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 not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were

$66,269,000 and $41,688,000 at May 31, 2020 and 2019, respectively.

The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.

Cash held by foreign subsidiaries was $13,060,000 and $8,711,000 at May 31, 2020 and 2019, respectively.

Marketable Securities

The Company has marketable securities held by banks or broker-dealers at May 31, 2020, consisting of short-term domestic certificates of deposit of $16,848,000 and commercial paper and U.S. 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 $260,556,000. Total outstanding marketable securities at May 31, 2020 were $277,404,000; there were $225,836,000 in marketable securities outstanding at May 31, 2019.

Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable security investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable security portfolio. 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

current

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 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. Adjustments in the fair value of these assets are recorded in other comprehensive income.

Marketable Securities as of May 31, 2020 and 2019 are listed below by classification and remaining maturities.


		Year ended May 31
(in thousands)	Maturity	2020		2019
US Treasuries	0 – 90 days	$	—	$	2,470
	91 –180 days		—		—
	181 days –1 year		2,532		2,435
	1 – 2 years		—		2,505

Commercial Paper & Corporate Bonds	0 – 90 days		133,130		84,338
	91 – 180 days		73,824		47,960
	181 days –1 year		43,231		34,369
	1 – 2 years		7,839		34,078

Certificates of Deposit	0 – 90 days		1,003		7,732
	91 – 180 days		5,184		5,000
	181 days –1 year		6,069		750
	1 – 2 years		4,592		4,199

Total Marketable Securities		$	277,404	$	225,836

The components of marketable securities at May 31, 2020 are as follows:


	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
US Treasuries	$	2,502	$	30	$	—		$	2,532
Commercial Paper & Corporate Bonds		257,700		347		(23	)		258,024
Certificates of Deposit		16,648		200		—			16,848

Total Marketable Securities	$	276,850	$	577	$	(23	)	$	277,404

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. We believe that these estimates have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. 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. Though the impact of the

COVID-19

pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. 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 histories 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, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable at May 31, 2020 or 2019, respectively. The activity in the allowance for doubtful accounts was as follows:


	Year ended May 31
(in thousands)	2020			2019			2018
Beginning Balance	$	1,700		$	1,550		$	2,000
Provision		393			263			152
Recoveries		49			38			40
Write-offs		(792	)		(151	)		(642	)

Ending Balance	$	1,350		$	1,700		$	1,550

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)	2020		2019
Raw Materials	$	45,058	$	41,594
Work-in-process		6,887		5,581
Finished goods		43,108		38,817

	$	95,053	$	85,992

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 within cost of sales expense. The valuation allowance for inventory

was $

2,850,000

and $

2,250,000

at May

2020

and

2019

, 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

as incurred

Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, which are generally

seven

years for buildings and improvements and

three

ten

years for furniture, fixtures, machinery and equipment. Depreciation expense was $

11,907,000

, $

11,315,000

and $

10,315,000

in fiscal years

2020

2019

and

2018

, 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

In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to assessing the fair value of all of our reporting units and compare the fair value of the reporting unit to carrying value to determine if any impairment is necessary. Doing so does not preclude us from performing the qualitative assessment in any subsequent period. In the fourth quarter of fiscal 2020, we elected to bypass the qualitative approach that allows the assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and instead proceeded directly to assessing the fair value of all of our reporting units and comparing the fair values of the reporting units to the carrying values to determine if any impairment is necessary

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.

No goodwill impairments were identified during the years ended May 31, 2020, 2019 and 2018, respectively.

The remaining weighted-average amortization period for intangibles was 9 years and 10 years at May 31, 2020 and May 31, 2019, 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.

No impairments of long-lived assets were identified during the years ended May 31, 2020, 2019 and 2018, respectively.

Reclassifications

Certain immaterial amounts in the fiscal 2019 and 2018 financial statements have been reclassified to conform with the fiscal 2020 presentation.

Equity Compensation Plans

At May 31, 2020, 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 2020, 2019 and 2018, estimated on the date of grant using the Black-Scholes option pricing model, was $15.56, $14.91 and $14.47, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:


	Year ended May 31
	2020		2019		2018
Risk-free interest rate		1.9%		2.6%		1.6%
Expected dividend yield		0.0%		0.0%		0.0%
Expected stock volatility		29.4%		27.0%		27.7%
Expected option life		3.5 years		3.5 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. We include recent historical experience in estimating our forfeitures. As employees terminate, grant tranches expire or as forfeitures are known, estimated expense is adjusted to actual. For options granted in fiscal years 2020, 2019 and 2018, the Company recorded charges in general and administrative expense based on the fair value of stock options using the straight-line method over the vesting period, generally five years.

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 Ltd, Quat-Chem Ltd, Abtek (Biologicals) Ltd, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Productos Quimicos Magiar S.A., Neogen Uruguay, Neogen Chile SpA, 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, 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. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

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 within sales and marketing as incurred and totaled

$1,454,000, $1,471,000 and $1,411,000 in fiscal years 2020, 2019 and 2018, 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)	2020		2019		2018
Numerator for basic and diluted net income per share - Net Income attributable to Neogen	$	59,475	$	60,176	$	63,145
Denominator for basic net income per share - Weighted average shares		52,550		51,888		51,358
Effect of dilutive stock options		310		537		791

Denominator for diluted net income per share		52,860		52,425		52,149
Net income attributable to Neogen per share
Basic	$	1.13	$	1.16	$	1.23
Diluted	$	1.13	$	1.15	$	1.21

At May 31, 2020, 28,000 potential shares from option exercises 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. At May 31, 2019, 5

000 potential shares were excluded from the computation. At May 31, 2018, all potential shares were included in the computation.

