10-K 1 blud20140531_10k.htm FORM 10-K blud20140531_10k.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, 2014 

 

 

OR 

 

___ 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

 

 

THE SECURITIES EXCHANGE ACT OF 1934 

 

 

For the transition period from to 

 

 

Commission file number 0-14820

 

IMMUCOR, INC.

(Exact name of registrant as specified in its charter)

 

Georgia 

22-2408354 

(State or other jurisdiction of incorporation or organization) 

(I.R.S. Employer Identification No.) 

 

 

3130 GATEWAY DRIVE, P.O. BOX 5625 30091-5625
Norcross, Georgia (Zip Code)
(Address of principal executive offices)  

 

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

 

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

 

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

 

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

Yes __X__  No ____ 

 

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

 

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

 

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

 

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

 

Large accelerated filer [    ]  

Accelerated filer                [   ] 

 

Non-accelerated filer   [ X] 

Small reporting company [   ] 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes____ No __ X___

 

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

 

As of August 26, 2014, there were 100 shares of common stock outstanding.

 

 
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Table Of Contents 

 

 

 

 

 

Part I 

 

     

 

 

 

 

Item 1. 

Business 

 

Item 1A. 

Risk Factors 

 

Item 1B. 

Unresolved Staff Comments 

 

Item 2. 

Properties 

 

Item 3. 

Legal Proceedings 

 

Item 4. 

[Reserved] 

 

 

 

 

Part II 

 

     

 

 

 

 

Item 5. 

Market For The Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities 

 

Item 6.  

Selected Financial Data 

 

Item 7. 

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 

 

Item 7A. 

Quantitative And Qualitative Disclosures About Market Risk 

 

Item 8.  

Financial Statements And Supplementary Data 

 

Item 9.  

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 

 

Item 9A. 

Controls And Procedures 

 

Item 9B. 

Other Information 

 

 

 

 

Part III 

 

     

 

 

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance 

 

Item 11. 

Executive Compensation 

  Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
  Item 13. Certain Relationships And Related Transactions, And Director Independence

 

Item 14. 

Principal Accountant Fees And Services 

 

 

 

 

Part IV

 

     
     
  Item 15. Exhibits And Financial Statement Schedules
     
  Signatures  
     
  Ex-21 Subsidiaries Of The Registrant
  Ex-31.1 Certificate Of Principal Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002

 

Ex-31.2  

Certificate Of Principal Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 

  Ex-32

Certifications Required Under Section 906 Of The Sarbanes-Oxley Act Of 2002

     

 

 
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FORWARD – LOOKING STATEMENTS

 

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

 

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

 

 

• 

our substantial indebtedness;

 

• 

lower industry blood demand;

 

• 

lower than expected demand for our instruments;

 

• 

the decision of customers to defer capital spending;

 

the failure of customers to efficiently integrate our products into their operations;

 

increased competition;

 

product development, manufacturing and regulatory obstacles;

 

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

 

general economic conditions; and

 

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

 

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

 

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

 

Item 1. — Business.

 

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

 

Acquisitions

 

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, for a purchase price of 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 that were incurred by Immucor and the Sponsor (the “Immucor Acquisition”). As a result of the Immucor Acquisition, our stock is no longer publicly traded. Currently, the issued and outstanding shares of Immucor are indirectly owned by the Sponsor and certain co-investors.

 

To consummate the Immucor Acquisition, we entered into new debt financing initially 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”).

  

 
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LIFECODES

 

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

 

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

 

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

 

LIFECODES Distribution Businesses

 

We completed the acquisition of two LIFECODES distribution businesses on January 31, 2014, one in United Kingdom (“UK”) and one in Italy. These acquisitions enable us to streamline the distribution of our LIFECODES products in Europe. We paid $6.4 million in cash to acquire these distribution businesses which was funded from cash flows from operating activities.

 

 Organ-i  

 

On May 30, 2014, we completed the acquisition of Organ-i, Inc. (“Organ-i”) a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. We paid $12.0 million in cash at closing to acquire this business, which was funded from cash flows from operating activities.

 

 

Financial Information about Segments

 

We determine our operating segments in accordance with our internal operating structure, which is organized based upon product groups. Each segment is separately managed and is evaluated primarily upon operating results. The Company has two operating segments, the Transfusion segment and the Transplant & Molecular segment, which have been aggregated into one reportable segment. We aggregate our operating segments because they have similar class of consumer, economic characteristics, nature of products, nature of production and distribution methods.    

 

 

Competitive Strengths

 

Automation – Since 1998, our strategy in transfusion diagnostics (or “immunohematology”) has been to drive automation in the blood bank with the goal of improving operations as well as patient safety. Due to the critical importance of matching patient and donor blood, manual testing is performed by highly educated and skilled technologists. In the U.S. market, we estimate that approximately 60% of customers perform testing on a manual basis without the use of an automated instrument. These customers are primarily in the small- to medium-hospital segment of the market. A significant number of customers in the high volume segment of the U.S. market (large hospitals, donor centers and reference laboratories) are automated. Outside the U.S., a significant portion of customers are automated in the developed international markets while there continues to be need for automation in the developing markets.

 

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

 

Leadership position in niche markets – We estimate the global market for our transfusion and transplantation products is approximately $1.6 billion and we believe we have leadership positions in our focused markets. We believe our transfusion products, ranging from our automated instruments to our proprietary Capture® technology, are widely used and recognized by the immunohematology industry worldwide. In transplantation, our LIFECODES® products leverage the significant installed base of Luminex Corporation (“Luminex”) instruments to enable adoption of our products in HLA labs around the world. We look to maintain our leadership position in these markets by continuing to innovate and introduce high value products for our customers.

  

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

 

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

 

Products

 

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

 

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

 

We sell reagents as well as instruments to allow laboratories – whether in a hospital, a donor center or a reference lab – to perform compatibility testing. Our automated instrument-reagent systems operate on a “razor/razor blade” model, with our instruments serving as the “razors” and our reagents serving as the “razor blades.” For transfusion diagnostics, our instruments are “closed systems,” meaning our proprietary reagents can only be used on our instruments. For transplant diagnostics, our reagents run on Luminex instruments, which are open systems. The “razor/ razor blade” business model generates a recurring revenue stream for us.

 

Transfusion Diagnostics

 

REAGENTS

 

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

 

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

 

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

 

INSTRUMENTS

 

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

 

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

 

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

  

 
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Transplant and Molecular Diagnostics

 

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

 

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

 

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

 

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

 

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

 

 

Marketing, Distribution and Seasonality

 

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

 

Backlog

 

For the majority of our products, the nature and shelf life prohibits us from maintaining a material backlog. For the orders in backlog, it is expected that the majority will be shipped or completed within the following 12 months. At May 31, 2014, our backlog was not material.

