10-Q 1 immucor_10q-022811.htm QUARTERLY REPORT immucor_10q-022811.htm
FORM 10-Q
United States
Securities and Exchange Commission
Washington, D. C. 20549
 
(Mark One)
X
Quarterly Report Pursuant to Section 13 or 15(d)
 
of the Securities Exchange Act of 1934
 
For the quarterly period ended:   February 28, 2011
OR
 
   
Transition Report Pursuant to Section 13 or 15(d)
 
of the Securities Exchange Act of 1934

Commission File Number: 0-14820

IMMUCOR, INC.
(Exact name of registrant as specified in its charter)
 
Georgia
22-2408354
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

3130 Gateway Drive     Norcross, Georgia 30071
(Address of principal executive offices)    (Zip Code)

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

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

Yes X        No

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

Yes X      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer X Accelerated filer
   
 Non-accelerated filer
(do not check if smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No  X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of March 31, 2011: Common Stock, $0.10 Par Value – 70,295,559
 
 

 

IMMUCOR, INC. AND SUBSIDIARIES
 
FORM 10-Q
 
INDEX
 
 
 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
     
  Condensed Consolidated Balance Sheets as of February 28, 2011 (unaudited) and May 31, 2010 3
     
 
Condensed Consolidated Statements of Income for the three and nine months ended
February 28, 2011 (unaudited) and February 28, 2010 (unaudited)
4
     
 
Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income
for the period June 1, 2010 through February 28, 2011 (unaudited)
5
     
 
Condensed Consolidated Statements of Cash Flows for the nine months ended
February 28, 2011 (unaudited) and February 28, 2010 (unaudited)
6
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 7
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
16
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
27
     
Item 4.
Controls and Procedures
27
     
PART II. OTHER INFORMATION
     
Item 1.
Legal Proceedings
28
     
Item 1A.
Risk Factors
28
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
     
Item 6.
Exhibits
28
     
 
SIGNATURES
29
 
 
2

 

ITEM 1.   Financial Statements
 
IMMUCOR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Amounts in thousands, except share data)
 
   
   
February 28, 2011
   
May 31, 2010
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
   Cash and cash equivalents
  $ 274,678     $ 202,649  
   Trade accounts receivable, net of allowance for doubtful accounts of $2,270 and $2,122 at
         February 28, 2011 and May 31, 2010, respectively
    64,378       59,578  
   Inventories
    33,459       35,730  
   Deferred income tax assets, current portion
    14,170       14,807  
   Prepaid expenses and other current assets
    4,054       4,832  
             Total current assets
    390,739       317,596  
                 
PROPERTY AND EQUIPMENT, Net
    54,037       49,169  
GOODWILL
    96,385       94,336  
INTANGIBLE ASSETS, Net
    55,069       57,628  
DEFERRED INCOME TAX ASSETS
    476       540  
OTHER ASSETS
    602       565  
             Total assets
  $ 597,308     $ 519,834  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
   Accounts payable
  $ 8,087     $ 7,973  
   Accrued expenses and other current liabilities
    15,731       17,378  
   Income taxes payable
    7,564       12,312  
   Deferred revenue, current portion
    7,954       8,994  
         Total current liabilities
    39,336       46,657  
                 
DEFERRED REVENUE
    6,854       7,687  
DEFERRED INCOME TAX LIABILITIES
    11,790       7,368  
OTHER LONG-TERM LIABILITIES
    2,058       1,999  
         Total liabilities
    60,038       63,711  
COMMITMENTS AND CONTINGENCIES (Note 9)
    -       -  
SHAREHOLDERS' EQUITY:
               
   Common stock, $0.10 par value; authorized 120,000,000 shares, issued and outstanding
      70,057,398 and 69,912,449 shares at February 28, 2011 and May 31, 2010, respectively
    7,006       6,991  
   Additional paid-in capital
    41,180       36,256  
   Retained earnings
    474,993       409,825  
   Accumulated other comprehensive income
    14,091       3,051  
         Total shareholders' equity
    537,270       456,123  
             Total liabilities and shareholders' equity
  $ 597,308     $ 519,834  

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
3

 

IMMUCOR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Amounts in thousands, except per share data)
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Nine Months Ended
 
   
February 28,
   
February 28,
   
February 28,
   
February 28,
 
   
2011
   
2010
   
2011
   
2010
 
                         
NET SALES
  $ 83,349     $ 80,499     $ 248,536     $ 246,141  
COST OF SALES
(exclusive of amortization shown separately below)
    24,330       24,785       71,465       72,598  
GROSS MARGIN
    59,019       55,714       177,071       173,543  
                                 
OPERATING EXPENSES:
                               
Research and development
    3,733       3,409       12,039       11,130  
Selling and marketing
    8,430       8,388       26,793       27,617  
Distribution
    3,982       3,579       11,954       10,805  
General and administrative
    7,936       8,399       25,025       25,907  
Amortization expense
    1,071       1,065       3,234       3,205  
Total operating expenses
    25,152       24,840       79,045       78,664  
                                 