Leases

On June 1, 2019, we adopted Topic 842 using the prospective approach and did not retrospectively apply to prior periods. Topic 842 requires the Company to 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. Upon adoption of Topic 842, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as

right-of-use

assets and lease liabilities

, each at an approximate balance

2.0

million.

Right-of-use

assets are recorded in other assets on our consolidated balance sheets. Current and

non-current

lease liabilities are recorded in other accruals within current liabilities and other

non-current

liabilities, respectively, on our consolidated balance sheets. 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.

We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all of our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option.

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

•

We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.

•

We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.

•

For all asset classes, we elected to not recognize a

right-of-use

asset and lease liability for short-term leases (i.e. leases with a term of 12 months or less).

•

For all asset classes, we elected to not separate

non-lease

components from lease components to which they relate and have accounted for the combined lease and

non-lease

components as a single lease component.

•

The determination of the discount rate used in a lease is our incremental borrowing rate that is based on what we would normally pay to borrow on a collateralized basis over a similar term

for

an amount equal to the lease payments.

Supplemental balance sheet information related to operating leases was as follows:


(in thousands)	May 31, 2020
Right of use – assets	$	1,952
Lease liabilities – current		1,054
Lease liabilities – non-current		913

The weighted average remaining lease term and weighted average discount rate were as follows:


	May 31, 2020
Weighted average remaining lease term		2.5 years
Weighted average discount rate		3.2	%

Operating lease expenses are classified as cost of revenues or operating expenses on the consolidated statements of income. The components of lease expense were as follows:


(in thousands)	Year Ended May 31, 2020
Operating leases	$	1,207
Short term leases		166

Total lease expense	$	1,373

Cash paid for amounts included in the measurement of lease liabilities for operating leases included in cash flows from operations on the statement of cash flows were approximately $1,178,000 for the year ended May 31, 2020. There were no

non-cash

additions to

right-of-use

assets obtained from new operating lease liabilities for the year ended May 31, 2020.

Undiscounted fut

re minimum lease payments as of May 31, 2020 were as follows:


(in thousands)	Amount
Years ending May 31, 2021	$	1,080
2022		546
2023		286
2024		141
2025 and thereafter		41

Total lease payments		2,094
Less: imputed interest		(112	)

Total lease liabilities	$	1,982

At May 31, 2019, under ASC 840, Leases, the minimum annual rental payments under our lease agreements were as follows: $1,112,000 in 2020; $810,000 in 2021; $297,000 in 2022; $101,000 in 2023; and none thereafter.

Revenue Recognition

On June 1, 2018, Neogen adopted ASC Topic 606—Revenue from Contracts with Customers (Topic 606) using the full retrospective approach.

We determine 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. We generally recognized revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect 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.

Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method, for incentives that are offered to individual customers, and the expected-value method, for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.

The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In suc

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. We account for shipping and handling for products as a fulfillment activity when goods are shipped. 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 $

13,514,000

, $

13,503,000

and $

12,147,000

in fiscal years 2020, 2019 and 2018, respectively. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our 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.

se 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, 2020, 2019 and 2018:


	Year Ended
			Increase/					Increase/
(dollars in thousands)	May 31, 2020		(Decrease)			May 31, 2019		(Decrease)			May 31, 2018
Food Safety:

Natural Toxins, Allergens & Drug Residues	$	76,207		(3	)%	$	78,373		7	%	$	72,962
Bacterial & General Sanitation		41,780		(0	)%		41,966		10	%		38,156
Culture Media & Other		47,847		(4	)%		49,857		13	%		44,271
Rodenticides, Insecticides & Disinfectants		28,890		13	%		25,584		7	%		23,821
Genomics Services		17,967		2	%		17,694		16	%		15,267

		212,691		(0	)%		213,474		10	%		194,477
Animal Safety:

Life Sciences		6,322		(20	)%		7,858		(25	)%		10,411
Veterinary Instruments & Disposables		42,941		(4	)%		44,582		(7	)%		47,749
Animal Care & Other		28,389		(5	)%		29,941		(3	)%		30,930
Rodenticides, Insecticides & Disinfectants		68,815		4	%		66,389		(2	)%		67,646
Genomics Services		59,012		14	%		51,942		11	%		46,717

		205,479		2	%		200,712		(1	)%		203,453

Total Revenue	$	418,170		1	%	$	414,186		4	%	$	397,930

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. We 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 revised the financials for fiscal year 2018 to conform to the current period presentation. These immaterial adjustments had no impact on Neogen’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 year ended May 31, 2018. Revised consolidated statements of income related to these periods are presented in this Form 10-K.


	Year Ended May 31, 2018
	As Previously Reported		Adjustments			As Revised
(in thousands)
Revenues
Product revenues	$	335,554	$	(4,266	)	$	331,288
Service revenues		66,698		(56	)		66,642

Total revenues		402,252		(4,322	)		397,930
Cost of revenues
Cost of product revenues		174,067		(342	)		173,725
Cost of service revenues		37,933		—			37,933

Total cost of revenues		212,000		(342	)		211,658

Gross margin		190,252		(3,980	)		186,272
Operating expenses
Sales and marketing		70,909		(3,980	)		66,929

Total operating expenses		120,058		(3,980	)		116,078

Operating income		70,194		—			70,194

The revisions had no impact our audited consolidated statement of equity or audited consolidated statement of cash flows for the year ended May 31, 2018.