UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X	THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended May 31, 2015
	OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

 

Commission file number 0-14820

 

IMMUCOR, INC.

(Exact name of registrant as specified in its charter)

Georgia	22-2408354
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3130 GATEWAY DRIVE, P.O. BOX 5625	30091-5625
Norcross, Georgia	(Zip Code)
(Address of principal executive offices)

 

Registrant’s telephone number, including area code, is (770) 441-2051

 

Securities registered pursuant to Section 12(b) and 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes___ No   X   

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    

Yes    X     No ____ 

 

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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 a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

 

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 “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]	Accelerated filer                [   ]
Non-accelerated filer   [ X]	Small reporting company [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 August 21, 2015, there were 100 shares of common stock outstanding.

  

 

 

Table Of Contents
Part I
Item 1.	Business
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	[Reserved]
Part II
Item 5.	Market For The Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Item 7A.	Quantitative And Qualitative Disclosures About Market Risk
Item 8.	Financial Statements And Supplementary Data
Item 9.	Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Item 9A.	Controls And Procedures
Item 9B.	Other Information
Part III
Item 10.	Directors, Executive Officers and Corporate Governance
Item 11.	Executive Compensation
Item 12.	Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
Item 13.	Certain Relationships And Related Transactions, And Director Independence
Item 14.	Principal Accountant Fees And Services
Part IV
Item 15.	Exhibits And Financial Statement Schedules
Signatures
Ex-21	Subsidiaries Of The Registrant
Ex-31.1	Certificate Of Principal Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
Ex-31.2	Certificate Of Principal Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
Ex-32	Certifications Required Under Section 906 Of The Sarbanes-Oxley Act Of 2002

 

 

FORWARD – LOOKING STATEMENTS

 

This annual report on Form 10-K 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 facts or current conditions or that are not purely historical. Many of these statements appear, in particular, under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this report, the words “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 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 products into their operations;
	•	increased competition;
	•	product development, manufacturing 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 “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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

 

All forward-looking statements attributable to us 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 publicly 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.

 

Item 1. — Business.

 

Founded in 1982, Immucor, Inc., a Georgia corporation (“Immucor” or the “Company”), is a worldwide leader in the transfusion and transplantation in vitro diagnostics markets. Our products perform typing and screening of blood and organs to ensure donor-recipient compatibility. Our offerings are targeted at hospitals, donor centers and reference laboratories around the world.

 

Our Company

 

On August 19, 2011, Immucor was acquired (the “Immucor Acquisition”) by investment funds from TPG Capital, L.P. (the “Sponsor”) and certain co-investors, for a purchase price of approximately $1.9 billion, including the assumption of approximately $1.1 billion of acquisition-related debt. As a result of the Immucor Acquisition, our stock is no longer publicly traded. Currently, the issued and outstanding shares of Immucor are indirectly owned by the Sponsor and certain co-investors.

 

Acquisitions

 

LIFECODES

 

On March 22, 2013, we acquired the LIFECODES business (“LIFECODES”), one of the market leaders in transplantation diagnostics. LIFECODES manufactures and markets diagnostics products used primarily by hospitals and reference laboratories in a number of tests performed to detect and identify certain properties of human tissue to ensure the most compatible match between patient and donor. These tests are performed for pre-transplant human leukocyte antigen (“HLA”) typing and screening processes as well as for post-transplant patient monitoring to aid in the identification of graft rejection. LIFECODES also offers other immune-monitoring products, which are used to identify certain properties commonly found in patients with severe illnesses, and with an immune response to certain drug therapies.

 

  

Acquiring LIFECODES strengthened our position in the global in vitro diagnostics market by creating a single source for transfusion and transplantation-related testing products, and signaled our initial steps in implementing our strategy to become a global leader in transfusion and transplantation medicine. Our goal is to diversify our business into the new and growing market of transplant diagnostics. Such diversification enhances our ability to grow our business, expand our customer reach and better insulate us against market and economic downturns. LIFECODES had approximately 170 employees at the date of acquisition.

 

We paid $86.2 million in cash to acquire LIFECODES financed with a combination of debt and equity. In conjunction with the LIFECODES acquisition, the Term Loan Facility was amended and an additional $50.0 million was issued with the same terms and maturity as the then-existing facility. An equity investment of $42.5 million was contributed by our parent company, IVD Intermediate Holdings B Inc. (the “Parent”), to fund the acquisition, including transaction costs and provide additional working capital.

 

LIFECODES Distribution Businesses

 

We have completed the acquisition of three LIFECODES distribution businesses, one in the United Kingdom and one in Italy, both of which were completed on January 31, 2014, and one in India which was completed on August 1, 2014. These acquisitions enable us to streamline the distribution of our LIFECODES products in Europe and in India. We paid $6.8 million in cash to acquire these distribution businesses which was funded from cash flows from operating activities.

 

Organ-i  

 

On May 30, 2014, we 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 to acquire this business was $12.0 million which was funded from cash flows from operating activities.

 

Sentilus

 

On October 1, 2014, we completed the acquisition of Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, Femtoarrays^TM. Among other uses, Sentilus has been developing Femtoarrays^TM 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 our transfusion diagnostics business. The total purchase price for the Sentilus business was $6.0 million which was paid in cash.

 

Other Investments

 

Sirona Collaboration

 

On October 3, 2014, we entered into a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) for the commercialization of Sirona’s human leukocyte antigen (“HLA”) typing sample preparation and bioinformatics offering for next generation sequencing. As part of this collaborative arrangement, the Company paid $0.7 million for a warrant with an exclusive option to acquire 100% of the common stock of Sirona and loaned $4.6 million bearing interest to Sirona for development funding. The collaborative arrangement includes the potential for future interest bearing loans from the Company of up to $6.7 million over a two year period from the date of the arrangement, subject to the achievement of certain development milestones and other terms of the arrangements, of which, $3.1 million was paid to Sirona as an additional loan on June 1, 2015. As of May 31, 2015, the total cash investment in the collaborative arrangement with Sirona was $5.3 million which was paid in cash and financed with a combination of debt (borrowings from our Term Loan Facility) and cash flows from operating activities.

 

Financial Information about Segments

 

We determine our operating segments in accordance with our 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. We aggregate our operating segments because they have a similar class of consumer, economic characteristics, nature of products, and nature of production and distribution methods.    

 

 

Competitive Strengths

 

Automation – Since 1998, our strategy in transfusion diagnostics (or “immunohematology”) has been to drive automation in the blood bank with the goal of improving operations as well as patient safety. Due to the critical importance of matching patient and donor blood, manual testing is performed by highly educated and skilled technologists. In the U.S. market, we estimate that approximately 55% of customers perform testing on a manual basis without the use of an automated instrument. These customers are primarily in the small- to medium-hospital segment of the market. A significant number of customers in the high volume segment of the U.S. market (large hospitals, donor centers and reference laboratories) are automated. Outside the U.S., a significant portion of customers are automated in the developed international markets while there continues to be need for automation in the developing markets.

 

We believe our customers, whether a hospital, a donor center or a reference laboratory, are able to realize significant economic benefits while improving patient safety from adopting our automation. Automation can allow customers to reduce headcount and/or overtime in the blood bank, which can be beneficial given the current shortage of qualified blood bank technologists in the U.S. Given the reduction in both human and economic capital, we estimate that our instruments have an average payback period of one year or less, depending on the size of the lab. We believe our automated products represent an attractive value proposition for manual customers to switch to automation.

 

Leadership position in niche markets – We estimate the global market for our transfusion and transplantation products is approximately $1.8 billion and we believe we have leadership positions in our focused markets. We believe our transfusion products, ranging from our automated instruments to our proprietary Capture® technology, are widely used and recognized by the immunohematology industry worldwide. In transplantation, our LIFECODES® products leverage the significant installed base of Luminex Corporation (“Luminex”) instruments to enable adoption of our products in HLA labs around the world. We look to maintain our leadership position in these markets by continuing to innovate and introduce high value products for our customers.

 

Product Innovations –We continually seek to improve existing products and develop new products to increase our market share and to improve the operations of our customers. In support of our immunohematology customers, we have launched four generations of automated serology instruments and we continue to develop innovative products, including our offering to support molecular methods, which we believe will be the future of immunohematology. In support of our transplant customers, we continue to launch new assays that support both pre- and post-transplant testing, including monitoring of patients to reduce the probability of transplant rejection.

 

Donor-patient compatibility – Our product offering, whether in transfusion or transplant medicine, is focused on achieving compatibility between donors and patients, which is explained in more detail in “Products” below.

 

Products 

 

Our products are used to determine compatibility between a patient and a donor for the purposes of a blood transfusion, organ or stem cells (bone marrow) transplant. Compatibility is determined by performing a “type and screen” for both the patient and the donor.

 

Typing for both transfusions and transplants involves identifying antigens. For transfusion, antigens in the Human Erythrocyte Antigen (“HEA”) system on the surface of red blood cells are identified. For transplant, antigens in the HLA system on the surface white blood cells are identified. Screening for both a transfusion and a transplant determines whether there are any antibodies present that could cause a negative immune response.

 

We sell reagents as well as instruments to allow laboratories – whether in a hospital, a donor center or a reference lab – to perform compatibility testing. 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 HLA reagents run on Luminex instruments, which are open systems. The “razor/ razor blade” business model generates a recurring revenue stream for us.

 

Transfusion Diagnostics

 

REAGENTS

 

We offer both traditional and proprietary serology reagents. Our serology instruments use both our traditional reagents, as well as our proprietary solid phase technology, marketed under the name Capture, to perform tests.

 

  

Traditional reagents are used in a manual setting with testing performed via traditional agglutination blood testing techniques in a test tube. Certain traditional reagents are also used on our automated instruments.

 

Capture reagents are used with our instruments to perform antibody screening and identification. Delivered in a microtitration plate, the technology delivers clearly defined, machine-readable test results that are often easier to interpret than the subjective results sometimes obtained from existing agglutination technology (manual method). Also, in batch test mode the solid phase test results can generally be obtained in substantially less time than by traditional agglutination techniques.

 

INSTRUMENTS

 

NEO – Targeted at donor centers, large volume hospitals and reference laboratories, NEO® provides a fully-automated solution to perform all routine blood bank tests, including blood grouping, antibody screening, cross match, direct antiglobulin test (“DAT”) and antibody identification. NEO is our fourth generation automated instrument. NEO’s added functionality includes STAT functionality, a faster turnaround time and improved reliability. NEO can process up to 224 different samples at once, and can perform approximately 60 type-and-screen tests an hour. We believe that NEO has the highest type and screen throughput available in the global market.

 

ECHO – The Echo® is targeted at small- to medium-sized hospitals as well as at integrated delivery networks (both hospital and lab systems) in combination with NEO. Echo has a broad test menu and the capacity to load 20 samples at a time, performing approximately 14 type-and-screen tests an hour. Echo features STAT functionality, exceptional mean time between failures and what we believe is the fastest turnaround time in the industry.

 

CAPTURE WORKSTATION (Semi-Automated Processor) – The Capture Workstation has semi-automated components for performing our proprietary Capture assays manually. It is marketed as a back-up system for our fully automated NEO and Echo instruments, or as a standalone test system for small laboratories looking to standardize testing.

 

Transplant and Molecular Diagnostics

 

Our molecular products perform typing for both transfusion and transplantation, including the HEA and HLA systems.

 

For transfusion, our molecular typing assays use our multiplex, polymerase chain reaction (“PCR”) technology. Our current offering includes HEA and Human Platelet Antigen (“HPA”) assays as well as our current semi-automated molecular immunohematology instrument, the Array Imaging System and BASIS database.

 

In May 2014, the U.S. Food and Drug Administration (“FDA”) approved our PreciseType^TM HEA test, which is the first FDA-approved molecular immunohematology product on the market. Formerly marketed as the HEA BeadChip™ Test, PreciseType provides clinicians with detailed genetic matching information that can reduce the risk of alloimmunization (antibody production) and serious hemolytic reactions associated with transfusions, which can be especially problematic for patients receiving frequent blood transfusions. With its FDA in-vitro diagnostic approval, PreciseType is now the “test of record” in the U.S. for both patient and donor typing of red blood cells. The test has been CE-marked in Europe for in vitro diagnostics, or IVD, use since 2010.

 

In July of 2015, Medicare approved coverage of our PreciseType product for pretransfusion molecular testing for four designated types of use in the Medicare Administrative Contractor jurisdiction which includes North Carolina, South Carolina, West Virginia and most counties within Virginia. In order to receive reimbursement for the service, healthcare providers are required to demonstrate that it is a medically necessary test for that particular patient.   

 

For transplant diagnostics, we deliver our reagents for both typing and screening on Luminex’s xMAP multiplex technology. In addition to other HLA-related testing products, such as serological typing trays, we also sell assays that monitor organ health post-transplant.

 

We also offer platelet-focused products for both transfusion medicine and specialty coagulation.

 

Marketing, Distribution and Seasonality

 

Our target customers are donor centers, hospitals and reference laboratories. Our products are distributed globally through both direct affiliate offices and third-party distribution arrangements. No single customer represents 10% or more of our annual consolidated revenue. We believe there is a slight amount of seasonality in our business as fewer blood donations and elective surgical procedures are generally performed in our first fiscal quarter (June-August).

 

 

Backlog

 

For the majority of our products, the nature and shelf-life prohibits us from maintaining a material backlog. For the orders in backlog, it is expected that the majority will be shipped or completed within the following 12 months. At May 31, 2015, our backlog was not material.

 

Suppliers

 

We obtain raw materials from numerous suppliers and believe our business relationships with them are good. Some of our products are derived from blood having particular or rare combinations of antibodies or antigens, which are found in a limited number of individuals. To date, we have been able to obtain sufficient quantities of such blood for use in manufacturing our products, but there can be no assurance that a sufficient supply of such blood will always be available to us.

 

We source our transfusion diagnostic instruments from single-source suppliers. Although we currently do not have written contract with our Echo instrument supplier, we generally operate under the terms of past contractual arrangements with that supplier. We believe that our business relationships with these suppliers are good. While these relationships are significant, we believe that other manufacturers could supply these instruments to us after a reasonable transition period. In the event one or more of these suppliers experience financial problems that prevent it from continuing to produce our instruments, we believe it would take in the range of 18 months to 24 months to begin production with a new supplier. While a change in suppliers would disrupt our business during the transition period, we do not believe it would have a material financial impact on our business as a whole.

 

We source our transplant diagnostic instrument as well as certain raw materials from Luminex. Our long-term contractual relationship with Luminex is significant and our business relationship is good.

 

Regulation

 

The manufacture and sale of transfusion in vitro diagnostics products is a highly regulated business and is subject to continuing compliance with country-specific statutes, regulations and standards that generally include licensing, product testing, facilities compliance, product labeling, post-market vigilance and consumer disclosure.   In the U.S., the FDA regulates the transfusion of human blood as a drug and as a biological product. The FDA regulates all phases of the transfusion process, including donor selection and the collection, classification, storage, handling and transfusion of blood and blood components.

 

In the U.S., an FDA biologics license is issued for an indefinite period of time, subject to the FDA’s right to revoke the license.  As part of its overview responsibility, the FDA makes facility inspections on an unannounced basis.  In addition, each product manufactured by us is subject to formal product submissions and review processes by the FDA and other regulatory bodies, such as Health Canada, a European Union recognized Notified Body and the Japanese Ministry of Health prior to authorization to market. Significant changes to our products or facilities can require additional submission and review prior to implementation. For example, we hold several FDA biologic licenses to manufacture blood grouping reagents, anti-human globulin reagents and reagent red blood cells. We must submit biologic license applications, pre-market approval applications or 510(k) pre-market notifications to the FDA to obtain product licenses, market approval or market clearance for new products or instruments. To accomplish this, we must submit detailed product information to the FDA, perform a clinical trial of the product, and demonstrate to the satisfaction of the FDA that the product meets certain efficacy and safety standards. There can be no assurance that any future product licenses, product clearances or instrument clearances will be obtained by us.

 

Our manufacturing and distribution facilities in the U.S., Germany and Canada are certified to 13485:2003. In addition, our manufacturing facility in Germany is also certified to ISO 9001:2008. This is an internationally recognized standard and certification is required in order to continue product distribution in key markets such as the European Union and Canada. In addition, to allow continued marketing of our products in the European Union, we are required to maintain certification under the EC Full Quality Assurance System Assessment in accordance with the requirements of Annex IV of the IVD Medical Devices Directive 98/79/EC. This certification authorizes the use of the CE Mark on our products that allows products free access to all countries within the European Union. We have successfully completed certifications for CE marking of all products manufactured for the European market.

 

There are multiple countries worldwide that also impose regulatory barriers to market entry. We maintain product registrations and approvals necessary to maintain access to certain foreign markets.

 

Environmental

 

Some of our processes generate hazardous waste and we have a U.S. Environmental Protection Agency identification number. We believe we are in compliance with applicable portions of the federal and state hazardous waste regulations.

 

 

Research, Development and Intellectual Property 

 

We rely on a combination of patent and trade secret laws, know-how and licensing opportunities to establish and protect our proprietary technologies and products. We enforce our intellectual property rights consistent with our strategic business objectives. We do not believe that we own any single patent or hold any single license (or series of patents or licenses) that is material to the operation of our business, but we consider them in the aggregate to be of material importance to our business.

 

We continually seek to improve our existing products and to develop new ones in order to increase our market share. Prior to sale, any new product requires regulatory approvals, including licensing or pre-market clearance from the FDA in the U.S. and CE marking in Western Europe. For fiscal years 2015, 2014, and 2013, we spent approximately $28.8 million, $29.1 million, and $21.3 million, respectively, for research and development.

 

We use trademarks on most of the products we sell. These trademarks are protected by registration in the U.S. and other countries where such products are marketed using the trademarks. We consider these trademarks in the aggregate to be of material importance in the operation of our business.

 

Competition

 

Competition in the transfusion and transplantation in vitro diagnostics markets is based on quality of products, pricing, the results of research and development efforts, talent of the sales forces, ability to furnish a range of products, reliable technology, skilled and trained technicians, customer service and continuity of product supply. We believe we are well positioned to compete favorably in our markets because of the completeness, reliability and quality of our product lines, our competitive pricing structure and our introduction of innovative products that enhances our competitive position. We also believe that new product introductions and the experience and expertise of our sales technical support personnel will enable us to remain competitive in the market.

 

Our principal competitors worldwide in transfusion diagnostics are Ortho-Clinical Diagnostics and Bio-Rad Laboratories, Inc. In transplantation diagnostics, our primary competitor is Thermo Fisher Scientific.  

 

Employees

 

At May 31, 2015, we had approximately 1,090 full-time employees worldwide. We have a low staff turnover rate and consider our employee relations to be good. In addition to our full-time work force, we employ temporary and contract employees. None of our employees are represented by a labor union.

 

 

Available Information

 

We file periodic reports under the Securities Exchange Act of 1934 with the SEC. Electronic versions of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished with the SEC may be accessed free of charge through our website at www.immucor.com. The information may also be accessed at the SEC’s web site at www.sec.gov. The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contain on the website is not part of this document.

 

 

Item 1A. — Risk Factors.

 

We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financing, legal and other factors or conditions that may affect us. We provide the following cautionary discussion of risks and uncertainties relevant to our business, which we believe are factors that, individually or in the aggregate, could have a material and adverse impact on our business, results of operations and financial condition, or could cause our actual results to differ materially from expected or historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, our operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.

 

Risks Relating to Our Company

 

Lower blood demand could negatively impact our financial results.

 

Our transfusion diagnostics products are used to test blood prior to transfusion. Lower demand for blood in the markets in which we operate could result in lower testing volumes. For example, we believe the U.S. market has been experiencing lower demand for blood in our last four fiscal years. Lower blood demand could result from a variety of factors, such as fewer elective surgeries and more efficient blood utilization by hospitals. Blood is a large expense for hospital laboratories and pressure on hospital budgets due to macroeconomic factors and healthcare reform could force changes in the ways in which blood is used. Lower blood demand could negatively impact our revenue, profitability and cash flows.

 

A catastrophic event at any of our manufacturing facilities would prevent us from producing many of our reagent products.

 

Substantially all of our diagnostic products are produced at single sites. While we have reliable supplies of most raw materials, our reagent production is highly dependent on the uninterrupted and efficient operation of each facility, and we currently have no plans to develop a third-party reagent manufacturing capability as an alternative source of supply. Therefore, if a catastrophic event occurred at any of our facilities, such as a fire or tornado, many of those products could not be produced until the manufacturing portion of the facility was restored and cleared by the FDA. We maintain a disaster recovery plan to minimize the effects of such a catastrophe, and we have obtained insurance to protect against certain business interruption losses. However, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all.

 

We may not be successful in capitalizing on our acquisitions.

 

Acquisitions could cause diversion of management’s time as well as a shift of focus from operating the businesses to issues related to integration and administration or inadequate management resources available for oversight as well as integration activities. We may face difficulties and inefficiencies in managing and operating businesses in multiple locations or operating businesses in which we have either limited or no direct experience today.

 

The long-term success of our acquisitions and any additional acquisitions we may complete in the future will depend upon our ability to successfully grow the acquired businesses as well as realize the anticipated benefits from combining the acquired businesses with our business. We may fail to grow these businesses or realize the expected synergies or anticipated growth targets from acquisitions. In addition, it may take longer than expected to achieve those synergies and growth targets. Acquisitions may cause other unexpected costs or liabilities and our failure to realize the anticipated benefits from acquisitions could harm our business and prospects.

 

Our business may be harmed by the contingent earn-out obligations in connection with acquisitions.

 

In connection with some of our acquisitions, we incur obligations to make contingent earn-out payments if certain financial and product development targets of certain acquired businesses are met over specified periods. Contractual provisions relating to the contingent earn-out obligation include covenants to operate the acquired businesses in a manner that may not otherwise be most advantageous to us. These provisions may also result in the risk of litigation relating to the calculation of the earn-out obligation amount due as well as the operation of the acquired businesses. Such litigation could be expensive and divert management attention and resources. We can give no assurance that our contingent obligations, including the associated covenants relating to the operation of the acquired businesses, will not otherwise adversely affect our business, liquidity, capital resources or results of operations.

 

Unforeseen product performance problems could prevent us from selling or result in a recall of the affected products.

 

In the event that we experience a product performance problem with either our instruments or our reagents, we may be required to, or may voluntarily, recall or suspend selling the products until the problem is resolved. We have from time to time initiated voluntary recalls of our products. Depending on the product, as well as the availability of acceptable substitutes, such a product recall or suspension could significantly impact our operating results.

 

 

Product performance could increase operating costs and result in the loss of current or future customers.

 

Product performance and reliability is a key factor in satisfying current customers and attracting new customers. Poor performance or unreliability of our products would not only increase maintenance costs, in the case of our instruments, but also could result in losing important current customers and an inability to gain new customers which could adversely affect our financial results.

 

Because we sell our U.S. manufactured products internationally, we could be adversely affected by fluctuations in foreign currency exchange rates.

 

In the fiscal year ended May 31, 2015, revenue outside the U.S. was approximately 39% of total revenue. As a result, fluctuations in foreign currency exchange rates against the U.S. Dollar could make our products less competitive and affect our revenue and earnings levels for our international affiliates. An increase in our revenue outside the U.S. would increase this exposure. We have not historically hedged against currency exchange rate fluctuations.

 

Gross margin volatility may negatively impact our profitability.

 

Our gross margin may be volatile from period to period due to various factors, including instrument sales, product mix, geographic mix, and manufacturing costs. As we continue to drive automation in the blood bank marketplace, we may experience increased instrument sales. The probable sales mix (in terms of instrument/reagent sales) could make it difficult for us to sustain the overall gross margins we have generated in the past. The higher margins on the reagents used on our instruments may not be enough to offset the lower margins on the instruments themselves. For our products, margins vary depending upon the type of product. Additionally, market pricing for our products varies by geographic region. Depending upon the product and geographic sales mix, margins could vary significantly from period to period. Our reagent products are manufactured in-house. Margins for these products could be impacted based upon costs of raw materials and labor as well as overhead and the efficiency of our manufacturing operations from period to period. Margins may also be negatively impacted by increased competition. New market entrants or existing market participants seeking to gain market share may foster a competitive environment of pricing pressures and/or increased marketing and other expenditures that could negatively impact profitability.

 

If customers delay integrating our instruments into their operations, the growth of our business could be negatively impacted.

 

From time to time in the past, some of our customers have experienced significant delays between the purchase of an instrument and the time at which it has been successfully integrated into the customer’s existing operations and is generating reagent revenue at its expected annualized run rate. These delays may be due to a number of factors, including staffing and training issues and difficulties interfacing our instruments with the customer’s computer systems. Because our business operates on a “razor/razor blade” model, such integration delays result in delayed purchases of the reagents used with the instrument. Delays of customers successfully integrating instruments into their operations could adversely impact our future revenues, earnings and cash flow.

 

We may not be successful in capitalizing on acquisitions of former distributors or newly established distribution networks outside the U.S.

 

An integral part of our strategy is to sell our products in additional markets outside North America. To further this strategy, in the past we have either acquired third party distribution businesses or have established our own direct distribution organizations. Our ability to grow successfully in overseas markets depends in part on our ability to achieve product acceptance and customer loyalty in these markets. Additionally, our operations in foreign countries present certain challenges and are subject to certain risks not necessarily present in our domestic operations, such as fluctuations in foreign currency exchange rates, shipping delays, changes in applicable laws and regulations and various restrictions on trade. These factors could impact our ability to compete successfully in these markets, which could in turn negatively affect our international expansion goals, and could have a material adverse effect on our operating results.

 

 

Our financial performance is dependent on the timely and successful introduction of new products and services.

 

Our financial performance depends in part upon our ability to successfully develop and market next generation automated instruments and other products in a rapidly changing technological and economic environment. Our market share and operating results would be adversely affected if we fail to successfully identify new product opportunities and timely develop and introduce new products that achieve market acceptance, or if new products or technology are introduced in the market by competitors that could render our products uncompetitive or obsolete. In addition, delays in the introduction of new products due to regulatory, developmental, or other obstacles could negatively impact our revenue, earnings and market share.

 

Industry adoption of alternative technology could negatively impact our ability to compete successfully.

 

Our products are used to test antibodies and DNA to determine a match prior to a transfusion or a transplant as well as for post-transplant monitoring to aid in the determination of graft rejection. Various advances in the treatment and monitoring of patients could cause lower demand for testing with our products. Additionally, customers could adopt alternative technologies for testing, instead of our technology, which could result in lower demand for our products.

 

We may need to develop new technologies for our products to remain competitive. We may have problems in the process of developing and delivering new products to the market, which could cause our financial performance to be negatively impacted.

 

Global economic conditions may have a material adverse impact on our results.

 

We are a global company with customers around the world. General economic conditions impact our customers, particularly hospitals. For our instruments, reduced capital budgets that result from negative economic conditions, such as a global recession, could result in lower instrument sales, which would negatively impact our future revenue, profitability and cash flow. Additionally, global economic conditions may adversely affect the ability of our customers to access funds to enable them to fund their operating and capital budgets. Budget constraints could slow our progress in driving automation in both our customer base and the blood banking industry as a whole, as well as the adoption of new products, which could negatively impact our future revenues, profitability and cash flow.

 

We are highly dependent on our senior management team and other key employees, and the loss of one or more of these employees could adversely affect our operations.

 

Our success is dependent upon the efforts of our senior management and staff, including sales, technical and management personnel, many of whom have very specialized industry and technical expertise that is not easily replaced. If key individuals leave us, we could be adversely affected if suitable replacement personnel are not quickly recruited. Our future success depends on our ability to continue to attract, retain and motivate qualified personnel. For example, there is intense competition for medical technologists, and in some markets there is a shortage of qualified personnel in our industry. If we are unable to continue to attract or retain highly qualified personnel, the development, growth and future success of our business could be adversely affected.

 

Supply chain interruptions could negatively impact our operations and financial performance.

