Neogen Corporation (NEOG) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the Neogen Fourth Quarter Fiscal Year 2013 Year-end Results Conference Call. My name is Adrienne, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Jim Herbert. Jim Herbert, you may begin.

Thanks, Adrienne, and good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, as Adrienne said, we will be reporting to you the results of our fourth quarter that ended on May 31 and, of course, also, the full fiscal year for the company. I'll remind you, to start with, that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties, and actual results may, in fact, differ from what we discuss today. The risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission, and our Form 10-K will soon be on file for this year at the SEC. In addition, to those of you who are joined today via this live telephone conference, I'd also welcome those who'll be joined by way of a simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the web for approximately 90 days. Following comments this morning, we'll entertain questions from participants, who are joined by this live conference. And I'm joined today by Steve Quinlan, our Chief Financial Officer; Lon Bohannon, Neogen's current President; Steve Snyder, Neogen's President-elect, who will also be assuming the role of President, Chief Operating Officer at Lon's retirement at the end of August. And I suspect that most of you saw our press release a few weeks back when we announced Lon's pending retirement and the selection of Steve Snyder. Lon's decision to retire was not a surprise. As many of you know, Lon and I worked together for over 27 years in building the company. And Lon told me sometime back that he'd like to retire at some point in order to pursue some family activities. And beginning last fall, Lon and I, with the Board of Directors, began to search for his replacement. Even though Neogen has a lot of great talent inside the company, we felt that bringing someone in from the outside, coupled with this inside talent, would enhance our growth. Steve Snyder comes to this position with a broad background in managing technical businesses at both Monsanto and at Cargill. This scheduling of being able to select Steve earlier has given us the opportunity for Lon personally, to lead Steve's orientation. So we feel good about the direction we're going now. Obviously, Lon has made a lot of great contributions to the company, and I'll miss him personally, but I think he's leaving the position in good hands. Earlier today, Neogen issued a press release announcing the results of our fourth quarter that ended on May 31. Our net income increased 21% from the previous year to approximately $27.2 million or $0.29 a share as compared to $0.25 for the fourth quarter last year. Net income for the fiscal year increased $1.12 a share compared to $0.94 last year. And for the yearly basis, that's a 19% increase. 5 years ago, in July of 2008, we celebrated a milepost in the company's history when our total revenues went over $100 million for the first time. Someone in that celebration said, "Let's not let this be a hitching post for Neogen, but merely a milepost as we continue to grow." So at that time, we said, "Why not just set our goals to hit $200 million in 5 years?" and we mapped out a plan to get there. Employees throughout the company adopted this as our corporate goal. So therefore, it's a great deal of pleasure that I can now officially announce today that Neogen has doubled its revenues in the last 5 years and that our revenues for 2013 reached $207.5 million; that's a 13% increase over last year. And on a quarterly basis, the fourth quarter revenues pushed us over the top as we increased by 15% to approximately $56 million. This quarter was the 85th quarter in the past 90 quarters that Neogen reported revenue increases as compared with the previous year. This is a record of over 22 years of consistent growth. And those of you who have sat in on our calls before, know that we take a great deal of pleasure in announcing that. I think it's -- throughout the company, it's become the byword is all employees have set this to be a record that we don't want to see broken. The good performance of fiscal year 2013 was attributable to an increase in market share, increase in new products. And we had 2 synergistic acquisitions. The Food Safety group led the revenues for the year with approximately $106 million in sales or 16.5% increase from the prior year. Sales of diagnostic test kits for the detection of natural toxins in grain were key contributors to the Food Safety side increase. Weather patterns across the central Grain Belt in the U.S. last summer gave rise to contamination from the natural toxin, aflatoxin, and as perhaps the leading producer of diagnostic test to detect this toxin, Neogen did well. A different weather pattern of cold and rain across parts of Europe caused the occurrence of a natural toxin called DON or vomitoxin. Again, Neogen has a strong product line to detect this toxin, and thereby, kept it out of our food system. Revenues in our Animal Safety group showed good solid growth with an increase of over 9% compared to a year earlier. Key contributors were our rodenticide product line and our small animal supplements. Our animal genomics business was also strong, and Steve Quinlan will talk a little bit about -- more about both of these areas to give you a little color in a few minutes. During the past year, we continued to look at acquisition to aid in the growth in addition to the new products in the market share increases I just talked about. Back in October, we acquired the stock of Macleod Pharmaceuticals, an animal health company that's headquartered in Fort Collins, Colorado. This pharmaceutical product -- the one and the only real key product they had, one called Uniprim, has excellent anti-bacterial activity against a wide range of infection in animals. And as it turned out, a large part of their customer base were already Neogen customers, and therefore, our sales and marketing -- their sales and marketing activity was quickly picked up by our larger sales organization. This acquisition has been accretive at both the top line and the bottom line just as we had expected. In the beginning of January, we acquired the assets of Scidera. This is a company that's headquartered in Davis, California. They once operated under the name of MMI Genomics and were, in fact, a pioneer in the development of cattle, poultry, swine and canine genetic testing. We are now in the final process of relocating that business to Lincoln, Nebraska, where is the base of our animal genetics overall business. With this kind of a general summary, let me stop at this point and ask Steve Quinlan to give you some color behind these results, then I'll come back and talk a bit about what I see in the future. And I'm going to call Lon Bohannon to get him to give us his thoughts about our future direction. Steve, as you give us some update, let me see if I can get my voice repaired here.

