Neogen Corp 10-Q for FY2024 Q3
Neogen Corp (NEOG)
About this 10-Q
Neogen Corp filed this 10-Q on April 9, 2024, covering the quarter ended February 29, 2024 (FY2024 Q3).
Headline figures
Quarter ended February 29, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $228.81M
- up 4.8% from $218.26M a year earlier
- Net loss
- $2.02M
- compared with net income of $8.19M a year earlier
- Diluted EPS
- -$0.01
- compared with $0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
(Address of principal executive offices, including zip code)
(
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each Class
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Trading
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Name of each exchange on which registered
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N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ |
Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
Smaller Reporting Company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES
As of February 29, 2024 there were
NEOGEN CORPORATION
TABLE OF CONTENTS
1
PART I – FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements
Neogen Corporation
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share amounts)
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February 29, 2024 |
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May 31, 2023 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Marketable securities |
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Accounts receivable, net of allowance of $ |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Net Property and Equipment |
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Other Assets |
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Right of use assets |
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Goodwill |
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Intangible assets, net |
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Other non-current assets |
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Total Assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current Liabilities |
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Current portion of finance lease |
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$ |
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$ |
- |
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Accounts payable |
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Accrued compensation |
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Income tax payable |
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Accrued interest |
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Deferred revenue |
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Other accruals |
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Total Current Liabilities |
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Deferred Income Tax Liability |
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Non-Current Debt |
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Other Non-Current Liabilities |
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Total Liabilities |
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Commitments and Contingencies ( 12) |
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Equity |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
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( |
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Retained earnings |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Neogen Corporation
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share amounts)
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Three Months Ended February 29/28, |
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Nine Months Ended February 29/28, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenues |
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Product revenues |
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$ |
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$ |
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$ |
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$ |
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Service revenues |
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Total Revenues |
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Cost of Revenues |
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Cost of product revenues |
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Cost of service revenues |
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Total Cost of Revenues |
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Gross Profit |
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Operating Expenses |
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Sales and marketing |
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General and administrative |
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Research and development |
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Total Operating Expenses |
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Operating Income |
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Other Expense |
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Interest income |
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Interest expense |
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( |
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( |
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( |
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( |
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Other expense |
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( |
) |
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( |
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( |
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( |
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Total Other Expense |
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( |
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( |
) |
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( |
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( |
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Loss Before Taxes |
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( |
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( |
) |
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( |
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( |
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Income Tax Benefit |
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(3,800 |
) |
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(10,450 |
) |
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(3,900 |
) |
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(1,250 |
) |
Net (Loss) Income |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Net (Loss) Earnings Per Share |
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Basic |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
( |
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Diluted |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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Weighted Average Shares Outstanding |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Neogen Corporation
Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited)
(in thousands)
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Three Months Ended February 29/28, |
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Nine Months Ended February 29/28, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net (loss) income |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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Foreign currency translation (loss) gain |
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( |
) |
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( |
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Unrealized gain on marketable securities (1) |
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Unrealized gain on derivative instruments (2) |
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Other comprehensive (loss) income, net of tax: |
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( |
) |
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( |
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Total comprehensive (loss) income |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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(1)
(2)
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Neogen Corporation
Condensed Consolidated Statements of Equity (unaudited)
(in thousands, except shares)
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Additional |
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Accumulated |
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Common Stock |
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Paid-in |
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Comprehensive |
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Retained |
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Shares |
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Amount |
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Capital |
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Loss |
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Earnings |
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Total |
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Balance, June 1, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of options and share-based compensation expense |
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— |
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— |
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— |
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Issuance of shares under employee stock purchase plan |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Balance, August 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of options and share-based compensation expense |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Balance, November 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of options and share-based compensation expense |
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— |
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— |
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Issuance of shares under employee stock purchase plan |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Other comprehensive loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance, February 29, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Accumulated |
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Additional |
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Other |
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Common Stock |
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Paid-in |
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Comprehensive |
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Retained |
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Shares |
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Amount |
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Capital |
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Loss |
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Earnings |
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Total |
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Balance, June 1, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of options and share-based compensation expense |
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— |
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— |
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Issuance of shares under employee stock purchase plan |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance, August 31, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of options and share-based compensation expense |
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— |
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— |
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Issuance of shares for 3M transaction |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Other comprehensive loss |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance, November 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Exercise of options and share-based compensation expense |
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— |
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— |
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Issuance of shares under employee stock purchase plan |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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Balance, February 28, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Neogen Corporation
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
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Nine Months Ended February 29/28, |
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2024 |
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2023 |
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Cash Flows From (For) Operating Activities |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
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Depreciation and amortization |
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Deferred income taxes |
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( |
) |
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Share-based compensation |
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Loss (gain) on disposal of property and equipment |
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( |
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Amortization of debt issuance costs |
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Impairment of discontinued product lines |
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(Gain) loss on sale of minority interest |
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( |
) |
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Change in operating assets and liabilities, net of business acquisitions: |
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Accounts receivable, net |
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( |
) |
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( |
) |
Inventories, net |
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( |
) |
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( |
) |
Prepaid expenses and other current assets |
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( |
) |
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( |
) |
Accounts payable and accrued liabilities |
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( |
) |
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Interest expense accrual |
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( |
) |
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Change in other assets and liabilities |
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( |
) |
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( |
) |
Net Cash From (For) Operating Activities |
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( |
) |
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Cash Flows (For) From Investing Activities |
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Purchases of property, equipment and other non-current intangible assets |
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( |
) |
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( |
) |
Proceeds from the maturities of marketable securities |
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Purchases of marketable securities |
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( |
) |
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Business acquisitions, net of working capital adjustments and cash acquired |
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Proceeds from the sale of property and equipment and other |
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Net Cash (For) From Investing Activities |
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( |
) |
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Cash Flows From (For) Financing Activities |
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|
|
||
Exercise of stock options and issuance of employee stock purchase plan shares |
|
|
|
|
|
|
||
Repayment of long-term debt |
|
|
|
|
|
( |
) |
|
Debt issuance costs paid and other |
|
|
( |
) |
|
|
( |
) |
Net Cash From (For) Financing Activities |
|
|
|
|
|
( |
) |
|
Effect of Foreign Exchange Rates on Cash |
|
|
( |
) |
|
|
( |
) |
Net (Decrease) Increase In Cash and Cash Equivalents |
|
|
( |
) |
|
|
|
|
Cash and Cash Equivalents, Beginning of Period |
|
|
|
|
|
|
||
Cash and Cash Equivalents, End of Period |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NEOGEN CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollar amounts in thousands except per share and share amounts)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Neogen Corporation and subsidiaries ("Neogen," "we," "our" or the "Company") develop, manufacture and market a diverse line of products and services dedicated to food and animal safety. Our Food Safety segment consists primarily of diagnostic test kits and complementary products (e.g., culture media) sold to food producers and processors to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant by-products, meat speciation, drug residues, pesticide residues and general sanitation concerns. The majority of the test kits are disposable, single-use, immunoassay and DNA detection products that rely on proprietary antibodies and RNA and DNA testing methodologies to produce rapid and accurate test results. Our expanding line of food safety products also includes genomics-based diagnostic technology, and advanced software systems that help testers objectively analyze and store, as well as perform analysis on, their results from multiple locations over extended periods.
Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, rodent control products, cleaners, disinfectants, insect control products and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through veterinarians, retailers, livestock producers and animal health product distributors. Our line of drug detection products is sold worldwide for the detection of abused and therapeutic drugs in animals and animal products, and has expanded into the workplace and human forensic markets.
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of the interim period have been included in the accompanying unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations during the three and nine months ended February 29, 2024 are not necessarily indicative of the results to be expected for the full fiscal year ending May 31, 2024. For more complete financial information, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.
