10-K 1 immucor_10k-053112.htm FORM 10-K immucor_10k-053112.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  
 X  THE SECURITIES EXCHANGE ACT OF 1934  
  For the fiscal year ended May 31, 2012  
  OR   
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF   
  THE SECURITIES EXCHANGE ACT OF 1934   
  For the transition period from                  to   
 
Commission file number 0-14820

IMMUCOR, INC.
(Exact name of registrant as specified in its charter)
Georgia   22-2408354
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
3130 GATEWAY DRIVE, P.O. BOX 5625   30091-5625
Norcross, Georgia   (Zip Code)
(Address of principal executive offices)    
 
Registrant’s telephone number, including area code, is (770) 441-2051

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes___ No X      
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 
Yes   X    No          

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes        X      No _____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes    X     No _____

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.       [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer [      ]       Accelerated filer              [    ]  
 Non-accelerated filer   [   X]     Small reporting company [    ]  
                                                                                                                                                          
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes____ No     X       
 
As of November 30, 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 July 27, 2012, there were 100 shares of common stock outstanding.
 
 
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Table Of Contents
 
 
 
Part I
   
       
  Item 1.
Business
3
  Item 1A.
Risk Factors
9
  Item 1B.
Unresolved Staff Comments
17
  Item 2.
Properties
17
  Item 3.
Legal Proceedings
 17
       
 
Part II
   
       
  Item 5.
Market For The Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities
18
  Item 6.
Selected Financial Data
19
  Item 7.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
19
  Item 7A.
Quantitative And Qualitative Disclosures About Market Risk
36
  Item 8.
Financial Statements And Supplementary Data
 
  Item 9.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
79
  Item 9A.
Controls And Procedures
79
  Item 9B.
Other Information
80
       
 
Part III
   
       
  Item 10.
Directors, Executive Officers and Corporate Governance
80
  Item 11.
Executive Compensation
84
  Item 12.
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
97
 
Item 13.
Certain Relationships And Related Transactions, And Director Independence
97
 
Item 14.
Principal Accountant Fees And Services
98
       
 
Part IV
   
       
  Item 15. Exhibits And Financial Statement Schedules 99
       
  Signatures    
       
  Ex-21 Subsidiaries Of The Registrant  
  Ex-23 Consents Of Experts And Counsel  
  Ex-31.1 Certificate Of Principal Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002  
  Ex-31.2 Certificate Of Principal Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002  
  Ex-32
Certifications Required Under Section 906 Of The Sarbanes-Oxley Act Of 2002
 
 
 
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PART I
 
FORWARD – LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements which include information concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information.  Many of these statements appear, in particular, under the headings “Business” and “Management’s discussion and analysis of financial condition and results of operations.” When used in this report, the words “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but there can be no assurance that we will realize our expectations or that our beliefs will prove correct.

 There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ include, but are not limited to, our substantial indebtedness, lower industry blood demand, lower than expected demand for our instruments, the decision of customers to defer capital spending, the outcome of the administrative action received from the Food and Drug Administration and other risks and uncertainties discussed in the “Risk Factors” section and elsewhere in this annual report.  There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us apply only as of the date they are made and are expressly made subject to the cautionary statements included in this report. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances occurring after the date they were made or to reflect the occurrence of unanticipated events.
 
Item 1. — Business.
 
Founded in 1982, Immucor, Inc., a Georgia corporation (“Immucor” or the “Company”), develops, manufactures and sells a complete line of reagents and automated systems that detect and identify certain properties of the cell and serum components of human blood for the purpose of blood transfusion. Our offerings are targeted at hospitals, donor centers and reference laboratories.

Acquisition of our Company
 
On August 19, 2011, Immucor was acquired by investment funds sponsored by TPG Capital, L.P. (collectively, the “Sponsor”) and certain co-investors, valued at approximately $1.9 billion, including the assumption of approximately $1.1 billion of acquisition-related debt and the incurrence of approximately $55.3 million of collective transaction costs which were incurred by Immucor and the Sponsor (the “Acquisition”). As a result of the Acquisition, our stock is no longer publicly traded. Currently, the issued and outstanding shares of Immucor are indirectly owned by the Sponsor and certain co-investors.
 
To consummate the Acquisition, we entered into new debt financing consisting of (i) $715.0 million of senior secured credit facilities (the “Senior Credit Facilities”) comprised of: (a) a $100.0 million, 5-year revolving credit facility (the “Revolving Facility”), which was undrawn at closing and (b) a $615.0 million, 7-year term loan credit facility (the “Term Loan Facility”), and (ii) $400.0 million of Senior Notes due 2019.

Industry
 
We are part of the in-vitro diagnostic blood typing and screening market also known as the blood banking industry, which generally seeks to prevent transfusion reactions through the testing of blood and blood components prior to transfusion. In the United States (U.S.), the Food and Drug Administration (“FDA”) regulates the transfusion of human blood as a drug and as a biological product. The FDA regulates all phases of the blood banking industry, including donor selection and the collection, classification, storage, handling and transfusion of blood and blood components. The FDA requires all facilities that manufacture products used for any of these purposes, and the products themselves, to be registered or licensed by the FDA. (See “Regulation” for further discussion.)
 
The principal components of blood are red cells (the cellular portion) and plasma (the fluid portion).  Attached to the exterior of red cells are antigens, which determine the blood group (such as A, B, AB or O) and type (RhD positive or RhD negative) of an individual’s blood. Plasma contains many different kinds of proteins, including antibodies that are produced by the body in response to foreign substances, such as foreign red cell antigens introduced during transfusion or pregnancy. In its normal state, a person’s blood does not contain antibodies that will react with its own red cell antigens. However, if foreign antigens are introduced into the person’s blood, the body will produce antibodies to combat those foreign antigens, which can create a potentially fatal reaction.

Because of the potential reaction of antigens and antibodies, it is crucial that healthcare providers correctly identify the antigens and antibodies present in patient blood and donor blood before a transfusion. If a donor’s red cells contain antigens that are recognized by existing antibodies in the patient’s plasma, the transfused red cells could be destroyed in a potentially life-threatening reaction. Additionally, the patient’s body can produce new antibodies to any foreign antigens of the donor’s red cells.  The production of these antibodies, known as alloimmunization, can complicate future transfusions.
 
 
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Because of the critical importance of matching patient and donor blood, highly skilled and educated technologists in hospitals, donor centers and reference laboratories generally perform procedures for testing compatibility. At present, many customers perform these tests manually in the U.S., making blood testing laboratories much more labor intensive than other types of testing laboratories. In our direct markets outside of the U.S., a significant portion of the customers are performing these tests with automation.

We estimate the blood banking reagent and instrument market at approximately $1.2 billion in developed countries. Our products are distributed globally through both direct affiliate offices and third-party distribution arrangements.
 
Strategy and Long-Term Growth Drivers

Strategy

Our strategy is to drive automation in the blood banking industry. We began our automation strategy in 1998 with the goal of improving the operations of the blood bank as well as patient safety. Through our innovation, we believe that our instruments are among the most functionally rich instrumentation available on the market.

We believe our customers, whether a hospital, a donor center or a reference laboratory, benefit from automation. Automation can allow customers to reduce headcount as well as overtime in the blood bank, which can be beneficial given the current shortage of qualified blood bank technologists. We also believe that automation can improve patient safety, can increase operational efficiency and, for customers such as integrated delivery networks with multiple blood banks, can permit the standardization of best practices. For Immucor, automation allows us to gain market share and secure a long-term, contractual relationship with our customers.

We continually innovate to ensure our offerings are competitive. For serology testing, we are the only company to offer “Scalable Solutions” to meet the needs of blood banks, regardless of size.  We offer two fully automated instruments for serology testing – NEO® and Echo® – to meet the different needs of our customers depending upon the volume in their laboratory and the complexity of the testing required.

In calendar 2010, we launched our fourth generation automated instrument, NEO, worldwide. Targeted at large hospitals, donor centers and reference laboratories, NEO replaces our previous high volume instrument, Galileo®, and due to added functionality, we believe NEO is a more attractive instrument for the hospital market. NEO delivers the market’s highest type-and-screen throughput and broadest test menu as well as new STAT priority functionality for improved workflow.

Launched worldwide in 2007, Echo, our third generation automated instrument, is targeted at the market segment that is the least automated in the U.S. – small- to medium-sized hospitals. Echo features STAT functionality, exceptional mean time between failures and what we believe is the fastest turnaround time in the industry.

With a focus on improving patient outcomes, we are developing an innovative product offering in what we believe is the future of transfusion medicine - molecular immunohematology. In many countries, blood pre-transfusion testing is limited to the prevention of transfusion reactions and not for the prevention of alloimmunization, which occurs when antigens foreign to the patient are inadvertently introduced into the patient’s blood system through transfusions. If alloimmunization occurs, the patient develops new antibodies in response to the foreign antigens, thereby complicating future transfusions. By using multiplex, cost-effective molecular testing, our molecular technology allows testing to prevent alloimmunization for better patient care. Our BioArray Solutions business is pioneering the development of DNA typing of blood for transfusion. Our current offering includes our Human Erythrocyte Antigen (“HEA”) product, and our Human Platelet Antigen (“HPA”) product as well as our semi-automated molecular immunohematology system, the Array Imaging System and BASIS™ database. These offerings are CE (“Conformité Européenne”) Marked, denoting regulatory clearance in the European Union, and are available on a Research Use Only basis in the U.S.
 
Long-Term Growth Drivers

Our long-term growth drivers revolve around our automation strategy. We believe innovative instrumentation is the key to improving blood bank operations and patient safety, as well as increasing our market share around the world. In implementing our automation strategy, we are focused on the following:

 
i)
Product Innovations – We believe innovation is an important part of our strategy. We continually seek to improve existing products and develop new products to increase our market share and to improve the operations of our customers. We have launched four generations of automated instruments for serology testing, including our most recent instrument, the NEO. We are currently developing new serology reagent tests for use on our automated instruments as well as in a manual testing environment to further improve transfusion medicine. Additionally, we are developing an innovative product offering in the new field of molecular immunohematology, which we believe will be the future of blood bank operations.
 
 
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ii)
Capitalize on the trend towards automation – We estimate that the majority of customers in the U.S. still perform blood typing and screening on a manual basis, particularly in the small- to medium-sized hospital segment. Given the labor shortages in blood banks and the strain on hospital budgets, we believe there are significant economic drivers behind the automation trend. Automation can allow customers to reduce headcount and/or overtime in the blood bank, which can be beneficial given the current shortage of qualified blood bank technologists. We also believe that automation can improve patient safety, increase operational efficiency and, for customers such as integrated delivery networks with multiple blood banks, permit the standardization of best practices. Given the reduction in both human and economic capital, we estimate that our instruments have an average payback period of one year or less, depending on the size of the lab. Hence, we believe our automated products represent an attractive value proposition for manual customers to switch to automation.

 
iii)
International growth – As of May 31, 2012, approximately 70% of our sales were generated in the U.S. We have a leadership position in the U.S. market and it is the market on which we have been focused historically. Due to our innovative product offering, we have grown our market share outside the U.S. over the last several years. In some regions, such as emerging markets, we believe a more focused effort would generate greater growth. In the emerging markets, for example, the infrastructure is far less developed than that in the U.S. and Europe, representing a significant opportunity for growth through automation. The long-term potential of the emerging markets is not included in the current estimated $1.2 billion market opportunity for instruments and reagents worldwide. With the combination of better focus and our innovative product offering, we believe the markets outside the U.S. represent a significant opportunity for future growth.
 
 
iv)
Further develop our industry-leading molecular platformWe have invested substantial effort and research and development expense in developing our molecular diagnostics platform and believe it will become an increasingly strategic asset over time. Molecular solutions have the potential to significantly enhance patient safety and outcomes. Molecular immunohematology is a developing field worldwide, and we believe we are on the forefront of this market. Our most significant molecular assays have received regulatory approval in the European Union, and we are working to achieve regulatory approval in the U.S.

Reagents

A reagent is a substance that is added during a test in order to bring about a reaction. The resulting reaction is used to confirm the presence of another substance. Our reagents are used to identify different properties of blood for the purpose of transfusion.

Most of our current reagent products are used in tests to i) identify the blood group (A, B, AB, O) and type (RhD positive or negative) ii) to detect and identify red cell antibodies or red cell antigens, iii) to detect and identify platelet antibodies and iv) to determine blood compatibility (crossmatch). The FDA requires the accurate testing of blood and blood components for the purpose of transfusion, using only reagents that have been licensed or cleared by the FDA.
 
We offer both traditional and proprietary reagents. Our serology instruments use both our traditional reagents, as well as our proprietary solid phase technology, marketed under the name Capture®, to perform tests.
 
Traditional serology reagents

Under traditional agglutination blood testing techniques (manual method), the technologist manually mixes serum with red blood cells in a test tube, performs several additional procedures, and then examines the mixture to determine whether there has been an agglutination reaction. A positive reaction occurs if the cells are drawn together in clumps by the presence of corresponding antibodies and antigens. Due to the critical importance of matching patient and donor blood, testing procedures using agglutination techniques are usually performed manually by highly educated and skilled technologists.

We estimate that approximately 60% of customers in the U.S. perform testing on a manual basis without the use of an automated instrument. These customers are primarily in the small- to medium-hospital segment of the market. In the high volume segment of the U.S. market (large hospitals, donor centers and reference laboratories) and in developed international markets, a significant portion of the customers are automated.

Traditional reagents are used in a manual setting but certain products are also used on our automated instruments. Traditional reagents accounted for approximately 60% of our revenue in fiscal 2012. We believe there is a slight amount of seasonality in our reagent business as fewer donations and elective surgical procedures are performed in our first fiscal quarter (June-August).
 
 
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Capture reagents (solid phase technology)

In our proprietary solid phase blood test system, known as Capture, red cell or platelet antigens are bound to a microtitration plate as a solid support (the solid phase), and the bound reactant “captures” other reactants in a fluid state and binds those fluid reactants to the solid phase. In this testing system, patient or donor serum or plasma is placed in the well of a plastic microtitration plate on which antigen reactants have been bound. Our special proprietary indicator cells are then added. In a positive reaction, antibodies in the test sample are captured by the indicator cells and adhere to the bottom of the test well as a thin layer. In a negative reaction, there is no antibody attached to the indicator cells and they settle to the bottom of the test well as a small cell button.

