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Summary of Significant Accounting Policies | 12 Months Ended
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May 31, 2018
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, all of which are wholly-owned as of May 31, 2018. Neogen Latinoamérica was 100% and 90% owned as of May 31, 2018 and 2017. We purchased all shares owned by the minority interest owner on December 31, 2017, which increased our ownership in Neogen Latinoamérica to 100%. For Neogen do Brasil, we purchased the 10% owned by the two minority interest owners on February 28, 2017, which increased our ownership interest to 100%. Non-controlling interest represents the non-controlling owners’ proportionate share in the equity of these subsidiaries; the non-controlling owners’ proportionate share in the income or losses of the subsidiaries is subtracted from, or added to, our 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 December 29, 2017 4-for-3 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 us 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, 2018 or 2017, respectively. The activity in the allowance for doubtful accounts was as follows:
|  | Year ended May 31 |
(in thousands) |  | 2018 |  |  | 2017 |  |  | 2016 |
Beginning Balance |  | $ | 2,000 |  |  | $ | 1,500 |  |  | $ | 1,300 |
Provision |  |  | 152 |  |  |  | 645 |  |  |  | 305 |
Recoveries |  |  | 40 |  |  |  | 25 |  |  |  | 90 |
Write-offs |  |  | (642 | ) |  |  | (170 | ) |  |  | (195 | )
Ending Balance |  | $ | 1,550 |  |  | $ | 2,000 |  |  | $ | 1,500 |
Fair Value of Financial Instruments The carrying amounts of our 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 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. We utilize 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 $83,074,000 and $77,567,000 at May 31, 2018 and 2017, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria. Cash held by foreign subsidiaries was $7,101,000 and $8,132,000 at May 31, 2018 and 2017, respectively. Marketable Securities We have marketable securities held by banks or broker-dealers at May 31, 2018, consisting of short-term domestic certificates of deposit of $27,400,000 and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $100,336,000. Total outstanding marketable securities at May 31, 2018 was $127,736,000; there were $66,068,000 in marketable securities outstanding at May 31, 2017. These securities are classified as available for sale. The primary objective of our 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 or net realizable value, determined on the first-in, first-out method. The components of inventories were as follows:
|  | Year ended May 31 |
(in thousands) |  | 2018 |  |  | 2017 |
Raw Materials |  | $ | 36,702 |  |  | $ | 33,190 |
Work-in-process |  |  | 5,993 |  |  |  | 4,831 |
Finished goods |  |  | 33,310 |  |  |  | 35,123 |
|  | $ | 76,005 |  |  | $ | 73,144 |
Our 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 $2,200,000 and $2,000,000 at May 31, 2018 and 2017, 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 $10,315,000, $8,783,000 and $7,452,000 in fiscal years 2018, 2017 and 2016, 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, generally over 5 to 25 years. We review 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 by performing 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 intangibles was 11 years, at both May 31, 2018 and May 31, 2017, respectively. 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 2017 and 2016 financial statements have been reclassified to conform to the fiscal 2018 presentation. Stock Options At May 31, 2018, we 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 2018, 2017 and 2016, estimated on the date of grant using the Black-Scholes option pricing model, was $14.47, $11.89 and $9.83, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
|  | Year ended May 31 |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Risk-free interest rate |  |  | 1.6% |  |  |  | 1.2% |  |  |  | 1.2% |
Expected dividend yield |  |  | 0.0% |  |  |  | 0.0% |  |  |  | 0.0% |
Expected stock volatility |  |  | 27.7% |  |  |  | 35.2% |  |  |  | 33.3% |
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 our 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. Prior to the fiscal 2017 grants, we recognized the fair value of stock options using the accelerated method over their requisite service periods which we have determined to be the vesting periods; for options granted in fiscal years 2017 and 2018, we recognized the fair value of stock options using the straight-line method. 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 2018, 2017 and 2016. 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 Neogen are recorded in sales and marketing expense; these expenses totaled $12,147,000, $10,185,000 and $9,734,000 in fiscal years 2018, 2017 and 2016, respectively. 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. Our wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Deoxi Biotecnologia Ltda, Rogama Industria e Comercio Ltda, Acumedia do Brasil, Neogen Latinoamérica, Neogen Bio-Scientific Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, and Neogen Australasia Pty Limited. Based on historical experience, as well as our future plans, earnings from these subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate 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, 2018, unremitted earnings of our foreign subsidiaries were $43,784,000. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law, making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed. 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 $1,699,000, $1,643,000 and $1,463,000 in fiscal years 2018, 2017 and 2016, 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. Our 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) |  | 2018 |  |  | 2017 |  |  | 2016 |
Numerator for basic and diluted net income per share - Net Income attributable to Neogen |  | $ | 63,145 |  |  | $ | 43,793 |  |  | $ | 36,564 |
Denominator for basic net income per share - Weighted average shares |  |  | 51,358 |  |  |  | 50,544 |  |  |  | 49,869 |
Effect of dilutive stock options |  |  | 791 |  |  |  | 621 |  |  |  | 631 |
Denominator for diluted net income per share |  |  | 52,149 |  |  |  | 51,165 |  |  |  | 50,500 |
Net income attributable to Neogen per share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 1.23 |  |  | $ | 0.87 |  |  | $ | 0.73 |
Diluted |  | $ | 1.21 |  |  | $ | 0.86 |  |  | $ | 0.72 |
At May 31, 2018, 2017 and 2016, 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. New Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers (Topic 606). 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. In April 2016, the FASB issued Accounting Standards Update No. 2016-10— Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth in ASU 2014-09 related to identifying performance obligations and licensing. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The guidance permits two methods of adoption: a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. Our internal task force identified all revenue streams at each significant subsidiary and reviewed contracts to evaluate the impact of adopting the new standard on our revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements and related disclosures. In our review of contracts in each revenue stream, we noted no material impact in the implementation of the standard. We have determined the impact of adopting the standard on our control framework and noted minimal, insignificant changes to our system and other controls processes. We adopted this standard on June 1, 2018 using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements. We are finalizing the impact of this ASU on the disclosures for our financial statement footnotes and expect the disclosures to be enhanced in the first quarter of fiscal 2019. 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 lessor 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; early adoption is permitted. Modified retrospective application is permitted with certain practical expedients. We will adopt this ASU on June 1, 2019 and are currently in the process of evaluating our lessee and lessor arrangements to determine the impact of this amendment on our consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease arrangements at most of our facilities. 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. We adopted this standard effective June 1, 2017. Adoption of this ASU decreased income tax expense by $4,816,000 in fiscal 2018; refer to Note 6 of our Consolidated Financial Statements for further information. In June 2016, the FASB issued ASU No. 2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturitydebt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. We do not believe adoption of this guidance will have an impact on our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15—Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We will adopt this ASU on June 1, 2019 and are currently evaluating its impact on our consolidated financial statements.

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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 Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI http://asc.fasb.org/topic&trid=2197479 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -URI http://asc.fasb.org/topic&trid=2134479 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 250 -URI http://asc.fasb.org/topic&trid=2122394 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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