Our functional currency is the U.S. dollar. We translate our non-U.S. operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive (loss) income. Gains or losses from foreign currency transactions are included in other expense on our condensed consolidated statements of operations. Management has designated certain intercompany loans as long-term in nature and, therefore, the gains and losses on remeasurement of these loans are recorded within accumulated other comprehensive loss.
7
ACCOUNTING POLICIES
Comprehensive (Loss) Income
Comprehensive (loss) income represents net (loss) income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net (loss) income and recognized directly as a component of equity. Accumulated other comprehensive (loss) income consists of foreign currency translation adjustments and unrealized gains or losses on our marketable securities and derivative instruments.
Fair Value of Financial Instruments
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying amounts of certain financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, our revolving credit agreement, and long-term debt, approximate their fair value based on either their short maturity or current terms for similar instruments.
Leases
We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, many of our leases are classified as operating leases. Operating leases are included in other assets, other accruals and other non-current liabilities on the Company’s condensed consolidated balance sheets. Finance leases are included in net property and equipment and current portion of finance lease on the Company’s condensed consolidated balance sheets.
Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. Costs associated with finance leases are recognized on a straight-line basis within depreciation and interest expense over the term of the lease. The right-of-use operating lease assets were $
8
Derivatives
The Company operates on a global basis and is exposed to the risk that its financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates and changes in interest rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, the Company enters into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions and has also entered into interest rate swap contracts as a hedge against changes in interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. On the date the derivative is established, the Company designates the derivative as either a fair value hedge, a cash flow hedge or a net investment hedge in accordance with its established policy. Each reporting period, derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. The change in fair value is recorded in accumulated other comprehensive loss, and amounts are reclassified into earnings on the condensed consolidated statement of income when transactions are realized. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings. The Company does not enter into derivative financial instruments for trading or speculative purposes.
ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets and derivatives. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject Neogen to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit histories before extending credit and by monitoring credit exposure on a regular basis. Collateral or other security is generally not required for accounts receivable. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, management considers relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts. No customer accounted for more than
Inventory
The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at the lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
9
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. The Company's business is organized into
Management reviews the carrying amounts of goodwill annually at the reporting unit level, or when indications of impairment exist, to determine if goodwill may be impaired. Goodwill is tested for impairment annually in the fourth quarter. During management's annual test or when there are indicators of impairment, if the carrying amount is deemed to be less than fair value based upon a discounted cash flow analysis and comparison to EBITDA multiples of peer companies, goodwill is reduced to the estimated fair value and a charge is recorded to operations.
Amortizable intangible assets are tested for impairment when indications of impairment exist. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis, such assets are reduced to their estimated fair value and a charge is recorded to operations.
Long-Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Business Combinations
We utilize the acquisition method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in Neogen’s results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. As part of our acquisition accounting, the Company will recognize intangible assets. Management determines the fair value of the intangible assets by applying certain valuation methodologies, including the multi-period excess earnings method, which involves the use of significant estimates and assumptions related to forecasted revenue growth rate and customer attrition rate. Valuation specialists are often used to develop and evaluate the appropriateness of the multi-period excess earnings method, our discount rates, our attrition rate and our fair value estimates using our cash flow projections.
The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If we made different estimates or judgments, it could result in material differences in the fair values of the net assets acquired.
10
Equity Compensation Plans
Share options, restricted stock units (RSUs) and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, an estimate of award forfeitures, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and are estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. For RSUs, we use the intrinsic value method to value the units.
To value equity awards, several recognized valuation models exist; none of these models can be singled out as being the best or most correct. The model applied by us can accommodate most of the specific features included in the options granted, which is the reason for its use. If different models were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 7, "Equity Compensation Plans."
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
New Accounting Pronouncements Not Yet Adopted
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which modifies the disclosure and presentation requirements of reportable segments. The amendments in the update require the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit and loss. The amendments also require disclosure of all other segment items by reportable segment and a description of its composition. Additionally, the amendments require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on the presentation of its consolidated financial statements and accompanying notes.
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that this guidance will have on the presentation of its consolidated financial statements and accompanying notes.
11
2. CASH AND MARKETABLE SECURITIES
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of
Marketable Securities
The Company has marketable securities held by banks or broker-dealers consisting of commercial paper and corporate bonds rated at least A-1/P-1 (short-term) and A/A2 (long-term) with original maturities between
Marketable Securities as of February 29, 2024 and May 31, 2023 are listed below by classification and remaining maturities.
|
|
Maturity |
|
February 29, 2024 |
|
|
May 31, 2023 |
|
||
& Corporate Bonds |
|
0 - 90 days |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Total Marketable Securities |
|
|
|
$ |
|
|
$ |
|
||
The components of marketable securities, consisting of commercial paper and corporate bonds, as of February 29, 2024 are as follows:
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
Commercial Paper & Corporate Bonds |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
The components of marketable securities, consisting of commercial paper and corporate bonds, as of May 31, 2023 are as follows:
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
||||
Commercial Paper & Corporate Bonds |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
12
3. INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in, first-out method, or net realizable value. The components of inventories follow:
|
|
February 29, 2024 |
|
|
May 31, 2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Finished and purchased goods |
|
|
|
|
|
|
||
Inventory reserve |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
4. REVENUE RECOGNITION
The Company derives revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
Revenues for Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally
The Company has
On September 1, 2022, Neogen closed on a Reverse Morris Trust transaction to combine with 3M Company's ("3M") Food Safety Division (“3M FSD”, “FSD”). Similar to Neogen, 3M’s former FSD sells diagnostic test kits, culture media and related products used by food producers and processors to detect foodborne bacteria, allergens and levels of general sanitation. Revenues for these products are recognized and invoiced when the product is shipped to the customer. Subsequent to the 3M FSD transaction, many of these products were manufactured,
13
invoiced, and distributed by 3M on behalf of Neogen under a number of transition service contracts. In the third quarter of fiscal year 2024, the Company completed its exit of distribution-related service contracts. As a result, all product shipments and invoicing to customers is now done directly by Neogen.
The following table presents disaggregated revenue by major product and service categories during the three and nine months ended February 29, 2024 and February 28, 2023:
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Food Safety |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Natural Toxins & Allergens |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Bacterial & General Sanitation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Indicator Testing, Culture Media & Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rodent Control, Insect Control & Disinfectants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Genomics Services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Animal Safety |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Life Sciences |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Veterinary Instruments & Disposables |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Animal Care & Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rodent Control, Insect Control & Disinfectants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Genomics Services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
5. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share was computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income per share was computed using the treasury stock method by dividing net (loss) income by the weighted average number of shares of common stock outstanding.
The calculation of net (loss) income per share follows:
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator for basic and diluted net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income attributable to Neogen |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Denominator for basic net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive stock options and RSUs |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Denominator for diluted net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Due to the net loss reported for the three and nine months ended February 29, 2024 and the nine months ended February 28, 2023, the dilutive stock options and RSUs were anti-dilutive.
14
6. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have
Many of our international operations originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment, such as cleaners, disinfectants, rodent control products, insect control products, veterinary instruments and genomics services. These additional products and services are managed and directed by existing Food Safety management and are reported through the Food Safety segment.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment. While Neogen was operating under a distribution services agreement with 3M, all sales of FSD products were reported through the Food Safety segment. Since the review of FSD sales occurs on a global scale, sales of these products occurring in Australia and New Zealand will continue to report through the Food Safety segment, despite now occurring at Neogen Australasia.
The accounting policies of each of the segments are the same as those described in Note 1, "Description of Business and Basis of Presentation."