INCOME FROM OPERATIONS
    33,867       30,874       98,026       94,879  
                                 
NON-OPERATING INCOME (EXPENSE):
                               
Interest income
    174       56       520       340  
Interest expense
    (29 )     (16 )     (48 )     (29 )
Other, net
    (94 )     (521 )     (35 )     (539 )
Total non-operating income (expense)
    51       (481 )     437       (228 )
                                 
INCOME BEFORE INCOME TAXES
    33,918       30,393       98,463       94,651  
PROVISION FOR INCOME TAXES
    11,232       10,332       33,295       33,555  
NET INCOME
  $ 22,686     $ 20,061     $ 65,168     $ 61,096  
                                 
Earnings per share:
                               
     Per common share - basic
  $ 0.32     $ 0.29     $ 0.93     $ 0.87  
     Per common share - diluted
  $ 0.32     $ 0.28     $ 0.92     $ 0.86  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
4

 
 
IMMUCOR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
 
(Unaudited, amounts in thousands)
 
                                     
                                     
                           
Accumulated
       
               
Additional
         
Other
   
Total
 
   
Common Stock
   
Paid-In
   
Retained
   
Comprehensive
   
Shareholders’
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income*
   
Equity
 
                                     
BALANCE, May 31, 2010
    69,912     $ 6,991     $ 36,256     $ 409,825     $ 3,051     $ 456,123  
                                                 
Shares issued under employee stock plan
    163       17       660       -       -       677  
Share-based compensation expense
    -       -       4,509       -       -       4,509  
Stock repurchases and retirements
    (18 )     (2 )     (349 )     -       -       (351 )
Tax benefits related to share-based compensation
    -       -       104       -       -       104  
Comprehensive income:
                                               
    Foreign currency translation adjustments
    -       -       -       -       11,040       11,040  
    Net income
    -       -       -       65,168       -       65,168  
Total comprehensive income
                                            76,208  
                                                 
BALANCE, February 28, 2011
    70,057     $ 7,006     $ 41,180     $ 474,993     $ 14,091     $ 537,270  
 
*Accumulated Other Comprehensive Income balance primarily consists of foreign currency translation adjustments and has no tax effect.
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
5

 
 
IMMUCOR, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited, amounts in thousands)
 
   
Nine Months Ended
 
   
February 28,
   
February 28,
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income
  $ 65,168     $ 61,096  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    13,411       12,233  
Loss on retirement of fixed assets
    712       429  
Provision for doubtful accounts
    396       306  
Share-based compensation expense
    4,509       4,164  
Deferred income taxes
    5,142       (2,376 )
Excess tax benefit from share-based compensation
    (104 )     (209 )
Changes in operating assets and liabilities:
               
Accounts receivable, trade
    (1,646 )     (5,764 )
Income taxes
    (5,183 )     5,662  
Inventories
    (5,027 )     (9,423 )
Other assets
    1,293       182  
Accounts payable
    (168 )     (1,436 )
Deferred revenue
    (2,250 )     (3,349 )
Accrued expenses and other liabilities
    (2,587 )     (5,992 )
Cash provided by operating activities
    73,666       55,523  
                 
INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (5,533 )     (5,679 )
Cash used in investing activities
    (5,533 )     (5,679 )
                 
FINANCING ACTIVITIES:
               
Repurchase of common stock
    (351 )     (11,727 )
Proceeds from exercise of stock options
    677       269  
Excess tax benefit from share-based compensation
    104       209  
Cash provided by (used in) financing activities
    430       (11,249 )
                 
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    3,466       566  
INCREASE IN CASH AND CASH EQUIVALENTS
    72,029       39,161  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    202,649       136,461  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 274,678     $ 175,622  
                 
SUPPLEMENTAL INFORMATION:
               
       Tax paid
  $ 33,318     $ 30,178  
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
       Movement from inventory to property and equipment of instruments placed on rental agreements
    8,657       9,444  
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
6

 

IMMUCOR, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION
 
Nature of Business
Immucor, Inc. (“Immucor” and, together with its wholly owned subsidiaries, the “Company”) develops, manufactures and sells a complete line of reagents and automated systems used primarily by hospitals, donor centers and reference laboratories in a number of tests performed to detect and identify certain properties of human blood for the purpose of blood transfusion. The Company operates facilities in the United States, Canada, Western Europe and Japan.  The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries.

Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission’s (“SEC”) instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the unaudited condensed consolidated financial statements have been recorded in the interim periods presented.  These unaudited, condensed consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and related notes for the year ended May 31, 2010, included in the Company’s Annual Report on Form 10-K.

The accompanying condensed consolidated financial statements present results of operations for the three and nine months ended February 28, 2011. These results are not necessarily indicative of the results that may be achieved for the year ending May 31, 2011, or any other period.

