FORM 10-Q

United States

Securities and Exchange Commission

Washington, D. C. 20549

 

	(Mark One)
	X	Quarterly Report Pursuant to Section 13 or 15(d)
		of the Securities Exchange Act of 1934
		For the quarterly period ended: February 28, 2017
		OR
	_	Transition Report Pursuant to Section 13 or 15(d)
		of the Securities Exchange Act of 1934
		Commission File Number: 0-14820

 

IMMUCOR, INC.

(Exact name of registrant as specified in its charter)

 

	Georgia	22-2408354
	(State or other jurisdiction of	(I.R.S. Employer
	incorporation or organization)	Identification No.)

 

3130 Gateway Drive Norcross, Georgia 30071

(Address of principal executive offices)        (Zip Code)

 

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

 

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

 

Yes X       No   

 

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

 

Yes X     No  

 

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

 

Large accelerated filer	Accelerated filer
Non-accelerated filer      X	Smaller reporting company
(do not check if smaller reporting company)

 

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

 

Yes      No X

 

As of August 19, 2011, 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 April 11, 2017, there were 100 shares of common stock outstanding.

 

 

IMMUCOR, INC.

 

QUARTERLY FINANCIAL STATEMENTS

 

INDEX

 

PART I.    FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited, except for May 31, 2016)		3
Consolidated Statements of Operations (unaudited)		4
Consolidated Statements of Comprehensive Loss (unaudited)		6
Consolidated Statement of Changes in Equity (unaudited for the period ending February 28, 2017)		8
Consolidated Statements of Cash Flows (unaudited)		9
Notes to Consolidated Financial Statements (unaudited)		10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	41
PART II.    OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	SIGNATURES	43

 

 

ITEM 1. Consolidated Financial Statements

IMMUCOR, INC.

CONSOLIDATED BALANCE SHEETS

---

(Amounts in thousands, except share data)

 

		February 28, 2017				May 31, 2016
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	10,035				10,263
Trade accounts receivable, net of allowance for doubtful accounts of $1,050 and $2,114 at February 28, 2017 and May 31, 2016, respectively			64,120				62,043
Inventories, net			48,870				46,894
Prepaid expenses and other current assets			8,825				8,479
Total current assets			131,850				127,679
Property and equipment, net			76,792				76,015
Goodwill			854,736				857,023
Intangible assets, net			589,264				633,097
Other assets			11,229				13,819
Total assets		$	1,663,871				1,707,633
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable		$	21,263				22,229
Accrued interest and interest rate swap liability			7,373				18,869
Accrued expenses and other current liabilities			23,892				22,009
Income taxes payable			3,476				2,585
Deferred revenue, current portion			3,220				2,864
Current portion of long-term debt			26,718				6,806
Total current liabilities			85,942				75,362
Long-term debt, excluding current portion			1,010,427				1,007,948
Deferred income tax liabilities			201,509				222,357
Other long-term liabilities			55,566				57,420
Total liabilities			1,353,444				1,363,087
Commitments and Contingencies (Note 18)
Equity:
Shareholders' equity of Immucor, Inc.:
Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of February 28, 2017 and May 31, 2016, respectively			-				-
Additional paid-in capital			750,026				753,709
Accumulated deficit			(401,702	)			(374,079	)
Accumulated other comprehensive loss			(44,866	)			(39,407	)
Total shareholders' equity of Immucor, Inc.			303,458				340,223
Equity of noncontrolling interest (Note 3)			6,969				4,323
Total equity			310,427				344,546
Total liabilities and equity		$	1,663,871				1,707,633

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

IMMUCOR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

---

(in thousands)

(Unaudited)

 

		Three Months Ended
		February 28				February 29
		2017				2016
Net sales		$	93,964				88,893
Cost of sales (*)			35,318				34,130
Gross profit			58,646				54,763
Operating expenses:
Research and development			8,828				6,910
Selling and marketing			13,528				13,251
Distribution			4,083				4,155
General and administrative			10,046				11,779
Amortization expense			14,109				13,575
Total operating expenses			50,594				49,670
Income from operations			8,052				5,093
Non-operating income (expense):
Interest income			1				48
Interest expense			(22,981	)			(22,329	)
Other, net			(106	)			(317	)
Total non-operating net expense			(23,086	)			(22,598	)
Loss before income taxes			(15,034	)			(17,505	)
Benefit for income taxes			(5,616	)			(8,845	)
Net loss			(9,418	)			(8,660	)
Net loss attributable to noncontrolling interest			(1,668	)			(237	)
Net loss attributable to shareholders of Immucor, Inc.		$	(7,750	)			(8,423	)

 

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

The accompanying notes are an integral part of these consolidated financial statements.

 

 

IMMUCOR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

---

(in thousands)

(Unaudited)

 

		Nine Months Ended
		February 28				February 29
		2017				2016
Net sales		$	286,233				281,854
Cost of sales (*)			109,949				106,660
Gross profit			176,284				175,194
Operating expenses:
Research and development			26,625				20,500
Selling and marketing			44,019				42,057
Distribution			12,648				12,969
General and administrative			32,111				33,133
Amortization expense			42,416				40,745
Total operating expenses			157,819				149,404
Income from operations			18,465				25,790
Non-operating income (expense):
Interest income			9				132
Interest expense			(69,203	)			(67,275	)
Other, net			(660	)			(366	)
Total non-operating net expense			(69,854	)			(67,509	)
Loss before income taxes			(51,389	)			(41,719	)
Benefit for income taxes			(19,112	)			(14,046	)
Net loss			(32,277	)			(27,673	)
Net loss attributable to noncontrolling interest			(4,654	)			(237	)
Net loss attributable to shareholders of Immucor, Inc.		$	(27,623	)			(27,436	)

 

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

The accompanying notes are an integral part of these consolidated financial statements.

 

 

IMMUCOR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

---

(in thousands)

(Unaudited)

 

		Three Months Ended
		February 28				February 29
		2017				2016
Net loss		$	(9,418	)			(8,660	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments			930				1,795
Changes in fair value of cash flow hedges:
Portion of cash flow hedges recognized in other comprehensive income			-				108
Less: reclassification adjustment for gains included in net loss			-				3
Net changes in fair value of cash flow hedges			-				111
Other comprehensive income			930				1,906
Comprehensive loss			(8,488	)			(6,754	)
Comprehensive loss attributable to the noncontrolling interest			(1,668	)			(237	)
Comprehensive loss attributable to shareholders of Immucor, Inc.		$	(6,820	)			(6,517	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

IMMUCOR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

---

(in thousands)

(Unaudited)

 

		Nine Months Ended
		February 28				February 29
		2017				2016
Net loss		$	(32,277	)			(27,673	)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments			(5,553	)			(3,680	)
Changes in fair value of cash flow hedges:
Portion of cash flow hedges recognized in other comprehensive loss			155				417
Less: reclassification adjustment for losses included in net loss			(61	)			(168	)
Net changes in fair value of cash flow hedges			94				249
Other comprehensive loss			(5,459	)			(3,431	)
Comprehensive loss			(37,736	)			(31,104	)
Comprehensive loss attributable to the noncontrolling interest			(4,654	)			(237	)
Comprehensive loss attributable to shareholders of Immucor, Inc.		$	(33,082	)			(30,867	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

IMMUCOR, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

---

(in thousands)

 

		Equity accounts attributable to Immucor, Inc.
														Retained				Accumulated
										Additional				Earnings				Other				Non-
		Common Stock								Paid-In				(Deficit)				Comprehensive				controlling
		Shares (1)				Amount (1)				Capital (1)				(1)				Income (Loss) (1)				Interest				Total
Audited:
Balance, May 31, 2015			100			$	-				755,234				(331,989	)			(39,564	)			-				383,681
Share-based compensation expense			-				-				5,326				-				-				-				5,326
Activities with IVD Holdings Inc.			-				-				(851	)			-				-				-				(851	)
Non-cash dividend distributed			-				-				(6,000	)			-				-				-				(6,000	)
Equity of noncontrolling interest																							6,000				6,000
Net loss			-				-				-				(42,090	)			-				(1,677	)			(43,767	)
Other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments			-				-				-				-				(174	)			-				(174	)
Changes in fair value of cash flow hedges, net of tax			-				-				-				-				331				-				331
Balance, May 31, 2016			100			$	-				753,709				(374,079	)			(39,407	)			4,323				344,546
Unaudited:
Share-based compensation expense			-				-				3,496				-				-				-				3,496
Activities with IVD Holdings Inc.			-				-				501				-				-				-				501
Dividends distributed			-				-				(7,680	)			-				-				-				(7,680	)
Equity of noncontrolling interest			-				-				-				-				-				7,300				7,300
Net loss			-				-				-				(27,623	)			-				(4,654	)			(32,277	)
Other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments			-				-				-				-				(5,553	)			-				(5,553	)
Changes in fair value of cash flow hedges, net of tax			-				-				-				-				94				-				94
Balance, February 28, 2017			100			$	-				750,026				(401,702	)			(44,866	)			6,969				310,427

 

(1) - Shareholders’ equity of Immucor, Inc.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

IMMUCOR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

(in thousands)

(Unaudited)

 

		Nine Months Ended
		February 28				February 29
		2017				2016
Operating activities:
Net loss		$	(32,277	)			(27,673	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			54,072				51,417
Noncash interest expense			10,559				8,178
Loss on disposition and retirement of fixed assets			738				526
Provision for doubtful accounts			282				456
Share-based compensation expense			3,496				4,045
Deferred income taxes			(22,325	)			(16,953	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, trade			(3,743	)			6,774
Income taxes			695				(495	)
Inventories			(8,293	)			(11,034	)
Other assets			(466	)			1,477
Accounts payable			(779	)			4,165
Deferred revenue			417				(20	)
Accrued expenses and other liabilities			(8,875	)			(14,022	)
Cash (used in) provided by operating activities			(6,499	)			6,841
Investing activities:
Purchases of property and equipment			(8,243	)			(7,050	)
Proceeds from sale of property and equipment			53				-
Other investments			-				(4,850	)
Acquisitions of businesses, net of cash acquired			(128	)			(750	)
Cash used in investing activities			(8,318	)			(12,650	)
Financing activities:
Repayments of long-term debt			(5,122	)			(4,982	)
Proceeds from Revolving Facilities			85,500				48,000
Repayments of Revolving Facilities			(65,500	)			(43,500	)
Dividend payments			(7,680	)			-
Proceeds from capital contribution to noncontrolling interest			7,300				-
Cash provided by (used in) financing activities			14,498				(482	)
Effect of exchange rates on cash and cash equivalents			91				118
Decrease in cash and cash equivalents			(228	)			(6,173	)
Cash and cash equivalents at beginning of period			10,263				18,363
Cash and cash equivalents at end of period		$	10,035				12,190
Supplemental information:
Income taxes paid, net of refunds		$	2,197				3,232
Interest paid			69,934				70,275
Non-cash investing and financing activities:
Movement from inventory to property and equipment of instruments placed on rental agreements		$	5,789				4,552
Non-cash dividend			-				6,000

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 IMMUCOR, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

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

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information, the Securities and Exchange Commission’s (“SEC”) instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company’s interim results are not necessarily indicative of the Company’s expected full year results. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and related notes for the year ended May 31, 2016, included in the Company’s Annual Report on Form 10-K filed with the SEC on August 22, 2016.

