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Summary of Significant Accounting Policies | 12 Months Ended
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May 31, 2016
Summary of Significant Accounting Policies |
1. | Summary of Significant Accounting Policies
Nature of Operations Neogen Corporation develops, manufactures and markets a diverse line of products and services dedicated to food and animal safety. Basis of Consolidation The consolidated financial statements include the accounts of Neogen Corporation and its subsidiaries (collectively, the Company), all of which are wholly owned, with the exception of Neogen Latinoamerica and Neogen do Brasil, which are each 90% owned as of May 31, 2016 and 2015, respectively. The Company made an additional capital contribution on December 31, 2013 which increased its ownership interest in Neogen Latinoamerica from 60% to 90%. Non-controlling interest represents the non-controlling owner’s proportionate share in the equity of these two subsidiaries; the non-controlling owner’s proportionate share in the income or losses of the subsidiaries is subtracted from, or added to, Company net income to calculate the net income attributable to Neogen Corporation. All intercompany accounts and transactions have been eliminated in consolidation. Share and per share amounts reflect the October 30, 2013 3-for-2 stock split as if it took place at the beginning of the period presented. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Significant estimates impacting the accompanying consolidated financial statements include the allowance for uncollectible accounts receivable, inventory valuation and intangible assets. Comprehensive Income Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments. Accounts Receivable and Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable at May 31, 2016 or 2015, respectively. The activity in the allowance for doubtful accounts was as follows:
|  | Year ended May 31 |
(in Thousands) |  | 2016 |  |  | 2015 |  |  | 2014 |
Beginning Balance |  | $ | 1,300 |  |  | $ | 1,200 |  |  | $ | 900 |
Provision |  |  | 305 |  |  |  | 337 |  |  |  | 367 |
Recoveries |  |  | 90 |  |  |  | 92 |  |  |  | 8 |
Write-offs |  |  | (195 | ) |  |  | (329 | ) |  |  | (75 | )
Ending Balance |  | $ | 1,500 |  |  | $ | 1,300 |  |  | $ | 1,200 |
Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments. Fair Value Measurements 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.
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 90 days or less. Cash and cash equivalents were $55,257,000 and $66,061,000 at May 31, 2016 and 2015, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meet the Level 1 criteria. Cash held by foreign subsidiaries was $5,320,000 and $13,277,000 at May 31, 2016 and 2015, respectively. Marketable Securities The Company has marketable securities held by banks or broker-dealers at May 31, 2016 consisting of short-term domestic certificates of deposit of $25,873,000 and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $26,666,000. Outstanding marketable securities at May 31, 2016 were $52,539,000; there were $48,103,000 in marketable securities outstanding at May 31, 2015. These securities are classified as available for sale. The primary objective of the Company’s short-term investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value (that approximates cost) based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within Other Income on the income statement. Inventories Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. The components of inventories were as follows:
|  | May 31 |
(in thousands) |  | 2016 |  |  | 2015 |
Raw materials |  | $ | 29,501 |  |  | $ | 21,605 |
Work-in-process |  |  | 4,498 |  |  |  | 3,972 |
Finished and purchased finished goods |  |  | 30,372 |  |  |  | 26,024 |
|  | $ | 64,371 |  |  | $ | 51,601 |
The Company’s inventories are analyzed for slow moving, expired and obsolete items no less frequently than quarterly and the valuation allowance is adjusted as required. The valuation allowance for inventory was $1,550,000 at both May 31, 2016 and 2015, respectively. Property and Equipment Property and equipment is stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, which are generally seven to 39 years for buildings and improvements and three to ten years for furniture, fixtures, machinery and equipment. Depreciation expense was $7,452,000, $6,318,000 and $5,383,000 in fiscal years 2016, 2015 and 2014, respectively. 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. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants not-to-compete and patents. Amortizable intangible assets are amortized on either an accelerated or a straight-line basis over 5 to 25 years. The Company reviews the carrying amounts of goodwill and other non-amortizable intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired. If the Company’s qualitative assessment concludes that it is more likely than not that an impairment exists, or the Company skips the qualitative assessment, then the Company performs a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable earnings multiples of peer companies, such assets are reduced to their estimated fair value and a charge is made to operations. The remaining weighted-average amortization period for customer-based intangibles and other intangibles are both 12 years, respectively, at May 31, 2016 and May 31, 2015. 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 are less than the carrying value of the asset. 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. Reclassifications Certain amounts in the fiscal 2015 and 2014 financial statements have been reclassified to conform to the fiscal 2016 presentation. Stock Options At May 31, 2016, the Company had stock option plans which are described more fully in Note 5. The weighted-average fair value per share of stock options granted during fiscal years 2016, 2015 and 2014, estimated on the date of grant using the Black-Scholes option pricing model, was $13.11, $11.91 and $9.87, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
|  | Year ended May 31 |
|  | 2016 |  |  | 2015 |  |  | 2014 |
Risk-free interest rate |  |  | 1.2% |  |  |  | 1.2% |  |  |  | 0.8% |
Expected dividend yield |  |  | 0% |  |  |  | 0% |  |  |  | 0% |
Expected stock price volatility |  |  | 33.3% |  |  |  | 36.2% |  |  |  | 33.1% |
Expected option life |  |  | 4.0 years |  |  |  | 4.0 years |  |  |  | 4.0 years |