 

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

 

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

 

Regulation

 

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

  

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

 

Our manufacturing and distribution facilities in the U.S., Germany and Canada are certified to 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.

 

Environmental

 

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

 

Research, Development and Intellectual Property

 

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

 

We continually seek to improve our existing products and to develop new ones in order to increase our market share. Prior to sale, any new product requires regulatory approvals, including licensing or pre-market clearance from the FDA in the U.S. and CE marking in Western Europe. For fiscal 2014, fiscal 2013, the Successor fiscal 2012 period (August 20, 2011 to May 31, 2012), and the Predecessor fiscal 2012 period (June 1, 2011 to August 19, 2011), we spent approximately $29.1 million (including $7.8 million for LIFECODES), $21.3 million (including $1.7 million for LIFECODES), $13.9 million, and $4.9 million, respectively, for research and development.

 

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

 

Competition

 

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

 

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

 

 
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Employees

 

At May 31, 2014, we had approximately 1,090 full-time employees worldwide. We have a low staff turnover rate and consider our employee relations to be good. In addition to our full-time work force, we employ temporary and contract employees. None of our employees are represented by a labor union.

 

 

Available Information

 

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

 

 
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Item 1A. — Risk Factors.

 

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

 

Risks Relating to Our Company

 

Lower blood demand could negatively impact our financial results.

 

Our transfusion diagnostics products are used to test blood prior to transfusion. Lower demand for blood in the markets in which we operate could result in lower testing volumes. For example, we believe the U.S. market has been experiencing lower demand for blood in our last 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.

 

A catastrophic event at our Norcross, Georgia facility would prevent us from producing many of our reagent products.

 

Substantially all our reagent products for transfusion diagnostics 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 recovery plan to minimize the effects of such a catastrophe, and we have obtained insurance to protect against certain business interruption losses. However, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all.

 

We may not be successful in capitalizing on our acquisitions.

 

The long-term success of our LIFECODES acquisition, our other acquisitions and any additional acquisitions we may complete in the future will depend upon our ability to successfully grow the acquired businesses as well as realize the anticipated benefits from combining the acquired businesses with our business. We may fail to grow the LIFECODES business or realize anticipated benefits for a number of reasons.

 

With the acquisition of LIFECODES, Immucor entered the new markets of transplantation and coagulation in which we do not have significant experience. Our success is dependent on our ability to understand and be effective competitively in these new markets. Problems may arise with our ability to successfully grow and to successfully integrate acquired businesses and technologies, which may result in us not operating as effectively and efficiently as expected. Acquisitions could cause diversion of management time as well as a shift of focus from operating the businesses to issues related to integration and administration or inadequate management resources available for oversight as well as integration activities. We may face difficulties and inefficiencies in managing and operating businesses in multiple locations or operating businesses in which we have either limited or no direct experience today. In addition, we may not be able to achieve the expected synergies or anticipated growth targets from acquisitions or it may take longer than expected to achieve those synergies and growth targets. Acquisitions may cause other unexpected costs or liabilities and our failure to realize the anticipated benefits from acquisitions could harm our business and prospects.

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

In the fiscal year ended May 31, 2014, revenue outside the U.S. was approximately 38% of total revenue. As a result, fluctuations in foreign currency exchange rates against the U.S. Dollar could make our products less competitive and affect our revenue and earnings levels. An increase in our revenue outside the U.S. would increase this exposure. We have not historically hedged against currency exchange rate fluctuations.

 

Gross margin volatility may negatively impact our profitability.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

 
10

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

 
11

 

 

Our molecular diagnostics products may not gain wide commercial acceptance.

 

BioArray’s molecular diagnostics products have slowly gained commercial traction. In May 2014, the FDA approved our PreciseTypeTM HEA test, but even with regulatory approval, these products are new to the marketplace and we will have to develop the nascent market for these products over time. Our molecular transfusion diagnostic business is also subject to risks associated with reimbursement, cannibalization of a portion of our existing serology business and the same macroeconomic factors, such as lower blood demand, that our serology business faces.

 

We may be unable to adequately protect our proprietary technology.

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks relating to our industry

 

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

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We could face increased competition in the U.S. market, which historically has had a limited number of market participants. For fiscal 2014, approximately 62% of our revenues were generated in the U.S., and our U.S. operations have higher gross margins than our operations outside the U.S. Additional competition in the U.S. could negatively impact our revenues and/or our profitability.

 

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

 

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

 

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

 

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

  

 
13

 

 

Risks related to our indebtedness

 

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

 

We have a significant amount of indebtedness outstanding. The major components of our debt financing consists of (i) the Senior Credit Facilities, as amended, comprised of: (a) a $100.0 million Revolving Credit Facility which matures in August 2017, and (b) a $663.3 million Term Loan Facility which matures in August 2018, and (ii) $400.0 million of unsecured 11.125% Notes due in August 2019. As of May 31, 2014, total principal indebtedness outstanding was $1,055.1 million and we had unused commitments of $100.0 million under our Revolving Credit Facility. The terms of the Senior Credit Facilities, as amended, also provide that we can borrow up to an additional $100.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions including bank approval.

 

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

 

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

 

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

 

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

 

increasing our vulnerability to general adverse economic and industry conditions;

 

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

 

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

 

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

 

increasing our cost of borrowing; and

 

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

 

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

 

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

 

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

 

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

 

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

  

 
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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, 2014, our Senior Credit Facilities had unused revolving debt commitments of $100.0 million, which amount could increase up to an additional $100.0 million (or a greater amount if we meet specified financial ratios), the availability of which is subject to certain conditions, including bank approval. All of those borrowings would be secured indebtedness. If new debt is added to our current debt levels, the risks that we face could intensify.

 

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

 

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

 

incur additional indebtedness;

 

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

 

prepay, redeem or repurchase certain debt;

 

make loans and investments;

 

sell assets;

 

incur liens;

 

enter into transactions with affiliates;

 

alter the businesses we conduct;

 

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

 

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

 

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

 

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

 

limited in how we conduct our business;

 

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

 

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

 

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

  

 
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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 that the entire Revolving Facility was fully drawn, each one-eighth point change in the LIBOR interest rate above the Term Loan Facility’s LIBOR floor of 1.25% would result in a $0.9 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.

 

 

Item 1B. — Unresolved Staff Comments.

 

Not applicable.

 

 

Item 2. — Properties.