All right. Thanks, Jim. And welcome to everyone listening on the conference call, as well as those joining us via the Internet. Jim has already reported on the overall sales and profit performance for the 2013 fiscal year, and I'd like to echo his comments that we're very pleased overall with the results. The company's operating units generated increased momentum each quarter during the year, culminating in double-digit growth for each unit in the fourth quarter and double-digit organic growth for the company overall. In the next few minutes, I'll address some of the significant highlights for the record quarter and year. The Food Safety group delivered an outstanding fourth quarter with revenues up 20%; almost all of that growth was organic. Sales growth, similar to previous quarters in the year, was broad-based across almost all of our market segments. Overall, the Lansing-based diagnostic group grew revenues by 16% for the year, with the milling and grain group, the strongest performer, up 43% as a result of the aflatoxin outbreak in the fall 2012 harvest. Our international operations, which are primarily focused in the Food Safety area, were also strong in the fourth quarter, led by our Neogen Europe business unit, with sales up almost 40%. Part of that increase was due to the horse meat scandal, which began in late winter when it was discovered that significant amounts of ground beef going into the European market have been mixed with horse meat, an example of economic adulteration of food. Neogen has an easy-to-use field test for the detection of horse meat and also has an approved laboratory facility in Scotland and was able to capitalize on this opportunity. This incident has also resulted in speciation testing for other adulterants including pork and chicken. We believe that increased levels of speciation testing will continue into the future and will also include testing of fish. Neogen Europe also benefited both in the quarter and for the full year from increased genomic revenues and increased mycotoxin testing in Germany and Eastern Europe. For the full year, revenues increased by over 20%, an outstanding performance in an area of the world which is experiencing significant economic turmoil. Neogen do Brazil continued to make inroads in penetrating the growing Brazilian market with sales up 42% in the fourth quarter and 44% for the full year, with strong growth in sales of test kits to detect drug residues in milk, an area of particular focus for the group this year; nice increases in mycotoxin; and allergen test kits. Revenues at Neogen Latino America, our Mexican subsidiary, increased by 68% in the fourth quarter, driven by strong sales of our mycotoxin test kits, and were up 12% overall for the year. Many of our product lines contributed to Food Safety's strong fourth quarter results. Revenues for the Natural Toxin product line increased 27% in the quarter and were up 33% for the year, as the company realized strong sales of test kits, readers and accessories used to test for aflatoxin and DON. Our Q+ quantitative lateral flow devices, introduced into the market in FY '12 and FY '13, have been well received and have allowed us to capture market share throughout the year. Revenues for our industry-leading product line to detect inadvertent allergen contamination, such as soy, milk and gliadin, were up 14% in the quarter and 16% for the year. This market segment continues to grow rapidly due to increasing regulations regarding product labeling and heightened awareness of the adverse effects of allergenic contaminants in food. Neogen is constantly investing in R&D to improve our existing allergen test kit lineup, including the popular 3-D lateral flow format, while also developing new allergen diagnostic tests to strengthen our position in this important market segment. Our Acumedia line of dehydrated culture media recorded a 23% increase in revenue for the quarter, up 17% for the full year in what was a nice recovery year from a relatively weak 2012. Revenues from products, such as ampouled media and filters used to test and monitor water quality and beverage manufacturers, rose 36% for the quarter and 42% for the full year, reflecting market share growth for these products. As we've discussed on previous conference calls, our new ANSR pathogen test platform continues to gain traction after almost a year devoted to validation and approvals. We placed a number of instruments and have other product evaluations underway with potential customers interested in the ANSR technology to test for both Salmonella and Listeria. We expect further growth for ANSR in fiscal 2014. Some weakness in the Soleris line of optical microbial test systems used in the detection of spoilage organisms like yeast and molds were seen in the fourth quarter. Soleris disposable vial sales increased by 39% in the quarter, but placements of the Soleris instruments declined in the quarter compared to the same period last year. As we've talked about in previous quarterly calls, we do see fluctuation in the timing of placements of Soleris instruments that can affect our quarter-to-quarter comparisons. New marketing programs in this product line are planned for the first quarter of 2014 to stimulate sales of the equipment and vials. Animal Safety recorded overall revenue