These reactions occur rapidly and result in clearly defined, machine-readable test results that are often easier to interpret than the subjective results sometimes obtained from existing agglutination technology (manual method). Also, in batch test mode the solid phase test results can generally be obtained in substantially less time than by traditional agglutination techniques.
 
Molecular Immunohematology Technology
 
Our molecular assays use multiplex, polymerase chain reaction (“PCR”) technology for DNA testing of blood for transfusion. Marketed under the BeadChip™ System our molecular offering allows for a variety of DNA-based testing.   With the goal of improving patient outcomes, our molecular technology allows testing to prevent alloimmunization making current and future blood transfusions safer.
 
Our current offering includes our HEA and HPA assays as well as our current semi-automated molecular immunohematology instrument, the Array Imaging System and BASIS database. Our current offering has regulatory clearance in the European Union and is available for Research Use Only in the U.S.
 
Instruments and Instrument Systems

Our automated instrument-reagent systems operate on a “razor/razor blade” model, with our automated analyzers serving as the “razors” and our proprietary reagents serving as the “razor blades.” Our instruments are “closed systems,” meaning our proprietary reagents can only be used on our instruments. The “razor/ razor blade” business model generates a recurring revenue stream for us. We designed our systems to be scalable, enabling laboratories to better match our instruments to their various needs based on the test volume in their laboratories and the complexity of the testing required.  We design and own the rights to our instruments, even though they are produced by third-party manufacturers.
 
Serology

Our serology instruments use both our proprietary solid phase technology as well as certain traditional reagents to perform tests.

NEO – Targeted at donor centers, large volume hospitals and reference laboratories, NEO provides a fully-automated solution to perform all routine blood bank tests, including blood grouping, antibody screening, crossmatch, direct antiglobulin test (DAT) and antibody identification. Launched worldwide in calendar 2010, NEO is our fourth generation automated instrument. It replaces our previous high volume instrument, Galileo, which was launched in Europe in 2002 and in the U.S. in 2004. We believe Galileo is in its natural replacement cycle (approximately five to seven years). In addition to opportunities in the Galileo installed base, we believe there is also opportunity to expand our automated footprint in the hospital market because of NEO’s added functionality, including STAT functionality, a faster turnaround time and improved reliability. A high throughput instrument, NEO can process up to 224 different samples at once, and can perform approximately 60 type-and-screen tests an hour.  NEO uses our proprietary Capture reagent products as well as certain traditional reagents. We believe that NEO has the highest type and screen throughput available in the global market.

ECHO – Launched worldwide in 2007, Echo is targeted at small- to medium-sized hospitals as well as at integrated delivery networks (both hospital and lab systems) in combination with NEO. Like NEO, Echo has a broad test menu and uses both our proprietary Capture reagents as well as certain traditional reagents to perform its testing. With the capacity to load 20 samples at a time, Echo can perform approximately 14 type-and-screen tests an hour. Echo features STAT functionality, exceptional mean time between failures and what we believe is the fastest turnaround time in the industry.

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

ARRAY IMAGING SYSTEM AND BASIS™ (Semi-automated) – Today, molecular testing using our BeadChip technology is a semi-automated process. The testing itself is primarily manual while the reading and interpretation of test results is automated with our Array Imaging System and BASIS database.
 
Research and Development

We continually seek to improve our existing products and to develop new ones in order to increase our market share.  Prior to sale, any new product requires regulatory approvals, including licensing or pre-market clearance from the FDA in the U.S. and CE marking in Western Europe.  For the Successor fiscal 2012 period (August 20, 2011 to May 31, 2012), the Predecessor fiscal 2012 period (June 1, 2011 to August 19, 2011), fiscal year 2011 and fiscal year 2010, we spent approximately $13.9 million, $4.9 million, $15.9 million and $15.4 million, respectively, for research and development.
 
Marketing and Distribution

Our potential customers are donor centers, hospitals and reference laboratories. More than three-quarters of our current customers are hospitals, and the remainder are primarily donor centers and reference laboratories. No single customer represents 10% or more of our annual consolidated revenue.

Our products are distributed globally through both direct affiliate offices and third-party distribution arrangements. We offer several instrument procurement options, including direct sales and rentals.
 
We typically seek to enter into both an instrument purchase or rental agreement with a customer and a reagent purchase agreement. Some of our agreements with our larger customers allow the customer to terminate the agreement without cause, usually with 60 days’ notice.
 
Backlog

The nature and shelf life of our reagent products prohibits us from maintaining a material backlog of these products. At any given time, we do have a backlog of instrument orders that have been received but the instruments have either not been installed or the customer validation process has not been completed. As such, the instruments are not generating recurring reagent revenue at their expected annualized run rates. While the instrument backlog is not material as of May 31, 2012, reagent revenue that will be generated from these instruments will contribute to revenue growth in the future.
 
Suppliers

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

We source our serology instruments from single-source suppliers. Although we currently do not have a written contract with the supplier of our Echo instrument, we generally operate under the terms of past contractual arrangements with that supplier. We believe that our business relationship with our instrument suppliers is good. While these relationships are significant, we believe that other manufacturers could supply the instruments to us after a reasonable transition period. We have elected not to dual source our instruments because we consider our primary exposure to be the sudden bankruptcy of the suppliers. In the event a current instrument supplier experiences financial problems that prevent it from continuing to produce our instrument, we believe it would take in the range of 18 months to 24 months to transfer the technology and begin production with a new instrument supplier. While a change in an instrument supplier would disrupt our growth opportunities during the transition period, we do not believe it would have a material financial impact on our existing business as nearly 85% of our revenue is generated from our reagents. During the transition period to a new supplier, over time there could be a material impact on our ability to execute our strategy of driving automation in the blood bank using a “razor/razor blade” model in which our sale of instruments is intended to establish a relationship with a customer to whom we continually sell reagents over time.
 
 
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Regulation

The manufacture and sale of blood banking products is a highly regulated business and is subject to continuing compliance with country-specific statutes, regulations and standards that generally include licensing, product testing, facilities compliance, product labeling, post-market vigilance and consumer disclosure.  

In the U.S., an FDA biologics license is issued for an indefinite period of time, subject to the FDA’s right to revoke the license.  As part of its overview responsibility, the FDA makes facility inspections on an unannounced basis.  In addition, each product manufactured by us is subject to formal product submissions and review processes by the FDA and other regulatory bodies, such as Health Canada, a European Union recognized Notified Body and the Japanese Ministry of Health prior to authorization to market. Significant changes to our products or facilities can require additional submission and review prior to implementation. For example, we hold several FDA biologic licenses to manufacture blood grouping reagents, anti-human globulin reagents and reagent red blood cells. We must submit biologic license applications or 510(k) pre-market notifications to the FDA to obtain product licenses or market clearance for new products or instruments. To accomplish this, we must submit detailed product information to the FDA, perform a clinical trial of the product, and demonstrate to the satisfaction of the FDA that the product meets certain efficacy and safety standards. There can be no assurance that any future product licenses, product clearances or instrument clearances will be obtained by us.
 
Our manufacturing and distribution facilities in the U.S., Germany and Canada are certified to ISO 13485:2003. This is an internationally recognized standard and certification is required in order to continue product distribution in key markets such as the European Union and Canada. In addition, to allow continued marketing of our products in the European Union, we are required to maintain certification under the EC Full Quality Assurance System Assessment in accordance with the requirements of Annex IV of the IVD Medical Devices Directive 98/79/EC. This certification authorizes the use of the CE Mark on our products that allows products free access to all countries within the European Union. We have successfully completed certifications for CE marking of all products manufactured for the European market.
 
There are multiple countries worldwide that also impose regulatory barriers to market entry. We maintain product registrations and approvals necessary to maintain access to certain foreign markets.
 
In June 2009, we announced that the FDA, in an administrative action based on a January 2009 inspection, issued a notice of intent to revoke (“NOIR”) our biologics license with respect to our Reagent Red Blood Cells and Anti-E (Monoclonal) Blood Grouping Reagent products. Under this administrative action, we have the opportunity to demonstrate or achieve compliance before the FDA initiates revocation proceedings or takes other action. The FDA did not order the recall of any of our products or restrict us from selling these products. This administrative action was a follow on to a warning letter that we received in May 2008. The Company began implementing extensive remediation efforts in early calendar 2009.  The FDA conducted an inspection of our facilities during June 2010 and we were notified by the FDA in September 2010 that while the June 2010 inspection “disclosed that substantive corrections have been made, some deviations continue.” Therefore, the FDA stated that the conditions outlined in the June 2009 NOIR administrative action remain in effect and it will evaluate our overall compliance status at its next inspection. Since the June 2010 inspection, the FDA has resumed the normal approval process in considering our regulatory applications. During June 2012, after our fiscal 2012 year-end, the FDA conducted an inspection of our facilities.  We have no update on our compliance status at this time. See “Risk factors—Risks related to the company—FDA administrative action could have a material and adverse effect on our business.”
 
Environmental

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

Since 1986, the U.S. Patent Office has issued six patents to us pertaining to our solid phase technology for serology testing, five of which have expired. The remaining patent expires in November 2012. We believe that our trade secrets and know-how will help prevent any current or future competitors from successfully copying our solid phase products.

For molecular testing, we have a substantial portfolio of issued patents and pending patent applications.  The issued patents expire between 2017 and 2026.
 
 
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We use trademarks on most of the products we sell. These trademarks are protected by registration in the U. S. and other countries where such products are marketed using the trademarks. We consider these trademarks in the aggregate to be of material importance in the operation of our business.
 
Competition

Competition in the blood banking industry is based on quality of instrumentation and reagents, pricing, talent of the sales forces, ability to furnish a range of quality existing and new products, reliable technology, skilled and trained technicians, customer service and continuity of product supply. We believe we are well positioned to compete favorably in this industry principally because of the completeness, reliability and quality of our product line, our competitive pricing structure and our introduction of innovative products, such as our Capture technology and full line of automated instruments for serology testing and our molecular immunohematology offering. We also believe that continuing research efforts in the area of blood bank automation, the experience and expertise of our sales personnel and the expertise of our technical and customer support staff will enable us to remain competitive in the market.

Our principal competitors worldwide are Ortho-Clinical Diagnostics, a Johnson & Johnson company, and Bio-Rad Laboratories, Inc.  Both companies sell instrumentation as well as reagents.
 
Financial Information about Geographic Areas

We conduct our business globally with manufacturing facilities in the U.S. and Canada, and with both direct affiliate offices and third-party distribution arrangements worldwide. Roughly 30% of our revenue is generated outside the U.S. In addition to the potentially adverse impact of foreign regulations (see “Regulations”), we may be affected by more difficult market conditions outside the U.S., which could impact our revenues and profit margins. Also, there may be adverse consequences from fluctuations in foreign currency exchange rates, which may affect the competitiveness of our products and our profit margins because our affiliates sell our products predominantly in local currencies, but our cost structure is weighted towards the U.S. dollar.

For financial information about geographic areas, see Note 18 “Segment and Geographic Information” of the notes to the consolidated financial statements.
 
Employees

At May 31, 2012, we had a total of 819 full-time employees worldwide. We have a low staff turnover rate and consider our employee relations to be good. In addition to our full-time work force, we employ temporary and contract employees. None of our employees are represented by a labor union.
 
Available Information

We file periodic reports under the Securities Exchange Act of 1934 with the SEC.  Electronic versions of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished with the SEC may be accessed free of charge through our website at www.immucor.com. The information may also be accessed at the SEC’s web site at www.sec.gov.  The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contain on the website is not part of this document.
 
Item 1A. — Risk Factors.
 
We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financing, legal and other factors or conditions that may affect us. We provide the following cautionary discussion of risks and uncertainties relevant to our business, which we believe are factors that, individually or in the aggregate, could have a material and adverse impact on our business, results of operations and financial condition, or could cause our actual results to differ materially from expected or historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, our operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.

Risks Relating to Our Company
 
Lower blood demand could negatively impact our financial results.
 
Our products are used to test blood prior to transfusion. Lower demand for blood in the markets in which we operate could result in lower testing volumes. For example, we believe the U.S. market has been experiencing lower demand for blood in our last three fiscal years. Lower blood demand could result from a variety of factors, such as fewer elective surgeries and more efficient blood utilization by hospitals. Blood is a large expense for hospital laboratories and pressure on hospital budgets due to macroeconomic factors and healthcare reform could force changes in the ways in which blood is used. Lower blood demand could negatively impact our revenue, profitability and cash flows.
 
 
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FDA administrative action could have a material and adverse effect on our business.
 
In June 2009, we announced that the FDA, in an administrative action based on a January 2009 inspection, issued a notice of intent to revoke our biologics license (“NOIR”) with respect to our Reagent Red Blood Cells and Anti-E (Monoclonal) Blood Grouping Reagent products. During June 2010, the FDA conducted an inspection of our facilities. During September 2010, we were notified by the FDA that while the June 2010 inspection “disclosed that substantive corrections have been made, some deviations continue.” Therefore, the FDA stated that the conditions outlined in the June 2009 NOIR administrative action remain in effect. The FDA stated that it will evaluate our overall compliance status at its next inspection. During June 2012, after our fiscal 2012 year-end, the FDA conducted an inspection of our facilities.  We have no update on our compliance status at this time.
 
As part of its overview responsibility, the FDA makes plant and facility inspections on an unannounced basis. The FDA could seek to escalate the NOIR by revoking our biologics license for the products impacted if we have failed to implement a corrective action plan that adequately addresses the deficiencies noted by the NOIR. The FDA could also take further regulatory actions, including seeking a consent decree, recalling or seizing our products, ordering a total or partial shutdown of production, delaying future marketing clearances or approvals, and withdrawing or suspending certain of our current products from the market.
 
An on-going governmental investigation could have a material and adverse effect on our business.
 
