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FORM 10-Q

United States

Securities and Exchange Commission

Washington, D. C. 20549

 

 

 (Mark One)

 

 

 

X

Quarterly Report Pursuant to Section 13 or 15(d)

 

 

 

of the Securities Exchange Act of 1934

 

       
       
    For the quarterly period ended: August 31, 2014  
       
    OR  
  _ Transition Report Pursuant to Section 13 or 15(d)  
    of the Securities Exchange Act of 1934  

 

Commission File Number: 0-14820

 

IMMUCOR, INC.

(Exact name of registrant as specified in its charter)

 

 

Georgia   

22-2408354 

 

 

(State or other jurisdiction of

(I.R.S. Employer

 

 

incorporation or organization) 

Identification No.)

 

 

3130 Gateway Drive Norcross, Georgia 30071

(Address of principal executive offices)     (Zip Code)

 

Registrant's telephone number: (770) 441-2051

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes     No X

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    

 

Yes X     No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  

Accelerated filer   

 

 

Non-accelerated filer      X

Smaller reporting company 

(do not check if smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes     No X

 

As of November 30, 2012, there was no established public trading market for the Company’s common stock; therefore, the aggregate market value of the common stock is not determinable.

 

As of October 10, 2014, there were 100 shares of common stock outstanding.

  

 
 

 

 

IMMUCOR, INC. AND SUBSIDIARIES

 

QUARTERLY FINANCIAL STATEMENTS

 

INDEX

 

 

 

PART I. FINANCIAL INFORMATION
 

Item 1.

Consolidated Financial Statements:

   

Consolidated Balance Sheets (unaudited, except for May 31, 2014)

 

Consolidated Statements of Operations (unaudited)

 

Consolidated Statements of Comprehensive Loss (unaudited)

 

Consolidated Statements of Cash Flows (unaudited)

 

Notes to Consolidated Financial Statements (unaudited)

 
 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations                     

   

Item 3.

Quantitative and Qualitative Disclosures about Market Risk     

   

Item 4.

Controls and Procedures               

   
   
PART II. OTHER INFORMATION
   

Item 1.

Legal Proceedings     

   

Item 1A.

Risk Factors

   

Item 6.

Exhibits      

   
   
  SIGNATURES

 

 
2

 

 

ITEM 1. Consolidated Financial Statements

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(Amounts in thousands, except share data)

 

   

August 31, 2014

   

May 31, 2014

 
   

(Unaudited)

         

ASSETS

               
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 17,355       23,621  

Trade accounts receivable, net of allowance for doubtful accounts of $954 and $898 at August 31, 2014 and May 31, 2014, respectively

    71,777       69,629  

Inventories

    48,886       49,151  

Deferred income tax assets, current portion

    8,268       8,251  

Prepaid expenses and other current assets

    11,167       12,582  

Total current assets

    157,453       163,234  
                 

PROPERTY AND EQUIPMENT, net

    75,794       76,311  

GOODWILL

    850,268       851,563  

INTANGIBLE ASSETS, net

    678,401       692,870  

DEFERRED FINANCING COSTS, net

    31,467       33,116  

OTHER ASSETS

    7,449       7,320  

Total assets

  $ 1,800,832       1,824,414  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Accounts payable

  $ 17,761       15,665  

Accrued interest and interest rate swap liability

    8,524       19,605  

Accrued expenses and other current liabilities

    23,617       23,716  

Income taxes payable

    4,183       4,927  

Deferred revenue, current portion

    3,080       2,813  

Current portion of long-term debt, net of debt discounts

    4,570       4,591  

Total current liabilities

    61,735       71,317  
                 

LONG-TERM DEBT, net of debt discounts

    1,036,184       1,037,183  

DEFERRED REVENUE

    74       86  

DEFERRED INCOME TAX LIABILITIES

    219,336       223,379  

OTHER LONG-TERM LIABILITIES

    24,095       23,833  

Total liabilities

    1,341,424       1,355,798  

COMMITMENTS AND CONTINGENCIES (Note 17)

               

SHAREHOLDERS' EQUITY:

               

Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of August 31, 2014 and May 31, 2014, respectively

    -       -  

Additional paid-in capital

    753,666       753,147  

Accumulated deficit

    (276,743 )     (271,264 )

Accumulated other comprehensive loss

    (17,515 )     (13,267 )

Total shareholders' equity

    459,408       468,616  

Total liabilities and shareholders' equity

  $ 1,800,832       1,824,414  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

  

 
3

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands)

(Unaudited)

 

   

Three Months Ended

 
   

August 31

 
   

2014

   

2013

 
                 

NET SALES

  $ 102,441       96,044  

COST OF SALES (exclusive of amortization shown separately below)

    36,827       36,051  

GROSS MARGIN

    65,614       59,993  
                 

OPERATING EXPENSES

               

Research and development

    7,078       8,130  

Selling and marketing

    15,056       14,292  

Distribution

    5,040       4,719  

General and administrative

    10,884       10,975  

Amortization expense

    13,682       13,207  

Acquisition-related items

    -       (1,320 )

Total operating expenses

    51,740       50,003  
                 

INCOME FROM OPERATIONS

    13,874       9,990  
                 

NON-OPERATING (EXPENSE) INCOME

               

Interest income

    56       9  

Interest expense

    (22,298 )     (22,178 )

Other, net

    76       (216 )

Total non-operating expense

    (22,166 )     (22,385 )
                 

LOSS BEFORE INCOME TAXES

    (8,292 )     (12,395 )

BENEFIT FOR INCOME TAXES

    (2,813 )     (4,635 )

NET LOSS

  $ (5,479 )     (7,760 )

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
4

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


(in thousands)

(Unaudited)

 

   

Three Months Ended

 
   

August 31

 
   

2014

   

2013

 
                 
                 

NET LOSS

  $ (5,479 )     (7,760 )
                 

OTHER COMPREHENSIVE (LOSS) INCOME, net of tax:

               

Foreign currency translation adjustment

    (4,365 )     1,385  
                 

Changes in fair value of cash flow hedges:

               

Portion of cash flow hedges recognized in other comprehensive loss

    249       518  

Less: reclassification adjustment for losses included in net income

    (132 )     (193 )

Net changes in fair value of cash flow hedges

    117       325  
                 

OTHER COMPREHENSIVE (LOSS) INCOME

    (4,248 )     1,710  
                 

COMPREHENSIVE LOSS

  $ (9,727 )     (6,050 )

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

  

 
5

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)

(Unaudited)

 

   

Three Months Ended

 
   

August 31

 
   

2014

   

2013

 

OPERATING ACTIVITIES:

               

Net loss

  $ (5,479 )     (7,760 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    18,395       17,579  

Noncash interest expense

    2,422       2,203  

Inventory fair value adjustment

    -       2,243  

Loss on disposition and retirement of fixed assets

    47       -  

Provision for doubtful accounts

    56       85  

Share-based compensation expense

    518       448  

Deferred income taxes

    (4,035 )     (5,935 )

Change in fair value of contingent consideration

    -       (1,320 )

Changes in operating assets and liabilities, net of effects of acquisitions:

               

Accounts receivable, trade

    (3,295 )     1,877  

Income taxes

    71       (34 )

Inventories

    (1,764 )     (5,023 )

Other assets

    555       (1,583 )

Accounts payable

    2,119       5,414  

Deferred revenue

    288       241  

Accrued expenses and other liabilities

    (10,204 )     (12,707 )

Cash used in operating activities

    (306 )     (4,272 )
                 

INVESTING ACTIVITIES:

               

Purchases of property and equipment

    (3,285 )     (963 )

Receipt from acquisition of business related to finalizing certain working capital adjustments

    -       1,116  

Acquisitions of businesses, net of cash acquired

    (241 )     -  

Cash (used in) provided by investing activities

    (3,526 )     153  
                 

FINANCING ACTIVITIES:

               

Repayments of long-term debt

    (1,664 )     (1,673 )

Proceeds from Revolving Facility

    8,000       -  

Repayments of Revolving Facility

    (8,000 )     -  

Cash used in financing activities

    (1,664 )     (1,673 )
                 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

    (770 )     406  

DECREASE IN CASH AND CASH EQUIVALENTS

    (6,266 )     (5,386 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    23,621       29,388  

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 17,355       24,002  
                 

SUPPLEMENTAL INFORMATION:

               

Income taxes paid, net of refunds

  $ 933       1,215  

Interest paid

    30,529       31,116  

NON-CASH INVESTING AND FINANCING ACTIVITIES:

               

Movement from inventory to property and equipment of instruments placed on rental agreements

  $ 1,717       2,775  

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 
6

 

 

IMMUCOR, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

NATURE OF BUSINESS AND BASIS OF PRESENTATION

  

Nature of Business

 

Immucor, Inc. (“Immucor”) and its subsidiaries (collectively, the “Company”) develops, manufactures and sells transfusion and transplantation diagnostics products used by hospitals, donor centers and reference laboratories around the world. Our products are used in a number of tests performed in the typing and screening of blood, organs or stem cells to identify certain properties of the cell and serum components of human blood and tissue to ensure donor-recipient compatibility for blood transfusion, and organ transplantations. The Company operates manufacturing facilities in North America with both direct affiliate offices and third-party distribution arrangements worldwide.