Segment information follows:
|
|
Food |
|
|
Animal |
|
|
Corporate and |
|
|
Total |
|
||||
As of and during the three months ended February 29, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Service revenues to external customers |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
As of and during the three months ended February 28, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Service revenues to external customers |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
15
|
|
Food |
|
|
Animal |
|
|
Corporate and |
|
|
Total |
|
||||
As of and during the nine months ended February 29, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Service revenues to external customers |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
As of and during the nine months ended February 28, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Product revenues to external customers |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Service revenues to external customers |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues to external customers |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
The following table presents the Company’s revenue disaggregated by geographic location:
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Domestic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
International |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
7. EQUITY COMPENSATION PLANS
The Company’s long-term incentive plans allow for the grant of various types of share-based awards to key directors, officers and employees of the Company. Incentive and non-qualified options to purchase shares of common stock have been granted under the terms of the 2023 Omnibus Incentive Plan and previously under the 2018 Omnibus Incentive Plan. These options are granted at an exercise price of the closing price of the common stock on the date of grant. Outstanding options vest ratably over
During the three and nine months ended February 29, 2024, the Company recorded $
The Company offers eligible employees the option to purchase common stock at a
16
8. BUSINESS COMBINATIONS
The condensed consolidated statements of operations reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
Fiscal 2023
Thai-Neo Biotech Co., Ltd. Acquisition
On July 1, 2022, Neogen acquired all of the stock of Thai-Neo Biotech Co., Ltd., a long-standing distributor of Neogen’s food safety products to Thailand and Southeast Asia. Consideration for the purchase was $
Corvium Acquisition
On February 10, 2023, the Company acquired certain assets as part of an asset purchase agreement with Corvium, Inc., a partner and supplier within the Company's software analytics platform. This acquisition, which primarily includes the software technology, advances the Company's food safety data analytics strategy. The purchase price consideration was $
There also is the potential for performance milestone payments of up to $
In the first quarter of fiscal 2024, the Company recorded an increase to intangible assets of $
The final purchase price allocation, based upon the fair value of these assets acquired and liabilities assumed, which was determined using the income approach, is summarized in the following table:
Prepaids and other current assets |
|
$ |
|
|
Property, plant and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Deferred revenue |
|
|
( |
) |
Adjustment of annual license prepaid |
|
|
( |
) |
Other non-current liabilities |
|
|
( |
) |
Total identifiable assets and liabilities acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
17
3M Food Safety Transaction
On September 1, 2022, Neogen, 3M, and Neogen Food Safety Corporation (“Neogen Food Safety Corporation”), formerly named Garden SpinCo, a subsidiary created to carve out 3M’s FSD, closed on a transaction combining 3M’s FSD with Neogen in a Reverse Morris Trust transaction and Neogen Food Safety Corporation became a wholly owned subsidiary of Neogen (“FSD transaction”). Immediately following the FSD transaction, pre-merger Neogen Food Safety Corporation stockholders owned, in the aggregate, approximately
The purchase price consideration for the 3M FSD was $
In the first quarter of fiscal 2024, the Company recorded adjustments to goodwill and intangible assets, based on third-party advisor's valuation work and fair value estimates, resulting in an increase to goodwill and a decrease to the intangible assets balance. The company also recorded adjustments to deferred tax liabilities, which increased the balance, based on finalization of entity income tax provisions. The excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets of $
The final purchase price allocation, based upon the fair value of these assets acquired and liabilities assumed, which was determined using the income approach, is summarized in the following table:
Cash and cash equivalents |
|
$ |
|
|
Inventories |
|
|
|
|
Other current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Intangible assets |
|
|
|
|
Right of use asset |
|
|
|
|
Lease liability |
|
|
( |
) |
Deferred tax liabilities |
|
|
( |
) |
Other liabilities |
|
|
( |
) |
Total identifiable assets and liabilities acquired |
|
|
|
|
Goodwill |
|
|
|
|
Total purchase consideration |
|
$ |
|
The following table summarizes the intangible assets acquired and the useful life of these assets.
|
|
Fair Value |
|
|
Useful Life in Years |
|
||
Trade Names and Trademarks |
|
$ |
|
|
|
|
||
Developed Technology |
|
|
|
|
|
|
||
Customer Relationships |
|
|
|
|
|
|
||
Total intangible assets acquired |
|
$ |
|
|
|
|
||
18
The following table presents pro forma information as if the merger with the 3M FSD business had occurred on June 1, 2022 and had been combined with the results reported in our condensed consolidated statements of operations for all periods presented:
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating Income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The unaudited pro forma information is presented for informational purposes only and is not indicative of the results that would have been achieved if the merger had taken place at such time. The unaudited pro forma information presented above includes adjustments primarily for amortization charges for acquired intangible assets and certain acquisition-related expenses for legal and professional fees.
In connection with the acquisition of the 3M FSD, the Company and 3M entered into several transition service agreements, including manufacturing, distribution and certain back-office support, that have been accounted for separately from the acquisition of assets and assumption of liabilities in the business combination. 3M periodically remits amounts charged to customers on our behalf and charges us for the associated cost of goods sold and transition service fees. As of February 29, 2024 and May 31, 2023, a net receivable from 3M of $5
19
9. GOODWILL AND INTANGIBLE ASSETS
The following table summarizes goodwill by reportable segment:
|
|
Food Safety |
|
|
Animal Safety |
|
|
Total |
|
|||
May 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Acquisitions (1) |
|
|
|
|
|
— |
|
|
|
|
||
Foreign currency translation and other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
February 29, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
As of May 31, 2023, non-amortizable intangible assets included licenses of $
Amortizable intangible assets consisted of the following and are included in customer-based intangibles and other non-current assets within the condensed consolidated balance sheets:
|
|
Gross |
|
|
Less |
|
|
Net |
|
|||
Licenses |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|||
Patents |
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
|
|
|
|
|
|
|
|||
Trade names and trademarks |
|
|
|
|
|
|
|
|
|
|||
Developed technology |
|
|
|
|
|
|
|
|
|
|||
Other product and service-related intangibles |
|
|
|
|
|
|
|
|
|
|||
February 29, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Licenses |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Covenants not to compete |
|
|
|
|
|
|
|
|
|
|||
Patents |
|
|
|
|
|
|
|
|
|
|||
Customer relationships |
|
|
|
|
|
|
|
|
|
|||
Trade names and trademarks |
|
|
|
|
|
|
|
|
|
|||
Developed technology |
|
|
|
|
|
|
|
|
|
|||
Other product and service-related intangibles |
|
|
|
|
|
|
|
|
|
|||
May 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Amortization expense relating to definite-lived intangible assets was $
Estimated amortization expense for fiscal years 2024 through 2028 is expected to be in the range of approximately $
20
The amortizable intangible assets' useful lives are
10. DEBT
The Company’s debt and finance lease consists of the following:
|
|
February 29, 2024 |
|
|
May 31, 2023 |
|
||
Term Loan |
|
$ |
|
|
$ |
|
||
Senior Notes |
|
|
|
|
|
|
||
Finance Lease |
|
|
|
|
|
— |
|
|
Total debt and finance lease |
|
|
|
|
|
|
||
Less: Current portion |
|
|
( |
) |
|
|
— |
|
Total non-current debt |
|
|
|
|
|
|
||
Less: Unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Total non-current debt, net |
|
$ |
|
|
$ |
|
||
The Company had a financing agreement with a bank providing for a $
Credit Facilities
In June 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility (“term loan facility”) in the amount of $
The Credit Facilities bear interest based on the term SOFR plus an applicable margin between a range of
The term loan facility contains an optional prepayment feature at the discretion of the Company. The Company determined that the prepayment feature did not meet the definition of an embedded derivative and does not require bifurcation from the host liability and, accordingly, has accounted for the entire instrument at amortized cost. In accordance with the prepayment feature, the Company paid $
21
The Company can draw any amount under the revolving facility up to the $
The Company must pay an annual commitment fee ranging from
There was
Financial covenants include maintaining specified levels of funded debt to EBITDA, and debt service coverage. As of February 29, 2024, the Company was in compliance with its debt covenants.
