| 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, 2021. All intercompany accounts and transactions have been eliminated in consolidation. Share and per share amounts reflect the June 4 , 2021 2-for-1 stock split as if it took place at the beginning of the periods presented. Functional Currency Our functional currency is the U.S. dollar. We translate our non-U.S. Recently Adopted Accounting Standards Financial Instruments—Credit Losses On June 1, 2020, the Company adopted ASU No. 2016-13—Measurement held-to-maturity Fair Value Measurements On June 1, 2020, the Company adopted ASU 2018-13, Cloud Computing Implementation Cost On June 1, 2020, the Company adopted ASU 2018-15, Internal-Use 350-40): Recent Accounting Pronouncements Not Yet Adopted Reference Rate Reform In March 2020, FASB issued Update 2020-04, Income Tax Simplification In December 2019, the Financial Accounting Standards Board (“FASB”) issued Update 2019-12, 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 stockholders’ equity. Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains and losses on our marketable securities. Changes in our Accumulated Other Comprehensive Income (Loss) (“AOCI”) balances, net of tax, were as follows:
(in thousands) Foreign Currency Unrealized Gain on Total AOCI
Balance, May 31, 2019 $ (11,640 ) $ — $ (11,640 )
Other comprehensive income (loss) (8,495 ) 426 (8,069 )
Balance, May 31, 2020 $ (20,135 ) $ 426 $ (19,709 )
Other comprehensive income (loss) 8,602 (268 ) 8,334
Balance, May 31, 2021 $ (11,533 ) $ 158 $ (11,375 )
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 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 $75,602,000 and $66,269,000 at May 31, 2021 and 2020, 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 $15,246,000 and $13,060,000 at May 31, 2021 and 2020, respectively. Marketable Securities The Company has marketable securities held by banks or broker-dealers at May 31, 2021, consisting of short-term domestic certificates of deposit of $5,785,000 and commercial paper and corporate bonds rated at least A-1/P-1 (short-term) and A/A2 (long-term) with original maturities between in marketable securities outstanding at May 31, 2020. 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. As these securities are highly rated and short-term in nature, they have very little credit risk; therefore, the Company does not believe a reserve for expected credit losses on marketable securities is material. 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 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 our consolidated statements of income. Adjustments in the fair value of these assets are recorded in other comprehensive income. Marketable Securities as of May 31, 2021 and 2020 are listed below by classification and remaining maturities .
Year ended May 31
(in thousands) Maturity 2021 2020
US Treasuries 0 - 90 $ — $ —
91 -180 — —
181 days - 1 year — 2,532
1 - 2 years — —
Commercial Paper & Corporate Bonds 0 - 90 days 106,631 133,130
91 - 180 days 78,727 73,824
181 days - 1 year 87,590 43,231
1 - 2 years 26,752 7,839
Certificates of Deposit 0 - 90 days 3,262 1,003
91 - 180 days 1,260 5,184
181 days - 1 year 1,263 6,069
1 - 2 years — 4,592
Total Marketable Securities $ 305,485 $ 277,404
The components of marketable securities as of
(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value
US Treasuries $ — $ — $ — $ —
Commercial Paper & Corporate Bonds 299,524 209 (33 ) 299,700
Certificates of Deposit 5,755 30 — 5,785
Total Marketable Securities $ 305,279 $ 239 $ (33 ) $ 305,485
The components of marketable securities as of May 31, 2020 are as follows:
(in thousands) Amortized Unrealized Unrealized 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 consolidated 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 COVID-19 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. Collateral or other security is generally not required for accounts receivable. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, management considers relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. 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 of accounts receivable at May 31, 2021 or 2020, respectively. The activity in the allowance for doubtful accounts was as follows:
Year ended May 31
(in thousands) 2021 2020 2019
Beginning Balance $ 1,350 $ 1,700 $ 1,550
Provision 239 393 263
Recoveries 139 49 38
Write-offs (328 ) (792 ) (151 )
Ending Balance $ 1,400 $ 1,350 $ 1,700
Inventories Inventories are stated at the lower of cost or net realizable value, determined on the first-in, first-out
Year ended May 31
(in thousands) 2021 2020
Raw Materials $ 47,588 $ 45,058
Work-in-process 6,412 6,887
Finished goods 46,701 43,108
$ 100,701 $ 95,053