 

Certain reclassifications have been made to the Company’s consolidated financial statements for fiscal year 2016 to conform to the fiscal year 2017 presentation. We have also performed an evaluation of subsequent events through the date the financial statements were issued.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of Immucor, Inc., its wholly owned subsidiaries, and a variable interest entity (“VIE”) that is required to be consolidated in accordance with GAAP (refer to Note 3 for additional information on our consolidated VIE). All significant intercompany balances and transactions have been eliminated in consolidation. There are no other entities controlled by the Company, either directly or indirectly.

 

Impact of Recently Issued Accounting Standards -

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles – Goodwill and Other (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead of performing Step 2 to determine the amount of an impairment charge, the fair value of a reporting unit will be compared with its carrying amount and an impairment charge will be recognized for the value by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, which corresponds to the Company’s first quarter of fiscal year 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact of ASU 2016-04 on its consolidated financial statements.

 

In October 2016, the FASB issued ASU No. 2016-17, Consolidation: Interest Held through Related Parties That Are under Common Control (“ASU 2016-17”), which changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the amendments require that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. ASU 2016-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which corresponds to the Company’s first quarter of fiscal year 2018. Early adoption is permitted, including adoption in an interim period. If an entity adopts the pending content that links to this paragraph in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the adoption of ASU 2016-17 to have a material impact on its consolidated financial statements.

 

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which eliminates the requirement to defer the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Therefore, under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for interim and annual reporting periods beginning after December 15, 2017, which corresponds to the Company’s first quarter of fiscal year 2019. Early adoption is permitted as of the first interim period and the amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of ASU 2016-16 to have a material impact on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides guidance on eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which corresponds to the Company’s first quarter of fiscal year 2019. Early adoption is permitted and the amendments should be applied using a retrospective method. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). ASU 2016-13 will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 will be effective for the Company beginning in the first quarter of fiscal year 2020, and early adoption is permitted but not earlier than fiscal year 2019. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which will replace the existing lease accounting guidance in GAAP. The core principle of ASU 2016-02 is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. ASU 2016-02 requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which corresponds to the Company’s first quarter of fiscal year 2020. Early adoption is permitted. The Company is in the process of assessing the impact of the adoption of ASU 2016-02 on its consolidated financial statements, accounting policies and disclosures. The Company is currently identifying the arrangements that qualify as a lease under the new guidance, evaluating the new requirements on existing lease arrangements, and collecting relevant data to quantify the impact of this new standard on its consolidated financial statements. The most significant impact expected is that the Company will recognize a “right-of-use” asset and lease liability for lease arrangements that are currently not included on the balance sheet under the existing lease guidance.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern ("ASU 2014-15"), which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements.  The guidance provides a definition of the term substantial doubt, requires an evaluation every reporting period including interim periods, provides principles for considering the mitigating effect of management's plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, requires an express statement and other disclosures when substantial doubt is not alleviated, and requires an assessment for a period of one year after the date that the financial statements are issued. ASU No. 2014-15 is effective for the Company for annual reporting periods ending after December 15, 2016, which corresponds to the Company's annual reporting period ending May 31, 2017 with early adoption permitted.  The Company will adopt this ASU at year end, perform the assessment, and make any required disclosures.

 

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 15, 2017, which corresponds to the Company’s first quarter of fiscal year 2019. In March 2016, the FASB issued ASU 2016-08, which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. No early adoption is permitted under these standards, and it is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  The Company is in the process of assessing the impact of the adoption of ASU 2014-09 on its consolidated financial statements, accounting policies and disclosures. The Company has identified the revenue streams that will be affected by this new standard and is collecting the relevant data to prepare an analysis of the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

 

2.	BUSINESS COMBINATIONS

 

Business combinations completed in fiscal 2016:

 

Acquisition of Sirona - On March 4, 2016, the Company exercised its warrant and acquired 100% of the common stock of Sirona Genomics, Inc. (“Sirona”).  The cash paid for the Sirona business was $15.0 million, of which $0.6 million was paid prior to fiscal year 2016 for the warrant, and $14.4 million was paid in the fourth quarter of fiscal year 2016. The purchase agreement included two contingent consideration arrangements, one for achieving certain revenue targets in each of the next five years and the other for achieving a revenue milestone during the next five years. The combined potential earn-out for these arrangements is $45.0 million in cash over the next five years. Management estimated that the fair value of the contingent consideration arrangements, as of the acquisition date, was approximately $20.0 million, which is included in Other long-term liabilities on the Company’s consolidated balance sheet. Including the contingent consideration, the aggregate estimated fair value of the consideration to be paid is approximately $35.0 million. The fair value of the assets and liabilities acquired was $40.6 million for identifiable intangible assets (existing technologies), $14.8 million for goodwill, $2.1 million for property and equipment, $1.3 million of cash, $1.5 million for current liabilities, $9.7 million for a Promissory Note payable to Immucor, and $12.5 million for long-term deferred tax liabilities. The goodwill arising from this acquisition is not deductible for tax purposes.

 

The Company determines contingent consideration liabilities 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 are not observable in the market.

 

Acquisition of reference lab – On August 3, 2015, the Company completed the asset purchase of a U.S. reference lab for a total cash purchase price of $0.8 million. This acquisition enables the Company to deliver current Immucor products as a service to customers as well as commercialize newly developed products. The fair values of the acquired assets were $0.3 million for equipment, $0.2 million for identifiable intangible assets and $0.3 million for goodwill. The goodwill is deductible for tax purposes.

 

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.	CONSOLIDATED VARIABLE INTEREST ENTITY

 

In February 2016, the Company contributed the assets of its Sentilus business acquired in October 2014 to a newly formed company, Sentilus Holdco LLC (“Sentilus LLC”). The Company then distributed its interest in Sentilus LLC via a dividend, indirectly, to IVD Intermediate Holdings A Inc., which is the owner of Immucor’s Parent company, IVD Intermediate Holdings B Inc.

 

Sentilus LLC develops Femtoarrays^TM and the underlying technology for use in a variety of in vitro diagnostics areas. This business was spun-off from Immucor to be able to separately market the potential new product offerings outside the Company’s current Transfusion and Transplant markets. The book value of the assets and liabilities transferred was $6.0 million. The book value included assets of $1.0 million of cash, $0.5 million of equipment, $18.8 million of identifiable intangible assets, and $0.1 million of goodwill, and liabilities including $7.2 million of deferred income tax liabilities, and a $7.2 million obligation to Immucor for contingent consideration liabilities. 

 

 

Sentilus LLC is considered to be a VIE.  Sentilus LLC is operated as a separate business. Sentilus LLC and the Company have entered into management services agreements (the “Management Contracts”) pursuant to which Immucor provides management, financial, legal and human resource services as well as personnel, materials and business locations to Sentilus LLC in exchange for management fees at Immucor’s cost plus a specified “arms-length” margin (which is subject to periodic adjustment). Immucor’s executive management controls and operates the Sentilus LLC business. Immucor is considered the primary beneficiary of Sentilus LLC because it is managing the Sentilus LLC business and providing the necessary personnel and support to operate the business under the terms of the Management Contracts. Accordingly, the financial results of Sentilus LLC are included in the consolidated financial results of the Company.   

 

The operations of Sentilus LLC are primarily funded through either additional potential future dividends from Immucor or from additional capital contributions from IVD Holdings Inc. (“Holdings”), the Parent company of IVD Intermediate Holdings A Inc. The Company could be exposed to a loss related to the Sentilus LLC business if there are expenses that are incurred by the Company on behalf of Sentilus LLC under the terms of the Management Contracts and are not reimbursed.  This risk is deemed unlikely since all of the entities involved in this arrangement are under the common control of Holdings.

 

The following tables include the carrying amounts and classification of the assets and liabilities of Sentilus LLC that are included in the Company’s consolidated balance sheet as of February 28, 2017 and May 31, 2016 that cannot be used to settle the obligations of Immucor, and are not Immucor’s obligation to pay (in thousands):

 

As of February 28, 2017
ASSETS					LIABILITIES
Current assets:					Current liabilities:
Cash and cash equivalents		$	337		Accounts payable		$	964
Total current assets			337		Accrued expenses and other current liabilities			12
					Total current liabilities			976
Noncurrent assets:					Noncurrent liabilities:
Property and equipment, net			674		Deferred income tax			3,671
Goodwill			105
Other intangible assets, net			18,815		Obligation to Immucor for contingent consideration liabilities			8,021
Total noncurrent assets			19,594		Total noncurrent liabilities			11,692
Total Assets		$	19,931		Total Liabilities		$	12,668

 

 

As of May 31, 2016
ASSETS					LIABILITIES
Current assets:					Current liabilities:
Cash and cash equivalents		$	36		Accounts payable		$	744
Total current assets			36		Accrued expenses and other current liabilities			4
					Total current liabilities			748
Noncurrent assets:					Noncurrent liabilities:
Property and equipment, net			644		Deferred income tax			6,207
Goodwill			105
Other intangible assets, net			18,820		Obligation to Immucor for contingent consideration liabilities			7,433
Total noncurrent assets			19,569		Total noncurrent liabilities			13,640
Total Assets		$	19,605		Total Liabilities		$	14,388

 

 

4.	RELATED PARTY TRANSACTIONS

 

In connection with the Immucor Acquisition in fiscal year 2012, the Company entered into a management services agreement with TPG Capital, L.P. (the “Sponsor”). Pursuant to such agreement, and in exchange for on-going consulting and management advisory services that are provided to the Company, the Sponsor receives an aggregate annual monitoring fee of approximately $3.0 million. In the three months and nine months ended February 28, 2017, approximately $0.8 million, and $2.4 million, respectively, was recorded for monitoring fees, additional services provided by the Sponsor, and out-of-pocket expenses and substantially all of these expenses are included in general and administrative expenses in the consolidated statements of operations. In the three months and nine months ended February 29, 2016, approximately $0.8 million, and $2.4 million was recorded for these same types of fees and expenses, respectively. As of February 28, 2017 and May 31, 2016, the Company owed $0.5 million and $1.7 million, respectively, to the Sponsor for these fees and expenses.

