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Summary of Significant Accounting Policies | 12 Months Ended
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May 31, 2019
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, 2019. Neogen Latinoamérica was 100% owned as of May 31, 2019 and May 31, 2018; Neogen purchased all shares owned by the minority interest owner on December 31, 2017, which increased its ownership in Neogen Latinoamérica from 90% to 100%. For Neogen do Brasil, the Company purchased the 10% owned by two minority interest owners on February 28, 2017, which increased its 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, Neogen’s 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. Recently Adopted Accounting Standards Revenue Recognition On June 1, 2018, the Company adopted ASU No. 2014-09—Revenue from Contracts with Customers (Topic 606). Refer to the Revenue Recognition section of Note 1 to the consolidated financial statements for further information. Classification of Cash Receipts and Payments 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. The Company adopted this ASU on June 1, 2018; the impact on its consolidated financial statements was immaterial. Recent Accounting Pronouncements Not Yet Adopted Leases 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. Modified retrospective application is required with certain practical expedients. The Company will adopt this ASU on June 1, 2019. The Company has performed a review of its lessee and lessor arrangements, including revenue through leasing programs as well as lease expenses, which primarily result from operating lease arrangements at most of the Company’s facilities. The Company will record a right-of-use (ROU) asset and corresponding lease liability on the balance sheet in the first quarter of fiscal 2020 and has determined the impact of this pronouncement on its consolidated financial condition and results of operations is immaterial. Financial Instruments- Credit Losses 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-maturity debt 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. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements. Fair Value Measurements In August 2018 , the FASB issued ASU 2018-3, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements. Cloud Computing Implementation Cost In August 2018 , the FASB issued ASU 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements. 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. 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 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 are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalent s. Cash and cash equivalents were $41,688,000 and $ 83,074,000 at May 31 , 2019 and 2018, res pectively. T he 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 $8,711,000 and $7,101,000 at May 31, 2019 and 2018, respectively. Marketable Securities The Company has marketable securities held by banks or broker-dealers at May 31, 2019, consisting of short-term domestic certificates of deposit of $17,681,000 and commercial paper and US treasuries rated at least A-1/P-1 (short-term) and A/A2 (long-term) with original maturities between 91 days and two years of $208,155,000. Total outstanding marketable securities at May 31, 2019 was $225,836,000; there were $127,736,000 in marketable securities outstanding at May 31, 2018. These securities are classified as available for sale. The primary objective of management’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. Marketable Securities as of May 31, 2019 and 2018 are listed below by classification and remaining maturities.
|  |  |  | Year ended May 31 |
|  | Maturity |  | 2019 |  |  | 2018 |
US Treasuries |  | 0 – 90 days |  |  | 2,470,000 |  |  |  | 19,910,000 |
|  | 91 – 180 days |  |  | — |  |  |  | — |
|  | 181 days – 1 year |  |  | 2,435,000 |  |  |  | — |
|  | 1 – 2 years |  |  | 2,505,000 |  |  |  | — |
Commercial Paper |  | 0 – 90 days |  |  | 84,338,000 |  |  |  | 47,740,000 |
|  | 91 – 180 days |  |  | 47,960,000 |  |  |  | 32,673,000 |
|  | 181 days – 1 year |  |  | 34,369,000 |  |  |  | — |
|  | 1 – 2 years |  |  | 34,078,000 |  |  |  | — |
Certificates of Deposit |  | 0 – 90 days |  |  | 7,732,000 |  |  |  | 5,446,000 |
|  | 91 – 180 days |  |  | 5,000,000 |  |  |  | 8,747,000 |
|  | 181 days – 1 year |  |  | 750,000 |  |  |  | 13,220,000 |
|  | 1 – 2 years |  |  | 4,199,000 |  |  |  | — |
Total Marketable Securities |  |  |  |  | 225,836,000 |  |  |  | 127,736,000 |
Use of Estimates 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. 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 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, 2019 or 2018, respectively. The activity in the allowance for doubtful accounts was as follows:
|  | Year ended May 31 |
(in thousands) |  | 2019 |  |  | 2018 |  |  | 2017 |
Beginning Balance |  | $ | 1,550 |  |  | $ | 2,000 |  |  | $ | 1,500 |
Provision |  |  | 263 |  |  |  | 152 |  |  |  | 645 |
Recoveries |  |  | 38 |  |  |  | 40 |  |  |  | 25 |
Write-offs |  |  | (151 | ) |  |  | (642 | ) |  |  | (170 | )
Ending Balance |  | $ | 1,700 |  |  | $ | 1,550 |  |  | $ | 2,000 |
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) |  | 2019 |  |  | 2018 |
Raw Materials |  | $ | 41,594 |  |  | $ | 36,702 |