 

We own our Canadian manufacturing facility and 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 2009, securities litigation was filed in the U.S. District Court of North Georgia against us and certain of our former directors and officers asserting federal securities fraud claims on behalf of a putative class of purchasers of our common stock between October 19, 2005 and June 25, 2009. In June 2011 the Court dismissed the complaint and closed the case and in September 2011 the plaintiffs appealed. We agreed to settle these actions in December 2012 and we received preliminary approval of the settlement in March 2013. Final approval was granted in June 2013. The settlement is covered under the Company’s insurance and did not impact our financial results.

 

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

 

 

Item 4. — [Reserved]

  

 
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PART II

 

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

 

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

 

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

 

 
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Item 6. – Selected Financial Data.

 

The following table sets forth selected consolidated financial data with respect to our operations. The data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto, located in “Item 8. Financial Statements and Supplementary Data.” The statement of operations data for each of the periods presented, and the related balance sheet data have been derived from the audited consolidated financial statements (in thousands).

 

                   

Successor

   

Predecessor

 
                   

August 20, 2011

   

June 1, 2011

                 
   

Year Ended

   

through

   

through

   

Year Ended

 
   

May 31, 2014

   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

   

May 31, 2011

   

May 31, 2010

 
                                                 
                                                 

Net sales

  $ 388,056       347,788       261,814       74,910       333,091       329,073  

Cost of sales (exclusive of amortization shown separately below)

    139,634       120,027       105,698       22,955       96,175       95,349  

Gross margin

    248,422       227,761       156,116       51,955       236,916       233,724  
                                                 

Operating expenses:

                                               

Research and development

    29,070       21,313       13,929       4,895       15,900       15,437  

Selling and marketing

    59,057       50,129       32,913       10,510       35,931       36,995  

Distribution

    20,165       18,718       14,333       3,952       16,508       14,831  

General and administrative

    41,603       42,801       36,954       19,312       37,747       36,841  

Amortization expense

    52,965       50,765       39,224       931       4,333       4,278  

Acquisition-related items

    (4,638 )     2,616       1,362       18,863       500       -  

Impairment loss

    160,150       3,500       -       -       -       -  

Certain litigation expenses

    -       -       22,000       -       -       -  

Loss on disposition of fixed assets

    -       1,175       -       -       -       -  

Total operating expenses

    358,372       191,017       160,715       58,463       110,919       108,382  
                                                 

(Loss) income from operations

    (109,950 )     36,744       (4,599 )     (6,508 )     125,997       125,342  
                                                 

Non-operating (expense) income:

                                               

Interest income

    36       28       7       142       706       454  

Interest expense

    (88,304 )     (90,830 )     (77,048 )     -       (70 )     (33 )

Loss on extinguishment of debt

    -       (9,111 )     -       -       -       -  

Other, net

    45       (539 )     447       2,673       3,997       (551 )

Total non-operating (expense) income

    (88,223 )     (100,452 )     (76,594 )     2,815       4,633       (130 )
                                                 

(Loss) income before income taxes

    (198,173 )     (63,708 )     (81,193 )     (3,693 )     130,630       125,212  

(Benefit) provision for income taxes

    (15,916 )     (24,566 )     (31,546 )     2,681       41,303       42,629  

Net (loss) income

  $ (182,257 )     (39,142 )     (49,647 )     (6,374 )     89,327       82,583  

 

   

The following data is as of the dates indicated below:

 
                   

Successor

   

Predecessor

 
                                                 
   

May 31, 2014

   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

   

May 31, 2011

   

May 31, 2010

 
                                                 

Working capital

  $ 91,917       87,069       71,295       381,259       378,979       270,939  

Total assets

    1,824,414       2,000,970       1,949,153       652,395       633,127       519,834  

Long-term debt, net of debt discounts

    1,037,183       1,039,278       986,361       -       -       -  

Shareholders’ equity

    468,616       644,706       637,378       576,646       568,872       456,123  

 

 
18

 

 

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

 

Overview

 

Our Business

 

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

 

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

 

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

 

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

 

 

Business Highlights of 2014

 

The following is a summary of significant factors affecting our business in fiscal 2014:

 

 

Acquisitions –

 

 

o

LIFECODES – We completed the acquisition of LIFECODES in the fourth quarter of fiscal 2013. We included the results of operations, financial position and cash flows of the acquired business in our consolidated financial statements from their dates of acquisition. Therefore, LIFECODES’ operating results were included in our consolidated financial statements for all of fiscal 2014, but were only included for approximately 2 months of fiscal 2013. LIFECODES contributed $47.3 million and $9.5 million in net sales and reported operating loss before income tax of $1.4 million and $2.6 million for the fiscal 2014 and fiscal 2013 periods, respectively. These operating results include non-cash charges of approximately $2.4 million and $0.4 million for amortization expense of intangible assets for fiscal 2014 and fiscal 2013, respectively, and approximately $2.8 million and $1.7 million of amortization expense for fiscal 2014 and fiscal 2013, respectively, related to a fair value adjustment to inventory that was recorded as of the acquisition date.

 

The LIFECODES purchase agreement included a potential earn-out totaling $10.0 million in cash if the LIFECODES business achieved a certain financial target in calendar 2013. During calendar year 2013, and our fiscal year 2014, management estimated, for accounting purposes, that the likelihood of achieving the financial performance target was lower than previously estimated and decreased the fair value of the related contingent consideration liability from $4.6 million to zero. This decrease in the contingent consideration liability is reflected as a gain in the acquisition-related items in the consolidated statements of operations for fiscal 2014.

 

 

o

Distribution businesses – We completed the acquisition of two distribution businesses of LIFECODES products on January 31, 2014 for $6.4 million in cash, including acquired cash of $1.2 million. These acquisitions enable us to streamline the distribution of our LIFECODES products in Europe. The operating results of these two distribution businesses were included in fiscal 2014 after the date of acquisition, but were not included in the fiscal 2013.

 

 

o

Organ-i – On May 30, 2014, we completed the acquisition of Organ-i, Inc. a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. The total cash purchase price of this business was $12.0 million plus a potential earn-out of up to $18.0 million if certain product and financial targets during fiscal 2015 through fiscal 2020 periods are met. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $11.3 million.

  

 
19

 

 

 

Goodwill Impairment –

 

 

o

Goodwill is evaluated on a reporting unit basis, therefore, while the overall aggregate value of the Company’s six reporting units exceeds the aggregate carrying amount of goodwill for these units, an impairment was generated for one of the six reporting units. Accordingly, a goodwill impairment charge was recorded for $160.0 million in the fourth quarter of fiscal 2014 for one of our reporting units.