 

Sentilus LLC and the Company have entered into management services agreements. Refer to Note 3 of the consolidated financial statements for additional information.

 

5.	INVENTORIES, NET

 

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

 

		As of
		February 28, 2017				May 31, 2016
Raw materials and supplies		$	12,490				11,840
Work in process			13,335				11,944
Finished goods			23,045				23,110
Total Inventories, net		$	48,870				46,894

 

6.	PROPERTY AND EQUIPMENT, NET

 

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

 

		As of
		February 28, 2017				May 31, 2016
Land		$	214				217
Buildings and improvements			2,183				2,163
Leasehold improvements			26,379				26,261
Capital work-in-progress			8,273				4,275
Furniture and fixtures			4,219				3,861
Machinery, equipment and instruments			115,131				110,145
Total property and equipment			156,399				146,922
Less: Accumulated depreciation			(79,607	)			(70,907	)
Property and equipment, net		$	76,792				76,015

 

Depreciation expense was $3.8 million and $11.7 million in the three months and nine months ended February 28, 2017 and was $3.6 million and $10.7 million in the three months and nine months ended February 29, 2016, respectively. Depreciation expense is primarily included in cost of sales in the Company’s consolidated statements of operations.

 

 

7.

GOODWILL

 

The consolidated financial statements include the goodwill resulting from the acquisition of various businesses by Immucor. The following table presents the changes in the carrying amount of goodwill during the nine months ended February 28, 2017 and the fiscal year ended May 31, 2016 (in thousands):

 

		February 28, 2017				May 31, 2016
Balance at beginning of period		$	857,023				842,258
Additions:
Acquisition of businesses			-				15,131
Foreign currency translation adjustment			(2,287	)			(366	)
Balance at end of period		$	854,736				857,023

 

In the first nine months of fiscal year 2017 and the twelve months of fiscal year 2016, there were no significant changes in goodwill other than the impact of changes in foreign currency exchange rates and an increase in goodwill from business acquisitions completed in those periods.

 

During the first nine months of fiscal year 2017 and the twelve months of fiscal year 2016, there were no impairment losses recorded. For the periods ending February 28, 2017 and May 31, 2016, the Company had $160.0 million of accumulated impairment losses on goodwill.

 

8.	OTHER INTANGIBLE ASSETS, NET

 

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

 

						As of
						February 28, 2017												May 31, 2016
		Weighted Average Life (years)				Cost				Accumulated Amortization				Net				Cost				Accumulated Amortization				Net
Other intangible assets subject to amortization:
Customer relationships			20			$	460,729				(126,122	)			334,607				462,602				(109,260	)			353,342
Existing technology / trade names			12				355,604				(151,495	)			204,109				355,604				(128,530	)			227,074
Corporate trade name			15				40,000				(14,754	)			25,246				40,000				(12,754	)			27,246
Below market leasehold interests			4				1,200				(685	)			515				1,200				(631	)			569
Other intangibles			4				428				(341	)			87				428				(262	)			166
Total amortizable assets							857,961				(293,397	)			564,564				859,834				(251,437	)			608,397
Intangible assets not subject to amortization:
In-process research and development							24,700				-				24,700				24,700				-				24,700
Total non-amortizable assets							24,700				-				24,700				24,700				-				24,700
Other intangible assets, net						$	882,661				(293,397	)			589,264				884,534				(251,437	)			633,097

 

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 expense related to these intangible assets for the three months and nine months ended February 28, 2017 was $14.1 million and $42.4 million and for the three months and nine months ended February 29, 2016 was $13.6 million and $40.7 million, respectively. Expected amortization expense for the remainder of fiscal year 2017 and for each of the five succeeding years is as follows (in thousands):

 

Year Ending May 31:
2017		$	14,137
2018			56,477
2019			52,553
2020			51,445
2021			51,416
2022			51,411

 

9.	LONG-TERM DEBT

 

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

 

		As of February 28, 2017																As of May 31, 2016
		Gross				OID (1)				DFC (2)				Net				Gross				OID (1)				DFC (2)				Net
Term Loan Facility		$	636,802				(3,505	)			(8,333	)			624,964				641,777				(5,210	)			(12,174	)			624,393
Notes			400,000				(2,120	)			(5,784	)			392,096				400,000				(2,648	)			(7,223	)			390,129
Revolving Facilities			20,000				-				-				20,000				-				-				-				-
Capital lease agreements			85				-				-				85				232				-				-				232
Total long-term debt			1,056,887				(5,625	)			(14,117	)			1,037,145				1,042,009				(7,858	)			(19,397	)			1,014,754
Less: Current portion of long-term debt			26,718				-				-				26,718				6,806				-				-				6,806
Long-term debt, excluding current portion		$	1,030,169				(5,625	)			(14,117	)			1,010,427				1,035,203				(7,858	)			(19,397	)			1,007,948

 

(1) - OID refers to original issue discounts on the Company's long-term debt

(2) - DFC refers to deferred financing costs related to the Company's long-term debt facilities

 

Senior Secured Credit Facilities, Security Agreement and Guaranty

 

The Company is party to a credit agreement and related security and other agreements as subsequently amended, with a bank syndicate of lenders, and Citibank N.A. as the Administrative Agent. The credit agreement, as amended, provides for (1) a $663.3 million senior secured term loan facility (the “Term Loan Facility”) and (2) $80.0 million of senior secured revolving loan facilities (the “Revolving Facilities,” and together with the Term Loan Facility, the “Senior Credit Facilities”). In addition to borrowings upon prior notice, the Revolving Facilities include 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, British Pounds, Euros, Japanese Yen, Canadian dollars and in such other currencies as the Company and the Administrative Agent under the Revolving Facilities may agree (subject to a sublimit for such non-U.S. currencies).

 

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 Facilities is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings, subject to a 0% LIBOR floor. The applicable margin for borrowings under the Revolving Facilities 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 Revolving Facilities mature on the earlier of (i) February 19, 2020, (ii) May 19, 2018, if the maturity of the Term Loan Facility has not been extended by such date, and (iii) 90 days prior to any maturity date of certain funded material indebtedness (which maturity date shall be no earlier than October 19, 2018). Certain other Company actions would also result in a springing maturity of the Revolving Facilities as early as August 20, 2017. The aggregate principal amount of the revolving credit commitments is as follows: (1) $80.0 million as of May 4, 2016, (2) on August 19, 2018, to $70.0 million, (3) on February 19, 2019, to $60.0 million, and (4) on August 19, 2019, to $50.0 million.

 

 

The interest rate on the Term Loan Facility was 5.00% as of February 28, 2017 and May 31, 2016. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Term Loan Facility is 6.18% for the nine months ended February 28, 2017. The weighted average interest rate on the borrowings from the Revolving Facilities during the first nine months of fiscal year 2017 was approximately 4.85%. At February 28, 2017, there were $20.0 million of outstanding borrowings under the Revolving Facilities and no outstanding letters of credit.

 

The Company is required to make scheduled principal payments on the last business day of each calendar quarter equal to 0.25% of the original principal amount of loans under the Term Loan Facility with the balance due and payable on August 19, 2018. Currently scheduled principal payments are $1.7 million per quarter. The Company is also required to repay loans under the Term Loan Facility based on annual excess cash flows as defined in the credit agreement governing the Term Loan Facility and upon the occurrence of certain other events set forth in that credit agreement. The additional principal due under the terms of the excess cash flow requirement was zero for fiscal year 2016 and fiscal year 2015. The terms of the Senior Credit Facilities provide that any principal paid as a result of the excess cash flow requirement, shall be applied to the scheduled installments of principal following the date of prepayment in direct order of maturity.

 

All obligations under the Senior Credit Facilities are unconditionally guaranteed by the parent company of Immucor, IVD Intermediate Holdings B Inc. (the “Parent”), and certain of Immucor’s existing and future wholly owned domestic subsidiaries (such subsidiaries collectively, the “Subsidiary Guarantors”), and are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Parent and Subsidiary Guarantors, subject in each case to customary exceptions and exclusions. Neither the assets nor the equity of Sentilus LLC is collateral for the Senior Credit Facilities.

 

Indenture and the Senior Notes Due 2019

 

The Company has also issued $400.0 million in principal amount of Senior Notes (the “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 11.81% for the nine months ended February 28, 2017. The Notes mature on August 15, 2019.

 

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

 

The Company is in compliance with the covenants pursuant to the terms of the indenture governing the Notes and 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):

 

Year Ended May 31:
2017			$	21,742
2018				6,632
2019				628,513
2020				400,000
Total			$	1,056,887

 

Interest Expense

 

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

 

		Three Months Ended								Nine Months Ended
		February 28				February 29				February 28				February 29
		2017				2016				2017				2016
Notes, including OID amortization		$	11,303				11,285				33,903				33,847
Term loan facility, including OID amortization			8,538				8,685				25,934				26,190
Amortization of deferred financing costs			1,771				1,792				5,285				5,327
Interest rate swaps and other interest			46				122				215				487
Revolving facility fees and interest			283				154				832				563
Interest accreted on contingent consideration liabilities			1,040				291				3,034				861
Total interest expense		$	22,981				22,329				69,203				67,275

 

Deferred financing costs

 

Changes in deferred financing costs during the nine months ended February 28, 2017 and the fiscal year ended May 31, 2016 are as follows (in thousands):

 

		February 28, 2017				May 31, 2016
Balance at beginning of period		$	19,397				26,399
Debt issuance costs (1)			5				118
Amortization			(5,285	)			(7,120	)
Balance at end of period		$	14,117				19,397

 

(1) Debt issuance costs are related to Amendment No. 6 of the Company's credit agreement.

 

Deferred financing costs are capitalized and are amortized over the life of the related debt agreements using the effective interest rate method, except for the costs associated with the Revolving Facilities which uses the straight-line method. The deferred financing costs associated with the Revolving Facilities are included in the amount of deferred financing costs for the Term Loan Facility.