Work-in-process |  |  | 5,581 |  |  |  | 5,993 |
Finished goods |  |  | 38,817 |  |  |  | 33,310 |
|  | $ | 85,992 |  |  | $ | 76,005 |
The Company’s inventories are analyzed for slow moving, expired and obsolete items on a quarterly basis and the valuation allowance is adjusted as required. The valuation allowance for inventory was $2,250,000 and $2,200,000 at May 31, 2019 and 2018, 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 $11,315,000, $10,315,000 and $8,783,000 in fiscal years 2019, 2018 and 2017, 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. Management 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 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 10 years and 11 years at May 31 , 2019 and May 31 , 2018 , 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 2018 and 2017 financial statements have been reclassified to conform with the fiscal 2019 presentation. Equity Compensation Plans At May 31, 2019, the Company had stock option plans which are described more fully in Note 5 to the consolidated financial statements. The weighted-average fair value per share of stock options granted during fiscal years 2019, 2018 and 2017, estimated on the date of grant using the Black-Scholes option pricing model, was $14.91, $14.47 and $11.89, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
|  | Year ended May 31 |
|  | 2019 |  |  | 2018 |  |  | 2017 |
Risk-free interest rate |  |  | 2.6 | % |  |  | 1.6 | % |  |  | 1.2 | %
Expected dividend yield |  |  | 0.0 | % |  |  | 0.0 | % |  |  | 0.0 | %
Expected stock volatility |  |  | 27.0 | % |  |  | 27.7 | % |  |  | 35.2 | %
Expected option life |  |  | 3.5 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. Prior to the fiscal 2017 grants, Neogen recognized the fair value of stock options using the accelerated method over their requisite service periods which management has determined to be the vesting periods; for options granted in fiscal years 2019, 2018 and 2017, the Company recognized the fair value of stock options using the straight-line method. 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 $13,503,000, $ 12,147 ,000 and $ 10,185 ,000 in fiscal years 2019, 2018 and 2017, 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 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. The Company’s wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Rogama Industria e Comercio Ltda, 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 management’s future plans, earnings from these subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, Neogen’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 , 2019 , unremitted earnings of the Company’s foreign subsidiaries were $55,553,000. On December 22 , 2017 , the Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate reduced 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. The U. S. Tax Act also includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries and a deduction for foreign derived intangible income (FDII), both of which became effective for us beginning June 1 , 2018 . See Note 6 to the consolidated financial statements for further information. 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 $1,471,000, $ 1,411,000 and $ 1,426,000 in fiscal years 2019, 2018 and 2017, 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) |  | 2019 |  |  | 2018 |  |  | 2017 |
Numerator for basic and diluted net income per share - Net Income attributable to Neogen |  | $ | 60,176 |  |  | $ | 63,145 |  |  | $ | 43,793 |
Denominator for basic net income per share - Weighted average shares |  |  | 51,888 |  |  |  | 51,358 |  |  |  | 50,544 |
Effect of dilutive stock options |  |  | 537 |  |  |  | 791 |  |  |  | 621 |
Denominator for diluted net income per share |  |  | 52,425 |  |  |  | 52,149 |  |  |  | 51,165 |
Net income attributable to Neogen per share |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 1.16 |  |  | $ | 1.23 |  |  | $ | 0.87 |
Diluted |  | $ | 1.15 |  |  | $ | 1.21 |  |  | $ | 0.86 |
At May 31, 2019, 5,000 shares were excluded from the computation of diluted net income per share, as the option exercise prices exceeded the average market price of the common shares. In 2018 and 2017, all shares were included in the computation. Revenue Recognition On June 1 , 2018 , Neogen adopted ASC Topic 606 —Revenue from Contracts with Customers (Topic 606) . This guidance 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. Neogen adopted this standard using the full retrospective approach. This approach was chosen to provide appropriate comparisons against the Company’s prior year financial statements; accordingly, historical information for the years ended May 31 , 2018 and 2017 has been adjusted to conform to the new standard. The adoption of Topic 606 did not have a material impact on the consolidated financial statements. Under Topic 606, the Company determines the amount of revenue to be recognized through application of the following steps:
| • |  | Identification of the contract with a customer;
| • |  | Identification of the performance obligations in the contract;
| • |  | Determination of the transaction price;
| • |  | Allocation of the transaction price to the performance obligations in the contract; and
| • |  | Recognition of revenue when or as the Company satisfies the performance obligations.