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission’s (“SEC”) instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Company's interim results are not necessarily indicative of the Company's expected full year results. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and related notes for the year ended May 31, 2014, included in the Company’s Annual Report on Form 10-K filed with the SEC on August 26, 2014.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of Immucor and all its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. There are no other entities controlled by the Company, either directly or indirectly.

 

 

Impact of Recently Issued Accounting Standards –

 

Accounting Changes Not Yet Adopted

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) on stock-based compensation, ASU 2014-12, Compensation – Stock Compensation, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (“ASU 2014-12”).  The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which corresponds to the Company’s first quarter of fiscal 2017. Earlier adoption is permitted. The Company is evaluating the effect of adoption of ASU 2014-12 on its consolidated financial statements.

 

In June 2014, the FASB issued a standard on development stage entities, 2014-10, Development Stage Entities, Elimination of Certain Financial Reporting Requirements Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation (“ASU 2014-10”), which removes the incremental financial reporting requirements for development stage entities.  This Update affects entities that are development stage entities as defined under U.S. GAAP, and may also affect the consolidation decisions for a reporting entity that has an interest in an entity that is a development stage entity. The amendments made by ASU 2014-10 are effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2014, which corresponds with the Company’s first quarter of fiscal 2016.  Earlier adoption is permitted. The Company is evaluating the effect of adoption of ASU 2014-10 on its consolidated financial statements.

  

 
7

 

 

In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This standard outlines a single comprehensive model for companies 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 revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. The Company will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, which corresponds to the Company’s first quarter of fiscal 2018. No early adoption is permitted under this standard, and it is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of the adoption of ASU 2014-09 on its consolidated financial statements.

 

 

2.

BUSINESS COMBINATIONS

 

Business combinations completed in fiscal 2015:

 

Acquisition of LIFECODES distribution business – The Company completed the acquisition of the LIFECODES distribution business in India effective August 1, 2014. This acquisition enables Immucor to streamline the distribution of its LIFECODES products in that region. The Company acquired the assets of the India distribution business for a total cash purchase price of $0.4 million, of which $0.2 million was paid as of August 31, 2014. The purchase price also included a potential earn-out of up to $0.2 million if certain financial targets are met during the following two year period.

 

Business combinations completed in fiscal 2014:

 

Acquisition of Organ-i – On May 30, 2014, the Company completed the acquisition of Organ-i, Inc. (“Organ-i”) a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. The total cash purchase price of this business was $12.0 million plus a potential earn-out of up to $18.0 million if certain product and financial targets during fiscal years 2015 through 2020 are met. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $11.3 million. This was determined by applying a form of the income approach, based on the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions were the earn-out period payment probabilities and an appropriate discount rate. These assumptions are considered to be level 3 inputs by ASC Topic 820, Fair Value Measurement, which is not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration paid was approximately $23.3 million. The other identifiable intangible assets including existing technology, IPR&D and non-competition agreements are valued at $26.7 million. Goodwill is valued at $5.8 million and the long-term deferred tax liability is valued at $9.1 million. The purchase price allocation for this acquisition is preliminary and is subject to material valuation adjustments or tax matters that may be identified within the measurement period. The goodwill arising from this acquisition is not deductible for tax purposes.

 

Acquisition of LIFECODES distribution businesses – The Company completed the acquisition of both the LIFECODES distribution businesses in the United Kingdom (“UK”) and Italy on January 31, 2014. These acquisitions enable Immucor to streamline the distribution of its LIFECODES products in Europe. The Company acquired the stock of the UK distribution business for a total cash purchase price of $4.0 million, including acquired cash of $1.2 million. The Company acquired the assets of the Italy distribution business for a total cash purchase price of $2.4 million. In total, the Company acquired other identifiable intangible assets of $3.5 million and $1.1 million of goodwill, respectively, in these acquisitions.  The other identifiable intangible assets are mainly customer relationships, which represent the fair value of the existing customer base. The tangible assets acquired in these acquisitions were not material to the Company’s consolidated financial statements. All of the goodwill arising from the Italy asset acquisition is deductible for income tax purposes.  The goodwill arising from the UK acquisition is not deductible for tax purposes.

  

 
8

 

 

The operating results of these acquired businesses have been included in the Company’s consolidated results of operations since their dates of acquisition.

 

 

3.

RELATED PARTY TRANSACTIONS

 

In connection with the acquisition of Immucor in fiscal 2012, the Company entered into a management services agreement with TPG Capital, L.P. (the “Sponsor”). Pursuant to such agreement, and in exchange for on-going consulting and management advisory services that are being provided to the Company, the Sponsor receives an aggregate annual monitoring fee of approximately $3.0 million. In the three months ended August 31, 2014, and August 31, 2013, approximately $0.9 million, and $1.0 million, respectively, was recorded for the monitoring fees, additional services provided by the Sponsor, and out-of-pocket expenses. These expenses are included in general and administrative expenses in the consolidated statements of operations. As of both August 31, 2014 and May 31, 2014, the Company owed $0.9 million to the Sponsor for these fees and expenses.

 

 

4.

INVENTORIES

 

Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Inventories as of August 31, 2014, and May 31, 2014 include the following (in thousands):

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 
                 

Raw materials and supplies

  $ 10,908       12,110  

Work in process

    9,574       9,146  

Finished goods

    28,404       27,895  
    $ 48,886       49,151  

 

 

5.

PROPERTY AND EQUIPMENT, net

 

Property and equipment consists of the following (in thousands):

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 
                 

Land

  $ 289       290  

Buildings and improvements

    2,939       2,966  

Leasehold improvements

    25,101       24,693  

Capital work-in-progress

    4,973       3,927  

Furniture and fixtures

    4,096       3,656  

Machinery, equipment and instruments

    89,776       88,057  
      127,174       123,589  

Less accumulated depreciation

    (51,380 )     (47,278 )

Property and equipment, net

  $ 75,794       76,311  

 

 

Depreciation expense was $4.7 million in the three months ended August 31, 2014, and was $4.4 million in the three months ended August 31, 2013. The estimated useful lives of the Company’s instrument equipment assets were reevaluated in the first three months of fiscal 2014. The evaluation indicated that the actual lives of our instrument equipment were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, the Company changed its estimates of the useful lives of its instrument equipment to better reflect the estimated periods during which these assets will remain in service effective June 1, 2013. The estimated useful lives of these assets increased from approximately 5 years to 10 years. The effect of this change in estimate was a reduction in depreciation expense of $1.6 million for the three months ended August 31, 2013. On an annual basis, the effect of this change is expected to decrease depreciation expense by approximately $6.3 million. Depreciation expense is primarily included in cost of sales in the consolidated statements of operations.

  

 
9

 

  

6.

GOODWILL

 

The consolidated financial statements include the goodwill resulting from the acquisition of Immucor in the first quarter of fiscal 2012, and the acquisition of various businesses completed in fiscal 2013 and fiscal 2014. The following table presents the changes in the carrying amount of goodwill during the three months ended August 31, 2014 and the fiscal year ended May 31, 2014 (in thousands):

 

   

August 31, 2014

   

May 31, 2014

 
                 

Balance at beginning of period

  $ 851,563       1,003,463  

Additions:

               

Acquisition of businesses

    -       6,912  

Foreign currency translation adjustment

    (1,295 )     1,188  

Impairment loss

    -       (160,000 )

Balance at end of period

  $ 850,268       851,563  

 

 

In the first quarter of fiscal 2015, there were no significant changes in goodwill other than the impact of changes in foreign currency exchange rates. In fiscal 2014, goodwill decreased by $151.9 million mainly due to the recognition of an impairment loss on goodwill in the fourth quarter, partially offset by an increase in goodwill from business acquisitions completed in that year and the impact of changes in foreign currency exchange rates.

 

There were no accumulated impairment losses for the Company’s goodwill prior to the period ending May 31, 2014. For the periods ending May 31, 2014 and August 31, 2014, the Company had $160.0 million of accumulated impairment losses on goodwill.

 

 

7.

