Neogen(NEOG) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Interim Condensed Consolidated Financial Statements (unaudited) This section presents Neogen's unaudited interim financial statements, reflecting significant changes from the 3M Food Safety Division merger Condensed Consolidated Balance Sheets The balance sheet shows total assets surged to $4.51 billion and liabilities to $1.38 billion due to the 3M merger Condensed Consolidated Balance Sheets (in thousands) | | February 28, 2023 | May 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $555,371 | $626,798 | | Goodwill | $2,135,118 | $142,704 | | Amortizable intangible assets, net | $1,620,229 | $92,106 | | Total Assets | $4,508,764 | $992,929 | | Total Current Liabilities | $107,155 | $77,844 | | Non-current debt | $884,701 | $— | | Total Liabilities | $1,383,209 | $105,555 | | Total Stockholders' Equity | $3,125,555 | $887,374 | | Total Liabilities and Stockholders' Equity | $4,508,764 | $992,929 | Condensed Consolidated Statements of Income (Loss) Q3 revenues rose 70% to $218.3 million, but nine-month net loss was $28.4 million due to merger costs Condensed Consolidated Statements of Income (Loss) (in thousands) | | Three Months Ended Feb 28, 2023 | Three Months Ended Feb 28, 2022 | Nine Months Ended Feb 28, 2023 | Nine Months Ended Feb 28, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $218,255 | $128,244 | $580,637 | $387,066 | | Gross Margin | $107,964 | $57,412 | $282,773 | $178,014 | | Operating Income | $15,684 | $6,377 | $14,090 | $40,591 | | Interest Expense | $(17,460) | $(35) | $(38,007) | $(63) | | Net Income (Loss) | $8,190 | $5,443 | $(28,442) | $33,348 | | Diluted EPS | $0.04 | $0.05 | $(0.16) | $0.31 | Condensed Consolidated Statements of Comprehensive Income (Loss) For the nine months, total comprehensive loss was $33.9 million, driven by net loss and foreign currency translations Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | | Nine Months Ended Feb 28, 2023 | Nine Months Ended Feb 28, 2022 | | :--- | :--- | :--- | | Net income (loss) | $(28,442) | $33,348 | | Foreign currency translations | (6,677) | (9,482) | | Unrealized gain (loss) on marketable securities, net of tax | 674 | (1,582) | | Unrealized gain on derivative instruments, net of tax | 550 | — | | Total comprehensive income (loss) | $(33,895) | $22,284 | Condensed Consolidated Statements of Equity Total stockholders' equity increased to $3.13 billion, driven by $2.26 billion in common stock issued for the 3M merger - On September 1, 2022, the company issued 108,270,000 shares for the 3M transaction, increasing common stock by $17.3 million and additional paid-in capital by $2.25 billion[17] Condensed Consolidated Statements of Cash Flows Nine-month operating cash flow was $(49.9) million, with $194.2 million from investing activities Net Cash Flow Summary (Nine Months Ended Feb 28, in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash (For) From Operating Activities | $(49,938) | $47,648 | | Net Cash From (For) Investing Activities | $194,163 | $(80,130) | | Net Cash (For) From Financing Activities | $(118,333) | $7,842 | | Net Increase (Decrease) In Cash | $22,661 | $(32,723) | Notes to Interim Condensed Consolidated Financial Statements Notes detail the $3.2 billion 3M Food Safety Division merger, including purchase price allocation and new debt financing - On September 1, 2022, Neogen completed its merger with 3M's Food Safety Division (3M FSD) in a Reverse Morris Trust transaction. The purchase consideration was $3.2 billion, consisting of 108.3 million shares of Neogen common stock. Post-merger, former 3M FSD stockholders own approximately 50.1% of Neogen[23] - The 3M FSD merger added $1.98 billion to goodwill and $1.56 billion to identifiable intangible assets, including customer relationships ($1.17B), developed technology ($280M), and trade names ($110M)[86][88][90] - In connection with the 3M FSD acquisition, the company incurred $1 billion in new debt, consisting of a $650 million term loan facility and $350 million in 8.625% senior notes due 2030[100][107] - In November 2022, the company entered into an interest rate swap agreement to fix the interest rate on $250 million of its variable-rate