| 1. | Summary of 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 (collectively, the Company), all of which are wholly owned, with the exception of Neogen Latinoamerica S.A.P.I. DE C.V., which is 60% owned and Neogen do Brasil, which is 92% owned. Noncontrolling interest represents the noncontrolling owner’s proportionate share in the equity of the Company’s majority owned subsidiaries. The noncontrolling owner’s proportionate share in the income or losses of the Company’s majority owned subsidiaries is subtracted from or added to, net income to calculate the net income attributable to Neogen Corporation.
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Company 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 possible losses 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 written off to the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable at May 31, 2013. One customer accounted for more than 10% of accounts receivable at May 31, 2012. As of May 31, 2012 the balance due from that customer was $3,785,000, approximately 10% of the total of all outstanding accounts receivable. The activity in the allowance for doubtful accounts was as follows:
| Year ended May 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
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Beginning Balance |
$ | 800,000 | $ | 800,000 | $ | 600,000 | ||||||
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Provision |
193,033 | 90,821 | 446,346 | |||||||||
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Recoveries |
24,029 | 12,211 | 88,175 | |||||||||
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Write-offs, net |
(117,062 | ) | (103,032 | ) | (334,521 | ) | ||||||
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Ending Balance |
$ | 900,000 | $ | 800,000 | $ | 800,000 | ||||||
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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
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:
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Level 1: |
Observable inputs such as quoted prices in active markets; |
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Level 2: |
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
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Level 3: |
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents were $50,032,000 and $49,045,000 at May 31, 2013 and 2012, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meet the Level 1 criteria.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers consisting of short-term domestic certificates of deposit of $13,348,000 and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $21,989,000. Outstanding marketable securities at May 31, 2013 were $35,337,000; there were $19,600,000 marketable securities outstanding at May 31, 2012. These securities are classified as held for sale. The primary objective of the Company’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 values (that approximate carrying value) based on recent trades or pricing models and therefore meet the Level 2 criteria.
Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. The components of inventories were as follows:
| May 31 | ||||||||
| (in thousands) | 2013 | 2012 | ||||||
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Raw materials |
$ | 16,587 | $ | 13,997 | ||||
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Work-in-process |
3,583 | 2,110 | ||||||
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Finished and purchased finished goods |
18,145 | 18,885 | ||||||
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| $ | 38,315 | $ | 34,992 | |||||
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No less frequently than quarterly, inventory is analyzed for slow moving and obsolete inventory and the valuation allowance is adjusted as required. Write offs against the allowance are not separately identified. The valuation allowance for inventory was $1,250,000 and $1,100,000 at May 31, 2013 and 2012, 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 $4,417,000, $3,646,000 and $3,185,000 in 2013, 2012 and 2011, 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 over five to 20 years. The Company 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. If the Company’s qualitative assessment concludes that it is probable that an impairment exists, or the Company skips the qualitative assessment, then the Company performs 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 EBITDA 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 customer based intangibles and other intangible is 12 and 13 years, respectively, at May 31, 2013 and May 31, 2012.
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 2012 and 2011 financial statements have been reclassified to conform to the 2013 presentation.
Stock Options
At May 31, 2013, the Company had stock option plans which are described more fully in Note 5.
The weighted-average fair value per share of stock options granted during 2013, 2012 and 2011, estimated on the date of grant using the Black-Scholes option pricing model, was $13.81, $10.41 and $8.66 respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
| Year ended May 31 | ||||||||||||
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Risk-free interest rate |
1.2 | % | 1.2 | % | 1.7 | % | ||||||
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Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||||
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Expected stock price volatility |
39.2 | % | 36.4 | % | 35.8 | % | ||||||
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Expected option life |
4.0 years | 4.0 years | 4.0 years | |||||||||
The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on historical volatility of 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. The Company recognizes the cost of stock options using the accelerated method over their requisite service periods which the Company has determined to be the vesting periods.
Revenue Recognition
Revenue from products and services is recognized when a purchase order has been received, the product has been shipped or the service has been performed, the sales price is fixed and determinable, and collection of any resulting receivable is probable. To the extent customer payment is received before all recognition criteria has been met, these revenues are initially deferred and later recognized in the period that all recognition criteria has been met. Where right of return exists, allowances are made at the time of sale to reflect expected returns based on historical experience.
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 the Company are recorded in sales and marketing expense; these expenses totaled $6,856,000, $5,940,000 and $5,211,000 in 2013, 2012 and 2011, respectively.
Income Taxes
The Company accounts for income taxes using the 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 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 foreign subsidiaries are comprised of Neogen Europe (wholly-owned subsidiary), Neogen Latinoamerica (60% owned by Neogen) and Neogen do Brasil (92% owned by Neogen). Based on historical experience as well as the Company’s future plans, earnings from these subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’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, 2013 unremitted earnings of the foreign subsidiaries were $13,419,000.
Research and Development Costs
Research and Development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and totaled $1,055,000, $1,001,000 and $677,000 in 2013, 2012 and 2011, 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. The Company’s dilutive potential common shares outstanding during the years result entirely from dilutive stock options and warrants. The following table presents the net income per share calculations:
| Year ended May 31 | ||||||||||||
| (in thousands) | 2013 | 2012 | 2011 | |||||||||
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Numerator for basic and diluted net income per share - Net income attributable to Neogen |
$ | 27,190 | $ | 22,513 | $ | 22,839 | ||||||
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Denominator - Denominator for basic net income per share weighted average shares |
23,845 | 23,466 | 23,007 | |||||||||
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Effect of dilutive stock options and warrants |
482 | 553 | 784 | |||||||||
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Denominator for diluted net income per share |
24,327 | 24,019 | 23,791 | |||||||||
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Net income attributable to Neogen per share |
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Basic |
$ | 1.14 | $ | 0.96 | $ | 0.99 | ||||||
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Diluted |
$ | 1.12 | $ | 0.94 | $ | 0.96 | ||||||
In 2012 and 2011, 52,300 and 12,000, options were excluded from the computations of net income per share as the option exercise prices exceeded the average market price of the common shares. In 2013, no options were excluded as the average market price exceeded the exercise price for all options outstanding.
New Accounting Pronouncements
In June 2011, the FASB issued an accounting standards update titled Presentation of Comprehensive Income. This update eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, must be displayed under either alternative. The Company adopted the update in the first quarter of its fiscal 2013; the adoption affected the presentation of its financial statements, but did not have an impact on the results of the Company’s operations.
In September 2011, the FASB issued an accounting standards update titled Intangibles — Goodwill and Other: Testing Goodwill for Impairment. This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and, in some cases, skip the two-step impairment test. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
In July 2012, the FASB issued an accounting standard update titled Intangibles – Goodwill and Other: Testing Indefinite Lived Intangible Assets for Impairment. This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that the fair value of the intangible amount is less than its carrying amount and, in some cases, skip the quantitative impairment test. This standard is effective for fiscal years beginning after September 15, 2012, and early adoption is permitted. The early adoption of this update did not have a material effect on the Company’s consolidated financial statements.