OTHER INTANGIBLE ASSETS, net

  

Other intangible assets, net consist of the following (in thousands):

 

           

As of

 
           

August 31, 2014

   

May 31, 2014

 
   

Weighted Average Life (years)

   

Cost

   

Accumulated Amortization

   

Net

   

Cost

   

Accumulated Amortization

   

Net

 
                                                         

Other intangible assets subject to amortization:

                                                       

Customer relationships

    20     $ 469,723       (69,706 )     400,017       470,679       (63,989 )     406,690  

Existing technology / trade names

    11       314,350       (78,323 )     236,027       314,350       (71,246 )     243,104  

Corporate trade name

    15       40,000       (8,088 )     31,912       40,000       (7,421 )     32,579  

Below market leasehold interests

    7       1,200       (477 )     723       1,200       (449 )     751  

Other intangibles

    4       399       (77 )     322       399       (53 )     346  

Total amortizable assets

            825,672       (156,671 )     669,001       826,628       (143,158 )     683,470  
                                                         

Intangible assets not subject to amortization:

                                                       

In-process research and development

            9,400       -       9,400       9,400       -       9,400  

Total non-amortizable assets

            9,400       -       9,400       9,400       -       9,400  
                                                         

Other intangible assets, net

          $ 835,072       (156,671 )     678,401       836,028       (143,158 )     692,870  

 

 

The weighted average life for below market leasehold interests changed from 6 to 8 years as of August 31, 2013 as a result of the renewal of certain lease agreements which extended the lease terms of existing leases. The costs associated with the new leases were treated as operating expenses as incurred.

 

A portion of the Company’s customer relationships is held in functional currencies outside the U.S. Therefore, the stated cost as well as the accumulated amortization is affected by the fluctuation in foreign currency exchange rates.

  

 
10

 

 

In fiscal 2014, it was determined that an in-process research and development (“IPR&D”) project related to our transplant and molecular diagnostics business was no longer economically feasible. This project was therefore abandoned and fully written-off in fiscal 2014. As a result, a loss of $0.2 million was recorded in fiscal 2014 and included in impairment loss on the Company’s consolidated statement of operations.

 

Amortization expense related to these intangible assets for the three months ended August 31, 2014 and August 31, 2013 was $13.7 million and $13.2 million, respectively. Expected amortization expense for the remainder of fiscal 2015 and for each of the five succeeding years is as follows (in thousands):

 

Year Ending May 31: 

       

2015

  $ 41,088  

2016

    54,751  

2017

    54,594  

2018

    54,479  

2019

    50,556  

2020

    49,451  

 

 

8.

DEFERRED FINANCING COSTS, net

 

Changes in deferred financing costs during the three months ended August 31, 2014 and the fiscal year ended May 31, 2014 are as follows (in thousands):

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 
                 

Balance at beginning of period

  $ 33,116       39,449  

Amortization

    (1,649 )     (6,333 )

Balance at end of period

  $ 31,467       33,116  

 

 

Deferred financing costs are capitalized and are amortized over the life of the related debt agreements using the effective interest rate method, except the Revolving Facility which uses the straight line method.

 

 

9.

LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 
                 

Term Loan Facility, net of $8,929 and $9,435 debt discounts, respectively

  $ 644,457       645,609  

Notes, net of $3,725 and $3,862 debt discounts, respectively

    396,275       396,138  

Capital lease agreements

    22       27  
      1,040,754       1,041,774  

Less current portion, net of debt discounts

    (4,570 )     (4,591 )

Long-term debt, net of current portion

  $ 1,036,184       1,037,183  

 

 

Senior Secured Credit Facilities, Security Agreement and Guaranty  

 

The Company is party to a credit agreement and related security and other agreements as subsequently amended, with a bank syndicate of lenders, and Citibank N.A. as the Administrative Agent. The credit agreement, as amended, provides for (1) a $663.3 million senior secured term loan facility with Term B-2 Loans (the “Term Loan Facility”) and (2) a $100.0 million senior secured revolving loan facility (the “Revolving Facility,” and together with the Term Loan Facility, the “Senior Credit Facilities”). In addition to borrowings upon prior notice, the Revolving Facility includes borrowing capacity in the form of letters of credit and borrowings on same-day notice, referred to as swing line loans, in each case, up to $25.0 million, and is available in U.S. dollars, GBP, Euros, Yen, Canadian dollars and in such other currencies as the Company and the Administrative Agent under the Revolving Facility may agree (subject to a sublimit for such non-U.S. currencies).

 

 
11

 

 

Borrowings under the Senior Credit Facilities bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (a) in the case of borrowings in U.S. dollars, a base rate determined by reference to the highest of (1) the prime rate of Citibank, N.A., (2) the federal funds effective rate plus 0.50% and (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (b) in the case of borrowings in U.S. dollars or another currency, a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which, in the case of the Term Loan Facility only, shall be no less than 1.25%. The applicable margin for borrowings under the Term Loan Facility is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings. The applicable margin for borrowings under the Revolving Facility is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings. The applicable margin for borrowings under the Revolving Facility is subject to a 0.25% step-down, when the Company’s senior secured net leverage ratio at the end of a fiscal quarter is less than or equal to 3:00 to 1:00.

 

The interest rate on the Term Loan Facility was 5.00% as of August 31, 2014 and May 31, 2014. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Term Loan Facility is 6.10% for the quarter ended August 31, 2014. At August 31, 2014, there were no outstanding borrowings under the Revolving Facility and no outstanding letters of credit.

 

The Company is required to make scheduled principal payments on the last business day of each calendar quarter equal to 0.25% of the original principal amount of loans under the Term Loan Facility with the balance due and payable on August 19, 2018. Currently scheduled principal payments are $1.7 million per quarter. The Company is also required to repay loans under the Term Loan Facility based on annual excess cash flows as defined in the credit agreement governing the Term Loan Facility and upon the occurrence of certain other events set forth in that credit agreement. The additional principal due under the terms of the excess cash flow requirement was zero for fiscal 2014 and was $2.0 million for fiscal 2013. The additional principal payment of $2.0 million was paid in September 2013. The terms of the Senior Credit Facilities provide that any principal paid as a result of the excess cash flow requirement, shall be applied to the scheduled installments of principal following the date of prepayment in direct order of maturity.

 

All obligations under the Senior Credit Facilities are unconditionally guaranteed by the parent company of Immucor, IVD Intermediate Holdings B Inc. (the “Parent”), and certain of Immucor’s existing and future wholly owned domestic subsidiaries (such subsidiaries collectively, the “Subsidiary Guarantors”), and are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Parent and Subsidiary Guarantors, subject in each case to customary exceptions and exclusions.

 

Indenture and the Senior Notes Due 2019

 

The Company has also issued $400.0 million in principal amount of Notes. The Notes bear interest at a rate of 11.125% per annum, and interest is payable semi-annually on February 15 and August 15 of each year. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Notes is 11.6% for the quarter ended August 31, 2014. The Notes mature on August 15, 2019.

 

Subject to certain exceptions, the Notes are guaranteed on a senior unsecured basis by each of Immucor’s current and future wholly owned domestic restricted subsidiaries (and non-wholly owned subsidiaries if such non-wholly owned subsidiaries guarantee the Company’s or another guarantor’s other capital market debt securities) that is a guarantor of certain debt of the Company or another guarantor, including the Senior Credit Facilities. The Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future indebtedness that is not expressly subordinated in right of payment thereto. The Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Company’s existing and future secured indebtedness, including the Senior Credit Facilities described above, to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Company’s non-guarantor subsidiaries.

 

The Company is not aware of any violations of the covenants pursuant to the terms of the indenture governing the Notes or the credit agreement governing the Senior Credit Facilities.

  

 
12

 

 

Future Commitments

 

The following is a summary of the combined principal maturities of all long-term debt and principal payments to be made under the Company’s capital lease agreements for the remainder of fiscal 2015 and each of the fiscal years presented in the table below (in thousands):

 

Year Ended May 31:

       

2015

  $ 4,989  

2016

    6,639  

2017

    6,632  

2018

    6,632  

2019

    628,516  

Thereafter

    400,000  
    $ 1,053,408  

 

Interest Expense

 

The significant components of interest expense are as follows (in thousands):

 

   

Three Months Ended

 
   

August 31

 
   

2014

   

2013

 
                 

Notes, including OID amortization

  $ 11,262       11,247  

Term Loan Facility, including OID amortization

    8,861       8,920  

Amortization of deferred financing costs

    1,649       1,556  

Interest rate swaps

    261       258  

Revolving Facility fees and interest

    142       128  

Interest accreted on contingent consideration liability

    123       67  

Other interest

    -       2  

Interest expense

  $ 22,298       22,178  

 

 

10.

DERIVATIVE FINANCIAL INSTRUMENTS

 

As of August 31, 2014, the Company has interest rate swap agreements to hedge $240.0 million of its future interest commitments resulting from the Company’s Term Loan Facility, and to protect the Company from variability in cash flows attributable to changes in LIBOR interest rates. The purpose of entering into these swap agreements is to match the LIBOR floor in the swaps with the terms of the Term Loan Facility. Consistent with the terms of the Company’s Term Loan Facility, these swaps include a LIBOR floor of 1.25%. These swap agreements hedge a portion of contractual floating rate interest commitments through the expiration of the agreement in September of each year through 2016. As a result of these agreements, the LIBOR rate associated with the hedged amount of the Company’s indebtedness has been fixed at 1.67% until September 30, 2014.