The Federal Trade Commission (“FTC”) is investigating whether we violated federal antitrust laws or engaged in unfair methods of competition, through three acquisitions made in the period from 1996 through 1999 or by restricting price competition. The FTC could decide to commence administrative and possibly federal court proceedings for purposes of determining whether there has been a violation and might seek to impose a variety of remedies for any violation including injunctive relief, divestiture of assets and/or disgorgement of profits. The imposition of any of these remedies could have a materially adverse impact on our business, financial condition and results of operations. In addition, we may incur significant expenses, including attorneys’ fees, in responding to issues raised in this matter.
 
A catastrophic event at our Norcross, Georgia facility would prevent us from producing many of our reagent products.
 
Substantially all our reagent products are produced in our Norcross facility. While we have reliable supplies of most raw materials, our reagent production is highly dependent on the uninterrupted and efficient operation of the Norcross facility, and we currently have no plans to develop a third-party reagent manufacturing capability as an alternative source of supply. Therefore, if a catastrophic event occurred at the Norcross facility, such as a fire or tornado, many of those products could not be produced until the manufacturing portion of the facility was restored and cleared by the FDA. We maintain a disaster plan to minimize the effects of such a catastrophe, and we have obtained insurance to protect against certain business interruption losses. However, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all.
 
Unforeseen product performance problems could prevent us from selling or result in a recall of the affected products.
 
In the event that we experience a product performance problem with either our instruments or our reagents, we may be required to, or may voluntarily recall or suspend selling the products until the problem is resolved. We have from time to time initiated voluntary recalls of our products. Depending on the product as well as the availability of acceptable substitutes, such a product recall or suspension could significantly impact our operating results.
 
Poor product performance could increase operating costs and result in the loss of current or future customers.
 
Instrument performance and reliability is a key factor in satisfying current customers and attracting new customers. Poor performance or unreliability of instruments would not only increase maintenance costs but also could result in losing important current customers and an inability to gain new customers. Therefore, if we are unable to provide effective instrument support and service and minimize instrument down time, our revenues and financial results would be adversely affected.
 
Because we sell our products internationally, we could be adversely affected by fluctuations in foreign currency exchange rates.
 
In the fiscal year ended May 31, 2012, revenue outside the U.S. was approximately 30% of total revenue. As a result, fluctuations in foreign currency exchange rates against the U.S. Dollar could make our products less competitive and affect our sales and earnings levels. An increase in our revenue outside the U.S. would increase this exposure. We have not historically hedged against currency exchange rate fluctuations.
 
 
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Gross margin volatility may negatively impact our profitability.
 
Our gross margin may be volatile from period to period due to various factors, including instrument sales, reagent product mix and manufacturing costs. As we continue to drive automation in the blood bank marketplace, we may experience increased instrument sales. The probable sales mix (in terms of instrument/reagent sales) could make it difficult for us to sustain the overall gross margins we have generated in the past. The higher margins on the reagents used on our instruments may not be enough to offset the lower margins on the instruments themselves. For our reagent products, margins vary depending upon the product with rarer products generating higher margins. Depending upon the sales mix of these products, margins could vary significantly from period to period. Our reagent products are manufactured in-house. Margins for these products could be impacted based upon costs of raw materials and labor as well as overhead and the efficiency of our manufacturing operations from period to period. Margins may also be negatively impacted by increased competition. New market entrants or existing market participants seeking to gain market share may foster a competitive environment of pricing pressures and/or increased marketing and other expenditures that could negatively impact profitability.
 
If customers delay integrating our instruments into their operations, the growth of our business could be negatively impacted.
 
From time to time in the past, some of our customers have experienced significant delays between the purchase of an instrument and the time at which it has been successfully integrated into the customer’s existing operations and is generating reagent revenue at its expected annualized run rate. These delays may be due to a number of factors, including staffing and training issues and difficulties interfacing our instruments with the customer’s computer systems. Because our business operates on a “razor/razor blade” model, such integration delays result in delayed purchases of the reagents used with the instrument. A number of steps have mitigated these integration delays: improved performance of our field service staff, better instrument instructions, increased use of internet-based remote diagnostic tools, and more efficient scheduling of instrument installations. In addition, we have taken steps in the design of our next generation instruments intended to make it easier for our customers to integrate the instruments into existing operations. However, delays of customers successfully integrating instruments into their operations could adversely impact our future revenues, earnings and cash flow.
 
We may not be successful in capitalizing on acquisitions of former distributors or newly established distribution networks outside the U.S.
 
An integral part of our strategy is to place our instruments in additional markets outside North America. To further this strategy, in the past we have either acquired former distribution businesses or have established our own direct distribution organizations. Our ability to grow successfully in overseas markets depends in part on our ability to achieve product acceptance and customer loyalty in these markets. Additionally, our operations in foreign countries present certain challenges and are subject to certain risks not necessarily present in our domestic operations, such as fluctuations in currency exchange rates, shipping delays, changes in applicable laws and regulations and various restrictions on trade. These factors could impact our ability to compete successfully in these markets, which could in turn negatively affect our international expansion goals, and could have a material adverse effect on our operating results.
 
Our financial performance is dependent on the timely and successful introduction of new products and services.
 
Our financial performance depends in part upon our ability to successfully develop and market next generation automated instruments and other products in a rapidly changing technological and economic environment. Our market share and operating results would be adversely affected if we fail to successfully identify new product opportunities and timely develop and introduce new instruments that achieve market acceptance, or if new products or technology are introduced in the market by competitors that could render our instruments or reagents uncompetitive or obsolete. In addition, delays in the introduction of new products due to regulatory, developmental, or other obstacles could negatively impact our revenue and market share, as well as our earnings, including the potential impairment of goodwill related to our molecular immunohematology offering.
 
Global economic conditions may have a material adverse impact on our results.
 
We are a global company with customers around the world. General economic conditions impact our customers, particularly hospitals. For our instruments, reduced capital budgets that result from negative economic conditions, such as a global recession, could result in lower instrument sales, which would negatively impact our future revenue, profitability and cash flow. A shift from capital purchases to rentals, which require no upfront cash outlay, could negatively impact our cash flow in the near term. Additionally, global economic conditions may adversely affect the ability of our customers to access funds to enable them to fund their operating and capital budgets. Budget constraints could slow our progress in driving automation in both our customer base and the blood banking industry as a whole, which could negatively impact our future revenues, profitability and cash flow.
 
We are highly dependent on our senior management team and other key employees, and the loss of one or more of these employees could adversely affect our operations.
 
Our success is dependent upon the efforts of our senior management and staff, including sales, technical and management personnel, many of whom have very specialized industry and technical expertise that is not easily replaced. If key individuals leave us, we could be adversely affected if suitable replacement personnel are not quickly recruited. Our future success depends on our ability to continue to attract, retain and motivate qualified personnel. There is intense competition for medical technologists, and in some markets there is a shortage of qualified personnel in our industry. If we are unable to continue to attract or retain highly qualified personnel, the development, growth and future success of our business could be adversely affected.
 
 
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Supply chain interruptions could negatively impact our operations and financial performance.
 
Supply chain interruptions could negatively impact our operations and financial performance. The supply of any of our manufacturing materials may be interrupted because of poor vendor performance or other events outside our control, which may require us, among other things, to identify alternate vendors and result in lost sales and increased expenses. While such interruption could impact any of our third-party sourced materials, two particular areas of note are our instrument suppliers and our supply sources for rare antibodies or antigen combinations, which are described below.
 
We purchase our instruments from single-source suppliers. If the supply of any of our instruments were interrupted, due to the supplier’s financial problems or otherwise, we believe an alternative supplier could be found but that it would take in the range of 18 months to 24 months to transfer the technology and begin production with a new instrument supplier. The disruption of one of these supply relationships could cause us to incur costs associated with the development of an alternative source. Also, we may be required to obtain FDA clearance of the instrument if it is not built to the same specifications as with the previous supplier. The process of changing an instrument supplier could have an adverse impact on future growth opportunities during the transition period if supplies of instruments on hand were insufficient to satisfy demand.
 
Some of our reagent products are derived from blood having particular or rare combinations of antibodies or antigens, which are found in a limited number of individuals. If we had difficulty in obtaining sufficient quantities of such blood and the supply was interrupted, we would need to establish a viable alternative, which may take both time and expense to either identify and/or develop and could have an adverse impact on our operations and financial position.
 
Distribution chain interruptions could negatively impact our operations and financial performance.
 
Distribution chain interruptions could negatively impact our operations and financial performance. Our international affiliates get almost all of their reagent products from our U.S. manufacturing facilities. If circumstances arose that disrupted our distribution of U.S.-sourced products internationally, we would need to establish an alternate distribution channel, which may take both time and expense to establish and could have an adverse impact on our operations and financial position.
 
We may be unable to adequately protect our proprietary technology.
 
We have a substantial patent portfolio of issued patents or pending patent applications supporting our molecular immunohematology offering. Also one of the original six patents on our proprietary Capture technology is still in force, but it expires in November 2012. Our competitiveness depends in part on our ability to maintain the proprietary nature of our owned and licensed intellectual property. Because the law is constantly changing, and unforeseen facts may arise, there is always a risk that patents may be found to be invalid or unenforceable. Therefore, there is no absolute certainty as to the exact scope of protection associated with any intellectual property. We believe our patents, together with our trade secrets and know-how, will prevent any current or future competitors from successfully copying and distributing our BeadChip and Capture products. However, there can be no assurance that competitors will not develop around the patented aspects of any of our current or proposed products or independently develop technology or know-how that is equivalent to or competitive with our technology and know-how. Any damage to our intellectual property portfolio could result in an adverse effect on our current or proposed products, our revenues and our operations.
 
Protecting our intellectual property rights is costly and time consuming. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel.
 
We may be subject to intellectual property rights infringement claims in the future, which are costly to defend, could require us to pay substantial damages and could limit our ability to use certain technologies in the future.
 
Our commercial success depends, in part, not only on protecting our own intellectual property but on not infringing the patents or proprietary rights of third parties. Were third parties to claim that we infringe on their intellectual property rights, responding to such claims, regardless of their merit, could be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. Our practices, products and technologies, particularly with respect to the field of molecular immunohematology, may not be able to withstand third-party claims, regardless of the merits of such claims.
 
As a result of such potential intellectual property infringement claims, we could be required or otherwise decide it is appropriate to discontinue manufacturing, using, or selling particular products subject to infringement claims or develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible. In addition, to the extent potential claims against us are successful, we may have to pay substantial monetary damages or discontinue certain of our practices, products or technologies that are found to be in violation of another party’s rights. We also may have to seek third-party licenses to continue certain of our existing or planned product lines, thereby incurring substantial costs related to royalty payments for such licenses, which could negatively affect our gross margins. Also, license agreements can be terminated under appropriate circumstances. No assurance can be given that efforts to remediate any infringement would be successful or that licenses could be obtained on acceptable terms or that litigation will not occur.
 
 
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In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay royalties to a third party and we fail to license such technology on acceptable terms and conditions or to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

Risks relating to our industry
 
Government regulation may delay or prevent new product introduction and affect our ability to continue manufacturing and marketing existing products.
 
Our instruments, reagents and other products are subject to regulation by governmental and private agencies in the U.S. and abroad, which regulate the testing, manufacturing, packaging, labeling, distribution and marketing of medical supplies and devices. Certain international regulatory bodies also impose import and tax restrictions, tariff regulations, and duties on imported products. Delays in agency review can significantly delay new product introduction and may result in a product becoming “outdated” or losing its market opportunity before it can be introduced. Also, the FDA and international agencies have the authority to require a recall or modification of products in the event of a defect.
 
FDA clearance or approval generally is required before we can market new instruments or reagents in the U.S. or make significant changes to existing products. The process of obtaining marketing clearances and approvals from regulatory agencies for new products can be time consuming and expensive. There is no assurance that clearances or approvals will be granted or that agency review will not involve delays that would adversely affect our ability to commercialize our products.
 
If any of our products failed to perform in the manner represented during this clearance or approval process, particularly concerning safety issues, one or more of these agencies could require us to cease manufacturing and selling that product, or even recall previously-placed products, and to resubmit the product for clearance or approval before we could sell it again. Depending on the product, and the availability of acceptable substitutes, such an agency action could result in significantly reduced revenues and earnings for an indefinite period. See “—Risks related to the company—FDA administrative action could have a material and adverse effect on our business.”
 
Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot predict what impact, if any, such changes might have on our business. In addition, there can be no assurance that regulation of our products will not become more restrictive in the future and that any such development would not have a material adverse effect on our business.
 
The industry and market segment in which we operate are highly competitive, and we may not be able to compete effectively with larger companies with greater financial resources than we have.
 
Our industry and the markets we operate in are highly competitive. Some of our competitors have greater financial resources than we do, making them better equipped to fund research and development, manufacturing and marketing efforts, or license technologies and intellectual property from third parties. Moreover, competitive and regulatory conditions in many markets in which we operate restrict our ability to fully recoup our costs in those markets. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Although we believe that we have certain technological and other advantages over our competitors, maintaining these advantages will require us to continue to invest in research and development, sales and marketing and customer service and support. We cannot assure you that we will have sufficient resources to continue to make such investments at levels that our larger competitors could make or that we will be successful in maintaining such advantages.
 
Increased competition in the U.S. could negatively impact our revenues and profitability.
 
We could face increased competition in the U.S. market, which historically has had a limited number of market participants. For fiscal 2012, approximately 70% of our revenues were generated in the U.S., and our U.S. operations have higher gross margins than our operations outside the U.S. Additional competition in the U.S. could negatively impact our revenues and/or our profitability.
 
Changes in government policy may have a material adverse effect on our business.
 
Changes in government policy could have a significant impact on our business by increasing the cost of doing business, affecting our ability to sell our products and negatively impacting our profitability. Such changes could include modifications to existing legislation, such as U.S. tax policy, or entirely new legislation, such as the Patient Protection and Affordable Care Act that became law in March 2010.  The act imposes a new 2.3% excise tax on medical device makers beginning in 2013, which could have a material negative impact on our results of operations and our cash flows. Other elements of this legislation could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business.
 
 
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We may be exposed to product liability claims resulting from the use of products we sell and distribute.
 