Senior Notes
In July 2022, Neogen Food Safety Corporation closed on an offering of $
The Company determined that the redemption features of the Notes did not meet the definition of a derivative and thus does not require bifurcation from the host liability and accordingly has accounted for the entire instrument at amortized cost.
Total accrued interest on the Notes was $
22
Finance Lease
The finance lease is a building lease that is classified within property and equipment and the current portion of debt on the condensed consolidated balance sheets as of February 29, 2024. The Company intends to elect the purchase option within the lease agreement prior to the end of the lease term.
Maturity of Term Loan and Senior Notes
There are
11. INCOME TAXES
The estimated annual effective tax rate ("EAETR") is derived from full-year pre-tax book earnings, statutory tax rates, and permanent differences between book and tax accounting across jurisdictions. For interim financial reporting, except in specified cases, the quarterly income tax provision aligns with the EAETR, updated each quarter based on revised full-year pre-tax book earnings. When projected full-year pre-tax book earnings are at or near breakeven, the EAETR may distort the interim income tax provision due to significant permanent differences. In such cases, the interim income tax provision is based on the year-to-date effective tax rate, adjusting for permanent differences proportionally.
In the three and nine months ending February 29, 2024, income taxes were calculated based on the year-to-date effective tax rate. In the three and nine months ending February 28, 2023, income taxes were calculated based on the EAETR.
Income tax benefit was $
The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of February 29, 2024 and May 31, 2023 are $
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. These annual remediation costs are expensed and have ranged from $
In the third quarter of fiscal year 2024, the Company received $
23
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.
13. DERIVATIVES
Derivatives Not Designated as Hedging Instruments
We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and have entered into a number of foreign currency forward contracts each month to mitigate that exposure. These contracts are recorded net at fair value on our condensed consolidated balance sheets, classified as Level 2 in the fair value hierarchy. Gains and losses from these contracts are recognized in other income in our condensed consolidated statements of operations. The notional amount of forward contracts in place was $
|
|
|
|
|
|
|
|
|
||
Fair Value of Derivatives Not Designated as Hedging Instruments |
|
Balance Sheet Location |
|
February 29, 2024 |
|
|
May 31, 2023 |
|
||
Foreign currency forward contracts, net |
|
Other (payable) receivable |
|
$ |
( |
) |
|
$ |
|
|
The location and amount of gains (losses) from derivatives not designated as hedging instruments in our condensed consolidated statements of operations were as follows:
|
|
|
|
Three Months Ended |
|
|||||
Derivatives Not Designated as Hedging Instruments |
|
Location in statements of operations |
|
February 29, 2024 |
|
|
February 28, 2023 |
|
||
Foreign currency forward contracts |
|
Other income (expense) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
Nine Months Ended |
|
||||||
Derivatives Not Designated as Hedging Instruments |
|
Location in statements of operations |
|
February 29, 2024 |
|
|
February 28, 2023 |
|
||
Foreign currency forward contracts |
|
Other expense |
|
$ |
( |
) |
|
$ |
( |
) |
Derivatives Designated as Hedging Instruments
In November 2022, we entered into a receive-variable, pay-fixed interest rate swap agreement with an initial $
We record the fair value of our interest rate swaps on a recurring basis using Level 2 observable market inputs for similar assets or liabilities in active markets.
Fair Value of Derivatives Designated as Hedging Instruments |
|
Balance Sheet Location |
|
February 29, 2024 |
|
|
May 31, 2023 |
|
||
Interest rate swap – current |
|
Other current assets |
|
$ |
|
|
$ |
|
||
Interest rate swap – non-current |
|
Other non-current liabilities |
|
|
( |
) |
|
|
( |
) |
24
The following table summarizes the other comprehensive income before reclassifications of derivative gains and losses:
|
|
Other Comprehensive Income Before Reclassifications During |
|
||||||||||||
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||||
Derivatives Designated as Hedging Instruments |
|
February 29, 2024 |
|
|
February 28, 2023 |
|
February 29, 2024 |
|
|
February 28, 2023 |
|
||||
Interest rate swaps |
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
The following table summarizes the reclassification of derivative gains and losses into net (loss) income from accumulated other comprehensive income (loss):
|
|
|
|
Gain Reclassified During |
|
|||||||||||||
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
Derivatives Designated as Hedging Instruments |
|
Location of Gain Reclassified |
|
February 29, 2024 |
|
|
February 28, 2023 |
|
|
February 29, 2024 |
|
|
February 28, 2023 |
|
||||
Interest rate swaps |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
25
PART I – FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q, including statements relating to management’s expectations regarding new product introductions; the adequacy of our sources for certain components, raw materials and finished products; and our ability to utilize certain inventory. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. There are a number of important factors, including circumstances beyond our control at our transition manufacturing partner, competition, recruitment, retention, dependence on key employees, impact of weather on agriculture and food production, global business disruption caused by the Russia invasion in Ukraine and related sanctions and the conflict between Israel and Hamas, identification and integration of acquisitions, research and development risks, intellectual property protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form 10-Q was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
TRENDS AND UNCERTAINTIES
In prior years, production was negatively impacted by broad supply chain challenges, labor market disruptions and other related impacts of the COVID-19 pandemic. Additionally, input cost inflation, including increases in certain raw materials, negatively impacted operating results. In fiscal 2023, these negative impacts steadily improved throughout the fiscal year. In fiscal 2024, despite a slowing of inflation rates, there remains economic headwinds of softening consumer demand and higher interest rates, coupled with ongoing geopolitical tension in certain regions.
Interest rates have risen sharply, particularly in fiscal 2023, as a way to combat inflation. This, subsequently, increased our borrowing costs and raised the overall cost of capital. While the frequent increases have largely subsided, the overall rate is significantly higher than in recent years, which increases interest expense on the unhedged portion of our Term Loan. In response to the historically high inflationary environment, we have taken pricing actions to mitigate the impacts on the business. We anticipate that the impact of inflation will continue to affect us for the remainder of fiscal year 2024, although at a continually decreasing rate compared to the prior two fiscal years. Beginning in the second quarter of the fiscal year, we implemented a new enterprise resource planning system and began the exit of our transition distribution agreements, which led to certain shipment delays and an elevated backlog of open orders, specifically in the Food Safety segment. Through our continued integration process, we expect our order fulfillment rates to improve to meet the needs of our customers in this improving end-market environment.
26
Although we have no operations in or direct exposure to Russia, Belarus and Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict, which began in February 2022, on the global economy. Our European operations and customer base have been negatively impacted by the conflict. Similarly, the military conflict between Israel and Hamas has increased overall geopolitical tensions. As the respective conflicts continue or worsen, they may further impact our business, financial condition or results of operations throughout the remainder of fiscal year 2024.
We continue to evaluate the nature and extent to which these issues impact our business, including consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us for the remainder of fiscal year 2024 and into fiscal year 2025.
Executive Overview
|
|
Three Months Ended February 29/28, |
|
|
|
|
|
Nine Months Ended February 29/28, |
|
|
|
|
||||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
% Change |
|
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
228,812 |
|
|
$ |
218,255 |
|
|
|
5 |
% |
|
$ |
687,428 |
|
|
$ |
580,637 |
|
|
|
18 |
% |
Core Sales Growth* |
|
|
|
|
|
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
2 |
% |
||||
Food Safety |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
157,754 |
|
|
$ |
151,542 |
|
|
|
4 |
% |
|
$ |
488,435 |
|
|
$ |
377,528 |
|
|
|
29 |
% |
Core Sales Growth* |
|
|
|
|
|
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
3 |
% |
||||
Animal Safety |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
71,058 |
|
|
$ |
66,713 |
|
|
|
7 |
% |
|
$ |
198,993 |
|
|
$ |
203,109 |
|
|
|
(2 |
)% |
Core Sales Growth* |
|
|
|
|
|
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
(2 |
)% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
% of International Sales |
|
|
46 |
% |
|
|
50 |
% |
|
|
|
|
|
49 |
% |
|
|
47 |
% |
|
|
|
||
Net (Loss) Income |
|
$ |
(2,022 |
) |
|
$ |
8,190 |
|
|
|
|
|
$ |
(4,006 |
) |
|
$ |
(28,442 |
) |
|
|
|
||
(Loss) Earnings per Diluted Share |
|
|
(0.01 |
) |
|
|
0.04 |
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.16 |
) |
|
|
|
||
Cash from (for) Operations |
|
|
|
|
|
|
|
|
|
|
|
8,517 |
|
|
|
(49,938 |
) |
|
|
|
||||
* Refer to the non-GAAP financial measures section in this document.