 

Supply chain interruptions could negatively impact our operations and financial performance. The supply of any of our manufacturing materials may be interrupted because of poor vendor performance or other events outside our control, which may require us, among other things, to identify alternate vendors and could result in lost sales and increased expenses. While such interruption could impact any of our third-party sourced materials, three particular areas of note are our transfusion diagnostic instrument suppliers, our supply sources for rare antibodies or antigen combinations and our supply of raw materials from Luminex, which are described below.

 

We purchase our transfusion diagnostic instruments from single-source suppliers. If the supply of any of our instruments were interrupted, due to the supplier’s financial problems or otherwise, we believe an alternative supplier could be found but that it would take in the range of 18 months to 24 months to transfer the technology and begin production with a new instrument supplier. The disruption of one of these supply relationships could cause us to incur costs associated with the development of an alternative source. Also, we may be required to obtain FDA clearance of the instrument if it is not built to the same specifications as with the previous supplier. The process of changing an instrument supplier could have an adverse impact on future growth opportunities during the transition period if supplies of instruments on hand were insufficient to satisfy demand.

 

Some of our reagent products are derived from blood having particular or rare combinations of antibodies or antigens, which are found in a limited number of individuals. If we had difficulty in obtaining sufficient quantities of such blood and the supply was interrupted, we would need to establish a viable alternative, which may take both time and expense to either identify and/or develop and could have an adverse impact on our operations and financial position.

 

 

Luminex is our technology partner for our HLA products and we secure certain raw materials from Luminex to manufacture our HLA reagents. A disruption in supply of these raw materials could cause us to not be able to supply products to our customers. Additionally, a long-term disruption of supply from Luminex could result in us having to develop an alternate technology platform on which to deliver our HLA products, which could be both costly and result in a loss of revenue until a new product was brought to market.

 

Interruptions in our production capabilities could increase our production costs or reduce sales.

 

Our manufacturing processes are dependent upon critical pieces of equipment for which there may be only limited or no production alternatives and this equipment may, on occasion, be out of service as a result of unanticipated failures. We may experience periods of reduced production as a result of these types of equipment failures, which could cause us to lose or prevent us from taking advantage of various business opportunities or prevent us from responding to competitive pressures.

 

Distribution chain interruptions could negatively impact our operations and financial performance.

 

Distribution chain interruptions could negatively impact our operations and financial performance. Our international affiliates get almost all of their reagent products from our U.S. manufacturing facilities. If circumstances arose that disrupted our distribution of U.S.-sourced products internationally, we would need to establish an alternate distribution channel, which may take both time and expense to establish and could have an adverse impact on our operations and financial position.

 

Our molecular diagnostics products may not gain wide commercial acceptance.

 

BioArray’s molecular diagnostics products have slowly gained commercial traction. In May 2014, the FDA approved our PreciseType^TM HEA test, and in July 2015, Medicare approved coverage for our product for pretransfusion molecular testing for four designated types of use in the Medicare Administrative Contractor jurisdiction which includes North Carolina, South Carolina, West Virginia and most counties within Virginia. However, even with regulatory approval, these products are new to the marketplace and we will have to develop the nascent market for these products over time. Our molecular transfusion diagnostic business is also subject to risks associated with reimbursement, cannibalization of a portion of our existing serology business and the same macroeconomic factors, such as lower blood demand, that our serology business faces.

 

We may be unable to adequately protect our proprietary technology.

 

We have a substantial patent portfolio of issued patents or pending patent applications supporting our molecular immunohematology offering. We also have patents supporting our transfusion and coagulation products. Our competitiveness depends in part on our ability to maintain the proprietary nature of our owned and licensed intellectual property. Because the law is constantly changing, and unforeseen facts may arise, there is always a risk that patents may be found to be invalid or unenforceable. Therefore, there is no absolute certainty as to the exact scope of protection associated with any intellectual property. We believe our patents, together with our trade secrets and know-how, will prevent any current or future competitors from successfully copying and distributing our products. However, there can be no assurance that competitors will not develop around the patented aspects of any of our current or proposed products or independently develop technology or know-how that is equivalent to or competitive with our technology and know-how. Any damage to our intellectual property portfolio could result in an adverse effect on our current or proposed products, our revenues and our operations.

 

Protecting our intellectual property rights is costly and time consuming. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel.

 

We may be subject to intellectual property rights infringement claims in the future, which are costly to defend, could require us to pay substantial damages and could limit our ability to use certain technologies in the future.

 

Our commercial success depends, in part, not only on protecting our own intellectual property but on not infringing the patents or proprietary rights of third parties. Were third parties to claim that we infringe on their intellectual property rights, responding to such claims, regardless of their merit, could be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. Our practices, products and technologies, particularly with respect to the field of molecular immunohematology, may not be able to withstand third-party claims, regardless of the merits of such claims.

 

As a result of such potential intellectual property infringement claims, we could be required or otherwise decide it is appropriate to discontinue manufacturing, using, or selling particular products subject to infringement claims or develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible. In addition, to the extent potential claims against us are successful, we may have to pay substantial monetary damages or discontinue certain of our practices, products or technologies that are found to be in violation of another party’s rights. We also may have to seek third-party licenses to continue certain of our existing or planned product lines, thereby incurring substantial costs related to royalty payments for such licenses, which could negatively affect our gross margins. Also, license agreements can be terminated under appropriate circumstances. No assurance can be given that efforts to remediate any infringement would be successful or that licenses could be obtained on acceptable terms or that litigation will not occur.

 

 

In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay royalties to a third party and we fail to license such technology on acceptable terms and conditions or to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

 

The upgrade of our business information system could pose a risk to our ability to effectively operate and manage our business.

 

In an effort to streamline our processes and gain efficiencies, the Company made the decision to reduce the number of business information systems we operate. We are currently in the process of migrating our existing businesses to a single business information system.  The business information system is also being upgraded to the next generation application. The introduction of a new business information system or upgrading existing systems poses multiple risks. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and to keep pace with continuing changes in information processing technology, evolving industry, and regulatory standards. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to maintain our information systems and data integrity effectively, we could have operational disruptions which could result in inaccurate or untimely reporting of financial and operational results, an inability to effectively manage the ongoing operations of the business, adversely affect our ability to adequately service the needs of our existing customer’s or attract new customers, or suffer other damaging consequences. We depend on independent third parties for significant portions of our systems-related support. This dependence makes our operations vulnerable to such third parties' failure to perform adequately under the contract, due to internal or external factors.

 

Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions and services.

 

Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Depending on their nature and scope, such threats could potentially lead to the compromising of confidential information, improper use of our systems and networks, manipulation and destruction of data and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.

 

 

Risks relating to our industry

 

Government regulation may delay or prevent new product introduction and affect our ability to continue manufacturing and marketing existing products.

 

Our instruments, reagents and other products are subject to regulation by governmental and private agencies in the U.S. and abroad, which regulate the testing, manufacturing, packaging, labeling, distribution and marketing of medical supplies and devices. Certain international regulatory bodies also impose import and tax restrictions, tariff regulations, and duties on imported products. Delays in agency review can significantly delay new product introduction and may result in a product becoming “outdated” or losing its market opportunity before it can be introduced. Also, the FDA and international agencies have the authority to require a recall or modification of products in the event of a defect.

 

FDA clearance or approval may be required before we can market new instruments or reagents in the U.S. or make significant changes to existing products. The process of obtaining marketing clearances and approvals from regulatory agencies for new products can be time consuming and expensive. There is no assurance that clearances or approvals will be granted or that agency review will not involve delays that would adversely affect our ability to commercialize our products.

 

If any of our products failed to perform in the manner represented during this clearance or approval process, particularly concerning safety issues, one or more of these agencies could require us to cease manufacturing and selling that product, or even recall previously-placed products, and to resubmit the product for clearance or approval before we could sell it again. Depending on the product, and the availability of acceptable substitutes, such an agency action could result in significantly reduced revenues and earnings for an indefinite period.

 

 

Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business. In addition, there can be no assurance that regulation of our products will not become more restrictive in the future and that any such development would not have a material adverse effect on our business.

 

We are subject to a number of existing laws and regulations, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment.

 

The sales, marketing and pricing of products and relationships that medical device companies have with healthcare providers are under increased scrutiny by federal, state and foreign government agencies. Compliance with the Anti-Kickback Statute, False Claims Act, Physician Payments Sunshine Act and other healthcare related laws, as well as competition, data and patient privacy and export and import laws is under increased focus by the agencies charged with overseeing such activities.

 

U.S. and foreign governments have also increased their focus on the enforcement of the US Foreign Corrupt Practices Act (FCPA), and similar anti-bribery laws. We are expanding internationally into countries that have higher risk profiles for anti-bribery compliance. We have compliance programs in place, including policies, training and various forms of monitoring, designed to address these risks. However, these programs and policies may not always protect us from conduct by individual employees that violate these laws. Violations, or allegations of violations, of these laws may result in large civil and criminal penalties, debarment from participating in government programs, diversion of management time, attention and resources and may otherwise have an adverse effect on our business, financial condition and results of operations.

 

The industry and market segments in which we operate are highly competitive, and we may not be able to compete effectively with larger companies with greater financial resources than we have.

 

Our industry and the markets we operate in are highly competitive. Some of our competitors have greater financial resources than we do, making them better equipped to fund research and development, manufacturing and marketing efforts, or license technologies and intellectual property from third parties. We also face risks related to customers finding alternative methods of testing, which could result in lower demand for our products. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Although we believe that we have certain technological and other advantages over our competitors, maintaining these advantages will require us to continue to invest in research and development, sales and marketing and customer service and support. Sufficient resources to continue to make such investments may not be available, or at such levels that would allow us to be successful in maintaining such advantages.

 

Increased competition in the U.S. could negatively impact our revenues and profitability.

 

We could face increased competition in the U.S. market, which historically has had a limited number of market participants. For fiscal 2015, approximately 61% of our revenues were generated in the U.S., and our U.S. operations have higher gross margins than our operations outside the U.S. Additional competition in the U.S. could negatively impact our revenues and/or our profitability.

 

Changes in government policy may have a material adverse effect on our business.

 

Changes in government policy could have a significant impact on our business by increasing the cost of doing business, affecting our ability to sell our products and negatively impacting our profitability. Such changes could include modifications to existing legislation, such as U.S. tax policy, or entirely new legislation.

 

We may be exposed to product liability claims resulting from the use of products we sell and distribute.

 

Although product liability claims in our industry are infrequent, the expansion of our business in an increasingly litigious business environment may expose us to product liability claims related to the products we sell. We maintain insurance that includes product liability coverage, and we believe our insurance coverage is adequate for our business. However, there can be no assurance that insurance coverage for these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of coverage will continue to be available at a reasonable cost. A partially or completely uninsured successful claim against us could have a material adverse effect on us.

 

 

Risks related to our indebtedness

 

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.

 

We have a significant amount of indebtedness outstanding. The major components of our debt consist of senior credit facilities (“Senior Credit Facilities”) and unsecured notes (“Notes”). Our Senior Credit Facilities, as amended, are comprised of: (a) a $100.0 million senior secured revolving loan facility (the “Revolving Facility”) which matures in August 2017, and (b) a $663.3 million senior secured term loan facility (the “Term Loan Facility”) which matures in August 2018. We have $400.0 million in aggregate principal of unsecured 11.125% Notes due in August 2019. As of May 31, 2015, total principal indebtedness outstanding was $1,048.4 million and we had unused commitments of $100.0 million under our Revolving Facility. The terms of the Senior Credit Facilities, as amended, also provide that we can borrow up to an additional $100.0 million (or a greater amount if we meet specified financial ratios) of which the availability is subject to certain conditions including bank approval. In addition, 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).

 

Subject to the limits contained in the credit agreement governing our Senior Credit Facilities and the indenture that governs the Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:

 

•

making it more difficult for us to satisfy our obligations with respect to our debt;

 

•

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

•

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

•

increasing our vulnerability to general adverse economic and industry conditions;

 

•

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Credit Facilities, are at variable rates of interest;

 

•

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

•

placing us at a disadvantage compared to other, less leveraged competitors;

 

•

increasing our cost of borrowing; and

 

•

preventing us from raising the funds necessary to repurchase all the Notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indenture governing the Notes and cause a cross-default under the Senior Credit Facilities.

 

 

In addition, the indenture that governs the Notes and the credit agreement governing our Senior Credit Facilities contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.

 

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing our Senior Credit Facilities and the indenture governing the Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.

 

 In addition, we conduct a substantial portion of our operations through our subsidiaries, many of which are foreign legal entities and are not guarantors of our debt. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our non-guarantor subsidiaries do not have any obligation to pay amounts due on our debt or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the Notes and the credit agreement governing our Senior Credit Facilities limit the ability of our subsidiaries to incur contractual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

 

 

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under our indebtedness. If we cannot make scheduled payments on our debt, we will be in default and holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under our Senior Credit Facilities could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.

 

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.

 

We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indenture governing the Notes and the credit agreement governing our Senior Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of May 31, 2015, our Senior Credit Facilities had unused revolving debt commitments of $100.0 million, which amount could increase up to an additional $100.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions, including bank approval. All of those borrowings would be secured indebtedness. If new debt is added to our current debt levels, the risks that we face could intensify.

 

The terms of the credit agreement governing our Senior Credit Facilities and the indenture governing the Notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

 

The indenture governing the Notes and the credit agreement governing our Senior Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:

•

incur additional indebtedness;

•

pay dividends or make other distributions or repurchase or redeem our capital stock;

•

prepay, redeem or repurchase certain debt;

•

make loans and investments;

•

sell assets;

•

incur liens;

•

enter into transactions with affiliates;

•

alter the businesses we conduct;

•

enter into agreements restricting our subsidiaries’ ability to pay dividends; and

•

consolidate, merge or sell all or substantially all of our assets.

 

In addition, the restrictive covenants in the credit agreement governing the Revolving Facility portion of our Senior Credit Facilities require us to maintain a senior secured net leverage ratio of less than 5.25 to 1.00 to be tested on the last day of each fiscal quarter. Our ability to meet this financial covenant can be affected by events beyond our control.

 

A breach of the covenants under the indenture governing the Notes or under the credit agreement governing our Senior Credit Facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our Senior Credit Facilities would permit the lenders under our Senior Credit Facilities to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Senior Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or note holders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:

•

limited in how we conduct our business;

•

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

•

unable to compete effectively or to take advantage of new business opportunities.

 

These restrictions may affect our ability to grow in accordance with our strategy.

 

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

 

Borrowings under our Senior Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed will remain the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming that the entire Revolving Facility was fully drawn, each one-eighth point change in the LIBOR interest rate above the Term Loan Facility’s LIBOR floor of 1.25% would result in a $0.8 million change in annual interest expense on our indebtedness under our Senior Credit Facilities. We have entered into, and may continue to enter into, interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

 

 

Item 1B. — Unresolved Staff Comments.

 

Not applicable.

 

 

Item 2. — Properties.

 

We own our Canadian manufacturing facility and one of our Belgium sales offices. We lease the remainder of our facilities.

 

Our owned properties are not encumbered as security for any loan. We believe that our current facilities are adequate for our current and anticipated needs and do not foresee any difficulty in renewing leases that expire in the near term.

 

 

Item 3. — Legal Proceedings.

 

We (Immucor, Inc. and BioArray) are defendants in an action brought in August 2014 by Rutgers, the State University of New Jersey (“Rutgers”), in the Superior Court of New Jersey for Middlesex County, alleging breach of contract and fraud claims under a patent license between Rutgers and BioArray. We believe the claims are without merit and that we have meritorious defenses. We believe that liability is unlikely and that the amount of any liability is not now reasonably estimable, but that any potential liability would not be material to our operations or to our financial condition.

 

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 4. — [Reserved]

 

 

PART II

 

Item 5. — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

  

Prior to the Immucor Acquisition, our common stock was traded on The NASDAQ Stock Market under the symbol BLUD. Following the Immucor Acquisition, our common stock is privately held. Therefore there is no established trading market.

 

IVD Intermediate Holdings B Inc. (the “Parent”) is the only owner of record of our common stock. The Parent is a wholly owned indirect subsidiary of IVD Holdings Inc. (“Holdings”) which was formed by investment funds affiliated with TPG Capital, L.P.

 

 

Dividend Policy

 

With the exception of certain limited circumstances, payment of dividends is restricted under our Senior Credit Facilities and the indenture governing our Notes. We have never declared cash dividends with respect to our common stock and do not expect to do so in the future. We presently intend to continue to reinvest our earnings in the business. 

 

 

Item 6. – Selected Financial Data.

 

 

The following financial tables present selected consolidated financial data for Immucor. The data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes, included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

 

As a result of the Immucor Acquisition on August 19, 2011, our stock is no longer publicly traded. Currently, the issued and outstanding shares of Immucor are indirectly owned by TPG Capital, L.P. and certain co-investors. Our financial data is labeled as “Predecessor” for financial periods prior to the Immucor Acquisition, and “Successor” for financial periods after the Immucor Acquisition. In the following financial tables, we have presented the results of operations for the twelve month periods ended May 31, 2015 (the fiscal 2015 period), May 31, 2014 (the fiscal 2014 period), and May 31, 2013 (the fiscal 2013 period), and have presented separately the results of operations for the period from August 20, 2011 to May 31, 2012 (the Successor fiscal 2012 period) and the period from June 1, 2011 to August 19, 2011 (the Predecessor fiscal 2012 period), as well as May 31, 2011 (the fiscal 2011 period). This data has been derived from our audited consolidated financial statements and is in thousands of dollars.

 

														Successor				Predecessor
														August 20,				June 1,
														2011				2011
														through				through
		Year Ended May 31												May 31,				August 19,				Year Ended
		2015				2014				2013				2012				2011				May 31, 2011
Net sales		$	389,300				388,056				347,788				261,814				74,910				333,091
Cost of sales (exclusive of amortization shown separately below)			143,659				139,634				120,027				105,698				22,955				96,175
Gross margin			245,641				248,422				227,761				156,116				51,955				236,916
Operating expenses:
Research and development			28,791				29,070				21,313				13,929				4,895				15,900
Selling and marketing			57,833				59,057				50,129				32,913				10,510				35,931
Distribution			20,022				20,165				18,718				14,333				3,952				16,508
General and administrative			41,191				41,603				42,801				36,954				19,312				37,747
Amortization expense			54,531				52,965				50,765				39,224				931				4,333
Acquisition-related items			-				(4,638	)			2,616				1,362				18,863				500
Impairment loss			-				160,150				3,500				-				-				-
Certain litigation expenses		-					-				-				22,000				-				-
Loss on disposition of fixed assets			-				-				1,175				-				-				-
Total operating expenses		202,368					358,372				191,017				160,715				58,463				110,919
Income (loss) from operations		43,273					(109,950	)			36,744				(4,599	)			(6,508	)			125,997
Non-operating (expense) income:
Interest income			145				36				28				7				142				706
Interest expense			(89,421	)			(88,304	)			(90,830	)			(77,048	)			-				(70	)
Loss on extinguishment of debt			-				-				(9,111	)			-				-				-
Other, net			878				45				(539	)			447				2,673				3,997
Total non-operating net (expense) income			(88,398	)			(88,223	)			(100,452	)			(76,594	)			2,815				4,633
(Loss) income before income taxes			(45,125	)			(198,173	)			(63,708	)			(81,193	)			(3,693	)			130,630
Provision (benefit) for income taxes			15,600				(15,916	)			(24,566	)			(31,546	)			2,681				41,303
Net (loss) income		$	(60,725	)			(182,257	)			(39,142	)			(49,647	)			(6,374	)			89,327

 

 

 

		The following data is as of the dates indicated below:
														Successor				Predecessor
		May 31												May 31				August 19				May 31
		2015				2014				2013				2012				2011				2011
Working capital		$	74,946				91,917				87,069				71,295				381,259				378,979
Total assets			1,752,686				1,824,414				2,000,970				1,949,153				652,395				633,127
Long-term debt, net of debt discounts			1,033,276				1,037,183				1,039,278				986,361				-				-
Shareholders’ equity			383,681				468,616				644,706				637,378				576,646				568,872

 

 

Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

Our Business

 

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.

 

 

Business Highlights of 2015

 

The following is a summary of significant factors affecting our business in fiscal 2015:

 

●

Acquisitions and Investments –

 

o

Sentilus Acquisition – On October 1, 2014, the Company paid $6.0 million in cash to acquire Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, FemtoarraysTM. 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 our molecular transfusion diagnostics business.

 

o

Sirona Collaboration – On October 3, 2014, the Company entered into a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) for the commercialization of Sirona’s human leukocyte antigens (“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 loaned $4.6 million to Sirona for development funding. The collaborative arrangement also includes the potential to provide additional future funding in the form of a loan of up to $6.7 million over a two year period from the date of the arrangement, subject to the achievement of certain development milestones and other terms of the arrangement, of which $3.1 million was paid to Sirona as an additional loan on June 1, 2015.

 

●

Income Tax Expense Item –

 

o

During fiscal 2015, the Company decided to change its election with regard to the treatment of its foreign tax credits (“FTCs”). This decision is expected to generate a significant reduction in cash income tax payments related to the fiscal 2014, fiscal 2015 and fiscal 2016 years as a result of the Company changing from the credit method to the deduction method for its FTCs in various tax periods. As a result of this change in election, the Company recognized a discrete charge of additional income tax expense of $23.7 million during fiscal 2015. In addition, the Company recorded a valuation allowance of $7.6 million during fiscal 2015 related to uncertainties in the Company’s ability to utilize its FTC carryovers prior to their expiration.

 

 

●

Fluctuations in Foreign Currency Exchange Rates –

 

o

Certain of the foreign markets in which we operate have experienced significant fluctuations in foreign currency exchange rates in fiscal 2015 which caused an unfavorable impact on our consolidated operating results, balance sheet and cash flows in that period. Our foreign markets could continue to see significant fluctuations in foreign currency exchange rates in future periods which could cause a decline in expected future consolidated operating results, statement of position and cash flows.

 

 

Results of Operations

 

The operating results presented in the table below are in thousands of dollars, except percentages.

 

														Change
		Year Ended May 31												2015 vs 2014								2014 vs 2013
		2015				2014				2013				Amount				%				Amount				%
Net sales		$	389,300				388,056				347,788				1,244				0.3				40,268				11.6
Cost of sales (*)			143,659				139,634				120,027				4,025				2.9				19,607				16.3
Gross margin			245,641				248,422				227,761				(2,781	)			(1.1	)			20,661				9.1
Operating expenses:
Research and development			28,791				29,070				21,313				(279	)			(1.0	)			7,757				36.4
Selling and marketing			57,833				59,057				50,129				(1,224	)			(2.1	)			8,928				17.8
Distribution			20,022				20,165				18,718				(143	)			(0.7	)			1,447				7.7
General and administrative			41,191				41,603				42,801				(412	)			(1.0	)			(1,198	)			(2.8	)
Amortization expense			54,531				52,965				50,765				1,566				3.0				2,200				4.3
Acquisition-related items			-				(4,638	)			2,616				4,638				(100.0	)			(7,254	)			**
Impairment loss			-				160,150				3,500				(160,150	)			(100.0	)			156,650				**
Loss on disposition of fixed assets			-				-				1,175				-				**				(1,175	)			**
Total operating expenses			202,368				358,372				191,017				(156,004	)			(43.5	)			167,355				87.6
Income (loss) from operations			43,273				(109,950	)			36,744				153,223				**				(146,694	)			**
Non-operating (expense) income:
Interest income			145				36				28				109				**				8				28.6
Interest expense			(89,421	)			(88,304	)			(90,830	)			(1,117	)			1.3				2,526				(2.8	)
Loss on extinguishment of debt			-				-				(9,111	)			-				-				9,111				**
Other, net			878				45				(539	)			833				**				584				**
Total non-operating net expense			(88,398	)			(88,223	)			(100,452	)			(175	)			0.2				12,229				(12.2	)
Loss before income taxes			(45,125	)			(198,173	)			(63,708	)			153,048				(77.2	)			(134,465	)			211.1
Provision (benefit) for income taxes			15,600				(15,916	)			(24,566	)			31,516				(198.0	)			8,650				(35.2	)
Net loss		$	(60,725	)			(182,257	)			(39,142	)			121,532				(66.7	)			(143,115	)			365.6

 

 

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

(**) Calculation is not meaningful.

 

 

Years Ended May 31, 2015 and 2014:

 

Net sales were $389.3 million in fiscal 2015 as compared with $388.1 million in fiscal 2014, an increase of $1.2 million, or 0.3%. 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 except percentages):

 

		Year Ended May 31								Change
		2015				2014				Amount				%
Net sales by product group:
Transfusion		$	326,850				330,547				(3,697	)			(1.1	)
Transplant & Molecular			62,450				57,509				4,941				8.6
Total		$	389,300				388,056				1,244				0.3

 

Transfusion: Net sales of our Transfusion products were $326.8 million in fiscal 2015 as compared with $330.5 million in fiscal 2014, a decrease of $3.7 million, or 1.1%. Transfusion product net sales were lower in fiscal 2015 primarily due to a lower number of ship cycles, and an unfavorable effect of changes in foreign currency exchange rates on our international operations as compared with the same period in fiscal 2014, partially offset by the residual benefit of an increase in our installed base of instruments. Our Transfusion net sales had a higher concentration of sales from our Capture reagent products (reagents used in our semi-automated diagnostic testing instruments), and a lower concentration of sales from our Red Cell products (reagents used in our traditional, manual diagnostic testing instruments) in fiscal 2015 as compared with fiscal 2014. This shift in product mix reflects a growing trend of users moving to our automated diagnostic solution. In addition, net sales of our Red Cell products were lower in fiscal 2015 as compared with fiscal 2014 due to an increase in pricing pressures in the U.S. market. After adjusting for the impact of ship cycles and foreign currency exchange rate fluctuations, net sales for fiscal 2015 would have increased by 2.1% when compared to fiscal 2014.

 

Transplant & Molecular: Net sales of our Transplant and Molecular products were $62.4 million in fiscal 2015 as compared with $57.5 million in fiscal 2014, an increase of $4.9 million, or 8.6%. The increase in net sales in fiscal 2015 was primarily driven by continued efforts to expand our market reach and strong customer acceptance of our Transplant and Molecular products in the European, and Emerging markets. This increase in net sales was partially offset by an unfavorable effect of changes in foreign currency exchange rates on our international operations as compared with the same period in fiscal 2014. The increase in net sales was largely due to a higher volume of Transplant product shipments which partially offset lower volume of sales of our Molecular products. Management believes that the lower volume of Molecular products sold in fiscal 2015 reflects a delay in orders as our customers converted their existing systems to incorporate our new blood typing assay, the PreciseType^TM human erythrocyte antigen (“HEA”) test, which was approved for commercial use by the FDA in May 2014. Net sales of our Molecular products increased in each quarter of fiscal 2015, with reported net sales in the fourth quarter nearly double that of the first quarter of fiscal 2015. After adjusting for the impact of the foreign currency exchange rate fluctuations, net sales for fiscal 2015 compared to fiscal 2014, would have increased by 13.3%.

 

Gross margin decreased by $2.8 million in fiscal 2015 as compared with fiscal 2014, or 1.1%, reflecting an increase in cost of sales in the fiscal 2015 period. And, in fiscal 2014, gross margin included $2.9 million of costs for the amortization of the fair value of inventory related to the acquisition of our LIFECODES business that was not included in fiscal 2015.  Gross margin as a percentage of consolidated net sales was approximately 0.9% lower in fiscal 2015 as compared with fiscal 2014. The lower gross margin percentage was primarily due to a less favorable product mix and an unfavorable effect of changes in foreign currency exchange rates on the conversion of net sales from our international operations partially offset by lower destruction and medical device excise tax costs in fiscal 2015. 

 

Research and development expenses were $28.8 million in fiscal 2015 as compared with $29.1 million in fiscal 2014, a decrease of $0.3 million, or 0.9%. The decrease was primarily due to the completion of certain significant development projects in fiscal 2014, including the development work related to the PreciseType^TM HEA test that was completed in the fourth quarter of fiscal 2014. This decrease in research and development expenses was partially offset by additional expenses associated with development activities from recently acquired businesses, and the development of new technologies in transplant diagnostics as well as the development of new technologies for our transfusion products. The development costs related to new technologies in transplant diagnostics were mainly for the study of antigens and proteins that appear to be associated with renal transplant rejections to determine their commercial applications. The development costs related to new technologies for our transfusion products were primarily for the development of new products, such as ABO titrations, and to improve certain existing assay products that are sold in our international markets.