Although product liability claims in our industry are infrequent, the expansion of our business in an increasingly litigious business environment may expose us to product liability claims related to the products we sell. We maintain insurance that includes product liability coverage, and we believe our insurance coverage is adequate for our business. However, there can be no assurance that insurance coverage for these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of coverage will continue to be available at a reasonable cost. A partially or completely uninsured successful claim against us could have a material adverse effect on us.
 
Risks related to our indebtedness
 
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.
 
We have a significant amount of indebtedness. To complete the acquisition of the Company, we entered into new debt financing consisting of (i) $715.0 million of senior secured credit facilities (the “Senior Credit Facilities”) comprised of: (a) a $100.0 million, 5-year revolving credit facility (the “Revolving Facility”), which was undrawn at closing and (b) a $615.0 million, 7-year term loan credit facility (the “Term Loan Facility”), and (ii) $400.0 million of Senior Notes due 2019 (the “Notes”). As of May 31, 2012, our total debt was $1,012.0 million and we had unused commitments of $100.0 million under our Senior Credit Facilities, which amount could increase by $150.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions.
 
Subject to the limits contained in the credit agreement governing our Senior Credit Facilities and the indenture that governs the Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:
 
making it more difficult for us to satisfy our obligations with respect to our debt;
 
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
 
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
 
increasing our vulnerability to general adverse economic and industry conditions;
 
exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Credit Facilities, are at variable rates of interest;
 
limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
 
placing us at a disadvantage compared to other, less leveraged competitors;
 
increasing our cost of borrowing; and
 
preventing us from raising the funds necessary to repurchase all the Notes tendered to us upon the occurrence of certain changes of control, which would constitute a default under the indenture governing the Notes.
 
In addition, the indenture that governs the Notes and the credit agreement governing our Senior Credit Facilities contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
 
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
 
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
 
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing our Senior Credit Facilities and the indenture governing the Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.
 
 
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 In addition, we conduct a substantial portion of our operations through our subsidiaries, all of which except our single domestic subsidiary, BioArray Solutions Ltd., currently are foreign subsidiaries and are not guarantors of our debt. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our non-guarantor subsidiaries do not have any obligation to pay amounts due on our debt or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture governing the Notes and the credit agreement governing our Senior Credit Facilities limit the ability of our subsidiaries to incur contractual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
 
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under our indebtedness. If we cannot make scheduled payments on our debt, we will be in default and holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under our Senior Credit Facilities could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.
 
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.
 
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indenture governing the Notes and the credit agreement governing our Senior Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of May 31, 2012, our Senior Credit Facilities had unused commitments of $100.0 million, which amount could increase by $150.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions. All of those borrowings would be secured indebtedness. If new debt is added to our current debt levels, the related risks that we and the guarantors now face could intensify.
 
The terms of the credit agreement governing our Senior Credit Facilities and the indenture governing the Notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
 
The indenture governing the Notes and the credit agreement governing our Senior Credit Facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
 
incur additional indebtedness;
 
pay dividends or make other distributions or repurchase or redeem our capital stock;
 
prepay, redeem or repurchase certain debt;
 
make loans and investments;
 
sell assets;
 
incur liens;
 
enter into transactions with affiliates;
 
alter the businesses we conduct;
 
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
 
consolidate, merge or sell all or substantially all of our assets.
 
In addition, the restrictive covenants in the credit agreement governing our Senior Credit Facilities require us to maintain a maximum senior secured net leverage ratio to be tested on the last day of each fiscal quarter. Our ability to meet this financial covenant can be affected by events beyond our control.
 
 
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A breach of the covenants under the indenture governing the Notes or under the credit agreement governing our Senior Credit Facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our Senior Credit Facilities would permit the lenders under our Senior Credit Facilities to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Senior Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
 
limited in how we conduct our business;
 
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
 
unable to compete effectively or to take advantage of new business opportunities.
 
These restrictions may affect our ability to grow in accordance with our strategy.
 
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
 
Borrowings under our Senior Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming all revolving loans are fully drawn, each one-eighth point change in the LIBOR interest rate above 1.5% would result in a $0.9 million change in annual interest expense on our indebtedness under our Senior Credit Facilities. We have entered into, and may continue to enter into, interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
 
 
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Item 1B. — Unresolved Staff Comments.

Not applicable.
 
Item 2. — Properties.

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

Our owned properties are not encumbered as security for any loan. We believe that our current facilities are adequate for our current and anticipated needs and do not foresee any difficulty in renewing leases that expire in the near term.
 
Item 3. — Legal Proceedings.
 
In October 2007, we reported that the Federal Trade Commission (“FTC”) was investigating whether we violated federal antitrust laws or engaged in unfair methods of competition through three acquisitions made in the period from 1996 through 1999, and whether we or others engaged in unfair methods of competition by restricting price competition. We have provided certain documents and information to the FTC concerning those acquisitions and concerning our product pricing activities since then.  As was previously the case, at this time we cannot reasonably assess the timing or outcome of the investigation or its effect, if any, on our business.
 
Beginning in May 2009, a series of class action lawsuits was filed against the Company, Ortho-Clinical Diagnostics, Inc. and Johnson & Johnson Health Care Systems, Inc. alleging that the defendants conspired to fix prices at which blood reagents are sold, asserting claims under Section 1 of the Sherman Act, and seeking declaratory and injunctive relief, treble damages, costs, and attorneys’ fees.  These actions are identified in Exhibit 99.1 hereto.  All of these actions make substantially the same allegations, and were consolidated in the U.S. District Court for the Eastern District of Pennsylvania.  In January 2012, we entered into a settlement agreement with the plaintiff class representatives in these actions pursuant to which we paid $22.0 million into a qualified settlement trust fund in April 2012.  Under the settlement agreement, all potential class members have agreed to release the Company from the direct purchaser claims related to the products and acts enumerated in the lawsuits, and we are to be dismissed from the case with prejudice.  After a hearing in June 2012, the Court indicated that in September 2012, after a statutory waiting period, it would enter an order granting final approval of the settlement.  The $22.0 million is reflected in “certain litigation expenses” on our consolidated statements of operations.
 
Private securities litigation in the U.S. District Court of North Georgia against us and certain of our current and former directors and officers asserts federal securities fraud claims on behalf of a putative class of purchasers of our common stock between October 19, 2005 and June 25, 2009.  The case alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, by failing to disclose that we had violated the antitrust laws, and challenges the sufficiency of our disclosures about the results of FDA inspections and our quality control efforts. In June 2011, the Court dismissed the complaint and closed the case.  In September 2011 plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. We intend to defend the case vigorously if it is reinstated. At this time, we cannot reasonably assess the timing or outcome of this litigation or its effect, if any, on our business.
 
A series of class action lawsuits were filed in July 2011 in connection with the Acquisition, including two lawsuits filed in the Superior Court of Gwinnett County, Georgia, captioned as Babette C. Schorsch v. Immucor, Inc., et al., Civil Action No. 11A0776-1, and Gilbert Rosenthal v. Immucor, Inc., et al., Civil Action No. 11A079463.  These actions were brought on behalf of our public shareholders against us, our individual directors, the Sponsor and certain of its affiliates. The actions asserted claims for breaches of fiduciary duties against our board of directors in connection with the Acquisition, and for aiding and abetting the purported breaches of fiduciary duties by the Sponsor, and included allegations that our Schedule 14D-9 filed with respect to the Acquisition failed to provide certain allegedly material information. The plaintiffs sought, among other things, preliminary and permanent relief, including injunctive relief enjoining the consummation of the Acquisition, rescission of the Acquisition and costs, expenses and disbursements of the action. The Schorsch case was dismissed with prejudice in March 2012 and the Rosenthal case was dismissed without prejudice in April 2012.

Other than as set forth above, we are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.  However, from time to time, we may become a party to certain legal proceedings in the ordinary course of business.
 
 
17

 
 
PART II
 
Item 5. — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Prior to the Acquisition, our common stock was traded on The Nasdaq Stock Market under the symbol BLUD.  Following the Acquisition, our common stock is privately held.  Therefore there is no established trading market.

As of July 13, 2012, IVD Intermediate Holdings B, Inc. (the “Parent”) was the only owner of record of our common stock.  The Parent is a wholly owned indirect subsidiary of IVD Holdings, Inc. (“Holdings”) which was formed by investment funds affiliated with the Sponsor.

Dividend Policy

With the exception of certain limited circumstances, payment of dividends is restricted under our Senior Credit Facilities and the indenture governing our Notes.  We have never declared cash dividends with respect to our common stock and do not expect to do so in the future. We presently intend to continue to reinvest our earnings in the business.
 
 
18

 
 
Item 6. – Selected Financial Data.
(All amounts are in thousands)
 
   
Successor
   
Predecessor
 
    August 20, 2011
through
   
June 1, 2011
through
   
For the Year Ended May 31,
 
   
May 31, 2012
(1)
   
August 19, 2011
(1)
   
2011
(1)
   
2010
(1)
   
2009
(1)
   
2008
(1)
 
Statement of Operations Data:
                                   
                                                 
Net sales
  $ 261,814     $ 74,910     $ 333,091     $ 329,073     $ 300,547     $ 261,199  
Cost of sales (exclusive of amortization included in operating expenses below)
    105,698       22,955       96,175       95,349       84,536       75,710  
Gross profit
    156,116       51,955       236,916       233,724       216,011       185,489  
                                                 
Operating expenses:
                                               
Research and development
    13,929       4,895       15,900       15,437       10,698       6,454  
Selling, general and administrative
    85,562       52,637       90,686       88,667       84,616       70,289  
Restructuring expenses
    -       -       -       -       -       646  
Amortization expense
    39,224       931       4,333       4,278       3,739       357  
Certain litigation expenses
    22,000       -       -       -       -       -  
Total operating expenses
    160,715       58,463       110,919       108,382       99,053       77,746  
                                                 
(Loss) Income from operations
    (4,599 )     (6,508 )     125,997       125,342       116,958       107,743  
                                                 
Non-operating income (expense):
                                               
Interest income
    7       142       706       454       1,957       4,263  
Interest expense
    (77,048 )     -       (70 )     (33 )     (250 )     (371 )
Other (expense) income – net
    447       2,673       3,997       (551 )     (1,684 )     33  
Total non-operating income (expense)
    (76,594 )     2,815       4,633       (130 )     23       3,925  
                                                 
(Loss) Income before income taxes
    (81,193 )     (3,693 )     130,630       125,212       116,981       111,668  
(Benefit) Provision for Income taxes
    (31,546 )     2,681       41,303       42,629       40,798       40,214  
Net (loss) income
  $ (49,647 )   $ (6,374 )   $ 89,327     $ 82,583     $ 76,183     $ 71,454  
 
   
Successor
   
Predecessor
 
    August 20, 2011
through
     June 1, 2011
through
   
For the Year Ended May 31,
 
   
May 31, 2012
   
August 19, 2011
   
2011
   
2010
   
2009
   
2008
 
Balance Sheet Data:
                                   
Working capital
  $ 71,295     $ 381,259     $ 378,979     $ 270,939     $ 192,562     $ 230,556  
Total assets
    1,949,153       652,395       633,127       519,834       451,340       364,950  
Long-term obligations, less current portion
    986,361       -       -       -       -       -  
(Accumulated deficit) Retained earnings
    (49,865 )     492,778       499,152       409,825       327,242       251,059  
Shareholders’ equity
    637,378       576,646       568,872       456,123       384,578       307,696  
 
Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview
 
Our Business
 
We develop, manufacture, and sell a complete line of reagents and automated systems used primarily by hospitals, donor centers and reference laboratories for testing to detect and identify certain properties of human blood for the purpose of blood transfusion. 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.
 
 
19

 

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 blood banking industry, including the marketing of reagents and instruments used to detect and identify blood properties. Additionally, we are subject to government legislation that governs the delivery of healthcare.  For example, in the U.S. the Patient Protection and Affordable Care Act was signed into law in March 2010 and contains elements that could meaningfully change the way healthcare is developed, delivered and paid for in the U.S.  Included in the legislation is a 2.3% excise tax on the sale of medical devices beginning in 2013.

In the markets of Western Europe, the testing of donor and patient blood for the purpose of transfusion is primarily automated. However, in the U.S., we estimate approximately 60% of laboratories perform this testing manually today. These laboratories are primarily in the small- to medium-sized hospital segment.

Our strategy is to drive automation in the blood bank with the goal of improving the blood bank’s operations as well as patient safety. We continually innovate to ensure our automation offerings are competitive. We offer two fully automated instruments for serology testing – NEO® and Echo® – to meet the different needs of our customers depending upon the volume in their laboratory and the complexity of the testing required. All of our serology instrumentation uses Capture® technology, our proprietary reagents, as well as traditional reagents to perform automated testing.

NEO, our fourth generation automated instrument is targeted at large hospitals, donor centers and reference laboratories and replaces our previous high volume serology instrument, Galileo.

Echo, our third generation automated instrument, is a compact bench top, fully-automated walk-away serology instrument that meets the needs of the small- to medium-sized hospital market as well as integrated delivery networks that want to standardize the operations of their laboratories.

With a focus on improving patient outcomes, Immucor is developing an innovative product offering in what we believe is the future of transfusion medicine - molecular immunohematology. In many countries, blood pre-transfusion testing is limited to the prevention of transfusion reactions and not for the prevention of alloimmunization, which occurs when antigens foreign to the patient are inadvertently introduced into the patient’s blood system through transfusions. If alloimmunization occurs, the patient develops new antibodies in response to the foreign antigens, thereby complicating future transfusions. By using multiplex, cost-effective molecular testing, our molecular technology allows testing to prevent alloimmunization for better patient care. Our BioArray Solutions business is pioneering the development of DNA typing of blood for transfusion. Our current offering includes our Human Erythrocyte Antigen (“HEA”) product, and our Human Platelet Antigen (“HPA”) product as well as our semi-automated molecular immunohematology system, the Array Imaging System and BASIS™ database. These offerings are CE (“Conformité Européenne”) Marked, denoting regulatory clearance in the European Union, and are available on a Research Use Only basis in the U.S.
 
Business Highlights

The following discusses recent material developments in our business.