 

Effective October 1, 2014, the Company has swap agreements that hedge the Company’s floating rate interest commitments of $155.0 million at a weighted average fixed LIBOR rate of 1.77%, until September 30, 2015.  Effective after September 30, 2015 through September 30, 2016, the Company has swap agreements to hedge the Company’s floating rate interest commitments of $70.0 million at a fixed LIBOR rate of 1.91% until September 30, 2016.

 

The Company has designated these interest rate swap agreements as cash flow hedges. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these swaps are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses will be recorded as a component of interest expense. Future realized gains and losses in connection with each required interest payment will be reclassified from accumulated other comprehensive income or loss to interest expense.

  

 
13

 

 

The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into interest expense in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in the fair values of derivatives that do not qualify as effective are immediately recognized in earnings.

 

The gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. As of August 31, 2014, approximately $0.8 million of the deferred net loss on derivative instruments accumulated in other comprehensive loss is expected to be reclassified as interest expense during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions.

 

The fair values of the interest rate swap agreements are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (level 2). A summary of the recorded liabilities included in the consolidated balance sheets is as follows (in thousands):

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 
                 

Interest rate swaps (included in other liabilities)

  $ (1,108 )     (1,357 )

 

The losses from accumulated other comprehensive loss (“AOCI”) was reclassified to the consolidated statement of operations and appears as follows (in thousands):

 

   

Three Months Ended

 
   

August 31

 

Location of (loss) gain reclassified from AOCI into income

 

2014

   

2013

 
                 

(Losses) gains on cash flow hedges:

               

Interest expense (effective portion)

  $ (261 )     (257 )

Interest income (expense) (ineffective portion)

  $ -       3  

 

 

11.

FAIR VALUE

 

The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

 

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2—Observable inputs, other than quoted prices included in Level 1, such as quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

  

 
14

 

 

   

As of August 31, 2014

 
   

Fair Value Measurements of Assets (Liabilities) Using

   

Carrying

 
   

(Level 1)

   

(Level 2)

   

(Level 3)

   

Amount

 
   

(in thousands of dollars)

 
                                 

Derivative instruments

  $ -       (1,108 )     -       (1,108 )

Contingent consideration liability

  $ -       -       (11,579 )     (11,579 )

 

 

   

As of May 31, 2014

 
   

Fair Value Measurements of Assets (Liabilities) Using

   

Carrying

 
   

(Level 1)

   

(Level 2)

   

(Level 3)

   

Amount

 
   

(in thousands of dollars)

 
                                 

Derivative instruments

  $ -       (1,357 )     -       (1,357 )

Contingent consideration liability

  $ -       -       (11,300 )     (11,300 )

 

 

The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short-term maturity of these instruments. Of the $17.4 million and $23.6 million of cash and cash equivalents at August 31, 2014 and May 31, 2014, respectively, approximately 15% and 19% was located in the U.S., respectively.

 

The Company uses derivative financial instruments, primarily in the form of floating-to-fixed interest rate swap agreements, in order to mitigate the risks associated with interest rate fluctuations on the Company’s floating rate indebtedness. The estimated fair value of the Company’s derivative instruments is based on quoted market prices for similar instruments (a level 2 input) and are reflected at fair value in the consolidated balance sheets. The level 2 inputs used to calculate fair value were interest rates, volatility and credit derivative markets. The Company’s current and long-term derivative financial instrument liabilities are included in accrued interest and interest rate swap liability and other long-term liabilities in the Company’s consolidated balance sheets.

 

The fair value of the Company’s Notes and the Term Loan Facility (collectively referred to as the Company’s debt instruments) is estimated to be $442.8 million and $656.7 million at August 31, 2014, respectively, based on recent trades of similar instruments. The fair value of the Notes and the Term Loan Facility was estimated to be $446.3 million and $656.7 million at May 31, 2014, respectively, based on the fair value of these instruments at that time.

 

Management believes that these liabilities can be liquidated without restriction.

 

At August 31, 2014, the Company had $11.6 million in contingent consideration liabilities for earn-out provisions resulting from acquisitions completed since May 30, 2014. The fair value of these contingent consideration liabilities was determined by applying a form of the income approach (a level 3 input), based upon the probability weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the financial performance target. Assumptions included in the calculations were the cumulative probability of success, discount rate and time of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments. As of August 31, 2014, $0.2 million of the contingent consideration liability was included in Accrued expenses and other current liabilities and $11.4 million was included in Other long-term liabilities on the Company’s consolidated balance sheet. As of May 31, 2014, the contingent consideration liability was included in Other long-term liabilities on the Company’s consolidated balance sheet.

 

As of the beginning of fiscal 2014, the Company had a contingent consideration liability of $4.5 million for an earn-out provision resulting from the LIFECODES acquisition, which was written down by $1.3 million in the first quarter of fiscal 2014, and written down to zero by the end of fiscal 2014. The adjustment to the estimated fair value amount was reflected as a gain in the acquisition-related items on the Company’s consolidated statements of operations.

  

 
15

 

 

The changes in the contingent consideration liability are summarized in the following table (in thousands):

  

   

Three Months Ended

   

Twelve Months Ended

 
   

August 31, 2014

   

May 31, 2014

 

Balance at the beginning of the period

  $ (11,300 )     (4,504 )

Additions due to acquisitions

    (156 )     (11,300 )

Change in fair value

    -       4,638  

Accretion of fair value

    (123 )     (134 )

Balance at the end of the period

  $ (11,579 )     (11,300 )

 

12.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss are as follows (in thousands):

 

   

Pretax

   

Tax

   

After Tax

 

Three Months Ended August 31, 2014

                       

Foreign exchange translation adjustment

  $ (4,340 )     25       (4,365 )

Changes in fair value of cash flow hedges

    248       131       117  
    $ (4,092 )     156       (4,248 )
                         

Three Months Ended August 31, 2013

                       

Foreign exchange translation adjustment

  $ 1,385       -       1,385  

Changes in fair value of cash flow hedges

    518       193       325  
    $ 1,903       193       1,710  

 

 

The components of accumulated other comprehensive loss as of August 31, 2014 and May 31, 2014 are as follows (in thousands):

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 
                 

Cumulative foreign currency translation adjustment

  $ (16,792 )     (12,427 )

Change in fair value of cash flow hedges, net of tax

    (723 )     (840 )

Accumulated other comprehensive (loss) income

  $ (17,515 )     (13,267 )

 

 

13.

SHARE-BASED COMPENSATION

 

The Company has granted nonvested restricted stock, stock options, and stock appreciation rights to key employees and directors under several stock award plans. The Company granted stock awards with an aggregate fair value of approximately $0.6 million and $0.2 million during the first three months ended August 31, 2014 and August 31, 2013, respectively. As of August 31, 2014, a total of 25,973 shares were available for future grants.

 

Restricted stock units typically vest over a two year period (50% per year) and do not expire. Upon vesting, restricted stock units are settled in shares of IVD Holdings Inc.’s common stock. Stock option awards are granted with service-based vesting conditions, and performance-based or market-based vesting conditions.  The service-based vesting options contain tiered vesting terms over the service period. The performance-based or market-based options vest in tranches upon the achievement of certain performance or market objectives, which are measured over a three or four year period.  The stock appreciation rights vest only on the occurrence of a liquidity event.  These awards have a ten year term. 

 

The compensation cost for the restricted stock units and stock option awards are recognized on a straight-line basis over the vesting period. The Company recognized expense of $0.5 million and $0.4 million in the three months ended August 31, 2014 and August 31, 2013, respectively, before income tax benefits, for all of the Company’s stock plans. As of August 31, 2014, there was $3.5 million of total unrecognized compensation cost related the Company’s stock plans that will be recognized over approximately 2.4 years.

  

 
16

 

 

As of August 31, 2014 there was no expense or liability recognized related to the stock appreciation rights granted as management has determined that a liquidity event is not considered probable. The fair value of the liability relating to cash-settled stock appreciation rights was approximately $1.0 million as of August 31, 2014.

 

 

14.

INCOME TAXES

 

The effective tax rate for the quarters ended August 31, 2014 and August 31, 2013 was 33.9% and 37.4%, respectively.  The difference between the federal statutory rate and the effective tax rate for the quarter ended August 31, 2014 was primarily due to income subject to tax in the various tax jurisdictions with rates that differ from the U.S. statutory tax rate and the impact of recording U. S. income taxes associated with current and future distributions of foreign earnings. The difference between the United States federal statutory rate and the effective tax rate for the quarter ended August 31, 2013 was primarily due to the following: (1) a portion of the Company’s income is subject to tax in various tax jurisdictions with rates that differ from the U.S. statutory tax rate, (2) the fact that the gain on the acquisition related item is not taxable, and (3) the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings. 

 

The Company does not consider itself to be permanently reinvested with respect to its accumulated and unrepatriated earnings as well as the future earnings of each foreign subsidiary. Accordingly, the Company has provided for deferred taxes on future earnings of its foreign subsidiaries. The Company continues to consider its investment in each foreign subsidiary in excess of its accumulated and unrepatriated earnings to be permanently reinvested and thus has not recorded a deferred tax liability on that amount.