 

 

Selling and marketing expenses were $57.8 million in fiscal 2015 as compared with $59.0 million in fiscal 2014, a decrease of $1.2 million, or 2.1%. The decrease in selling and marketing expenses is due to a reduction in expenses from cost containment efforts initiated by management and a more favorable effect of changes in foreign currency exchange rates on international expenses in fiscal 2015. These decreases were partially offset by additional marketing expenses related to business acquisitions completed since May 2014.

 

Distribution expenses were $20.0 million in fiscal 2015 as compared with $20.1 million in fiscal 2014, a decrease of $0.1 million, or 0.7%. The decrease in distribution expenses was primarily due to a more favorable effect of changes in foreign currency exchange rates on international expenses partially offset by higher distribution costs recorded in our European market. The higher distribution costs recorded in our European market were primarily driven by improvements in the packaging materials of our temperature sensitive products, and a one-time increase in costs from a strategic initiative to consolidate and outsource the distribution process in Europe. This strategic initiative is expected to reduce distribution costs on a long-term basis. Distribution costs in the fourth quarter of fiscal 2015 were lower than any of the previous quarters in fiscal 2015 and fiscal 2014.

 

General and administrative expenses were $41.2 million in fiscal 2015 as compared with $41.6 million in fiscal 2014, a decrease of $0.4 million, or 1.0%. This decrease was mainly due to a more favorable effect of changes in foreign currency exchange rates on international expenses in fiscal 2015 partially offset by higher acquisition-related costs, and additional bad debt expense recorded in fiscal 2015 and a one-time credit that was recorded in fiscal 2014 that was not included in fiscal 2015. The higher acquisition-related transaction costs reflect the increase in acquisition activities in fiscal 2015 as compared with fiscal 2014. The increase in bad debt expense in fiscal 2015 reflects an additional allowance for international distributors with past due amounts and the one-time credit recorded in fiscal 2014 reduced bad debt expense by $1.9 million which resulted from a change in estimate of our allowance for doubtful accounts to better reflect our actual bad debt experience.

 

Amortization expense was $54.5 million in the fiscal 2015 period as compared with $52.9 million in the fiscal 2014 period, an increase of $1.6 million, or 3.0%. The increase was primarily due to additional costs related to acquisitions completed since May 30, 2014.

 

Non-operating net expense was $88.4 million in fiscal 2015 and $88.2 million in fiscal 2014, an increase of $0.2 million, or 0.2%. The increase in non-operating net expense was mainly due to a favorable change in exchange gains and losses partially offset by an increase in interest expense in fiscal 2015. The increase in interest expense was primarily due to higher interest accreted on the contingent consideration liabilities in 2015 resulting from the three acquisitions completed since May 30, 2014. 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 our interest rate swap arrangements used to hedge against interest rate exposure.

 

The effective tax rate for fiscal 2015 and fiscal 2014 was (34.6)% and 8.0%, respectively. The effective tax rate for fiscal 2015 was lower than the effective tax rate for the corresponding period in fiscal 2014 primarily due to the impact of discrete items recorded during the third quarter of fiscal 2015. These discrete items primarily consisted of $23.7 million due to the Company’s change in election related to its treatment of foreign tax credits (“FTCs”) and a $7.6 million change in the valuation allowance for its FTC carryovers. Excluding these discrete items, the effective tax rate for fiscal 2015 would have been 34.8%. The effective tax rate for fiscal 2014 was primarily impacted by the impairment of goodwill which is not deductible for income tax purposes. Excluding the impairment of goodwill, the effective tax rate for fiscal 2014 would have been 36.3%.

 

 

Years Ended May 31, 2014 and 2013:

 

Net sales were $388.1 million in fiscal 2014 as compared with $347.8 million in fiscal 2013, an increase of $40.3 million, or 11.6%. 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 except percentages):

 

		Year Ended May 31								Change
		2014				2013				Amount				%
Net sales by product group:
Transfusion		$	330,547				330,931				(384	)			(0.1	)
Transplant & Molecular			57,509				16,857				40,652				241.2
Total		$	388,056				347,788				40,268				11.6

 

Transfusion: Net sales of our transfusion products in fiscal 2014 were $330.5 million as compared with $330.9 million in fiscal 2013, a decrease of $0.4 million, or 0.1%. The decrease in net sales was primarily due to fewer ship cycles partially offset by the favorable effect of changes in foreign currency exchange rates on our international operations in fiscal 2014 as compared with fiscal 2013. The increase in revenue generated from a higher number of instrument placements in fiscal 2014 as compared with fiscal 2013 was offset by the impact of a disruption in the production of certain transfusion products in fiscal 2014 resulting in lost sales. After adjusting for the impact of foreign currency exchange rate fluctuations and ship cycles, net sales in fiscal 2014 were comparable with the net sales of fiscal 2013.

 

Transplant & Molecular: Net sales of our transplant and molecular products for fiscal 2014 were $57.5 million as compared with $16.8 million for the fiscal 2013 periods, an increase of $40.7 million, or over 200%. This increase was primarily due to additional net sales from our newly acquired product lines from the LIFECODES acquisition completed on March 22, 2013.

 

Gross margin increased by $20.7 million for fiscal 2014 as compared with fiscal 2013, or 9.1%, mainly due to the higher net sales generated in 2014. Gross margin as a percentage of consolidated net sales was approximately 1.5% lower in fiscal 2014 as compared with fiscal 2013. The lower gross margin percentage was primarily due to a less favorable product mix, a lower gross margin percentage on our transfusion products, and additional amortization of the adjustment in fair value of inventory of $1.5 million related to recent acquisitions that was included in fiscal 2014 that was not included in fiscal 2013. The lower gross margin percentage on our transfusion products was mainly due to the production disruption in fiscal 2014 resulting in lost sales. Gross margin as a percentage of consolidated net sales was also lower due to the medical device excise tax that became effective in January 2013 which increased our production costs by approximately $1.2 million.  These decreases in gross margin percentage were partially offset by lower depreciation expense of approximately $6.3 million in fiscal 2014 related to a change in the anticipated benefit period of our instrument equipment assets as discussed in the section entitled “Change in Estimates” below.

 

Research and development expenses were $29.1 million in fiscal 2014 as compared with $21.3 million in the fiscal 2013 periods. The overall increase of $7.8 million, or 36.4%, was primarily due to additional expenses related to LIFECODES and continued investment in development projects. One of the most significant projects underway is our new molecular blood typing assay (now marketed as the PreciseType^TM HEA test). This new product is an in vitro diagnostic test and is our core molecular test for extended typing of red blood cell antigens which was approved by the FDA in May 2014. We anticipate introducing this new product to the market in the near term.

 

Selling and marketing expenses were $59.0 million in fiscal 2014 as compared with $50.1 million in fiscal 2013. The increase of $8.9 million, or 17.8%, was primarily due to additional costs related to LIFECODES.

 

Distribution expenses were $20.1 million in fiscal 2014 as compared with $18.7 million in fiscal 2013, an increase of $1.4 million, or 7.7%. The increase was primarily due to additional costs related to LIFECODES.

 

General and administrative expenses were $41.6 million in the fiscal 2014 period as compared with $42.8 million in the fiscal 2013 periods, a decrease of $1.2 million, or 2.8%. The decrease was primarily due to cost reduction efforts made by management in fiscal 2014, synergies achieved from our LIFECODES acquisition, and a reduction in bad debt expense of $1.9 million resulting from a change in estimate of the allowance for doubtful accounts as discussed in the section entitled “Change in Estimates” below. These decreases in costs were partially offset by additional expenses related to LIFECODES.

 

 

Amortization expense was $53.0 million for fiscal 2014 as compared with $50.8 million for fiscal 2013, an increase of $2.2 million, or 4.3%. The increase was primarily due to a full year of amortization of intangible assets related to the LIFECODES acquisition in fiscal 2014 as compared with two months of amortization in fiscal 2013.

 

Acquisition-related items was a gain of $4.6 million for fiscal 2014 resulting from a decrease in the contingent consideration liability related to the acquisition of LIFECODES. Based upon information available in fiscal 2014, management determined that the likelihood of the LIFECODES business achieving the financial performance target was lower than previously estimated and decreased the fair value of the related contingent consideration liability by $4.6 million to zero in fiscal 2014. See Note 2 to the consolidated financial statements for additional information related to the LIFECODES acquisition.

 

An impairment loss on goodwill of $160.0 million was recorded for one of our reporting units in the fourth quarter of fiscal 2014. The Company has six reporting units with goodwill from prior acquisitions reported on the balance sheet at May 31, 2014. The annual evaluation for impairment utilizes the financial projections of the next fiscal year and the five year strategic plans that are prepared in the fourth quarter and reflect Management’s continuing knowledge of the operations and the markets in which the reporting units operate. Because goodwill is evaluated on a reporting unit basis, an impairment was generated for one of the six reporting units, although the overall aggregate value of the Company’s six reporting units exceeds the aggregate carrying amount of goodwill for these units. (See Note 7 to the consolidated financial statements for additional information on the goodwill impairment). In addition, an impairment loss on an in-process research and development (“IPR&D”) project of $0.2 million was recorded in fiscal 2014. It was determined that a project related to our transplant and molecular diagnostics business was no longer economically feasible and therefore was abandoned and its costs were fully written-off.

 

Non-operating expense was $88.2 million in the fiscal 2014 period and $100.4 million in the fiscal 2013 periods, a decrease of $12.2 million, or 12.2%. The most significant component of non-operating expense is interest expense from our long-term debt which was first issued at the time of the Immucor Acquisition, in August 2011. The decrease in non-operating net expense for fiscal 2014 as compared with fiscal 2013 was mainly due to a $9.1 million loss on the extinguishment of debt incurred from refinancing of our Senior Credit Facilities twice during fiscal 2013 that did not reoccur in fiscal 2014. Non-operating net expense was also lower in fiscal 2014 due to a decrease in interest expense of $2.5 million on our outstanding debt. The lower interest expense was mainly due to a lower interest rate, partially offset by a higher average long-term debt balance in fiscal 2014 as compared with fiscal 2013. The higher average debt balance was mainly a result of the acquisition of LIFECODES during the fourth quarter of fiscal 2013.

 

The effective tax rate for the fiscal 2014 period and the fiscal 2013 period was 8.0% and 38.6%, respectively.  The effective tax rate for fiscal 2014 was lower as compared with the effective tax rate for the fiscal 2013 periods primarily because the impairment of goodwill is not deductible for tax purposes.  Other items that impacted the lower rate are the fact that the acquisition-related items are not taxable, the impact of lower foreign income tax rates, discrete tax items recognized during the fiscal 2014 as compared to fiscal 2013 period, and the expiration of the statute of limitations of the benefits associated with uncertain tax positions. 

 

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 fiscal 2015, our cash and cash equivalents decreased by $5.3 million to $18.4 million as of May 31, 2015. The decrease was primarily due to $11.7 million of cash used for investments in new businesses and the Sirona collaboration, $11.4 million for the purchase of additional property and equipment, and $6.7 million used to repay long-term debt. These decreases in cash and cash equivalents were partially offset by $25.6 million of positive cash flow contributed by our operating activities. The cash balance at May 31, 2015 includes cash of $11.5 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.

 

Operating activities

 

Operating activities provided cash of $25.6 million in both fiscal 2015 and 2014. The increase in net cash provided by our operating results after adjusting for non-cash items was offset by an increase in working capital requirements in fiscal 2015. The increase in our working capital requirements was primarily driven by a decrease in collections on our accounts receivable balances and an increase in payments to our vendors mainly due to the timing of payments received and paid. These increases in our working capital requirements were partially offset by lower purchases of our inventories in fiscal 2015.

 

 

Investing activities

 

 

During the fiscal 2015, we used cash of $11.7 million for investments in new businesses and the Sirona collaboration, and $11.4 million for purchases of additional property and equipment, including the upgrade of certain financial systems and the implementation of a new financial consolidation application. During fiscal 2014, we used cash of $17.2 million to acquire new businesses and received $1.1 million due from the seller of LIFECODES as a result of finalizing certain purchase price adjustments. For other investing activities, we used cash of $9.2 million to purchase property and equipment in fiscal 2014.

 

Financing activities

 

In fiscal 2015, we used cash for financing activities of $6.7 million for repayments of our long-term debt. We also borrowed and repaid $55.5 million on our Revolving Facility during fiscal 2015. In fiscal 2014, we used cash for financing activities of $6.7 million for repayments of our long-term debt and had no amounts outstanding under our Revolving Facility.

 

 

Contingencies

 

We record contingent liabilities resulting from asserted and unasserted claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain.

 

Although, from time to time, we are a party to certain legal proceedings in the ordinary course of business, one or more of such matters, or any future legal matters, may have an adverse effect on our consolidated financial position, results of operations or cash flows. We are currently not involved in any material legal proceedings (see Part I, Item 3 – Legal Proceedings for further discussion).

Contingent liabilities are described in Note 23 of our consolidated financial statements.

 

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 $32.8 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 May 31, 2015, we had principal of $1,048.4 million of long-term borrowings outstanding under our Term Loan Facility and the Notes. Our net total available borrowings under our Revolving Facility were $100 million as of May 31, 2015.

 

We expect that recurring capital expenditures during fiscal 2016 will range from $10 million to $15 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.

 

As part of the Sirona collaboration, we have an exclusive option to acquire 100% of the common stock of Sirona, and have a potential obligation to provide additional funding of up to $3.6 million in the form of interest bearing loans. As of the date of this collaborative agreement in October 2014, we had lent Sirona $4.6 million. As of May 31, 2015, we had committed to lend an additional $3.1 million to Sirona, and funded that payment on June 1, 2015. Additional loans are subject to the achievement of certain development milestones and other terms of the arrangements. Refer to Note 3 of our consolidated financial statements for additional information on the Sirona collaboration.

 

 

Contractual Obligations and Commercial Commitments

 

Contractual obligations and commercial commitments for the next five years are detailed in the table below (in thousands):

 

Contractual Obligations		Payments Due by Period
		Total				Less than 1 year				1-3 years				4 - 5 years				After 5 years
Senior Credit Facilities (1) (2)		$	648,410				6,632				13,264				628,514				-
Notes (2)			400,000				-				-				400,000				-
Purchase obligations			45,328				16,611				17,784				8,366				2,567
Operating and capital leases			30,302				5,916				8,159				5,505				10,722
Minimum royalty obligations			14,717				2,553				5,199				5,345				1,620
Unrecognized tax benefits (3)			9,066				-				-				-				9,066
Acquisition costs for earn-out provision (4)			18,596				1,819				10,950				2,578				3,249
Interest (5)			311,832				78,469				154,316				79,047				-
Total contractual cash obligations		$	1,478,251				112,000				209,672				1,129,355				27,224

 

(1)

The Senior Credit Facilities are comprised of a $655.0 million Term Loan Facility and a $100.0 million Revolving Facility. These are minimum scheduled payments of the Term Loan Facility.

(2)

Amounts shown do not include interest.

(3)

Approximately $13.8 million of unrecognized tax benefits, including accrued interest of $1.4 million, have been recorded as liabilities in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes”, and we are uncertain as to if or when such amounts may be settled. However, as none of these amounts are expected to be settled within the current period, all amounts are presented as due after 5 years. We recorded $4.7 million as an offset to long-term deferred tax liabilities and included $9.1 million in other long-term liabilities. In addition, certain payments related to unrecognized tax benefits would be partially offset by reductions in payments in other jurisdictions (see Note 18 to the consolidated financial statements for additional information).

(4)

This earn-out provision is calculated using the present value of the expected (probability-weighted) payments based on the likelihood of achieving each of the financial performance targets. The total cash payments will total $89.3 million assuming that the full earn-out amount is achieved (see Note 16 to the consolidated financial statements for additional information).

(5)

Interest on the Term Loan Facility and Notes is computed based on the scheduled loan balance multiplied by the minimum rate currently required for a LIBOR loan under the credit agreement. Interest on the Notes is computed using the stated interest rate. Also, includes expected interest on the interest rate hedge at the stated rates and the unused line fees on the Revolving Facility assuming that the Revolving Facility is not used.

 

The expected timing of payment of the obligations discussed above is estimated based on current information. The timing of payments and actual amounts paid may differ depending on the timing of receipt of services, or, for some obligations, changes to agreed-upon amounts. 

 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financial arrangements as of May 31, 2015.

 

 

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 (loss) 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.

 

 

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 fiscal years ended May 31, 2015, 2014 and 2013 are as follows (in thousands):   

 

		Year Ended May 31
		2015				2014				2013
Net loss		$	(60,725	)			(182,257	)			(39,142	)
Interest expense (income), net			89,276				88,268				90,802
Income tax expense (benefit)			15,600				(15,916	)			(24,566	)
Depreciation and amortization			71,271				71,287				71,746
EBITDA			115,422				(38,618	)			98,840
Adjustments to EBITDA:
Share-based compensation (i)			2,087				1,512				1,423
Acquisition expenses, net (ii)			2,272				(2,397	)			3,072
Sponsor fee (iii)			3,700				3,916				4,390
Non-cash impact of purchase accounting (iv)			442				3,284				2,119
Impairments			-				160,150				3,500
Loss on extinguishment of debt			-				-				9,111
Certain non-recurring expenses and other (v)			11,721				13,903				17,368
Adjusted EBITDA		$	135,644				141,750				139,823

 

 

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 fiscal 2014 also include the non-cash gains resulting from decreases in the contingent consideration liability related to the LIFECODES acquisition.

iii.

Represents management fees and other charges associated with a management services agreement with TPG Capital, L.P.

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, and the effect of the change in estimate in the allowance for doubtful accounts recorded in fiscal 2014 which decreased the adjustment for non-recurring expenses and non-cash items by $1.9 million for that period.

 

Under the Revolving Facility, the senior secured leverage ratio is the sole financial covenant. 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. As of May 31, 2015, we were in compliance with our senior secured net leverage ratio covenant.

 

 

Critical Accounting Policies and Estimates

 

General

 

We have identified the policies below as critical to our business operations and the understanding of our financial statements. The impact and any associated risks related to these policies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the notes to the consolidated financial statements included with this report. We believe that our most critical accounting policies and estimates relate to the following:

 

i.

Revenue recognition

ii.

Trade accounts receivable and allowance for doubtful accounts

iii.

Inventories

iv.

Goodwill

v.

Income taxes

 

i) Revenue Recognition

 

Revenue is recognized in accordance with Accounting Standards Codification (“ASC”) Topic No. 605, “Revenue Recognition,” when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services are rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.

 

We enter into arrangements in which we commit to delivering multiple products or services to our customers. In these cases, total arrangement consideration is allocated to all deliverables, which primarily include the delivery of products such as reagents and part kits, instrument (sold and leased) and the performance of services such as training and general support services, based on their relative selling prices. The following hierarchy is used to determine the selling price to be used for allocating revenue to deliverables: (i) vendor specific objective evidence (“VSOE”) of fair value for reagents and general support services, (ii) third-party evidence of selling price (“TPE”), and (iii) management’s best estimate of selling price (“MBESP”) for all other deliverables. VSOE generally exists only when we sell the deliverable separately and it is the price actually charged by us for that deliverable. TPE represents the selling price of a similar product or service by another vendor. MBESPs reflect management’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.

 

ii) Trade Accounts Receivable and Allowance for Doubtful Accounts

 

The allowance for doubtful accounts represents a reserve for estimated losses resulting from the inability of our customers to pay their debts. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, a specific allowance for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered.

 

iii) Inventories

 

Typically inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves. We record adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand, and market conditions.

 

In connection with the LIFECODES acquisition on March 22, 2013, a fair value adjustment of approximately $4.5 million increased inventory to fair value, which was greater than replacement cost. As of May 31, 2013, approximately $1.7 million of the fair value adjustment was expensed through cost of sales in the fiscal 2013 period. The remaining fair value adjustment was expensed through cost of sales by the end of the second quarter of fiscal 2014, at which time inventories were again stated at the lower of cost or market, net of reserves.

 

iv) Goodwill

 

Consistent with ASC 350, “Intangibles – Goodwill and Other,” goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually or more frequently if impairment indicators arise. Intangible assets that have finite lives are amortized over their useful lives.

 

 

We evaluate the carrying value of goodwill during the fourth quarter of each fiscal year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired we first assesses qualitative factors to determine if it is more likely than not (defined as 50% or more) that the fair value of the reporting unit is less than its carrying amount. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, no additional steps are taken. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we then compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using primarily the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

 

v) Income Taxes

 

Deferred income taxes are computed using the asset and liability method. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. The value of our deferred tax assets assumes that we will be able to generate sufficient future taxable income in applicable tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against deferred tax assets resulting in additional income tax expense in our consolidated statements of operations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and we consider the Company’s history of taxable income (loss), the scheduled reversal of deferred tax liabilities, projected future taxable income, carry-back opportunities, and tax-planning strategies in making this assessment. Management assesses the need for additional valuation allowances quarterly.

 

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC 740, “Income Taxes,” provides clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute will continue to require significant judgment by management. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations.

 

Effective with the Immucor Acquisition, our taxable income or loss is included in the consolidated income tax returns of Holdings. Current and deferred income taxes are allocated to the members of the consolidated group as if each member were a separate taxpayer.

 

Recently Issued Accounting Standards

 

Refer to the section entitled, “Impact of Recently Issued Accounting Standards” in Note 1 of our consolidated financial statements.

 

Item 7A. — Quantitative and Qualitative Disclosures about Market Risk.

 

We are exposed to market risks for foreign currency exchange rates. Our financial instruments that can be affected by foreign currency fluctuations and exchange risks consist primarily of cash and cash equivalents, and trade receivables and trade payables denominated in currencies other than the U.S. dollar. We attempt to manage our exposure primarily by balancing assets and liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes. It has not been our practice to actively hedge our foreign subsidiaries’ assets or liabilities denominated in foreign currencies. To manage these risks, we regularly evaluate our exposure and, if warranted, may enter into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. As part of accumulated other comprehensive income in shareholders’ equity, we recorded a foreign currency translation loss of $26.7 million in fiscal 2015, a gain of $4.3 million in fiscal 2014, and a gain of $1.6 million in fiscal 2013.

 

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the Term Loan Facility outstanding under our Senior Credit Facilities. We have approximately $648.4 million outstanding under our Senior Credit Facilities, bearing interest at variable rates. A 0.125% increase in these floating rates applicable to the indebtedness outstanding under our Senior Credit Facilities would increase should interest rates exceed the 1.25% floor our pro forma annual interest expense by approximately $0.8 million, assuming there are no borrowings under the Revolving Credit Facility. The Senior Credit Facilities also allow up to an aggregate of $100.0 million (or a greater amount if we meet specified financial ratios) in uncommitted incremental facilities, the availability of which are subject to our meeting certain conditions, bearing interest at variable rates. We have interest rate swaps on approximately 24% of our outstanding Term Loan Facility. These swaps reduce the risk of variability in the interest rates by fixing a portion of the interest costs. We consider these swaps to be effective hedges and they are marked-to-market with the changes in other comprehensive income.

 

 

Item 8. — Financial Statements and Supplementary Data.

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS	Page
Report of Grant Thornton LLP Independent Registered Public Accounting Firm	32
Consolidated Balance Sheets as of May 31, 2015 and as of May 31, 2014	33
Consolidated Statements of Operations for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013	34
Consolidated Statements of Comprehensive (Loss) Income for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013	35
Consolidated Statements of Changes in Shareholders’ Equity for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013	36
Consolidated Statements of Cash Flows for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013	37
Notes to Consolidated Financial Statements	38
Consolidated Financial Statement Schedule	78

 

 

Report of Independent Registered Public Accounting Firm

 

 

Board of Directors and Shareholders

Immucor, Inc.