Service Revenue
Service revenue, which includes genomics testing and other laboratory services, was $26.6 million and $77.0 million, respectively, during the three and nine months ended February 29, 2024. Service revenue was $27.6 million and $79.8 million, respectively, during the three and nine months ended February 28, 2023. The decrease in the third quarter was primarily driven by customer attrition in the poultry market, partially offset by strength in genomics testing in the U.K. and China, and new business gained with our Neogen Analytics software as a service.
27
International Revenue
International sales were $104.6 million and $338.6 million during the three and nine months ended February 29, 2024, compared to $108.3 million and $275.7 million during the three and nine months ended February 28, 2023. The increase during the nine months ended February 29, 2024 was primarily due to $63.8 million in international sales related to the 3M FSD transaction during the first quarter of fiscal 2024. The decrease in sales in the third quarter as compared to the same period in the prior year was primarily due to lower sales of food safety products in Asia and Latin America due largely to product availability challenges.
Revenues
|
|
Three Months Ended February 29/28, |
|
|
|
|
|
|
|
|||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
Increase / (Decrease) |
|
|
% |
|
||||
Food Safety |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Natural Toxins & Allergens |
|
$ |
19,738 |
|
|
$ |
19,198 |
|
|
$ |
540 |
|
|
|
3 |
% |
Bacterial & General Sanitation |
|
|
40,395 |
|
|
|
39,444 |
|
|
|
951 |
|
|
|
2 |
% |
Indicator Testing, Culture Media & Other |
|
|
81,168 |
|
|
|
77,955 |
|
|
|
3,213 |
|
|
|
4 |
% |
Rodent Control, Insect Control & Disinfectants |
|
|
10,136 |
|
|
|
9,550 |
|
|
|
586 |
|
|
|
6 |
% |
Genomics Services |
|
|
6,317 |
|
|
|
5,395 |
|
|
|
922 |
|
|
|
17 |
% |
|
|
|
157,754 |
|
|
|
151,542 |
|
|
|
6,212 |
|
|
|
4 |
% |
Animal Safety |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Life Sciences |
|
$ |
1,372 |
|
|
$ |
1,440 |
|
|
$ |
(68 |
) |
|
|
(5 |
)% |
Veterinary Instruments & Disposables |
|
|
17,976 |
|
|
|
15,428 |
|
|
|
2,548 |
|
|
|
17 |
% |
Animal Care & Other |
|
|
10,066 |
|
|
|
8,735 |
|
|
|
1,331 |
|
|
|
15 |
% |
Rodent Control, Insect Control & Disinfectants |
|
|
23,055 |
|
|
|
20,242 |
|
|
|
2,813 |
|
|
|
14 |
% |
Genomics Services |
|
|
18,589 |
|
|
|
20,868 |
|
|
|
(2,279 |
) |
|
|
(11 |
)% |
|
|
|
71,058 |
|
|
|
66,713 |
|
|
|
4,345 |
|
|
|
7 |
% |
Total Revenues |
|
$ |
228,812 |
|
|
$ |
218,255 |
|
|
$ |
10,557 |
|
|
|
5 |
% |
|
|
Nine Months Ended February 29/28, |
|
|
|
|
|
|
|
|||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
Increase / (Decrease) |
|
|
% |
|
||||
Food Safety |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Natural Toxins & Allergens |
|
$ |
63,116 |
|
|
$ |
61,236 |
|
|
$ |
1,880 |
|
|
|
3 |
% |
Bacterial & General Sanitation |
|
|
128,393 |
|
|
|
91,293 |
|
|
|
37,100 |
|
|
|
41 |
% |
Indicator Testing, Culture Media & Other |
|
|
246,812 |
|
|
|
179,293 |
|
|
|
67,519 |
|
|
|
38 |
% |
Rodent Control, Insect Control & Disinfectants |
|
|
32,180 |
|
|
|
29,502 |
|
|
|
2,678 |
|
|
|
9 |
% |
Genomics Services |
|
|
17,934 |
|
|
|
16,204 |
|
|
|
1,730 |
|
|
|
11 |
% |
|
|
|
488,435 |
|
|
|
377,528 |
|
|
|
110,907 |
|
|
|
29 |
% |
Animal Safety |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Life Sciences |
|
$ |
4,710 |
|
|
$ |
4,456 |
|
|
$ |
254 |
|
|
|
6 |
% |
Veterinary Instruments & Disposables |
|
|
47,845 |
|
|
|
46,534 |
|
|
|
1,311 |
|
|
|
3 |
% |
Animal Care & Other |
|
|
27,226 |
|
|
|
29,830 |
|
|
|
(2,604 |
) |
|
|
(9 |
)% |
Rodent Control, Insect Control & Disinfectants |
|
|
65,694 |
|
|
|
63,121 |
|
|
|
2,573 |
|
|
|
4 |
% |
Genomics Services |
|
|
53,518 |
|
|
|
59,168 |
|
|
|
(5,650 |
) |
|
|
(10 |
)% |
|
|
|
198,993 |
|
|
|
203,109 |
|
|
|
(4,116 |
) |
|
|
(2 |
)% |
Total Revenues |
|
$ |
687,428 |
|
|
$ |
580,637 |
|
|
$ |
106,791 |
|
|
|
18 |
% |
Food Safety
Natural Toxins & Allergens – Revenues in this category increased 3% during the three months ended February 29, 2024 compared to the same period in the prior year. Excluding currency impact and sales of drug residue test kits that were largely discontinued in fiscal 2023, core revenue in this category increased 5% primarily driven by sales of tree nut allergen test kits, as prior quarter domestic backlog was fulfilled, partially offset by lower natural toxin volumes due to shipping constraints. During the nine months ended February 29, 2024, revenues in this category
28
increased 3% compared to the same period in the prior year. On a core growth basis, revenues increased 2% in the year-to-date period.
Bacterial & General Sanitation – Revenues in this category increased 2% and 41% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. On a core growth basis, revenues increased 3% and 5%, during the three and nine months ended February 29, 2024, respectively. The increase during both periods was driven primarily by strength in our general sanitation product lines and strong placements of Soleris® microbiological diagnostic equipment.
Indicator Testing, Culture Media & Other – Revenues in this category increased 4% and 38% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth was 7% during the quarter and 2% during the year-to-date period. The increase in the third quarter was due to higher volumes of indicators, partially offset by lower sales of culture media due to a large non-recurring sale of custom product in the prior year. For the nine months, higher volumes of indicators were partially offset by the non-recurring culture media sale and a first-quarter decline in sales of Megazyme food quality and nutritional analysis products, due to distributor ordering patterns.
Rodent Control, Insect Control & Disinfectants – Revenues in this category increased 6% and 9% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. During the quarter, core growth was 2%, driven by a large tender sale of insect control products in Brazil, as well as higher cleaner and disinfectant sales in China. On a year-to-date basis, core revenue increased 4%, driven primarily by insect control product sales in Brazil and strong cleaner and disinfectant sales in Europe in the first half of the fiscal year.
