| Accounting Policies | 1. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying unaudited consolidated financial statements
include the accounts of Neogen Corporation (“Neogen” or
the “Company”) and its wholly owned subsidiaries and
have been prepared in accordance with accounting principles
generally accepted in the United States of America (generally
accepted accounting principles) for interim financial information
and with the instructions to Form 10-Q S-X.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair
presentation have been included in the accompanying unaudited
consolidated financial statements. All intercompany balances and
transactions have been eliminated in consolidation. The results of
operations for the six-month 10-K
Share and per share amounts reflect the December 29,
2017 4-for-3
Recently Adopted Accounting Standards
Revenue Recognition
On June 1, 2018, we adopted ASU
No. 2014-09—Revenue
Classification of Cash Receipts and Payments
In August 2016, the FASB issued ASU
No. 2016-15—Classification 2016-15 2016-15
Recent Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued ASU
No. 2016-02—Leases right-of-use
Financial Instruments- Credit Losses
In June 2016, the FASB issued ASU
No. 2016-13—Measurement held-to-maturity 2016-13
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 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. The carrying value of these
assets approximates fair value due to the short maturity of these
instruments and meets the Level 1 criteria.
Marketable Securities
The Company has marketable securities held by banks or
broker-dealers at November 30, 2018, consisting of short-term
domestic certificates of deposit and commercial paper rated at
least A-2/P-2
ESTIMATES AND ASSUMPTIONS
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.
There have been no significant changes to the critical accounting
policies and estimates disclosed in our Annual Report on
Form 10-K
There were no significant changes to the contractual obligations or
contingent liabilities and commitments disclosed in our Annual
Report on Form 10-K
Accounts Receivable Allowance
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 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.
Inventory
The reserve for obsolete and slow-moving inventory is reviewed at
least quarterly based on an analysis of the inventory, considering
the current condition of the asset as well as other known facts and
future plans. The reserve required to record inventory at lower of
cost or net realizable value is adjusted as conditions change.
Product obsolescence may be caused by shelf-life expiration,
discontinuance of a product line, replacement products in the
marketplace or other competitive situations.
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 non-amortizable
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 indicate that the carrying amount of the
asset may not be recoverable. 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.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to
employees under certain stock purchase plans are recognized as
compensation expense based on their fair value at grant date. The
fair market value of options granted under the Company stock option
plans was estimated on the date of grant using the Black-Scholes
option-pricing model with assumptions for inputs such as interest
rates, expected dividends, volatility measures and specific
employee exercise behavior patterns based on statistical data. Some
of the inputs used are not market-observable and have to be
estimated or derived from available data. Use of different
estimates would produce different option values, which in turn
would result in higher or lower compensation expense recognized. To
value options, several recognized valuation models exist. None of
these models can be singled out as being the best or most correct
one. The model applied by us can handle most of the specific
features included in the options granted, which is the reason for
its use. If a different model were used, the option values could
differ despite using the same inputs. Accordingly, using different
assumptions coupled with using a different valuation model could
have a significant impact on the fair value of employee stock
options. Fair value could be either higher or lower than the number
provided by the model applied and the inputs used. Further
information on our equity compensation plans, including inputs used
to determine the fair value of options, is disclosed in Note 5 to
the unaudited consolidated financial statements.
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 period.
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
reduction 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 one-time
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09—Revenue No. 2016-10— 2014-09
Prior to the adoption, we 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 determined the
impact of adopting the standard on our control framework and noted
minimal, insignificant changes to our system and other controls
processes.
We derive 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 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.
Service revenue consists primarily of:
•
Genomic identification and related interpretive
bioinformatic services; and
•
Other commercial laboratory services.
Revenues for our genomics and commercial laboratory services are
recognized and invoiced when the applicable laboratory service is
performed and the results are conveyed to the customer.