term loan at a fixed rate of 6.215%[122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 3M merger's impact, with Q3 revenues up 70% and a nine-month net loss of $28.4 million Trends and Uncertainties The company faces macroeconomic challenges including inflation, supply chain disruptions, and the Russia-Ukraine conflict - The company experienced higher than normal input cost inflation (transportation, supply chain, labor), which negatively impacted operating results. Pricing actions have mitigated some, but not all, of these pressures[127] - The Russia-Ukraine conflict has caused intermittent material shortages and increased costs for transportation, energy, and raw materials, adversely impacting European operations[128] - COVID-19 continues to cause supply chain difficulties, including vendor disruptions, shipping issues, increased shipping costs, and labor shortages[131] Executive Overview Q3 revenues grew 70% to $218.3 million, with a nine-month net loss of $28.4 million Financial Highlights (Nine Months Ended Feb 28) | Metric (in thousands, except %) | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $580,637 | $387,066 | 50% | | Core Sales Growth | 5% | N/A | N/A | | Net (Loss) Income | $(28,442) | $33,348 | (185)% | | Adjusted EBITDA | $142,341 | $83,343 | 71% | | Cash (for) from Operations | $(49,938) | $47,648 | N/A | - The 3M Food Safety Division (FSD) contributed $87.0 million and $179.7 million in revenue for the three and nine months ended February 28, 2023, respectively. All FSD revenue is reported within the Food Safety segment[134] Revenues Total revenues increased 50% to $580.6 million for nine months, driven by the 3M FSD business Revenue by Segment (Nine Months Ended Feb 28, in thousands) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Food Safety | $377,528 | $192,610 | 96% | | Animal Safety | $203,109 | $194,456 | 4% | | Total Revenues | $580,637 | $387,066 | 50% | - The 3M FSD acquisition significantly boosted the 'Bacterial & General Sanitation' and 'Culture Media & Other' product lines within the Food Safety segment, with YTD growth of 163% and 219% respectively[142] Gross Margin Gross margin improved to 49.5% in Q3, primarily due to higher-margin products from the acquired 3M FSD business - Gross margin increased to 49.5% in Q3 FY23 from 44.8% in Q3 FY22. The increase was primarily due to incremental revenues from the higher-margin FSD merger products[156] - Legacy Neogen Food Safety gross margin improved by 20 basis points, and Animal Safety gross margins increased by 220 basis points, driven by pricing actions and declining freight costs[156] Operating Expenses Operating expenses nearly doubled to $268.7 million for nine months due to 3M FSD transaction and amortization costs - For the nine months ended Feb 28, 2023, operating expenses increased to $268.7 million from $137.4 million year-over-year[157] - General and administrative expenses for the nine months of FY2023 included $55.8 million in transaction/integration fees and $40.6 million in amortization of intangibles from the FSD merger[160] - Sales and marketing expenses for the nine months increased to $98.3 million from $63.2 million, driven by $27.7 million in absorbed expenses from the FSD transaction[158] Operating Income Operating income for nine months fell to $14.1 million, with margin compressing to 2.4% due to higher expenses Operating Income Comparison | Metric | Nine Months Ended Feb 28, 2023 | Nine Months Ended Feb 28, 2022 | | :--- | :--- | :--- | | Operating Income | $14.1 million | $40.6 million | | Operating Margin | 2.4% | 10.5% | Other (Expense)/Income Total other expense was $43.8 million for nine months, primarily due to $38.0 million in new debt interest Other (Expense)/Income Breakdown (Nine Months Ended Feb 28, 2023, in thousands) | Item | Amount | | :--- | :--- | | Interest income | $2,163 | | Interest expense | $(38,007) | | Foreign currency transactions | $(6,287) | | Loss on sale of minority interest | $(1,516) | | Total Other (Expense) Income | $(43,782) | Net Income (Loss) Neogen incurred a net loss of $28.4 million for nine months, driven by significant 3M FSD merger-related costs - The company reported a net loss of $28.4 million for the