Genomics Services – Revenues of genomics services sold through our international Food Safety operations increased 17% and 11% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth in this category was 17% in the third quarter, driven by increased sales in Europe and new business in China. On a year-to-date basis, core growth was 9% for the same reasons.
Animal Safety
Life Sciences – Revenues in this category decreased 5% and increased 6% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year; core revenue was the same for both periods. During the quarter, lower sample volumes from forensic customers contributed to the decrease, while, for the year-to-date period, the increase was primarily driven by increased demand for substrates from manufacturers of diagnostic tests.
Veterinary Instruments & Disposables – Revenues in this category increased 17% and 3% during the three and nine months ended February 29, 2024 compared to the same periods in the prior year; core revenue increases were the same for both periods. The increase in the third quarter was driven by higher sales of detectable needles and syringes to our large veterinary distributors. For the year-to-date period, third quarter revenue increases were partially offset by inventory de-stocking with the same distributors in the first and second quarters.
Animal Care & Other – Revenues of these products increased 15% and decreased 9% the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth in this category, which excludes currency impact and the discontinued Thyrokare product line, increased 17% and decreased 7% during the three and nine months ended February 29, 2024, respectively. The increase within the quarter was primarily driven by relief of vitamin injectable backorders as well as distributor sales recovery. The decrease during the year-to-date period was driven by lower sales of small animal supplements and wound care products caused primarily by distributor ordering patterns.
29
Rodent Control, Insect Control & Disinfectants – Revenues increased 14% and 4% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year; core revenue increases were the same for both periods. The revenue increase for the quarter was driven by success of marketing programs within insect control products and higher sales of domestic cleaners and disinfectants to combat avian influenza.
Genomics Services – Revenues in this category decreased 11% and 10% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth declined 10% during the quarter and 9% for the year-to-date. Core revenue in both periods was negatively impacted by customer attrition associated with a strategic shift in the business to focus primarily on large production animals.
Gross Profit
Gross margin was 51.1% and 51.0% during the three and nine months ended February 29, 2024, respectively, compared to 49.5% and 48.7% during the three and nine months ended February 28, 2023, respectively. The increase in the third quarter was primarily due to increased sales of higher-margin products in our Food Safety segment. The increase in the year-to-date period was primarily due to incremental revenues from the FSD transaction, which generated gross margin higher than the legacy company average gross margin. Within each reporting segment, increased raw material costs continue to pressure gross margins in certain product lines. However, while inflation continues to impact the business, the rate of raw material price and freight costs changes have significantly declined throughout both the current and prior year comparative periods. Finally, pricing actions taken during these periods also mitigated the impact of cost increases.
Operating Expenses
Operating expenses were $104.9 million and $304.8 million during the three and nine months ended February 29, 2024, respectively, compared to $92.3 million and $268.7 million for the same periods in the prior year. The increase during the three and nine months ended February 29, 2024 was primarily the result of costs added to accommodate the increased size and complexity of the Company following the FSD transaction, which were not in the prior year comparable period.
Sales and marketing expenses were $47.9 million and $138.5 million during the three and nine months ended February 29, 2024, respectively, compared to $38.6 million and $98.3 million during the three and nine months ended February 28, 2023, respectively. The increase was primarily driven by incremental costs resulting from the FSD transaction, including compensation and related expenses for the acquired sales and marketing teams and higher costs related to inefficiencies as we took over distribution from 3M.
General and administrative expenses were $52.1 million and $148.9 million during the three and nine months ended February 29, 2024, respectively, compared to $46.4 million and $151.4 million during the three and nine months ended February 28, 2023, respectively. Increases during the three months ended February 29, 2024 were primarily the result of additional personnel hired to accommodate the increased size and complexity of the organization, compensation increases, the issuance of share-based compensation grants, software license fees and other information technology infrastructure investments. The year-to-date decline was primarily the result of lower transaction fees and integration expenses compared to the prior year comparable period. These decreases were partially offset by the additional costs previously identified.
Research and development expense was $4.9 million and $17.3 million during the three and nine months ended February 29, 2024, respectively, compared to $7.3 million and $19.0 million in the same periods of the prior year. The decrease during the three and nine months ended February 29, 2024 is primarily the result of lower contracted services and employee costs, as we continue to integrate the FSD business and realize synergies in certain areas.
Operating Income
Operating income was $12.0 million and $45.6 million during the three and nine months ended February 29, 2024 respectively, compared to an operating income of $15.7 million and $14.1 million during the three and nine months
30
ended February 28, 2023, respectively. Decreases in operating income during the three months ended February 29, 2024 compared to the prior year quarter reflect increased operating expenses to accommodate the increased size and complexity of the Company. Operating income increased during the nine months ended February 29, 2024 compared to the prior year primarily due to incremental revenues and higher gross profits from the FSD transaction. The prior year also included transaction and integration costs of $55.8 million during the nine months ended February 28, 2023 compared to $12.1 million during the nine months ended February 29, 2024.
Other (Expense)/Income
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
(in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest income |
|
$ |
1,612 |
|
|
$ |
640 |
|
|
$ |
5,265 |
|
|
$ |
2,163 |
|
Interest expense |
|
|
(18,285 |
) |
|
|
(17,460 |
) |
|
|
(54,773 |
) |
|
|
(38,007 |
) |
Foreign currency transactions |
|
|
(1,107 |
) |
|
|
243 |
|
|
|
(3,642 |
) |
|
|
(6,287 |
) |
(Loss) gain on sale of minority interest |
|
|
- |
|
|
|
(1,516 |
) |
|
|
74 |
|
|
|
(1,516 |
) |
Contingent consideration adjustments |
|
|
200 |
|
|
|
300 |
|
|
|
(250 |
) |
|
|
300 |
|
Other |
|
|
(265 |
) |
|
|
(151 |
) |
|
|
(203 |
) |
|
|
(435 |
) |
Total Other Expense |
|
$ |
(17,845 |
) |
|
$ |
(17,944 |
) |
|
$ |
(53,529 |
) |
|
$ |
(43,782 |
) |
Interest expense recorded during the three and nine months ended February 29, 2024 was the result of debt incurred to fund the 3M transaction. In the first quarter of fiscal 2023, the Company had no debt outstanding. Interest income relates to earnings on our marketable securities and money market account portfolio. Higher balances in money market portfolios with higher yields drove the increase in interest income for the three and nine months ended February 29, 2024. Other (expense) income resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.
Provision for Income Taxes
Income tax benefit was $3.8 million and $3.9 million during the three and nine months ended February 29, 2024, respectively, compared to $10.5 million and $1.3 million during the three and nine months ended February 28, 2023, respectively. The net tax benefit for all comparison periods is primarily related to pre-tax losses due to amortization expense and interest expense from the FSD transaction.
The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of February 29, 2024 and May 31, 2023 are $1.9 million and $1.1 million, respectively. Increases in unrecognized tax benefits are primarily associated with the FSD transaction, including positions for transfer pricing and research and development credits.
Net (Loss) Income
Net loss was $2.0 million and $4.0 million during the three and nine months ended February 29, 2024, respectively, compared to net income of $8.2 million and net loss of $28.4 million during the three and nine months ended February 28, 2023, respectively. The net loss during the three months ended February 29, 2024 compared to net income during the three months ended February 28, 2023 reflects additional expenses to accommodate the integration of the FSD business. The decrease in net loss during the nine months ended February 29, 2024 was primarily the result of higher transaction fees and integration costs in the prior year, which were $55.8 million during the nine months ended February 28, 2023.
31
Non-GAAP Financial Measures
This report includes certain financial information for the Company that differs from what is reported in accordance with GAAP. These non-GAAP financial measures consist of core revenue growth, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share. These non-GAAP financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of the Company, and because these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in industries the Company operates in.