 

 

15.

SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company determines operating segments in accordance with its internal operating structure, which is organized based upon product groups. Each segment is separately managed and is evaluated primarily upon operating results. The Company has two operating segments, the Transfusion segment and the Transplant & Molecular segment, which have been aggregated into one reportable segment.

 

The Company manufactures and markets a complete line of diagnostics products and automated systems used primarily by hospitals, donor centers and reference laboratories in a number of tests performed to detect and identify certain properties of human blood and human tissue to ensure the most compatible match between patient and donor. These tests are performed for the purpose of blood transfusion, pre-transplant human leukocyte antigen (HLA) typing and screening processes as well as post-transplant patient monitoring to aid in the identification of graft rejection.

 

The Company operates in various geographies. These geographic markets are comprised of the United States, Europe, Canada and other international markets which include the BRIC region (countries of Brazil, Russia, India and China), the Asia Pacific region, and Mexico. These products are marketed globally, both directly to the end user and through established distributors.

 

Accounting policies for segments are the same as those described in the summary of significant accounting policies.

 

The following is a summary of the Company’s segment data (in thousands):

 

    Three Months Ended  
   

August 31

 
   

2014

   

2013

 

Net sales by product group:

               

Transfusion

  $ 86,369       82,990  

Transplant & Molecular

    16,072       13,054  

Total

  $ 102,441       96,044  

  

 
17

 

 

Following is a summary of enterprise-wide information (in thousands):

 

    Three Months Ended  
   

August 31

 
   

2014

   

2013

 

Net sales to customers by geography are as follows:

               

United States

  $ 62,379       61,120  

Europe (A)

    21,447       17,851  

Canada

    4,891       4,553  

Other

    13,724       12,520  

Total

  $ 102,441       96,044  

 

 

Net sales are attributed to individual countries based on the customer’s country of origin at the time of the sale and where the Company has an operating entity.

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 

Long-lived assets (excluding goodwill and intangibles) by geography:

               

United States

  $ 53,689       54,066  

Europe (B)

    15,467       15,725  

Canada

    4,437       4,517  

Other (C)

    2,201       2,003  

Total

  $ 75,794       76,311  

 

   

As of

 
   

August 31, 2014

   

May 31, 2014

 

Concentration of net assets by geography:

               

United States

  $ 292,042       299,948  

Europe

    121,444       123,095  

Canada

    32,803       32,802  

Other (C)

    13,119       12,771  

Total

  $ 459,408       468,616  

 

 

(A) – Net sales to any individual country within Europe were not material to the Company’s consolidated net sales.

(B) - Long-lived assets located in any individual country within Europe were not material to the Company's consolidated long-lived assets.

(C) - Primarily Japan and India.

 

Sales to an individual customer did not exceed more than 10% of our net sales during the three months ended August 31, 2014, or August 31, 2013.

  

 
18

 

 

16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES

 

The Company has certain outstanding indebtedness that is guaranteed by its U.S. subsidiaries. However, the indebtedness is not guaranteed by the Company’s foreign subsidiaries. The guarantor subsidiaries are all wholly owned and the guarantees are made on a joint and several basis and are full and unconditional. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information is presented. The condensed consolidating financial information of the Company is as follows:

 

Balance Sheets

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

August 31, 2014


(in thousands)

(Unaudited)

 

   

Immucor, Inc.

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Total

 
                                         

ASSETS

                                       
                                         

CURRENT ASSETS:

                                       

Cash and cash equivalents

  $ 3,313       (695 )     14,737       -       17,355  

Accounts receivable, net

    32,507       5,314       33,956       -       71,777  

Intercompany receivable

    61,102       16,719       12,989       (90,810 )     -  

Inventories

    20,477       17,152       13,424       (2,167 )     48,886  

Deferred income tax assets, current portion

    4,160       2,807       465       836       8,268  

Prepaid expenses and other current assets

    5,398       569       5,200       -       11,167  

Total current assets

    126,957       41,866       80,771       (92,141 )     157,453  
                                         

PROPERTY AND EQUIPMENT, net

    38,353       15,336       22,105       -       75,794  

INVESTMENT IN SUBSIDIARIES

    255,411       5,020       3,081       (263,512 )     -  

GOODWILL

    743,512       47,877       58,879       -       850,268  

OTHER INTANGIBLE ASSETS, net

    574,259       62,398       41,744       -       678,401  

DEFERRED FINANCING COSTS, net

    31,467       -       -       -       31,467  

OTHER ASSETS

    6,873       256       320       -       7,449  

Total assets

  $ 1,776,832       172,753       206,900       (355,653 )     1,800,832  
                                         

LIABILITIES AND SHAREHOLDERS' EQUITY

                                       
                                         

CURRENT LIABILITIES:

                                       

Accounts payable

  $ 9,390       4,258       4,113       -       17,761  

Intercompany payable

    6,951       76,099       7,760       (90,810 )     -  

Accrued interest and interest rate swap liability

    8,524       -       -       -       8,524  

Accrued expenses and other current liabilities

    9,208       5,181       9,228       -       23,617  

Income taxes payable

    30,785       (30,227 )     3,625       -       4,183  

Deferred revenue, current portion

    1,678       8       1,394       -       3,080  

Current portion of long term debt, net of debt discounts

    4,553       17       -       -       4,570  

Total current liabilities

    71,089       55,336       26,120       (90,810 )     61,735  
                                         

LONG TERM DEBT, NET OF DEBT DISCOUNTS

    1,036,179       5       -       -       1,036,184  

DEFERRED REVENUE

    6       -       68       -       74  

DEFERRED INCOME TAX LIABILITIES

    199,088       8,389       11,859       -       219,336  

OTHER LONG-TERM LIABILITIES

    11,062       11,546       1,487       -       24,095  

Total liabilities

    1,317,424       75,276       39,534       (90,810 )     1,341,424  

SHAREHOLDERS' EQUITY:

                                       

Total shareholders' equity

    459,408       97,477       167,366       (264,843 )     459,408  

Total liabilities and shareholders' equity

  $ 1,776,832       172,753       206,900       (355,653 )     1,800,832  

 
19

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2014


(in thousands)

 

   

Immucor, Inc.

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Total

 
                                         

ASSETS

                                       
                                         

CURRENT ASSETS:

                                       

Cash and cash equivalents

  $ 4,863       (409 )     19,167       -       23,621  

Accounts receivable, net

    29,558       5,137       34,934       -       69,629  

Intercompany receivable

    57,167       15,058       6,548       (78,773 )     -  

Inventories

    20,733       17,358       13,184       (2,124 )     49,151  

Deferred income tax assets, current portion

    4,160       2,807       464       820       8,251  

Prepaid expenses and other current assets

    6,228       470       5,884       -       12,582  

Total current assets

    122,709       40,421       80,181       (80,077 )     163,234  
                                         

PROPERTY AND EQUIPMENT, net

    37,963       16,103       22,245       -       76,311  

INVESTMENT IN SUBSIDIARIES

    247,567       5,021       3,114       (255,702 )     -  

GOODWILL

    743,512       47,877       60,174       -       851,563  

OTHER INTANGIBLE ASSETS, net

    586,243       63,474       43,153       -       692,870  

DEFERRED FINANCING COSTS, net

    33,116       -       -       -       33,116  

OTHER ASSETS

    6,721       260       339       -       7,320  

Total assets

  $ 1,777,831       173,156       209,206       (335,779 )     1,824,414  
                                         

LIABILITIES AND SHAREHOLDERS' EQUITY

                                       
                                         

CURRENT LIABILITIES:

                                       

Accounts payable

  $ 6,805       5,945       2,915       -       15,665  

Intercompany payable

    99       69,999       8,675       (78,773 )     -  

Accrued interest and interest swap liability

    19,605       -       -       -       19,605  

Accrued expenses and other current liabilities

    8,681       4,950       10,085       -       23,716  

Income taxes payable

    30,785       (29,698 )     3,840       -       4,927  

Deferred revenue, current portion

    1,269       12       1,532       -       2,813  

Current portion of long-term debt, net of debt discounts

    4,580       11       -       -       4,591  

Total current liabilities

    71,824       51,219       27,047       (78,773 )     71,317  
                                         

LONG-TERM DEBT, net of debt discounts

    1,037,168       15       -       -       1,037,183  

DEFERRED REVENUE

    14       -       72       -       86  

DEFERRED INCOME TAX LIABILITIES

    201,184       10,157       12,038       -       223,379  

OTHER LONG-TERM LIABILITIES

    11,025       11,425       1,383       -       23,833  

Total liabilities

    1,321,215       72,816       40,540       (78,773 )     1,355,798  

SHAREHOLDERS' EQUITY:

                                       

Total shareholders' equity

    456,616       100,340       168,666       (257,006 )     468,616  

Total liabilities and shareholders' equity

  $ 1,777,831       173,156       209,206       (335,779 )     1,824,414  

 

 
20

 

 

Statements of Operations for the Quarter

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended August 31, 2014


(in thousands)

(Unaudited)

 

   

Immucor, Inc.