Basis of Consolidation
The condensed consolidated financial statements include the accounts of Immucor and all its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
2.
INVENTORIES
 
Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value):

   
February 28, 2011
   
May 31, 2010
 
   
(in thousands)
 
             
Raw materials and supplies
  $ 9,142     $ 8,211  
Work in process
    4,065       4,145  
Finished goods
    20,252       23,374  
    $ 33,459     $ 35,730  
 
3.
SHAREHOLDERS’ EQUITY
 
During the first quarter of fiscal 2011, in compliance with statutory tax withholding requirements, the Company reacquired from certain restricted shareholders an aggregate of 18,265 shares valued at $0.4 million. During the first quarter of fiscal 2010, the Company similarly either withheld from certain option exercises or reacquired from certain restricted shareholders an aggregate of 9,481 shares valued at $0.2 million. No shares were reacquired for this purpose during the second or third quarters of fiscal 2011 and 2010.  The Company retired these shares and disclosed their value as ‘Stock repurchases and retirements’ in the condensed consolidated statement of shareholders’ equity and comprehensive income and as ‘Repurchase of common stock’ under financing activities in the condensed consolidated statements of cash flows.

The shares acquired were returned to the status of authorized, but unissued shares.
 
 
7

 
 
4.
STOCK REPURCHASE PROGRAM
 
The Company instituted a stock repurchase program in June 1998. In August 2009, the Board of Directors authorized the Company to repurchase an additional 2,000,000 shares of the Company’s common stock under this repurchase program, bringing the total authorized shares to 11,375,000.

No repurchases were made during the three or nine months ended February 28, 2011. During the three months ended February 28, 2010, no repurchases were made. During the nine months ended February 28, 2010, approximately 650,000 shares were repurchased in the open market under the 1998 repurchase plan for approximately $11.6 million.  Shares that are repurchased by the Company are returned to the status of authorized, but unissued shares.
 
As of February 28, 2011, 9,178,356 shares had been repurchased under the program, leaving 2,196,644 shares available for repurchase.  The Company’s stock repurchase program does not have an expiration date.
 
5.
SHARE-BASED COMPENSATION
 
Plan summary

During the first nine months of fiscal 2011, the Immucor, Inc. 2005 Long-Term Incentive Plan (the “2005 Plan”) was the only plan under which the Company was authorized to grant stock incentive awards. Under the 2005 Plan, the Company is able to award stock options, stock appreciation rights, restricted stock, deferred stock, and other performance-based awards as incentive and compensation to employees and directors. Awards for up to 3,600,000 shares of the Company’s common stock may be granted under the 2005 Plan.  There is a restriction on the number of shares that may be used for awards other than stock options (1,800,000), and a separate restriction on the number of shares that may be used for grants of incentive stock options (also 1,800,000), but there is no restriction on the number of shares that may be used for grants of non-incentive stock options. As of February 28, 2011, awards for 2,564,683 shares have been granted under the 2005 Plan and 1,035,317 shares are still available for future awards, all of which can be awarded as restricted shares. The option exercise price is the closing market price on the date of the grant. Option awards generally vest equally over a four-year period and have a six-year contractual term. Restricted stock awards generally vest equally over a five-year period.  The 2005 Plan provides for accelerated vesting of option and restricted stock awards if there is a change in control, as defined in the 2005 Plan.

Valuation method used and assumptions

The fair value of each option grant in the three and nine months ended February 28, 2011 and 2010 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

   
Three Months Ended
 
Nine Months Ended
   
February 28,
 
February 28,
 
February 28,
 
February 28,
   
2011
 
2010
 
2011
 
2010
Risk-free interest rate (1)
 
1.74%
 
2.07%
 
1.59%
 
2.15%
Expected volatility (2)
 
44.11%
 
44.70%
 
43.47%
 
45.52%
Expected life (years) (3)
 
4.25
 
4.25
 
4.25
 
4.25
Expected dividend yield (4)
 
 -
 
 -
 
 -
 
 -
 
 
(1)
Based on the U.S. Treasury yield curve in effect at the time of grant.
 
(2)
Expected stock price volatility is based on the average historical volatility of the Company’s shares during the period corresponding to the expected life of the options.
 
(3)
Represents the period of time options are expected to remain outstanding.  As the Company has so far only awarded “plain vanilla options” as described by Accounting Standards Codification (“ASC”) 718-10-S99, “Compensation – Stock Compensation: Overall: SEC Materials,” the Company used the “simplified method” for determining the expected life of the options granted. The “simplified method” calculates expected term as the sum of the vesting term and the original contractual term divided by two. The Company will continue to use the “simplified method” until such time that it has sufficient historical data for options with six-year contractual terms to estimate the expected term of these share-based awards.
 
 
8

 
 
 
(4)
The Company has not paid dividends on its common stock and does not expect to pay dividends on its common stock in the near future.
 
Stock option activity

The options granted under the 2005 Plan during the nine months ended February 28, 2011 have a six-year term with vesting of 25% at each anniversary of the issuance date.  The Company has not granted any option awards with market or performance conditions. Compensation costs for stock options with tiered vesting terms are recognized evenly over the vesting period.