Acquisition of the Company – On August 19, 2011, the Company was acquired through a merger transaction with IVD Acquisition Corporation (“Merger Sub”), a wholly owned subsidiary of IVD Intermediate Holdings B, Inc. (the “Parent”).  The Parent is a wholly owned indirect subsidiary of IVD Holdings, Inc. (“Holdings”), which was formed by investment funds affiliated with the Sponsor. The acquisition was accomplished through a merger of Merger Sub with and into the Company, with the Company being the surviving company (the “Acquisition”). As a result of the Acquisition, the Company became a wholly owned subsidiary of the Parent. Prior to August 19, 2011, the Company operated as a public company with common stock traded on the NASDAQ Stock Market.

Lower Industry Demand – In the U.S. market, we believe there has been lower demand for blood during our last three fiscal years because of the macroeconomic environment. Lower blood demand negatively impacts our reagent revenue as fewer blood transfusions result in lower testing volume.  Blood demand continued to decline in fiscal 2012 although at a much lower rate than the prior two fiscal years. We believe we are seeing signs of an industry slowdown in Europe due to tough economic conditions.
 
Results of Operations
 
In Management’s Discussion and Analysis, we have presented the results of operations and cash flows separately for the period from June 1, 2011 to August 19, 2011 (the Predecessor fiscal 2012 period), the period from August 20, 2011 to May 31, 2012  (the Successor fiscal 2012 period), and the twelve months ended May 31, 2011 (the Predecessor fiscal 2011 period). We have prepared our discussion and analysis of the results of operations and cash flows by comparing the combined results of the Predecessor and Successor fiscal 2012 periods (twelve months ended May 31, 2012) with those of the Predecessor twelve months ended May 31, 2011. We believe this approach provides the most meaningful basis for the analysis and discussion of our results. Combined changes in operating results (i) have not been prepared on a pro forma basis as if the Acquisition occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the Acquisition, and (iii) may not be predictive of future results of operations.
 
 
20

 

Comparison of Years Ended May 31, 2012 and May 31, 2011
 
      Successor         Predecessor          
     
August 20, 2011
 
       
June 1, 2011
 
     
For the Year
 
       
Change
 
     
May 31, 2012
       
August 19, 2011
     
May 31, 2011
      Amount          
      (in thousands)           (in thousands)                    
Net sales
  $ 261,814       $ 74,910     $ 333,091     $ 3,633       1 %
Gross profit (1)
    156,116         51,955       236,916       (28,845 )     -12 %
Gross profit percentage
    59.6 %       69.4 %     71.1 %                
Operating expenses
    160,715         58,463       110,919       108,259       98 %
(Loss) Income from operations
    (4,599 )       (6,508 )     125,997       (137,104 )     -109 %
Non-operating income (expense)
    (76,594 )       2,815       4,633       (78,412 )        
(Loss) Income before income tax
    (81,193 )       (3,693 )     130,630       (215,516 )     -165 %
(Benefit) Provision for income tax
    (31,546 )       2,681       41,303       (70,168 )     -170 %
Net (loss) income
  $ (49,647 )     $ (6,374 )   $ 89,327     $ (145,348 )     -163 %
 
(1)
The determination of gross margin is exclusive of amortization expense which is presented separately as an operating expense in the income statement.
 
Revenue was $261.8 million in the Successor fiscal 2012 period and $74.9 million in Predecessor fiscal 2012 period compared to $333.1 million in the Predecessor fiscal 2011 period. The overall increase of $3.6 million was primarily due to growth in foreign business offset by weaker industry demand in the U.S. market. Fiscal 2012 revenue also benefited from favorable fluctuations in foreign currency exchange rates of $1.2 million.
 
Consolidated gross margin was 59.6% in the Successor fiscal 2012 period and 69.4% in Predecessor fiscal 2012 period yielding a combined consolidated gross margin of 61.8% for fiscal 2012.  This was a decrease from the 71.1% achieved in the Predecessor fiscal 2011 period. Gross margin in the Successor fiscal 2012 period was negatively impacted by the amortization of the fair value adjustment to inventory and gross margin in the Predecessor fiscal 2012 period was negatively impacted by the acceleration of share-based compensation expense both resulting from the Acquisition of the Company. The acceleration of share-based compensation expense, transaction costs, and amortization of intangibles which all relate to the Acquisition, as well as the settlement of the antitrust class action lawsuit drove the 98% increase in operating expenses and those expenses along with interest expense related to the debt incurred as a result of the Acquisition drove the 163% decrease in net income.
 
Net sales
 
   
Successor
   
Predecessor
   
 
 
   
August 20, 2011
through
   
June 1, 2011
through
   
For the Year
Ended
   
Change
 
   
May 31, 2012
   
August 19, 2011
   
May 31, 2011
   
Amount
   
%
 
   
(in thousands)
   
(in thousands)
             
Traditional reagents
  $ 151,644     $ 42,936     $ 199,826     $ (5,246 )     -3 %
Capture products
    69,174       21,239       82,366       8,047       10 %
Instruments
    36,228       9,457       45,112       573       1 %
Molecular immunohematology
    4,768       1,278       5,787       259       4 %
    $ 261,814     $ 74,910     $ 333,091     $ 3,633       1 %
 
Traditional reagent revenue was $151.6 million in the Successor fiscal 2012 period and $42.9 million in the Predecessor fiscal 2012 period compared to $199.8 million in the Predecessor fiscal 2011 period. The overall decrease was $5.2 million, or 3%. While traditional reagent revenue benefited by $1.0 million from fluctuations in foreign currency exchange rates, lower sales revenue from weaker industry demand in the U.S. market resulted in an overall decrease in traditional reagent revenue. Additionally, traditional reagent revenue was negatively impacted as we convert current manual customers to automation by placing an instrument. Instruments use approximately 70% Capture reagents and 30% traditional reagents so placing an instrument results in an increase in Capture reagent revenue and a decrease in traditional reagent revenue when the instrument is placed with a current customer. With our automation strategy, we expect this trend to continue.
 
 
21

 

Capture reagent revenue was $69.2 million in the Successor fiscal 2012 period and $21.2 million in the Predecessor fiscal 2012 period compared to $82.4 million in the Predecessor fiscal 2011 period. The overall increase of $8.0 million, or 10%, was primarily driven by incremental revenue from instrument placements as well as more ship cycles during the current fiscal year. Sales of Capture reagents are largely dependent on the number of installed instruments requiring the use of our proprietary Capture technology. As we continue to place more instruments in the market, we expect revenue from Capture reagents to continue to increase as a percent of our total revenue.

Instrument revenue was $36.2 million in the Successor fiscal 2012 period and $9.5 million in the Predecessor fiscal 2012 period compared to $45.1 million in the Predecessor fiscal 2011 period.  The primary driver of the $0.6 million increase was revenue generated from increased instrument placements offset by a reduction in deferred revenue recognized.
 
Molecular immunohematology revenue was $4.8 million in the Successor fiscal 2012 period and $1.3 million in the Predecessor fiscal 2012 period compared to $5.8 million in the Predecessor fiscal 2011 period, which is an increase of $0.3 million, or 4%.
 
Gross margin
 
   
Successor
     
Predecessor
       
   
August 20, 2011
through
May 31, 2012
     
June 1, 2011
through
August 19, 2011
   
For the Year
Ended
May 31, 2011
   
Change
 
   
Amount
   
Margin %
     
Amount
   
Margin %
   
Amount
   
Margin %
   
Amount
 
   
(in thousands)
           
(in thousands)
         
(in thousands)
         
(in thousands)
 
Traditional reagents (1)
  $ 94,610       62.4 %     $ 32,481       75.6 %   $ 160,630       80.4 %   $ (33,539 )
Capture products (1)
    53,978       78.0 %       16,887       79.5 %     65,305       79.3 %     5,560  
Instruments (1)
    6,544       18.1 %       2,053       21.7 %     8,541       18.9 %     56  
Molecular immunohematology (1)
    984       20.6 %       534       41.8 %     2,440       42.2 %     (922 )
    $ 156,116       59.6 %     $ 51,955       69.4 %   $ 236,916       71.1 %   $ (28,845 )
 
 
(1)
The determination of gross margin is exclusive of amortization expense which is presented separately as an operating expense in the income statement.
 
Gross margin on traditional reagents was 62.4% in the Successor fiscal 2012 period and 75.6% in the Predecessor fiscal 2012 period.  The combined fiscal 2012 period margin of 65.3% was lower than the 80.4% in the Predecessor fiscal 2011 period.  The decrease in gross margin in the Successor fiscal 2012 period was primarily driven by the amortization of the fair value of inventory of $24.4 million and the decrease in gross margin in the Predecessor fiscal 2012 period was primarily driven by expenses related to accelerated share-based compensation costs of $2.0 million, both arising from the Acquisition of the Company. Lower revenue also contributed to the year-over-year margin decline.

Capture reagents gross margin was 78.0% in the Successor fiscal 2012 period and 79.5% in the Predecessor fiscal 2012 period.  Capture margin for the combined fiscal 2012 period of 78.4% was lower than the 79.3% achieved in the Predecessor fiscal 2011 period.  The margin decline was due to an increase in reagent rentals and the related increase in the allocation of revenue from Capture reagents to instruments related to reagent rentals. In a reagent rental, the reagent revenue stream is used to fund all components of the customer’s acquisition, including the reagents themselves as well as the instrument and instrument-related items, such as training. Reagent gross margin is negatively impacted as a portion of reagent revenue is allocated to instruments over the life of the contract but none of the costs associated with the reagents are allocated.

Gross margin on instruments was 18.1% in the Successor fiscal 2012 period and 21.7% in the Predecessor fiscal 2012 period.  The combined fiscal 2012 period margin of 18.8% is generally in line with the 18.9% in the Predecessor fiscal 2011 period with increased instrument placements being offset by the purchase accounting adjustment related to deferred revenue.

We expect molecular immunohematology gross margin to be volatile until production volumes are higher.
 
 
22

 
 
Operating expenses
 
   
Successor
   
Predecessor
   
 
 
   
August 20, 2011
through
   
June 1, 2011
through
   
For the Year
Ended
   
Change
 
   
May 31, 2012
   
August 19, 2011
   
May 31, 2011
   
Amount
   
%
 
   
(in thousands)
             
Research and development
  $ 13,929     $ 4,895     $ 15,900     $ 2,924       18 %
Selling and marketing
    32,913       10,510       36,431       6,992       19 %
Distribution
    14,333       3,952       16,508       1,777       11 %
General and administrative
    38,316       38,175       37,747       38,744       103 %
Amortization expense
    39,224       931       4,333       35,822       827 %
Certain litigation expenses
    22,000       -       -       22,000       100 %
Total operating expenses
  $ 160,715     $ 58,463     $ 110,919     $ 108,259       98 %
 
Research and development expenses were $13.9 million in the Successor fiscal 2012 period and $4.9 million in the Predecessor fiscal 2012 period compared to $15.9 million in the Predecessor fiscal 2011 period. The overall increase of $2.9 million, or 18%, was primarily due to $1.5 million of increased spend on projects in the Successor fiscal 2012 period.  Additionally, $0.9 million of compensation expense in the Predecessor fiscal 2012 period related to the vesting of all share-based awards in conjunction with the Acquisition that is non-recurring.

Selling and marketing expenses were $32.9 million in the Successor fiscal 2012 period and $10.5 million in the Predecessor fiscal 2012 period compared to $36.4 million in the Predecessor fiscal 2011 period. The overall increase of $7.0 million, or 19%, was primarily due to an increase in other compensation-related expenses.  Additionally, $1.3 million of compensation expense was recorded in the Predecessor fiscal 2012 period related to the vesting of all share-based awards in conjunction with the Acquisition that is non-recurring.

Distribution expenses were $14.3 million in the Successor fiscal 2012 period and $4.0 million in the Predecessor fiscal 2012 period compared to $16.5 million in the Predecessor fiscal 2011 period. The overall increase of $1.8 million, 11%, was due to increases in warehouse expenses and freight costs.  Additionally, $0.2 million of compensation expense was recorded in the Predecessor fiscal 2012 period related to the vesting of all share-based awards in conjunction with the Acquisition.

General and administrative expenses were $38.3 million in the Successor fiscal 2012 period and $38.2 million in the Predecessor fiscal 2012 period compared to $37.7 million in the Predecessor fiscal 2011 period. The overall increase of $38.7 million was primarily due to $18.9 million of transaction costs in the Predecessor fiscal 2012 period related to the Acquisition.  Additionally, $10.2 million of compensation expense was recognized in the Predecessor fiscal 2012 period related to the vesting of all share-based awards in conjunction with the Acquisition that is non-recurring.  During the Successor fiscal 2012 period $4.1 million of severance was expensed as well as $3.2 million of monitoring fees and expenses pursuant to a management services agreement with the Sponsor.

Amortization expense was $39.2 million in the Successor fiscal 2012 period and $0.9 million in the Predecessor fiscal 2012 period compared to $4.3 million in the Predecessor fiscal 2011 period. The overall increase for fiscal 2012 was $35.8 million.  The increase in the Successor 2012 period was related to amortizing intangible assets in connection with the Acquisition.

Certain litigation expenses of $22.0 million recorded in the Successor fiscal 2012 period relate to the settlement of the antitrust class action lawsuit (See Part II, Item 1 – Legal Proceedings for further discussion).

Non-operating income (expense)
 
   
Successor
     
Predecessor
       
   
August 20, 2011
through
     
June 1, 2011
through
   
For the Year
Ended
   
Change
 
   
May 31, 2012
     
August 19, 2011
   
May 31, 2011
   
Amount
 
   
(in thousands)
 
Non-operating income (expense)
  $ (76,594 )     $ 2,815     $ 4,633     $ (78,412 )
 
Non-operating income (expense) was expense of $76.6 million in the Successor fiscal 2012 period and income of $2.8 million in the Predecessor fiscal 2012 period compared to $4.6 million of income in the Predecessor fiscal 2011 period.  Realized foreign exchange gains relating to the settlement of intercompany balances accounted for $2.9 million of the income in the Predecessor fiscal 2012 period.  During the Successor fiscal 2012 period non-operating income (expense) included interest expense of $77.0 million relating to the Company’s long-term debt.
 