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 our revenue is generated through contracts with our
customers. A performance obligation is a promise in a contract to
transfer a product or service to a customer. We generally recognize
revenue at a point in time when all our 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, we provide rebates, marketing support,
credits or incentives to selected 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 our contracts are generally
satisfied well within one year of the contract inception. In such
cases, we have elected the practical expedient to not adjust the
promised amount of consideration for the effects of a significant
financing component. We have 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 following table presents disaggregated revenue by major product
and service categories for the three and six months ended
November 30, 2018 and 2017:
Three Months
Ended Six Months
Ended
2018 2017 2018 2017
(in
thousands) (in
thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues $ 20,571 $ 18,989 $ 39,409 $ 38,153
Bacterial & General Sanitation 10,822 9,324 21,288 18,443
Culture Media & Other 12,191 11,041 24,408 21,173
Rodenticides, Insecticides & Disinfectants 5,943 6,126 12,569 10,817
Genomics Services 4,223 3,726 8,259 6,911
Animal Safety $ 53,750 $ 49,206 $ 105,933 $ 95,497
Life Sciences $ 1,891 $ 2,394 $ 3,971 $ 4,820
Veterinary Instruments & Disposables 11,683 11,687 22,087 22,174
Animal Care & Other 9,064 8,237 15,617 15,649
Rodenticides, Insecticides & Disinfectants 18,673 17,786 35,664 35,167
Genomics Services 12,037 11,388 23,452 21,600
$ 53,348 $ 51,492 $ 100,791 $ 99,410
Total Revenues $ 107,098 $ 100,698 $ 206,724 $ 194,907
Restatement 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 product revenues
or sales and marketing expense in our 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 three-month period
ended August 31, 2018, the first quarter of the
Company’s current fiscal year, and has revised the prior
year’s quarter and year-to-date
The effects of the revisions on the line items within our unaudited
consolidated statements of income for the three and six months
ended November 30, 2017 are as follows:
Three Months Ended Six Months Ended
As Adjustments As Revised As Adjustments As Revised
(in
thousands) (in
thousands)
Revenues
Product revenues $ 85,590 $ (1,119 ) $ 84,471 $ 166,157 $ (2,141 ) $ 164,016
Service revenues 16,227
— 16,227 30,916 (25 ) 30,891
Total revenues 101,817 (1,119 ) 100,698 197,073 (2,166 ) 194,907
Cost of revenues
Cost of product revenues 43,349 (97 ) 43,252 84,433 (197 ) 84,236
Cost of service revenues 9,197
— 9,197 17,498
— 17,498
Total cost of revenues 52,546 (97 ) 52,449 101,931 (197 ) 101,734
Gross margin 49,271 (1,022 ) 48,249 95,142 (1,969 ) 93,173
Operating expenses
Sales and marketing 17,815 (1,022 ) 16,793 34,838 (1,969 ) 32,869
Total operating expenses 31,273 (1,022 ) 30,251 60,720 (1,969 ) 58,751
Operating income 17,998
— 17,998 34,422
— 34,422
Presented below are the effects of the revisions on the line items
within the previously issued unaudited consolidated statements of
income for the three and nine months ended February 28, 2018
and the consolidated statements of income for the years ended
May 31, 2018 and 2017. Revised consolidated statements of
income related to these periods will be presented in the
Forms 10-Q 10-K
Three Months Ended February 28, 2018 Nine Months Ended February 28, 2018
As Adjustments As Revised As Adjustments As Revised
(in
thousands) (in
thousands)
Revenues
Product revenues $ 78,142 $ (958 ) $ 77,184 $ 244,298 $ (3,098 ) $ 241,200
Service revenues 17,750 (31 ) 17,719 48,667 (56 ) 48,611
Total revenues 95,892 (989 ) 94,903 292,965 (3,154 ) 289,811
Cost of revenues
Cost of product revenues 40,352 (69 ) 40,283 124,785 (265 ) 124,520
Cost of service revenues 10,019
— 10,019 27,517
— 27,517
Total cost of revenues 50,371 (69 ) 50,302 152,302 (265 ) 152,037
Gross margin 45,521 (920 ) 44,601 140,663 (2,889 ) 137,774
Operating expenses
Sales and marketing 17,492 (920 ) 16,572 52,331 (2,889 ) 49,442
Total operating expenses 29,608 (920 ) 28,688 90,328 (2,889 ) 87,439
Operating income 15,913
— 15,913 50,335
— 50,335
Year
Ended Year
Ended
May 31, 2018 May 31, 2017
As Adjustments As As Adjustments As
(in
thousands) (in
thousands)
Revenues
Product revenues $ 335,554 $ (4,266 ) $ 331,288 $ 306,512 $ (3,390 ) $ 303,122
Service revenues 66,698 (56 ) 66,642 55,082 73 55,155
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
unaudited consolidated statements of equity or unaudited
consolidated statements of cash flows for the three and six months
ended November 30, 2017 and the three and nine months ended
February 28, 2018. |