 

10.	DERIVATIVE FINANCIAL INSTRUMENTS

 

As of February 28, 2017, the Company does not currently have any outstanding interest rate swap agreements. Prior to October 1, 2016, the Company had entered into floating-to-fixed interest rate swap agreements for an aggregate notional amount of $70.0 million related to a portion of the Company’s floating rate indebtedness. The purpose of the interest rate swap was to hedge the Company’s future interest commitments resulting from the Term Loan Facility, and to protect the Company from variability in cash flows attributable to changes in LIBOR interest rates. The Company had entered into a swap agreement 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, the swap included a LIBOR floor of 1.25%. The swap agreement hedged a portion of contractual floating rate interest commitments through the expiration of the swap agreement in September 2016.

 

 

Effective October 1, 2014 through September 30, 2015, the Company had swap agreements that hedged $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 has swap agreements to hedge $70.0 million of the Company’s floating rate interest commitments at a fixed LIBOR rate of 1.91%.

 

The Company designated these interest rate swap agreements as cash flow hedges. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these swaps are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is 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.

 

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
		February 28, 2017				May 31, 2016
Interest rate swaps (included in other liabilities)		$	-				(155	)

 

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

 

		Three Months Ended								Nine Months Ended
		February 28				February 29				February 28				February 29
Location of loss reclassified from AOCI into income		2017				2016				2017				2016
Loss on cash flow hedges:
Interest expense (effective portion)		$	-				(121	)			(167	)			(489	)
Interest expense (ineffective portion)		$	-				-				-				(1	)

 

11.	FAIR VALUE

 

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

 

•

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

 

 

•

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

•

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

		As of February 28, 2017
		Fair Value Measurements of Assets (Liabilities) Using												Carrying
		(Level 1)				(Level 2)				(Level 3)				Amount
		(in thousands)
Contingent consideration liabilities		$	-				-				(43,384	)			(43,384	)

 

 

		As of May 31, 2016
		Fair Value Measurements of Assets (Liabilities) Using												Carrying
		(Level 1)				(Level 2)				(Level 3)				Amount
		(in thousands of dollars)
Derivative instruments		$	-				(155	)			-				(155	)
Contingent consideration liabilities		$	-				-				(40,356	)			(40,356	)

 

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 $10.0 million and $10.3 million of cash and cash equivalents at February 28, 2017 and May 31, 2016, respectively, approximately 42% and 38% was located in the U.S., respectively.

 

The Company used 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 Notes and the Term Loan Facility is estimated to be $384.0 million and $631.2 million at February 28, 2017, respectively, based on recent trades of similar instruments. The fair value of the Notes and the Term Loan Facility was estimated to be $364.3 million and $614.5 million at May 31, 2016, respectively, based on the fair value of these instruments at that time.

 

Management believes that these liabilities can be liquidated without restriction.

 

As of February 28, 2017 and May 31, 2016, the Company had $43.4 million and $40.4 million, respectively, in contingent consideration liabilities for earn-out provisions resulting from acquisitions included in Other long-term liabilities on the Company’s consolidated balance sheet.

 

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.

 

 

The changes in the Company’s current and long-term contingent consideration liabilities are summarized in the following table (in thousands):

 

		Nine Months Ended				Twelve Months Ended
		February 28, 2017				May 31, 2016
Balance at the beginning of the period		$	(40,356	)			(18,596	)
Additions due to acquisitions			-				(20,000	)
Payments			6				65
Accretion of fair value			(3,034	)			(1,825	)
Balance at the end of the period		$	(43,384	)			(40,356	)

 

12.	ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

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

 

		Pretax				Tax				After Tax
Nine Months Ended February 28, 2017
Foreign exchange translation adjustments		$	(5,694	)			(141	)			(5,553	)
Changes in fair value of cash flow hedges			155				61				94
Accumulated other comprehensive loss		$	(5,539	)			(80	)			(5,459	)
Twelve Months Ended May 31, 2016
Foreign exchange translation adjustments		$	(282	)			(108	)			(174	)
Changes in fair value of cash flow hedges			530				199				331
Accumulated other comprehensive income		$	248				91				157

 

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

 

		As of
		February 28, 2017				May 31, 2016
Cumulative foreign currency translation adjustments		$	(44,866	)			(39,313	)
Change in fair value of cash flow hedges, net of tax			-				(94	)
Accumulated other comprehensive loss		$	(44,866	)			(39,407	)

 

13.	SHARE-BASED COMPENSATION

 

The Company has granted nonvested restricted stock, and stock options to key employees and directors under its 2011 Equity Incentive Plan. The Company granted stock awards with an aggregate fair value of approximately $0.3 million, and $1.3 million during the three months and nine months ended February 28, 2017 and zero and $17.2 million during the three months and nine months ended February 29, 2016, respectively. As of February 28, 2017, a total of 11,103 shares were available for future grants.

 

Restricted stock units typically vest over a two-year period (50% per year) and do not expire. Upon vesting, and in some cases certain other triggers, restricted stock units are settled in shares of IVD Holdings Inc.’s common stock. Stock option awards are granted with service-based vesting conditions (“service-based options”), or performance-based or market-based vesting conditions (“performance-based options”). The service-based options contain tiered vesting terms over the service period. The performance-based options vest in tranches upon the achievement of certain performance or market objectives, which are measured over a three or four year period.

 

 

The Company recognized expense of $1.0 million and $3.5 million in the three months and nine months ended February 28, 2017 and $1.3 million and $4.0 million in the three months and nine months ended February 29, 2016, respectively, before income tax benefits, for all the Company’s stock awards. As of February 28, 2017, there was $10.7 million of total unrecognized compensation cost related the Company’s stock plans that will be recognized over approximately 2.6 years.

 

14.	INCOME TAXES

 

The effective tax rate for the nine months ended February 28, 2017 and February 29, 2016 was 37.2% and 33.7%, respectively.  The difference between the federal statutory rate and the effective tax rate for the nine months ended February 28, 2017 was primarily due to income subject to tax in various tax jurisdictions with rates that differ from the U.S. statutory tax rate, the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings, adjustments to reconcile the fiscal year 2016 tax provision to the filed income tax returns, and the reversal of uncertain tax positions (net of the corresponding reduction in competent authority assets) resulting from the completion of a foreign income tax examination during the second quarter of fiscal year 2017. The difference between the federal statutory rate and the effective tax rate for the nine months ended February 29, 2016, was primarily due to income subject to tax in the various tax jurisdictions with rates that differ from the U.S. statutory tax rate, the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings and changes in the U.S. tax law related to the R&D tax credit. The difference between the effective tax rate of 37.2% for the nine months ended February 28, 2017 and 33.7% for the nine months ended February 29, 2016 is primarily due to variations in the ratio of foreign income to domestic income for each period.

 

The Company does not consider itself to be permanently reinvested with respect to its accumulated and un-repatriated earnings as well as the future earnings of each foreign subsidiary. Accordingly, the Company recorded a deferred tax liability associated with unremitted future earnings of its foreign subsidiaries. The Company continues to consider its investment in each foreign subsidiary to be permanently reinvested and thus has not recorded a deferred tax liability on such amounts.

 

15.	SEGMENT AND GEOGRAPHIC INFORMATION

 

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

 

The Company markets a complete line of diagnostics products and automated systems which are 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 transfusions and organ and stem cell transplantations.

 

The Company operates in various geographies. These geographic markets are comprised of the United States, Europe, Canada and other international markets. The majority of the 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 is a summary of the Company’s segment data (in thousands):

 

		Three Months Ended								Nine Months Ended
		February 28				February 29				February 28				February 29
		2017				2016				2017				2016
Net sales by product group:
Transfusion		$	77,881				73,589				236,165				235,296
Transplant & Molecular			16,083				15,304				50,068				46,558
Total		$	93,964				88,893				286,233				281,854

 

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

 

		Three Months Ended								Nine Months Ended
		February 28				February 29				February 28				February 29
		2017				2016				2017				2016
Net sales to customers by geography are as follows:
United States		$	59,682				57,435				179,654				179,878
Europe (A)			17,181				16,609				52,756				52,517
Canada			3,721				3,233				11,245				11,084
Other			13,380				11,616				42,578				38,375
Total		$	93,964				88,893				286,233				281,854

 

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
		February 28, 2017				May 31, 2016
Long-lived assets (excluding goodwill and intangibles) by geography:
United States		$	55,308				55,080
Europe (B)			15,292				14,729
Canada			3,536				3,543
Other (C)			2,656				2,663
Total		$	76,792				76,015

 

		As of
		February 28, 2017				May 31, 2016
Concentration of net assets by geography:
United States		$	175,891				200,226
Europe			93,221				102,593
Canada			29,821				28,617
Other (C)			11,494				13,110
Total		$	310,427				344,546

 

(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 any individual customer did not equal or exceed 10% of our net sales during the three months and nine months ended February 28, 2017, or during the three months and nine months ended February 29, 2016.

 

 

16.	CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES

 

The Company has certain outstanding indebtedness that is guaranteed by its U.S. subsidiaries. However, the indebtedness is not guaranteed by the Company’s foreign subsidiaries or its consolidated variable interest entity. 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.

 

Refer to Note 3 for information on assets and liabilities of Sentilus LLC, a consolidated variable interest entity, that are included in the Company’s consolidated balance sheet as of February 28, 2017 and May 31, 2016. These assets and liabilities cannot be used to settle the obligations of Immucor, and are not Immucor’s obligation to pay. Accordingly, the condensed consolidated financial information reflects the activity of Sentilus LLC and its related eliminations under the VIE and VIE Eliminations heading. The condensed consolidating financial information of the Company is as follows:

 

Balance Sheets

 

IMMUCOR, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

February 28, 2017

(in thousands)

(Unaudited)