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. The Company generally recognizes revenue at a point in time when all of its performance obligations under the terms of a contract are satisfied. With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met. In certain situations, Neogen provides rebates, marketing support, credits or incentives to select customers, which are accounted for as variable consideration when estimating the amount of revenue to recognize on a contract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available. The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. The Company accounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred. The Company derives revenue from two primary sources — product revenue and service revenue. Product revenue consists primarily of shipments of:
| • |  | Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
| • |  | Consumable products marketed to veterinarians, retailers, livestock producers and animal health product distributors; and
| • |  | Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Revenue for Neogen’s products are recognized and invoiced when the product is shipped to the customer. Service revenue consists primarily of:
| • |  | Genomic identification and related interpretive bioinformatic services; and
| • |  | Other commercial laboratory services.
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 30 to 60 days. The following table presents disaggregated revenue by major product and service categories for the years ended May 31, 2019 and 2018:
|  | Year Ended |
|  |  |  |  | Increase/ |  |  |  |  |  | Increase/ |  |  |  |
|  | May 31, 2019 |  |  | (Decrease) |  |  | May 31, 2018 |  |  | (Decrease) |  |  | May 31, 2017 |
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Food Safety: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Natural Toxins, Allergens & Drug Residues |  | $ | 78,373 |  |  |  | 7 | % |  | $ | 72,962 |  |  |  | 3 | % |  | $ | 70,926 |
Bacterial & General Sanitation |  |  | 41,966 |  |  |  | 10 | % |  |  | 38,156 |  |  |  | 10 | % |  |  | 34,706 |
Culture Media & Other |  |  | 49,857 |  |  |  | 13 | % |  |  | 44,271 |  |  |  | 12 | % |  |  | 39,367 |
Rodenticides, Insecticides & Disinfectants |  |  | 25,584 |  |  |  | 7 | % |  |  | 23,821 |  |  |  | 75 | % |  |  | 13,620 |
Genomics Services |  |  | 17,694 |  |  |  | 16 | % |  |  | 15,267 |  |  |  | 34 | % |  |  | 11,415 |
|  |  | 213,474 |  |  |  | 10 | % |  |  | 194,477 |  |  |  | 14 | % |  |  | 170,034 |
Animal Safety: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Life Sciences |  |  | 7,858 |  |  |  | (25 | )% |  |  | 10,411 |  |  |  | 7 | % |  |  | 9,704 |
Veterinary Instruments & Disposables |  |  | 44,582 |  |  |  | (7 | )% |  |  | 47,749 |  |  |  | 15 | % |  |  | 41,693 |
Animal Care & Other |  |  | 29,941 |  |  |  | (3 | )% |  |  | 30,930 |  |  |  | 11 | % |  |  | 27,891 |
Rodenticides, Insecticides & Disinfectants |  |  | 66,389 |  |  |  | (2 | )% |  |  | 67,646 |  |  |  | (3 | )% |  |  | 69,429 |
Genomics Services |  |  | 51,942 |  |  |  | 11 | % |  |  | 46,717 |  |  |  | 18 | % |  |  | 39,526 |
|  |  | 200,712 |  |  |  | (1 | )% |  |  | 203,453 |  |  |  | 8 | % |  |  | 188,243 |
Total Revenue |  | $ | 414,186 |  |  |  | 4 | % |  | $ | 397,930 |  |  |  | 11 | % |  | $ | 358,277 |