increases of 11% in the quarter and 9% for the year. Demand for the veterinarian antibiotic acquired in the Macleod acquisition continued to be strong. And as we discussed in our last call, the Lexington group has also capitalized on a supply disruption earlier in the year for a thyroid replacement product for dogs, resulting in significant revenue gains this year. We also recorded increases in our retail farm store business, where we have grown through the years with our relationship with a number of retailers, including tractor supply. GeneSeek recorded revenue increases of 9% for the year, in part reflecting the incremental impact of business acquired in the Igenity and Scidera acquisitions. The acquisition of Igenity has greatly expanded GeneSeek's capabilities in using information derived from sample testing to help animal protein producers speed genetic improvement efforts and better manage economically important positive and negative genetic traits in food animals. With Scidera, we've been able to strengthen our relationships with a number of breeding associations, including the American kennel club. The overall revenue increases at our Lexington and GeneSeek operations were partially offset by lower sales in the fourth quarter at Hacco, which manufactures our rodenticides and cleaners and disinfectants, which are important components of our -- of effective biosecurity programs maintained by animal protein producers. Rodenticides slowed to a 4.5% growth in the fourth quarter, but ended the year with a solid organic growth rate at 20%. Sales of disinfectants were weak all year, mostly from lower international orders, and caused Hacco's revenues to decline 13% in the fourth quarter. For the full year, Hacco revenues increased a little more than 2%. At this point, I'd like to recognize our manufacturing and operation groups at all of our locations this year, which did exceptional jobs of ramping up production to capitalize on market opportunities, particularly in Lansing for the significant aflatoxin and deoxynivalenol outbreaks and Lexington for the thyroid tablet for dogs I mentioned earlier; Neogen Europe for the dramatic increase in speciation testing in the last half of the year; and GeneSeek, which absorbed all of the incremental sample volume and integrated 2 acquisitions during the year. That they were able to accomplish all this while still supporting the normal growth of the business is a testament to the can-do, will-do attitude that permeates this company. For the full year, gross margins of 52.8% represent a 260 basis point increase over last year. That's due to higher gross margins from new product from acquisitions, the incremental sales of the small animal supplements, shift towards food safety and diagnostic products and the 20% increase in rodenticide revenues discussed earlier. Operating expenses increased 19% in the fourth quarter and were up 17% for the full year. About 1/3 of those, the increase in those expenses, is a result of personnel and related expenses absorbed in our acquisitions. Sales and marketing expenses increased by 13% in the quarter, and this reflects the investments, primarily in headcount, we have made in these groups in the last couple of years as we've built our infrastructure to accommodate our anticipated future growth. Strong organic growth during the year in our internal tracking of new business, which shows us generating over $4.0 million in new business for the year, supports our belief that our investments in this area are having a positive impact. Our general and administrative expenses increased 37% for the quarter. This reflects increased salary costs and fringes and increased depreciation for investments made in personnel and systems in the past couple of years; higher amortization expenses relating to businesses acquired; and increases in stock option and legal expenses from year-ago levels. For the year, these expenses grew by 19%. Our R&D expenses increased 13% over the prior year in the fourth quarter, reflecting the continued high level of new product activity for the group. For the year, the increase was about 17%. So for the quarter, revenue growth was 15.4%; operating income was 17.7% over last year. For the full year, revenue growth was 12.8%; operating income increased by 20.6%; net operating income represented 19.6% of our revenues compared to 18.3% last year, a nice improvement year-over-year, made possible by the increased gross margin percentage and higher revenues for the year. A couple of comments on the balance sheet. The overall receivable and inventory balances each grew on a percentage basis by less than the increase in revenues, indicative of improvements in both our collection period and our inventory turns. Cash generated by operating activities allowed us to finance nearly $9 million of investments in property and equipment and $13.3 million in business acquisitions, while still increasing our cash and marketable securities position by almost $17 million. So it was a very strong financial year as well. In closing, I have the pleasure of announcing these results to you today, but I think it's important at this point to recognize and thank the more than 800 Neogen employees worldwide, whose effort make these results possible. At this point, I'll turn it back to Jim.