		Immucor, Inc.				Guarantors				Non- Guarantors				Eliminations				Immucor, Inc. and Subsidiaries				VIE and VIE eliminations				Total
ASSETS
Current Assets:
Cash and cash equivalents		$	4,095				(193	)			5,796				-				9,698				337				10,035
Accounts receivable, net			29,687				6,253				28,180				-				64,120				-				64,120
Intercompany receivable			98,999				39,091				18,687				(156,483	)			294				(294	)			-
Inventories, net			19,630				18,993				12,482				(2,235	)			48,870				-				48,870
Prepaid expenses and other current assets			2,788				240				5,797				-				8,825				-				8,825
Total current assets			155,199				64,384				70,942				(158,718	)			131,807				43				131,850
Property and equipment, net			41,865				12,769				21,484				-				76,118				674				76,792
Investment in subsidiaries			194,061				20,032				3,019				(217,112	)			-				-				-
Goodwill			744,044				62,771				47,816				-				854,631				105				854,736
Other intangible assets, net			453,920				87,570				28,959				-				570,449				18,815				589,264
Other assets			28,268				364				489				(9,871	)			19,250				(8,021	)			11,229
Total assets		$	1,617,357				247,890				172,709				(385,701	)			1,652,255				11,616				1,663,871
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	10,244				4,911				5,144				-				20,299				964				21,263
Intercompany payable			8,643				134,286				13,554				(156,483	)			-				-				-
Accrued interest and interest rate swap liability			7,373				-				-				-				7,373				-				7,373
Accrued expenses and other current liabilities			12,654				4,850				6,376				-				23,880				12				23,892
Income taxes payable			30,026				(29,609	)			3,059				-				3,476				-				3,476
Deferred revenue, current portion			2,204				-				1,016				-				3,220				-				3,220
Current portion of long-term debt			26,633				85				-				-				26,718				-				26,718
Total current liabilities			97,777				114,523				29,149				(156,483	)			84,966				976				85,942
Long-term debt, excluding current portion			1,010,427				-				-				-				1,010,427				-				1,010,427
Deferred income tax liabilities			187,284				3,710				7,707				(863	)			197,838				3,671				201,509
Other long-term liabilities			18,411				45,709				1,317				(9,871	)			55,566				-				55,566
Total liabilities			1,313,899				163,942				38,173				(167,217	)			1,348,797				4,647				1,353,444
Equity:
Shareholders' equity of Immucor, Inc.			303,458				83,948				134,536				(218,484	)			303,458				-				303,458
Noncontrolling interest			-				-				-				-				-				6,969				6,969
Total equity			303,458				83,948				134,536				(218,484	)			303,458				6,969				310,427
Total liabilities and equity		$	1,617,357				247,890				172,709				(385,701	)			1,652,255				11,616				1,663,871

 

 

IMMUCOR, INC.

CONDENSED CONSOLIDATING BALANCE SHEETS

May 31, 2016

(in thousands)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Immucor, Inc. and Subsidiaries				VIE and VIE eliminations				Total
ASSETS
Current Assets:
Cash and cash equivalents		$	4,058				(187	)			6,356				-				10,227				36				10,263
Accounts receivable, net			28,314				5,866				27,863				-				62,043				-				62,043
Intercompany receivable			98,375				26,311				24,710				(148,502	)			894				(894	)			-
Inventories, net			19,853				17,321				11,415				(1,695	)			46,894				-				46,894
Prepaid expenses and other current assets			3,381				449				4,649				-				8,479				-				8,479
Total current assets			153,981				49,760				74,993				(150,197	)			128,537				(858	)			127,679
Property and equipment, net			39,724				14,713				20,934				-				75,371				644				76,015
Investment in subsidiaries			211,451				20,033				3,019				(234,503	)			-				-				-
Goodwill			744,044				62,771				50,103				-				856,918				105				857,023
Other intangible assets, net			489,871				92,500				31,906				-				614,277				18,820				633,097
Other assets			30,346				274				360				(9,728	)			21,252				(7,433	)			13,819
Total assets		$	1,669,417				240,051				181,315				(394,428	)			1,696,355				11,278				1,707,633
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	10,622				5,517				5,346				-				21,485				744				22,229
Intercompany payable			18,293				117,516				12,693				(148,502	)			-				-				-
Accrued interest and interest rate swap liability			18,869				-				-				-				18,869				-				18,869
Accrued expenses and other current liabilities			10,700				5,230				6,075				-				22,005				4				22,009
Income taxes payable			30,190				(29,838	)			2,233				-				2,585				-				2,585
Deferred revenue, current portion			1,785				-				1,079				-				2,864				-				2,864
Current portion of long-term debt			6,634				172				-				-				6,806				-				6,806
Total current liabilities			97,093				98,597				27,426				(148,502	)			74,614				748				75,362
Long-term debt, excluding current portion			1,007,888				60				-				-				1,007,948				-				1,007,948
Deferred income tax liabilities			201,489				7,070				8,245				(654	)			216,150				6,207				222,357
Other long-term liabilities			22,724				43,099				1,325				(9,728	)			57,420				-				57,420
Total liabilities			1,329,194				148,826				36,996				(158,884	)			1,356,132				6,955				1,363,087
Equity:
Shareholders' equity of Immucor, Inc.			340,223				91,225				144,319				(235,544	)			340,223				-				340,223
Noncontrolling interest			-				-				-				-				-				4,323				4,323
Total equity			340,223				91,225				144,319				(235,544	)			340,223				4,323				344,546
Total liabilities and equity		$	1,669,417				240,051				181,315				(394,428	)			1,696,355				11,278				1,707,633

 

 

Statements of Operations for the Quarter     

 

IMMUCOR, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended February 28, 2017

(in thousands)

(Unaudited)

		Immucor, Inc.				Guarantors				Non- Guarantors				Eliminations				Immucor, Inc. and Subsidiaries				VIE and VIE eliminations				Total
Net sales		$	61,765				16,805				34,628				(19,234	)			93,964				-				93,964
Cost of sales (*)			22,155				10,155				22,242				(19,234	)			35,318				-				35,318
Gross profit			39,610				6,650				12,386				-				58,646				-				58,646
Operating expenses:
Research and development			3,572				3,960				240				-				7,772				1,056				8,828
Selling and marketing			6,684				1,865				4,979				-				13,528				-				13,528
Distribution			2,100				296				1,687				-				4,083				-				4,083
General and administrative			6,507				1,144				2,380				-				10,031				15				10,046
Amortization expense			11,970				1,629				508				-				14,107				2				14,109
Total operating expense			30,833				8,894				9,794				-				49,521				1,073				50,594
Income (loss) from operations			8,777				(2,244	)			2,592				-				9,125				(1,073	)			8,052
Non-operating income (expense)
Interest income			241				-				69				(107	)			203				(202	)			1
Interest expense			(22,136	)			(889	)			(63	)			107				(22,981	)			-				(22,981	)
Other, net			1,014				403				(219	)			-				1,198				(1,304	)			(106	)
Total non-operating net expense			(20,881	)			(486	)			(213	)			-				(21,580	)			(1,506	)			(23,086	)
(Loss) income before income taxes			(12,104	)			(2,730	)			2,379				-				(12,455	)			(2,579	)			(15,034	)
(Benefit) provision for income taxes			(4,173	)			(995	)			463				-				(4,705	)			(911	)			(5,616	)
Net (loss) income before earnings of consolidated subsidaries			(7,931	)			(1,735	)			1,916				-				(7,750	)			(1,668	)			(9,418	)
Net income (loss) of consolidated subsidiaries			181				-				-				(181	)			-				-				-
Net (loss) income			(7,750	)			(1,735	)			1,916				(181	)			(7,750	)			(1,668	)			(9,418	)
Net loss attributable to noncontrolling interest			-				-				-				-				-				(1,668	)			(1,668	)
Net (loss) income attributable to shareholders of Immucor, Inc.		$	(7,750	)			(1,735	)			1,916				(181	)			(7,750	)			-				(7,750	)

 

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

 

 

 

IMMUCOR, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended February 29, 2016

(in thousands)

(Unaudited)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
Net sales		$	57,913				14,370				32,288				(15,678	)			88,893
Cost of sales (*)			20,150				8,527				21,132				(15,679	)			34,130
Gross profit			37,763				5,843				11,156				1				54,763
Operating expenses:
Research and development			2,970				3,785				408				(253	)			6,910
Selling and marketing			5,745				2,242				5,264				-				13,251
Distribution			2,288				333				1,534				-				4,155
General and administrative			8,588				1,289				1,929				(27	)			11,779
Amortization expense			11,972				1,082				521				-				13,575
Total operating net expense			31,563				8,731				9,656				(280	)			49,670
Income (loss) from operations			6,200				(2,888	)			1,500				281				5,093
Non-operating income (expense):
Interest income			105				-				54				(111	)			48
Interest expense			(22,253	)			(118	)			(69	)			111				(22,329	)
Other, net			4,086				92				(4,215	)			(280	)			(317	)
Total non-operating net expense			(18,062	)			(26	)			(4,230	)			(280	)			(22,598	)
(Loss) income before income taxes			(11,862	)			(2,914	)			(2,730	)			1				(17,505	)
Benefit for income taxes			(7,727	)			(1,045	)			(73	)			-				(8,845	)
Net (loss) income before earnings of consolidated subsidiaries			(4,135	)			(1,869	)			(2,657	)			1				(8,660	)
Net (loss) income of consolidated subsidiaries			(4,288	)											4,288				-
Net (loss) income			(8,423	)			(1,869	)			(2,657	)			4,289				(8,660	)
Net loss attributable to noncontrolling interest			-				-				(237	)			-				(237	)
Net (loss) income attributable to shareholders of Immucor, Inc.		$	(8,423	)			(1,869	)			(2,420	)			4,289				(8,423	)

 

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

 

 

Statements of Operations for the Nine Month periods

 

IMMUCOR, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS

Nine Months Ended February 28, 2017

(in thousands)

(Unaudited)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Immucor, Inc. and Subsidiaries				VIE and VIE eliminations				Total
Net sales		$	184,721				48,473				107,257				(54,218	)			286,233				-				286,233
Cost of sales (*)			64,628				29,370				70,169				(54,218	)			109,949				-				109,949
Gross profit			120,093				19,103				37,088				-				176,284				-				176,284
Operating expenses:
Research and development			10,910				12,330				563				-				23,803				2,822				26,625
Selling and marketing			22,275				6,133				15,611				-				44,019				-				44,019
Distribution			6,559				942				5,147				-				12,648				-				12,648
General and administrative			21,825				3,828				6,391				-				32,044				67				32,111
Amortization expense			35,912				4,930				1,569				-				42,411				5				42,416
Total operating expense			97,481				28,163				29,281				-				154,925				2,894				157,819
Income (loss) from operations			22,612				(9,060	)			7,807				-				21,359				(2,894	)			18,465
Non-operating income (expense):
Interest income			628				5				263				(299	)			597				(588	)			9
Interest expense			(66,800	)			(2,596	)			(106	)			299				(69,203	)			-				(69,203	)
Other, net			7,845				1,282				(6,078	)			-				3,049				(3,709	)			(660	)
Total non-operating net expense			(58,327	)			(1,309	)			(5,921	)			-				(65,557	)			(4,297	)			(69,854	)
(Loss) income before income taxes			(35,715	)			(10,369	)			1,886				-				(44,198	)			(7,191	)			(51,389	)
(Benefit) provision for income taxes			(15,554	)			(3,093	)			2,072				-				(16,575	)			(2,537	)			(19,112	)
Net loss before earnings of consolidated subsidaries			(20,161	)			(7,276	)			(186	)			-				(27,623	)			(4,654	)			(32,277	)
Net (loss) income of consolidated subsidiaries			(7,462	)			-				-				7,462				-				-				-
Net (loss) income			(27,623	)			(7,276	)			(186	)			7,462				(27,623	)			(4,654	)			(32,277	)
Net loss attributable to noncontrolling interest			-				-				-				-				-				(4,654	)			(4,654	)
Net (loss) income attributable to shareholders of Immucor, Inc.		$	(27,623	)			(7,276	)			(186	)			7,462				(27,623	)			-				(27,623	)

 

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

 

 

IMMUCOR, INC.

