Neogen Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended August 31, 2022; unaudited results compared with the three months ended August 31, 2021. Neogen operates in Food Safety and Animal Safety, including diagnostic products, animal health products, genomics, and laboratory services.
Financial performance and position
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $132.3 million | $128.3 million | +3%; organic growth was 0% |
| Gross margin | $62.3 million; 47.0% | $60.0 million; 46.8% | Margin +0.2 percentage points |
| Operating expenses | $56.2 million | $38.3 million | Increase included $13.7 million of 3M transaction expenses |
| Operating income | $6.1 million; 4.6% of revenue | $21.7 million; 16.9% | Declined substantially |
| Net income / diluted EPS | $5.2 million / $0.05 | $17.1 million / $0.16 | Net income down 69% |
| Adjusted EBITDA (non-GAAP) | $27.0 million; 20.4% margin | $28.9 million; 22.5% margin | Down 6% |
| Operating cash flow | $(14.1) million | $23.2 million | Cash use versus cash generation |
Revenue increased 3% in both Food Safety and Animal Safety. Foreign currency translation reduced comparative revenue by approximately $3.9 million; international sales grew 10% on a currency-neutral basis, or 7% excluding acquisitions. Gross margin improved overall, with Animal Safety up 200 basis points and Food Safety down 160 basis points. Management attributed pressure in some product lines to raw-material and freight costs.
At August 31, cash and cash equivalents were $107.1 million and marketable securities were $240.6 million, or $347.7 million combined, compared with $381.1 million at May 31. Total current assets were $607.9 million and current liabilities were $67.0 million. Neogen had no borrowings under its existing $15 million revolving line at quarter-end. Cash used in operations reflected transaction expenses, higher inventory and other working-capital changes; investing cash flow was positive $81.6 million, primarily reflecting net marketable-securities sales. Capital spending and other non-current asset purchases were $13.0 million.
Material changes and significant transaction
- Reported earnings were materially reduced by $13.7 million in legal, consulting, and other expenses related to the combination with 3M’s Food Safety business. Excluding those expenses, management reported operating income of $19.8 million (15.0% margin) and net income of $15.9 million after tax adjustments. These are management-adjusted figures, not GAAP results.
- The 3M Food Safety transaction closed on September 1, 2022, after quarter-end, as a Reverse Morris Trust. The filing valued the business at approximately $3.3 billion, based on 108.3 million Neogen shares valued at $20.90 per share and $1 billion of debt assumed post-close. Former Garden SpinCo shareholders received approximately 50.1% of the combined company; pre-transaction Neogen shareholders retained approximately 49.9%.
- Financing associated with the transaction included a $650 million five-year senior secured term loan and a $150 million five-year secured revolving facility, funded to Garden SpinCo before closing and becoming Neogen’s obligation on September 1. The term-loan pricing is Term SOFR plus 235 basis points. A separate $350 million of 8.625% senior notes due 2030 became guaranteed by Neogen at closing.
- The company acquired Thai-Neo Biotech for approximately $1.6 million in July 2022. Revenue and net income from the listed acquisitions were not disclosed because management considered them immaterial.
Outlook, commentary, and risks
Neogen does not provide forecasts of future financial performance. Management said higher input, transportation, supply-chain, and labor costs had hurt results; pricing actions offset some, but not all, pressure. Inflation was expected to continue affecting the remainder of fiscal 2023, though its impact could not be quantified. The company also cited ongoing COVID-19 effects on demand, labor, shipping, and supply; possible further effects from the Russia-Ukraine conflict; and foreign-exchange exposure. Management noted that future cash generation and borrowing capacity may not be sufficient for all operating, debt repayment, product development, and acquisition needs.
Contingencies include a $916,000 recorded liability for environmental remediation at a Wisconsin facility; alternative remediation could increase costs. The company continues to cooperate with an OFAC investigation concerning certain services involving an Iranian party and stated that its $600,000 reserve was considered adequate; the outcome remains uncertain. Management said the investigation was not expected to have a material impact based on information then available. The filing also identifies routine legal proceedings and risks including competition, acquisition integration, regulation, and research and development.
Important facts for investors to verify
- Post-close debt balances, repayment terms, covenant compliance, interest expense, and liquidity following the 3M transaction.
- Integration costs and whether expected operating benefits from combining the businesses are realized; the filing’s acquisition accounting and purchase-price allocation were still being prepared.
- Whether organic revenue and adjusted profitability improve, given flat consolidated organic sales and lower adjusted EBITDA margin.
- Ongoing inflation, supply-chain, COVID-19, currency, and customer-demand effects, and their impact on margins and operating cash flow.
- Developments in the OFAC investigation and Wisconsin remediation plan, including whether reserves or estimated costs change.
Amounts are in U.S. dollars. Non-GAAP measures are not substitutes for GAAP results and may not be comparable with similarly titled measures at other companies.