The following is a summary of the changes in outstanding options for the nine months ended February 28, 2011:
 
   
Number of Shares
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Contractual
Life (years)
   
Aggregate
Intrinsic Value (1)
 
                     
(in thousands)
 
Outstanding at May 31, 2010
    2,660,097     $ 17.77              
Granted  (2)
    374,003     $ 19.10              
Exercised  (3)
    (82,254 )   $ 8.23              
Forfeited
    (52,870 )   $ 24.82              
Expired
    (102,318 )   $ 24.86              
Outstanding at February 28, 2011
    2,796,658     $ 17.83     3.8     $ 13,789  
                               
Exercisable at February 28, 2011
    1,835,278     $ 15.82     3.5     $ 12,908  
 
 
(1)
The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of options that are in the money as of the date presented).
 
(2)
The weighted-average grant-date fair value of share options granted during the first nine months of fiscal years 2011 and 2010 was $7.14 and $6.50, respectively.
 
(3)
The total intrinsic value of share options exercised during the first nine months of fiscal years 2011 and 2010 was $1.0 million and $0.5 million, respectively.

As of February 28, 2011, there was $5.7 million of total unrecognized compensation cost related to nonvested stock option awards. This compensation cost is expected to be recognized through February 2015, based on existing vesting terms with the weighted average remaining expense recognition period being approximately 2.3 years.

Restricted stock activity

The restricted stock granted under the 2005 Plan during the nine months ended February 28, 2011 vests 20% at each anniversary of the issuance date.  The Company has not granted any share awards with market or performance conditions. Compensation costs for restricted stock with tiered vesting terms are recognized evenly over the vesting period.

 
9

 

The following is a summary of the changes in nonvested restricted stock for the nine months ended February 28, 2011:
 
   
Number of Shares
   
Weighted-Average
Grant-Date
Fair Value
 
Nonvested stock outstanding at May 31, 2010
    288,168     $ 18.54  
Granted
    211,865     $ 19.10  
Vested
    (80,960 )   $ 18.67  
Forfeited
    (21,251 )   $ 18.53  
Nonvested stock outstanding at February 28, 2011
    397,822     $ 18.81  
 
The total fair value of restricted shares vested was $1.6 million and $1.0 million during the nine months ended February 28, 2011 and 2010, respectively.

As of February 28, 2011, there was $5.8 million of total unrecognized compensation cost related to nonvested restricted stock awards. This compensation cost is expected to be recognized through June 2015, based on existing vesting terms with the weighted average remaining expense recognition period being approximately 3.6 years.
 
6.
COMPREHENSIVE INCOME
 
The components of comprehensive income for the three and nine months ended February 28, 2011 and 2010 are as follows (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
February 28,
   
February 28,
   
February 28,
   
February 28,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 22,686     $ 20,061     $ 65,168     $ 61,096  
Net foreign currency translation adjustments
    5,521       (5,306 )     11,040       381  
Comprehensive income
  $ 28,207     $ 14,755     $ 76,208     $ 61,477  
 
No tax effect is recorded for foreign currency translation adjustments as the foreign net assets translated are deemed permanently invested.
 
7.
EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings per share in accordance with ASC 260, “Earnings per Share.” Basic earnings per common share is calculated by dividing net income by weighted-average common shares outstanding during the period.  Diluted earnings per common share is calculated by dividing net income by weighted-average common shares outstanding during the period plus dilutive potential common shares, which are determined as follows (in thousands, except per share data):

 
10

 
 
   
Three Months Ended
   
Nine Months Ended
 
   
February 28,
   
February 28,
   
February 28,
   
February 28,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Numerator for basic and diluted earnings per share:
                       
Net Income
  $ 22,686     $ 20,061     $ 65,168     $ 61,096  
Denominator:
                               
For basic earnings per share
- weighted average shares basis
    70,037       69,869       70,005       70,121  
Effect of dilutive stock options and restricted stock
    628       587       558       543  
Denominator for diluted earnings per share
-adjusted weighted average shares basis
    70,665       70,456       70,563       70,664  
                                 
Earnings per common share – basic
  $ 0.32     $ 0.29     $ 0.93     $ 0.87  
Earnings per common share – diluted
  $ 0.32     $ 0.28     $ 0.92     $ 0.86  
 
Out of the money options were excluded from the above calculation because inclusion of these securities would be anti-dilutive. For the quarters ended February 28, 2011 and 2010, 1,447,893 and 1,674,235, respectively, of out-of-the-money options were excluded. For the nine months ended February 28, 2011 and 2010, 1,839,871 and 1,774,366, respectively, of out-of-money options were excluded.
 
8.
SEGMENT AND GEOGRAPHIC INFORMATION
 
The Company’s operations and segments are organized around geographic areas.  The foreign locations principally function as distributors of products developed and manufactured by the Company in the United States and Canada.  The accounting policies applied in the preparation of the Company’s consolidated financial statements are applied consistently across all segments.  Intersegment sales are recorded at market price and are eliminated in consolidation.

Segment information for the three and nine months ended February 28, 2011 and 2010 is summarized below (in thousands).