 

We have audited the accompanying consolidated balance sheets of Immucor, Inc. (a Georgia corporation) and subsidiaries (the “Company”) as of May 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2015. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 8. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Immucor, Inc. and subsidiaries as of May 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

 

 

/s/ GRANT THORNTON LLP

Atlanta, Georgia

August 21, 2015

 

 

Consolidated Financial Statements

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

		As of May 31
		2015				2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	18,363				23,621
Trade accounts receivable, net of allowance for doubtful accounts of $1,669 and $898 at May 31, 2015 and 2014, respectively			67,674				69,629
Inventories, net			41,847				49,151
Deferred income tax assets, current portion			5,931				8,251
Prepaid expenses and other current assets			11,161				12,582
Total current assets			144,976				163,234
PROPERTY AND EQUIPMENT, net			73,574				76,311
GOODWILL			842,258				851,563
OTHER INTANGIBLE ASSETS, net			650,294				692,870
DEFERRED FINANCING COSTS, net			26,399				33,116
OTHER ASSETS			15,185				7,320
Total assets		$	1,752,686				1,824,414
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	13,866				15,665
Accrued interest and interest rate swap liability			19,288				19,605
Accrued expenses and other current liabilities			26,208				23,716
Income taxes payable			3,496				4,927
Deferred revenue, current portion			2,703				2,813
Current portion of long-term debt, net of debt discounts			4,469				4,591
Total current liabilities			70,030				71,317
LONG-TERM DEBT, net of debt discounts			1,033,276				1,037,183
DEFERRED INCOME TAX LIABILITIES			236,487				223,379
OTHER LONG-TERM LIABILITIES			29,212				23,919
Total liabilities			1,369,005				1,355,798
COMMITMENTS AND CONTINGENCIES (Note 23)
SHAREHOLDERS' EQUITY:
Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of May 31, 2015 and May 31, 2014, respectively			-				-
Additional paid-in capital			755,234				753,147
Accumulated deficit			(331,989	)			(271,264	)
Accumulated other comprehensive loss			(39,564	)			(13,267	)
Total shareholders' equity			383,681				468,616
Total liabilities and shareholders' equity		$	1,752,686				1,824,414

 

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

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

		Year Ended May 31
		2015				2014				2013
NET SALES		$	389,300				388,056				347,788
COST OF SALES (exclusive of amortization shown separately below)			143,659				139,634				120,027
GROSS MARGIN			245,641				248,422				227,761
OPERATING EXPENSES
Research and development			28,791				29,070				21,313
Selling and marketing			57,833				59,057				50,129
Distribution			20,022				20,165				18,718
General and administrative			41,191				41,603				42,801
Amortization expense			54,531				52,965				50,765
Acquisition-related items			-				(4,638	)			2,616
Impairment loss			-				160,150				3,500
Loss on disposition of fixed assets			-				-				1,175
Total operating expenses			202,368				358,372				191,017
INCOME (LOSS) FROM OPERATIONS			43,273				(109,950	)			36,744
NON-OPERATING (EXPENSE) INCOME
Interest income			145				36				28
Interest expense			(89,421	)			(88,304	)			(90,830	)
Loss on extinguishment of debt			-				-				(9,111	)
Other, net			878				45				(539	)
Total non-operating net expense			(88,398	)			(88,223	)			(100,452	)
LOSS BEFORE INCOME TAXES			(45,125	)			(198,173	)			(63,708	)
PROVISION (BENEFIT) FOR INCOME TAXES			15,600				(15,916	)			(24,566	)
NET LOSS		$	(60,725	)			(182,257	)			(39,142	)

 

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

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

		Year Ended May 31
		2015				2014				2013
NET LOSS		$	(60,725	)			(182,257	)			(39,142	)
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax:
Foreign currency translation adjustment			(26,712	)			4,315				1,644
Changes in fair value of cash flow hedges:
Portion of cash flow hedges recognized in other comprehensive income			672				(313	)			(535	)
Less: reclassification adjustment for losses included in net income			(257	)			653				712
Net changes in fair value of cash flow hedges			415				340				177
OTHER COMPREHENSIVE (LOSS) INCOME			(26,297	)			4,655				1,821
COMPREHENSIVE LOSS		$	(87,022	)			(177,602	)			(37,321	)

 

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

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands)

 

																		Accumulated
										Additional								Other				Total
		Common Stock								Paid-In				Retained				Comprehensive				Shareholders’
		Shares				Amount				Capital				Earnings				Income (Loss)				Equity
BALANCE, MAY 31, 2012			100			$	-				706,986				(49,865	)			(19,743	)			637,378
Capital contribution from Parent, net of costs			-				-				42,500				-				-				42,500
Share-based compensation expense			-				-				1,423				-				-				1,423
Net loss			-				-				-				(39,142	)			-				(39,142	)
Tax benefit from tax deduction contributed by Holdings			-				-				726				-				-				726
Other comprehensive loss (net of taxes):
Foreign currency translation adjustments			-				-				-				-				1,644				1,644
Cash flow hedges, net of tax			-				-				-				-				177				177
BALANCE, MAY 31, 2013			100				-				751,635				(89,007	)			(17,922	)			644,706
Share-based compensation expense			-				-				1,512				-				-				1,512
Net loss			-				-				-				(182,257	)			-				(182,257	)
Other comprehensive loss (net of taxes):
Foreign currency translation adjustments			-				-				-				-				4,315				4,315
Cash flow hedges, net of tax			-				-				-				-				340				340
BALANCE, MAY 31, 2014			100				-				753,147				(271,264	)			(13,267	)			468,616
Share-based compensation expense			-				-				2,087				-				-				2,087
Net loss			-				-				-				(60,725	)			-				(60,725	)
Other comprehensive loss (net of taxes):
Foreign currency translation adjustments			-				-				-				-				(26,712	)			(26,712	)
Cash flow hedges, net of tax			-				-				-				-				415				415
BALANCE, MAY 31, 2015			100			$	-				755,234				(331,989	)			(39,564	)			383,681

 

 

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

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Year Ended May 31
		2015				2014				2013
OPERATING ACTIVITIES:
Net loss		$	(60,725	)			(182,257	)			(39,142	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			71,271				71,287				71,746
Noncash interest expense			10,222				8,761				7,471
Loss on disposition and retirement of fixed assets			374				93				1,306
Inventory fair value adjustment			-				2,889				1,745
Loss on extinguishment of debt			-				-				9,111
Asset impairment loss			-				160,150				3,500
Provision (recoveries) for doubtful accounts			970				(1,666	)			203
Share-based compensation expense			2,087				1,512				1,423
Deferred income taxes			12,127				(21,059	)			(28,573	)
Change in fair value of contingent consideration			-				(4,638	)			104
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, trade			(5,614	)			2,154				7,665
Income taxes			111				(179	)			1,976
Inventories			(3,097	)			(15,589	)			(9,774	)
Other assets			(340	)			(1,301	)			105
Accounts payable			(1,375	)			1,700				(305	)
Deferred revenue			64				413				(651	)
Accrued expenses and other liabilities			(485	)			3,331				(3,376	)
Cash provided by operating activities			25,590				25,601				24,534
INVESTING ACTIVITIES:
Purchases of property and equipment			(11,393	)			(9,193	)			(9,639	)
Receipt from acquisition of business related to finalizing certain working capital adjustments			-				1,151				-
Other investments			(5,300	)			-				-
Acquisitions of businesses, net of cash acquired			(6,396	)			(17,151	)			(84,762	)
Cash used in investing activities			(23,089	)			(25,193	)			(94,401	)
FINANCING ACTIVITIES:
Proceeds from long-term debt			-				-				338,076
Proceeds from capital contributions, net of costs			-				-				42,500
Payment of debt issuance costs			-				-				(11,412	)
Repayments of long-term debt			(6,653	)			(6,674	)			(288,332	)
Proceeds from Revolving Facility			55,500				-				49,000
Repayments of Revolving Facility			(55,500	)			-				(49,000	)
Cash (used in) provided by financing activities			(6,653	)			(6,674	)			80,832
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			(1,106	)			499				(155	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(5,258	)			(5,767	)			10,810
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			23,621				29,388				18,578
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	18,363				23,621				29,388
SUPPLEMENTAL INFORMATION:
Income taxes paid, net of refunds		$	4,571				5,423				4,161
Interest paid			79,218				79,762				85,033
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Movement from inventory to property and equipment of instruments placed on rental agreements		$	8,670				10,383				12,037
Fair value of contingent consideration liabilities at the date of acquisition			6,469				11,300				4,400
Exchange of debt instruments due to debt amendment August 2012			-				-				468,241
Exchange of debt instruments due to debt amendment February 2013			-				-				467,406
Tax benefit from tax deductions contributed by IVD Holdings Inc.			-				-				726

 

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

 

 

IMMUCOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business – Founded in 1982, Immucor, Inc., a Georgia corporation (“Immucor” or 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 Company (Immucor, Inc. together with its wholly owned subsidiaries) was acquired on August 19, 2011 through a merger transaction with IVD Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of IVD Intermediate Holdings B Inc. (the “Parent”). The Parent is a wholly owned indirect subsidiary of IVD Holdings Inc. (“Holdings”) which was formed by investment funds affiliated with TPG Capital, L.P. (“the Sponsor”). The acquisition was accomplished through a merger of the Merger Sub with and into the Company, with the Company being the surviving company (the “Immucor Acquisition”). As a result of the merger, the Company became a wholly owned subsidiary of Parent. Prior to August 19, 2011, the Company operated as a public company with common stock traded on the NASDAQ Stock Market.

 

The accompanying consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows are presented for the fiscal years ended May 31, 2015, 2014, and 2013. We have also performed an evaluation of subsequent events through the date the financial statements were issued.

 

Consolidation Policy – The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

 

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Share-Based Compensation – Consistent with the provisions of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation,” compensation cost for grants of all share-based payments is based on the estimated grant date fair value. The value of share-based compensation is attributed to expense over the requisite service period using the graded-vesting method for performance-based options, and the straight-line method for service-based options.

 

The fair value of the Company’s share-based payment awards is estimated using a Monte Carlo simulation approach. The Monte Carlo method is used to calculate the fair value of an option with multiple sources of uncertainty by creating random price paths for the underlying share and expected future value, then discounting the average of those paths to determine the fair value. Key input assumptions used to estimate the fair value of stock options and stock appreciation rights include the initial value of common stock, expected term until the exercise of the equity award, the expected volatility of the equity, risk-free rates of return and dividend yields, if any.

 

Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. In order to mitigate the concentration of credit risk, the Company places its cash and cash equivalents with multiple financial institutions. Cash and cash equivalents were $18.4 million and $23.6 million at May 31, 2015 and 2014, respectively. Cash and cash equivalents located in the U.S. were approximately 37% and 19% at May 31, 2015 and 2014, respectively.

 

Concentrations of credit risk with respect to trade accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. At May 31, 2015, 2014 and 2013, no single customer represented more than 10% of total consolidated net sales or trade accounts receivable. The Company controls credit risk through credit limits and monitoring procedures. At May 31, 2015 and 2014, the Company’s net trade accounts receivable balances were $67.7 million and $69.6 million, respectively, with about 50% of these accounts being of foreign origin, predominantly European in both years. Companies and government agencies in some European countries require longer payment terms as a part of doing business. This may subject the Company to a higher risk of uncollectibility. This risk is considered when the allowance for doubtful accounts is evaluated. The Company generally does not require collateral from its customers.

 

 

During fiscal 2014, the Company reviewed the valuation method used to determine the estimate of our allowance for doubtful accounts and determined that a change in estimate was needed to better reflect the actual bad debt experience. As a result, the Company revised its valuation method, effective November 30, 2013, and reduced the estimate of allowance for doubtful accounts on uncollected receivables. The effect of this change in estimate was a reduction in bad debt expense of $1.9 million, and a decrease in net loss of approximately $1.1 million in fiscal 2014.

 

Cash and Cash Equivalents – The Company considers deposits and investments with an original maturity of three months or less when purchased to be cash and cash equivalents. Generally, cash and cash equivalents held at financial institutions are in excess of insurance limit. The Company limits its exposure to credit loss by placing its cash and cash equivalents in liquid investments with high quality financial institutions.

 

Inventories, net – Typically inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves. The Company records adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand, and market conditions.

 

In connection with the LIFECODES acquisition on March 22, 2013, a fair value adjustment of approximately $4.5 million increased inventories to fair value which was greater than replacement cost. As of May 31, 2013, approximately $1.7 million of the fair value adjustment had been expensed through cost of sales in the fiscal 2013 period. The remaining fair value adjustment was expensed through cost of sales by the end of the second quarter of fiscal 2014, at which time inventories were again stated at the lower of cost or market, net of reserves.

 

Fair Value of Financial Instruments – The Company measures fair value using a three-level hierarchy that prioritizes the inputs used. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are explained in Note 15 of the Company’s consolidated financial statements. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, accounts payable and other current liabilities approximate fair value because of their short-term nature.

 

Derivative Instruments – The Company may from time to time use derivatives as a risk management tool to mitigate the potential impact of interest rate and foreign exchange risk. All derivatives are carried at fair value in the Company’s consolidated balance sheets. The Company does not enter into speculative derivatives. The derivatives are cash flow hedges which are considered effective. Changes in fair value are recognized through other comprehensive income. Any portion considered ineffective is recognized directly into operating income.

 

Property and Equipment, net – Property and equipment is stated at cost less accumulated depreciation. Expenditures for replacements are capitalized, and the replaced items are retired. Normal maintenance and repairs are charged to operations. Major maintenance and repair activities that significantly enhance the useful life of the asset are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. Depreciation is computed using the straight-line method over the estimated lives of the related assets ranging from three to thirty years. Carrying values of these assets are evaluated if impairment indicators arise.

 

The Company reviews the estimated useful lives of its fixed assets on an ongoing basis. During fiscal 2014, this review indicated that the actual lives of the Company’s instrument equipment were longer than the estimated useful lives used for depreciation purposes in our financial statements. As a result, the Company changed its estimates of the useful lives of its instrument equipment, effective June 1, 2013, to better reflect the estimated periods during which these assets will remain in service. As a result, 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 $6.3 million and a decrease in net loss of approximately $3.6 million for fiscal 2014, respectively.

 

Deferred Financing Costs, net – 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. The amortization expense is included in interest expense in the consolidated statements of operations.

 

Goodwill – Consistent with ASC 350, “Intangibles – Goodwill and Other,” goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually or more frequently if impairment indicators arise. Intangible assets that have finite lives are amortized on a straight line basis over their useful lives.

 

 

The Company evaluates the carrying value of goodwill as of March 1^st of each fiscal year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired the Company first assesses qualitative factors to determine if it is more likely than not (defined as 50% or more) that the fair value of the reporting unit is less than its carrying amount. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, no additional steps are taken. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using primarily the income, or discounted cash flows, approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s evaluation of goodwill and other intangible assets with indefinite lives completed during fiscal years 2015 and 2013 resulted in no impairment charges, and resulted in $160.0 million in impairment charges in fiscal 2014. Refer to Footnote 8 of the Company’s consolidated financial statements for additional information.   

 

Other Intangible Assets, net – Other intangible assets primarily include customer relationships, deferred licensing costs, existing technology and trade names. These other intangible assets are amortized over their anticipated benefit period. Carrying values of these assets are evaluated when impairment indicators arise. There was no impairment charge related to other intangible assets in fiscal years 2015, 2014 or 2013.

 

In-process research and development (“IPR&D”) is also included in other intangible assets. IPR&D has an indefinite life until the completion or abandonment of the individual project. When a project is completed, its value will be amortized over the useful life. If a project is abandoned, its value is written off. The carrying value of IPR&D is tested for impairment annually or more frequently if impairment indicators arise. There was no impairment charge related to IPR&D during fiscal 2015. An impairment charge of $0.2 million and $3.5 million was recorded in fiscal 2014 and fiscal 2013, respectively, for IPR&D projects that were determined not to be economically feasible, and therefore were abandoned.

 

Foreign Currency Translation – The financial statements of foreign subsidiaries have been translated into U.S. Dollars in accordance with ASC 830-30, “Translation of Financial Statements”. The financial position and results of operations of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. Dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments.

 

Gains and losses that result from foreign currency transactions are included in “other non-operating (expense) income” in the consolidated statements of operations.

 

Revenue Recognition – The Company recognizes revenue in accordance with ASC 605, “Revenue Recognition,” when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services are rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured.

 

The Company enters into arrangements in which the Company commits to delivering multiple products or services to its customers. In these cases, total arrangement consideration is allocated to all deliverables based on their relative selling prices. The following hierarchy is used to determine the selling price to be used for allocating revenue to deliverables: (i) vender specific objective evidence (“VSOE”) of fair value, (ii) third-party evidence of selling price (“TPE”), and (iii) management’s best estimate of selling price (“MBESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. TPE represents the selling price of a similar product or service by another vendor. MBESPs reflect management’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. In determining MBESP, the Company considers the following: (1) pricing practices as they relate to future price increases, and (2) the overall economic conditions.

 

The significant deliverables included in the Company’s arrangements are the delivery of products such as reagents and part kits, instrument (sold and leased) and the performance of services such as training and general support services. Each of these significant deliverables qualify as separate units of accounting.

 

 

The Company recognizes revenue from product sales, such as reagents and part kits, when the goods are shipped or when the goods are delivered, title passes, and risk of loss passes to the customer. The products selling price, which is used to allocate the total arrangement consideration to each deliverable, is based on either VSOE or MBESP. The revenue from instrument sales or leases is recognized when the instrument has been installed and accepted by the customer. The selling price of instrument sales or leases is based on MBESP. Training revenue is recognized as the training services are provided. The selling price of training is based on MBESP. General support service revenue is recognized over the term of the agreement. The selling price of general support services is based on VSOE by reference to the price our customers are required to pay for the general support services when sold separately as renewal agreements.

 

Shipping and Handling Charges and Sales Tax – The amounts billed to customers for shipping and handling of orders are classified as revenue and reported in the statements of operations as net sales. The costs of handling and shipping customer orders are reported in the operating expense section of the consolidated statements of operations as distribution expense. For fiscal 2015, 2014, and 2013, these costs were $20.0 million, $20.2 million, and $18.7 million, respectively. Sales taxes invoiced to customers and payable to government agencies are recorded on a net basis with the sales tax portion of a sales invoice directly credited to a liability account and the balance of the sales invoice credited to a revenue account.

 

Trade Accounts Receivable and Allowance for Doubtful Accounts –The allowance for doubtful accounts represents a reserve for estimated losses resulting from the inability of the Company’s customers to pay their debts. The collectability of trade accounts receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, a specific allowance for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered.

 

Research and Development costs – Research and development costs are expensed as incurred and are disclosed as a separate line item in the consolidated statements of operations.

 

Loss contingencies – Certain conditions may exist as of the date the financial statements are issued that may result in a loss to the Company, but which will only be determined and resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss is likely to occur and the amount of the liability can be estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not accrued or disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. Legal costs relating to loss contingencies are expensed as incurred.

 

Contingent consideration liabilities resulting from a business combination are recorded at fair value at the time of acquisition. The fair value is calculated by applying a form of the income approach, based on the probability-weighted projected payment amounts discounted to a present value at a rate appropriate for the risk of achieving the performance targets according to the terms of the arrangements. Key assumptions are the earn-out period probabilities and an appropriate discount rate. Contingent consideration liabilities are then reevaluated on a quarterly basis and adjusted as needed to reflect changes in fair value, and to reflect interest accretion. The contingent consideration liability exists until the earn-out is achieved and subsequently paid or the earn-out is not achieved and the fair value of the liability is reduced.

 

Income Taxes – Effective with the Immucor Acquisition, the Company’s taxable income or loss is included in the consolidated income tax returns of Holdings. Current and deferred income taxes are allocated to the members of the consolidated group as if each member were a separate taxpayer.

 

Deferred income taxes are computed using the asset and liability method. The Company records the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. The value of the Company’s deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in applicable tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company’s consolidated statements of operations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and the Company considers the Company’s history of taxable income (loss), the scheduled reversal of deferred tax liabilities, projected future taxable income, carry-back opportunities, and tax-planning strategies in making this assessment. Management assesses the need for additional valuation allowances quarterly.

 

 

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC 740, “Income Taxes,” provides clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute will continue to require significant judgment by management. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations.

 

Business Combinations – Transactions classified as an acquisition of a business are recognized in accordance with ASC 805, “Business Combinations.” Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the acquired assets and liabilities based on estimates of their fair values at the date of the acquisition. Contingent consideration is recognized at the estimated fair value on the acquisition date. Subsequent changes to the fair value of contingent consideration liabilities are recognized in earnings. Any purchase price in excess of these acquired assets and liabilities is recorded as goodwill. The allocation of purchase price in certain circumstances may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

 

 

Impact of Recently Issued Accounting Standards –

 

Adopted by the Company in fiscal 2015

 

In the fourth quarter of fiscal 2015, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-02, Amendments to the Consolidation Analysis. Update 2015-02 amended the process that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Update 2015-02 is effective for the Company in the first quarter of fiscal 2017. Early application is permitted. The adoption of ASU 2015-02 did not have a material impact on the Company’s consolidated financial statement. 

 

In the fourth quarter of fiscal 2015, the Company adopted the FASB ASU 2014-12 on stock-based compensation, 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 adoption of ASU 2014-12 did not have a material impact on the Company’s consolidated financial statement. 

 

In the second quarter of 2015, the Company adopted the FASB ASU No. 2014-17, Business Combinations: Pushdown Accounting (“ASU 2014-17”). ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period as a change in accounting principle in accordance with ASC Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. ASU 2014-17 also requires an acquired entity that elects the option to apply pushdown accounting in its separate financial statements to disclose information in the current reporting period that enables users of financial statements to evaluate the effect of pushdown accounting. The Company adopted the amendments in ASU 2014-17, effective November 18, 2014, as the amendments in the update were effective upon issuance. The adoption of ASU 2014-17 did not have a material impact on the Company’s consolidated financial statements.

 

 

Accounting Changes Not Yet Adopted

 

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. An amendment was made in July 2015 to change the effective date of this standard from the first interim period within annual reporting periods beginning after December 15, 2016 to December 16, 2017, which corresponds to our first quarter of fiscal 2019. 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.

 

In April 2015, the FASB issued ASU 2015-03, Interest — Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 changes the presentation of debt issuance costs for term debt in the balance sheet by requiring the debt issuance costs to be presented as a direct deduction from the related debt liability, rather than recorded as an asset. The standard is required to be adopted in interim and annual periods beginning on or after December 15, 2015, which corresponds to our first quarter of fiscal 2017. This standard is to be applied retrospectively and early adoption is permitted. The Company is evaluating the effect of the adoption of ASU 2015-03 on its consolidated financial statements.  

 

 

2.

BUSINESS COMBINATIONS

 

 

Business combinations completed in fiscal 2015:

 

Acquisition of Sentilus – On October 1, 2014, the Company completed the acquisition of Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, Femtoarrays^TM. Among other uses, Sentilus has been developing Femtoarrays^TM 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 our transfusion diagnostics business. The total cash purchase price of the Sentilus business was $6.0 million which was paid in the second quarter of fiscal 2015. The purchase agreement includes two contingent consideration arrangements, one for achieving certain regulatory milestones with a potential earn-out for $4.0 million in cash over the next three years, and the other in the form of performance payments based on a percentage of net future sales of the to-be-developed products over approximately the next twenty years. Management estimated that the fair value of the contingent consideration arrangements, as of the acquisition date, was approximately $6.3 million, which is included in Other long-term liabilities on the consolidated balance sheet. This was determined by applying a form of the income approach, based upon the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the financial performance targets. The key assumptions were the earn-out period payment probabilities, projected revenues, discount rate and the timing 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. These assumptions are considered to be level 3 inputs by ASC Topic 820, Fair Value Measurement (“ASC Topic 820”), which is not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration paid was approximately $12.3 million. The other identifiable intangible assets include in-process research and development (“IPR&D”) and a non-competition agreement, which are valued at $18.8 million in the aggregate. Goodwill is valued at $0.6 million and the long-term deferred tax liability is valued at $7.2 million. The goodwill arising from this acquisition is not deductible for tax purposes.

 

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 a total of $0.2 million was paid in both the first and second quarters of fiscal 2015. The purchase price also included a potential earn-out of up to $0.2 million if certain financial targets are met during the two year period ending July 2016.

 

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 operating results of the acquired business are included in the Company’s consolidated results of operations from the date of acquisition. The contingent consideration liability is considered long-term and is included in long-term liabilities in the Company’s consolidated balance sheet. In the third quarter of fiscal 2015, the long-term deferred tax liability was revised to $8.9 million due to the Company finalizing the amount of the tax attributes acquired in the acquisition and goodwill was revised to $5.6 million. 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.

 

Business combinations completed in fiscal 2013:

 

Acquisition of LIFECODES – The Company completed the acquisition of the LIFECODES business on March 22, 2013. This acquisition enables Immucor to enter the field of transplantation diagnostics – a close adjacency to our current business of transfusion medicine. The LIFECODES business specializes in pre-transplant human leukocyte antigen (HLA) typing and screening to ensure the most compatible match between patient and donor, as well as post-transplant patient monitoring to aid in the identification of graft rejection. LIFECODES also offers other immune-monitoring products.

 

Purchase Price Allocation 

 

The total cash purchase price of the LIFECODES business was $86.2 million, of which $87.3 was paid in fiscal 2013, and $1.1 million was returned by the seller in the first quarter of fiscal 2014 as a result of finalizing certain purchase price adjustments. The purchase agreement included a contingent consideration arrangement for a potential earn-out totaling $10.0 million in cash based upon the LIFECODES business attaining certain operating targets for fiscal year 2013. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $4.4 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 which are not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration was approximately $90.6 million. The contingent consideration liability was included in current liabilities in the Company’s consolidated balance sheet as of May 31, 2013.

 

During fiscal 2013, the Company recognized accretion of $0.1 million of the fair value amount which increased the contingent consideration liability to $4.5 million as of May 31, 2013. This fair value adjustment was included in interest expense in the consolidated statement of operations.

 

During fiscal 2014, the fair value of the contingent consideration liability was decreased to zero to reflect a change in the earn-out payment probabilities, and the accretion of the fair value amount. These decreases in the contingent consideration liability are reflected as a gain of $4.6 million in the acquisition-related items in the consolidated statements of operations in fiscal 2014.

 

The LIFECODES acquisition was recorded under the acquisition method of accounting by the Company and pushed-down to the acquired businesses by allocating the purchase consideration of $90.6 million to the cost of the assets acquired, including intangible assets, based on their estimated fair values at the acquisition date. The allocation of purchase price was based on management’s judgment after evaluating several factors including valuation assessments of tangible and intangible assets. The excess of the total purchase price over the fair value of assets acquired and the liabilities assumed of $36.9 million was recorded as goodwill. The goodwill resulting from the LIFECODES acquisition is largely attributable to the synergies it is expected to achieve with the existing Immucor business, future technologies management expects to develop, and the value of its assembled workforce.

 

 

The fair values of major classes of assets acquired and liabilities assumed along with the contingent consideration liability recorded at the date of acquisition is included in the reconciliation of the total consideration as follows (in thousands):

  

Cash on hand		$	2,558
Accounts receivable			7,697
Inventories			16,800
Property and equipment			13,432
Intangible assets			33,240
Goodwill			36,889
Current liabilities			(4,669	)
Deferred tax assets and liabilities - net			(15,197	)
Other assets and liabilities - net			(146	)
Total consideration paid			90,604
Less: Contingent consideration liability			(4,400	)
Total cash purchase price		$	86,204

 

The Company has acquired identifiable intangible assets, not including goodwill, totaling approximately $33.2 million in the LIFECODES acquisition.  Identifiable intangible assets of $31.8 million are subject to amortization over their anticipated benefit period, as indicated in the table below. The Company did not incur costs to renew or extend the term of acquired intangible assets during the period ended May 31, 2013. IPR&D assets of $1.4 million are not subject to amortization until the projects are complete or abandoned. The amortization of these intangibles is not deductible for tax purposes and hence the Company recorded a deferred tax liability of approximately $12.7 million to offset the future book amortization related to these intangibles.  Substantially all of the $36.9 million of goodwill resulting from the LIFECODES acquisition is not deductible for tax purposes.

 

The valuation method and assumptions used to determine fair value of major classes of assets acquired and liabilities assumed in accordance with ASC Topic 820 are as follows:

 

●

Cash, receivables, current liabilities, and other assets and liabilities, net – The carrying amounts of each of these items approximated fair value because of the short-term maturity of these instruments.

 

●

Inventories, net were valued on the basis of estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance on the selling effort. The inventory values were established separately for raw materials and supplies (including instruments and genotyping inventories), work-in-process, and finished goods.

 

●

Property and equipment were valued based on a cost and market approach. The cost approach quantifies value by examining either the historical cost to reproduce or the estimated current cost to replace at a given level of functionality and estimated physical deterioration. A physical deterioration factor was considered for the loss in value brought about by wear and tear of the elements, disintegration, use in service, and physical factors that reduce the life and serviceability of the property. In addition to the cost approach, certain assets were valued through a market approach. The market approach measures the value of an asset through an analysis of recent sales.

 

●

Intangible assets were valued primarily through application of the income approach. The income approach is a valuation technique that provides an estimation of the fair value of an asset based on the cash flows that an asset can be expected to generate over its remaining useful life. The Company used a variation of the income approach called the Multi-Period Excess Earnings Method (the “Excess Earnings Method”) to estimate the fair value of the Customer Relationships and the IPR&D projects. In estimating the fair value of the Existing Technology and the Trade Name intangible assets, a variation of the income approach, the relief from royalty method, was applied. In addition, the analysis provides an estimate for the remaining useful life of acquired intangible assets. For intangible assets without any contractual terms, the employment of certain statistical approaches to the economic pattern of asset utilization and qualitative assessments was used.

 

●

Goodwill results from the application of ASC Topic 805 since it requires that the acquirer subsume into goodwill the value of any acquired intangible asset that is not identifiable and the value attributed to items that do not qualify for separate recognition as assets at the acquisition date.

  

 

●

Deferred tax assets and liabilities were determined in accordance with ASC Topic 740, Income Taxes. Since this business combination was a stock acquisition, the assets are not adjusted to fair value for income tax reporting purposes. Therefore, deferred tax assets and liabilities are reflected for the expected income tax effects of the difference in bases for financial reporting and income tax purposes that result from applying the acquisition method of accounting for financial reporting purposes.

 

●

Contingent consideration liability was calculated based on the expected (probability-weighted) payment based on the likelihood of achieving the financial performance target. Information as of March 22, 2013 was used to determine the likelihood of achievement. Assumptions included in the calculation were cumulative probability of success, discount rate and time of payment. The present value of the expected payment considers the time at which the obligation will be settled and a discount rate that reflects the risk associated with the performance payment.

 

Identifiable Intangible Assets

 

In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analyses of historical financial performance and estimates of future performance. The following table sets forth the components of intangible assets as of the date of the LIFECODES acquisition (in thousands):

  

						Useful Life
Intangible Asset		Fair Value				in Years
Customer relationships		$	16,000				20
Existing technology			13,250				10
Trade name			2,250				22
Below market leasehold interests			340				2 to 12
In-process research and development			1,400			n/a
		$	33,240

 

Customer relationships represent the fair value of the existing customer base.

 

Existing technologies relate to existing intellectual property related to patents, trade secrets and accumulated know-how, from which LIFECODES derives a competitive advantage, market share and/or pricing margin.

 

Trade name represents the LIFECODES^® company brand. LIFECODES is well recognized by customers as a company that provides a selection of quality products including products that are not available elsewhere in the marketplace.

 

Below market leasehold interests represents the Company’s interest in the current leases, which provide for payments below comparable leases obtainable contemporaneously with the LIFECODES acquisition.

 

Useful lives of the amortizable intangible assets were based on estimated economic useful lives and are being amortized using the straight-line method.

 

In-process research and development (“IPR&D”) relates primarily to the development of products that detect certain types of antibodies. IPR&D is not amortized, but will be evaluated on a periodic basis to determine which projects remain in process. When a project is completed, its value will be amortized over its useful life. If a project is abandoned, its value is written off.

