Neogen(NEOG) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Interim Consolidated Financial Statements (unaudited) The interim consolidated financial statements reflect a significant post-merger transformation, with substantial asset growth and net losses driven by acquisition-related costs and new debt Consolidated Balance Sheets The balance sheet dramatically expanded post-merger, with total assets reaching $4.56 billion and liabilities increasing due to new debt Consolidated Balance Sheet Highlights (in thousands USD) | Account | Nov 30, 2022 | May 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $4,563,242 | $992,929 | +360% | | Goodwill | $2,122,397 | $142,704 | +1387% | | Amortizable intangible assets, net | $1,626,514 | $92,106 | +1666% | | Total Liabilities | $1,456,979 | $105,555 | +1280% | | Non-current debt | $923,962 | $0 | N/A | | Total Stockholders' Equity | $3,106,263 | $887,374 | +250% | Consolidated Statements of Income (Loss) Revenues significantly increased due to the 3M FSD merger, but the company reported net losses driven by higher operating expenses and new interest costs Statement of Income (Loss) Summary - Three Months Ended Nov 30 (in thousands USD) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $230,033 | $130,517 | 76.2% | | Gross Margin | $112,539 | $60,594 | 85.7% | | Operating Income (Loss) | $(7,656) | $12,469 | -161.4% | | Net Income (Loss) | $(41,841) | $10,828 | -486.0% | | Diluted EPS | $(0.19) | $0.10 | -290.0% | Statement of Income (Loss) Summary - Six Months Ended Nov 30 (in thousands USD) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $362,382 | $258,822 | 40.0% | | Gross Margin | $174,809 | $120,602 | 45.0% | | Operating Income (Loss) | $(1,594) | $34,214 | -104.7% | | Net Income (Loss) | $(36,632) | $27,905 | -231.3% | | Diluted EPS | $(0.23) | $0.26 | -188.5% | Consolidated Statements of Cash Flows Operating cash flow turned negative due to net losses and merger-related expenses, while investing activities provided cash and financing activities used cash for debt repayment Cash Flow Summary - Six Months Ended Nov 30 (in thousands USD) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash (For) From Operating Activities | $(32,869) | $41,057 | | Net Cash (For) From Investing Activities | $174,640 | $(64,744) | | Net Cash (For) From Financing Activities | $(78,356) | $6,619 | | Net Increase (Decrease) In Cash | $55,527 | $(24,483) | Notes to Interim Consolidated Financial Statements The notes detail the significant accounting impacts of the 3M FSD merger, including the $3.2 billion purchase price, asset allocation, new debt, and segment revenue changes - On September 1, 2022, Neogen completed its merger with 3M's Food Safety Division (FSD) in a Reverse Morris Trust transaction. Neogen was deemed the accounting acquiror[27][28] - The purchase price for the 3M FSD was $3.2 billion, consisting of 108.3 million shares of Neogen common stock and $1 billion in cash funded by new debt financing[27][91] Preliminary Purchase Price Allocation for 3M FSD (in thousands USD) | Account | Fair Value | | :--- | :--- | | Intangible assets | $1,560,000 | | Goodwill | $1,963,171 | | Total purchase consideration | $3,222,410 | - The company incurred new long-term debt totaling $940 million, comprising a $590 million term loan and $350 million in senior notes, to finance the 3M FSD transaction[104][105][111] - Transaction costs related to the 3M FSD merger totaled $39.1 million for the quarter and $52.9 million for the six months ended Nov 30, 2022, recorded in general and administrative expenses[95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant revenue growth driven by the 3M FSD merger, offset by a net loss due to transaction costs, interest expense, and amortization, while highlighting adjusted EBITDA growth Executive Overview Q2 FY2023 saw consolidated revenues grow 76% due to the 3M FSD merger, but a net loss resulted from merger-related expenses, despite a significant increase in Adjusted EBITDA Q2 FY2023 Key Metrics vs. Q2 FY2022 (in thousands USD) | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $230,033 | $130,517 | 76% | | Net Income (Loss) | $(41,841) | $10,828 | -486% | | Per Diluted Share | $(0.19) | $0.10 | -290% | | Adjusted EBITDA* | $64,051 | $29,594 | 116% | - The net loss was adversely impacted by $39.1 million in legal, consulting, and other expenses related to the 3M Food Safety business combination[137] Results of Operations Q2 FY2023 revenues increased 76% driven by the 3M FSD acquisition, improving gross margin, but operating