 
11

 
 
   
For the Three Months Ended February 28, 2011
 
                                     
   
U.S.
   
Europe
   
Canada
   
Japan
   
Elims
   
Consolidated
 
 Traditional reagent revenues:
                                   
    Unaffiliated customers
  $ 37,721     $ 7,160     $ 2,359     $ 2,365     $ -     $ 49,605  
    Affiliates
    1,127       1,248       30       -       (2,405 )     -  
       Total
    38,848       8,408       2,389       2,365       (2,405 )     49,605  
 Capture revenues:
                                               
    Unaffiliated customers
    14,214       5,519       1,338       468       -       21,539  
    Affiliates
    1,844       674       11       -       (2,529 )     -  
       Total
    16,058       6,193       1,349       468       (2,529 )     21,539  
 Net instrument revenues:
                                               
    Unaffiliated customers
    7,038       2,825       712       232       -       10,807  
    Affiliates
    608       1,161       -       -       (1,769 )     -  
       Total
    7,646       3,986       712       232       (1,769 )     10,807  
 Net molecular immunohematology revenues:
                                               
    Unaffiliated customers
    902       496       -       -       -       1,398  
    Affiliates
    261       228       -       -       (489 )     -  
       Total
    1,163       724       -       -       (489 )     1,398  
                                                 
 Net Sales
    63,715       19,311       4,450       3,065       (7,192 )     83,349  
                                                 
 Income (loss) from operations
    28,237       3,213       1,899       644       (126 )     33,867  
                                                 
 Depreciation
    2,299       1,034       90       42       -       3,465  
 Amortization
    1,008       40       -       23       -       1,071  
 Income tax (benefit) expense
    9,454       973       653       197       (45 )     11,232  
 Capital expenditures
    1,158       178       563       5       -       1,904  

 
   
For the Three Months Ended February 28, 2010
 
                                     
   
U.S.
   
Europe
   
Canada
   
Japan
   
Elims
   
Consolidated
 
 Traditional reagent revenues:
                                   
    Unaffiliated customers
  $ 38,660     $ 7,286     $ 2,465     $ 2,099     $ -     $ 50,510  
    Affiliates
    1,028       1,173       49       -       (2,250 )     -  
       Total
    39,688       8,459       2,514       2,099       (2,250 )     50,510  
 Capture revenues:
                                               
    Unaffiliated customers
    10,994       5,607       1,194       285       -       18,080  
    Affiliates
    1,685       708       -       -       (2,393 )     -  
       Total
    12,679       6,315       1,194       285       (2,393 )     18,080  
 Net instrument revenues:
                                               
    Unaffiliated customers
    6,614       3,033       562       68       -       10,277  
    Affiliates
    1,150       1,052       -       -       (2,202 )     -  
       Total
    7,764       4,085       562       68       (2,202 )     10,277  
 Net molecular immunohematology revenues:
                                               
    Unaffiliated customers
    965       667       -       -       -       1,632  
    Affiliates
    389       -       -       -       (389 )     -  
       Total
    1,354       667       -       -       (389 )     1,632  
                                                 
 Net Sales
    61,485       19,526       4,270       2,452       (7,234 )     80,499  
                                                 
 Income from operations
    24,989       3,151       2,151       296       287       30,874  
                                                 
 Depreciation
    2,089       949       80       26       -       3,144  
 Amortization
    1,004       40       -       21       -       1,065  
 Income tax expense
    8,359       1,117       752       -       104       10,332  
 Capital expenditures
    1,092       38       46       19       -       1,195  
 
 
12

 
 
   
For the Nine Months Ended February 28, 2011
 
                                     
   
U.S.
   
Europe
   
Canada
   
Japan
   
Elims
   
Consolidated
 
 Traditional reagent revenues:
                                   
    Unaffiliated customers
  $ 113,258     $ 21,165     $ 7,394     $ 7,056     $ -     $ 148,873  
    Affiliates
    3,322       3,499       198       -       (7,019 )     -  
       Total
    116,580       24,664       7,592       7,056       (7,019 )     148,873  
 Capture revenues:
                                               
    Unaffiliated customers
    39,942       16,977       3,937       1,356       -       62,212  
    Affiliates
    5,163       2,202       11       -       (7,376 )     -  
       Total
    45,105       19,179       3,948       1,356       (7,376 )     62,212  
 Net instrument revenues:
                                               
    Unaffiliated customers
    20,590       9,803       2,105       821       -       33,319  
    Affiliates
    2,565       5,357       -       -       (7,922 )     -  
       Total
    23,155       15,160       2,105       821       (7,922 )     33,319  
 Net molecular immunohematology revenues:
                                               
    Unaffiliated customers
    2,576       1,556       -       -       -       4,132  
    Affiliates
    732       775       -       -       (1,507 )     -  
       Total
    3,308       2,331       -       -       (1,507 )     4,132  
                                                 
 Net Sales
    188,148       61,334       13,645       9,233       (23,824 )     248,536  
                                                 
 Income (loss) from operations
    80,992       8,857       6,193       2,134       (150 )     98,026  
                                                 
 Depreciation
    6,669       3,135       259       114       -       10,177  
 Amortization
    3,048       119       -       67       -       3,234  
 Income tax (benefit) expense
    27,981       2,890       2,122       349       (47 )     33,295  
 Capital expenditures
    3,977       281       1,040       235       -       5,533  
 Property & equipment, net
    37,525       13,256       2,825       431       -       54,037  
 Total assets at period end
    657,440       86,162       37,132       24,436       (207,862 )     597,308  
 
 
13

 
 
   
For the Nine Months Ended February 28, 2010
 
                                     
   
U.S.
   
