment.

For the year-to-date we've generated 45.4 million from operations and spend 8.9 million in property and equipment.

Our inventory rebalances have increased 17% since the beginning of the fiscal year.

In addition, the Company has acquired about $3.1 million in inventory from its two acquisitions this fiscal year.

And our operations in Europe where we now have nearly 200 people, once again showed strong growth, up 31% in British pounds compared to the prior year. So, this increase was reduced to 12% when we translated it to the dollars as we've discussed.

Our Neogen Brazil operations were up 47% in Brazilian real.

We actually got a boost to pushing them up to 81% when we converted the dollars as the real strengthen from its position a year ago.

Our Neogen China operations for the quarter were up about 68%.

Indian operations were up over 200%.

Canadian revenues were about five times what they were previous years.

Mexico was the exception to our revenue growth internationally then Mexican peso, revenues were up a strong 15%; however, due to continued decline of peso versus the dollar when we recorded in these U.S. dollars at 15% up was actually down 1.7% when converted to U.S. dollars.

It's estimated that by the year 2030 and that's just 13 years away, the middle-class will grow from approximately 1.8 billion people to 4.9 billion people.

We bought the English business valued in pounds sterling so again it took us fewer dollars to make that transaction than it would have a year ago These two acquisitions will likely produce approximately $30 million in disinfectant revenue on an annual basis our net income without some revenue casualty.

In the short-term, we're likely to lose up to a $1 million in revenue that we would normally have enjoyed in the fourth quarter.

Just in the U.S. in 2016, we had 273 food recalls from FDA, and that's about a 23% increase compared to the prior year.