 
23

 
 
Income taxes
 
The effective tax rate for the Successor fiscal 2012 period, the Predecessor fiscal 2012 period, and the Predecessor fiscal 2011 period was 38.9%, (72.6)% and 31.6%, respectively. The difference between the federal statutory rate of 35% and the effective tax rate for the Successor fiscal 2012 period primarily relates to foreign tax credits and the disallowance of the domestic production deduction due to income tax limitations. The difference between the federal statutory rate and the effective tax rate for the Predecessor fiscal 2012 period primarily relates to the income taxes associated with the repatriation of foreign earnings in excess of foreign tax credits earned, the non-deductibility of certain transaction costs, and state income taxes.
 
Comparison of Predecessor Years Ended May 31, 2011 and May 31, 2010

   
For the Year Ended May 31,
   
Change
 
   
2011
   
2010
   
Amount
   
%
 
   
(in thousands)
             
Net sales
  $ 333,091     $ 329,073     $ 4,018       1 %
Gross profit (1)
    236,916       233,724       3,192       1 %
Gross profit percentage
    71.1 %     71.0 %             0 %
Operating expenses
    110,919       108,382       2,537       2 %
Income from operations
    125,997       125,342       655       1 %
Non-operating income (expense)
    4,633       (130 )     4,763    
NM
 
Income before income tax
    130,630       125,212       5,418       4 %
Provision for income tax
    41,303       42,629       (1,326 )     -3 %
Net income
  $ 89,327     $ 82,583     $ 6,744       8 %
 
 
(1) The determination of gross margin is exclusive of amortization expense which is presented separately as an operating expense in the income statement.
 
Revenue increased by approximately $4.0 million, or approximately 1%, during the year ended May 31, 2011 compared with the prior year. While revenue increased year-over-year, revenue growth was negatively impacted by lower sales volume of reagents due to weaker industry demand in the U.S. market as well as by a decreased number of ship cycles when compared with the prior year. While ship cycles are typically consistent year-to-year, the timing of ship cycles is determined by the calendar, which can result in a different number of ship cycles between years.  Revenue was negatively impacted by approximately $0.5 million in fiscal 2011 from foreign currency fluctuations.  

For fiscal 2011, our consolidated gross margin was generally in line compared with the prior year. Gross margins in the prior year included costs related to our Quality System improvement efforts in response to the June 2010 FDA administrative action of approximately $5.9 million, primarily for external consultants. There were no material external costs related to the Quality System efforts in the current year, which benefited margins. Gross margins in the current year were negatively impacted by the mix of instrument-related revenue, more instruments being expensed in the current year compared with the prior year as well as by manufacturing variances related primarily to fewer ship cycles. Operating expenses increased by 2% when compared by the prior year, primarily due to increased distribution expenses and increased general and administrative expenses. Non-operating income increased by $4.8 million when compared with the prior year, primarily due to a return of funds escrowed in connection with prior acquisitions. Net income increased by approximately 8% in fiscal 2011 when compared with the prior year.
 
 
24

 
 
Net sales

   
For the Year Ended May 31,
   
Change
 
   
2011
   
2010
   
Amount
   
%
 
   
(in thousands)
             
Traditional reagents
  $ 199,826     $ 207,710     $ (7,884 )     -4 %
Capture products
    82,366       77,003       5,363       7 %
Instruments
    45,112       39,680       5,432       14 %
Molecular immunohematology
    5,787       4,680       1,107       24 %
    $ 333,091     $ 329,073     $ 4,018       1 %
 
Traditional reagent revenue decreased by approximately $7.9 million, or approximately 4%, in fiscal 2011 compared with fiscal 2010 primarily due to lower sales volume because of weaker industry demand in the U.S. market and fewer ship cycles in the current year compared with the prior year. Traditional reagent revenue is negatively impacted as we place more instruments in the market. Instruments use approximately 70% Capture reagents and 30% traditional reagents so placing an instrument results in an increase in Capture reagent revenue and a decrease in traditional reagent revenue when the instrument is placed with a current customer. With our automation strategy, we expect this trend to continue. Additionally, we revised our go-to-market strategy at the beginning of the third quarter of fiscal 2011 to better address the economic downturn as well as the competitive pressures that we have historically experienced in our traditional reagent business.
 
Capture revenue increased by approximately $5.4 million, or approximately 7%, in fiscal 2011 when compared with the prior year primarily from incremental revenue from instrument placements. Capture’s year-over-year revenue growth rate was negatively impacted by weaker industry demand in the U.S. market. Sales of Capture reagents are largely dependent on the number of installed instruments requiring the use of our proprietary Capture technology. As we continue to place more instruments in the market, we expect revenue from Capture reagents to continue to increase as a percent of our total revenue.

Revenue from instruments increased by approximately $5.4 million, or approximately 14% in fiscal 2011 compared with the prior year due to increased instrument placements. Instrument revenue is typically recognized over the life of either the instrument rental period or the underlying reagent contract period dependent upon how the instrument was acquired. Historically, when instruments are sold (versus rented) revenue is deferred and recognized over the life of the underlying reagent contract period when the contract includes a price guarantee (which our contracts typically do). Since the launch of the Echo in the first quarter of fiscal 2008, the proportion of instruments rented (versus sold) has increased. In fiscal 2011, approximately $15.2 million of deferred revenue was recognized from previous instrument sales compared with $16.8 million recognized in fiscal 2010. In fiscal 2011, we deferred approximately $11.6 million of instrument and associated service revenues related to instrument sales compared with $11.6 million in the prior year. As of May 31, 2011 and 2010, deferred instrument and service revenues on the balance sheet totaled approximately $13.6 million and $16.7 million, respectively. The decrease in the deferred revenue balance is due to the increase in rentals as an acquisition option.

Molecular immunohematology revenue increased by approximately $1.1 million in fiscal 2011 compared with fiscal 2010 due to new customers.
 
Gross margin

   
For the Year Ended May 31,
       
   
2011
   
2010
   
Change
 
   
Amount
   
Margin %
   
Amount
   
Margin %
   
Amount
 
   
(in thousands)
         
(in thousands)
             
Traditional reagents (1)
  $ 160,630       80.4 %   $ 161,557       77.8 %   $ (927 )
Capture products (1)
    65,305       79.3 %     62,732       81.5 %     2,573  
Instruments (1)
    8,541       18.9 %     8,813       22.2 %     (272 )
Molecular immunohematology (1)
    2,440       42.2 %     622       13.3 %     1,818  
    $ 236,916       71.1 %   $ 233,724       71.0 %   $ 3,192  
 
(1)  The determination of gross margin is exclusive of amortization expense which is presented separately as an operating expense in the income statement.
 
 
25

 
 
Gross margins on traditional reagents increased to 80.4% in fiscal 2011 from 77.8% in the prior year. Gross margins in the prior year included expenses related to the remediation portion of our Quality System improvement efforts, which was completed in the third quarter of fiscal 2010, of approximately $5.9 million. These costs were primarily for external consultants. There were no material external costs related to the Quality System efforts in the current year periods, which benefited gross margins.

For fiscal 2011, Capture product gross margins decreased to 79.3% from 81.5% in the prior year primarily due to the allocation of revenue from Capture reagents to instruments related to reagent rentals. In a reagent rental, the reagent revenue stream is used to fund all components of the customer’s acquisition, including the reagents themselves as well as the instrument and instrument-related items, such as training. Reagent gross margin is negatively impacted as a portion of reagent revenue is allocated to instruments over the life of the contract but none of the costs associated with the reagents are allocated.

Gross margins on instruments decreased to 18.9% in fiscal 2011 from 22.2% in the prior year, primarily due to the mix of instrument revenue and more instruments being expensed in the current year as compared with the prior year. Where sales contracts have reagent price guarantee clauses (which our automation contracts typically do), instrument costs are expensed when the sale is made, but the related instrument revenue is deferred and recorded as income over the term of the contract. When an instrument is rented, revenue and expenses for the transaction are recognized evenly over the life of the contract.  In fiscal 2011 and fiscal 2010, we recognized $15.2 million and $16.8 million, respectively, of deferred revenue related to instrument sales and service.

We expect molecular immunohematology gross margin to be volatile until production volumes are higher.
 
Operating expenses

   
For the Year Ended May 31,
   
Change
 
   
2011
   
2010
   
Amount
   
%
 
   
(in thousands)
             
Research and development
  $ 15,900     $ 15,437     $ 463       3 %
Selling and marketing
    36,431       36,995       (564 )     -2 %
Distribution
    16,508       14,831       1,677       11 %
General and administrative
    37,747       36,841       906       2 %
Amortization expense
    4,333       4,278       55       1 %
Total operating expenses
  $ 110,919     $ 108,382     $ 2,537       2 %
 
Research and development expenses increased by approximately $0.5 million in fiscal 2011 compared with the prior year, primarily due to project-related expenses.

Selling and marketing expenses decreased by approximately $0.6 million in fiscal 2011 compared with fiscal 2010, primarily due to lower compensation expense.

Distribution expenses rose by approximately $1.7 million in fiscal 2011 over the prior year, primarily due to increased shipping supplies and freight costs.

General and administrative expenses increased by approximately $0.9 million in fiscal 2011 over the prior year, primarily due to expenses of approximately $2.3 million related to the resignation of the Company’s Chief Operating Officer offset by lower legal expenses.

Amortization expense was generally in line with the prior year period.
 
Non-operating income (expense)

   
For the Year Ended May 31,
   
Change
 
   
2011
   
2010
   
Amount
 
   
(in thousands)
 
Non-operating income (expense)
  $ 4,633     $ (130 )   $ 4,763  
 
The year-over-year change in non-operating income (expense) was primarily attributable to the recognition of $4.3 million of other income related to the return of funds escrowed in association with prior acquisitions.
 
 
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Income taxes

The provision for income taxes decreased $1.3 million in fiscal 2011 compared with fiscal 2010 primarily due to a New Jersey state tax law change relating to apportionment. The effective income tax rate was 31.6% in fiscal 2011 compared with 34.0% in fiscal 2010. The fiscal 2011 tax rate was favorably impacted primarily by the New Jersey law change and a settlement of the escrow account related to prior acquisitions.  Since the return of the escrowed funds was considered a return of purchase price, no income taxes were provided on these amounts.

As a result of using compensation cost deductions arising from the exercise of nonqualified employee stock options and vesting of restricted shares for federal and state income tax purposes, we had an income tax benefit of approximately $1.8 million in fiscal 2011 and we had an income tax shortfall of approximately $0.2 million in fiscal 2010. As required by U.S. generally accepted accounting principles, the income tax benefits and income tax shortfall are recognized in our financial statements as a reduction of or an addition to additional paid-in capital rather than as an increase or reduction of the respective income tax provisions in the consolidated financial statements.
 
Liquidity and Capital Resources

Cash flow

Our principal source of liquidity is our operating cash flow. This cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing and financing needs. We believe that we have adequate working capital and sources of capital to operate our current business and to meet our existing capital requirements. At May 31, 2012, we had working capital of $71.3 million, compared to $379.0 million of working capital at May 31, 2011. The following table shows the cash flows provided by or used in operating, investing and financing activities for fiscal 2012, 2011 and 2010, as well as the effect of exchange rates on cash and cash equivalents for those same years:
 
   
Successor
     
Predecessor
 
   
August 20, 2011
through
     
June 1, 2011
through
   
For the Year Ended May 31,
 
   
May 31 2012
     
August 19, 2011
   
2011
   
2010
 
   
 
 
Net cash provided by (used in) operating activities
  $ (9,593 )     $ 25,588     $ 102,111     $ 84,751  
Net cash used in investing activities
    (1,945,450 )       (2,265 )     (9,061 )     (6,304 )
Net cash provided by (used in) financing activities
    1,652,090         66       2,578       (11,757 )
Effect of exchange rate changes on cash and cash equivalents
    (1,432 )       (3,029 )     4,326       (502 )
(Decrease) increase in cash and cash equivalents
  $ (304,385 )     $ 20,360     $ 99,954     $ 66,188  
 
Our cash and cash equivalents were $18.6 million at May 31, 2012 (Successor), as compared with $302.6 million at May 31, 2011 (Predecessor).  The reduction in our cash position resulted primarily from $301.1 million of net cash used in the Acquisition.

Operating activities – Net cash used in operating activities was $9.6 million for the Successor fiscal 2012 period and net cash provided by operating activities was $25.6 million for the Predecessor fiscal 2012 period compared with $102.1 million for the Predecessor fiscal 2011 period.  The reduction in cash provided by operating activities primarily relates to $50.4 million of interest paid and transaction costs of $16.9 million relating to the Acquisition as well as $22.0 million related to the settlement of the antitrust class action lawsuit which were all accounted for in operating cash in the Successor fiscal 2012 period.
 
In fiscal 2011, net cash generated by operating activities was $102.1 million compared with $84.8 million in fiscal 2010. The year-over-year increase in cash flow from operating activities was primarily attributable to the $6.7 million year-over-year increase in net income and changes in working capital.

Investing activities – Generally, the primary use of cash for investing activities is related to the purchase of property and equipment.  However, in the Successor fiscal 2012 period, we used a significant amount of cash for the Acquisition.

Net cash used in investing activities was $1.9 billion for the Successor fiscal 2012 period and $2.3 million for the Predecessor fiscal 2012 period, compared with $9.1 million for the Predecessor fiscal 2011 period.  The purchase of property and equipment was the primary use of cash in the Predecessor fiscal 2012 period and fiscal 2011.  In the Successor period of fiscal 2012, $6.0 million was used for the purchase of property and equipment and $1.9 billion was used in the Acquisition.
 
 
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In fiscal 2011, $9.1 million of net cash was used in investing activities compared with $6.3 million of cash used in the fiscal 2010. Cash in both periods was used to purchase property and equipment.

Financing activities – For financing activities during the Predecessor periods, the typical use of cash was for the repurchase of our common stock and the typical cash proceeds relates to the exercise of stock options.  However, in fiscal 2012, we had significant proceeds from long-term debt which was used in the Acquisition.