 

 

Notice of Intent to Revoke Lifted –

 

 

o

During December 2013, the FDA conducted an inspection of our Norcross facility and found no significant deviations. As a result, the FDA lifted the notice of intent to revoke (“NOIR”) administrative action effective May 2014.

 

 

PreciseTypeTM FDA Approval –

 

 

o

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

 

 
20

 

 

Results of Operations

 

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 Immucor Acquisition was accomplished through a merger of Merger Sub with and into the Company, with the Company being the surviving company. As a result of the Immucor 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.

 

In the following financial tables, we have presented the results of operations for the twelve month periods ended May 31, 2014 (the fiscal 2014 period), and May 31, 2013 (the fiscal 2013 period), and have presented separately the results of operations for the period from August 20, 2011 to May 31, 2012 (the Successor fiscal 2012 period) and the period from June 1, 2011 to August 19, 2011 (the Predecessor fiscal 2012 period). We have prepared our discussion and analysis of the results of operations and cash flows by comparing the fiscal 2014 period, the fiscal 2013 period, and the results of the combined Predecessor fiscal 2012 period and the Successor fiscal 2012 period, all of which include twelve months of operating activity. 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 Immucor Acquisition occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the Immucor Acquisition, and (iii) may not be predictive of future results of operations. The operating results presented in the table below are in thousands of dollars, except percentages.

 

                   

Successor

   

Predecessor

   

Change

 
                   

August 20, 2011

   

June 1, 2011

                                 
   

Year Ended

   

through

   

through

                                 
   

May 31, 2014

   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

   

Amount

   

%

   

Amount

   

%

 
                                                                 

Net sales

  $ 388,056       347,788       261,814       74,910     $ 40,268       11.6     $ 11,064       3.3  

Cost of sales (*)

    139,634       120,027       105,698       22,955       19,607       16.3       (8,626 )     (6.7 )

Gross margin

    248,422       227,761       156,116       51,955       20,661       9.1       19,690       9.5  
                                                                 

Operating expenses:

                                                               

Research and development

    29,070       21,313       13,929       4,895       7,757       36.4       2,489       13.2  

Selling and marketing

    59,057       50,129       32,913       10,510       8,928       17.8       6,706       15.4  

Distribution

    20,165       18,718       14,333       3,952       1,447       7.7       433       2.4  

General and administrative

    41,603       42,801       36,954       19,312       (1,198 )     (2.8 )     (13,465 )     (23.9 )

Amortization expense

    52,965       50,765       39,224       931       2,200       4.3       10,610       26.4  

Acquisition-related items

    (4,638 )     2,616       1,362       18,863       (7,254 )     **       (17,609 )     (87.1 )

Impairment loss

    160,150       3,500       -       -       156,650       **       3,500       **  

Certain litigation expenses

    -       -       22,000       -       -       **       (22,000 )     (100.0 )

Loss on disposition of fixed assets

    -       1,175       -       -       (1,175 )     **       1,175       **  

Total operating expenses

    358,372       191,017       160,715       58,463       167,355       87.6       (28,161 )     (12.8 )
                                                                 

(Loss) income from operations

    (109,950 )     36,744       (4,599 )     (6,508 )     (146,694 )     **       47,851       **  
                                                                 

Non-operating (expense) income:

                                                               

Interest income

    36       28       7       142       8       28.6       (121 )     (81.2 )

Interest expense

    (88,304 )     (90,830 )     (77,048 )     -       2,526       (2.8 )     (13,782 )     17.9  

Loss on extinguishment of debt

    -       (9,111 )     -       -       9,111       **       (9,111 )     **  

Other, net

    45       (539 )     447       2,673       584       **       (3,659 )     **  

Total non-operating (expense) income

    (88,223 )     (100,452 )     (76,594 )     2,815       12,229       (12.2 )     (26,673 )     36.2  
                                                                 

Loss before income taxes

    (198,173 )     (63,708 )     (81,193 )     (3,693 )     (134,465 )     211.1       21,178       (24.9 )

(Benefit) provision for income taxes

    (15,916 )     (24,566 )     (31,546 )     2,681       8,650       (35.2 )     4,299       (14.9 )

Net loss

    (182,257 )     (39,142 )     (49,647 )     (6,374 )   $ (143,115 )     365.6     $ 16,879       (30.1 )

 

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

(**) Calculation is not meaningful.

 

 
21

 

 

 Years Ended May 31, 2014 and 2013:

 

Net sales were $388.1 million in fiscal 2014 as compared with $347.8 million in fiscal 2013, an increase of $40.3 million, or 11.6%. This increase in net sales is described in the discussion of net sales by product group below. Net sales by product group are presented in the following table (in thousands except percentages):

 

   

Year Ended

    Change  
   

May 31, 2014

   

May 31, 2013

   

Amount

   

%

 

Net sales by product group:

                               

Transfusion

  $ 330,547       330,931       (384 )     (0.1 )

Transplant & Molecular

    57,509       16,857       40,652       241.2  

Total

  $ 388,056       347,788       40,268       11.6  

 

 

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

 

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

 

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

 

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

 

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

 

Distribution expenses were $20.2 million in fiscal 2014 as compared with $18.7 million in fiscal 2013, an increase of $1.4 million, or 7.7%. The increase was primarily due to additional costs related to LIFECODES.

 

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

 

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

  

 
22

 

 

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

 

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

 

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

 

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

 

Years Ended May 31, 2013 and 2012:

 

Net sales were $347.8 million in the fiscal 2013 period as compared with $336.7 million in the combined Successor and Predecessor fiscal 2012 periods, an increase of $11.1 million, or 3.3%. This increase in net sales is described in the discussion of net sales by product group below. Net sales by product group are presented in the following table (in thousands except percentages):

 

           

Successor

   

Predecessor

   

Change

 
           

August 20, 2011

   

June 1, 2011

                 
   

Year Ended

   

through

   

through

                 
   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

   

Amount

   

%

 

Net sales by product group:

                                       

Transfusion

  $ 330,931       257,046       73,632       253       0.1  

Transplant & Molecular

    16,857       4,768       1,278       10,811       178.8  

Total

  $ 347,788       261,814       74,910       11,064       3.3  

 

Transfusion: Net sales of our transfusion products for fiscal 2013 were $330.9 million as compared with $330.7 million for the combined Successor and Predecessor fiscal 2012 periods, an increase of $0.2 million, or 0.1%. This increase in net sales was mainly due to increased revenue generated from higher instrument placements partially offset by a lower number of ship cycles included in fiscal 2013 as compared with the combined Successor and Predecessor fiscal 2012 periods, and a lower industry demand for reagent products reflecting the challenging global economic climate. The year-over-year change in net sales also reflects the unfavorable effect of changes in foreign currency exchange rates on our international operations in fiscal 2013, and a reduction in deferred revenue of $0.9 million related to the Immucor Acquisition in the 2012 fiscal year. After adjusting for the impact of foreign currency exchange rate fluctuations, ship cycles, and the reduction in deferred revenue, revenue in fiscal 2013 increased by 2.0 % when compared with the combined Successor and Predecessor fiscal 2012 periods.