Thanks, Steve, for those updates. And again, our thanks always to that group that makes it happen. As Steve pointed out, some of the great things that happened during the year, they seemed like there was always some excitement somewhere, some that came along that we hadn't quite expected and always turned out to be the positive and that can-do, will-do attitude certainly permeated throughout the year. And as we've expanded our product line and our geographic coverage, I think we've become more effective suppliers of solutions for both food and animal safety, as our mission states. And I think we'll be able to continue steadily developing those programs. Speaking of programs, I'm sure that some of you may be curious to know what's happened to the Food Safety Modernization Act. It was passed and signed into law by the President some 30 months ago, and the answer is not much. There were 7 major rules that comprise that Act, 2 of these have been published in draft form and were put out for comment. Now the comment period has been extended. I don't know -- our contacts in Washington say that surely we'll see these 2 rules make the rounds within the next 12 months and become law and begin to be enforced. There are 5 other major rules that are still remaining. I think it's interesting that a consumer group filed a lawsuit against the FDA for failure to act, and the federal court in the Northern District of California ruled a couple of weeks ago that FDA be required to publish those proposed rules -- on those 5 between now and the end of November and that the comment period on those 5 be held open until March of 2014 and that all 5 would be under enforcement by July -- by June of 2015. So as you can see, it's there and it continues to drag along. Now we've got some knowledge of what, I think, is going to be in all 5 of these, and we believe that all of them will require some additional amount of increased testing. However, as indicated by those dates, we don't have any extra revenue built into our budgets for the FY '14 year on the basis of this. Neogen's business, I think, is -- I know is perfectly situated as we look at the growing need for awareness of what's happening in food security. Neogen products will continue to play a strong role in helping to produce not only the quantity of food that's going to be required over the next 2 decades, but also the quality of food that's going to be needed to satisfy the developing middle classes. There are hurdles of food safety, animal safety and animal genomics. We're going to continue to be critical if we meet those requirements. It's estimated that by 2030, the world's middle class will have grown from 1.8 billion people to 4.9 billion and that the spending power of this group will increase from $20 trillion to $56 trillion. So I think you can, with those numbers, can perhaps better understand our mission is aimed at the food security for that middle class that is in countries, in a number of areas, but certainly India and China will have explosive demands for higher quality foods, and they're going to welcome food providers. The Chinese meat companies' interest in acquiring Smithfield Foods is one example. In addition to increasing pork production within China, Chinese leaders recognize that they need this to be supplemented by food produced elsewhere. In general, I believe that the U.S. meat producers look upon this as an opportunity to produce more pork for a known buyer, and this means for the U.S. that we can produce more corn and more soybeans and more pigs and create more U.S. jobs. So I think the U.S. continues to be in a strong position. As the U.S.-based food service companies move into these growing middle class countries, food safety within those countries becomes an even bigger issue. I think one only has to look at what happened to Yum! Brands and Kentucky Fried Chicken earlier this year. The Chinese press reported that KFC was using chicken that has drug residues. Revenues in the KFC stores in China fell between 20% and 50% in the last 2 quarters. And these China earnings are so important that this ended Yum! Brands' 11 year of streak of double-digit growth in earnings per share. I think it's proof that this new middle class is looking for higher quality food, but not at the risk of food safety. In the year that's ahead of us, we'll continue to use the same growth strategy that has been rewarding to us in the past. We're off to a good start with the first month of the new year. Several new products from our R&D groups are now finding their way into the market. Other products are gaining approval by a government or third-party approval agencies. At the beginning of July, we acquired the assets of SyrVet, a veterinary instrument business that's been a Neogen competitor for the past 26 years. The delivery of medicines and veterinary practices is important in keeping animals healthy back inside the farm gate. This acquisition brings new revenues of about $8 million to the company. It brings with it a number of new products and provides us with access to some additional products. Also, brings with it the expertise of Daniel Klein, who will be working with the company, who is the guy who started all this and built it up. This acquisition for Neogen will be treated as a bolt-on, and we expect to move those operations either to our current operations for Animal Safety in Lexington, Kentucky or to our manufacturing site here in Lansing, Michigan. Let me leave some time for Lon Bohannon. As I've said in the beginning of my comments today, Lon has long had plans for retirement. After 27 years, he's now going to exercise on those plans. I know that many of you on this call have known Lon for a long time, and I thought that you'd be interested in his thoughts on where Neogen is headed in the future. And following Lon's comments then, we'll open the phone lines for any additional questions. Lon?