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Total

 
                                         

NET SALES

  $ 66,268       14,614       39,573       (18,014 )     102,441  

COST OF SALES (exclusive of amortization shown separately below)

    20,775       9,627       24,439       (18,014 )     36,827  

GROSS MARGIN

    45,493       4,987       15,134       -       65,614  
                                         

OPERATING EXPENSES:

                                       

Research and development

    2,640       4,214       224       -       7,078  

Selling and marketing

    6,237       2,695       6,124       -       15,056  

Distribution

    2,680       388       1,972       -       5,040  

General and administrative

    7,261       1,045       2,578       -       10,884  

Amortization expense

    11,971       1,076       635       -       13,682  

Total operating expenses

    30,789       9,418       11,533       -       51,740  
                                         

INCOME (LOSS) FROM OPERATIONS

    14,704       (4,431 )     3,601       -       13,874  
                                         

NON-OPERATING (EXPENSE) INCOME:

                                       

Interest income

    3       -       78       (25 )     56  

Interest expense

    (22,180 )     (123 )     (20 )     25       (22,298 )

Other, net

    143       (40 )     (27 )     -       76  

Total non-operating (expense) income

    (22,034 )     (163 )     31       -       (22,166 )
                                         

(LOSS) INCOME BEFORE INCOME TAXES

    (7,330 )     (4,594 )     3,632       -       (8,292 )

(BENEFIT) PROVISION FOR INCOME TAXES

    (2,189 )     (1,734 )     1,110       -       (2,813 )

NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES

    (5,141 )     (2,860 )     2,522       -       (5,479 )

Net (loss) income of consolidated subsidiaries

    (338 )     -       -       338       -  

NET (LOSS) INCOME

  $ (5,479 )   $ (2,860 )   $ 2,522     $ 338       (5,479 )

 
21

 

  

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended August 31, 2013


(in thousands)

(Unaudited)

 

   

Immucor, Inc.

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Total

 
                                         

NET SALES

  $ 64,210       13,664       34,991       (16,821 )     96,044  

COST OF SALES (exclusive of amortization shown separately below)

    22,026       9,144       21,702       (16,821 )     36,051  

GROSS MARGIN

    42,184       4,520       13,289       -       59,993  
                                         

OPERATING EXPENSES:

                                       

Research and development

    3,632       4,490       8       -       8,130  

Selling and marketing

    6,327       2,093       5,872       -       14,292  

Distribution

    2,722       382       1,615       -       4,719  

General and administrative

    6,865       1,736       2,374       -       10,975  

Amortization expense

    11,971       668       568       -       13,207  

Acquisition-related items

    (1,320 )     -       -       -       (1,320 )

Total operating expenses

    30,197       9,369       10,437       -       50,003  
                                         

INCOME (LOSS) FROM OPERATIONS

    11,987       (4,849 )     2,852       -       9,990  
                                         

NON-OPERATING (EXPENSE) INCOME:

                                       

Interest income

    1       1       28       (21 )     9  

Interest expense

    (22,191 )     -       (8 )     21       (22,178 )

Other, net

    389       28       152       (785 )     (216 )

Total non-operating (expense) income

    (21,801 )     29       172       (785 )     (22,385 )
                                         

(LOSS) INCOME BEFORE INCOME TAXES

    (9,814 )     (4,820 )     3,024       (785 )     (12,395 )

(BENEFIT) PROVISION FOR INCOME TAXES

    (3,681 )     (1,616 )     925       (263 )     (4,635 )

NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES

    (6,133 )     (3,204 )     2,099       (522 )     (7,760 )

Net (loss) income of consolidated subsidiaries

    (1,105 )     -       -       1,105       -  

NET (LOSS) INCOME

  $ (7,238 )     (3,204 )     2,099       583       (7,760 )

  

 
22

 

 

Statements of Cash Flows for the Quarter

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

Three Months Ended August 31, 2014


(in thousands)

(Unaudited)

 

   

Immucor, Inc.

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Total

 
                                         

Net cash provided by (used in) operating activities

  $ 2,827       124       (3,289 )     32       (306 )

Net cash used in investing activities

    (2,728 )     (369 )     (429 )     -       (3,526 )

Net cash used in financing activities

    (1,659 )     (5 )     -       -       (1,664 )

Effect of exchange rate changes on cash and cash equivalents

    (25 )     -       (713 )     (32 )     (770 )

Decrease in cash and cash equivalents

    (1,585 )     (250 )     (4,431 )     -       (6,266 )

Cash and cash equivalents at beginning of period

    4,898       (445 )     19,168       -       23,621  

Cash and cash equivalents at end of period

  $ 3,313       (695 )     14,737       -       17,355  

 

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

Three Months Ended August 31, 2013


(in thousands)

(Unaudited)

 

   

Immucor, Inc.

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Total

 
                                         

Net cash (used in) provided by operating activities

  $ (3,578 )     (2,845 )     3,045       (894 )     (4,272 )

Net cash provided by (used in) investing activities

    6,399       (536 )     (5,710 )     -       153  

Net cash (used in) provided by financing activities

    (1,658 )     (15 )     (785 )     785       (1,673 )

Effect of exchange rate changes on cash and cash equivalents

    -       -       297       109       406  

Increase (decrease) in cash and cash equivalents

    1,163       (3,396 )     (3,153 )     -       (5,386 )

Cash and cash equivalents at beginning of period

    6,971       4,107       18,310       -       29,388  

Cash and cash equivalents at end of period

  $ 8,134       711       15,157       -       24,002  

 

 

 

 

17.

COMMITMENTS AND CONTINGENCIES

 

 Legal Proceedings

 

From time to time, the Company is a party to certain legal proceedings in the ordinary course of business. However, the Company is not currently subject to any legal proceedings expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.  

 

 
23

 

 

 Purchase Commitments

 

Purchase commitments made in the normal course of business were $43.4 million as of August 31, 2014. These purchases were primarily for inventory items. The following is a schedule of approximate future payments for purchase commitments as of August 31, 2014 (in thousands):

 

2015

  $ 20,680  

2016

    4,185  

2017

    3,683  

2018

    3,883  

2019

    4,083  

  

 

18.

SUBSEQUENT EVENTS

  

Sirona Collaboration

  

On October 3, 2014, the Company entered into a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) for the commercialization of Sirona’s HLA typing sample preparation and bioinformatics offering for next generation sequencing. As part of the collaboration, the Company paid $0.7 million for a warrant with an exclusive option to acquire 100% of the common stock of Sirona at a future date and also loaned $4.6 million to Sirona for development funding. The collaborative arrangement includes the potential for additional future funding, subject to terms of the arrangement. Sirona is considered to be a variable interest entity (“VIE”) but does not meet the requirements for consolidation as Immucor is not considered the primary beneficiary.

 

Sentilus Acquisition

 

On October 1, 2014, the Company paid $6.0 million to acquire Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, FemtorarraysTM. Sentilus has been developing FemtoarraysTM and the underlying technology for use in a variety of in vitro diagnostics areas, including transfusion diagnostics, and could potentially serve as a next generation technology platform for that business. The final purchase price of Sentilus may be impacted by certain working capital targets associated with this acquisition as well as a potential earn-out if the business achieves certain financial targets.

 

Stock-Based Compensation Plan Amendment

 

The Company amended its 2011 Equity Incentive Plan effective on September 2, 2014 to (1) modify the financial targets for all unvested performance-based option grants, and (2) specify that the unvested options will vest on each of August 19, 2015 and August 19, 2016 if the financial targets are achieved or exceeded for the immediately preceding fiscal years, or will vest on the later date if the financial targets are not achieved for fiscal 2015 but are achieved for the combined fiscal 2015 and 2016 periods. All other terms remain unchanged.

 

 
24

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We operate in the transfusion and transplantation in vitro diagnostics markets. Our products perform typing and screening of blood, organs or stem cells to ensure donor-recipient compatibility. Our offerings are targeted at hospitals, donor centers and reference laboratories around the globe. We have manufacturing facilities in the United States (“U.S.”) and Canada and sell our products through both direct affiliate offices and third-party distribution arrangements.

 

We operate in a highly regulated industry and are subject to continuing compliance with multiple country-specific statutes, regulations and standards. For example, in the U.S. the Food and Drug Administration (“FDA”) regulates all aspects of the transfusion process, including the marketing of reagents and instruments used to determine compatibility. Additionally, we are subject to government legislation that governs the delivery of healthcare.