 

Transplant & Molecular: Net sales of our transplant and molecular products for fiscal 2013 were $16.8 million as compared with $6.0 million for the combined Successor and Predecessor fiscal 2012 periods, an increase of $10.8 million, or approximately 180%. This increase was primarily due to $9.5 million of additional net sales from our newly acquired product lines from the LIFECODES acquisition completed on March 22, 2013 as well as $1.3 million of organic growth in net sales in our existing product lines in fiscal 2013. Net sales of our existing molecular products increased in fiscal 2013 as compared with the combined Successor and Predecessor fiscal 2012 periods mainly due to increased market acceptance of those products in the U.S. and Latin America.

   

 
23

 

 

Gross margin as a percentage of consolidated net sales was approximately 3.7% higher in the fiscal 2013 period as compared with the combined Successor and Predecessor fiscal 2012 periods. The higher gross margin percentage in fiscal 2013 was mainly due to items recorded in fiscal 2012 related to the Immucor Acquisition that negatively impacted the overall gross margin percentage in the combined Successor and Predecessor fiscal 2012 periods that were not included in fiscal 2013 (primarily driven by the $24.4 million of amortization of the fair value of inventory) partially offset by a higher percentage of net sales generated from distributors in fiscal 2013, which have a lower gross margin than direct sales, and a less favorable product mix in fiscal 2013. The less favorable product mix was mainly a result of lower shipments of our reagent products coupled with a higher volume of instrument placements, which typically have a lower gross margin percentage than our reagent products. In addition, the gross margin percentage in fiscal 2013 also included net sales of $9.5 million from our LIFECODES product line, which has a lower margin than our existing product lines.

 

Research and development expenses were $21.3 million in the fiscal 2013 period as compared with $18.8 million in the combined Successor and Predecessor fiscal 2012 periods. The overall increase of $2.5 million, or 13.2%, was primarily due to additional expenses related to LIFECODES and continued investment in development projects.

 

Selling and marketing expenses were $50.1 million in the fiscal 2013 period as compared with $43.4 million in the combined Successor and Predecessor fiscal 2012 periods. The increase of $6.7 million, or 15.4%, was primarily due to additional costs related to LIFECODES, and investments in personnel and associated expenses in our commercial sales and marketing infrastructure in the U.S. and to develop an infrastructure in the emerging markets to drive future growth. These increases were partially offset by additional compensation expense in the combined Successor and Predecessor fiscal 2012 periods of $1.3 million related to the vesting of all share-based awards in conjunction with the Immucor Acquisition that is non-recurring.

 

Distribution expenses were relatively unchanged in the fiscal 2013 period as compared with the combined Successor and Predecessor fiscal 2012 periods.

 

General and administrative expenses were $42.8 million in the fiscal 2013 period as compared with $56.3 million in the combined Successor and Predecessor fiscal 2012 periods, a decrease of $13.5 million, or 23.9%. The decrease was primarily due to $10.2 million of compensation expense recognized in the Predecessor fiscal 2012 period related to the vesting of all share-based awards in conjunction with the Immucor Acquisition and reduced project costs partially offset by additional expenses related to LIFECODES.

 

Amortization expense was $50.8 million in the fiscal 2013 period as compared with $40.2 million in the combined Successor and Predecessor fiscal 2012 periods, an increase of $10.6 million, or 26.4%. The increase was due to a full year of amortization of intangible assets related to the Immucor Acquisition, as well as the additional amortization of intangible assets related to LIFECODES.

 

An impairment loss on in-process research and development (“IPR&D”) projects of $3.5 million was recorded in the fiscal 2013 period. In the fourth quarter of fiscal 2013, we decided that a certain IPR&D project related to our molecular immunohematology business was no longer economically feasible. The project was therefore abandoned and fully written-off.

 

Acquisition-related charges were $2.6 million in fiscal 2013. These charges were primarily for professional fees for legal, due-diligence, and valuation services for the acquisition of our LIFECODES business. Acquisition-related charges were $20.2 million in the combined Successor and Predecessor fiscal 2012 periods. These charges were primarily for professional fees for legal, due-diligence, and valuation services related to the Immucor Acquisition.

 

We recognized a disposition loss of $1.2 million in 2013 to reduce certain capital work-in-progress equipment assets associated with a high-speed filling project to its estimated salvage value. The project was determined to no longer be economically viable and management therefore decided to dispose of the equipment in fiscal 2013.

 

Non-operating expense was $100.5 million in the fiscal 2013 period and $73.8 million in the combined Successor and Predecessor fiscal 2012 periods, an increase of $26.7 million. The most significant component of non-operating expense is interest expense from our long-term debt which was first issued at the time of the Immucor Acquisition, in August 2011. The year-over-year increase in non-operating expense was mainly due to higher interest expense of $13.7 million resulting from the impact of outstanding debt for the full year of fiscal 2013 as compared to 9.5 months in fiscal 2012, a $9.1 million loss on the extinguishment of debt incurred from the refinancings of our Senior Credit Facilities, and a foreign exchange gain of $2.9 million related to the settlement of intercompany balances realized in the Predecessor fiscal 2012 period.

  

 
24

 

 

The effective tax rate for the fiscal 2013 period, the Successor fiscal 2012 period, and the Predecessor fiscal 2012 period was 38.6%, 38.9% and (72.6)%, respectively. The effective tax rate for fiscal 2013 was higher as compared with the effective tax rate for the combined Successor and Predecessor fiscal 2012 periods primarily due to the impact of lower foreign income tax rates, discrete tax items recognized during the fiscal 2013 period as a result of changes in enacted tax laws and the expiration of the statute of limitations of the benefits associated with uncertain tax positions.

 

 

Change in Estimates

 

Change in the Provision for Allowance for Doubtful Accounts

 

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

 

Change in Depreciable Lives of Property and Equipment

 

In accordance with our policy, we review the estimated useful lives of our fixed assets on an ongoing basis. During fiscal 2014, this review indicated that the actual lives of our instrument equipment were longer than the estimated useful lives used for depreciation purposes in our financial statements. As a result, we changed our estimates of the useful lives of our instrument equipment, effective June 1, 2013, to better reflect the estimated periods during which these assets will remain in service. As a result, the estimated useful lives of these assets increased from approximately 5 years to 10 years. The effect of this change in estimate was a reduction in depreciation expense of $6.3 million and a decrease in net loss of approximately $3.6 million for fiscal 2014, respectively.