Europe
   
Canada
   
Japan
   
Elims
   
Consolidated
 
 Traditional reagent revenues:
                                   
    Unaffiliated customers
  $ 120,821     $ 22,237     $ 7,183     $ 6,349     $ -     $ 156,590  
    Affiliates
    3,450       3,665       185       -       (7,300 )     -  
       Total
    124,271       25,902       7,368       6,349       (7,300 )     156,590  
 Capture revenues:
                                               
    Unaffiliated customers
    34,580       17,355       3,608       845       -       56,388  
    Affiliates
    5,126       2,241       -       -       (7,367 )     -  
       Total
    39,706       19,596       3,608       845       (7,367 )     56,388  
 Net instrument revenues:
                                               
    Unaffiliated customers
    18,666       8,773       1,699       456       -       29,594  
    Affiliates
    3,783       4,297       -       -       (8,080 )     -  
       Total
    22,449       13,070       1,699       456       (8,080 )     29,594  
 Net molecular immunohematology revenues:
                                               
    Unaffiliated customers
    2,376       1,193       -       -       -       3,569  
    Affiliates
    876       -       -       -       (876 )     -  
       Total
    3,252       1,193       -       -       (876 )     3,569  
                                                 
 Net Sales
    189,678       59,761       12,675       7,650       (23,623 )     246,141  
                                                 
 Income from operations
    80,563       7,051       6,091       891       283       94,879  
                                                 
 Depreciation
    5,729       2,949       249       101       -       9,028  
 Amortization
    3,019       125       -       61       -       3,205  
 Income tax expense
    28,629       2,578       2,130       -       218       33,555  
 Capital expenditures
    5,261       280       102       36       -       5,679  
 Property & equipment, net
    36,057       10,911       1,619       236       -       48,823  
 Total assets at period end
    569,537       74,524       29,779       19,642       (198,599 )     494,883  
 
Net export sales to unaffiliated customers (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
February 28,
   
February 28,
   
February 28,
   
February 28,
 
   
2011
   
2010
   
2011
   
2010
 
                         
United States
  $ 1,527     $ 1,373     $ 4,804     $ 4,037  
Europe
    1,374       1,466       4,757       4,831  
Canada
    453       387       1,583       1,558  
Total net export sales
  $ 3,354     $ 3,226     $ 11,144     $ 10,426  
 
9.
COMMITMENTS AND CONTINGENCIES
 
In October 2007, the Company reported that the Federal Trade Commission (“FTC”) was investigating whether Immucor violated federal antitrust laws or engaged in unfair methods of competition through three acquisitions made in the period from 1996 through 1999, and whether Immucor or others engaged in unfair methods of competition by restricting price competition.  At various times since the investigation began, the Company provided certain documents and information to the FTC concerning those acquisitions and concerning the Company’s product pricing activities since then, including copies of documents the Company provided to the United States Department of Justice, Antitrust Division (“DOJ”) in the previously-reported DOJ investigation that was closed in November 2010.   The Company has cooperated with the FTC and intends to continue cooperating.  At this time the Company cannot reasonably assess the timing or outcome of the investigation or its effect, if any, on its business.

 
14

 
 
In November 2010, the DOJ informed the Company that its investigation of the Company had been closed. The Company learned in April 2009 that the Company was being investigated for possible violations of the federal criminal antitrust laws in the blood reagents industry. Immucor cooperated fully with the investigation, which was closed with no further action taken on the part of the DOJ.

Beginning in May 2009, a series of class action lawsuits was filed against the Company, Ortho-Clinical Diagnostics, Inc. and Johnson & Johnson Health Care Systems, Inc. alleging that the defendants conspired to fix prices at which blood reagents are sold, asserting claims under Section 1 of the Sherman Act, and seeking declaratory and injunctive relief, treble damages, costs, and attorneys’ fees. All of these complaints make substantially the same allegations. The cases have been consolidated in the United States District Court for the Eastern District of Pennsylvania.  The defendants’ motions to dismiss were denied and discovery began in December 2010.  No determination has been made whether any of the plaintiffs’ claims have merit or should be allowed to proceed as a class action. The Company intends to vigorously defend against these cases. At this time the Company cannot reasonably assess the timing or outcome of this litigation or its effect, if any, on its business.