The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on historical volatility of the Company’s stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. The Company recognizes the fair value of stock options using the accelerated method over their requisite service periods which the Company has determined to be the vesting periods. Revenue Recognition Revenue from products and services is recognized when the product has been shipped or the service performed, the sales price is fixed and determinable, and collection of any receivable is probable. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred and later recognized in the period that all recognition criteria have been met. Customer credits for sales returns, pricing and other disputes, and other related matters (including volume rebates offered to certain distributors as marketing support) represent approximately 3% of reported net revenue in fiscal years 2016, 2015 and 2014. Shipping and Handling Costs Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by the Company are recorded in sales and marketing expense; these expenses totaled $9,734,000, $8,648,000 and $7,497,000 in fiscal years 2016, 2015 and 2014, respectively. Income Taxes The Company accounts 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 carry forwards 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. The Company’s foreign subsidiaries are comprised of Neogen Europe (wholly-owned subsidiary), Lab M Holdings (wholly-owned subsidiary), Neogen Latinoamerica (90% owned subsidiary), Neogen do Brasil (90% owned subsidiary), Neogen Bio-Scientific Technology (Shanghai) Co (wholly-owned subsidiary), Neogen Food and Animal Security (India) (wholly-owned subsidiary), Neogen Canada (wholly-owned subsidiary) and Deoxi Biotecnologia Ltda (wholly-owned subsidiary). Based on historical experience, as well as the Company’s future plans, earnings from these subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’s domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, the Company evaluates the current business environment and whether any new events or other external changes might require a re-evaluation of the decision to indefinitely re-invest foreign earnings. At May 31, 2016, unremitted earnings of the foreign subsidiaries were $27,880,000. Research and Development Costs Research and development costs, which consist primarily of compensation costs, administrative expenses and new product development, among other items, are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred and totaled $1,463,000, $1,371,000 and $1,344,000 in fiscal years 2016, 2015 and 2014, respectively. Net Income Attributable to Neogen per Share Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding. The Company’s dilutive potential common shares outstanding during the years result entirely from dilutive stock options. The following table presents the net income per share calculations:
|  | Year ended May 31 |
(in thousands, except per share) |  | 2016 |  |  | 2015 |  |  | 2014 |
Numerator for basic and diluted net income per share - Net income attributable to Neogen |  | $ | 36,564 |  |  | $ | 33,526 |  |  | $ | 28,158 |
Denominator for basic net income per share - Weighted average shares |  |  | 37,402 |  |  |  | 36,953 |  |  |  | 36,511 |
Effect of dilutive stock options |  |  | 473 |  |  |  | 491 |  |  |  | 756 |
Denominator for diluted net income per share |  |  | 37,875 |  |  |  | 37,444 |  |  |  | 37,267 |
Net income attributable to Neogen per share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.98 |  |  | $ | 0.91 |  |  | $ | 0.77 |
Diluted |  | $ | 0.97 |  |  | $ | 0.90 |  |  | $ | 0.76 |
At both May 31, 2016 and 2015, the market price of the common stock exceeded the option exercise price for all outstanding options; therefore, no shares were excluded from the diluted net income per share computation. At May 31, 2014, 48,716 shares were excluded from the computation, as the option exercise prices exceeded the average market price of the common shares. On October 30, 2013, the Company paid a 3-for-2 stock split effected in the form of a dividend of its common stock. All share and per share amounts, with the exception of par value per share, have been adjusted to reflect the stock split as if it had taken place at the beginning of the period presented. The common stock and additional paid-in capital accounts at May 31, 2013 reflect the retroactive capitalization of the 3-for-2 stock split. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued a new standard on revenue recognition. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and the change will be presented retrospectively. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this standard on our consolidated financial statements. In November 2015, the FASB issued ASU 2015-17—Balance Sheet Classification of Deferred Taxes. As part of the FASB’s accounting simplification initiative, ASU 2015-17 removes the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Instead, the update requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. ASU 2015-17 is effective for entities for fiscal years beginning after December 15, 2016, with retrospective application to all periods presented. The Company is currently evaluating the effects of ASU 2015-17 on our consolidated balance sheet and statements of income. In September 2015, the FASB issued ASU 2015-16—Simplifying the Accounting for Measurement -Period Adjustments. Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for public companies for periods beginning after December 15, 2015. The Company is currently evaluating the impact of adopting this guidance. In July 2015, the FASB issued ASU No. 2015-11—Inventory: Simplifying the Measurement of Inventory. The update requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the impact of ASU 2015-11 on our consolidated financial condition and results of operations. In February 2016, the FASB issued ASU No. 2016-02—Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospective application is permitted with certain practical expedients. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2016-02 on our consolidated financial condition and results of operations. In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2016-09 on our consolidated financial condition and results of operations.

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- Definition The entire disclosure for the general note to the financial statements for the reporting entity which may include, descriptions of the basis of presentation, business description, significant accounting policies, consolidations, reclassifications, new pronouncements not yet adopted and changes in accounting principles. + References No definition available. + Details
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