CONSOLIDATING STATEMENTS OF OPERATIONS

Nine Months Ended February 29, 2016

(in thousands)

(Unaudited)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
Net sales		$	185,196				43,423				102,718				(49,483	)			281,854
Cost of sales (*)			62,491				26,605				67,047				(49,483	)			106,660
Gross profit			122,705				16,818				35,671				-				175,194
Operating expenses:
Research and development			8,919				11,088				746				(253	)			20,500
Selling and marketing			18,820				7,745				15,492				-				42,057
Distribution			7,224				1,056				4,689				-				12,969
General and administrative			22,683				4,117				6,360				(27	)			33,133
Amortization expense			35,916				3,238				1,591				-				40,745
Total operating net expense			93,562				27,244				28,878				(280	)			149,404
Income (loss) from operations			29,143				(10,426	)			6,793				280				25,790
Non-operating income (expense):
Interest income			183				-				114				(165	)			132
Interest expense			(66,997	)			(350	)			(93	)			165				(67,275	)
Other, net			5,046				(154	)			(4,978	)			(280	)			(366	)
Total non-operating net expense			(61,768	)			(504	)			(4,957	)			(280	)			(67,509	)
(Loss) income before income taxes			(32,625	)			(10,930	)			1,836				-				(41,719	)
(Benefit) provision for income taxes			(11,612	)			(3,833	)			1,399				-				(14,046	)
Net (loss) income before earnings of consolidated subsidiaries			(21,013	)			(7,097	)			437				-				(27,673	)
Net (loss) income of consolidated subsidiaries			(6,423	)			-				-				6,423				-
Net (loss) income			(27,436	)			(7,097	)			437				6,423				(27,673	)
Net loss attributable to noncontrolling interest			-				-				(237	)			-				(237	)
Net (loss) income attributable to shareholders of Immucor, Inc.		$	(27,436	)			(7,097	)			674				6,423				(27,436	)

 

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

 

 

Statements of Cash Flows for the Nine Month periods          

 

IMMUCOR, INC.

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

Nine Months Ended February 28, 2017

(in thousands)

(Unaudited)

 

		Immucor, Inc.				Guarantors				Non- Guarantors				Eliminations				Immucor, Inc. and Subsidiaries				VIE and VIE elimination				Total
Net cash (used in) provided by operating activities		$	(5,034	)			1,337				9,187				(5,132	)			358				(6,857	)			(6,499	)
Net cash used in investing activities			(2,414	)			(1,196	)			(663	)			(3,903	)			(8,176	)			(142	)			(8,318	)
Net cash provided by (used in) financing activities			7,345				(147	)			(8,744	)			8,744				7,198				7,300				14,498
Effect of exchange rate changes on cash and cash equivalents			140				-				(340	)			291				91				-				91
Increase (decrease) in cash and cash equivalents			37				(6	)			(560	)			-				(529	)			301				(228	)
Cash and cash equivalents at beginning of period			4,058				(187	)			6,356				-				10,227				36				10,263
Cash and cash equivalents at end of period		$	4,095				(193	)			5,796				-				9,698				337				10,035

 

 

IMMUCOR, INC.

CONDENSED CONSOLIDATING CASH FLOW INFORMATION

Nine Months Ended February 29, 2016

(in thousands)

(Unaudited)

 

		Immucor, Inc.				Guarantors				Non-Guarantors				Eliminations				Total
Net cash provided by (used in) operating activities		$	10,666				1,423				(1,600	)			(3,648	)			6,841
Net cash (used in) provided by investing activities			(8,860	)			(1,671	)			3,890				(6,009	)			(12,650	)
Net cash (used in) provided by financing activities			(6,475	)			(7	)			(3,517	)			9,517				(482	)
Effect of exchange rate changes on cash and cash equivalents			269				-				(291	)			140				118
Decrease in cash and cash equivalents			(4,400	)			(255	)			(1,518	)			-				(6,173	)
Cash and cash equivalents at beginning of period			7,080				(263	)			11,546				-				18,363
Cash and cash equivalents at end of period		$	2,680				(518	)			10,028				-				12,190

 

17.	OTHER EQUITY MATTERS

 

In the first nine months of fiscal year 2017, the Company paid dividends of $7.3 million to its Parent to fund Sentilus LLC activities, and $0.4 million to fund stock redemption and tax payments made by IVD Holdings Inc.

 

18.	COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

Immucor and BioArray Solutions Limited (“BioArray”), a wholly owned subsidiary of Immucor, 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 has removed the case to the United States District Court for the District of New Jersey, and the plaintiffs are seeking to remand the case back to state court. The Company believes the claims are without merit and that it has meritorious defenses. While the Company believes the amount of any liability resulting from this claim is unlikely and cannot be estimated at this time, the Company does not expect any potential liability would be material to the Company’s operations or to its financial condition.

 

 

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

 

Purchase Commitments

 

Purchase commitments made in the normal course of business were $36.1 million as of February 28, 2017. These purchases were primarily for inventory items. The following is a schedule of the approximate future payments for purchase commitments as of February 28, 2017 (in thousands):

 

Year ended May 31:
2017	$	10,831
2018		12,705
2019		7,337
2020		3,498
2021		1,750
Total	$	36,121

 

19.	SUBSEQUENT EVENTS

 

On March 31, 2017, the Compensation Committee approved an 85,000 increase in the restricted stock units eligible for grant under the Company's 2011 Equity Incentive Plan. The 85,000 restricted stock units were granted with an aggregate fair value of approximately $7.2 million.

 

 

 

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

 

Overview

 

We operate in the transfusion and transplantation in vitro diagnostics markets. Our products perform typing and screening of blood, organs or stem cells to ensure donor-recipient compatibility. Our offerings are targeted at hospitals, donor centers and reference laboratories around the globe.

 

We have manufacturing facilities in the United States (“U.S.”) and Canada and sell our products through both direct affiliate offices and third-party distribution arrangements.

 

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

 

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 Fiscal Year 2017

 

Operations -

 

●

The closing of the Stamford, Connecticut facility as announced in April 2016 is on schedule for completion in April 2017 with most of the activity relocating to our Waukesha, Wisconsin site. We continue to anticipate that the costs involved in closing the facility will be recovered within approximately 12 months.

 

Results of Operations

 

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

 

		Three Months Ended
		February 28				February 29				Change
		2017				2016				Amount				%
Net sales		$	93,964				88,893				5,071				5.7
Cost of sales (*)			35,318				34,130				1,188				3.5
Gross profit			58,646				54,763				3,883				7.1
Operating expenses:
Research and development			8,828				6,910				1,918				27.8
Selling and marketing			13,528				13,251				277				2.1
Distribution			4,083				4,155				(72	)			(1.7	)
General and administrative			10,046				11,779				(1,733	)			(14.7	)
Amortization expense			14,109				13,575				534				3.9
Total operating expenses			50,594				49,670				924				1.9
Income from operations			8,052				5,093				2,959				58.1
Non-operating income (expense):
Interest income			1				48				(47	)			**
Interest expense			(22,981	)			(22,329	)			(652	)			2.9
Other, net			(106	)			(317	)			211				(66.6	)
Total non-operating net expense			(23,086	)			(22,598	)			(488	)			2.2
Loss before income taxes			(15,034	)			(17,505	)			2,471				(14.1	)
Benefit for income taxes			(5,616	)			(8,845	)			3,229				(36.5	)
Net loss			(9,418	)			(8,660	)			(758	)			8.8
Net loss attributable to noncontrolling interest			(1,668	)			(237	)			(1,431	)			**
Net loss attributable to shareholders of Immucor, Inc.		$	(7,750	)			(8,423	)			673				(8.0	)

 

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

(**) Calculation is not meaningful.

 

 

		Nine Months Ended
		February 28				February 29				Change
		2017				2016				Amount				%
Net sales		$	286,233				281,854				4,379				1.6
Cost of sales (*)			109,949				106,660				3,289				3.1
Gross profit			176,284				175,194				1,090				0.6
Operating expenses:
Research and development			26,625				20,500				6,125				29.9
Selling and marketing			44,019				42,057				1,962				4.7
Distribution			12,648				12,969				(321	)			(2.5	)
General and administrative			32,111				33,133				(1,022	)			(3.1	)
Amortization expense			42,416				40,745				1,671				4.1
Total operating expenses			157,819				149,404				8,415				5.6
Income from operations			18,465				25,790				(7,325	)			(28.4	)
Non-operating income (expense):
Interest income			9				132				(123	)			(93.2	)
Interest expense			(69,203	)			(67,275	)			(1,928	)			2.9
Other, net			(660	)			(366	)			(294	)			80.3
Total non-operating net expense			(69,854	)			(67,509	)			(2,345	)			3.5
Loss before income taxes			(51,389	)			(41,719	)			(9,670	)			23.2
Benefit for income taxes			(19,112	)			(14,046	)			(5,066	)			36.1
Net loss			(32,277	)			(27,673	)			(4,604	)			16.6
Net loss attributable to noncontrolling interest			(4,654	)			(237	)			(4,417	)			**
Net loss attributable to shareholders of Immucor, Inc.		$	(27,623	)			(27,436	)			(187	)			0.7

 

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

(**) Calculation is not meaningful.

 

Three Months Ended February 28, 2017 and February 29, 2016:

 

Net sales were $94.0 million for the three months ended February 28, 2017 as compared with $88.9 million for the three months ended February 29, 2016, an increase of $5.1 million or 5.7%. This increase in net sales is described in the discussion below on net sales by product group. Net sales by product group are presented in the following table (in thousands except percentages):

 

		Three Months Ended
		February 28				February 29				Change
		2017				2016				Amount				%
Net sales by product group:
Transfusion		$	77,881				73,589				4,292				5.8
Transplant & Molecular			16,083				15,304				779				5.1
Total		$	93,964				88,893				5,071				5.7

 

Transfusion: Net sales of our Transfusion products for the three months ended February 28, 2017 were $77.9 million as compared with $73.6 million for the three months ended February 29, 2016, an increase of $4.3 million or 5.8%. The increase over the prior year was driven by growth in both reagent and instrument revenue. The fiscal year 2017 quarter also benefited from the timing of shipments in the U.S. related to the ship cycle schedule which resulted in higher reagent sales volumes. Net sales were negatively affected by changes in foreign currency exchange rates, primarily related to the Euro and British Pound.