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 $3,100,000 and $2,850,000 at May 31, 2021 and 2020, 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 three 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 2021 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, 2021, 2020 and 2019, respectively. The remaining weighted-average amortization period for intangibles was 10 years and 9 years at May 31, 2021 and May 31, 2020, 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, 2021, 2020 and 2019, respectively. Reclassifications Certain immaterial amounts in the fiscal 2020 and 2019 consolidated financial statements have been reclassified to conform with the fiscal 2021 presentation. Equity Compensation Plans At May 31, 2021, 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 2021, 2020 and 2019, estimated on the date of grant using the Black-Scholes option pricing model, was $7.71, $7.78 and $7.46, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
Year ended May 31
2021 2020 2019
Risk-free interest rate 0.2 % 1.9 % 2.6 %
Expected dividend yield 0.0 % 0.0 % 0.0 %
Expected stock volatility 31.3 % 29.4 % 27.0 %
Expected option life 3.25 years 3.5 years 3.5 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 2021, 2020 and 2019, 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. The Company also issues restricted stock units (RSUs), which are described more fully in Note 5 to the consolidated financial statements. The RSUs generally vest over three 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, Quat-Chem Ltd, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, Neogen Bio-Scientific re-invested re-evaluation re-invest 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 $1,687,000, $1,454,000 and $1,471,000 in fiscal years 2021, 2020 and 2019, respectively. Net Income 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) 2021 2020 2019
Numerator for basic and diluted net income per share — Net Income $ 60,882 $ 59,475 $ 60,176
Denominator for basic net income per share — Weighted average shares 106,499 105,100 103,776
Effect of dilutive stock options 621 620 1,074
Denominator for diluted net income per share 107,120 105,720 104,850
Net income attributable to Neogen per share
Basic $ 0.57 $ 0.57 $ 0.58
Diluted $ 0.57 $ 0.56 $ 0.57
At May 31, 2021, no potential shares from option exercises were excluded from the computation of diluted net income per share, as the option exercise prices did not exceed the average market price of the common shares. 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 right-of-use lease liabilities Right-of-use non-current non-current 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 : ,
• 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
• For all asset classes, we elected to not separate non-lease non-lease
• The determination of the discount rate used in a lease is our incremental borrowing rate that is based on our estimate of what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments. Supplemental balance sheet information related to operating leases was as follows:
Year ended May 31
(in thousands) 2021 2020
Rights of use—assets $ 2,477 $ 1,952
Lease liabilities—current 1,285 1,054
Lease liabilities—non-current 1,207 913 The weighted average remaining lease term and weighted average discount rate were as follows:
Year ended May 31
2021 2020
Weighted average remaining lease term 2 years 2.5 years
Weighted average discount rate 2.0% 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:
Year ended May 31
(in thousands) 2021 2020
Operating leases $ 1,352 $ 1,207
Short term leases 134 166
Total lease expense $ 1,486 $ 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 was approximately $1,397,000, and $1,633,000 for the years ended May 31, 2021, 2020 and 2019, respectively. There were non-cash right-of-use Maturities of operating lease liabilities as of May 31, 2021 are as follows:
(in thousands) Amount
Years ending May 31, 202 2 $ 1,313
2023 874
2024 345
2025 42
2026 —
Total lease payments $ 2,574
Less: imputed interest (82 )
Total lease liabilities $ 2,492
Revenue Recognition 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 or 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 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. 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 $15,180,000, $13,514,000 and $13,503,000 in fiscal years 2021, 2020 and 2019, 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. 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, 2021, 2020 and 2019:
Year Ended
(dollars in thousands) May 31, 2021 Change May 31, 2020 Change May 31, 2019
Food Safety:
Natural Toxins, Allergens & Drug Residues $ 76,614 1 % $ 76,207 (3 %) $ 78,373
Bacterial & General Sanitation 44,009 5 % 41,780 (0 %) 41,966
Culture Media & Other 56,922 19 % 47,847 (4 %) 49,857
Rodenticides, Insecticides & Disinfectants 36,542 26 % 28,890 13 % 25,584
Genomics Services 20,157 12 % 17,967 2 % 17,694
$ 234,244 10 % $ 212,691 (0 %) $ 213,474
Animal Safety:
Life Sciences 5,715 (10 % ) 6,322 (20 %) 7,858
Veterinary Instruments & Disposables 48,128 12 % 42,941 (4 %) 44,582
Animal Care & Other 35,897 26 % 28,389 (5 %) 29,941
Rodenticides, Insecticides & Disinfectants 77,458 13 % 68,815 4 % 66,389
Genomics Services 67,017 14 % 59,012 14 % 51,942
$ 234,215 14 % $ 205,479 2 % $ 200,712
Total Revenue $ 468,459 12 % $ 418,170 1 % $ 414,186
See Note 9 to the consolidated financial statements for disaggregated revenues by geographical location. |