 

Our automated instrument-reagent systems operate on a “razor/razor blade” model, with our instruments serving as the “razors” and our reagents serving as the “razor blades.” For transfusion diagnostics, our instruments are “closed systems,” meaning our proprietary reagents can only be used on our instruments. For transplant diagnostics, our reagents run on Luminex instruments, which are open systems. The “razor/razor blade” business model generates a recurring revenue stream for us.

 

Results of Operations

 

The following table sets forth items from the consolidated statements of operations as reported and as a percentage of net sales for each period (in thousands of dollars, except percentages).

 

   

Three Months Ended

                 
   

August 31

   

Change

 
   

2014

   

2013

   

Amount

   

%

 
                                 

Net sales

  $ 102,441       96,044     $ 6,397       6.7  

Cost of sales (*)

    36,827       36,051       776       2.2  

Gross margin

    65,614       59,993       5,621       9.4  
                                 

Operating expenses:

                               

Research and development

    7,078       8,130       (1,052 )     (12.9 )

Selling and marketing

    15,056       14,292       764       5.3  

Distribution

    5,040       4,719       321       6.8  

General and administrative

    10,884       10,975       (91 )     (0.8 )

Amortization expense

    13,682       13,207       475       3.6  

Acquisition-related items

    -       (1,320 )     1,320       **  

Total operating expenses

    51,740       50,003       1,737       3.5  
                                 

Income from operations

    13,874       9,990       3,884       38.9  
                                 

Non-operating (expense) income:

                               

Interest income

    56       9       47       522.2  

Interest expense

    (22,298 )     (22,178 )     (120 )     0.5  

Other, net

    76       (216 )     292       **  

Total non-operating net expense

    (22,166 )     (22,385 )     219       (1.0 )
                                 

Loss before income taxes

    (8,292 )     (12,395 )     4,103       (33.1 )

Benefit for income taxes

    (2,813 )     (4,635 )     1,822       (39.3 )

Net loss

  $ (5,479 )     (7,760 )   $ 2,281       (29.4 )

 

(*) Cost of sales is exclusive of amortization expense which is shown separately within operating expenses.

(**) Calculation is not meaningful.

 

 
25

 

  

Three Months Ended August 31, 2014 and August 31, 2013:

 

Net sales were $102.4 million for the three months ended August 31, 2014 as compared with $96.0 million for the three months ended August 31, 2013, an increase of $6.4 million, or 6.7%. This increase in net sales is described in the discussion of net sales by product group below. Net sales by product group are presented in the following table (in thousands of dollars, except percentages):

 

   

Three Months Ended

                 
   

August 31

   

Change

 
   

2014

   

2013

   

Amount

   

%

 

Net sales by product group:

                               

Transfusion

  $ 86,369       82,990     $ 3,379       4.1  

Transplant & Molecular

    16,072       13,054       3,018       23.1  

Total

  $ 102,441       96,044     $ 6,397       6.7  

 

 

Transfusion: Net sales of our transfusion products for the three months ended August 31, 2014 were $86.4 million as compared with $83.0 million for the three months ended August 31, 2013, an increase of $3.4 million, or 4.1%. This increase in net sales was mainly due to a higher number of ship cycles in the first three months of fiscal 2015 as compared with the same period in fiscal 2014, and higher net sales generated from our capture reagents in Europe and the Emerging Markets driven mainly by an increase in our installed base of instruments in those markets. After adjusting for the impact of ship cycles, net sales in the first three months of fiscal 2015 increased by 1.6 % when compared with the first three months of fiscal 2014.

 

Transplant & Molecular: Net sales of our transplant and molecular products for the three months ended August 31, 2014 were $16.1 million as compared with $13.1 million for the three months ended August 31, 2013, an increase of $3.0 million, or 23.1%. The increase in net sales was primarily due to higher net sales in Europe and the Emerging Markets during three months ended August 31, 2014 reflecting strong customer acceptance of our Transplant and Molecular products in those markets.

 

Gross margin increased by $5.6 million for the three months ended August 31, 2014 as compared with the three months ended August 31, 2013, or 9.4%, mainly due to the higher net sales generated in the first three months of fiscal 2015. Gross margin as a percentage of consolidated net sales was approximately 1.6% higher for the three months ended August 31, 2014 as compared with the three months ended August 31, 2013. The higher gross margin percentage was primarily due to the amortization of the fair value of inventory of $2.3 million related to the acquisition of LIFECODES that was included in fiscal 2014 that was not included in fiscal 2015, partially offset by a less favorable product mix.

 

Research and development expenses were $7.0 million for the three months ended August 31, 2014 as compared with $8.1 million for the three months ended August 31, 2013. The decrease of $1.1 million, or 12.9%, was primarily due to the completion of certain significant development projects in fiscal 2014, including the development work related to the PreciseTypeTM HEA test that was completed in the fourth quarter of fiscal 2014.

 

Selling and marketing expenses were $15.1 million for the three months ended August 31, 2014 as compared with $14.3 million for the three months ended August 31, 2013. The increase in selling and marketing expenses of $0.8 million, or 5.3%, was primarily attributable to additional personnel costs to support the anticipated growth of the business and other operating expenses.

 

Distribution expenses were $5.0 million for the three months ended August 31, 2014 and $4.7 million for the three months ended August 31, 2013, an increase of $0.3 million, or 6.8%. The increase in distribution expenses is in direct correlation with the increase in net sales for the first quarter of fiscal 2015 as compared with the first quarter of fiscal 2014, which was higher by 6.7%.

 

General and administrative expenses were comparable in the three months ended August 31, 2014 as compared with the three months ended August 31, 2013. General and administrative expenses were $10.9 million for the three months ended August 31, 2014 and $11.0 million for the three months ended August 31, 2013, a decrease of $0.1 million, or 0.8%.

  

 
26

 

 

Amortization expense was $13.7 million for the three months ended August 31, 2014 as compared with $13.2 million for the three months ended August 31, 2013, an increase of $.5 million, or 3.6%. The increase was primarily due to additional costs related to acquisitions completed since May 30, 2014.

 

Acquisition-related items were zero for the three months ended August 31, 2014 as compared with a gain of $1.3 million for the three months ended August 31, 2013. The gain reported in the three months ended August 31, 2013 resulted from a decrease in the contingent consideration liability related to the acquisition of our LIFECODES business. Based upon information available in the first quarter of fiscal 2014, management determined that the likelihood of achieving the financial performance target was lower than originally estimated and decreased the fair value of the related contingent consideration liability.

 

Non-operating net expense was $22.2 million for the three months ended August 31, 2014 as compared with $22.4 million for the three months ended August 31, 2013, a decrease of $0.2 million, or 1.0%. The most significant component of non-operating expense is interest expense which increased by $0.1 million on a quarter-over-quarter basis. The increase in interest expense was mainly due to the amortization of deferred financing costs and the accretion of our contingent consideration liabilities. This increase in interest expense was offset by changes in exchange gains and losses recorded in those same periods. Exchange gains and losses are recorded for foreign currency transactions denominated in a currency other than the functional currency of the reporting entity, and the ineffective portion of forward contracts used to hedge against currency exposure.

 

The effective tax rate for the three months ended August 31, 2014 and 2013 was 33.9% and 37.4%, respectively.  The effective tax rate for the fiscal 2015 period was lower than the effective tax rate for the corresponding period in fiscal 2014 primarily due to changes in the mix of income by tax jurisdiction and the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings.  Also, the gain on acquisition related items only impacted the fiscal 2014 effective tax rate.

 

 

Non-GAAP Disclosures

 

EBITDA and Adjusted EBITDA are both non-GAAP financial measures and are presented in this report because we consider them important supplemental measures of our performance and believe that they are frequently used by interested parties in the evaluation of companies in the industry. EBITDA, as we use it, is net income (loss) before interest, taxes, depreciation and amortization. We believe that the presentation of EBITDA enhances an investor’s understanding of our financial performance. Adjusted EBITDA is calculated in a similar manner as EBITDA except that certain non-cash charges, unusual or non-recurring items and other items that we believe are not representative of our core business are excluded. We believe that Adjusted EBITDA is also a useful financial metric to assess our operating performance from period to period. EBITDA and Adjusted EBITDA do not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity or any other performance measure derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

EBITDA and Adjusted EBITDA do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;

EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and

EBITDA and Adjusted EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments, limiting its usefulness as a comparative measure.

 

 

 

 
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Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using EBITDA and Adjusted EBITDA as supplemental information. Adjusted EBITDA for the three months ended August 31, 2014 and August 31, 2013 is calculated as follows (in thousands):

 

   

Three Months Ended

 
   

August 31

 
   

2014

   

2013

 
                 

Net loss

  $ (5,479 )     (7,760 )

Interest expense

    22,242       22,169  

Income tax benefit

    (2,813 )     (4,635 )

Depreciation and amortization

    18,395       17,579  
                 

EBITDA

    32,345       27,353  
                 

Adjustments to EBITDA:

               

Stock-based compensation (i)

    518       448  

Acquisition expenses, net (ii)

    826       (910 )

Sponsor fee (iii)

    934       1,005  

Non-cash impact of purchase accounting (iv)

    111       2,342  

Certain non-recurring expenses and other (v)

    2,404       3,873  

Adjusted EBITDA

  $ 37,138       34,111  

 

 

i.