Thank you, Jim. I appreciate that Jim has allowed me the opportunity to take a few minutes to make some general comments and, as he said, more importantly, give listeners my perspective on the bright future I see for Neogen. However, I do like to begin by commenting on our excellent 2013 fiscal year-end results. As Jim indicated, 5 years ago, we established a goal to double our annual sales from $100 million to $200 million. I know I'm going to sound like a broken record, but I am very proud of the efforts of Neogen's outstanding team of over 800 employees, who made it possible to achieve this important milestone. And I do want to congratulate them for their efforts to make a 5-year plan to double sales a reality. I think Jim has also accurately described some of the thought process surrounding my pending retirement from Neogen. While I'm definitely going to miss the employee relationships, the excitement and the success that I've been lucky to be a part of at Neogen, it is true that I'm looking forward to working more closely with family on some new business adventures. I also want to take a brief moment to thank the analysts and listeners -- or investors, excuse me -- the analysts and investors listening in on this call, who I've had the good fortune to work with for quite a long time now and who have supported our efforts to build Neogen into a world leader in the development and marketing of solutions for food and animal safety. And that brings me to the most important part of my comments, which is to describe a few of the reasons why I continue to believe Neogen has a very bright future for many years to come. A lot of things have changed during my tenure with Neogen, but one thing remains constant: our mission matters as much today as it did when I joined the company. Actually, in my opinion, that mission, along with the product and service solutions we offer to food producers and processors, are more relevant today than they were when I started with Neogen over 27 years ago. A company can have great products, they can have great operating systems, the hard-working staff of employees, but if the markets for its products are static or declining, it is very tough to achieve the kind of growth investors are looking for. Since I expect to maintain a significant investment in Neogen stock going forward, it gives me great confidence to know that the markets for Neogen's products and services are both large and growing. I just saw an announcement for a new report from a third-party market research firm indicating that the cost of tracking pathogens, like Salmonella and Listeria, in North America will increase by 47% in the next 5 years. That same report estimated that food safety testing cost will hit $5.5 billion by the year 2018. Currently, the largest share of that testing is centered in the U.S., which, of course, bodes well for Neogen's long-term future since we have seen that emerging international markets often follow the lead of North America and Europe when it comes to food and animal safety testing. And Neogen's market growth should be sustainable well into the future. For example, we introduced our first diagnostic test for mycotoxins in the mid- to late 1980s, and you heard earlier that sales of mycotoxin diagnostic tests were still contributing to Neogen's growth 25 years later. Another example, I think, is reflected in our sales of test kits to detect food-borne allergens. This product line has delivered annual growth of approximately 15% to 20% each and every year since 2006. Aside from growing markets for existing product lines, new markets are emerging to add growth opportunities in the years ahead. I also recently saw that global animal protein production from aquaculture in 2012 surpassed the output from cattle and the gap was expected to widen going forward, providing another significant market growth opportunity for Neogen. We also continue to believe that testing for drug residues will expand in the years and decades ahead. As Jim alluded to in his comments earlier, major multinational firms want to avoid and prevent the kind of negative impact that Yum! Brands just experienced in China as a result of drug residues found in chicken. Accordingly, these large multinational firms are expressing a growing interest in implementing food safety solutions that will help them protect their brand equity from any form of food adulteration, including things like drug residue contamination. And as Steve touched upon in his comments, this year's meat speciation scandal in Europe has both increased awareness and expanded our markets for meat and fish speciation testing. We also expect food security issues to remain in the headlines. I really don't need to say much about this, except we expect it to help drive the need for Neogen's animal and plant genomic products and testing services going forward. We know that consumers, along with domestic and foreign governments, continue to push for new regulations like the Food Safety Modernization Act. While the gears of government often grind away pretty slowly, implementation of new regulations should ultimately increase the demand for Neogen's product and testing solutions. I can elaborate on many other growth markets if I had the time, but I trust you get a feel for the excitement that I have when it comes to future opportunities in the markets served by Neogen. I'll close my comments by saying that not only does Neogen operate in rapidly growing and sustainable markets, but I believe we also have the vision, leadership and management experience, supported by a great team of talented employees, to continue our consistent track record of growth in sales and profits far into the future. As I mentioned earlier, I do fully expect to maintain a significant investment in Neogen stock long after I retire because when it comes to Neogen's future, I remain convinced that the best is yet to come. Again, I want to thank Jim for allowing me the opportunity to make some comments during this conference call, and I think this concludes our formal remarks. At this time, we'll open the call for questions from our listeners.