 

 

Sources and Uses of Funds

 

The sources and uses of funds in connection with the LIFECODES acquisition are summarized below (in thousands):

 

Sources:
Proceeds from Term Loan		$	50,000
Proceeds from equity contributions			42,500
		$	92,500
Uses:
Equity purchase price		$	86,204
Transaction costs			4,161
Additional working capital			2,135
		$	92,500

 

The acquisition was funded by additional borrowings of $50.0 million of Term B-2 Loans under the terms of the Amended and Restated Amendment No. 2 to the Senior Credit Facilities and an equity investment of $42.5 million from the Parent, including a $39.0 million investment by the Sponsor. The incremental funding was used to fund transaction costs of $4.2 million and to provide additional working capital of $2.1 million.

 

Transaction costs include legal and accounting fees, deferred financing costs related to the additional borrowings, and other external costs directly related to the LIFECODES acquisition. Of the $4.2 million of transaction costs paid at closing, $1.6 million was deferred financing costs that were capitalized and the remaining $2.6 million was incurred by the Company and included in acquisition-related charges in the consolidated statement of operations in fiscal 2013.

 

Financial Information

 

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

 

 

3.

OTHER INVESTMENTS

 

Sirona Collaboration – On October 3, 2014, the Company entered into a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) for the commercialization of Sirona’s human leukocyte antigen (“HLA”) typing sample preparation and bioinformatics offering for next-generation sequencing. As part of this collaborative arrangement, the Company paid $0.7 million for a warrant with an exclusive option to acquire 100% of the common stock of Sirona and loaned $4.6 million bearing interest at a market rate to Sirona for development funding. The collaborative arrangement also includes the potential for future interest bearing loans from the Company of up to $6.7 million over a two year period from the date of the arrangement, subject to the achievement of certain development milestones and other terms of the arrangement, of which $3.1 million was payable to Sirona as an additional loan on May 31, 2015, and were paid on June 1, 2015.

 

Sirona is considered to be a variable interest entity (“VIE”). However, because Sirona retains sole responsibility for and control of the operations of the business and for achieving product commercialization, the Company is not required to consolidate the results of Sirona. The maximum loss exposure associated with the VIE is $12.0 million, which includes the outstanding loan to Sirona of $7.7 million and the amount paid for the warrant of $0.7 million, and any future potential loans to be made by Immucor. The outstanding loan and the warrant asset are both included in Other assets on the Company’s consolidated balance sheet as of May 31, 2015.

 

 

4.

RELATED PARTY TRANSACTIONS

 

In connection with the Immucor Acquisition 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 will be provided to the Company, the Sponsor receives an aggregate annual monitoring fee of approximately $3.0 million.  In the fiscal 2015, 2014 and 2013 periods, approximately $3.7 million, $3.9 million, and $4.4 million, respectively, was recorded for monitoring fees, additional services provided by the Sponsor, and out-of-pocket expenses and is included in general and administrative expenses in the consolidated statements of operations. At May 31, 2015 and 2014, the Company owed $0.7 million and $0.9 million, respectively, to the Sponsor for these fees and expenses.

 

 

5.

INVENTORIES, net

 

Typically inventories, net are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Inventories, net consist of the following (in thousands):

 

 

		As of May 31
		2015				2014
Raw materials and supplies		$	10,816				12,110
Work in process			9,197				9,146
Finished goods			21,834				27,895
		$	41,847				49,151

 

 

6.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

		As of May 31
		2015				2014
Income tax prepayments		$	4,267				5,736
Prepaid expenses			3,942				5,677
Other receivables			2,952				1,169
Prepaid expenses and other current assets		$	11,161				12,582

 

 

7.

PROPERTY AND EQUIPMENT, net

 

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

 

		As of May 31
		2015				2014
Land		$	250				290
Buildings and improvements			2,494				2,966
Leasehold improvements			25,639				24,693
Capital work-in-progress			6,897				3,927
Furniture and fixtures			3,757				3,656
Machinery, equipment and instruments			94,021				88,057
			133,058				123,589
Less accumulated depreciation			(59,484	)			(47,278	)
Property and equipment, net		$	73,574				76,311

 

Depreciation expense was $16.8 million, $18.3 million, and $21.0 million in fiscal 2015, 2014, and 2013, respectively. Depreciation expense is primarily included in cost of sales in the consolidated statements of operations.

 

 

8.

GOODWILL

 

Changes in the carrying amount of goodwill for the years ended May 31, 2015 and 2014 were as follows (in thousands):

 

		Year Ended May 31
		2015				2014
ABalance at beginning of period		$	851,563				1,003,463
Additions:
Acquisition of businesses			432				6,912
Foreign currency translation adjustment			(9,737	)			1,188
Impairment loss			-				(160,000	)
Balance at end of period		$	842,258				851,563

 

 

The Company has six reporting units with goodwill as a result of prior acquisitions which it evaluates for impairment. The Company evaluates goodwill for impairment on an annual basis as of March 1^st, and between annual tests if a triggering event or a change in circumstances indicates that a reporting unit’s goodwill might be impaired. An impairment loss on goodwill is recognized to the extent that a reporting unit’s carrying amount of goodwill exceeds the implied fair value of goodwill of such reporting unit, determined in accordance with ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”). ASC 350 requires that based on an initial evaluation, if the fair value of a reporting unit is less than its carrying amount, including goodwill, further analysis is required to measure the amount of the impairment loss, if any. The amount by which the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the reporting unit’s goodwill, determined in accordance with ASC 350, is to be recognized as an impairment loss.

 

The annual evaluation of goodwill for impairment utilizes financial projections of the following fiscal year and the five year strategic plan that is prepared during the Company’s fourth quarters and reflects Management’s continuing knowledge of the operations and the markets in which the reporting units operate. The Company estimated the fair value of each of its reporting units in a manner similar to the method used in a business combination. The Company utilized the income approach in the determination of fair value. Under the income approach, estimated fair value is based on the discounted cash flow method. The key assumptions that drive the estimated fair value of the reporting units under the income approach are level 3 inputs and include future cash flows from operations and the discount rate applied to those future cash flows, determined from a weighted-average cost of capital calculation. The future cash flows include additional key assumptions relating to revenue growth rates, margins and costs.

 

During fiscal 2015, the estimated fair value of each of our reporting units exceeded its carrying amount, therefore no further analysis was required. For each of the six reporting units that passed step one as of March 1, 2015, the percentage by which the estimated fair value exceeded the carrying amount of the reporting units ranged from 23% to 143%. 

 

During fiscal 2014, the estimated fair value of five of the Company’s six reporting units exceeded its carrying amounts. For each of the five reporting units that passed step one as of March 1, 2014, the percentage by which the estimated fair value exceeded the carrying amount of the reporting units ranged from 45% to 123%. For one of the Company’s reporting units, the estimated fair value that reflects Management’s continuing knowledge of the operations and the markets in which the reporting unit operates did not exceed the carrying amount. Therefore, the Company completed step two of the impairment testing process to measure the amount of the impairment loss. The impairment loss on goodwill was determined to be $160.0 million and was recorded in the fourth quarter of fiscal year 2014. This impairment loss represented 18% of the carrying amount of goodwill for this reporting unit.

 

As of May 31, 2014 the Company had $160.0 million of accumulated impairment losses on goodwill which was unchanged as of May 31, 2015. There were no accumulated impairment losses for the Company’s goodwill as of May 31, 2013.

 

 

9.

OTHER INTANGIBLE ASSETS, net

 

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

 

						As of May 31
						2015												2014
		Weighted Average Life (years)				Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Other intangible assets subject to amortization:
Customer relationships			20			$	462,534				(86,052	)			376,482				470,679				(63,989	)			406,690
Existing technology / trade names			11				314,850				(99,565	)			215,285				314,350				(71,246	)			243,104
Corporate trade name			15				40,000				(10,088	)			29,912				40,000				(7,421	)			32,579
Below market leasehold interests			7				1,200				(557	)			643				1,200				(449	)			751
Other intangibles			4				428				(156	)			272				399				(53	)			346
Total amortizable assets							819,012				(196,418	)			622,594				826,628				(143,158	)			683,470
Other intangible assets not subject to amortization:
In-process research and development							27,700				-				27,700				9,400				-				9,400
Total non-amortizable assets							27,700				-				27,700				9,400				-				9,400
Other intangible assets, net						$	846,712				(196,418	)			650,294				836,028				(143,158	)			692,870

 

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. 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.

 

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. Amortization of other intangible assets amounted to $54.5 million in fiscal 2015, $53.0 million in fiscal 2014, and $50.8 million in fiscal 2013. The following table presents an estimate of amortization expense for each of the next five fiscal years (in thousands):   

 

 

Year Ending May 31:
2016		$	54,565
2017			54,408
2018			54,294
2019			50,370
2020			49,262

 

 

10.

DEFERRED FINANCING COSTS, net

 

Changes in deferred financing costs, net for the fiscal 2015 and 2014 periods were as follows (in thousands):

 

		Year Ended May 31
		2015				2014
Balance at beginning of period		$	33,116				39,449
Amortization			(6,717	)			(6,333	)
Balance at end of period		$	26,399				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.

 

Debt issuance costs, loss on extinguishment of debt, and the Revolving Facility are further detailed in Note 13.

 

 

11.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

		As of May 31
		2015				2014
Salaries and wages		$	13,981				11,410
Sales and other taxes payable			3,344				4,880
Other accruals			4,842				3,381
Royalties			1,226				1,572
Pricing discount to dealers			446				197
Professional fees and dealer commission			1,163				1,389
Medical claims liability			1,206				887
Accrued expenses and other current liabilities		$	26,208				23,716

 

 

12.

DEFERRED REVENUE

 

The additions to and recognition of deferred revenue for the year ended May 31, 2015 and 2014 were as follows (in thousands):

 

		Year Ended May 31
		2015				2014
Balance at beginning of year		$	2,899				2,413
Additions to deferred revenue from new contracts			9,388				8,658
Revenue recognized during the year			(9,293	)			(8,246	)
Foreign currency translation adjustment			(228	)			74
Balance at end of year			2,766				2,899
Less current portion			(2,703	)			(2,813	)
Deferred revenue, net of current portion		$	63				86

  

 

13.

LONG-TERM DEBT

 

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

 

		As of May 31
		2015				2014
Term Loan Facility, net of $7,381 and $9,435 debt discounts, respectively		$	641,029				645,609
Notes, net of $3,291 and $3,862 debt discounts, respectively			396,709				396,138
Capital lease agreements			7				27
			1,037,745				1,041,774
Less current portion, net of discounts			(4,469	)			(4,591	)
Long-term debt, net of current portion		$	1,033,276				1,037,183

 

 

Senior Secured Credit Facilities, Security Agreement and Guaranty

 

In connection with the Immucor Acquisition on August 19, 2011, the Company entered into a credit agreement and related security and other agreements for (1) a $615.0 million senior secured term loan facility with Term B Loans (the “Original Term Loan Facility”) and (2) a $100.0 million senior secured revolving loan facility (the “Revolving Facility,” and together with the Original Term Loan Facility, the “Original Senior Credit Facilities”) with certain lenders, Citibank, N.A., as Administrative Agent and collateral agent (the “Administrative Agent”) and the other agents party thereto. 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, Euros, British Pounds, Japanese 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).

 

On August 21, 2012, the Company, the Administrative Agent and the various lenders party thereto modified the Original Senior Credit Facilities by entering into Amendment No. 1 which replaced the existing Term B Loans with a new class of Term B-1 Loans in an aggregate principal amount of $610.4 million and lowered the interest rate on the Original Senior Credit Facilities, as amended. Amendment No. 1 also extended the maturity date of the Revolving Facility to August 19, 2017.

 

As a result of Amendment No. 1, the Company recognized a $6.7 million loss on debt extinguishment in the first quarter of the 2013 fiscal year with regards to certain portions of the deferred financing costs ($4.0 million) and original issuance discount (“OID”) ($2.7 million) related to the Original Term Loan Facility. Amendment No. 1 had no significant impact related to the Revolving Facility, as there was no change in the lenders or decrease in the Revolving Facility borrowing capacity. In addition, the Company capitalized $2.5 million of deferred financing costs associated with Amendment No. 1.

 

On January 25, 2013, the Company, the Administrative Agent and the various lenders party thereto further modified the Original Senior Credit Facilities, as previously amended, by entering into Amendment No. 2 to the credit agreement governing the Original Senior Credit Facilities. Amendment No. 2 was to become effective on the date of the closing of the LIFECODES acquisition and provided for an incremental $50.0 million of Term B-1 Loans with the same terms as the original Term Loan Facility.

 

On February 19, 2013, the Company, the Administrative Agent and the various lenders party thereto modified the Original Senior Credit Facilities, as previously amended, by entering into Amendment No. 3 and Amendment No. 4 to the credit agreement governing the Original Senior Credit Facilities. Amendment No. 3 replaced the existing Term B-1 Loans with a new class of Term B-2 Loans in an aggregate principal amount of $613.3 million (the “Term Loan Facility”), including the issuance of an additional $6.0 million of Term B-2 Loans. Amendment No. 3 also lowered the interest rates on the Term B-2 Loans and removed the financial debt covenant requirement. The Term B-2 Loans mature August 19, 2018, the same maturity date as the previous Term B-1 Loans. Amendment No. 4 lowered the interest rates on the Revolving Facility. There were no other substantive changes to the Revolving Facility. The Term Loan Facility, as amended, together with the Revolving Facility, as amended, is referred to as the “Senior Credit Facilities.”

 

As a result of Amendment No. 3, the Company recognized a $2.4 million loss on debt extinguishment in the third quarter of the 2013 fiscal year with regards to certain portions of the deferred financing costs ($1.7 million) and OID ($0.7 million) related to the Original Term Loan Facility, as previously amended. Amendment No. 4 had no significant impact related to the Revolving Facility, as there was no change in the lenders or decrease in the Revolving Facility borrowing capacity. In addition, the Company capitalized $7.3 million of deferred financing costs associated with Amendments No. 3 and No. 4.

 

 

On February 19, 2013 and concurrent with Amendments No. 3 and No. 4, the Company, the Administrative Agent and the various lenders party thereto modified the Original Senior Credit Facilities, as previously amended, by entering into Amended and Restated Amendment No. 2. The Amended and Restated Amendment No. 2 became effective on March 22, 2013, the date of the closing of the LIFECODES Acquisition. On that date, the Company issued an additional $50.0 million in Term B-2 Loans with the same terms and maturity date as the existing Term Loan Facility. In addition, the Company capitalized $1.6 million of deferred financing costs associated with Amended and Restated Amendment No. 2.

 

The credit agreement governing the Senior Credit Facilities provides that, subject to certain conditions, the Company may request additional tranches of term loans and/or increase commitments under the Revolving Facility and/or the Term Loan Facility and/or add one or more incremental revolving credit facility tranches (provided there are no more than three such tranches with different maturity dates outstanding at any time) in an aggregate amount not to exceed (a) $100.0 million plus (b) an unlimited amount at any time, subject to compliance on a pro forma basis with a senior secured first lien net leverage ratio of no greater than 4.00 to 1.00. Availability of such additional tranches of term loans or revolving credit loans and/or increased commitments is subject to, among other conditions, the absence of any default under the credit agreement governing the Senior Credit Facilities and the receipt of commitments by existing or additional financial institutions.

 

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 as most recently amended 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 the Term Loan Facility.

 

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 May 31, 2015 and 2014. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Term Loan Facility is 6.1% for fiscal 2015. At May 31, 2015, there were no outstanding borrowings under the Revolving Facility and no outstanding letters of credit.

 

Prior to Amendment No. 1, the interest rates on the Original Term Loan Facility had a LIBOR floor of 1.50% and the applicable margin was 5.75%. The Revolving Facility’s interest rates had an applicable margin of 4.75% with respect to base rate loans and 5.75% with respect to LIBOR loans. The interest rate on the Original Term Loan Facility for all periods prior to the effective date of Amendment No. 1 was 7.25%.

 

Prior to Amendments No. 3 and No. 4, the interest rates on the Original Term Loan Facility, as amended, had a LIBOR floor of 1.25% and the applicable margin was 4.50%. The Revolving Facility’s interest rates had an applicable margin of 3.50% with respect to base rate loans and 4.50% with respect to LIBOR loans. The interest rates on the Original Term Loan Facility, as amended, for all periods after the effective date of Amendment No. 1 and prior to the effective date of Amendment No. 3 was 5.75%.

 

All obligations under the Senior Credit Facilities are unconditionally guaranteed by the Parent and certain of the Company’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, including, in each case subject to customary exceptions and exclusions:

 

•

a first-priority pledge of all of the Company’s capital stock directly held by Parent and a first-priority pledge of all of the capital stock directly held by the Company and Subsidiary Guarantors (which pledge, in the case of the capital stock of each (a) domestic subsidiary that is directly owned by the Company or by any Subsidiary Guarantor and that is a disregarded entity for United States federal income tax purposes and that has no material assets other than equity interests in one or more foreign subsidiaries that are controlled foreign corporations for United States federal income tax purposes or (b) foreign subsidiary, is limited to 65% of the stock of such subsidiary); and

 

•

a first-priority security interest in substantially all of the Parent’s, the Company’s and the Subsidiary Guarantor’s other tangible and intangible assets. Parent has no material operations or assets other than the capital stock of the Company.

 

 

The Senior Credit Facilities include restrictions on the Company’s ability and the ability of certain of its subsidiaries to, among other things, incur or guarantee additional indebtedness, pay dividends (including to Parent) on or redeem or repurchase capital stock, make certain acquisitions or investments, materially change its business, incur or permit to exist certain liens, enter into transactions with affiliates or sell its assets to, or merge or consolidate with or into, another company or prepay or amend subordinated or unsecured debt.

 

Although the Parent is not generally subject to the negative covenants under the Senior Credit Facilities, the Parent is subject to a passive holding company covenant that limits its ability to engage in certain activities other than (i) owning equity interests in the Company and holding cash or property received by the Company, (ii) maintaining its legal existence and engaging in administrative matters related to being a holding company, (iii) performing its obligations under the Senior Credit Facilities, the Senior Notes due 2019 (“Notes”) and other financings not prohibited by the Senior Credit Facilities, (iv) engaging in public offerings of its securities and other equity issuances and financing activities permitted under the Senior Credit Facilities, (v) providing indemnifications to officers and directors and (vi) engaging in activities incidental to the activities described above.

 

Amendment No. 3 also modified the financial covenant of the Senior Credit Facilities such that the financial covenant is no longer applicable to the Term Loan Facility and is only applicable to the Revolving Facility. The Company is required to comply on a quarterly basis with a maximum senior secured net leverage ratio covenant of 5.25 to 1.00 only if there are amounts outstanding under the Revolving Facility. Remedies for default under such covenant may only be exercised by the lenders under the Revolving Facility.

 

Prior to Amendment No. 3, the covenant, which applied to the Term B Loans and subsequent Term B-1 Loans, required the Company to comply with a maximum senior secured net leverage ratio financial maintenance covenant of 5.25 to 1.00, tested on the last day of each fiscal quarter. A breach of this covenant was subject to certain equity cure rights. If an event of default had occurred, the lenders could have declared all amounts outstanding under the Senior Credit Facilities immediately due and payable. In such event, the lenders could have exercised any rights and remedies they may have had by law or agreement, including the ability to cause all or any part of the collateral securing the Senior Credit Facilities to be sold.

 

The credit agreement governing the Senior Credit Facilities also contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default, including upon change of control and a cross-default to any other indebtedness with an aggregate principal amount of $20 million or more.

  

Indenture and the Senior Notes Due 2019

 

On August 19, 2011, the Company (as successor by merger to the Merger Sub), issued $400 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 11.7% for the year ended May 31, 2015. The Notes mature on August 15, 2019.

 

Subject to certain exceptions, the Notes are guaranteed on a senior unsecured basis by each of the Company’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 Indenture governing the Notes contains certain customary provisions relating to events of default and covenants, including without limitation, a cross-payment default provision and cross-acceleration provision in the case of a payment default or acceleration according to the terms of any indebtedness with an aggregate principal amount of $25 million or more, restrictions on the Company’s and certain of its subsidiaries’ ability to, among other things, incur or guarantee indebtedness; pay dividends on, redeem or repurchase capital stock; prepay, redeem or repurchase certain debt; sell or otherwise dispose of assets; make investments; issue certain disqualified or preferred equity; create liens; enter into transactions with the Company’s affiliates; designate the Company’s subsidiaries as unrestricted subsidiaries; enter into agreements restricting the Company’s restricted subsidiaries’ ability to (1) pay dividends, (2) make loans to the Company or any restricted subsidiary that is a guarantor or (3) sell, lease or transfer assets to the Company or any restricted subsidiary that is a guarantor; and consolidate, merge, or transfer all or substantially all of the Company’s assets. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants, excluding without limitation those relating to transactions with the Company’s affiliates and consolidation, merger, or transfer of all or substantially all of the Company’s assets, will be suspended during any period of time that (1) the Notes have investment grade ratings and (2) no default has occurred and is continuing under the Indenture. In the event that the Notes are downgraded to below an investment grade rating, the Company and certain subsidiaries will again be subject to the suspended covenants with respect to future events.

 

 

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.

 

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 each of the fiscal years presented in the table below (in thousands):

 

For the Year Ended May 31:
2016			$	6,639
2017				6,632
2018				6,632
2019				628,514
2020				400,000
			$	1,048,417

 

 

Interest Expense

 

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

 

		Year Ended May 31
		2015				2014				2013
Notes, including OID amortization		$	45,071				45,008				44,951
Term loan facility, including OID amortization			35,078				35,298				38,780
Amortization of deferred financing costs			6,719				6,333				5,107
Interest rate swaps and other interest			913				1,024				1,033
Revolving facility fees and interest			726				507				855
Interest accreted on contingent consideration liability			914				134				104
Interest expense		$	89,421				88,304				90,830

 

 

14.

OTHER LONG-TERM LIABILITIES

 

 

Other long-term liabilities consist of the following (in thousands):

 

		As of May 31
		2015				2014
Contingent consideration liability		$	18,526				11,300
Unrecognized tax benefits			9,066				10,399
Severance indemnity for employees			1,223				1,384
Interest rate swap and other liabilities			252				712
Deferred leasehold improvement incentive			145				124
Other long-term liabilities		$	29,212				23,919

  

 

15.

DERIVATIVE FINANCIAL INSTRUMENTS

 

Interest Rate Swaps

 

In August 2011, the Company entered into floating-to-fixed interest rate swap agreements for an aggregate notional amount of $320 million related to a portion of the Company’s floating rate indebtedness. The purpose of entering into these swaps was to eliminate all but small movements (due to possible differences in reset timing between the swap and the debt) in future debt interest payments and to protect the Company from variability in cash flows attributable to changes in LIBOR interest rates. The Company’s strategy is to use a pay fixed, receive floating swap to convert the current or any replacement floating rate credit facility where LIBOR is consistently applied into a USD fixed rate obligation. The only variable piece remaining is the difference in actual reset date when the swap and debt are not lined up. Consistent with the terms of the Original Term Loan Facility, these swaps included a LIBOR floor of 1.50%. These swap agreements, effective in August 2011, hedged a portion of contractual floating rate interest commitments through the expiration of the agreements in September of each year 2013 through 2016. As a result of entering into the swap agreements, the LIBOR rate associated with the hedged amount of the Company’s indebtedness was fixed at a weighted average rate of 1.80% through September 28, 2012.

 

In August 2012, the Company amended the interest rate swap agreements noted above effective on September 28, 2012. 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, as amended. Consistent with the terms of the Company’s Term Loan Facility, these amended 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 agreements in September of each year through 2016. As a result of the amended swap agreements, the LIBOR rate associated with the hedged amount of the Company’s indebtedness was fixed at 1.59% after September 28, 2012.

 

Prior to October 1, 2014, the Company had swap agreements that hedged $240.0 million of its floating rate interest commitments at a weighted average fixed LIBOR rate of 1.67%. Effective October 1, 2014 through September 30, 2015, the Company has swap agreements that hedge $155.0 million of the Company’s floating rate interest commitments at a weighted average fixed LIBOR rate of 1.77%. Effective October 1, 2015 through September 30, 2016, the Company will have swap agreements to hedge $70.0 million of the Company’s floating rate interest commitments at a fixed LIBOR rate of 1.91%.

 

As of May 31, 2015, the Company has interest rate swap agreements to hedge $155.0 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.

 

The Company designated the 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.

 

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 May 31, 2015, approximately $0.6 million of the deferred net loss on derivative instruments accumulated in other comprehensive income or 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 May 31
		2015				2014
Interest rate swaps (included in other liabilities)		$	(686	)			(1,357	)

 

 

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

 

		Year Ended May 31
Location of (loss) gain reclassified from AOCI into income		2015				2014
(Losses) gains on cash flow hedges:
Interest expense (effective portion)		$	(907	)			(1,001	)
Interest income (expense) (ineffective portion)		$	(3	)			(10	)

 

 

16.

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.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis 

 

		As of May 31, 2015
		Fair Value Measurements of Assets (Liabilities) Using												Carrying
		(Level 1)				(Level 2)				(Level 3)				Amount
		(in thousands)
Derivative instruments		$	-				(686	)			-				(686	)
Contingent consideration liability		$	-				-				(18,596	)			(18,596	)

 

		As of May 31, 2014
		Fair Value Measurements of Assets (Liabilities) Using												Carrying
		(Level 1)				(Level 2)				(Level 3)				Amount
		(in thousands)
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 $18.4 million and $23.6 million of cash and cash equivalents as of May 31, 2015 and 2014, approximately 37% 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 $424.3 million and $653.3 million at May 31, 2015, respectively, based on recent trades of these debt 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 debt instruments at that time.   

 

Management believes that these liabilities can be liquidated without restriction.

 

As of the end of fiscal 2015, the Company had $18.6 million in contingent consideration liabilities for earn-out provisions resulting from acquisitions. 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 performance targets. The key assumptions included in the calculations were the earn-out period payment probabilities, projected revenues, discount rate and the timing 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 May 31, 2015, $0.1 million of the contingent consideration liabilities was included in Accrued expenses and other current liabilities and $18.5 million was included in Other long-term liabilities on the Company’s consolidated balance sheet. As of May 31, 2014, the contingent consideration liabilities were 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 completed in March 2013. Based upon information available during fiscal 2014, management determined that the likelihood of achieving the financial performance target was lower than previously estimated and therefore the fair value of this contingent consideration liability was reduced to zero during fiscal 2014. The adjustment to the estimated fair value amounts is reflected as a gain in the acquisition related items on the Company’s consolidated statements of operations in fiscal 2014.

 

These changes in the Company’s contingent consideration liabilities are summarized in the following table (in thousands):

 

		Year Ended May 31
		2015				2014
Balance at the beginning of the period		$	(11,300	)			(4,504	)
Additions due to acquisitions			(6,469	)			(11,300	)
Change in fair value			-				4,638
Payments			87				-
Accretion of fair value			(914	)			(134	)
Balance at the end of the period		$	(18,596	)			(11,300	)

  

 

17.

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

Total accumulated other comprehensive (loss) income is included in the Consolidated Statement of Shareholders’ Equity. The changes in accumulated other comprehensive (loss) income are as follows (in thousands):

 

		Pretax				Tax				After Tax
Year Ended May 31, 2015
Foreign exchange translation adjustment		$	(30,276	)			(3,564	)			(26,712	)
Changes in fair value of cash flow hedges			698				283				415
		$	(29,578	)			(3,281	)			(26,297	)
Year Ended May 31, 2014
Foreign exchange translation adjustment		$	4,528				213				4,315
Changes in fair value of cash flow hedges			550				210				340
		$	5,078				423				4,655
Year Ended May 31, 2013
Foreign exchange translation adjustment		$	1,644				-				1,644
Changes in fair value of cash flow hedges			287				110				177
		$	1,931				110				1,821

 

 

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

 

		As of May 31
		2015				2014				2013
Cumulative foreign currency translation adjustment		$	(39,139	)			(12,427	)			(16,742	)
Change in fair value of cash flow hedges, net of tax			(425	)			(840	)			(1,180	)
Accumulated other comprehensive loss		$	(39,564	)			(13,267	)			(17,922	)

 

 

18.

