Neogen Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended February 28, 2023; fiscal year ends May 31. Neogen develops and sells food- and animal-safety products and services. Results include 3M’s Food Safety Division (FSD) beginning September 1, 2022, making year-over-year comparisons materially affected by the acquisition.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months ended February 28, 2023 | Prior-year quarter | Nine months ended February 28, 2023 | Prior-year period |
|---|---|---|---|---|
| Revenue | $218.3 | $128.2 | $580.6 | $387.1 |
| Gross margin | $108.0; 49.5% | $57.4; 44.8% | $282.8; 48.7% | $178.0; 46.0% |
| Operating income | $15.7 | $6.4 | $14.1 | $40.6 |
| Net income (loss) | $8.2; $0.04 diluted EPS | $5.4; $0.05 diluted EPS | $(28.4); $(0.16) diluted EPS | $33.3; $0.31 diluted EPS |
| Operating cash flow | Not presented for the quarter | $(49.9) | $47.6 |
Quarterly revenue increased 70%, while management reported core sales growth of 4%; nine-month revenue increased 50%, with core growth of 5%. The acquired FSD contributed $87.0 million of third-quarter revenue and $179.7 million year to date. Adjusted EBITDA was $51.3 million for the quarter and $142.3 million year to date; these are non-GAAP measures and are not directly comparable across periods because FSD was not owned in the prior-year period.
- Liquidity: Cash and cash equivalents were $67.1 million and marketable securities were $116.1 million at February 28, 2023, totaling $183.2 million, versus $381.1 million at May 31, 2022. Current assets were $555.4 million and current liabilities $107.2 million.
- Debt: Debt principal totaled $900 million: a $550 million term loan and $350 million of 8.625% senior notes due 2030. Debt net of issuance costs was $884.7 million. The company repaid $100 million of term-loan principal during fiscal 2023; its $150 million revolving facility remained undrawn. It reported compliance with debt covenants.
- Cash flow: Nine-month operating cash outflow was $49.9 million, investing cash inflow $194.2 million, and financing cash outflow $118.3 million. Investing inflows primarily reflected sales of marketable securities.
Material changes and drivers
- The September 2022 FSD combination was a $3.2 billion transaction, funded with $1 billion cash consideration and 108.3 million newly issued shares valued at approximately $2.2 billion. FSD drove much of the reported revenue increase, particularly in Food Safety; reported growth should therefore be distinguished from core growth.
- Quarterly gross margin improved mainly because FSD’s product mix carried higher margins and prior pricing actions benefited legacy operations. Lower freight costs also helped, while raw-material inflation remained a pressure.
- Operating expenses rose substantially, including $55.8 million in transaction and integration costs for the nine-month period and increased amortization of acquired intangibles. Nine-month operating income fell to $14.1 million from $40.6 million.
- Interest expense was $38.0 million year to date, principally reflecting acquisition-related borrowing. The nine-month net loss also included acquired-intangible amortization, transaction and integration costs, and impairment charges.
- Goodwill was $2.14 billion at quarter-end, up from $142.7 million at May 31, 2022, primarily because of FSD. Acquired FSD intangible assets were provisionally valued at $1.56 billion; purchase-price allocation remained subject to review.
Outlook, risks and unusual items
- Management stated that it does not provide forecasts of future financial performance. It expects inflation to continue affecting results through the remainder of fiscal 2023, but said the impact was impracticable to quantify. The filing also describes ongoing COVID-related effects, supply-chain and labor pressures, and potential additional effects from the Russia-Ukraine conflict.
- Management cited transition-service dependence on 3M for manufacturing, invoicing and distribution of FSD products; these services were expected to continue for up to 18 months, concluding March 1, 2024. At quarter-end, Neogen reported a $42.9 million net receivable from 3M.
- China operations faced COVID-related disruptions and staffing shortages. Foreign currency movements reduced reported revenue by $2.4 million in the quarter and $11.2 million year to date; foreign-currency transaction losses also weighed on year-to-date results.
- Unusual items included a $10.5 million quarterly income-tax benefit, primarily associated with the annualized effective tax-rate calculation, and a $1.5 million loss on dissolution of Neogen’s minority interest in Corvium. Corvium was acquired in February 2023 for approximately $24.1 million, with potential milestone payments.
- Contingencies include environmental remediation at a Wisconsin facility, with a recorded liability of $916,000, and an ongoing OFAC investigation concerning certain services involving an Iranian party. The company said it was cooperating and did not expect the investigation to have a material impact, while noting the outcome was uncertain.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its most recent Form 10-K.
Investor verification priorities
- Track organic/core growth and segment performance separately from the substantial acquisition-driven revenue increase.
- Assess integration progress, FSD margins, 3M transition-service dependence, and the timing and cost of moving operations in-house.
- Monitor operating cash conversion and working capital, particularly acquired receivables and inventory, alongside the decline in cash and marketable securities.
- Evaluate debt service and interest-rate exposure, including the 8.625% notes, variable-rate term loan, and the interest-rate swap covering $250 million of principal.
- Review final acquisition valuations, goodwill and intangible-asset amortization, and whether reported non-GAAP adjustments meaningfully reflect ongoing costs.
- Follow inflation, foreign-exchange, supply-chain and China-related risks, as well as developments in the OFAC matter and environmental remediation.