[Operator Instructions] And we have Steven Crowley from Craig-Hallum on-line with a question.

Now in terms of some of the drivers to your business looking forward, Jim, you mentioned some new products that were coming to market as we speak, and we're on the near-term horizon, but there's also the product seeds like ANSR that you planted in the last year or so. Could we maybe talk about some of the new stuff that you're hoping to get rolling over the next year and then some of the stuff that should be sparks and real contributors to the financial performance this year that may be launched over the last year or 2?

Yes. And of course, as you know, Steve, research and development doesn't know corporate calendars, as far as success is concerned. A lot of what we are doing now and have done is a bit invisible in the marketplace, as some of it is improvements of existing product to make them faster, to make them better, to make them less expensive for the end user. And so those continue to find their way out. In the pathogen area, which is where we've now got 3 platforms that are aimed, we talk about ANSR, and it's coming along just about where we expected it to be based on our overall plans, but we've also got our Reveal product line. It's really a great product that's out there that's a lateral flow device that is based on antibodies. It detects the presence or absence of a number of pathogenic organisms. And then we've got our earlier product line that came over from the acquisition of GeneSeek products back -- sometime back. But I think we've going to see pathogen detection continue to grow. We're all waiting to see what's going to happen with the FSMA rules. I think there's going to be some need -- or basis for validating FSMA rules. We think some of those are going to be based on -- go back, maybe look at just generic E. coli, whether E. coli is present in a food system or not. So that's -- I think we're pretty well positioned for that. Our Soleris vials, I think Steve said that our Soleris product line of the centris format was down a little bit in instrument sales in the fourth quarter. There's really nothing to be concerned about there. It's just how these things happen to fall. But those are all detecting spoilage organisms. I think we're going to see increases in concerns about detecting spoilage organisms. And that's already being exhibited by increase of sales of the consumable vials that go with the Soleris system. I think in his comments, Steve talked about international approvals for certain of these products. Within this country, we have a few products that had to be approved by governmental agencies. The USDA approves products for detection of natural toxins as an example. That's out of the U.S. government. But then we've also got the AOAC, which is an independent approval agency. I think we still have the largest number of AOAC-approved tests of anybody in this business. And then we also are going for the more expensive tests that for the detection of some of these that are going through the French AFNOR approval process. That's -- in some places, they're necessary in order to get the validations for Europe. So all of those, I think, combine as to what some of the things that we're doing in R&D on the pathogen side. The speciation area, now that, that has been unlocked and people have become more aware of what we knew for some time was out there, the economic adulteration of calling something what is not in order to get an economic advantage either by adding horse meat to ground beef or by selling a pollock and calling it cod, we think that those areas, all will continue to grow. There's a couple of new areas that where we're not today, in fact, where really nobody is today. We probably don't want to talk about those yet, but I mentioned them just so you know that we still got a lot of opportunities to continue to grow those areas.

And in terms of your progress with the company in doubling sales over the last 5 years, is there another one of those goals to double again in the next 5 years, or putting a dollar number on the long-term objective of the company? Or is that really just implied by a continuation of the kind of growth we've seen in the last 5 or 10 years continuing in the next 5 or 10 years?

