Neogen Corp. rating lowered to ’B+’ from ’BB-’ by S&P Global

Investing.com -- S&P Global Ratings has downgraded Neogen Corp.’s credit rating to ’B+’ from ’BB-’ due to elevated leverage, while maintaining a stable outlook.

The ratings agency cited Neogen’s adjusted leverage of 6.6x as of August 31, significantly exceeding the previous downgrade trigger of 4x. The company’s acquisition of 3M’s food safety business has continued to strain operating performance, with over $50 million in transaction, integration, restructuring, and other one-time costs during the fiscal year ended May 31, 2025.

These expenses weakened Neogen’s EBITDA margin to 15.8%, below S&P’s previous expectation of 18.1%. The costs have persisted longer than anticipated, with $18 million incurred in the first quarter of fiscal 2026, prompting S&P to revise its forecast for significant margin improvement this year.

S&P now projects minimal EBITDA margin improvement to about 16% in 2026, rising to approximately 20% in 2027. Neogen expects its recently announced headcount reduction to save an additional $20 million in run rate labor costs.

The company faces multiple macroeconomic challenges, including lower food production volumes, destocking due to economic uncertainty, inflationary freight and distribution costs, tariffs, and weakness in agricultural markets. These factors have constrained revenue and margins, contributing to underperformance in recent quarters.

Despite divesting its cleaners and disinfectants business in the first quarter of 2026 for about $120 million and using $100 million of the proceeds to repay debt, S&P expects Neogen’s adjusted leverage to remain above 4x. The company is also in discussions to sell its Genomics business, with proceeds estimated at a minimum of $100 million to be used for further debt reduction.

S&P projects that adjusted leverage will improve to approximately 5.6x by fiscal year-end and to 4.4x in 2027. The divested businesses generate about $150 million in combined revenue, with lower EBITDA margins than Neogen’s remaining operations.

The ratings agency expects Neogen to generate positive free operating cash flow (FOCF) in 2026, following two years of material outflow driven by elevated capital spending. Capital expenditure is projected to decrease from about $105 million in 2025 to $50 million in 2026 and $35 million in 2027 as the company completes construction of a new facility for in-house Petrifilm production.

S&P forecasts FOCF of approximately $25 million in 2026 and $50 million in 2027. While cash is expected to gradually accumulate on the balance sheet, S&P does not assume additional debt reduction beyond the divestitures.

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