 

 

Liquidity and Capital Resources

 

Cash flow

 

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

 

In fiscal 2014, our cash and cash equivalents decreased by $5.8 million to $23.6 million as of May 31, 2014. The decrease was primary due to net cash used for acquisitions totaling $16.0 million, for the purchase of additional property and equipment of $9.2 million, and to repay $6.7 million of long-term debt. These decreases in cash and cash equivalents were partially offset by positive cash flow contributed by our operating activities. There were no borrowings from the Revolving Facility during fiscal 2014. The cash balance at May 31, 2014 includes cash of $19.2 million that is held by our subsidiaries outside of the United States. We are not permanently reinvested in our subsidiaries and can repatriate these funds, if needed, to support future debt payments.

 

Operating activities

 

Operating activities provided cash of $25.6 million in fiscal 2014 as compared with $24.5 in fiscal 2013. The increase was mainly due to improved operating results exclusive of non-cash adjustments, partially offset by higher working capital requirements. The higher working capital requirements in fiscal 2014 were primarily due to an increase in inventory levels partially offset by a decrease in collections of accounts receivable, and lower interest payments in fiscal 2014 as compared with fiscal 2013. Interest payments were lower in the fiscal 2014 as compared with fiscal 2013 due to the refinancing of our long-term debt twice during fiscal 2013 which reduced the interest rate of our Senor Credit Facilities; we made interest payments of $79.8 million in fiscal 2014 and $85.0 million in fiscal 2013. The favorable impact of a lower interest rate on our long-term debt was partially offset by the impact of higher average borrowings on our interest payments made in fiscal 2014. The higher average borrowings were primarily due to the acquisition of LIFECODES in the fourth quarter of fiscal 2013.

 

Investing activities

 

 

During the fiscal 2014, we used cash of $17.2 million to acquire new businesses as compared with using $84.8 million of cash in fiscal 2013 to acquire the LIFECODES business. We received cash of $1.1 million in fiscal 2014 from the seller of LIFECODES as a result of finalizing certain purchase price adjustments. We also used $9.2 million of cash to purchase property and equipment, including the upgrade of certain financial systems, in fiscal 2014 as compared with $9.6 million of cash used for property and equipment purchases in fiscal 2013.

  

 
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Financing activities

 

In fiscal 2014, we used cash for financing activities of $6.7 million for repayments of our long-term debt and had no amounts outstanding under our Revolving Facility during fiscal 2014. In fiscal 2013, net cash provided by financing activities was $80.8 million. The LIFECODES acquisition in fiscal 2013 was funded by additional borrowings of $50.0 million under the Term Loan Facility and an equity investment of $42.5 million from our Parent. The excess of the cash received over the purchase price was used to pay transaction expenses and provided an additional $2.1 million of working capital.

 

In addition to the borrowings for the LIFECODES acquisition, we refinanced our Senior Credit Facilities twice in fiscal 2013. In connection with these refinancings, we received cash proceeds of $288.1 million including the $6.0 million of additional term loan debt, and we repaid long term debt of $282.1 million. We also made scheduled principal payments on the Term Loan Facility of $6.2 million and paid debt issuance costs of $11.4 million that resulted from the refinancing of our Senior Credit Facilities during fiscal 2013 and the LIFECODES acquisition.

 

The first refinancing arrangement completed in August 2012 lowered the interest rate on our Term Loan Facility by 1.50%, including lowering the LIBOR floor on the term debt from 1.50% to 1.25%, lowered the interest rate on the revolving debt and extended the maturity date of the Revolving Facility to August 2017. In February 2013, we refinanced our Senior Credit Facilities again which lowered our interest rates on the Term Loan Facility by 0.75%. The refinancing completed in February 2013 also lowered the interest rate on the Revolving Facility and modified the financial covenant per the Senior Credit Facilities to only apply to the Revolving Facility.

 

Contingencies

 

We record contingent liabilities resulting from asserted and unasserted claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. We are currently not involved in any material legal proceedings. (See Part I, Item 3 – 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 22 to the audited consolidated financial statements included herein.

 

Future Cash Requirements and Restrictions

 

Our Term Loan Facility requires quarterly principal payments equal to 0.25% of the original principal amount of the loan with the balance due and payable on August 19, 2018. Required principal and interest payments related to our Term Loan Facility are $6.6 million and $33.1 million, respectively, for the next 12 months. Required interest payments related to the Notes is $44.5 million for the next 12 months. The Senior Credit Facilities are secured by substantially all of the tangible and intangible assets of our U.S. subsidiaries and the pledge of 65% of the stock of our foreign subsidiaries. As of May 31, 2014, we had principal of $1,055.0 million of long-term borrowings outstanding under our Term Loan Facility and the Notes. Our net total available borrowings under our Revolving Facility was $100 million as of May 31, 2014.

 

We expect that recurring capital expenditures during fiscal 2015 will range from $10 million to $15 million. These expenditures will be used to purchase equipment that increases or enhances capacity and productivity, and to upgrade certain financial systems.

 

 

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

 

 
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Contractual Obligations and Commercial Commitments

 

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

 

Contractual Obligations

 

Payments Due by Period

 
                                         
   

Total

   

Less than 1 year

   

1-3 years

   

4 - 5 years

   

After 5 years

 

Senior Credit Facilities (1) (2)

  $ 655,044       6,632       13,264       635,148       -  

Notes (2)

    400,000       -       -       -       400,000  

Purchase obligations

    46,253       20,773       10,619       8,011       6,850  

Operating and capital leases

    31,866       4,345       7,877       6,730       12,914  

Acquisition costs for earn-out provision (4)

    11,300       -       4,490       6,797       13  

Interest (3)

    390,816       78,985       156,108       133,473       22,250  

Total contractual cash obligations

  $ 1,535,279       110,735       192,358       790,159       442,027  

   

 

(1)

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

(2)

Amounts shown do not include interest.

(3)

Interest on the Term Loan Facility is computed based on the scheduled loan balance multiplied by the minimum rate currently required for a LIBOR loan under the credit agreement. Interest on the Notes is computed using the stated interest rate.

(4)

This earn-out provision is calculated using the present value of the expected (probability-weighted) payments based on the likelihood of achieving each of the financial performance targets. The total cash payments will total $18.0 million assuming that the full earn-out amount is achieved.

