Investing.com -- On May 2, 2025, Moody’s Ratings confirmed the ratings for Neogen (NASDAQ: NEOG ) Food Safety Corporation, previously known as Garden SpinCo Corporation. The confirmed ratings include the Ba3 Corporate Family Rating (CFR), the Ba3-PD Probability of Default Rating (PDR), and the B2 senior unsecured notes rating. However, the Speculative Grade Liquidity rating was downgraded to SGL-2 from SGL-1, and the outlook was revised to negative from stable.
The revision of the outlook to negative is due to the expectation that the debt/EBITDA ratio will remain above 4 times over the next 12 to 18 months. This forecast takes into account the recently announced sale of Neogen’s cleaners and disinfectants business, which is expected to generate net proceeds of $100 million for debt repayment. An array of factors, including government spending cuts, deregulation, and tariff uncertainties, are expected to lead to more cautious spending by Neogen’s customers. This is predicted to result in below-average top-line growth in the low single digits over the next 12 to 18 months. Neogen is also continuing to face challenges in integrating the 3M Food Safety business, including the lengthy process of transferring Petrifilm manufacturing to its new production facility.
The Ba3 CFR for Neogen reflects its global leadership in food and animal safety products. The company profits from a high proportion of recurring consumable sales that yield attractive margins. Neogen’s customer base is highly diversified, primarily consisting of food processors, contract labs, and other related end-markets. The rising global emphasis on food safety is predicted to drive long-term demand for Neogen’s products.
However, the rating is limited by integration challenges following the 2022 acquisition of 3M Company (NYSE: MMM )’s Food Safety segment. These challenges are expected to continue to limit revenue growth and margin improvement and keep gross debt/EBITDA somewhat high. Neogen also lacks diversification beyond its niche focus on food and animal safety, which exposes it to potential manufacturing problems, product defects, or increasing competition. The company does not have long-term contracts with most customers and delivers goods on a per-order basis.
The SGL-2 Speculative Grade Liquidity Rating indicates the expectation that Neogen’s liquidity will remain good over the next 12 to 18 months. This is based on anticipated cash on hand of over $100 million, positive free cash flow as capital expenditures moderate, and full availability under the recently upsized $250 million revolving credit facility expiring in 2030, once net proceeds from the asset sale are used to repay the $100 million outstanding balance. The credit agreement includes financial maintenance covenants with a maximum net leverage of 4.5x and minimum interest coverage of 2.25x through August 31, 2025, increasing to 2.5x thereafter. Neogen is expected to maintain a sufficient cushion under these covenants.
The negative outlook reflects the expectation for the gross debt/EBITDA ratio to remain above 4 times over the next 12 to 18 months due to ongoing macroeconomic challenges and difficulties related to the integration of the 3M Food Safety business.
Potential factors leading to a ratings upgrade include successful integration of the former 3M Food Safety business, strong organic growth, and a reduction in debt due to solid free cash flow. The ratings could be upgraded if the gross debt/EBITDA ratio is consistently below 3.0x.
Factors that could lead to a downgrade include escalating integration challenges with the former 3M Food Safety business, significant customer attrition or weak end user market conditions, or more aggressive financial policies. A weakening of the company’s liquidity position, including sustained negative free cash flow, could also result in a ratings downgrade. The ratings could be downgraded if the gross debt to EBITDA ratio remains above 4.0x.
Neogen Food Safety Corporation is a subsidiary of the publicly traded Neogen Corporation.
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