Represents non-cash stock-based compensation.

 

ii.

Represents non-recurring items related to acquisition activities including legal, accounting and other costs. The items included in the first quarter of fiscal 2014 also include the non-cash gain of $1.3 million resulting from the decrease in the contingent consideration liability related to the LIFECODES acquisition.

 

iii.

Represents management fees and other charges associated with a management services agreement with the Sponsor.

 

iv.

Represents non-cash expenses, such as inventory valuation adjustments, primarily incurred as a result of the LIFECODES acquisition.

 

v.

Represents non-recurring or non-cash items not included in captions above including personnel and business optimization costs.

 

 

Under the Revolving Facility, the senior secured leverage ratio is the sole financial covenant. We believe the future directional trend of this ratio will provide valuable insight to understanding our operational performance and financial position with respect to our debt obligations. The senior secured leverage ratio is defined by our credit agreement governing the Senior Credit Facilities as consolidated senior secured net debt divided by the total of the last twelve months Adjusted EBITDA. Adjusted EBITDA used in this leverage ratio is calculated in a similar manner to that included in the table presented above, except that it includes certain additional adjustments such as projected cost savings and synergies calculated on a pro forma basis that we expect to realize in future periods related to actions already taken or expected to be taken within twelve months of the end of the applicable period, including the LIFECODES acquisition and related initiatives, and the deferred revenue adjustment described above. As of August 31, 2014, we were in compliance with our senior secured net leverage ratio covenant.

 

 

Liquidity and Capital Resources

 

Cash flow

 

Our principal source of liquidity is our operating cash flow. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing and financing requirements.

 

In the first quarter of fiscal 2015, our cash and cash equivalents decreased by $6.3 million to $17.4 million as of August 31, 2014. The decrease was primary due to net cash used in the purchase of additional property and equipment of $3.5 million, and to repay $1.7 million of long-term debt. The cash balance at August 31, 2014 includes cash of $14.7 million that is held by our subsidiaries outside of the United States. We are not permanently reinvested in our subsidiaries and can repatriate these funds, if needed, to support future debt payments.

  

 
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In the first quarter of fiscal 2014, our cash and cash equivalents decreased by $5.4 million to $24.0 million as of August 31, 2013. The decrease was primary due to the timing of payments to fund the working capital requirements of our operations and to repay $1.7 million of long-term debt in the first three months of fiscal 2014. There were no borrowings from the Revolving Facility during the quarter.

 

Operating activities

 

Operating activities used no cash in the first quarter of fiscal 2015 as compared with $4.3 of cash used by operating activities in the first quarter of fiscal 2014. The decrease was mainly due to improved operating results of $2.3 million and a $2.4 million decrease in non-cash adjustments. The decrease in non-cash adjustments was mainly due to amortization of an inventory fair value adjustment included in the first quarter of fiscal 2014 that was not included in the first quarter of fiscal 2015.

 

Investing activities

 

 

We used cash of $3.5 million to purchase property and equipment and to upgrade certain financial systems in the three months ended August 31, 2014 as compared to fixed asset purchases of $1.0 million in the three months ended August 31, 2013. In addition, during the three months ended August 31, 2013, we received $1.1 million due from the seller of LIFECODES as a result of finalizing certain purchase price adjustments.

 

Financing activities

 

In the first quarter of fiscal 2015, we used cash from financing activities of $1.7 million for repayments of our long-term debt. We also borrowed and repaid $8.0 million from our Revolving Facility during the first quarter of fiscal 2015. As of August 31, 2014, there were no amounts outstanding under our Revolving Facility. In the first quarter of fiscal 2014, we used cash from financing activities of $1.7 million for repayments of our long-term debt and had no amounts outstanding under our Revolving Facility during the quarter or as of August 31, 2013.

 

Future Cash Requirements and Restrictions

 

Our Term Loan Facility requires quarterly principal payments equal to 0.25% of the original principal amount of the loan with the balance due and payable on August 19, 2018. Required principal and interest payments related to our Term Loan Facility are $6.6 million and $33.0 million, respectively, for the next 12 months. Required interest payments related to the Notes is $44.5 million for the next 12 months. The Senior Credit Facilities are secured by substantially all of the tangible and intangible assets of our U.S. subsidiaries and the pledge of 65% of the stock of our foreign subsidiaries. As of August 31, 2014, we had principal of $1,053.4 million of long-term borrowings outstanding under our Term Loan Facility and the Notes. Our net total available borrowings under our Revolving Facility was $100.0 million as of August 31, 2014.

 

In October 2014, we used our Revolving Facility to fund a portion of the payments made to acquire Sentilus, Inc. for $6.0 million on October 1, 2014, and in connection with the execution of a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) in which we paid Sirona $5.3 million on October 3, 2004, as well as related transaction costs. As of October 10, 2014, our net total available borrowings under our Revolving Facility was approximately $86.5 million. Refer to Note 18 of the Company’s consolidated financial statements for additional information related to these two transactions.

 

We expect that recurring capital expenditures during fiscal 2015 will range from $10.0 million to $15.0 million. These expenditures will be used to purchase equipment that increases or enhances capacity and productivity, and to upgrade certain financial systems. These expenditures exclude the purchase of instrument assets that are used in equipment rental agreements with our customers, which is reflected in non-cash investing and financing activities in our consolidated statements of cash flows.

 

 

Management believes that existing cash and cash equivalent balances, cash provided from operations, and borrowings available under the Revolving Facility of our Senior Credit Facilities will provide sufficient liquidity to meet the operating and capital expenditure needs for existing operations during the next twelve months.

 

 

Commitments and Contractual Obligations

 

As of August 31, 2014, our material cash commitments and contractual obligations have not changed significantly from those disclosed in our Annual Report for the year ended May 31, 2014.

  

 
29

 

  

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financial arrangements as of August 31, 2014.

 

 

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which often require the judgment of management in the selection and application of certain accounting principles and methods. We discuss our critical accounting policies in the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K. There have been no other significant changes in our critical accounting policies since May 31, 2014.

 

 

Risk Factors and Forward-Looking Statements

 

This document contains “forward-looking statements,” which include information concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other statements that are not related to present factors or current conditions or that are not purely historical. Words such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but there can be no assurance that we will realize our expectations or that our beliefs will prove correct.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements include but are not limited to:

 

 

our substantial indebtedness;

 

lower industry blood demand;

 

lower than expected demand for our instruments;

 

the decision of customers to defer capital spending;

 

the failure of customers to efficiently integrate our instruments into their blood banking operations;

 

increased competition;

 

product development and regulatory obstacles;

 

the failure to successfully integrate and capitalize on past or future acquisitions;

 

general economic conditions; and

 

other risks and uncertainties discussed in this report, particularly in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

There may be other factors of which we are currently unaware of or deem immaterial that may cause our actual results to differ materially from the forward-looking statements.

 

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date they are made and are expressly made subject to the cautionary statements included in this report. Except as may be required by law, we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events.

 

Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading “Risk Factors” in ITEM 1A of this report, and in the Company’s Annual Report on Form 10-K for the year ended May 31, 2014.

 

 
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

As of August 31, 2014, there have been no material changes regarding the Company’s market risk position from those disclosed in Item 7A., “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended May 31, 2014.

 

 

ITEM 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2014. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of August 31, 2014, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting during the quarter ended August 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 
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PART II

 

OTHER INFORMATION

ITEM 1. Legal Proceedings

 

From time to time, we are a party to certain legal proceedings in the ordinary course of business. However, we are not currently subject to any legal proceedings expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.  

 

ITEM 1A. Risk Factors

 

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2014. In addition to the other information included in this report, carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our business. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may have a material adverse effect on our business, financial condition and/or operating results.

 

 
32

 

  

ITEM 6. Exhibits

 

10.1

Amendment to IVD Holdings Inc. 2011 Equity Incentive Plan dated September 2, 2014.

31.1

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

31.2

Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

32.1

Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document *

101.SCH

XBRL Taxonomy Extension Schema *

101.CAL

XBRL Taxonomy Extension Calculation *

101.DEF

XBRL Taxonomy Extension Definition *

101.LAB

XBRL Taxonomy Extension Label *

101.PRE

XBRL Taxonomy Extension Presentation *

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

IMMUCOR, INC.

 

        (Registrant)  
           

Date:

October 10, 2014 

 

 

By: 

/s/ William A. Hawkins 

 

 

 

 

 

William A. Hawkins, Chief Executive Officer  

 

 

 

 

(Principal Executive Officer)  

 

 

 

 

 

 

 

Date: 

October 10, 2014 

 

 

By: 

/s/ Dominique Petitgenet 

 

 

 

 

 

Dominique Petitgenet, Chief Financial Officer

 

 

 

 

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

33