nine months ended Feb 28, 2023, compared to a net income of $33.3 million in the prior year[167] - The decline in earnings was primarily due to merger-related costs: $55.8M in transaction fees, $40.6M in amortization, $38.0M in interest expense, and $1.3M in goodwill impairment[167] Non-GAAP Financial Measures Adjusted EBITDA for nine months was $142.3 million and Adjusted Net Income was $75.4 million Reconciliation of Net Income (Loss) to Adjusted EBITDA (Nine Months Ended Feb 28, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net (Loss) Income | $(28,442) | $33,348 | | Provision for income taxes | (1,250) | 7,950 | | Depreciation and amortization | 59,938 | 17,833 | | Interest expense (income), net | 35,844 | (741) | | EBITDA | $66,090 | $58,390 | | Share-based compensation | 7,311 | 5,045 | | Certain transaction fees and integration costs | 55,754 | 19,908 | | Other adjustments | 13,186 | — | | Adjusted EBITDA | $142,341 | $83,343 | Reconciliation of Net Income (Loss) to Adjusted Net Income (Nine Months Ended Feb 28, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net (Loss) Income | $(28,442) | $33,348 | | Amortization of acquisition-related intangibles | 46,637 | 5,432 | | Certain transaction fees and integration costs | 55,754 | 19,908 | | Other adjustments | 26,965 | 5,045 | | Estimated tax effect of above adjustments | (24,864) | (6,873) | | Adjusted Net Income | $75,446 | $56,860 | Financial Condition and Liquidity Cash decreased to $183.2 million, reflecting cash used for operations and $100 million debt repayment - Cash, cash equivalents, and marketable securities decreased to $183.2 million as of Feb 28, 2023, from $381.1 million as of May 31, 2022[184] - The company repaid $100 million of its term loan principal during fiscal year 2023[184][189] - Net accounts receivable increased to $146.4 million from $99.7 million, and net inventory increased to $143.9 million from $122.3 million, primarily due to the FSD business integration[185][187] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign exchange risks, mitigated by derivative financial instruments - The company has foreign exchange risk exposure from operations in numerous countries, with primary currencies being the British pound sterling, euro, Mexican peso, Brazilian real, and Chinese yuan. Derivative instruments are used to manage this risk[194] Market Risk Sensitivity Analysis (as of Feb 28, 2023) | Risk Category | Hypothetical Change | Impact on Earnings/Fair Value (in thousands) | | :--- | :--- | :--- | | Foreign Currency—Revenue | 10% Decrease in exchange rates | $43,334 (Earnings) | | Foreign Currency—Hedges | 10% Decrease in exchange rates | $1,850 (Fair Value) | | Interest Income | 10% Decrease in interest rates | $194 (Earnings) | | Interest Expense | 10% Increase in interest rates | $1,998 (Earnings) | Item 4. Controls and Procedures Management concluded disclosure controls are effective, with no material changes to internal control over financial reporting - Based on an evaluation as of February 28, 2023, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective[197] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[198] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, including an OFAC investigation and environmental remediation - The company received an administrative subpoena from the U.S. Treasury's Office of Foreign Assets Control (OFAC) regarding activities involving parties in Iran. A reserve of $600,000 was recorded in fiscal 2020 for potential fines[114][115] - The company is involved in environmental remediation and monitoring at its Randolph, Wisconsin facility, with an estimated remaining liability of $916,000[113] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for May 31, 2022 - There have been no material changes in the risk factors described in the Annual Report on Form 10-K for the year ended May 31, 2022[200] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL documents - The exhibits filed with this report include: - 31.1: Certification of Principal Executive Officer - 31.2: Certification of Principal Financial Officer - 32: Certification Pursuant to 18 U.S.C. Section 1350 (Sarbanes-Oxley Act of 2002) - 101 & 104: Inline XBRL Data Files[202]