Well, I think you just won the lottery. We had a question going around here earlier how long before somebody asks what we're going to do in the next 5 years because what we did in the last 5 is now history, and we understand that. We think we probably can do that. We've got a little work to do as to decide exactly how we're going to get there. I think we got there the last time by having a good plan, thinking it out, knowing where we were going. There were a few curves in the road that we didn't anticipate. But I think that -- I think we got another doubling left in us, Steve. And we're going to be looking at how we put that together here over the next few months.

And we have Tony Brenner from Roth Capital Partners on-line with a question.

A couple of things. Gross margins were up year-over-year in the quarter, but sequentially, they were almost 300 basis points lower than in the first 9 months of the year. What is that attributable to?

Tony, this is Steve. In the fourth quarter, GeneSeek had a couple of very large projects, which were lower gross margin products -- projects. And that really drove -- that was the biggest driver of the lower gross margin in the quarter. Another part was -- we talked about rodenticides being up 20% in the first 3 quarters. And with that growth slowing, it was up about 5% in the fourth quarter. It was really the mix there. The weakening of that growth caused the margins to decline a little bit in the...

And the risk factors?

Yes, on the GeneSeek side, remember that we play with gross margins that are less than what we look at in others, but our operating costs are also considerably less than some of the other product lines.

I understand. Are those factors carrying over into the new year as well?

No. I think -- the GeneSeek project is basically completed. It might be running over a little bit into June's numbers, but for all intents and purposes, that wasn't done. And the mix between cleaners and disinfectants and rodenticides in the Hacco business, it's always changing. So I can't really answer that until we get further along in the quarter. But there should be no significant long-term degradation of that margin.

Okay. Lon, you mentioned that Mexico was up 68% in the fourth quarter. It was up, as I recall, 30% in the third quarter. And it's up 12% for the year. I don't recall during the first half any discussion about how weak Mexico was. I'm wondering why those disparate results for the full year.

Well, we did have some one-time sales in the prior year in the first 6 months, particularly in the area of some of the animal safety products that did not repeat. We knew they were one-time sales, large orders for stocking, inventory and also then a transfer [indiscernible] order that was very large that went to, at the time, Pfizer and stuff. So those were just things we had to overcome. The Food Safety was the big driver of the revenue growth. They were -- that continued to grow in the first 2 quarters, and then once we got past those ugly comparisons in the first 6 months, the second half of the year was very strong for Mexico. We anticipate ongoing solid growth there. Occasionally, when you're small or operational like that, you're more impacted sometimes in quarter-to-quarter comparisons for those one-time kinds of sales.

Could you discuss what sales in China was for the year, or what kind of increase there was?

Virtually flat, Tony, slightly down there, about $2.3 million in fiscal '13. And part of that is, there'll be -- it's some of the Soleris order timing. You might get -- we had significant number of units in fiscal '12 that weren't repeated in '13.

That's another area where, because of government tenders and things that occur, we have some sales that sometimes can occur in one year and not the next year. We've had that occur, I know, for AccuPoint test systems. But overall, we continue to make progress in terms of growing our business there. But again, when you've got relatively small level of sales, you can be impacted from quarter-to-quarter on those kinds of comparisons.

Last question. Your cash position is built up pretty significantly to a point where it seems unlikely that you're going to require that amount of cash or anything close to it for acquisitions, and you're generating enough cash for your CapEx program. So I wonder what other uses for cash are being considered.

Well, we've got some pretty spectacular plans on what might be available for us, Tony, but I probably shouldn't say much more on that.

That's a good non-answer answer.

I know what the rest of that question is, so -- no, we fully understand that we've got a lot of cash built-up that we need to put to use. It's the worst time in macro here to have a lot of cash laying around as far as the value of the cash is concerned. And we've got an extremely good line of credit at very low rates. And we need to be using those assets that are available to us. We've done 24 good acquisitions in -- since the year 2000, and there's some good opportunities out there, but I think our model works and we don't want to be tempted away from that model. So we're still actively looking in the acquisition area. We've got -- I can tell you that we have several on our radar screen now. We do not have any active fully-developed letters of intent in place. But we've got some opportunities that would fit well and be synergistic to our current businesses, so -- and again, as I said in the very beginning, we might do 3 or 4, who knows, we might not be able to get any of them done, so -- but we have high hopes of continuing to add some significant growth through acquisitions.

And we have Jason Rogers from Great Lakes Review on-line with a question.

Could you provide the FX impact on sales and operating profit for the quarter and the year?

Sure. If we look at last year's rates and this year's volumes, the effect on the revenue would have been lower by $1.7 million and operating income would have been lower by $900,000.