Core revenue growth
We define core revenue growth as net sales for the period excluding the impacts of foreign currency translation rates, the first-year impacts of acquisitions and divestitures, where applicable, and net sales from discontinued product lines. We present core revenue growth because it allows for a meaningful comparison of results across periods without the volatility caused by foreign currency gains or losses, or the incomparability that would be caused by the impact of an acquisition or divestiture.
EBITDA
We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, adjusted for share-based compensation and certain transaction fees and expenses. We present Adjusted EBITDA because it provides an understanding of underlying business performance by excluding the following:
32
Adjusted EBITDA margin
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.
Adjusted Net Income
We define Adjusted Net Income as Net Income, adjusted for share-based compensation, FX translation gain/(loss) on loan revaluation, certain transaction fees and expenses, and other one-time adjustments, all of which are tax effected.
Adjusted Earnings per Share
We define Adjusted Earnings per Share as Adjusted Net Income divided by diluted average shares outstanding.
These non-GAAP financial measures are presented for informational purposes only. Core Revenue Growth, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net income (loss), operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.
The use of the terms EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.
These non-GAAP financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:
A reader should compensate for these limitations by relying primarily on the financial statements of Neogen and using these non-GAAP financial measures only as a supplement to evaluate Neogen’s performance.
For each of these non-GAAP financial measures below, we are providing a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure.
33
Reconciliation between net (loss) income and EBITDA and Adjusted EBITDA and between net (loss) income margin % and Adjusted EBITDA margin % are as follows:
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
(in thousands, except for percentages) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net (loss) income |
|
$ |
(2,022 |
) |
|
$ |
8,190 |
|
|
$ |
(4,006 |
) |
|
$ |
(28,442 |
) |
Net (loss) income margin % |
|
|
-0.9 |
% |
|
|
3.8 |
% |
|
|
-0.6 |
% |
|
|
-4.9 |
% |
Income tax benefit |
|
|
(3,800 |
) |
|
|
(10,450 |
) |
|
|
(3,900 |
) |
|
|
(1,250 |
) |
Depreciation and amortization |
|
|
29,650 |
|
|
|
27,471 |
|
|
|
87,853 |
|
|
|
59,938 |
|
Interest expense, net |
|
|
16,673 |
|
|
|
16,820 |
|
|
|
49,508 |
|
|
|
35,844 |
|
EBITDA |
|
$ |
40,501 |
|
|
$ |
42,031 |
|
|
$ |
129,455 |
|
|
$ |
66,090 |
|
Share-based compensation |
|
|
3,679 |
|
|
|
2,812 |
|
|
|
9,829 |
|
|
|
7,311 |
|
FX transaction loss (gain) on loan and other revaluation (1) |
|
|
638 |
|
|
|
(697 |
) |
|
|
1,350 |
|
|
|
5,092 |
|
Certain transaction fees and integration costs |
|
|
5,451 |
|
|
|
2,890 |
|
|
|
12,090 |
|
|
|
55,754 |
|
Restructuring (2) |
|
|
938 |
|
|
|
— |
|
|
|
3,353 |
|
|
|
— |
|
Contingent consideration adjustments |
|
|
(200 |
) |
|
|
(300 |
) |
|
|
250 |
|
|
|
(300 |
) |
ERP expense (3) |
|
|
1,701 |
|
|
|
— |
|
|
|
3,904 |
|
|
|
— |
|
Discontinued product line expense |
|
|
33 |
|
|
|
3,633 |
|
|
|
53 |
|
|
|
3,633 |
|
Loss (recovery) on sale of minority interest |
|
|
— |
|
|
|
1,516 |
|
|
|
(74 |
) |
|
|
1,516 |
|
Inventory step-up charge |
|
|
— |
|
|
|
(614 |
) |
|
|
— |
|
|
|
3,245 |
|
Adjusted EBITDA |
|
$ |
52,741 |
|
|
$ |
51,271 |
|
|
$ |
160,210 |
|
|
$ |
142,341 |
|
Adjusted EBITDA margin % |
|
|
23.0 |
% |
|
|
23.5 |
% |
|
|
23.3 |
% |
|
|
24.5 |
% |
Adjusted EBITDA increased $1.5 million during the three months ended February 29, 2024 and increased $17.9 million during the nine months ended February 29, 2024. Expressed as a percentage of revenue, adjusted EBITDA was 23.0% and 23.3% during the three and nine months ended February 29, 2024, respectively, compared to 23.5% and 24.5% during the three and nine months ended February 28, 2023, respectively. The lower Adjusted EBITDA margin was driven primarily by higher operating expenses compared to the prior-year periods, reflecting additions to accommodate the integration of the 3M FSD.
34
Reconciliation between net (loss) income and Adjusted Net Income and earnings per share and Adjusted Earnings per Share are as follows:
|
|
Three Months Ended February 29/28, |
|
|
Nine Months Ended February 29/28, |
|
||||||||||
(in thousands, except per share amounts) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net (loss) income |
|
$ |
(2,022 |
) |
|
$ |
8,190 |
|
|
$ |
(4,006 |
) |
|
$ |
(28,442 |
) |
(Loss) earnings per diluted share |
|
$ |
(0.01 |
) |
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.16 |
) |
Amortization of acquisition-related intangibles |
|
|
23,266 |
|
|
|
22,680 |
|
|
|
69,685 |
|
|
|
46,637 |
|
Share-based compensation |
|
|
3,679 |
|
|
|
2,812 |
|
|
|
9,829 |
|
|
|
7,311 |
|
FX transaction loss (gain) on loan and other revaluation (1) |
|
|
638 |
|
|
|
(697 |
) |
|
|
1,350 |
|
|
|
5,092 |
|
Certain transaction fees and integration costs |
|
|
5,451 |
|
|
|
2,890 |
|
|
|
12,090 |
|
|
|
55,754 |
|
Restructuring (2) |
|
|
938 |
|
|
|
— |
|
|
|
3,353 |
|
|
|
— |
|
Contingent consideration adjustments |
|
|
(200 |
) |
|
|
(300 |
) |
|
|
250 |
|
|
|
(300 |
) |
ERP expense (3) |
|
|
1,701 |
|
|
|
— |
|
|
|
3,904 |
|
|
|
— |
|
Discontinued product line expense |
|
|
33 |
|
|
|
3,633 |
|
|
|
53 |
|
|
|
3,633 |
|
Loss (recovery) on sale of minority interest |
|
|
— |
|
|
|
1,516 |
|
|
|
(74 |
) |
|
|
1,516 |
|
Inventory step-up charge |
|
|
— |
|
|
|
(614 |
) |
|
|
— |
|
|
|
3,245 |
|
Other adjustments(4) |
|
|
— |
|
|
|
1,514 |
|
|
|
— |
|
|
|
5,864 |
|
Estimated tax effect of above adjustments (5) |
|
|
(7,046 |
) |
|
|
(15,095 |
) |
|
|
(21,446 |
) |
|
|
(24,864 |
) |
Adjusted Net Income |
|
$ |
26,438 |
|
|
$ |
26,529 |
|
|
$ |
74,988 |
|
|
$ |
75,446 |
|
Adjusted Earnings per Share |
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.35 |
|
|
$ |
0.42 |
|
Adjusted Net Income decreased $0.1 million and $0.5 million, respectively, during the three and nine months ended February 29, 2024. The decreases are driven primarily by higher depreciation expense, partially offset by increases in Adjusted EBITDA.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of Neogen was $168.4 million as of February 29, 2024, compared to $245.6 million as of May 31, 2023. Cash from operating activities was $8.5 million during the nine months ended February 29, 2024 compared to cash for operating activities of $49.9 million during the nine months ended February 28, 2023. The net inflow during the nine months ended February 29, 2024 was primarily the result of fewer transaction fees and lower net loss. Cash for investing activities was $11.8 million during the nine months ended February 29, 2024, which was primarily the result of purchases of property and equipment of $87.2 million, partially offset by proceeds from the sale of marketable securities of $75.3 million. Cash from investing activities was $194.2 million during the nine months ended February 28, 2023. Cash from financing activities was $2.0 million during the nine months ended February 29, 2024 compared to cash for financing activities of $118.3 million during the nine months ended February 28, 2023.