 

Transplant & Molecular: Net sales of our Transplant and Molecular products were $16.1 million for the three months ended February 28, 2017 as compared with $15.3 million for the three months ended February 29, 2016, an increase of $0.8 million or 5.1%. The increase was driven by growth in our Transplant products with the strongest performance outside the U.S. Net sales were higher for both our LIFECODES-branded Transplant products and our new MIA FORA next generation sequencing (“NGS”) offering which is being adopted by more customers. Net sales were negatively affected by changes in foreign currency exchange rates, primarily the Euro and British Pound.

 

 

Gross profit increased $3.9 million or 7.1% for the three months ended February 28, 2017 compared with the three months ended February 29, 2016. Gross profit as a percentage of consolidated net sales was 62.4% in the third quarter of fiscal year 2017 compared with 61.6% in the third quarter of fiscal year 2016. The higher gross profit and gross profit as a percent of sales were driven by higher reagent sales in the U.S. primarily due to a change in timing of shipments, partially offset by higher costs related to the closure of our Stamford, Connecticut manufacturing facility.

 

Research and development expenses were $8.8 million in the third quarter of fiscal year 2017 as compared with $6.9 million in the same period in the prior fiscal year, an increase of $1.9 million, or 27.8%. The increase in expenses was primarily related to increased activity for Sentilus LLC and the Sirona operation which was acquired in March 2016.

 

Selling and marketing expenses were $13.5 million in the third quarter of fiscal year 2017 as compared with $13.2 million in the same period in the prior fiscal year, an increase of $0.3 million or 2.1%. The increase was driven by higher employee-related costs partially offset by lower regulatory expenses.

 

Distribution expenses were $4.1 million in the three months ended February 28, 2017 as compared with $4.2 million in the three months ended February 29, 2016, a decrease of $0.1 million or 1.7%.

 

General and administrative expenses were $10.0 million in the three months ended February 28, 2017 as compared with $11.8 million in the three months ended February 29, 2016, a decrease of $1.7 million, or 14.7%. The decrease was primarily driven by lower legal fees and higher prior year expenses related to the Sirona acquisition and the legal entity restructuring.

 

Amortization expense was $14.1 million in the three months ended February 28, 2017 as compared with $13.6 million in the three months ended February 29, 2016, an increase of $0.5 million, or 3.9%. The increase was primarily due to additional amortization costs related to the Sirona acquisition.

 

Non-operating expense was $23.1 million for the three months ended February 28, 2017 as compared with $22.6 million for the three months ended February 29, 2016, an increase of $0.5 million, or 2.2%. The increase in non-operating net expense was mainly due to an increase in interest expense, partially offset by a favorable change in the exchange gains and losses in the third quarter of fiscal year 2017 as compared with the third quarter of fiscal year 2016. Interest expense increased primarily due to higher accretion recorded on our contingent consideration liabilities of $0.7 million due to the Sirona acquisition completed in March 2016.

 

The effective tax rate for the three months ended February 28, 2017 and for the three months ended February 29, 2016 was 37.4% and 50.5%, respectively.  The difference between the federal statutory rate and the effective tax rate for the quarters ended February 28, 2017 and February 29, 2016 was primarily due to the income subject to tax in the various tax jurisdictions with rates that differ from the U.S. statutory tax rate and the impact of recording U.S. income taxes associated with current and future distributions of foreign earnings. In addition, the fiscal year 2016 effective tax rate was impacted by changes in the U.S. tax law related to the R&D tax credit.

 

 

 

Nine months Ended February 28, 2017 and February 29, 2016:

 

Net sales were $286.2 million for the nine months ended February 28, 2017 as compared with $281.9 million for the nine months ended February 29, 2016, an increase of $4.4 million, or 1.6%. 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 of dollars, except percentages):

 

		Nine Months Ended
		February 28				February 29				Change
		2017				2016				Amount				%
Net sales by product group:
Transfusion		$	236,165				235,296				869				0.4
Transplant & Molecular			50,068				46,558				3,510				7.5
Total		$	286,233				281,854				4,379				1.6

   

Transfusion: Net sales of our Transfusion products for the nine months ended February 28, 2017 were $236.2 million as compared with $235.3 million for the nine months ended February 29, 2016, an increase of $0.9 million, or 0.4%. The increase was primarily driven by higher instrument sales. Growth of reagent revenue in the emerging markets was offset by lower reagent volume in the U.S. due the timing of shipments related to the ship cycle schedule. Changes in foreign currency exchange rates had a slightly negative effect on net sales of Transfusion products.

 

Transplant & Molecular: Net sales of our Transplant & Molecular products for the nine months ended February 28, 2017 were $50.1 million as compared with $46.6 million for the nine months ended February 29, 2016, an increase of $3.5 million or 7.5%. The increase was driven by growth in our Transplant products with the strongest performance outside the U.S. Net sales were higher for both our LIFECODES-branded Transplant products and our new MIA FORA NGS offering, which is being adopted by more customers. The year-over-year increase was also driven by higher sales of products related to a change in donor screening guidelines in the U.S. Net sales were negatively affected by changes in foreign currency exchange rates, primarily the Euro and British Pound, for the first nine months of fiscal year 2017 compared to the same period in fiscal year 2016.

 

Gross profit increased by $1.1 million or 0.6% for the nine months ended February 28, 2017 as compared with the nine months ended February 29, 2016. Gross profit as a percentage of consolidated net sales was 61.6% in the first nine months of fiscal year 2017 compared with 62.2% in the previous fiscal year. The lower gross profit percentage was driven by lower volume of reagent products due to the timing of shipments related to the ship cycle schedule as well as by higher costs related to the closure of our Stamford, Connecticut manufacturing facility and other one-time expenses.

 

Research and development expenses were $26.6 million for the nine months ended February 28, 2017 as compared with $20.5 million for the nine months ended February 29, 2016. The increase of $6.1 million or 29.9% was primarily due to increased activity for Sentilus LLC and the Sirona operation which was acquired in March 2016.

 

Selling and marketing expenses were $44.0 million for the nine months ended February 28, 2017 as compared with $42.1 million for the nine months ended February 29, 2016. The increase in selling and marketing expenses of $1.9 million, or 4.7% was primarily attributable to employee-related costs, and higher marketing-related expenses associated with new product offerings and markets.

 

Distribution expenses were $12.6 million for the nine months ended February 28, 2017 as compared with $12.9 million for the nine months ended February 29, 2016, a decrease of $0.3 million, or 2.5%.

 

General and administrative expenses were $32.1 million for the nine months ended February 28, 2017 as compared with $33.1 million for the nine months ended February 29, 2016. The decrease in general and administrative expenses of $1.0 million, or 3.1%, was mainly due to lower legal expenses in the current year and higher costs in the prior year related to the acquisition of Sirona and the legal entity restructuring, partially offset by higher costs in the current fiscal year related to the closure of our Stamford, Connecticut manufacturing facility.

 

Amortization expense was $42.4 million for the nine months ended February 28, 2017 as compared with $40.7 million for the nine months ended February 29, 2016, an increase of $1.7 million, or 4.1%. The increase was primarily due to the amortization of costs related to the Sirona acquisition in March 2016.

 

 

Non-operating expense was $69.9 million for the nine months ended February 28, 2017 as compared with $67.5 million for the nine months ended February 29, 2016, an increase of $2.3 million, or 3.5%. The increase in non-operating net expense was mainly due to an increase in interest expense and an unfavorable change in the exchange gains and losses recorded in the first nine months of fiscal year 2017 as compared with the first nine months of fiscal year 2016. Interest expense increased primarily due to higher accretion recorded on our contingent consideration liabilities of $2.2 million due to the Sirona acquisition completed in March 2016.

 

The effective tax rate for the nine months ended February 28, 2017 and the nine months ended February 29, 2016 was 37.2% and 33.7%, respectively.  The effective tax rate for the fiscal year 2017 period was higher than the effective tax rate for the corresponding period in fiscal year 2016 primarily due to the income subject to tax in the various tax jurisdictions with rates that differ from the U.S. statutory rate, the impact of recording U.S. income taxes associated with the future remittance of its un-repatriated foreign earnings, adjustments to reconcile the fiscal year 2016 tax provision to the filed income tax returns, and due to the reversal of uncertain tax positions (net of the corresponding reduction in competent authority assets) resulting from the completion of a foreign income tax examination during the second quarter of fiscal year 2017. In addition, the fiscal year 2016 effective tax rate was impacted by changes in the U.S. tax law related to the R&D tax credit.

 

Future Trends

 

With the acquisition of the Sirona business on March 4, 2016, and the planned increase in activities of the Sentilus LLC business, we expect that our research and development expenses will continue to be higher for the remainder of fiscal year 2017 as compared with the previous year. Refer to Note 2 of the consolidated financial statements for additional information on the Sirona acquisition.

 

We plan to consolidate our LIFECODES facilities and have announced the closure of our Stamford, Connecticut operation in April 2017. We anticipate that the costs involved in closing this facility will be recovered within approximately 12 months.