That's the quarter?

No, I'm sorry, that was for the year. Did you want the quarter as well?

If you have it.

Sure. The revenue is $325,000 decline, and operating income, $73,000 lower.

And then, do you have the cash flow from operations either the quarter or the year?

We do. For the quarter, it's $6.9 million. And so that would make the year's $26.6 million.

Okay. And then, would you be able to provide your CapEx plans for fiscal '14?

We don't really talk much about that. I mean, this year, we spent about $8.9 million. And remember, we -- that included the purchase of a building in Scotland for about $1.5 million. So we don't really talk about it, but the level is probably going to be similar.

And we have Michael Castor from Sio Capital on-line with a question.

Great. A couple of questions for Steve. First, can you provide some color on the expected tax rate for next year?

Well, that's always interesting. I think we'll probably going to be somewhere in the 35.5%, maybe 36%. The more states that we do business that are claiming nexus on dragging us in increases that rate. But if you noticed, this year, our rate was a little bit lower, but actually, when we compare it to last year's rate, remember we took a -- we had a pickup of about $0.5 million in last year's fourth quarter for a tax reversal. We were under audit in 2012 and had set aside some money, and actually the results of the audit were favorable, so we took that -- we reversed that, took it to income. This year, the rates are a little bit lower than the 35.5%. Some of our R&D credits were larger than they had been in prior years. And then [indiscernible]

So the 35.5% rate, is that a sort of a stable rate that you anticipate going forward?

That's probably a good approximation.

Second question was, minority interest actually contributed about $150,000 this year, $125,000 last year. Give an outlook for minority interest over time?

That minority interest is actually a -- that's an operating loss by the minority. We actually have -- our Brazil and Mexico subsidiaries have small positions in the company. Their operating losses are added back to our net income to basically give the income that's attributable to Neogen. So those are small losses. I would expect that probably somewhere in the same range going forward.

And the last question was on other income. I think it was roughly $300,000 or so this year, again, can speak to some of the components and your expectations for coming years?

Other income is usually a mishmash of numbers. The pieces -- we have some currency loss in there, and -- about $170,000. We pay some royalties -- I'm sorry, we received royalty income, and that was about $360,000 of income. And then we recognized some change in some of the secondary obligations that we -- in some of the acquisitions that we do. So that's pretty nominal amounts there. We don't plan for currency amounts each year. I can't really give you a number. It's -- I think going forward, royalty will probably still be there, maybe a couple hundred thousand of royalties. But anything else is really just a mishmash of numbers.

And we have Joseph Pattman [ph] on-line with a question.

Jim, that raises another consideration, and that's, if Lon feels that taking the world tour is a worthwhile endeavor, are you satisfied that you've pretty much seen all of what you need to see? Or are you thinking about gracefully exiting?

No, I'm going to stay around. I've told them that when I start, somebody will have to catch me and if I start slobbering out of both the corners of my mouth, well roll me off somewhere and get me out of the way. But until then I'm having fun. And I think I'm being useful. And there's 3 or 4 people who've got keys to tell me whether I'm useful or not, and I think they'll usually apply them justly. So no, I'm having fun, Joe. And my health is good. And I expect to stay around. I got to get Steve Snyder off on the right foot. I mean, Lon's going to get him oriented but I got to train him to sort of start finishing my sentences up. Lon could always -- when I'd slow up, he could finish the last half of my sentences when I got into a southern drawl, and Steve's going to learn how to do the same thing. I will be around a while.

And we have no further questions. Mr. Jim Herbert, do you have any closing remarks?

I sure do. And as Joe Pattman [ph] indicated, please don't forget that tomorrow, that Thursday afternoon, is our annual barbecue for investors, analysts and friends. And it's -- if you didn't get an invitation, it was -- something happened to the mail or whatever, you're -- please consider yourself invited. To get the details and particulars, well call off this number and talk to Terry Maynard. He can give you all the details, starts tomorrow afternoon. Thank you for -- excuse me, not tomorrow. Joe, you got me messed up. That's Thursday afternoon. And to all of you, thank you for your continued support. It's been a great year, and we're off to start another new one. So we'll look forward to talking to you as we end the next quarter. Good day, and thank you, Adrienne.

Ladies and gentlemen, this concludes today's conference. Thank you for participating, and you may now disconnect.