expenses surged due to transaction costs and amortization, leading to an operating loss - The 3M FSD business is reported entirely within the Food Safety segment, driving its revenue up 140% in Q2[144] Q2 Revenue by Segment (in thousands USD) | Segment | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Food Safety | $161,343 | $67,132 | 140% | | Animal Safety | $68,690 | $63,385 | 8% | | Total Revenues | $230,033 | $130,517 | 76% | - Gross margin increased to 48.9% from 46.4% in the prior-year quarter, primarily due to higher-margin products from the FSD merger and pricing actions[156] - Q2 operating expenses included $39.1 million in 3M FSD transaction costs and $20.3 million in amortization of acquired intangible assets[157] - Net interest expense was approximately $20.0 million for the quarter, a direct result of the $1 billion in debt incurred to fund the 3M FSD combination[163] Non-GAAP Financial Measures Non-GAAP measures, including Adjusted EBITDA and Adjusted Net Income, are presented to provide a clearer view of underlying business performance by excluding merger-related costs and amortization Reconciliation of Net Income (Loss) to Adjusted EBITDA - Q2 (in thousands USD) | Line Item | 2022 | 2021 | | :--- | :--- | :--- | | Net Income (Loss) | $(41,841) | $10,828 | | Adjustments (Taxes, D&A, Interest) | $54,480 | $8,155 | | EBITDA | $12,639 | $18,533 | | Share-based compensation | $2,632 | $1,748 | | Certain transaction fees and expenses | $39,132 | $9,313 | | Other Adjustments | $9,648 | $0 | | Adjusted EBITDA | $64,051 | $29,594 | Reconciliation of Net Income (Loss) to Adjusted Net Income - Q2 (in thousands USD) | Line Item | 2022 | 2021 | | :--- | :--- | :--- | | Net Income (Loss) | $(41,841) | $10,828 | | Amortization of acquisition-related intangibles | $22,116 | $1,770 | | Certain transaction fees and expenses | $39,132 | $9,313 | | Other Adjustments (Share-based comp, etc.) | $16,630 | $1,748 | | Estimated tax effect of adjustments | $(4,676) | $(3,146) | | Adjusted Net Income | $31,361 | $20,513 | | Adjusted Earnings per Share | $0.15 | $0.19 | Financial Condition and Liquidity Cash and marketable securities decreased, operating cash flow was negative due to deal expenses, and significant new debt was incurred to finance the 3M FSD merger - Cash, cash equivalents, and marketable securities totaled $276.3 million at Nov 30, 2022, down from $381.1 million at May 31, 2022[184] - Cash flow from operating activities was negative $32.9 million for the first six months of fiscal 2023, primarily due to 3M FSD deal-related expenses[184] - To finance the 3M FSD merger, the company entered into a $650 million term loan facility and issued $350 million in senior notes[188][189] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations due to new variable-rate debt and foreign currency exchange rate exposure from global operations, using derivatives to mitigate some risks - The company has exposure to interest rate risk from its new debt and foreign exchange risk from its global operations[192][193] Market Risk Sensitivity Analysis (in thousands USD) | Risk Category | Hypothetical Change | Impact on Earnings/Fair Value | | :--- | :--- | :--- | | Foreign Currency—Revenue | 10% Decrease in exchange rates | $46,248 (Earnings) | | Interest Expense | 10% Increase in interest rates | $2,068 (Earnings) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of November 30, 2022, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of November 30, 2022[196] - No material changes in internal control over financial reporting occurred during the quarter ended November 30, 2022[197] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company refers to Note 12 for details on material pending legal proceedings, including environmental remediation and an OFAC investigation with an established reserve - For details on legal proceedings, the report refers to Note 12, which discusses environmental remediation and an OFAC investigation[198][117][118] Item 1A. Risk Factors No material changes to the risk factors described in the company's Annual Report on Form 10-K were reported - No material changes in risk factors were reported since the last Annual Report on Form 10-K[199] Item 6. Exhibits This section provides an index of all exhibits filed with the Form 10-Q, including merger and financing agreements related to the 3M FSD transaction and officer certifications - Lists various agreements and certifications filed as exhibits, including numerous documents related to the 3M FSD merger and subsequent financing[202][203]