Net accounts receivable balances were $173.6 million as of February 29, 2024 compared to $153.3 million as of May 31, 2023. Days' sales outstanding, a measurement of the time it takes to collect receivables, was 65 days as of February 29, 2024, compared to 57 days as of May 31, 2023 and 62 days as of February 28, 2023.
As part of transition services agreements between the Company and 3M, related to the merger of the Food Safety business, 3M invoiced our customers for products that 3M manufactured and shipped on our behalf through
35
December 2023. We have completed the exit of distribution and back office-related service contracts and currently only have a contract manufacturing agreement in place with 3M for certain products. As of February 29, 2024, there were $5.5 million in customer receivables billed by 3M on our behalf, compared to $57.3 million as of May 31, 2023.
Net inventory was $182.4 million as of February 29, 2024, an increase of $48.6 million, compared to a May 31, 2023 balance of $133.8 million. The higher inventory levels are primarily the result of the Company now stocking FSD products manufactured by 3M.
We expect to spend approximately $130 million in capital expenditures in fiscal year 2024; $100 million of the total is related to our new building, systems implementation and related FSD integration projects.
Debt and Liquidity
On September 1, 2022, Neogen, 3M, and Neogen Food Safety Corporation, a subsidiary of 3M created to carve out 3M’s Food Safety business, closed on the FSD transaction that previously was announced in December 2021, combining 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction.
In June 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650 million and a five-year senior secured revolving facility in the amount of $150 million (collectively, the “Credit Facilities”), which became available in connection with the merger and related transactions. The loan facility was funded to Neogen Food Safety Corporation on August 31, 2022, and upon the effectiveness of the merger on September 1, 2022, became Neogen’s obligation through a non-cash transaction. Financial covenants include maintaining specified levels of funded debt to EBITDA and debt service coverage. The Credit Facilities, together with the Notes described below, represent the financing incurred in connection with the merger of the 3M FSD with Neogen. In accordance with the prepayment feature, the Company paid $100 million of the term loan facility’s principal in fiscal year 2023, in order to decrease the outstanding debt balance.
In July 2022, Neogen Food Safety Corporation closed on an offering of $350 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Neogen Food Safety Corporation to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Neogen Food Safety Corporation did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Neogen Food Safety Corporation’s common stock to 3M stockholders, the Notes were guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its guarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen through a non-cash transaction.
In addition to the 3M transaction described above, our future cash generation and borrowing capacity may not be sufficient to meet cash requirements to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs. However, we continuously monitor and forecast our liquidity situation in light of industry, customer and economic factors, and take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. As a result, we believe that our cash flows from operations, cash on hand, and borrowing capacity will enable us to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development, and execute our strategic plans.
We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.
36
PART I – FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments. Our primary interest rate risk is due to potential fluctuations of interest rates for our variable rate borrowings.
Foreign exchange risk exposure arises because we market and sell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. As such, our operating results are exposed to changes in exchange rates. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection. We use derivative financial instruments to help manage the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the U.S. Our investments in foreign subsidiaries are considered long-term. As discussed in ITEM 1A. RISK FACTORS of our Annual Report on Form 10-K for the year ended May 31, 2023, our financial condition and results of operations could be adversely affected by currency fluctuations.
The following table sets forth the potential loss in future earnings or fair values, resulting from hypothetical changes in relevant market rates or prices:
Risk Category |
|
Hypothetical Change |
|
February 29, 2024 |
|
|
Impact |
|
(in thousands) |
|
|
|
|
|
|
|
|
Foreign Currency—Revenue |
|
10% Decrease in exchange rates |
|
$ |
10,459 |
|
|
Earnings |
Foreign Currency—Hedges |
|
10% Decrease in exchange rates |
|
|
6,509 |
|
|
Fair Value |
Interest Income |
|
10% Decrease in interest rates |
|
|
488 |
|
|
Earnings |
Interest Expense |
|
10% Increase in interest rates |
|
|
2,305 |
|
|
Earnings |
37
PART I – FINANCIAL INFORMATION
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 29, 2024 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive Officer and Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective because of previously reported material weaknesses in our internal control over financial reporting, which we describe in Part II, Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2023.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
As disclosed in Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2023, management identified the following material weaknesses in internal controls over financial reporting during the year ended May 31, 2023: (1) information technology general controls ("ITGCs") in the areas of user access and change management over certain information technology systems that support the Company’s financial reporting process and the manual business process controls dependent on the affected ITGCs, (2) ineffective period-end invoice accrual controls, and (3) ineffective operation of management review controls related to the accounting, valuation and purchase price allocation of the Company’s acquisitions and associated goodwill.
Ongoing Remediation Efforts to Address the Previously Identified Material Weaknesses
As previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2023, management concluded that our internal controls over financial reporting were not effective as of May 31, 2023. Management is in the process of enhancing, and will continue to enhance, the risk assessment process and design and implementation of internal controls over financial reporting. The remediation measures to correct the previously identified material weaknesses include enhancing the design and implementation of existing controls and creating new controls as needed to address identified risks and providing additional training to personnel including the appropriate level of documentation to be maintained to support internal controls over financial reporting.
As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above. When fully implemented and operational, we believe the controls we have designed or plan to design will remediate the control deficiency that has led to the material weaknesses that we have identified. The previously identified material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Controls over Financial Reporting
Other than with respect to the remediation efforts described above in connection with the previously identified material weaknesses, no changes in our control over financial reporting were identified as having occurred during the quarter ended February 29, 2024 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our material pending legal proceedings, see Note 12. “Commitments and Contingencies” of the Notes to interim condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference.
Item 1A. Risk Factors
This Form 10-Q should be read in conjunction with Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2023. There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the year ended May 31, 2023.
Items 2, 3, and 4 are not applicable or removed or reserved and have been omitted.
Item 5. Other Information
During the quarterly period ended February 29, 2024, no director or officer (as defined in SEC Rule 16a-1(f)) of the Company
39
Item 6. Exhibits
(a) Exhibit Index
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
32 |
|
|
|
101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document |
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEOGEN CORPORATION |
(Registrant) |
Dated: April 9, 2024
/s/ John E. Adent |
John E. Adent |
President & Chief Executive Officer |
(Principal Executive Officer) |
Dated: April 9, 2024
/s/ David H. Naemura |
David H. Naemura |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
41
EXHIBIT 31.1
13a. – CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
NEOGEN CORPORATION
CEO CERTIFICATION
I, John E. Adent, certify that:
Dated: April 9, 2024
|
/s/ John E. Adent |
John E. Adent |
President & Chief Executive Officer |
(Principal Executive Officer) |
EXHIBIT 31.2
13a. – CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
NEOGEN CORPORATION
CFO CERTIFICATION
I, David H. Naemura, certify that:
Dated: April 9, 2024
|
/s/ David H. Naemura |
David H. Naemura |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
EXHIBIT 32
18 U.S.C. SECTION 1350 CERTIFICATION
NEOGEN CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q of Neogen Corporation (the “Company”) for the period ended February 29, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John E. Adent, as President & Chief Executive Officer of the Company and I, David H. Naemura, as Chief Financial Officer, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Dated: April 9, 2024
|
/s/ John E. Adent |
John E. Adent |
President & Chief Executive Officer |
(Principal Executive Officer) |
|
/s/ David H. Naemura |
David H. Naemura |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
This certification accompanies the Quarterly Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Neogen Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report), irrespective of any general incorporation language contained in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.