See Note 9 to the consolidated financial statements for disaggregated revenues by geographical location. Revision of Previously Issued Financial Statements The Company has historically classified certain variable consideration components resulting from volume rebates, distributor support, and other marketing discounts as cost of revenues or sales and marketing expense in its consolidated financial statements of income. These amounts should have been classified as contra revenue in product or service revenues. The Company had determined in prior periods that the misstatements were clearly immaterial, individually and in the aggregate, to each of the reporting periods affected. The Company began properly classifying these items as contra revenues beginning in the fiscal year ended May 31, 2019 and has revised the financials for prior fiscal years 2018 and 2017 to conform to the current period presentation. These immaterial adjustments had no impact on the Company’s operating income, income before taxes, net income or reported earnings per share, and no change to stockholders’ equity. Presented below are the effects of the revisions on the line items within our previously issued consolidated statements of income for the years ended May 31, 2018 and 2017. Revised consolidated statements of income related to these periods are presented in this Form 10-K.
|  | Year Ended |  |  | Year Ended |
|  | May 31, 2018 |  |  | May 31, 2017 |
|  | As Previously Reported |  |  | Adjustments |  |  | As Revised |  |  | As Previously Reported |  |  | Adjustments |  |  | As Revised |
|  | (in thousands) |  |  | (in thousands) |
Revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product revenues |  | $ | 335,554 |  |  | $ | (4,266 | ) |  | $ | 331,288 |  |  | $ | 306,512 |  |  | $ | (3,390 | ) |  | $ | 303,148 |
Service revenues |  |  | 66,698 |  |  |  | (56 | ) |  |  | 66,642 |  |  |  | 55,082 |  |  |  | 73 |  |  |  | 55,129 |
Total revenues |  |  | 402,252 |  |  |  | (4,322 | ) |  |  | 397,930 |  |  |  | 361,594 |  |  |  | (3,317 | ) |  |  | 358,277 |
Cost of revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of product revenues |  |  | 174,067 |  |  |  | (342 | ) |  |  | 173,725 |  |  |  | 156,568 |  |  |  | (273 | ) |  |  | 156,295 |
Cost of service revenues |  |  | 37,933 |  |  |  | — |  |  |  | 37,933 |  |  |  | 33,058 |  |  |  | — |  |  |  | 33,058 |
Total cost of revenues |  |  | 212,000 |  |  |  | (342 | ) |  |  | 211,658 |  |  |  | 189,626 |  |  |  | (273 | ) |  |  | 189,353 |
Gross margin |  |  | 190,252 |  |  |  | (3,980 | ) |  |  | 186,272 |  |  |  | 171,968 |  |  |  | (3,044 | ) |  |  | 168,924 |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sales and marketing |  |  | 70,909 |  |  |  | (3,980 | ) |  |  | 66,929 |  |  |  | 62,424 |  |  |  | (3,044 | ) |  |  | 59,380 |
Total operating expenses |  |  | 120,058 |  |  |  | (3,980 | ) |  |  | 116,078 |  |  |  | 107,023 |  |  |  | (3,044 | ) |  |  | 103,979 |
Operating income |  |  | 70,194 |  |  |  | — |  |  |  | 70,194 |  |  |  | 64,945 |  |  |  | — |  |  |  | 64,945 |
The revisions had no impact on our audited consolidated balance sheets as of May 31, 2018 and 2017 and no impact on our audited consolidated statements of equity or audited consolidated statements of cash flows for the fiscal years ended May 31, 2018 and 2017.

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