Private securities litigation in the United States District Court for the Northern District of Georgia against the Company and certain of its current and former directors and officers asserts federal securities fraud claims on behalf of a putative class of purchasers of the Company's Common Stock between October 19, 2005 and June 25, 2009. The case alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, by failing to disclose that Immucor had violated the antitrust laws, and challenges the sufficiency of the Company’s disclosures about the results of FDA inspections and the Company’s quality control efforts. There has been no discovery and no determination has been made whether any of the plaintiffs’ claims have merit or should be allowed to proceed as a class action. The Company will defend the case vigorously. At this time, the Company cannot reasonably assess the timing or outcome of this litigation or its effect, if any, on its business.

Other than as set forth above, the Company is not currently subject to any material legal proceedings, nor, to its knowledge, is any material legal proceeding threatened against it.  However, from time to time, the Company may become a party to certain legal proceedings in the ordinary course of business.
 
10.
RECENT ACCOUNTING PRONOUNCEMENTS
 
Adopted by the Company in fiscal 2011

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an update to ASC 810, “Consolidation” (“ASC 810”). This update changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This update will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009.  The adoption of this update to ASC 810 during the first quarter of fiscal 2011 did not have an impact on the Company’s consolidated financial statements.

In December 2009, the FASB issued ASU 2009-16, “Accounting for Transfers of Financial Assets” (“ASU 2009-16”), which is an amendment of ASC 860, “Transfers and Servicing.”  This update requires more information about the transfer of financial assets.  More specifically, ASU 2009-16 eliminates the concept of a “qualified special purpose entity”, changes the requirements for derecognizing financial assets, and enhances the information reported to users of financial statements.  This update is effective for fiscal years beginning on or after November 15, 2009. The adoption of ASU 2009-16 during the first quarter of fiscal 2011 did not have an impact on the Company’s consolidated financial statements.

 
15

 
 
In April 2010, the FASB issued ASU 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”), which is an amendment of ASC 718, “Compensation—Stock Compensation.  This update clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This update is effective for fiscal years and interim periods beginning on or after December 15, 2010, however, early application is permitted.  The adoption of ASU 2010-13 during the first quarter of fiscal 2011 did not have an impact on the Company’s consolidated financial statements. 

Not yet adopted by the Company

In October 2009, the FASB issued ASU 2009-13, “Multiple Deliverables Revenue Arrangements” (“ASU 2009-13”), which is an amendment of ASC 605-25, “Revenue Recognition: Multiple Element Arrangements.”  This update addresses the accounting for multiple-deliverable arrangements to allow the vendor to account for deliverables separately instead of as one combined unit by amending the criteria for separating consideration in multiple-deliverable arrangements.  This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on (a) vendor-specific objective evidence, (b) third-party evidence or (c) best estimate of selling price.  The residual method of allocation has been eliminated and arrangement consideration is now required to be allocated to all deliverables at the inception of the arrangement using the selling price method.  Additionally, expanded disclosures will be required relating to multiple deliverable revenue arrangements.  This update will be effective for fiscal years beginning on or after June 15, 2010, which corresponds to the Company’s first quarter of fiscal 2012.  Early adoption is permitted, however, the Company does not intend to adopt early.  The Company is currently evaluating the impact of the adoption of this update to ASC 605-25 on its financial statements.

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

From time to time the Company makes statements or projections about future financial results or economic performance, or statements about plans and objectives for future operations, which are referred to as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the safe harbor provisions set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by words such as “plans,” “expects,” “believes,” “anticipates,” “estimates,” “projects,” “will,” “should” and other words of similar meaning.  We sometimes use forward-looking statements in discussions of our business, for example, when discussing future operations, financial performance, product development and new product launches, FDA and other regulatory applications and approvals, market position and expenditures.  Some of the statements in this report are such forward-looking statements.  Factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company include the following, some of which are described in greater detail below: lower industry blood demand and the subsequent impact on the business; lower than expected demand for the Company’s instruments, including the new NEO; the decision of customers to defer capital spending; the outcome of the administrative action (“notice of intent to revoke our biological license”) received from the Food and Drug Administration (“FDA”); customer reaction to the FDA action and the subsequent impact on the business; the strengthening of the U.S. Dollar versus any of the functional currencies in which the Company operates and its adverse impact on reported results; the unexpected change in the mix of instruments being purchased instead of acquired through other means, which could significantly change costs recognized in the period; the consequences of the recent natural disasters in Japan; the failure of customers to efficiently integrate the Company’s instruments into their blood banking operations; increased competition in the sale of instruments and reagents, particularly in the United States; unanticipated operational problems that result in non-compliance with FDA regulations; the failure to effectively integrate BioArray operations into the Company’s overall operations; product development obstacles including obstacles related to the development of the next generation automated instrument for the molecular immunohematology products; regulatory obstacles including obstacles in securing regulatory approval of molecular immunohematology products; the inability to hire and retain, and the unexpected loss of, key managers; changes in interest rates; the inability of the Company’s Japanese subsidiary as well as our molecular immunohematology operations to attain expected revenue, gross margin and net income levels; the outcome of any legal claims or regulatory investigations known or unknown, including the ongoing investigation by the  Federal Trade Commission; customer and shareholder class action lawsuits; the Company’s inability to protect its intellectual property, particularly as to the molecular immunohematology products, or its infringement of the intellectual property of others; lower than expected market acceptance of the molecular immunohematology products; the unexpected application of different accounting rules; general economic conditions; and adverse developments with respect to the operation or performance of the Company, its products and its affiliates or the market price of its common stock. Investors are cautioned not to place undue reliance on any forward-looking statements. The Company cautions that historical results should not be relied upon as indications of future performance.  The Company assumes no obligation to update any forward-looking statements.  Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended May 31, 2010 as filed with the SEC on July 23, 2010 as such risk factors may be revised or expanded in this report.