SHARE–BASED COMPENSATION

 

Plan summary

 

The IVD Holdings Inc. 2011 Equity Incentive Plan (the “2011 Plan”) was established in December 2011 by Holdings.  Under the 2011 Plan, awards of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards and any other awards that are convertible into or based on stock can be granted as incentive or compensation to employees, non-employee directors, consultants or advisors of the Company and Holdings.  The share-based compensation expense relating to awards to those persons has been pushed down from Holdings to the Company. 

 

A maximum of 514,631 shares of Holdings stock may be delivered in satisfaction of, or may underlie, awards under the 2011 Plan. 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 and market-based options vest in tranches based upon either the achievement of the performance conditions, if they are considered probable, or if they are not considered probable, on the achievement of the market-based condition, 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.

 

During fiscal 2014 and in the first quarter of fiscal 2015, stock option awards were measured based upon the achievement of the market condition since the Company believed that the achievement of the performance conditions were not probable. Effective on September 2, 2014, the Company amended its 2011 Equity Incentive Plan 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. As a result of this plan amendment, the Company believed that the achievement of the performance conditions was probable and therefore the stock-based compensation cost was revalued as of September 2, 2014 for all unvested performance-based option grants. During the fourth quarter of fiscal 2015, management reviewed the Company’s forecasted results and determined that the financial targets were no longer likely to be achieved for the combined fiscal 2015 and 2016 periods, and the stock-based compensation costs that were revalued as of September 2, 2014 were reversed.

 

 

Valuation method used and assumptions

 

The Company estimates the fair value of stock options and stock appreciation rights using a Monte Carlo simulation approach. Key assumptions used to estimate the fair value of stock options and stock appreciation rights include the initial value of common stock, expected term until the exercise of the equity award, the expected volatility of the equity value, risk-free rates of return and dividend yields, if any. The Company estimated the fair value of options and stock appreciation rights at the grant date using the following weighted average assumptions:

 

		Year Ended May 31
		2015				2014				2013
Risk-free interest rate (1)			0.50%				0.42%				0.24%
Expected volatility (2)			35.00%				45.00%				50.00%
Expected life (years) (3)			2.0				3.5				4.7
Expected dividend yield (4)			None				None				None

 

1.

Based on the U.S. Constant Maturity Treasury (CMT) curve in effect at the time of award.

2.

Expected stock price volatility is based on the average historical volatility of the Company when it was publicly traded and weekly stock returns of comparable companies during the period corresponding to the expected life of the options and stock appreciation rights.

3.

Represents the period of time options are expected to remain outstanding.

4.

The Company has not paid dividends on its common stock and does not expect to pay dividends on its common stock in the near future.

 

 

Stock options

 

Service-based vesting conditions

  

The Company has granted awards that contain service-based vesting conditions.  These awards contain tiered vesting terms over the service period. The compensation cost for these options is recognized on a graded-vesting basis over the vesting periods. Activity for the service-based vesting options was as follows for the year ended May 31, 2015:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (years)				Aggregate Intrinsic Value (1)
Service-based options outstanding at May 31, 2014			141,279			$	100.00
Granted			20,550				100.00
Exercised			-				-
Forfeited			(2,500	)			100.00
Expired or cancelled			(1,000	)			100.00
Service-based options outstanding at May 31, 2015			158,329				100.00				7.1			$	-
Exercisable at May 31, 2015			80,717			$	100.00				6.8			$	-

 

(1)

The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal year. Options with a market value less than its exercise value are not included in the intrinsic value amount.

  

 

The weighted-average grant-date fair value of share options granted during the fiscal years ended May 31, 2015, 2014, and 2013 were $13.75, $26.93, and $27.73, respectively.

 

As of May 31, 2015, there was $1.3 million of total unrecognized compensation cost related to nonvested service-based stock option awards. This compensation cost is expected to be recognized over a weighted average period of approximately 2.1 years.

 

Performance-based or market-based vesting conditions

 

The Company has granted awards that contain either performance-based or market-based conditions.  Compensation cost for the performance-based or market-based stock options is recognized based on either the achievement of the performance conditions, if they are considered probable, or if they are not considered probable, on the achievement of the market-based condition. Awards granted which vest upon either the satisfaction of the performance or market conditions were measured based upon the achievement of the market condition during fiscal 2015 since the Company believes that the achievement of the performance conditions are not probable. Activity for the performance-based or market-based options was as follows for the year ended May 31, 2015:

 

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (years)				Aggregate Intrinsic Value (1)
Performance or market-based options outstanding at May 31, 2014			136,279			$	100.00
Granted			20,550				100.00
Exercised			-				-
Forfeited			(7,500	)			100.00
Expired or cancelled			-				-
Performance or market-based options outstanding at May 31, 2015			149,329				100.00				7.1			$	-
Exercisable at May 31, 2015			67,233			$	100.00				6.9			$	-

 

(1)

The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal year. Options with a market value less than its exercise value are not included in the intrinsic value amount.

 

The weighted-average grant-date fair value of share options granted during the fiscal years ended May 31, 2015, 2014, and 2013 were $4.86, $16.79, and $20.59, respectively.

 

As of May 31, 2015, there was $0.4 million of total unrecognized compensation cost related to nonvested performance-based or market-based stock option awards. This compensation cost is expected to be recognized over a weighted average period of approximately 0.9 years.

 

 

Restricted stock units

 

The fair value of restricted stock is estimated using the Monte Carlo simulation approach described above and is then discounted due to non-marketability. The following is a summary of the changes in unvested restricted stock units for the fiscal year ended May 31, 2015:

 

		Number of Shares				Weighted-Average Grant-Date Fair Value
Nonvested restricted stock units outstanding at May 31, 2014			2,400			$	86.93
Granted			1,600				81.47
Vested			(1,600	)			84.68
Forfeited			-				-
Nonvested restricted stock units outstanding at May 31, 2015			2,400			$	84.55

 

As of May 31, 2015, there was $0.2 million of total unrecognized compensation cost related to nonvested restricted stock awards. This compensation cost is expected to be recognized over the weighted average period of approximately 1.5 years.

 

Stock appreciation rights

 

The stock appreciation rights granted contain both a performance and a market condition and are cash settled so require liability classification.  The market condition is a defined return to investors and was incorporated into the grant date fair value calculation.  The performance condition is only met upon a liquidity event. As of May 31, 2015, management has determined that the satisfaction of that performance condition is not considered probable. Therefore, no expense or liability has been recognized.

 

The following is a summary of the changes in cash-settled stock appreciation rights for the fiscal year ended May 31, 2015:

 

		Number of Shares				Weighted-Average Grant-Date Fair Value
Stock appreciation rights outstanding at May 31, 2014			147,200			$	16.79
Granted			52,150				1.98
Vested			-				-
Forfeited			(32,350	)			1.98
Cancelled/Expired			-				-
Stock appreciation rights outstanding at May 31, 2015			167,000			$	1.98

 

As of May 31, 2015, the fair value of the liability relating to cash settled stock appreciation rights was $0.3 million.

 

Shares available for future grants

 

As of May 31, 2015, a total of 33,073 shares were available for future grants under the 2011 Plan.

 

A summary of share-based compensation recorded in the statements of operations is as follows (in thousands):

 

		Year Ended May 31
		2015				2014				2013
Share-based compensation		$	2,087				1,512				1,423
Tax benefit			(806	)			(584	)			(549	)
Share-based compensation, net		$	1,281				928				874

 

 

19.

INCOME TAXES

 

The Company is included in the consolidated income tax returns of Holdings. In accordance with GAAP, allocation of the consolidated income tax expense (benefit) is necessary when separate financial statements are prepared for affiliates. The Company uses a method that allocates current and deferred taxes to members of the consolidated group by applying the liability method to each member as if it were a separate taxpayer. As of May 31, 2015 and 2014, the Company had no amounts due to or from Holdings related to income taxes.

 

The following is a geographic breakdown of (loss) income before income taxes (in thousands):

  

		Year Ended May 31
		2015				2014				2013
Domestic operations		$	(57,043	)			(210,354	)			(74,451	)
Foreign operations			11,918				12,181				10,743
(Loss) before income taxes		$	(45,125	)			(198,173	)			(63,708	)

  

The provision (benefit) for income taxes is summarized as follows (in thousands):

  

		Year Ended May 31
		2015				2014				2013
Current:
Federal		$	(642	)			321				403
State and Local			740				914				69
Foreign			4,058				4,107				4,434
			4,156				5,342				4,906
Non-Current:
Federal			46				(298	)			(899	)
State and Local			(729	)			-				-
			(683	)			(298	)			(899	)
Deferred:
Federal			14,344				(19,030	)			(26,319	)
State and Local			(1,944	)			(1,092	)			(1,522	)
Foreign			(273	)			(838	)			(732	)
			12,127				(20,960	)			(28,573	)
Provision (benefit) for income taxes		$	15,600				(15,916	)			(24,566	)

  

 

 

The Company’s effective tax rate differs from the federal statutory rate as follows:

 

		Year Ended May 31
		2015				2014				2013
Federal statutory tax rate			35.0	%			35.0				35.0
State income taxes, net of federal tax benefit			5.9				0.8				3.7
Foreign taxes, including rate differential			1.6				(0.1	)			(0.9	)
Incremental U.S. benefit related to foreign dividends			(2.1	)			0.4				0.8
Tax Credits			2.5				0.2				1.9
Permanent items			(1.5	)			(0.3	)			(1.3	)
Change in election related to foreign tax credits			(69.4	)			-				-
Unremitted Subsidiary earnings			(4.7	)			-				-
Impairment of Goodwill			-				(28.3	)			-
Acquistion-related items			-				0.8				-
Change in analysis of uncertain income tax positions			0.3				(0.1	)			0.9
Valuation Allowance			(1.7	)			(0.4	)			(1.5	)
Other			(0.5	)			-				-
Effective tax rate			(34.6	)%			8.0				38.6

 

The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2015 primarily relates to the Company’s change in election related to the treatment of foreign tax credits (“FTCs”) and the change in the valuation allowance for its FTC carryovers. Excluding these items, the effective tax rate would have been 34.8%.

 

The effective tax rate for fiscal 2015 was significantly impacted by the Company’s decision during the third quarter of fiscal 2015 to change its election with regard to the treatment of its foreign tax credits. This decision is expected to generate a significant reduction in cash tax payments related to the fiscal 2014, fiscal 2015 and fiscal 2016 years as a result of the Company changing from the credit method to the deduction method for its FTCs in various tax periods. As a result, the Company elected the deduction method for FTCs for the fiscal 2012, fiscal 2013, fiscal 2014 and fiscal 2015 periods. The Company filed its fiscal 2014 income tax returns reflecting this change. The Company will amend its fiscal 2012 and fiscal 2013 income tax returns to reflect this change. The Company will not amend the income tax return for the period ended August 19, 2011. As a result of this change in election, the Company recognized a discrete charge of additional income tax expense of $23.7 million during the third quarter of fiscal 2015. In addition, the Company recorded a valuation allowance of $7.6 million during the same period related to uncertainties in the Company’s ability to utilize the FTC carryovers prior to their expiration. These items have been combined in the Company’s reconciliation of the effective tax rate.

 

The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2014 primarily relates to the following: (1) the impairment of goodwill is not deductible for income tax purposes, (2) the gain on acquisition-related item is not taxable, (3) a portion of the Company’s income is subject to tax in various tax jurisdictions with tax rates which differ from the U.S. statutory tax rate, (3) the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings, (4) changes in discrete tax items recognized during the period based on enacted tax laws, and (5) the expiration of the statute of limitations for the benefits associated with uncertain tax positions.

 

The difference between the federal statutory rate of 35% and the effective tax rate for fiscal 2013 primarily relates to state income taxes and tax credits net of the changes in the valuation allowance.

 

Deferred income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes; and (b) net operating losses and tax credit carry-forwards. In accounting for the LIFECODES acquisition, the Company recorded deferred tax liabilities of approximately $12.7 million associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with reserves and state tax credit carry-forwards. In accounting for the Organ-i acquisition, the Company recorded deferred tax liabilities of approximately $10.2 million primarily associated with acquired intangible assets that have no income tax basis. These liabilities were offset by deferred tax assets primarily associated with net operating loss carry-forwards. In accounting for the Sentilus acquisition, the Company recorded deferred tax liabilities of approximately $7.1 million primarily associated with acquired intangible assets that have no income tax basis.

 

 

The significant items comprising the Company’s net deferred tax liabilities as of May 31, 2015 and 2014 are as follows (in thousands):

 

		Year Ended May 31
		2015				2014
Deferred tax liabilities:
Intangibles		$	(244,319	)			(260,981	)
Unremitted Subsidiary earnings			(10,375	)			-
Interest expense			(8,704	)			(11,291	)
Property and equipment			(3,157	)			(2,224	)
Prepaids and other			(744	)			(492	)
Transfer pricing			(342	)			(238	)
Deferred tax assets:
Net operating loss carry-forwards			18,508				6,793
Tax credit carry-forwards			15,352				32,632
Capitalized research			5,431				15,122
Compensation expense			5,186				3,543
Inventory			1,939				3,351
Reserves not currently deductible			1,726				1,110
Other			1,062				1,526
			(218,437	)			(211,149	)
Valuation Allowance			(12,177	)			(3,962	)
Net deferred tax liabilities		$	(230,614	)			(215,111	)

 

In addition to the specific line items on the consolidated balance sheets at May 31, 2015 the Company included $19 thousand of long-term deferred tax assets in Other Assets, long-term and $77 thousand of short-term deferred tax liabilities in Accrued expenses and other current liabilities.

 

As of May 31, 2015 and 2014, net deferred tax liabilities located in countries outside the U.S. were $10.6 million and $10.7 million, respectively.

 

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company’s largest foreign tax jurisdictions are Canada, Germany and Italy. The Company’s tax returns for substantially all fiscal years beginning after May 31, 2009 remain subject to examination by various tax authorities. The Company’s U.S. Federal income tax return for fiscal 2011 is currently under examination. Although the outcome of tax examinations is always uncertain, the Company believes that adequate amounts of tax, including interest and penalties, if any, have been provided for any adjustments that are expected to result from the Company’s tax positions.

 

As of May 31, 2015, $41.8 million of Federal net operating loss (“NOL”) carry-forwards were available to reduce future U.S. Federal taxable income. These net operating loss carry-forwards begin to expire in fiscal 2025. The Company has $7.6 million of FTC carry-forwards which expire in fiscal 2021. The Company has $5.3 million of Federal research and development credits which expire between fiscal 2019 and fiscal 2035 and Federal alternative minimum tax credit carryovers of $0.5 million with no expiration period. Certain portions of the Federal net operating loss and certain tax credit carry-forwards are subject to annual limitations on their usage resulting from the BioArray acquisition in fiscal 2009 and the Organ-i acquisition in fiscal 2014.

 

In September 2013, the U.S. Department of the Treasury and the IRS issued final regulations addressing the acquisition, production and improvement of tangible property, and also proposed regulations addressing the disposition of property. These regulations are effective for tax years beginning after January 1, 2014. The Company has analyzed the expected impact of these regulations on the Company and concluded that the expected impact is minimal. The Company will continue to monitor the impact of any future changes to these regulations and any changes will be reported prospectively.

 

 

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. During fiscal 2015 and 2014, the Company recorded a deferred tax liability associated with unremitted foreign earnings of certain subsidiaries. The amount of the deferred tax liability significantly increased as a result of the change in estimate for FTCs during fiscal 2015. At May 31, 2013, the Company’s unremitted foreign earnings resulted in a net deferred tax asset. Accordingly, the Company did not provide for any deferred income taxes related to unremitted foreign earnings during fiscal 2013. The Company considers its equity investment in each foreign subsidiary to be permanently reinvested and thus has not recorded a deferred tax liability on such amounts.

 

The Company has NOL carry-forwards of $2.7 million in Belgium and $0.5 million in France. The NOL carry-forwards for Belgium and France do not expire. The Company has recorded a full valuation allowance related to the Belgium NOLs due to uncertainties regarding the realization of this deferred tax asset.

 

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company’s valuation allowances are primarily related to deferred tax assets generated from certain foreign net operating losses, state net operating losses and tax credit carry-forwards. Current evidence does not suggest the Company will realize sufficient taxable income of the appropriate character within the carry-forward period to allow us to realize these deferred tax benefits. If the Company were to identify tax planning strategies that become available in the future to recover these deferred tax assets or generate sufficient income of the appropriate character in these jurisdictions in the future, it could lead to the reversal of these valuation allowances and a reduction of income tax expense. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining deferred tax assets.

 

An analysis of the Company’s deferred tax asset valuation allowance is as follows (in thousands):

 

		Year Ended May 31
		2015				2014
Balance, beginning of period		$	3,962				3,234
Additions			8,381				1,111
Reductions			(17	)			(367	)
Other			(149	)			(16	)
Balance, end of period		$	12,177				3,962

 

The following is a tabular reconciliation of the total tax liability for unrecognized tax benefits for the years ended May 31, 2015 and 2014 (in thousands):

 

		Year Ended May 31
		2015				2014
Balance, beginning of period		$	12,863				12,729
Gross increases(decreases) in unrecognized tax benefits as a result of tax positions taken during a prior period			(337	)			(35	)
Gross increases in unrecognized tax benefits as a result of tax positions taken during current period			1,180				788
Reductions to unrecognized tax benefits as a result of the applicable statute of limitations expiring			(1,239	)			(619	)
Balance, end of period		$	12,467				12,863

 

The Company does not anticipate that within the next twelve months the total amount of unrecognized tax benefits will significantly increase or decrease. The total balance of unrecognized tax benefits at May 31, 2015 is $13.8 million, including accrued interest. Of this amount, the amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, is $13.5 million.

 

 

Approximately $9.1 million of the unrecognized tax benefit is reflected as a non-current liability as it is unlikely to require payment during the twelve-month period ending May 31, 2016. The remaining $4.7 million is included in non-current deferred tax liabilities. At May 31, 2014, the liability for unrecognized tax benefits, including accrued interest, of $10.4 million was included as a non-current liability and $4.1 million was included in non-current deferred tax liabilities.

 

As of May 31, 2015 and 2014, the Company had recorded accrued interest related to the unrecognized tax benefits of $1.4 million and $1.6 million, respectively. During fiscal 2015, 2014, and 2013, the Company recognized an income tax (benefit) expense of ($0.3) million, $0.3 million, and $0.1 million, respectively, due to changes in the reserves for interest. The Company has not accrued penalties since adoption of the update to ASC 740, “Income Taxes.”

 

At May 31, 2015 and 2014, other assets in the consolidated balance sheets include $6.1 million and $6.7 million, respectively, of competent authority offsets related to transfer pricing. Competent authority offsets represent anticipated refunds from bilateral agreements between the taxing authorities of two countries which eliminates double taxation by treaty. For Immucor, this competent authority offset represents anticipated refunds by taxing authorities that will offset potential uncertain tax positions related to transfer pricing.

 

 

20.

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 enable the most compatible match available 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, Japan and other international markets. These other international markets are considered Emerging Markets for our business. 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 segment data is presented for the years ended May 31, 2015, 2014, and 2013 as follows (in thousands):

 

		Year Ended May 31
		2015				2014				2013
Net sales by product group:
Transfusion		$	326,850				330,547				330,931
Transplant & Molecular			62,450				57,509				16,857
Total		$	389,300				388,056				347,788

 

 

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

 

		Year Ended May 31
		2015				2014				2013
Net sales to customers by geography are as follows:
United States		$	238,639				239,204				229,944
Europe (A)			77,820				79,219				63,643
Canada			19,260				19,127				19,985
Other			53,581				50,506				34,216
Total		$	389,300				388,056				347,788

 

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 May 31
		2015				2014
Long-lived assets (excluding goodwill and intangibles) by geography:
United States		$	52,764				54,066
Europe (B)			14,542				15,725
Canada			4,029				4,517
Other (C)			2,239				2,003
Total		$	73,574				76,311

 

		As of May 31
		2015				2014
Concentration of net assets by geography:
United States		$	241,522				299,948
Europe			100,071				123,095
Canada			30,274				32,802
Other (C)			11,814				12,771
Total		$	383,681				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 annual net sales during any of the years ended May 31, 2015, 2014, or 2013. 

 

 

21.

RETIREMENT PLAN

  

The Company maintains a 401(k) retirement plan covering its U.S. employees who meet the plan requirements. The Company matches a portion of employee contributions, which vest immediately. The Company matched contributions to the plan of $2.1 million during fiscal 2015, $1.9 million during fiscal 2014, and $1.6 million during 2013 fiscal periods.

 

The Company’s Canadian affiliate maintains a defined contribution pension plan covering all Canadian employees, except temporary employees. The Company matches a portion of employee contributions to the plan, and each employee vests in the Company’s matching contributions once they have been a participant continuously for two years. The Company’s matching contributions to the plan were $0.1 million for fiscal 2015, $0.1 million for fiscal 2014, and $0.1 million for fiscal 2013 periods.

 

 

22.

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

May 31, 2015

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	7,080				(263	)			11,546				-				18,363
Accounts receivable, net			30,442				6,014				31,218				-				67,674
Intercompany receivable			68,815				24,201				8,861				(101,877	)			-
Inventories, net			18,361				13,706				11,830				(2,050	)			41,847
Deferred income tax assets, current portion			2,512				2,253				375				791				5,931
Prepaid expenses and other current assets			5,178				426				5,557				-				11,161
Total current assets			132,388				46,337				69,387				(103,136	)			144,976
PROPERTY AND EQUIPMENT, net			38,915				13,849				20,810				-				73,574
INVESTMENT IN SUBSIDIARIES			220,412				5,021				3,019				(228,452	)			-
GOODWILL			744,149				47,640				50,469				-				842,258
OTHER INTANGIBLE ASSETS, net			557,133				59,164				33,997				-				650,294
DEFERRED FINANCING COSTS, net			26,399				-				-				-				26,399
OTHER ASSETS			14,533				310				342				-				15,185
Total assets		$	1,733,929				172,321				178,024				(331,588	)			1,752,686
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	6,297				2,604				4,965				-				13,866
Intercompany payable			2,389				91,547				7,941				(101,877	)			-
Accrued interest and interest swap liability			19,288				-				-				-				19,288
Accrued expenses and other current liabilities			13,758				5,131				7,319				-				26,208
Income taxes payable			30,061				(30,074	)			3,509				-				3,496
Deferred revenue, current portion			1,498				7				1,198				-				2,703
Current portion of long-term debt, net of debt discounts			4,462				7				-				-				4,469
Total current liabilities			77,753				69,222				24,932				(101,877	)			70,030
LONG-TERM DEBT, net of debt discounts			1,033,276				-				-				-				1,033,276
DEFERRED INCOME TAX LIABILITIES			223,232				3,639				9,616				-				236,487
OTHER LONG-TERM LIABILITIES			15,987				11,908				1,317				-				29,212
Total liabilities			1,350,248				84,769				35,865				(101,877	)			1,369,005
SHAREHOLDERS' EQUITY:
Total shareholders' equity			383,681				87,552				142,159				(229,711	)			383,681
Total liabilities and shareholders' equity		$	1,733,929				172,321				178,024				(331,588	)			1,752,686

 

 

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, net			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			259,567				5,021				3,114				(267,702	)			-
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		$	1,789,831				173,156				209,206				(347,779	)			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			468,616				100,340				168,666				(269,006	)			468,616
Total liabilities and shareholders' equity		$	1,789,831				173,156				209,206				(347,779	)			1,824,414

 

 

Statements of Operations Year to Date

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS

For the Year Ended May 31, 2015

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
NET SALES		$	250,714				56,844				153,768				(72,026	)			389,300
COST OF SALES (exclusive of amortization shown separately below)			80,606				37,470				97,609				(72,026	)			143,659
GROSS MARGIN			170,108				19,374				56,159				-				245,641
OPERATING EXPENSES:
Research and development			11,633				16,331				827				-				28,791
Selling and marketing			24,878				10,133				22,822				-				57,833
Distribution			10,814				1,612				7,596				-				20,022
General and administrative			27,438				4,520				9,233				-				41,191
Amortization expense			47,887				4,309				2,335				-				54,531
Total operating expenses			122,650				36,905				42,813				-				202,368
INCOME (LOSS) FROM OPERATIONS			47,458				(17,531	)			13,346				-				43,273
NON-OPERATING (EXPENSE) INCOME:
Interest income			64				-				192				(111	)			145
Interest expense			(88,957	)			(507	)			(68	)			111				(89,421	)
Other, net			3,000				(552	)			(1,570	)			-				878
Total non-operating net expense			(85,893	)			(1,059	)			(1,446	)			-				(88,398	)
(LOSS) INCOME BEFORE INCOME TAXES			(38,435	)			(18,590	)			11,900				-				(45,125	)
PROVISION (BENEFIT) FOR INCOME TAXES			17,631				(5,806	)			3,775				-				15,600
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES			(56,066	)			(12,784	)			8,125				-				(60,725	)
Net (loss) income of consolidated subsidiaries			(4,659	)			-				-				4,659				-
NET (LOSS) INCOME		$	(60,725	)			(12,784	)			8,125				4,659				(60,725	)

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS

For the Year Ended May 31, 2014

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
NET SALES		$	251,079				55,457				149,725				(68,205	)			388,056
COST OF SALES (exclusive of amortization shown separately below)			82,485				32,936				92,418				(68,205	)			139,634
GROSS MARGIN			168,594				22,521				57,307				-				248,422
OPERATING EXPENSES:
Research and development			13,514				15,180				376				-				29,070
Selling and marketing			24,701				9,188				25,168				-				59,057
Distribution			11,199				1,484				7,482				-				20,165
General and administrative			25,412				7,362				8,829				-				41,603
Amortization expense			47,883				2,700				2,382				-				52,965
Acquisition-related items			(4,638	)			-				-				-				(4,638	)
Impairment loss			160,000				150				-				-				160,150
Total operating expenses			278,071				36,064				44,237				-				358,372
(LOSS) INCOME FROM OPERATIONS			(109,477	)			(13,543	)			13,070				-				(109,950	)
NON-OPERATING (EXPENSE) INCOME:
Interest income			-				8				84				(56	)			36
Interest expense			(88,314	)			-				(46	)			56				(88,304	)
Other, net			819				153				(927	)			-				45
Total non-operating net (expense) income			(87,495	)			161				(889	)			-				(88,223	)
(LOSS) INCOME BEFORE INCOME TAXES			(196,972	)			(13,382	)			12,181				-				(198,173	)
(BENEFIT) PROVISION FOR INCOME TAXES			(14,381	)			(5,060	)			3,525				-				(15,916	)
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES			(182,591	)			(8,322	)			8,656				-				(182,257	)
Net income (loss) of consolidated subsidiaries			334				-				-				(334	)			-
NET (LOSS) INCOME		$	(182,257	)			(8,322	)			8,656				(334	)			(182,257	)

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS

For the Year Ended May 31, 2013

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
NET SALES		$	256,676				15,835				124,465				(49,188	)			347,788
COST OF SALES (exclusive of amortization shown separately below)			84,320				11,056				73,839				(49,188	)			120,027
GROSS MARGIN			172,356				4,779				50,626				-				227,761
OPERATING EXPENSES:
Research and development			13,428				7,850				35				-				21,313
Selling and marketing			25,611				3,632				20,886				-				50,129
Distribution			11,599				421				6,698				-				18,718
General and administrative			26,143				6,673				9,985				-				42,801
Amortization expense			47,820				663				2,282				-				50,765
Acquisition-related items			2,616				-				-				-				2,616
Impairment loss			3,500				-				-				-				3,500
Loss on disposition of fixed assets			1,175				-				-				-				1,175
Total operating expenses			131,892				19,239				39,886				-				191,017
INCOME (LOSS) FROM OPERATIONS			40,464				(14,460	)			10,740				-				36,744
NON-OPERATING (EXPENSE) INCOME:
Interest income			-				-				97				(69	)			28
Interest expense			(90,875	)			(2	)			(22	)			69				(90,830	)
Loss on extinguishment of debt			(9,111	)			-				-				-				(9,111	)
Other, net			(1,043	)			(84	)			588				-				(539	)
Total non-operating net (expense) income			(101,029	)			(86	)			663				-				(100,452	)
(LOSS) INCOME BEFORE INCOME TAXES			(60,565	)			(14,546	)			11,403				-				(63,708	)
(BENEFIT) PROVISION FOR INCOME TAXES			(23,783	)			(4,773	)			3,990				-				(24,566	)
NET (LOSS) INCOME BEFORE EARNINGS OF CONSOLIDATED SUBSIDIARIES			(36,782	)			(9,773	)			7,413				-				(39,142	)
Net (Loss) Income of consolidated subsidiaries			(2,360	)			-				-				2,360				-
NET (LOSS) INCOME		$	(39,142	)			(9,773	)			7,413				2,360				(39,142	)

 

 

Statements of Cash Flows

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

For the Year Ended May 31, 2015

(in thousands)

 

		Successor
		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
Net cash provided by (used in) operating activities		$	20,299				2,814				4,548				(2,071	)			25,590
Net cash used in investing activities			(11,487	)			(2,648	)			(8,954	)			-				(23,089	)
Net cash (used in) provided by financing activities			(6,633	)			(20	)			(556	)			556				(6,653	)
Effect of exchange rate changes on cash and cash equivalents			38				-				(2,659	)			1,515				(1,106	)
Increase (decrease) in cash and cash equivalents			2,217				146				(7,621	)			-				(5,258	)
Cash and cash equivalents at beginning of period			4,863				(409	)			19,167				-				23,621
Cash and cash equivalents at end of period		$	7,080				(263	)			11,546				-				18,363

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

For the Year Ended May 31, 2014

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
Net cash provided by (used in) operating activities		$	15,530				(1,540	)			12,221				(610	)			25,601
Net cash provided by (used in) investing activities			1,209				(14,972	)			(11,233	)			(197	)			(25,193	)
Net cash (used in) provided by financing activities			(6,633	)			(40	)			(786	)			785				(6,674	)
Effect of exchange rate changes on cash and cash equivalents			(179	)			-				656				22				499
(Increase) decrease in cash and cash equivalents			9,927				(16,552	)			858				-				(5,767	)
Cash and cash equivalents at beginning of period			6,971				4,107				18,310				-				29,388
Cash and cash equivalents at end of period		$	16,898				(12,445	)			19,168				-				23,621

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

For the Year Ended May 31, 2013

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
Net cash provided by (used in) operating activities		$	4,690				6,423				13,534				(113	)			24,534
Net cash used in investing activities			(86,490	)			(2,164	)			(5,747	)			-				(94,401	)
Net cash provided by (used in) financing activities			80,840				(8	)			-				-				80,832
Effect of exchange rate changes on cash and cash equivalents			(162	)			-				(106	)			113				(155	)
(Decrease) increase in cash and cash equivalents			(1,122	)			4,251				7,681				-				10,810
Cash and cash equivalents at beginning of period			8,093				(144	)			10,629				-				18,578
Cash and cash equivalents at end of period		$	6,971				4,107				18,310				-				29,388

 

 

23.

COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

In the U.S., the Company leases office, warehousing and manufacturing facilities under several operating lease agreements expiring at various dates through fiscal 2026 with a right to renew for an additional term in the case of most of the leases. Certain of these leases contain escalation clauses. Outside the U.S., the Company leases foreign office and warehouse facilities under operating lease agreements expiring at various dates through fiscal 2020. The total leasing expense for the Company was $5.5 million in fiscal 2015, $5.5 million in fiscal 2014, and $5.8 million in fiscal 2013 periods.

 

 

The following is a schedule of the approximate future annual lease payments under all operating leases that have initial or remaining non-cancelable lease terms as of May 31, 2015 (in thousands):

 

Year Ended May 31:
2016		$	5,916
2017			4,588
2018			3,571
2019			3,100
2020			2,405
Thereafter			10,722
		$	30,302

 

 

Purchase Commitments

 

Purchase commitments made in the normal course of business were $45.3 million as of May 31, 2015. These purchases were primarily for inventory items. The following is a schedule of the approximate future payments for purchase commitments as of May 31, 2015 (in thousands):

 

Year Ended May 31:
2016		$	16,611
2017			13,901
2018			3,883
2019			4,083
2020			4,283
Thereafter			2,567
		$	45,328

 

 

Legal Proceedings

 

The Company and its subsidiary BioArray are defendants in an action brought in August 2014 by Rutgers, the State University of New Jersey (“Rutgers”), in the Superior Court of New Jersey for Middlesex County, alleging breach of contract and fraud claims under a patent license between Rutgers and BioArray. The Company believes the claims are without merit and that it has meritorious defenses. The Company believes that liability is unlikely and that the amount of any liability is not now reasonably estimable, but that any potential liability would not be material to the Company’s operations or to its financial condition.

 

From time to time, the Company is 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 its consolidated financial position, results of operations or cash flows.  

 

Self-Insurance Costs

 

In fiscal 2014, the Company entered into a program to self-insure its costs related to U.S. medical employee benefits. Liabilities are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for medical claims are accounted for on an undiscounted basis. The Company has purchased stop-loss coverage to limit its exposure on a per claim and on an aggregate basis. The Company is insured for covered costs in excess of these per claim limits. As of May 31, 2015 and May 31, 2014, the self-insured liability was approximately $1.2 million and $0.9 million, respectively, and was included in accrued expenses and other current liabilities on the Company’s consolidated balance sheet.

 

Royalty Payments

 

The Company is required to pay royalty payments on the sales of specific products. These royalty payments are based on the net selling price of the specific products and are mainly calculated at fixed percentages. On certain products, a minimum annual royalty fee is applicable. In total, the Company incurred costs of $4.6 million, $4.2 million and $1.6 million related to royalty fees in fiscal years 2015, 2014 and 2013, respectively. As of May 31, 2015, the Company had a minimum royalty payment obligation of approximately $14.7 million. The following is a schedule of the approximate future payments for royalty payment commitments as of May 31, 2015 (in thousands):

 

Year Ended May 31:
2016		$	2,553
2017			2,574
2018			2,625
2019			2,637
2020			2,708
Thereafter			1,620
		$	14,717

 

 

24.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

  

The quarterly financial data included in the tables below are in thousands:

 

										Income
Fiscal Year		Net				Gross				from				Net
Ended		Sales				Margin				Operations				Loss
May 31, 2015
First Quarter		$	102,441				65,614				13,874				(5,479	)
Second Quarter			96,277				60,504				8,351				(9,077	)
Third Quarter			95,605				61,634				12,878				(39,440	)
Fourth Quarter			94,977				57,889				8,170				(6,729	)
		$	389,300				245,641				43,273				(60,725	)

 

 

										Income (loss)
Fiscal Year		Net				Gross				from				Net
Ended		Sales				Margin				Operations				Loss
May 31, 2014
First Quarter		$	96,044				59,993				9,990				(7,760	)
Second Quarter			100,203				65,521				20,030				(787	)
Third Quarter			90,979				58,620				8,834				(7,355	)
Fourth Quarter			100,830				64,288				(148,804	)			(166,355	)
		$	388,056				248,422				(109,950	)			(182,257	)

 

 

25.

SUBSEQUENT EVENTS

 

The IVD Holdings Inc. 2011 Equity Incentive Plan was modified in August 2015 to increase the shares available for future grants by 259,247 shares. These shares were then granted to Mr. Jeffrey Binder in accordance with his employment agreement with the Company.

 

 

Item 8. — Financial Statements and Supplementary Data

 

B.

Supplementary Financial Information

 

Consolidated Financial Statement Schedule

 

Schedule II – Valuation and Qualifying Accounts

 

Years Ended May 31, 2015, 2014, and 2013

(in thousands)

  

		Beginning Balance				Additions to Expense				Deductions (1)				Other (2)				Ending Balance
2015
Allowance for doubtful accounts		$	898				970				(199	)							1,669
Deferred income tax valuation allowance			3,962				8,381				(166	)							12,177
2014
Allowance for doubtful accounts			815				268				(1,934	)			1,749				898
Deferred income tax valuation allowance			3,234				1,111				(383	)							3,962
2013
Allowance for doubtful accounts			612				180				23								815
Deferred income tax valuation allowance			1,888				984				362								3,234

 

(1)

Includes deductions, allowances written-off during the period less recoveries of accounts previously written-off, as well as the effect of changes in foreign exchange rates and changes in estimates. In 2013, the $362,000 of deferred income tax valuation allowance represents the beginning balance acquired in the LIFECODES acquisition.

(2)

Represents valuation allowance to show gross receivables and related allowances at their net fair value at the time of acquisition, now reversed as the related receivables have been collected.

 

 

Item 9. — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Not applicable.

 

 

Item 9A. — Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation as of May 31, 2015, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

(b) Changes in Internal Control

 

There were no changes in our internal control over financial reporting during the quarter ended May 31, 2015 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

(c) Management’s Report on Internal Control over Financial Reporting

 

The management of Immucor is responsible for establishing and maintaining adequate internal control over financial reporting, as such is defined in Rules 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended, and for performing an assessment of the effectiveness of internal control over financial reporting as of May 31, 2015. The Company’s internal control over financial reporting is a process that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

Immucor’s management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of May 31, 2015 using the criteria described in “Internal Control—2013 Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The objective of this assessment is to determine whether the Company’s internal control over financial reporting was effective as of May 31, 2015. Immucor’s management has concluded that, as of May 31, 2015, its internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

 

Item 9B. — Other Information.

 

Not applicable.

 

 

PART III

 

Item 10. — Directors, Executive Officers and Corporate Governance.

 

 

Board of Directors

 

The board of directors of IVD Holdings Inc. (“Holdings”), the indirect parent of the Company, manages the affairs of the Company. All references to the “Board of Directors” refer to the board of directors of Holdings. Set forth below are the names, ages and biographical information of the current directors of Holdings. Jeffrey Binder, Jeffrey Rhodes, and Todd Sisitsky are also directors of the Company.

 

 

Name of Director		Age	Position and Biographical information
Jeffrey K. Rhodes		40	Mr. Rhodes has been a director of Holdings and the Company since August 2011. Mr. Rhodes was a Principal at the Sponsor beginning 2005 and became a Partner in 2014. He serves on the board of directors of EnvisionRX, Par Pharmaceutical Companies, IMS Health and Surgical Care Affiliates. We believe Mr. Rhodes is qualified to serve on our Board of Directors because of his financial expertise as well as his experience as a director of other privately held companies in the healthcare industry.
Todd B. Sisitsky		43	Mr. Sisitsky has been a director of Holdings and the Company since August 2011. Mr. Sisitsky has been a Partner of the Sponsor since 2007 and was an Investor at the Sponsor from 2003 to 2007. Mr. Sisitsky serves on the board of directors of Healthscope, IASIS Healthcare Corp., Surgical Care Affiliates, IMS Health, Aptalis Pharma and Par Pharmaceuticals. Mr. Sisitsky also serves on the board of directors of the Campaign for Tobacco Free Kids and on the Dartmouth Medical School Board of Overseers. We believe Mr. Sisitsky is qualified to serve on our Board of Directors because of his financial expertise as well as his experience as a director of other privately held companies in the healthcare industry.
Jeffrey R. Binder		52	Mr. Binder has been a director of Holdings and the Company since June 2015. Mr. Binder joined the Company from Biomet, Inc. where he served as President and Chief Executive Officer from February 2007 to June 2015. Prior to that role, Mr. Binder served as Senior Vice President of Diagnostic Operations of Abbott Laboratories from January 2006 to February 2007. We believe Mr. Binder is qualified to serve on our Board of Directors because of his extensive experience, executive leadership and management experience in other companies in the healthcare industry.
William A. Hawkins		61	Mr. Hawkins is Lead Director of Holdings, and has been a director since October 2011. Mr. Hawkins served as the Company’s President and Chief Executive Officer from October 2011 to June 2015. From 2002 to June 2011, Mr. Hawkins served in a variety of executive capacities, including Chairman and CEO, at Medtronic, Inc. Mr. Hawkins serves on the board of KeraNetics, Thoratec and AdvaMedDx. Mr. Hawkins also serves on the Duke University Board of Trustees and the board of the Duke University Health System. We believe Mr. Hawkins is qualified to serve on our Board of Directors because of his extensive experience, executive leadership and management experience in other companies in the healthcare industry.

 

Scott Garrett		65	Mr. Garrett has been a director of Holdings since January 2012. Mr. Garrett is a Senior Operating Partner with Water Street Healthcare Partners, a strategic private equity firm focused exclusively on the healthcare industry. From 2005 to 2010 Mr. Garrett was the Chief Executive Officer of Beckman Coulter, a leading biomedical testing company.  Mr. Garrett currently serves on the boards of Hologic, Inc., Oregentec, Inc., MarketLab, Inc. and AdvaMedDx. Until 2010 Mr. Garrett served on the boards of Beckman Coulter, AdvaMed and InHealth. We believe Mr. Garrett is qualified to serve as a director given his extensive healthcare and industry experience.
David A. Kessler, M.D.		64	Dr. Kessler has been a director of Holdings since January 2012. Dr. Kessler is currently Professor of Pediatrics and Epidemiology and Biostatistics at the School of Medicine, University of California, San Francisco (UCSF). Dr. Kessler was Commissioner of the FDA from 1990-1997. He was Dean of the School of Medicine and the Vice Chancellor for Medical Affairs at UCSF from 2003 through 2007. Dr. Kessler has served on the board of directors of Tokai Pharmaceuticals, Inc. since 2009. We believe Dr. Kessler is qualified to serve on our Board of Directors because of his extensive healthcare and regulatory experience.
Sean Murphy		62	Mr. Murphy, a director of Holdings since January 2012, serves as a senior advisor to Evercore Partner, a New York based investment bank. Mr. Murphy served in a variety of executive capacities, including Vice President of Strategy and Business Development at Abbott from 1979 to 2010. Mr. Murphy serves on the board of directors for Brandon Point Industries, Malin Life Science, Melinta Pharma, Novan Therapeutics, and Altan Pharma. We believe Mr. Murphy is qualified to serve on our Board of Directors because of his extensive healthcare experience and because of his background in finance and accounting.
Sharad Mansukani		46	Dr. Mansukani, a Director of Holdings since January 2012, serves as a senior advisor of the Sponsor. He was appointed to the Medicare’s Program Advisory and Oversight Committee, a committee established by Congress. Dr. Mansukani previously served as a senior advisor to the Administrator of CMS from 2003 to 2005. Dr. Mansukani serves on the board of directors of Envision RX, IASIS Healthcare, Surgical Care Affiliates, Health Spring Inc., Children’s Hospital of Philadelphia, and IMS Health. He is also a strategic advisor to the board of directors at Cigna. We believe Dr. Mansukani is qualified to serve on our Board of Directors because of his medical expertise and leadership experience.

 

 

Audit Committee Financial Expert

 

Mr. Murphy and Mr. Rhodes are the current members of the Company’s Audit Committee. In light of our status as a privately held company and the absence of a public listing or trading market for our common stock, we are not required to have an “audit committee financial expert.” However, we have determined that Messrs. Murphy and Rhodes are each an “audit committee financial expert” as defined by applicable SEC rules. Although the Board of Directors has not made an official determination, Mr. Murphy would likely be considered independent under the listing standards of the NASDAQ Stock Market.  The Audit Committee performs its duties pursuant to a written Audit Committee Charter adopted by the Board of Directors. 

 

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Conduct that applies to all our employees, including our executive officers. A copy of the Code of Conduct is available on the Company’s website at www.immucor.com. Certain amendments to or waivers of the Code of Conduct will be promptly posted on the Company’s website or in a report on Form 8-K, as required by applicable laws.

 

 

Executive Officers

 

Set forth below are the names, ages, existing positions and biographical information of the current executive officers.

 

Name of Executive Officer		Age		Position and Biographical information		Since
Jeffrey R. Binder		52		Mr. Binder has served as President and Chief Executive Officer since June 2015. Please see biography above under “Board of Directors.”		2015
Dominique Petitgenet		53		Mr. Petitgenet has served as Chief Financial Officer and Vice President and of the Company since February 2012. In May 2014, Mr. Petitgenet’s role was expanded to include oversight of the international operations for the Company’s Transfusion Diagnostics business as well as the finance function for the Company. From 2008 to 2012, Mr. Petitgenet was the Chief Financial Officer of Merial, Inc. Mr. Petitgenet was the Executive Director of Planning & Financial Evaluations at Merial, Inc. from 2005 to 2008.		2012

 

 

Section 16(a) Beneficial Ownership Reporting Compliance 

 

None.

 

 

Item 11. — Executive Compensation.

 

Compensation Discussion and Analysis 

 

This Compensation Discussion and Analysis describes the material elements of compensation awarded to Named Executive Officers for our 2015 fiscal year. It should be read in conjunction with the Summary Compensation Table, related tables and the narrative disclosure under the heading “Executive Compensation.” The compensation committee of the Board of Directors (the “Committee”) is primarily responsible for overseeing and designing our executive compensation program.  

 

The Named Executive Officers for fiscal 2015 were:

 

●

William Hawkins, Former President and Chief Executive Officer from October 2011 to June 2015;

 

●

Dominique Petitgenet, Vice President and Chief Financial Officer from March 2012 to the present;

 

Jeffrey Binder replaced Mr. Hawkins as our Chief Executive Officer effective June 29, 2015, which was after the close of our 2015 fiscal year.

 

Overview

 

The Committee has responsibility over matters relating to compensation of executives, including cash incentive and other compensation and benefit arrangements, including reviewing the performance of management in achieving the Company’s goals and objectives and for setting the annual compensation of the Company’s executive officers. The Committee also has responsibility over the administration of the IVD Holdings Inc. 2011 Equity Incentive Plan (the “2011 Plan”).

 

 

Cash bonuses paid to executive officers for fiscal year 2015 were conditioned on the achievement of certain revenue and Adjusted EBITDA targets and Company objectives and on meeting individual goals.  Long-term equity incentives are awarded to executive officers when they are hired, but are not generally awarded on an annual or other periodic basis.

 

No independent executive compensation consultants advised the Committee on fiscal year 2015 compensation matters. The Committee has sought input from management, but no executive officer has participated directly in any Committee meetings relating to his or her compensation.

 

Our Compensation Philosophy

 

Immucor Executive Compensation Philosophy and Objectives

 

Immucor’s executive compensation program is designed to help achieve superior performance of Immucor’s executive officers and management team by accomplishing the following objectives:

 

•

Attracting, retaining and rewarding highly-qualified employees;

•

Relating compensation to both company and individual performance;

•

Encouraging and rewarding the achievement of our short and long-terms goals and operating plans

•

Establishing compensation levels that are internally equitable and externally competitive; and

•

Aligning the interest of our executives with the financial strategic objectives of our shareholders.

 

 Total Compensation

 

We seek to achieve the objectives of our executive compensation program by offering a compensation package that uses three key elements: (1) base salary, (2) annual cash incentives, and (3) long-term equity incentives.

  

•

Base Salaries. We seek to provide competitive base salaries factoring in the responsibilities associated with the executive’s position, the executive’s skills and experience, and the executive’s performance as well as other factors

 

•

Annual Cash Incentives. The aim of this element of compensation is to reward individual and group contributions to the Company’s annual operating performance based upon the achievement of pre-established performance standards in the most recent completed fiscal year.

 

•

Long-Term Equity Incentives. The long-term element of our compensation program consists of the opportunity for our executive officers to participate directly as equity owners of the Company, combined with an up-front grant of stock options. The equity component is the most significant element of our executive compensation program because we believe that a meaningful equity interest by our executive officers and management team will provide a strong incentive to drive top line growth, increase margins and pursue growth opportunities, which we believe will lead to increased equity value and returns to our Sponsors.

 

Elements of Compensation for Fiscal 2015

 

The following section outlines the components of compensation and how we established pay levels for each of these components in fiscal 2015.

 

Each of our Named Executive Officers has an employment contract or offer letter that provided for a minimum base salary and a target annual bonus while he remained employed by us and the agreement was in effect. The terms of those agreements were negotiated with each of the Named Executive Officers at the time he joined the Company. In negotiating those agreements, the Committee relied on the experience of its members in setting compensation in other business settings to determine the level of compensation for the Named Executive Officer.

   

Base Salary

 

The base salary paid to Mr. Hawkins for fiscal 2015 was governed by the terms of his employment agreement with us. The base salary paid to Mr. Petitgenet was governed by the terms of the Offer Letter between Mr. Petitgenet and the Company dated February 12, 2012.   These agreements contain the general terms of each Named Executive Officer’s employment and establish the minimum compensation that such Named Executive Officers are entitled to receive, but do not prohibit, limit or restrict our ability to pay additional compensation, whether in the form of base salary, bonus, stock options or otherwise. The Committee reviews base salaries of our executive officers annually.

 

 

The table below shows the base salary for each Named Executive Officer for fiscal 2015.

 

William Hawkins	Former President and Chief Executive Officer	$800,000
Dominique Petitgenet	Vice President, Chief Financial Officer	$440,000 (1)

 

(1)

Mr. Petitgenet’s salary was increased to $440,000 from $400,000 in January 2015.

 

  

Annual Cash Incentives --- Annual Bonus Plan

 

The purpose of our annual cash bonus plan is to motivate and reward executives for achieving our shorter-term financial goals and strategic goals, and to provide competitive total compensation opportunities.  Each executive’s annual bonus opportunity has been designed by the Committee based on knowledge of, and experience with, compensation levels for other executives at other broadly similar companies, including other portfolio companies of the Sponsor.  

 

Mr. Petitgenet was granted 7,500 stock options in fiscal 2015.

 

In 2015, Mr. Hawkins and Mr. Petitgenet continued to vest in options that were granted to them in prior years. In addition, their outstanding performance-based options (along with all other outstanding options) were adjusted and partially accelerated on September 2, 2014. The Committee determined that, based on its experience, this adjustment was appropriate to realign the performance goals in a manner that made them challenging, yet achievable, and that partial acceleration of vesting was appropriate as recognition for the achievement of certain operational goals by the Company.

 

The Committee first approved the Annual Bonus Plan in August 2013.  Under the terms of the Annual Bonus Plan, the Committee may establish performance goals and award opportunities at its discretion. For fiscal 2015, the Committee determined that the Company’s executive officers were eligible for bonuses based on four components:

 

●

Revenue Component (30%): actual revenue compared to fiscal 2015 target net revenue;

●

Adjusted EBITDA Component (40%): actual Adjusted EBITDA compared to fiscal 2015 target Adjusted EBITDA;

●

Corporate Goals Component (10%): the achievement of corporate goals established by the Compensation Committee for fiscal 2015; and

●

Individual Component (20%): individual goals to support key corporate objectives.

 

The Committee retains the ability to provide for bonuses for outstanding individual performance even when targeted metrics for overall Company performance are not achieved. Annual bonuses can increase if we exceed targeted revenue, Adjusted EBITDA and corporate or individual goals. 

 

The table below shows the performance factors that could be applied depending on the extent to which each of the components listed above are achieved. Executive officers can earn bonus awards on a prorated basis for levels of achievement in between the performance factors listed below.  No annual bonuses are paid with respect to a particular bonus component if achievement of that bonus component is less than 50% of target.

 

	Below Minimum	Minimum	Slightly Below Target	Target	Maximum
Performance Factor	0%	50%	90%	100%	200%

 

 The target bonus for each Named Executive Officer’s is equal to a percentange of his base compensation as follows:

 

William Hawkins	100%
Dominique Petitgenet	50%

 

 

For fiscal 2015, Target Revenue was $407.8 million and Target Adjusted EBITDA was $146.6 million. Our actual revenue for fiscal 2015 was $389.3 million and actual Adjusted EBITDA was $135.6 million. Therefore, we achieved 91% of our revenue target and 53% of our Adjusted EBITDA target. We achieved approximately 53.2% of the corporate goals component. Mr. Hawkins and Mr. Petitgenet each achieved 100% of their individual goals component. Weighing the components as described above, we achieved 73.2% of the bonus targets. Messrs. Hawkins and Petitgenet will receive the bonuses listed below under the Annual Bonus Plan.  

 

William Hawkins	$ 585,600
Dominique Petitgenet	$ 161,040

 

Stock-Based Long-Term Incentives --- 2011 Equity Incentive Plan

 

Our Named Executive Officers’ compensation is heavily weighted in long-term equity because we believe that a meaningful equity interest by our executive officers and management team will provide a strong incentive to drive top line growth, increase margins and pursue growth opportunities, which we believe will lead to increased equity value and returns to our Sponsors.

 

On December 12, 2011 Holdings adopted the 2011 Plan pursuant to which shares of the stock of Holdings were reserved for issuance to senior management of the Company, the non-employee directors of Holdings and other consultants or advisors to the Company. Consistent with the Board’s view of long-term equity incentives as an important part of an ownership culture that encourages a focus on long-term performance by our Named Executive Officers and other key associates, each of the Named Executive Officers were awarded stock options when they joined the Company. The number of options awarded to each individual was “front-loaded” and intended to represent a long-term equity opportunity. The options will vest upon meeting certain time- and performance-based conditions. The Committee does not expect to make equity awards on an annual basis, but the Committee has discretion to grant awards at any time. The grant date fair value of these options is shown in the Grants of Plan-Based Awards table below.

 

Benefits and Perquisites

 

Our executives receive benefits consistent with our general employee population. Both of our Named Executive Officers receive certain perquisites and personal benefits in connection with their employment with us, which are described below in note 3 to the Summary Compensation Table for 2015. We believe the value of these perquisites and personal benefits are reasonable relative to their value to our Named Executive Officers.

 

 

Compensation Committee Interlocks and Insider Participation

 

The members of the Committee who served during fiscal year 2015 are Messrs. Sisitsky, Murphy, Garrett and Hawkins. Other than Mr. Hawkins, none of these committee members were officers or employees of the Company during fiscal year 2015, were formerly Company officers or had any relationship otherwise requiring disclosure. There were no interlocks or insider participation between any member of the Board of Directors or compensation committee and any member of the Board or compensation committee of another company.

 

 

Report of the Compensation Committee

 

The Committee has reviewed the Compensation Discussion and Analysis and discussed it with management. Based on its review and discussions with management, the Committee recommended to our Board that the Compensation Discussion and Analysis be included in this report for filing with the SEC.

 

 Submitted by the Compensation Committee of the Board of Directors:

 

Todd Sisitsky

Scott Garrett

Sean Murphy

 

 

Executive Compensation

 

Summary Compensation Table for 2015

 

The following table sets forth the compensation earned by the Named Executive Officers for services rendered in all capacities to the Company for each of the fiscal years presented.

 

Name and Principal Position		Year				Salary				Bonus (1)				Option Awards (2)				Non-Equity Incentive Plan Compensation (3)				All Other Compensation (4)				Total
						($)				($)				($)				($)				($)				($)
William A. Hawkins		2015					808,083				-				-				585,600				290,600				1,684,283
Former President and		2014					808,146				-				-				340,000				150,800				1,298,946
Chief Executive Officer		2013					830,769				-				-				312,000				259,620				1,402,389
Dominique G. Petitgenet		2015					423,229				150,000				87,238				161,040				10,954				832,461
Vice President		2014					412,468				150,000				-				105,000				16,478				683,946
Chief Financial Officer		2013					389,423				150,000				60,400				90,625				14,038				704,486

  

(1)			Pursuant to his Offer Letter, Mr. Petitgenet was paid a series of retention bonuses of $150,000 each in July of 2012, 2013 and 2014 for still being employed by the Company on each of June 30, 2012, June 30, 2013 and June 30, 2014.
(2)			The amount shown in this column with respect to Mr. Petitgenet’s 2013 stock option award reflects the aggregate grant date fair value of such award as computed in accordance with Accounting Standards Codification 718. Assumptions used in the calculation of this amount are included in Note 17, “Share-Based Compensation”, to the Company’s audited financial statements for the fiscal year ended May 31, 2013, included in the Annual Report on Form 10-K filed with the SEC on August 26, 2013. The awards listed above are classified as equity awards in accordance with Accounting Standards Codification 718 and consequently their aggregate grant date fair value is fixed.
(3)			Represents the discretionary bonus and annual cash incentive awards earned under the Annual Bonus Plan. We will pay bonuses for fiscal 2015 at the beginning of fiscal 2016 based on the achievement of financial, corporate and individual goals established under the Company’s Annual Bonus Plan. The Annual Bonus Plan is described in greater detail in the Compensation Discussion and Analysis section of this report.
(4)			All Other Compensation consisted of the following:

 

Name		Year				Perquisites and Other Personal Benefits				Company Contributions to Retirement and 401(k) Plans				Total
						($)				($)				($)
William A. Hawkins (1)		2015					280,000				10,600				290,600
Former President and		2014					140,000				10,800				150,800
Chief Executive Officer		2013					239,820				19,800				259,620
Dominique G. Petitgenet		2015					-				10,954				10,954
Vice President		2014					5,855				10,623				16,478
Chief Financial Officer		2013					-				14,038				14,038

 

(1)

Mr. Hawkins is a party to an agreement with the Sponsor dated December 12, 2011, pursuant to which Mr. Hawkins is entitled to at least $140,000 per calendar year from the Sponsor or its portfolio companies for services. The Company paid Mr. Hawkins $140,000 for calendar year 2012 in June 2013 and $140,000 payments for calendar years 2013 and 2014 in March of 2014 and 2015 respectively.