Net cash provided by financing activities was $1.7 billion during the Successor fiscal 2012 period and $0.1 million during the Predecessor fiscal 2012 period, compared with $2.6 million in the Predecessor fiscal 2011 period.  During the Successor fiscal 2012 period, we received $991.4 million in proceeds from long-term debt and $706.2 million in equity contributions, net of costs.  Additionally, we paid $42.5 million of debt issuance costs.  During both the Predecessor fiscal 2012 period and the Predecessor fiscal 2011 period, we had a cash outflow of $0.5 million for payment of withholding taxes in compliance with the statutory tax withholding requirements on exercise of options and vesting of restricted shares in exchange for surrender of the Company’s shares of equal value. The value of these reacquired shares is disclosed as ‘Repurchase of common stock’ under financing activities in the consolidated statement of cash flows.  During both the Predecessor fiscal 2012 and Predecessor fiscal 2011 periods we received $0.5 million and $1.3 million, respectively, in proceeds from stock option exercises. Additionally in the Predecessor fiscal 2011 period, we had a tax benefit of $1.8 million from the exercise of nonqualified employee stock options.

Net cash provided by financing activities was $2.6 million during fiscal 2011, compared with $11.8 million used in financing activities in fiscal 2010. Reflected in ‘repurchase of common stock’ in the cash flow statement is approximately $0.5 million in withholding taxes we paid in fiscal 2011 compared with $0.3 million in fiscal 2010. This payment was in compliance with statutory tax withholding requirements for the exercise of options and vesting of restricted shares in exchange for surrender of the Company’s shares of equal value. During fiscal 2011, we received $1.3 million cash from the exercise of employee stock options compared with $0.3 million in the same period of the prior year. For fiscal 2011 we had a tax benefit of $1.8 million and in fiscal 2010 we had a tax shortfall of $0.2 million from the exercise of nonqualified employee stock options.  During fiscal 2010, we used $11.6 million to repurchase shares of our common stock in the open market.

Contingencies

We record contingent liabilities resulting from asserted and unasserted claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. We currently are involved in certain legal proceedings. (See Part II, Item 1 – Legal Proceedings for further discussion.) Although we believe we have meritorious defenses to the claims and other issues asserted in such matters, one or more of such matters or any future legal matters may have an adverse effect on the Company or our financial position. Contingent liabilities are described in Note 21 to the audited consolidated financial statements included herein.

Future Cash Requirements and Restrictions

In conjunction with the Acquisition, we have entered into a Senior Credit Facility, including a $615 million term loan facility and a $100 million revolving facility.  We also issued $400 million principal amount of Notes.  There were no borrowings under the revolving facility as of May 31, 2012.  Our term loan facility requires quarterly principal payments equal to 0.25% of the original principal amount of the loan.  Required principal and interest payments related to our senior term loan facility are $6.2 million and $44.2 million, respectively, for the next 12 months.  Required interest payments related to the Notes is $44.5 million for the next 12 months.

We expect that cash and cash equivalents and cash flows from operations together with available borrowings from the revolving facility will be sufficient to support our operations, planned capital expenditures and debt service requirements for at least the next 12 months.  Our ongoing ability to meet our substantial debt service and other obligations will depend upon future performance, which may be subject to economic and regulatory factors that are not in our control. However, the Company continually evaluates opportunities for growth through acquisitions and other organic methods.  There are no legal restrictions on our subsidiaries with respect to sending dividends, or making loans or advances to Immucor.
 
 
28

 
 
Contractual Obligations and Commercial Commitments
 
Contractual obligations and commercial commitments, primarily for the next five years, are detailed in the table below:
 
Contractual Obligations
 
Payments Due by Period
 
   
(in thousands)
 
   
Total
   
Less than 1 year
   
1-3 years
   
4 - 5 years
   
After 5 years
 
Operating leases
  $ 14,503     $ 3,870     $ 5,977     $ 3,375     $ 1,281  
Purchase obligations
    23,320       23,073       208       39       -  
Senior Credit Facility (1) (2)
    611,925       6,150       12,300       12,300       581,175  
Notes (2)
    400,000       -       -       -       400,000  
Interest on term loan and notes (3)
    607,998       88,697       176,058       174,391       168,852  
Total contractual cash obligations
  $ 1,657,746     $ 121,790     $ 194,543     $ 190,105     $ 1,151,308  
 
(1)
The Senior Credit Facility is comprised of a $615.0 million senior secured term loan and a $100.0 million senior secured revolving loan facility. These are minimum scheduled payments.  The term loan facility has an excess cash flow requirement beginning in fiscal 2013.
(2)
Amounts shown do not include interest.
(3)
Interest on the Term Loan is computed based on the scheduled loan balance multiplied by the minimum rate currently required for a LIBOR loan under the loan agreement.  Interest on the Notes is computed using the stated interest rate.
 
In addition to the obligations in the table above, approximately $14.8 million of unrecognized tax benefits, including accrued interest of $1.2 million, have been recorded as liabilities in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes”, and we are uncertain as to if or when such amounts may be settled. Of this amount, $2.1 million is recorded in long-term deferred tax liabilities.
 
The expected timing of payment of the obligations discussed above is estimated based on current information. The timing of payments and actual amounts paid may differ depending on the timing of receipt of services, or, for some obligations, changes to agreed-upon amounts.

Off-Balance Sheet Arrangements

We have no off-balance sheet financial arrangements as of May 31, 2012.

Non-GAAP Disclosures
 
Adjusted EBITDA is defined as EBITDA (net income before interest, taxes, depreciation and amortization), further adjusted to exclude certain non-cash charges and other adjustments set forth below. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and as a measure of compliance under our credit agreement.
 
Under the Senior Credit Facilities, the senior secured leverage ratio is used as a benchmark to determine maximum levels of additional indebtedness we may incur. We believe the future directional trend of this ratio will provide valuable insight to understanding our operational performance and financial position with respect to our debt obligations.  Our senior secured leverage ratio is defined by our credit agreement as consolidated senior secured net debt divided by the total of the last twelve months Adjusted EBITDA. For purposes of calculating the senior secured leverage ratio, Adjusted EBITDA is calculated in a substantially similar manner to our credit agreement. At May 31, 2012, our senior secured net leverage ratio was 3.95.
 
We use Adjusted EBITDA, among other measures, to evaluate the performance of our core operations, establish operational goals and forecasts that are used in allocating resources and to evaluate our performance period over period, including for incentive program purposes. We view Adjusted EBITDA as a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. The inclusion of these supplementary adjustments is appropriate to provide additional information to readers about certain material non-cash items; unusual or non-recurring items that we do not expect to continue in the future; and other adjustments permitted in calculating Adjusted EBITDA under our credit agreement (although Adjusted EBITDA as set forth below may not equal Adjusted EBITDA as calculated under our credit agreement).
 
 
29

 

Adjusted EBITDA for the fiscal year ended May 31, 2012 separated into the Successor and Predecessor periods and for the fiscal year ended May 31, 2011 is calculated as follows:
 
   
Successor
     
Predecessor
 
   
August 20, 2011 to
May 31, 2012
     
June 1, 2011 to
August 19, 2011
   
Twelve Months Ended
May 31, 2011
 
     (in thousands)  
Net income (loss)
  $ (49,647 )     $ (6,374 )   $ 89,327  
Interest expense (income), net
    77,041         (142 )     (636 )
Income tax expense (benefit)
    (31,546 )       2,681       41,303  
Depreciation and amortization*
    52,141         4,264       18,198  
EBITDA
  $ 47,989       $ 429     $ 148,192  
                           
Adjustments to EBITDA:
                         
Stock-based compensation (i)
    753         16,233       6,941  
Transaction costs and transaction related fees (ii)
    1,362         18,863       500  
Specified legal fees (iii)
    1,779         -       1,588  
Sponsor fee (iv)
    3,161         -       -  
Non-cash impact of purchase accounting (v)
    29,205         -       -  
Certain non-recurring expenses and other (vi)
    27,844         2,444       (1,930 )
Adjusted EBITDA
  $ 112,093       $ 37,969     $ 155,291  
 
* Calculated at monthly average exchange rates.
 
i.
 
Represents non-cash stock-based compensation.
ii.
 
Related to legal, accounting and other costs related to the Acquisition.
iii.
 
Represents certain litigation-related professional expenses.
iv.
 
Represents management fees and other charges associated with a management services agreement with the Sponsor.
v.
 
Represents non-cash expenses incurred as a result of purchase accounting related to the Acquisition.
vi.
 
Represents non-recurring or non-cash items as defined in the Senior Credit Facilities not included in captions above, such as $22.0 million recorded in the Successor fiscal 2012 period relating to the settlement of the antitrust class action lawsuit (see Part II, Item 1 – Legal Proceedings for further discussion).
 
Adjusted EBITDA is a non-GAAP measure and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity or any other performance measure derived in accordance with GAAP.

Adjusted EBITDA has 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:
Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;
Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; 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, 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 Adjusted EBITDA as supplemental information.
 
 
30

 
 
Critical Accounting Policies and Estimates

General

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.  For a detailed discussion on the application of these and other accounting policies, see the notes to the  consolidated financial statements included with this report. Senior management has discussed our critical accounting policies and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure. We believe that our most critical accounting policies and estimates relate to the following:
 
  i. Revenue recognition
  ii.
Trade accounts receivable and allowance for doubtful accounts
  iii. Inventories
  iv. Goodwill
  v. Income taxes
  vi. Share-based employee compensation
  
i) Revenue Recognition

Revenue is recognized in accordance with ASC 605, “Revenue Recognition,” when the following four basic criteria have been met:  (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services are rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.  Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Our revenue is primarily generated from the following types of arrangements:
· 
Instrument sales arrangements, which includes the sale of instruments, reagents, consumables (parts kits), training, and general support services
· 
Instrument lease arrangements, which includes the lease of instruments and the sale of reagents
· 
Reagent sales

ASU 2009-13, “Multiple Element Revenue Arrangements” was prospectively adopted effective June 1, 2012.  Under the historical standards, the residual method was used to allocate arrangement consideration when vendor-specific objective evidence (“VSOE”) existed for an undelivered element, but not for the delivered elements.  Under the new standards, revenue is allocated to all deliverables based on their relative selling prices.  The following hierarchy is used to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price (“TPE”), and (iii) management’s best estimate of selling price (“MBESP”).  VSOE generally exists only when the Company sells the deliverable separately and it is the price actually charged by the Company for that deliverable.  TPE represents the selling price of a similar product or service by another vendor.  MBESPs reflect management’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.  The adoption of this accounting standard update did not have a material impact on the consolidated financial statements.

Instrument Sales Arrangements

The Company enters into contractual obligations to sell instruments, reagents, consumable parts kits, training, and general support services.  The selling price of each of the elements is used for purposes of allocating total contract consideration on a relative selling price basis, and the related timing of revenue recognition of each of the elements is as follows:

Reagents (without price guarantees) – the selling price of reagents (without price guarantees) is based on VSOE of fair value by reference to the price our customers are required to pay for the reagents when sold separately.

Reagents (with price guarantees) – the selling price of reagents (with price guarantees) is based on MBESP.  In determining MBESP, the Company considers the following: (1) pricing practices as they relate to future price increases, (2) the overall economic conditions, and (3) competitor pricing.

Revenue from the sale of the Company’s reagents (both with and without price guarantees) to end users is primarily recognized upon shipment when both title and risk of loss transfer to the customer, unless there are specific contractual terms to the contrary.  Revenue from the sale of the Company’s reagents to distributors is recognized FOB customs clearance when both title and risk of loss transfer to the customer.

Instrument sales – the selling price of our instruments is based on MBESP.  In determining MBESP, the Company considers the following: (1) the overall economic conditions, (2) the expected profit margin to be realized on the instruments, and (3) competitor pricing.  Revenue from instrument sales is recognized when the instrument has been installed and accepted by the customer.
 
 
31

 
 
Consumables (part kits) – the selling price of consumables is based on MBESP.  In determining MBESP, the Company considers the following: (1) the overall economic conditions, (2) the expected profit margin to be realized on the agreement, and (3) competitor pricing.  Revenue from consumables is recognized when the consumables have been delivered.

Training – the selling price of training is based on MBESP.  In determining MBESP, the Company considers the following: (1) the overall economic conditions, (2) the expected profit margin to be realized on the agreement, and (3) competitor pricing.  Revenue from training services is recognized as the training services are provided.

General Support Services – the selling price of general support services is based on VSOE by reference to the price our customers are required to pay for the general support services when sold separately via renewals.  Revenue from general support services is recognized over the term of the agreement.

Instrument Lease Arrangements

The Company enters into contractual arrangements with customers to lease instruments, sell reagents and consumables (parts kits), and provide training and general support services.  At the onset of the arrangement, total contract consideration is allocated to the various elements of the arrangement based on the elements’ relative selling prices. On a monthly basis, revenue is reclassified using this allocation.  The monthly revenue reclassification has no impact on revenue recognition, but allows management to capture revenue by element for purposes of segment reporting.

The selling price of each of the elements is used for purposes of allocating total contract consideration on a relative selling price basis, and the related timing of revenue recognition of each of the elements is as follows:

Instrument leases – the selling price of instrument leases is based on MBESP.  In determining MBESP, the Company considers the following: (1) the overall economic conditions, (2) the expected profit margin to be realized on the agreement, and (3) competitor pricing.  The total rental revenue determined on this basis is recognized ratably over the term of the operating lease, which is generally 60 months. Revenue from instrument leases is first recognized when the instrument has been installed and accepted by the customer.

Reagents – the selling price of reagents is based on VSOE of fair value by reference to the price our customers are required to pay for the reagents when sold separately.  Due to their short shelf life, reagents are shipped on a frequent and recurring basis.  Revenue is primarily recognized upon shipment when both title and risk of loss transfer to the customer, unless there are specific contractual terms to the contrary.

Consumables (part kits) – the selling price of our consumables is based on MBESP.  In determining MBESP, the Company considers the following: (1) the overall economic conditions, (2) the expected profit margin to be realized on the agreement, and (3) competitor pricing.  Revenue from consumables is recognized when the consumables have been delivered.