 

Non-GAAP Disclosures

 

Like-For-Like Net Sales

 

Like-For-Like Net Sales is a non-GAAP financial measure and is presented in this report because we consider it an important supplemental measure and believe that it is useful in the evaluation of the financial performance of the Company. Like-For-Like Net Sales is Net sales as reported in accordance with United States generally accepted accounting principles ("GAAP") with an adjustment to remove the impact of ship cycle differences and foreign currency exchange rates on net sales for the periods presented in this quarterly report. We believe that the presentation of Like-For-Like Net Sales enhances an investor’s understanding of our financial performance as the metric provides a view of the financial performance on a more comparable basis. Like-For-Like Net Sales for the three and nine months ended February 28, 2017 and February 29, 2016, is calculated as follows (in thousands):

 

		Transfusion Sales																Transplant & Molecular Sales																Total Sales
		Three Months Ended																Three Months Ended																Three Months Ended
		February 28 2017				February 29 2016				$ Variance				% Variance				February 28 2017				February 29 2016				$ Variance				% Variance				February 28 2017				February 29 2016				$ Variance				% Variance
Net sales as reported per GAAP		$	77,881				73,589				4,292				5.8				16,083				15,304				779				5.1				93,964				88,893				5,071				5.7
Foreign currency impact			416				-				416				-				320				-				320				-				736				-				736				-
Ship cycle impact			(3,464	)			-				(3,464	)			-				-				-				-				-				(3,464	)			-				(3,464	)			-
Like-For-Like		$	74,833				73,589				1,244				1.7				16,403				15,304				1,099				7.2				91,236				88,893				2,343				2.6

 

		Transfusion Sales																Transplant & Molecular Sales																Total Sales
		Nine Months Ended																Nine Months Ended																Nine Months Ended
		February 28 2017				February 29 2016				$ Variance				% Variance				February 28 2017				February 29 2016				$ Variance				% Variance				February 28 2017				February 29 2016				$ Variance				% Variance
Net sales as reported per GAAP		$	236,165				235,296				869				0.4				50,068				46,558				3,510				7.5				286,233				281,854				4,379				1.6
Foreign currency impact			321				-				321				-				811				-				811				-				1,132				-				1,132				-
Ship cycle impact			1,555				-				1,555				-				-				-				-				-				1,555				-				1,555				-
Like-For-Like		$	238,041				235,296				2,745				1.2				50,879				46,558				4,321				9.3				288,920				281,854				7,066				2.5

 

After adjusting for the impact of ship cycles and changes in foreign currency exchange rates, total Like-For-Like Net Sales increased by $2.3 million, or 2.6%, in the third quarter of fiscal year 2017 as compared with the prior year quarter. After adjusting for the impact of ship cycles and changes in exchange rates, Transfusion net sales, on a Like-For-Like basis, increased by $1.2 million, or 1.7%, in the third quarter as compared with the prior year quarter. Transplant & Molecular net sales, on a Like-For-Like basis, increased by $1.1 million, or 7.2%, after adjusting for the impact of changes in foreign currency exchange rates.

 

 

After adjusting for the impact of ship cycles and changes in foreign currency exchange rates, total Like-For-Like Net Sales increased by $7.1 million, or 2.5%, for the nine months ended February 28, 2017 as compared with the nine months ended February 29, 2016. After adjusting for the impact of ship cycles and changes in exchange rates, Transfusion net sales, on a Like-For-Like basis, increased by $2.7 million, or 1.2%, in the first nine months of the fiscal year as compared with the first nine months of the prior year. Transplant & Molecular net sales, on a Like-For-Like basis, increased by $4.3 million, or 9.3%, after adjusting for the impact of changes in foreign currency exchange rates.

 

EBITDA and Adjusted EBITDA

 

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 as the metric provides a view of the financial performance before financing and tax considerations. 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 metric used by management and investors to assess our financial performance from period to period and is the metric that is applied to valuation scenarios. 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. EBITDA and Adjusted EBITDA for the three months and nine months ended February 28, 2017, and the three months and nine months ended February 29, 2016 are calculated as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		February 28				February 29				February 28				February 29
		2017				2016				2017				2016
Net loss		$	(9,418	)			(8,660	)			(32,277	)			(27,673	)
Interest expense, net			22,980				22,281				69,194				67,143
Income tax benefit			(5,616	)			(8,845	)			(19,112	)			(14,046	)
Depreciation and amortization			17,895				17,200				54,072				51,417
EBITDA			25,841				21,976				71,877				76,841
Adjustments to EBITDA:
Stock-based compensation (i)			1,024				1,265				3,496				4,045
Acquisition expenses, net (ii)			90				879				294				950
Sponsor fee (iii)			750				825				2,438				2,428
Non-cash impact of purchase accounting (iv)			-				112				43				339
Certain non-recurring expenses and other (v)			3,522				4,188				12,854				10,959
Adjusted EBITDA		$	31,227				29,245				91,002				95,562
Adjusted EBITDA attributable to shareholders of Immucor, Inc. (vi)		$	33,563				29,245				97,486				95,562

 

i.

Represents non-cash stock-based compensation.

ii.

Represents items related to acquisition activities including legal, accounting and other costs.

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 deferred rent.

v.

Represents certain items we believe are not representative of our core business that are not included in the adjustments above, including personnel and business optimization costs.

vi.

Excludes Adjusted EBITDA amounts attributable to Sentilus LLC.

 

Liquidity and Capital Resources

 

Cash flow

 

Our principal source of liquidity is our operating cash flow, which is expected to be positive on an annual basis. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing and financing requirements.

 

In the first nine months of fiscal year 2017, our cash and cash equivalents decreased by $0.2 million to $10.0 million as of February 28, 2017. The decrease was primarily due to cash used in operating activities of $6.5 million and investing activities of $8.3 million, as well as repayments of our long-term debt of $5.1 million in the first nine months of fiscal year 2017. This decrease in cash and cash equivalents was partially offset by cash provided by net borrowings of $20.0 million from our Revolving Facilities. The cash balance at February 28, 2017 includes cash of $5.8 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.

 

In the first nine months of fiscal year 2016, our cash and cash equivalents decreased by $6.2 million to $12.2 million as of February 29, 2016. The decrease was primarily due to investments in new businesses, additional property and equipment, and an additional loan to Sirona of $4.9 million, as well as repayments of our long-term debt of $5.0 million in the first nine months of fiscal year 2016. These decreases in cash and cash equivalents were partially offset by positive cash flow contributed by our operating activities of approximately $6.8 million and $4.5 million of borrowings from our Revolving Facilities.

 

Operating activities

 

Operating activities used $6.5 million of cash and cash equivalents in the first nine months of fiscal year 2017 as compared with $6.8 million of cash provided by operating activities in the first nine months of fiscal year 2016.  The decrease in cash provided by operating activities was mainly due to higher operating expenses driven by an increase in investment in research and development activities for our Sentilus LLC and Sirona operations in the first nine months of fiscal year 2017 as compared with the same period of the previous year, and an increase in working capital requirements.

 

 

Investing activities

 

 

In the first nine months of fiscal year 2017, we used $8.2 million of cash to purchase property and equipment to upgrade certain financial and operating systems and to facilitate the consolidation of our LIFECODES facilities. In the first nine months of fiscal year 2016, we used $7.1 million of cash to purchase property and equipment and to upgrade certain financial and operating systems, $4.9 million to fund an additional loan to Sirona, and $0.8 million to acquire the assets of a Reference Lab.

 

Financing activities

 

In the first nine months of fiscal year 2017, we used cash from financing activities of $5.1 million for repayments of our long-term debt. We borrowed $85.5 million and repaid $65.5 million from our Revolving Facilities, and had $20.0 million outstanding under our Revolving Facilities as of February 28, 2017. In addition, we paid a $7.3 million dividend to IVD Holdings B Inc. to fund the activities of Sentilus LLC, received $7.3 million in proceeds from a capital contribution made to the noncontrolling interest, and paid a $0.4 million dividend to fund stock redemption and tax payments made by IVD Holdings Inc. In the first nine months of fiscal year 2016, we used cash from financing activities of $5.0 million for repayments of our long-term debt. We also borrowed $48.0 million and repaid $43.5 million from our Revolving Facilities, and had $4.5 million outstanding under our Revolving Facilities as of February 29, 2016.

 

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 $32.2 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 February 28, 2017, we had principal of $1,036.8 million of long-term borrowings outstanding under our Term Loan Facility and the Notes, and $20.0 million outstanding on the Revolving Facilities.  Our net total available borrowings under our Revolving Facilities were $60.0 million as of February 28, 2017.

 

We expect that recurring capital expenditures during fiscal year 2017 will range from $10.0 million to $12.0 million. These expenditures will be used to purchase equipment that increases or enhances capacity and productivity, upgrade certain financial systems, and consolidate our LIFECODES facilities. 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 Facilities of our Senior Credit Facilities will provide sufficient liquidity to meet the operating and capital expenditure needs for existing operations during the next twelve months. 

 

Commitments and Contractual Obligations

 

As of February 28, 2017, our material cash commitments and contractual obligations have not changed significantly from those disclosed in our Annual Report for the year ended May 31, 2016.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financial arrangements as of February 28, 2017.

 

   

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with GAAP, which often require the judgment of management in the selection and application of certain accounting principles and methods. We discuss our critical accounting policies in the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K. There have been no other significant changes in our critical accounting policies since May 31, 2016.

 

Risk Factors and Forward-Looking Statements

 

This document contains “forward-looking statements,” which include information concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other statements that are not related to present 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 our examination of operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but there can be no assurance that we will realize our expectations or that our beliefs will prove correct.

 

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

 

	•	our substantial indebtedness;
	•	lower industry blood demand;
	•	lower than expected demand for our instruments;
	•	the decision of customers to defer capital spending;
	•	the failure of customers to efficiently integrate our products into their operations;
	•	the rate of adoption by customers of new technologies and products;
	•	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 of or deem immaterial that may cause our actual results to differ materially from the forward-looking statements.

 

All forward-looking statements attributable to us 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.

 

Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading “Risk Factors” in ITEM 1A of this report, and in the Company’s Annual Report on Form 10-K for the year ended May 31, 2016.

 

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

As of February 28, 2017, there have been no material changes regarding our market risk position from those disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended May 31, 2016.

 

ITEM 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 2017. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of February 28, 2017, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting during the three months ended February 28, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II

 

OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

We (Immucor, Inc. and BioArray Solutions Limited (“BioArray”), a wholly owned subsidiary of Immucor, Inc.) 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 have removed the case to the United States District Court for the District of New Jersey, and the plaintiffs are seeking to remand the case back to state court. We believe the claims are without merit and that we have meritorious defenses. While we believe that the amount of any liability resulting from this claim is unlikely and cannot be estimated at this time, we do not expect any potential liability would be material to our results of operations or 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 1A. Risk Factors

 

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2016. In addition to the other information included in this report, carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our business. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may have a material adverse effect on our business, financial condition and/or operating results.

 

ITEM 5. Other Information

 

None

 

 

ITEM 6. Exhibits

 

31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema *

101.CAL

XBRL Taxonomy Extension Calculation *

101.DEF

XBRL Taxonomy Extension Definition *

101.LAB

XBRL Taxonomy Extension Label *

101.PRE

XBRL Taxonomy Extension Presentation *

 

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

 

 

SIGNATURES

 

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

 

 

		IMMUCOR, INC.
		(Registrant)
Date:                 April 11, 2017	By:	/s/ Jeffrey R. Binder
		Jeffrey R. Binder, President and Chief Executive Officer
		(Principal Executive Officer)
Date:                 April 11, 2017	By:	/s/ Dominique Petitgenet
		Dominique Petitgenet, Chief Financial Officer and Vice President, Operations
		(Principal Financial and Accounting Officer)

 

43