 

 

Grants of Plan-Based Awards

 

The following table includes information with respect to grants of plan-based awards to our Named Executive Officers during the fiscal year ended May 31, 2015.

 

All Other

Estimated Possible

Option Awards:

Under Non-Equity

Number of

Grant Date

Incentive Plan Awards (1)

Securities

Fair Value of

Name

Grant Date

Target

Maximum

Underlying Options

Stock and Option Awards

($)

($)

(#)

($ / Sh)

William A. Hawkins

800,000

1,600,000

-

-

Former President and Chief Executive Officer

Dominique G. Petitgenet

8/7/14

220,000

440,000

7,500

11.63

Vice President Chief Financial Officer

 

(1)

Actual payouts in fiscal 2016 to the Named Executive Officers under the Annual Bonus Plan are reported under the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table. The Compensation Discussion and Analysis section of this report explains in greater detail the methodology used for calculating bonuses.

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

 

The Company and Holdings had a written employment agreement with Mr. Hawkins and the Company has a written offer letter with Mr. Petitgenet.

 

Employment Agreement with Mr. Hawkins. Mr. Hawkins entered into an employment agreement with the Company and Holdings on October 17, 2011. The agreement provided Mr. Hawkins with a minimum annual salary of $800,000 and an annual cash bonus with a target of 100% and a maximum of 200% of his annual base salary, based on the achievement of annual individual and Company performance objectives. The severance to which Mr. Hawkins may be entitled and the restrictive covenant provisions of the agreement are described below in the “Potential Payments upon Termination or Change of Control” section.

 

Offer Letter with Mr. Petitgenet. Mr. Petitgenet has a written offer letter the Company dated April 10, 2012. The offer letter provides that Mr. Petitgenet’s starting annual salary was $375,000 (which has been subsequently increased over time to $440,000 as of January 2015). The offer letter also specifies that Mr. Petitgenet is eligible to receive an annual cash bonus with a target of 50% and a maximum of 100% of his annual base salary, based on the achievement of Company financial performance and individual performance. The offer letter also provides that Mr. Petitgenet was entitled to retention bonuses of $150,000 each, payable annually over three years, subject to his having remained employed through the applicable payment dates in June 2012, 2013 and 2014. The retention bonuses were subject to repayment on a pro-rata basis in the event of Mr. Petitgenet’s voluntary termination of employment within 12 months of the receipt of the applicable retention bonus.

 

While Mr. Petitgenet’s offer letter does not provide for severance, he separately participates in the Company severance plan and will be bound by restrictive covenants in connection with his receipt of benefits under that plan, as described below in the “Potential Payments upon Termination or Change of Control” section.

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table shows outstanding equity awards to the Named Executive Officers at May 31, 2015:

 

		Option Awards (1)
		Number of Securities Underlying Unexercised Options				Number of Securities Underlying Unexercised Options				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned				Option Exercise				Option Expiration
Name		Exercisable				Unexercisable				Options				Price				Date
		(#)				(#)				(#)				($)
William A. Hawkins			38,597				25,732				-				100.00			12/12/2021
Former President and Chief Executive Officer			-				-				32,165				100.00			12/12/2021
Dominique G. Petitgenet			6,000				4,000				-				100.00			03/01/2022
Vice President			-				-				5,000				100.00			03/01/2022
Chief Financial Officer			500				750				-				100.00			04/25/2023
			-				-				834				100.00			04/25/2023
			-				3,750				-				100.00			08/07/2024
			-				-				2,500				100.00			08/07/2024

 

 

(1)

In connection with the closing of the Immucor Acquisition and the hiring of Mr. Petitgenet, respectively, each of Mr. Hawkins and Mr. Petitgenet were granted stock options (expiring on December 12, 2021 in the case of Mr. Hawkins and on March 1, 2022 in the case of Mr. Petitgenet). Half of each award consists of time-based options called “Tranche 1 Options”, which vest in equal installments over the five-year period following the closing of the Immucor Acquisition, subject to the Named Executive Officer’s continued employment or other service through the vesting date. The other half of the award consists of performance-based options called “Tranche 2 Options” that are eligible to vest based on achievement of operational, financial and/or investment performance metrics. Mr. Petitgenet’s option grants expiring on April 25, 2023 and August 7, 2024 are subject to similar vesting conditions.

 

Option Exercises and Stock Vested

 

There were no options exercised or restricted shares or other stock awards that vested during the 2015 fiscal year for any of the Named Executive Officers.

 

 

Severance and Restrictive Covenants

 

Mr. Hawkins

 

On June 29, 2015, the Company announced that Mr. Hawkins’ employment as President and CEO of the Company terminated. Mr. Hawkins remains on the board of directors of Parent, which manages the affairs of the Company. As of the date of this filing, Mr. Hawkins remains an employee of the Company in an advisory capacity.

 

The termination of Mr. Hawkins’ employment was not a qualifying involuntary termination and the severance provisions of his employment do not apply. Under the terms of his employment agreement, during the 18-month period that follows his employment with the Company, Mr. Hawkins is prohibited from competing with the Company and its affiliates or soliciting Company employees. Mr. Hawkins is also bound by restrictions on the disclosure of confidential and proprietary information and from disparaging the Company and its affiliates at any time following his employment.

 

 

Mr. Petitgenet

 

Mr. Petitgenet is a participant in the Company’s Key Employee Severance Plan (the “Severance Plan”). The Severance Plan provides that if the Company terminates the employee’s employment without cause or the employee terminates his employment for good reason (each, a “qualifying termination”), then the Company must pay the employee an amount equal to his base salary plus the employee cost of twelve (12) months of health benefits. Upon a qualifying termination, the portion of the severance that meets the requirements of Treasury Regulation 1.409A-1(b)(9)(iii)(A) will be paid in approximately equal monthly installments over the one year following a qualifying termination and the excess will be paid in a lump sum within sixty (60) days after the qualifying termination.

 

If a qualifying termination occurs within two (2) years after a change in control and the employee was not a party to an employment agreement with the Company on the date of the Immucor Acquisition, then the Company must pay the employee a lump sum cash payment equal to two times his base salary plus twelve (12) months of health benefits.

 

The Severance Plan includes a “best net” provision, pursuant to which benefits will be reduced or “cut back” to the extent necessary to avoid an excise tax, if that would result in a better net after-tax benefit for the employee (taking into account the excise taxes the employee would pay on an unreduced benefit).

 

A separation agreement and release of claims is required to receive the payments under the Severance Plan. The separation agreement must include an 18 month post-employment non-solicitation and non-competition restriction.

 

Effect of Change in Control on Outstanding Equity Awards. If the employment of a Named Executive Officer is terminated without “cause” by us or for “good reason” by the executive, in each case, within two years after a “change of control”, all unvested time-based stock options (Tranche 1 Options) held by the executive would become vested and exercisable. However, all unvested performance-based stock options (Tranche 2 Options) held by the executive would be forfeited upon a termination for any reason. For this purpose, the terms “cause”, “good reason” and “change in control” are defined in the 2011 Plan or the applicable stock option agreements.

 

 

Quantification of Potential Amounts Payable on Termination

 

The table below sets forth the estimated payments that would have been made to Mssrs. Petitgenet and Hawkins upon a qualifying involuntary termination before or after a change of control based on his base salary as of May 31, 2015. The information set forth in the table assumes, as necessary:

 

 

●

The termination and/or the qualified change in control event occurred on May 31, 2015 (the last business day of our last completed fiscal year);

 

●

The estimate market value per share of our common stock on the date of termination is less than $100.

 

				Before Change in Control				After Change in Control
Name		Benefit		Termination w/o Cause				Termination w/o Cause
William A. Hawkins		Severance		$	2,218,713				3,233,113
Former President and Chief Executive Officer		Stock Options (1)			-				-
		TOTAL		$	2,218,713				3,233,113
Dominique G. Petitgenet		Severance		$	462,075				902,075
Vice President Chief Financial Officer		Stock Options (1)			-				-
		TOTAL		$	462,075				902,075

  

(1)

As of May 31, 2015, the estimated market value of each stock option was less than the exercise price and therefore would have no value when vested upon termination.

  

Compensation of Directors

 

The following table provides information concerning the compensation of the Company’s non-employee directors for fiscal 2015. Directors who are employees of the Company and directors affiliated with the Sponsor receive no compensation for their services as directors.

 

Name		Fees Earned or Paid in Cash (1)				Stock Awards (2) (3)				All Other Compensation (1)				Total
		($)				($)				($)				($)
Scott Garrett			40,000				32,732				3,296				76,028
David Kessler			40,000				32,732				6,801				79,533
Sharad Mansukani			40,000				32,732				-				72,732
Sean Murphy			40,000				32,732				564				73,296
Jeffrey Rhodes (4)			-				-				-				-
Todd Sisitsky (4)			-				-				-				-

 

(1)

Non-employee directors receive an annual retainer of $40,000 and are reimbursed for all travel expenses to and from meetings of the Board of Directors.

 

(2)

Non-employee directors receive an annual grant of 400 restricted stock units.

 

(3)

The amounts in these columns reflect the aggregate grant date fair value, as computed in accordance with Accounting Standards Codification 718, of awards granted pursuant to the 2011 Plan. Assumptions used in the calculation of these amounts for awards granted in fiscal year 2015 are included in Note 17, “Share-Based Compensation”, to the Company’s audited financial statements for the fiscal year ended May 31, 2015, included in this Annual Report on Form 10-K. All the awards listed above were equity awards and consequently aggregate grant date fair value is fixed.

 

(4)

Our Board includes representatives from the Sponsors and these directors do not receive compensation for their service on the Board.

  

 

Name		Stock Awards				Option Awards				Total Awards
		($)				($)				($)
Scott Garrett			131,932				27,730				159,662
David Kessler			131,932				27,730				159,662
Sharad Mansukani			131,932				27,730				159,662
Sean Murphy			131,932				27,730				159,662

 

Directors serving on the Company’s board of directors (rather than Holdings’ board of directors) do not receive separate compensation for such service.

 

Employment Agreement with Mr. Binder

 

Mr. Binder assumed the role of President and Chief Executive Officer of the Company and Holdings on June 29, 2015 and, in connection with his commencement of employment, the Company and Holdings entered into an employment agreement with him. Mr. Binder’s compensation arrangements are designed to incentivize Mr. Binder’s performance in a manner that is consistent with the Company’s general approach to executive compensation as described above in the Compensation Discussion and Analysis. The level of Mr. Binder’s compensation was determined by the Committee and the Holdings board of directors based on Mr. Binder’s experience, including his success as Chief Executive Officer for another portfolio company of the Sponsor, and the needs of the Company. The employment agreement provides him with an annual salary of $800,000 and an annual cash bonus with a target of 100% of his annual base salary. He is also entitled to receive a one-time grant of 34,566 restricted stock units payable in Holdings common stock, and options to purchase 259,247 shares of Holdings common stock, in each case, subject to time-based vesting over four years and other terms set forth in the applicable award agreements. The employment agreement also permits Mr. Binder to serve as a senior adviser to the Sponsor and its affiliates.

 

If Mr. Binder’s employment is terminated without cause (which includes a non-renewal of the agreement by the Company) or if he resigns for good reason, subject to the execution of a release in favor of the Company and compliance with the restrictive covenants, he will be entitled to receive severance in an aggregate amount equal to (i) two times (a) his annual base salary, and (b) the average of the annual bonus received by Mr. Binder for the fiscal year prior to the termination (or his target annual bonus, if the termination occurs during the first fiscal year of his employment) and his target annual bonus (the “Bonus Component” and the amount described in this clause (i), the “Severance Payment”), payable over the 18-month period following the termination of his employment, (ii) a pro-rata portion of the annual bonus Mr. Binder would have received based on actual performance through the date the termination occurs, payable at the time annual bonuses are paid generally, and (iii) if Mr. Binder elects to continue coverage under the Company’s health plan following his termination of employment, Company-paid COBRA premiums for up to 18 months following the date of termination. If the termination occurs within two years following a change in control, Mr. Binder will receive the same severance as is described above, except that the Bonus Component will be based solely on Mr. Binder’s target annual bonus, the Severance Payment will generally be paid in a lump sum, Mr. Binder’s pro-rata bonus for the year of termination will be based on his target annual bonus, and the stock options and restricted stock units described above (or cash or property for which they are exchanged in connection with the change in control) would be treated as having vested in full upon such termination. Under the terms of the agreement, Mr. Binder may not compete or solicit customers or employees during and for 18 months following the termination of his employment with the Company and may not disclose confidential information at any time.

 

 

Item 12. — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

All outstanding shares of common stock of the Company are held indirectly by Holdings.

 

The following table describes the beneficial ownership of Holdings’ common stock as of May 31, 2015 by (i) each director, (ii) each Named Executive Officer of the Company, (iii) each person known to the Company to own more than 5% of the outstanding shares,

and (iv) all of the executive officers and directors of the Company as a group. This information provided is as of May 31, 2015, and the beneficial ownership percentages are based on a total of 7,781,266 shares issued and outstanding on May 31, 2015.

 

Name of Beneficial Owner (and address for those owning more than five percent)		Amount and Nature of Beneficial Ownership (1)				Percent of Class
5% Shareholders
TPG Partners VI, L.P.			6,217,231				79.9	%
Affiliates of TPG			1,524,635				19.6	%
Directors and Executive Officers
Scott Garrett			5,000				*
David Kessler			-				*
Sharad Mansukani			-				*
Sean Murphy			2,500				*
Jeffrey Rhodes			-	(2)			*
Todd Sisitsky			-	(2)			*
Dominique Petitgenet			-				*
William A. Hawkins			10,000				*
All Directors and Executive Officers as a
Group			21,900				*
* Represents less than one percent of the Company's outstanding Common Stock

 

---

 

(1)

Unless otherwise indicated, the address of each of our directors and executive officers is c/o Immucor, Inc., 3130 Gateway Drive, Norcross, Georgia, 30071. A person is considered to beneficially own any shares: (a) over which the person exercises sole or shared voting or investment power, or (b) of which the person has the right to acquire beneficial ownership at any time within 60 days (such as through the exercise of stock options). Unless otherwise indicated, voting and investment power relating to the above shares is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children. Amounts include restricted shares, both vested and unvested, which have voting rights.

 

(2)

Jeffrey K. Rhodes is a Principal and Todd Sisitsky is a Partner of TPG Capital, L.P., an affiliate of the TPG Funds. Neither Mr. Rhodes nor Mr. Sisitsky has voting or investment power over and disclaims beneficial ownership of the shares held by the TPG Funds. The business address of each of Messrs. Rhodes and Sisitsky is c/o TPG Capital, L.P., 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

 

 

Item 13. — Certain Relationships and Related Transactions, and Director Independence.

 

Related Party Transactions

 

The Audit Committee of the Board of Directors monitors the occurrence of related party transactions in connection with its general responsibility to oversee the adequacy and effectiveness of the Company’s accounting, financial controls and internal controls over financial reporting, including the Company’s systems to monitor and manage business risk and legal and ethical compliance programs. The Committee relies principally on the Company’s management to identify transactions that are related party transactions. Any such transactions identified are considered not later than the Audit Committee’s next regularly-scheduled meeting, at which meeting the Audit Committee will determine what, if any, action may be warranted. The Audit Committee’s responsibilities are generally stated in its Charter, although its practices concerning potentially-reportable transactions are not specifically stated in the Charter. 

 

The Company’s Code of Conduct requires that employees avoid conflicts of interest, which are defined broadly to include transactions between the Company and the employee, a family member or an affiliated company.  Any conflict of interest is required to be brought to the immediate attention of the Company’s General Counsel.  A violation of the Code of Conduct may result in disciplinary action up to and including dismissal.  A copy of the Code of Conduct is available on the Company’s website at www.immucor.com.

 

Management Services Agreement 

 

In connection with the Immucor Acquisition, we entered into a management services agreement with the Sponsor (the “Manager”), pursuant to which the Manager will provide us with certain management services until December 31, 2021, with evergreen one year extensions thereafter. The management services agreement provides that the Manager will receive an aggregate annual retainer fee equal to approximately $3 million. The management services agreement provides that the Manager will be entitled to receive fees in connection with certain subsequent financing, acquisition, disposition and change of control transactions equal to customary fees charged by internationally-recognized investment banks for serving as financial advisor in similar transactions. The management agreement also provides for reimbursement for out-of-pocket expenses incurred by the Manager or its designees after the consummation of the Immucor Acquisition. Additional services may also be provided by the Sponsor and charged to the Company.

 

The management services agreement includes customary exculpation and indemnification provisions in favor of the Manager, its designees and its affiliates. The management services agreement may be terminated by the Manager, the board of directors of Holdings or upon an initial public offering or change of control unless the Manager determines otherwise. In the event the management services agreement is terminated, we expect to pay the Manager or its designees all unpaid fees plus the sum of the net present values of the aggregate annual retainer fees that would have been payable with respect to the period from the date of termination until the expiration date in effect immediately prior to such termination.

 

Management Stockholders’ Agreement

 

In connection with the Immucor Acquisition, Holdings entered into a Management Stockholders’ Agreement with management stockholders, including all of the current executive officers. The stockholders’ agreement contains certain restrictions on such stockholders’ transfer of Holdings’ equity securities, contains rights of first refusal upon disposition of shares, contains standard tag-along and drag-along provisions, and generally sets forth the respective rights and obligations of the stockholders who are parties to that agreement.

 

Director Independence 

 

Although the Board of Directors has not made an official determination, Messrs. Garrett and Murphy and Dr. Kessler would likely be considered independent under the listing standards of the NASDAQ Stock Market.

 

 

Item 14. — Principal Accountant Fees and Services.

 

Audit Fees and Services 

 

The following table summarizes certain fees billed by Grant Thornton, LLP for the fiscal years 2015 and 2014:

 

Fee Category:		2015				2014
Audit fees		$	1,123,152				1,298,155
Audit-related fees			16,430				16,110
Tax fees			-				-
All other fees			-				-
Total fees		$	1,139,582				1,314,265

 

Set forth below is a description of the nature of the services that Grant Thornton provided to us in exchange for such fees.

 

Audit Fees

 

Audit fees represent fees Grant Thornton billed us for the audit of our annual financial statements and the review of our quarterly financial statements and for services normally provided in connection with statutory and regulatory filings. 

 

Audit-Related Fees

 

Audit-related fees represent fees Grant Thornton billed us for audit-related services, including services relating to the audit of employee benefit plan financial statements.

 

The Audit Committee pre-approved all of the above audit and audit-related fees of Grant Thornton, as required by the pre-approval policy described below. The Audit Committee concluded that the provision of the above services by Grant Thornton was compatible with maintaining Grant Thornton’s independence.

 

Tax Fees

 

During fiscal 2015 and fiscal 2014 there were no fees billed to us for professional services rendered by Grant Thornton for tax compliance, tax advice and tax planning.

 

All Other Fees

 

During fiscal 2015 and fiscal 2014, there were no fees billed to us for professional services rendered by Grant Thornton for other products or services.

 

Policy for Pre-Approval of Independent Registered Public Accounting Firm

 

Pursuant to our policy on Pre-Approval of Audit and Non-Audit Services, we discourage the retention of our independent registered public accounting firm for non-audit services. We will not retain our independent registered public accounting firm for non-audit work unless:

 

●

In the opinion of senior management, the independent registered public accounting firm possesses unique knowledge or technical expertise that is superior to that of other potential providers;

 

●

The approval of the Chair of the Audit Committee is obtained prior to the retention; and

 

●

The retention will not affect the status of the independent registered public accounting firm as “independent accountants” under applicable rules of the SEC, PCAOB and NASDAQ Stock Market.

 

During fiscal 2015 and 2014, all of the services provided by Grant Thornton for the services described above under the heading “Audit-Related Fees” were pre-approved using the above procedures, and none were provided pursuant to any waiver of the pre-approval requirement.

 

 

PART IV

 

Item 15. — Exhibits and Financial Statement Schedules.

 

 

(a)	Documents filed as part of this report:
	1.	Consolidated Financial Statements.
		The Consolidated Financial Statements, Notes thereto, and Report of Independent Registered Public Accounting Firm thereon are included in Part II, Item 8 of this report.
	2.	Consolidated Financial Statement Schedule included in Part II, Item 8 of this report.
		Schedule II — Valuation and Qualifying Accounts.
		Other financial statement schedules are omitted as they are not required or not applicable.
	3.	Exhibits.
		See Item 15(b) below.

 

 

 

(b)     Exhibits –

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

2.1

Stock Purchase Agreement by and between the Company and Gen-Probe Incorporated dated January 3, 2013 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 3, 2013).

 

3.1.1

Amended and Restated Articles of Incorporation dated August 19, 2011 (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on August 25, 2011).

 

3.2.1

Amended and Restated Bylaws dated August 19, 2011 (incorporated by reference to Exhibit 3.2 to the Form 8-K filed on August 25, 2011).

 

4.1

Indenture, dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011).

 

4.2

Supplemental Indenture, dated as of August 19, 2011 among the Company, BioArray Solutions Ltd. and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011).

 

4.4

Form of 11.125% Senior Notes due 2019 (included in Exhibit 4.1) (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011).

 

4.5

Registration Rights Agreement, dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company, J.P. Morgan Securities LLC, as representative of the several Initial Purchasers listed in Schedule 1 to the Purchase Agreement (as defined therein) (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011).

 

4.6

Registration Rights Agreement Joinder, dated as of August 19, 2011 among the Company, BioArray Solutions Ltd. and J.P. Morgan Securities LLC, as representative of the several Initial Purchasers listed in Schedule 1 to the Purchase Agreement (as defined therein) (incorporated by reference to Exhibit 4.1 of the Form S-4 filed November 22, 2011).

 

10.1

Credit Agreement dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company, with the Company surviving such merger as the Borrower, IVD Intermediate Holdings B Inc., as Holdings, Citibank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lenders and Agents party thereto (incorporated by reference to Exhibit 10.1 of the Form S-4 filed November 22, 2011).

  

 

10.2

Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 21, 2012, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on August 24, 2012).

 

10.3

Amendment No. 2 to Amended and Restated Credit Agreement, dated as of January 25, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 31, 2013).

 

10.4

Amended and Restated No. 2 to Amended and Restated Credit Agreement, dated as of February 19, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on February 22, 2013).

 

10.5

Amendment No. 3 to Amended and Restated Credit Agreement, dated as of February 19, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on February 22, 2013).

 

10.6

Amendment No. 4 to Amended and Restated Credit Agreement, dated as of February 19, 2013, by and among Immucor, Inc., IVD Intermediate Holdings B Inc., the Subsidiary Guarantor party thereto, CitiBank, N.A., as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.3 to the Form 8-K filed on February 22, 2013).

 

10.7

Security Agreement dated as of August 19, 2011 among IVD Acquisition Corporation, which on August 19, 2011 was merged with and into the Company, with the Company surviving such merger as the Borrower, IVD Intermediate Holdings B Inc., as Holdings, the subsidiary guarantors party thereto from time to time, and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Form S-4 filed November 22, 2011).

 

10.9

Guaranty dated as of August 19, 2011 among IVD Intermediate Holdings B Inc., as Holdings, the other guarantors party thereto from time to time, and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 of the Form S-4 filed November 22, 2011).

 

10.11

Management Services Agreement, entered into as of August 19, 2011, between IVD Acquisition Corporation, IVD Intermediate Holdings A Inc., IVD Intermediate Holdings B Inc., IVD Holdings Inc. and TPG Capital, L.P. (incorporated by reference to Exhibit 10.4 of the Form S-4 filed November 22, 2011).

 

10.12-1

Amended and Restated Office Lease Agreement [2990 Building], dated January 26, 2007, between the Company and Business Park Investors Group, successor in interest to AP-Southeast Realty LP, successor by name change to Crocker Realty Trust, L.P., successor in interest to Connecticut General Life Insurance Company (incorporated by reference to Exhibit 10.1-11 to the Annual Report on Form 10-K for the fiscal year ended May 31, 2007), as amended by the Seventh Amendment to Office Lease Agreement dated July 1, 2013, between the Company and MLCFC 2007-7 Norcross Park Limited Partnership.

 

10.12-2

Lease Agreement dated August 1, 2013 between the Company and Kennesaw Wall I, LLC. (incorporated by reference to Exhibit 10.12-2 to the Annual Report on Form 10-K for the fiscal year ended May 31, 2014).

 

10.13*

Employment Agreement by and among the Company, IVD Holdings Inc. and William Hawkins, executed as of December 8, 2011 and effective as of October 17, 2011 (incorporated by reference to Exhibit 10.11 to Amendment No. 1. to Form S-4 filed on December 9, 2011).

 

10.14*

Letter Agreement between TPG Capital, L.P. and William Hawkins, dated December 12, 2011. (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the fiscal year ended May 31, 2014).

 

10.15*

Offer Letter between Immucor, Inc. and Dominique Petitgenet dated February 12, 2012 (incorporated by reference to the Quarterly Report on Form 10-Q filed on April 11, 2012).

  

 

10.16*

Form of Management Stockholders’ Agreement, by and among the Company, Holdings and the Managers and Investors named therein (incorporated by reference to Exhibit 10.11 to Amendment No. 1. to Form S-4 filed on December 9, 2011).

 

10.17*

2012 Key Employee Severance Plan (incorporated by reference to Exhibit 10.5 to Form 10-K filed on July 27, 2012.

 

10.18*

Annual Bonus Plan for fiscal year 2014, executed as of August 6, 2013 and effective as of June 1, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 6, 2013).

 

10.19**

Employment Agreement by and among the Company, IVD Holdings Inc. and Jeffrey R. Binder, effective as of June 29, 2015.

 

14

Immucor Code of Conduct (available at Immucor.com/compliancehotline).

 

21**

Subsidiaries of the Registrant.

 

31.1**

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2**

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1**

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

 

32.2**

Certification of Chief Financial Officer Pursuant to Section 906 of the 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.

 

*

Denotes a management contract or compensatory plan or arrangement.

 

**

Filed or furnished herewith

 

 

(c)	Financial Statement Schedule

 

No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in Item 8 of this annual report on Form 10-K.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

By:	/s/ Jeffrey R. Binder
	Jeffrey R. Binder, President and Chief Executive Officer (Principal Executive Officer) August 21, 2015

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:	/s/ Jeffrey R. Binder
	Jeffrey R. Binder, President and Chief Executive Officer August 21, 2015

 

By:	/s/ Dominique Petitgenet
	Dominique Petitgenet, Chief Financial Officer and Vice President, International, Transfusion Diagnostics  (Principal Financial and Accounting Officer) August 21, 2015

By:	/s/ Jeffrey K. Rhodes
	Jeffrey K. Rhodes, Director August 21, 2015

 

By:	/s/Todd B. Sisitsky
	Todd B. Sisitsky, Director August 21, 2015

 

 

 

 

98