Training – the selling price of training is based on MBESP.  In determining MBESP, the Company considers the following: (1) the overall economic conditions, (2) the expected profit margin to be realized on the agreement, and (3) competitor pricing.  Revenue from training services is recognized as the training services are provided.

Reagent sales

Revenue from standalone reagent sales is recognized when both the title and risk of loss transfer to the customer
 
ii) Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivables at May 31, 2012 and May 31, 2011, totaling $66.4 million and $63.3 million, respectively, are net of allowances for doubtful accounts of $0.6 million and $2.2 million, respectively. The allowance for doubtful accounts represents a reserve for estimated losses resulting from the inability of our customers to pay their debts. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, a specific allowance for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered. On August 19, 2011, in connection with the Acquisition, trade receivables were written down to the amount expected to be recovered and the allowance for doubtful accounts was set to zero.
 
 
32

 
 
iii) Inventories

Typically, inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Cost includes material, labor and manufacturing overhead. The Company also allocates certain production-related general and administrative costs to inventory and incurred approximately $3.2 million, $0.9 million, $2.8 million, and $3.3 million of such costs in Successor fiscal 2012 period, the Predecessor fiscal 2012 period, and the fiscal years ended May 31, 2011 and 2010, respectively.  The Company had approximately $1.1 million and $0.9 million of general and administrative costs remaining in inventory as of May 31, 2012 and May 31, 2011, respectively.

We use a standard cost system as a tool to monitor production efficiency.  The standard cost system applies estimated labor and manufacturing overhead factors to inventory based on budgeted production and efficiency levels, staffing levels and costs of operation, based on the experience and judgment of management.  Actual costs and production levels may vary from the standard established and such variances are charged to the consolidated statement of operations as a component of cost of sales.  Since U.S. generally accepted accounting principles require that the standard cost approximate actual cost, periodic adjustments are made to the standard rates to approximate actual costs.

In connection with the Acquisition, a fair value adjustment of $24.4 million increased inventory to fair value, which was greater than replacement cost.  As of May 31, 2012, all of the fair value adjustment has been expensed through cost of sales in the Successor fiscal 2012 period, and the inventory is again stated at the lower of cost (first-in, first-out basis) or market (net realizable value). No material changes have been made to the inventory policy during fiscal years 2012, 2011 or 2010.
 
iv) Goodwill

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

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

Our income tax policy records the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as net operating loss and tax credit carry-forwards. The value of our deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense in our consolidated statements of operations. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and we consider the scheduled reversal of deferred tax liabilities, projected future taxable income, carry-back opportunities, and tax-planning strategies in making this assessment.  We assess the need for additional valuation allowances quarterly.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC 740, “Income Taxes,” provides clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute prescribed by the Financial Accounting Standards Board (“FASB”) will continue to require significant judgment by management. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations.
 
 
33

 

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

vi) Share-based Employee Compensation

Consistent with the provisions of ASC 718, “Compensation – Stock Compensation,” compensation cost for grants of all share-based payments is based on the estimated grant date fair value.  We attribute the value of share-based compensation to expense using the straight-line method.
 
The fair value of our share-based payment awards for the Predecessor fiscal periods was estimated using the Black-Scholes option-pricing model (the “Black-Scholes model”). The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable.  The Black-Scholes model requires the input of certain assumptions, and changes in the assumptions can materially affect the fair value estimates.

The fair value of our share-based payment awards for the Successor fiscal periods is estimated using a Monte Carlo simulation approach. The Monte Carlo method is used to calculate the fair value of an option with multiple sources of uncertainty by creating random price paths for the underlying share and expected future value, then discounting the average of those paths to determine the fair value.  Key input assumptions used to estimate the fair value of stock options and stock appreciation rights include the initial value of common stock, expected term until the exercise of the equity award, the expected volatility of the equity, risk-free rates of return and dividend yields, if any.
 
We calculated our additional paid in capital pool (“APIC pool”) based on the actual income tax benefits received from exercises of share-based compensation awards granted after the effective date of ASC 718 using the long method. As of the Acquisition Date, the APIC pool was reset to zero.
 
Recently Issued Accounting Standards

Adopted by the Company in fiscal 2012
 
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multiple Deliverables Revenue Arrangements”, which is an amendment of ASC 605-25, “Revenue Recognition: Multiple Element Arrangements.” This update addresses the accounting for multiple-deliverable arrangements to allow the vendor to account for deliverables separately instead of as one combined unit by amending the criteria for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on (a) vendor-specific objective evidence, (b) third-party evidence or (c) best estimate of selling price. The residual method of allocation has been eliminated and arrangement consideration is now required to be allocated to all deliverables at the inception of the arrangement using the selling price method. Additionally, expanded disclosures are required relating to multiple deliverable revenue arrangements. This update is effective for fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-13 during the first quarter of fiscal 2012 did not have a material impact on the Company’s consolidated financial statements.
 
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, which simplifies testing for impairment by allowing an entity to first assess qualitative factors and determine if it is more likely than not (defined as 50% or more) that the fair value of the reporting unit is less than its carrying amount. That determination can then be used to decide if it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which corresponds to the Company’s first quarter of fiscal 2013. Early adoption is permitted in certain circumstances. The Company early adopted ASU 2011-08 during the fourth quarter of the current fiscal year and this adoption did not have a material impact on the Company’s consolidated financial statements.
 
Not yet adopted by the Company
 
In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” which requires an entity to disclose information about offsetting and related arrangements to ensure that the users of the Company’s financial statements can understand the effect that offsetting has on the Company’s financial position.  ASU 2001-11 is effective for annual periods beginning on or after January 1, 2013, which corresponds to the Company’s first quarter of fiscal 2014.  Retrospective application is required for all comparative periods presented.  The adoption of ASU 2011-11 is not expected have a material impact on the Company’s consolidated financial statements.
 
 
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In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income”, which was issued to enhance comparability between entities that report under U.S. GAAP and IFRS, and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, which corresponds to the Company’s first quarter of fiscal 2013. Early adoption of the new guidance is permitted and full retrospective application is required. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s consolidated financial statements.
 
However, in December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which deferred the guidance on whether to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. The adoption of ASU 2011-12 is not expected to have a material impact on the Company’s consolidated financial statements.
 
The FASB issues ASUs to amend the authoritative literature in the Accounting Standards Codification.  There have been a number of ASUs to date that amend the original text of the ASC.  Except for those listed above, those issued to date either (i) provide supplemental guidance, (ii) are technical corrections or (iii) are not applicable to the Company.  Additionally, there were various other accounting standards and interpretations issued during the fiscal year ended May 31, 2012 that the Company has not been required to adopt, none of which is expected to have a material impact on the Company’s consolidated financial statements and the notes thereto going forward.
 
 
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Item 7A. — Quantitative and Qualitative Disclosures about Market Risk.
 
We are exposed to market risks for foreign currency exchange rates. Our financial instruments that can be affected by foreign currency fluctuations and exchange risks consist primarily of cash and cash equivalents and trade receivables denominated in currencies other than the U.S. dollar. We attempt to manage our exposure primarily by balancing assets and liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes. It has not been our practice to actively hedge our foreign subsidiaries’ assets or liabilities denominated in foreign currencies. To manage these risks, we regularly evaluate our exposure and, if warranted, may enter into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. As part of accumulated other comprehensive income in shareholders’ equity, we recorded foreign currency translation losses of $18.4 million in the Successor fiscal 2012 period, losses of $2.2 million in the Predecessor fiscal 2012 period, gains of $13.9 million in fiscal 2011 and losses of $5.2 million in fiscal 2010.
 
Additionally, we are exposed to interest rate risks related to cash and cash equivalents. It has been our practice to hold cash and cash equivalents in deposits that can be redeemed on demand and in investments with an original maturity of three months or less. The interest income earned from these deposits and investments is impacted by interest rate fluctuations.

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the term loan outstanding under our Senior Credit Facilities. We have approximately $612.0 million outstanding under our Senior Credit Facilities, bearing interest at variable rates. A 0.125% increase in these floating rates applicable to the indebtedness outstanding under our Senior Credit Facilities would increase should interest rates exceed the 1.5% floor, then our pro forma annual interest expense by approximately $0.8 million, assuming the senior secured term loan under the Senior Credit Facilities is fully funded and there are no borrowings under the revolving facility. The Senior Credit Facilities also allow an aggregate of $150.0 million (or a greater amount if we meet specified financial ratios) in uncommitted incremental facilities, the availability of which are subject to our meeting certain conditions, bearing interest at variable rates. We have interest rate swaps on approximately 52% of our outstanding term debt.  These swaps reduce the risk of variability in the interest rates by fixing a portion of the interest costs.  We consider these swaps to be effective hedges and they are marked-to-market with the changes in other comprehensive income.
 
Item 8. — Financial Statements and Supplementary Data.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
   
Reports of Grant Thornton, LLP, Independent Registered Public Accounting Firm 37
   
Consolidated Balance Sheets as of May 31, 2012 (Successor) and as of May 31, 2011 (Predecessor) 38
   
Consolidated Statements of Operations for the periods August 20, 2011 to May 31, 2012 (Successor), June 1, 2011 to August 19, 2011 (Predecessor) and fiscal years ended May 31, 2011 and 2010 (Predecessor)
39
   
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the periods August 20, 2011 to May 31, 2012 (Successor), June 1, 2011 to August 19, 2011 (Predecessor) and for the years ended May 31, 2011 and 2010 (Predecessor)
40
   
Consolidated Statements of Cash Flows for the periods August 20, 2011 to May 31, 2012 (Successor), June 1, 2011 to August 19, 2011 (Predecessor) and for the years ended May 31, 2011 and 2010 (Predecessor)
41
   
Notes to Consolidated Financial Statements
42
   
Consolidated Financial Statement Schedule 79
 
 
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Report of Independent Registered Public Accounting Firm
 
Board of Directors and Shareholder
Immucor, Inc.
 
We have audited the accompanying consolidated balance sheets of Immucor, Inc. (a Georgia corporation) and subsidiaries (the “Company”) as of May 31, 2012 (Successor) and 2011 (Predecessor), and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for the periods from August 20, 2011 through May 31, 2012 (Successor) and June 1, 2011 through August 19, 2011 (Predecessor), and for the years ended May 31, 2011 (Predecessor) and 2010 (Predecessor). Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Immucor Inc. and subsidiaries as of May 31, 2012 (Successor) and 2011 (Predecessor), and the results of their operations and their cash flows for the periods from August 20, 2011 through May 31, 2012 (Successor) and June 1, 2011 through August 19, 2011 (Predecessor), and for the years ended May 31, 2011 (Predecessor) and 2010 (Predecessor), in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
 
 
/s/ GRANT THORNTON LLP
Atlanta, Georgia
July 27, 2012
 
 
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ITEM 1. Financial Statements
 
IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)
(Audited)
 
   
Successor
     
Predecessor
 
               
   
May 31, 2012
     
May 31, 2011
 
               
ASSETS
             
               
CURRENT ASSETS:
             
Cash and cash equivalents
  $ 18,578       $ 302,603  
Trade accounts receivable, net of allowance for doubtful accounts of $612 and $2,157 at May 31, 2012 and May 31, 2011, respectively
    66,392         63,324  
Inventories
    33,370         32,914  
Deferred income tax assets, current portion
    5,489         15,884  
Prepaid expenses and other current assets
    11,738         11,164  
Total current assets
    135,567         425,889  
                   
PROPERTY AND EQUIPMENT, Net
    64,662         58,216  
GOODWILL
    966,338         93,767  
INTANGIBLE ASSETS, Net
    735,522         54,133  
DEFERRED FINANCING COSTS, Net
    38,769         -  
OTHER ASSETS
    8,295         1,122  
Total assets
  $ 1,949,153       $ 633,127  
                   
LIABILITIES AND SHAREHOLDERS' EQUITY
                 
                   
CURRENT LIABILITIES:
                 
Accounts payable
  $ 12,734       $ 10,790  
Accrued expenses and other current liabilities
    41,356         20,331  
Income taxes payable
    3,654         8,294  
Deferred revenue, current portion
    2,606         7,495  
Current portion of long term debt, net of debt discounts
    3,922         -  
Total current liabilities
    64,272         46,910  
                   
LONG TERM DEBT, NET OF DEBT DISCOUNTS
    986,361         -  
DEFERRED REVENUE
    431         6,080  
DEFERRED INCOME TAX LIABILITIES
    245,496         9,264  
OTHER LONG-TERM LIABILITIES
    15,215         2,001  
Total liabilities
    1,311,775         64,255  
COMMITMENTS AND CONTINGENCIES (Note 21)
    -         -  
SHAREHOLDERS' EQUITY:
                 
Successor: Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of May 31, 2012
    -         -  
Predecessor: Common stock, $0.10 par value, 120,000,000 shares authorized, 70,367,219 issued and outstanding as of May 31, 2011
    -         7,037  
Additional paid-in capital
    706,986         45,729  
(Accumulated deficit) Retained earnings
    (49,865 )       499,152  
Accumulated other comprehensive (loss) income, net of tax
    (19,743 )       16,954  
Total shareholders' equity
    637,378         568,872  
Total liabilities and shareholders' equity
  $ 1,949,153       $ 633,127  
 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
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IMMUCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)
(Audited)
 
    Successor       Predecessor  
    August 20, 2011
through
      June 1, 2011
through
     For the Year Ended May 31,  
   
May 31, 2012
     
August 19, 2011
   
2011
   
2010
 
NET SALES
  $ 261,814       $ 74,910     $ 333,091     $ 329,073  
COST OF SALES (exclusive of amortization shown separately below)
    105,698         22,955       96,175       95,349  
GROSS MARGIN
    156,116         51,955       236,916       233,724  
                                   
OPERATING EXPENSES
                                 
Research and development
    13,929         4,895       15,900       15,437  
Selling and marketing
    32,913         10,510       36,431       36,995  
Distribution
    14,333         3,952       16,508       14,831  
General and administrative
    38,316         38,175       37,747       36,841  
Amortization expense
    39,224         931       4,333       4,278  
Certain litigation expenses
    22,000         -       -          
Total operating expenses
    160,715         58,463       110,919       108,382  
                                   
(LOSS) INCOME FROM OPERATIONS
    (4,599 )       (6,508 )     125,997