 

In addition to the obligations in the table above, approximately $14.5 million of unrecognized tax benefits, including accrued interest of $1.6 million, have been recorded as liabilities in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes”, and we are uncertain as to if or when such amounts may be settled.  However, as none of these amounts are expected to be settled within the current period, all amounts are classified as long-term. We recorded $4.1 million as an offset to long-term deferred tax liabilities and $10.4 million in other long-term 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, 2014.

 

 
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Non-GAAP Disclosures

 

 

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

 

   

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

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

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

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

 

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using EBITDA and Adjusted EBITDA as supplemental information. Adjusted EBITDA for the fiscal year ended May 31, 2014, May 31, 2013 and for fiscal 2012 separated into the Successor and Predecessor periods is calculated as follows:   

 

                   

Successor

   

Predecessor

 
   

Year Ended

   

August 20, 2011 to

   

June 1, 2011 to

 
   

May 31, 2014

   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

 
                                 

Net loss

  $ (182,257 )     (39,142 )     (49,647 )     (6,374 )

Interest expense (income), net

    88,268       90,802       77,041       (142 )

Income tax (benefit) expense

    (15,916 )     (24,566 )     (31,546 )     2,681  

Depreciation and amortization*

    71,287       71,746       53,650       4,264  
                                 

EBITDA

    (38,618 )     98,840       49,498       429  
                                 

Adjustments to EBITDA:

                               

Stock-based compensation (i)

    1,512       1,423       753       16,233  

Acquisition expenses, net (ii)

    (2,397 )     3,072       665       15,906  

Sponsor fee (iii)

    3,916       4,390       3,055       106  

Non-cash impact of purchase accounting (iv)

    3,284       2,119       22,183       2,379  

Impairments

    160,150       3,500       -       -  

Loss on extinguishment of debt

    -       9,111       -       -  

Certain non-recurring expenses and other (v)

    13,903       17,368       32,953       2,771  

Adjusted EBITDA

  141,750       139,823       109,107       37,824  

 

 

* Depreciation and amortization related to purchase accounting is reflected below on the line titled Non-cash impact of purchase accounting (v).

 

 

i.

Represents non-cash stock-based compensation.

 

ii.

Represents non-recurring items related to acquisition activities including legal, accounting and other costs. The items included in fiscal 2014 also include the non-cash gains resulting from decreases in the contingent consideration liability related to the LIFECODES acquisition.

 

iii.

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

 

iv.

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

 

v.

Represents non-recurring or non-cash items not included in captions above including personnel and business optimization costs, and the effect of the change in estimate in the allowance for doubtful accounts recorded in fiscal 2014 which decreased the adjustment for non-recurring expenses and non-cash items by $1.9 million for that period.

  

 
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In fiscal 2014, we revised the presentation of EBITDA and Adjusted EBITDA to include all of the depreciation and amortization expense on a single line and to exclude the adjustment for deferred revenue related to the acquisition of Immucor that was previously included in item v. of the calculation for all periods presented. The deferred revenue adjustment increased Adjusted EBITDA to reflect certain revenue items that were written-off in fiscal 2012 as a result of the acquisition of Immucor to increase the comparability of Adjusted EBITDA reported in fiscal 2012 with that reported in fiscal 2011. Management has determined that this adjustment is not as relevant for comparability purposes on a go-forward basis, and has therefore excluded it from the Adjusted EBITDA presentation. The following table is a reconciliation of Adjusted EBITDA that was previously reported and that presented in the table above for the fiscal year ended May 31, 2013 and for fiscal 2012 separated into the Successor and Predecessor periods are as follows (in thousands):

 

 

           

Successor

   

Predecessor

 
    Year Ended    

August 20, 2011 to

   

June 1, 2011 to

 
   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

 
                         

Adjusted EBITDA as previously presented

  142,656       112,093       37,969  

Less: Deferred revenue adjustment

    2,833       2,986       145  

Adjusted EBITDA as presented in the table above

  139,823       109,107       37,824  

 

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

 

 
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Critical Accounting Policies and Estimates

 

General

 

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

 

 

i.

Revenue recognition

 

ii.

Trade accounts receivable and allowance for doubtful accounts

 

iii.

Inventories

 

iv.

Goodwill

 

v.

Income taxes

 

i) Revenue Recognition

 

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

 

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

 

ii) Trade Accounts Receivable and Allowance for Doubtful Accounts

 

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

 

iii) Inventories

 

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

 

In connection with the Acquisition of Immucor on August 19, 2011, a fair value adjustment of approximately $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 had been expensed through cost of sales in the Successor fiscal 2012 period, and the inventory was again stated at the lower of cost (first-in, first-out basis) or market (net realizable value) net of reserves.

 

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

 

 
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iv) Goodwill

 

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

 

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

 

v) Income Taxes

 

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

 

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

 

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

 

Recently Issued Accounting Standards

 

Accounting Changes Recently Adopted

 

In the first quarter of 2014, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210) (“ASU 2011-11”) which requires an entity to disclose information about offsetting and related arrangements to ensure that the users of our financial statements can understand the effect that offsetting has on our financial position. The adoption of ASU 2011-11 did not have a material impact on our consolidated financial statements.

 

In the first quarter of 2014, we adopted the FASB ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the FASB determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. The adoption of ASU 2013-01 did not have a material impact on our consolidated financial statements.

  

 
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In the first quarter of 2014, we adopted the FASB ASU No. 2013-02: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”) which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.

 

In the first quarter of 2014, we adopted the FASB ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes ("ASU 2013- 10"). ASU 2013-10 permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the United States Treasury rate and London Interbank Offered Rate ("LIBOR"). In addition, the restriction on using different benchmark rates for similar hedges is removed. The adoption of ASU 2013-10 did not have a material impact on our consolidated financial statements.

 

In the second quarter of 2014, we adopted the FASB ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The amendments in ASU 2013-04 provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The adoption of ASU 2013-04 did not have a material impact on our consolidated financial statements.

 

In the second quarter of 2014, we adopted the FASB ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”). ASU 2013-05 clarifies that when a parent reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to apply the guidance in ASC 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The adoption of ASU 2013-05 did not have a material impact on our consolidated financial statements.

 

In the second quarter of 2014, we adopted the FASB ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 amends accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This new guidance requires entities, if certain criteria are met, to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The adoption of ASU 2013-11 did not have a material impact on our consolidated financial statements.

 

In the fourth quarter of 2014, we adopted the FASB ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. We elected early adoption of this standard for disposals subsequent to May 31, 2014.  The adoption of ASU 2014-08 did not have a material impact on our consolidated financial statements.

