Neogen Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended May 31, 2023; filed August 15, 2023. The filing is an annual report, not a standalone 2022 fourth-quarter report. Dollar amounts below are in U.S. dollars.
Business context and reporting period
Neogen develops and sells food-safety testing products and animal-safety products and services. Its reportable segments are Food Safety and Animal Safety. On September 1, 2022, Neogen completed a Reverse Morris Trust combination with 3M’s Food Safety Division (FSD), substantially expanding Food Safety. At closing, former FSD shareholders owned approximately 50.1% of Neogen and pre-transaction Neogen shareholders approximately 49.9%.
Key financial metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $822.4 million | $527.2 million |
| Gross margin | 49.4% | 46.1% |
| Operating income | $37.5 million; 4.6% margin | $58.6 million; 11.1% margin |
| Net income (loss) | $(22.9) million; $(0.12) diluted EPS | $48.3 million; $0.45 diluted EPS |
| Cash from operations | $41.0 million | $68.0 million |
| Cash and marketable securities | $245.6 million | $381.1 million |
| Debt at year-end | $900.0 million principal; $885.4 million net of issuance costs | No debt outstanding |
Revenue increased 56%, while reported Food Safety revenue rose 110% to $546.8 million and Animal Safety revenue increased 3% to $275.7 million. Growth was primarily acquisition-driven: FSD contributed $279.5 million from its September 2022 closing through year-end. Management reported 4% consolidated core sales growth, excluding acquisitions and currency effects. International revenue was $398.4 million, or 48.4% of total revenue.
Operating cash flow fell by $27.0 million year over year, primarily reflecting FSD transaction costs and added receivables. Investing activities provided $201.0 million, largely from marketable-security maturities and sales; financing activities used $118.1 million, including $100 million of term-loan repayments. Year-end current assets were $585.9 million and current liabilities $145.5 million. Receivables were $153.3 million, including $57.3 million billed by 3M on Neogen’s behalf during transition services.
Gross margin improved, partly because FSD’s products carried higher margins than Neogen’s legacy average. Operating income declined despite higher revenue, reflecting acquisition and integration costs, acquired-intangible amortization and added operating expenses. Net loss also reflected $56.0 million of interest expense, principally associated with transaction financing. Adjusted EBITDA, a non-GAAP measure, was $205.4 million (25.0% margin), versus $115.4 million (21.9%); adjusted net income was $105.7 million and adjusted EPS $0.56, versus $79.3 million and $0.73. These adjusted measures exclude specified expenses and are not substitutes for GAAP results.
Material changes versus the prior comparable period
- The FSD transaction increased scale and Food Safety’s share of revenue, but also drove substantial balance-sheet changes: assets rose to $4.55 billion from $992.9 million, including $2.14 billion of goodwill and $1.59 billion of net amortizable intangibles.
- Neogen issued 108.3 million shares in the transaction; year-end shares outstanding were 216.2 million, compared with 107.8 million a year earlier.
- Debt increased from zero to $900 million principal. It comprised a $550 million term loan and $350 million of 8.625% senior notes due 2030. The $150 million revolving facility was undrawn; the company reported compliance with debt covenants at year-end.
- Operating expenses doubled to $368.4 million. They included $59.8 million of transaction and integration costs; general and administrative expense also included $60.9 million of acquired-intangible amortization.
- Sales outside the U.S. increased to 48.4% of revenue from 39.7%, substantially reflecting FSD’s international business.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expected inflation to continue affecting FY2024, but at a lower rate than in the prior two fiscal years; it also expected the effects of the Russia-Ukraine conflict and COVID-related disruption to remain uncertain and potentially continue into FY2024. Management expected R&D spending of approximately 3%–4% of revenue annually and anticipated some new products becoming commercially available during FY2024 and FY2025.
- Investment plans: Estimated FY2024 capital expenditures for legacy operations were $30–$40 million. Neogen expected to spend about $120 million over two fiscal years on a Lansing manufacturing facility and about $30 million over the same period on a new ERP system.
- Integration and transition: Management identified integration of FSD—particularly manufacturing, systems and controls—as an important execution challenge. 3M continued certain manufacturing, invoicing and distribution services, with invoicing and distribution transition services expected to conclude by March 1, 2024.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at May 31, 2023. Identified material weaknesses involved IT access and change management, period-end invoice accruals, and management review of acquisition accounting and purchase-price allocation. The auditor issued an adverse opinion on internal controls, while issuing an unqualified opinion on the financial statements. FSD, representing about 82% of year-end assets, was excluded from the internal-control assessment because of the acquisition timing.
- Other risks: Key exposures include acquisition integration and anticipated synergies, debt service and floating-rate borrowing costs, supply and raw-material inflation, international operations and foreign exchange, cybersecurity and ERP implementation, regulation, competition, and agricultural-market and weather conditions.
- Unusual items: Neogen reversed a $0.6 million reserve after OFAC concluded an investigation without a monetary penalty or other enforcement action. The company also recorded $3.1 million of impairment of discontinued product lines and a $3.2 million inventory fair-value step-up charge related to the transaction.
Important facts for investors to verify
- Whether FSD integration, manufacturing transfers and transition-service exits proceed on schedule, and whether projected synergies materialize.
- Progress in remediating the three material weaknesses, including whether controls over the acquired FSD business are brought into the company-wide assessment.
- Debt balances, interest costs, covenant headroom and liquidity after planned factory, ERP and other capital spending.
- Underlying organic growth and margins by segment, distinguished from acquisition contributions and non-GAAP adjustments.
- Collection of receivables billed by 3M, inventory utilization, and the effects of inflation, supply constraints and foreign-exchange movements.
- Finalization of the FSD purchase-price allocation and the assumptions supporting substantial goodwill and customer-relationship intangible valuations.