 

Accounting Changes Not Yet Adopted

 

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

  

 
32

 

 

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

 

We are exposed to market risks for foreign currency exchange rates. Our financial instruments that can be affected by foreign currency fluctuations and exchange risks consist primarily of cash and cash equivalents, and trade receivables and trade payables denominated in currencies other than the U.S. dollar. We attempt to manage our exposure primarily by balancing assets and liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes. It has not been our practice to actively hedge our foreign subsidiaries’ assets or liabilities denominated in foreign currencies. To manage these risks, we regularly evaluate our exposure and, if warranted, may enter into various derivative transactions when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. As part of accumulated other comprehensive income in shareholders’ equity, we recorded a foreign currency translation gain of $4.3 million in fiscal 2014, gain of $1.6 million in fiscal 2013, and losses of $18.4 million in the Successor fiscal 2012 period, and $2.2 million in the Predecessor fiscal 2012 period.

 

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 $655.1 million outstanding under our Senior Credit Facilities, bearing interest at variable rates. A 0.125% increase in these floating rates applicable to the indebtedness outstanding under our Senior Credit Facilities would increase should interest rates exceed the 1.25% floor our pro forma annual interest expense by approximately $0.8 million, assuming there are no borrowings under the Revolving Credit Facility. The Senior Credit Facilities also allow up to an aggregate of $100.0 million (or a greater amount if we meet specified financial ratios) in uncommitted incremental facilities, the availability of which are subject to our meeting certain conditions, bearing interest at variable rates. We have interest rate swaps on approximately 37% of our outstanding Term Loan Facility. These swaps reduce the risk of variability in the interest rates by fixing a portion of the interest costs. We consider these swaps to be effective hedges and they are marked-to-market with the changes in other comprehensive income.

 

 
33

 

 

Item 8. — Financial Statements and Supplementary Data.

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 

 Page

 

 

 

 

Report of Grant Thornton LLP Independent Registered Public Accounting Firm 

 35

 

 

 

 

Consolidated Balance Sheets as of May 31, 2014 and as of May 31, 2013 

 36

 

 

 

 

Consolidated Statements of Operations for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) 

 37

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) 

 38

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) 

 39

 

 

 

 

Consolidated Statements of Cash Flows for the fiscal year ended May 31, 2014, fiscal year ended May 31, 2013, periods August 20, 2011 to May 31, 2012 (Successor), and June 1, 2011 to August 19, 2011 (Predecessor) 

 40

 

 

 

 

Notes to Consolidated Financial Statements 

 41

 

 

 

 

Consolidated Financial Statement Schedule 

 87

 

 
34

 

 

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, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for the years ended May 31, 2014, 2013, and the periods from August 20, 2011 through May 31, 2012 (Successor) and June 1, 2011 through August 19, 2011 (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, 2014 and 2013, and the results of their operations and their cash flows for the years ended May 31, 2014 and 2013, the periods from August 20, 2011 through May 31, 2012 (Successor) and June 1, 2011 through August 19, 2011 (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

August 26, 2014

 

 
35

 

 

ITEM 1. Consolidated Financial Statements

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(Amounts in thousands, except share data)

 

 

   

May 31, 2014

   

May 31, 2013

 
                 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 23,621       29,388  

Trade accounts receivable, net of allowance for doubtful accounts of $898 and $815 at May 31, 2014 and 2013, respectively

    69,629       68,086  

Inventories

    49,151       45,941  

Deferred income tax assets, current portion

    8,251       5,290  

Prepaid expenses and other current assets

    12,582       11,577  

Total current assets

    163,234       160,282  
                 

PROPERTY AND EQUIPMENT, net

    76,311       76,381  

GOODWILL

    851,563       1,003,463  

INTANGIBLE ASSETS, net

    692,870       714,603  

DEFERRED FINANCING COSTS, net

    33,116       39,449  

OTHER ASSETS

    7,320       6,792  

Total assets

  $ 1,824,414       2,000,970  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Accounts payable

  $ 15,665       13,638  

Accrued interest and interest rate swap liability

    19,605       20,084  

Accrued expenses and other current liabilities

    23,716       26,654  

Income taxes payable

    4,927       3,873  

Deferred revenue, current portion

    2,813       2,252  

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

    4,591       6,712  

Total current liabilities

    71,317       73,213  
                 

LONG-TERM DEBT, net of debt discounts

    1,037,183       1,039,278  

DEFERRED REVENUE

    86       161  

DEFERRED INCOME TAX LIABILITIES

    223,379       231,040  

OTHER LONG-TERM LIABILITIES

    23,833       12,572  

Total liabilities

    1,355,798       1,356,264  

COMMITMENTS AND CONTINGENCIES (Note 22)

               

SHAREHOLDERS' EQUITY:

               

Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of May 31, 2014 and May 31, 2013, respectively

    -       -  

Additional paid-in capital

    753,147       751,635  

Accumulated deficit

    (271,264 )     (89,007 )

Accumulated other comprehensive loss

    (13,267 )     (17,922 )

Total shareholders' equity

    468,616       644,706  

Total liabilities and shareholders' equity

  $ 1,824,414       2,000,970  

 

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

  

 
36

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands)

 

 

                   

Successor

   

Predecessor

 
                   

August 20, 2011

   

June 1, 2011

 
   

Year Ended

   

through

   

through

 
   

May 31, 2014

   

May 31, 2013

   

May 31, 2012

   

August 19, 2011

 
                                 

NET SALES

  $ 388,056       347,788       261,814       74,910  

COST OF SALES (exclusive of amortization shown separately below)

    139,634       120,027       105,698       22,955  

GROSS MARGIN

    248,422       227,761       156,116       51,955  
                                 

OPERATING EXPENSES

                               

Research and development

    29,070       21,313       13,929       4,895  

Selling and marketing

    59,057       50,129       32,913       10,510  

Distribution

    20,165       18,718       14,333       3,952  

General and administrative

    41,603       42,801       36,954       19,312  

Amortization expense

    52,965       50,765       39,224       931  

Acquisition-related items

    (4,638 )     2,616       1,362       18,863  

Impairment loss

    160,150       3,500       -       -  

Certain litigation expenses

    -       -       22,000       -  

Loss on disposition of fixed assets

    -       1,175       -       -  

Total operating expenses

    358,372       191,017       160,715       58,463  
                                 

(LOSS) INCOME FROM OPERATIONS

    (109,950 )     36,744       (4,599 )     (6,508 )
                                 

NON-OPERATING (EXPENSE) INCOME

                               

Interest income

    36       28       7       142  

Interest expense

    (88,304 )     (90,830 )     (77,048 )     -  

Loss on extinguishment of debt

    -       (9,111 )     -       -  

Other, net

    45       (539 )     447