 
16

 

Overview
 
Our Business
 
We develop, manufacture, and sell a complete line of reagents and automated systems used primarily by hospitals, donor centers and reference laboratories for testing to detect and identify certain properties of human blood for the purpose of blood transfusion. We have manufacturing facilities in the United States (“U.S.”) and Canada and sell our products through our direct sales networks in the U.S., Canada, Western Europe and Japan as well as through third-party distributors in other markets.

We operate in a highly regulated industry and are subject to continuing compliance with multiple country-specific statutes, regulations and standards. For example, in the U.S. the Food and Drug Administration (“FDA”) regulates all aspects of the blood banking industry, including the marketing of reagents and instruments used to detect and identify blood properties. Additionally, we are subject to government legislation that governs the delivery of healthcare.  For example, in the U.S. the Patient Protection and Affordable Care Act was signed into law in March 2010 and contains elements that could meaningfully change the way healthcare is developed, delivered and paid for in the U.S.  Included in the legislation is a 2.3% excise tax on medical device makers beginning in 2013.

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

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

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

Launched worldwide in 2007, Echo, our third generation automated instrument, is a compact bench top, fully-automated walk-away serology instrument that meets the needs of the small- to medium-sized hospital market as well as integrated delivery networks that want to standardize the operations of their laboratories. Echo offers an extensive test menu and significant labor reduction while increasing productivity and patient safety. Echo features STAT functionality, exceptional mean time between failures and what we believe is the fastest turnaround time in the industry.

In August 2008, we invested in what we believe will be the future of the blood bank – molecular immunohematology – with our acquisition of privately-held BioArray Solutions (“BioArray”). BioArray pioneered the development of DNA typing of blood for transfusion. With the goal of improving transfusion medicine, we believe that molecular immunohematology will revolutionize blood bank operations. In many countries, blood pre-transfusion testing is limited to the prevention of transfusion reactions and not for the prevention of alloimmunization, which occurs when antigens foreign to the patient are inadvertently introduced into the patient’s blood system through transfusions. If alloimmunization occurs, the patient develops new antibodies in response to the foreign antigens, thereby complicating future transfusions. By using multiplex, cost-effective molecular testing, we believe that our molecular technology allows testing to prevent alloimmunization for better patient care.

 
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In late fiscal 2010, we received CE (“Conformité Européenne”) Mark approval denoting regulatory clearance in the European Union (“EU”) for the Human Platelet Antigen (“HPA”) molecular immunohematology product as well as our current semi-automated molecular immunohematology instrument, the Array Imaging System and BASIS™ database. While the testing itself is primarily manual today, the current instrument automates the reading and interpretation of test results. In June 2010, we received CE Mark approval in the EU for our Human Erythrocyte Antigen (“HEA”) molecular immunohematology product. Our molecular offering is currently available for Research Use Only in the U.S.

We are currently working on the next generation automated instrument, which we believe will allow for the further commercialization of our molecular immunohematology technology by automating the testing. Our current timeline is to have a Research Use Only instrument available in calendar 2012.

Business Highlights

A significant business highlight is the development of the next generation automated molecular instrument to facilitate the full scale commercialization of our acquired molecular immunohematology offering, which is discussed above under “Our Business.” The following discusses other highlights in our business.

Lower Industry Demand in the U.S. Market – Beginning early in our fiscal year 2010, we believe the U.S. market began experiencing lower demand for blood because of the macroeconomic environment. Lower blood demand negatively impacts our reagent revenue as fewer blood transfusions result in lower testing volume. We believe industry demand in the U.S. market declined approximately 3.5% in our fiscal year 2010 and we are currently expecting a decline of between 3% and 4% in industry demand during our fiscal year 2011.

U.S. Department of Justice Closes its Investigation In November 2010, the United States Department of Justice, Antitrust Division (“DOJ”) informed us that its investigation of the Company had been closed. We learned in April 2009 that we were being investigated for possible violations of the federal criminal antitrust laws in the blood reagents industry.  We cooperated fully with the investigation, which was closed with no further action taken on the part of the DOJ.

Worldwide Launch of NEO – In late fiscal 2010, we began the worldwide introduction of our fourth generation automated instrument for serology testing, NEO, which replaced our previous high volume instrument, Galileo. We believe Galileo, which was launched in Western Europe in 2002 and in the U.S. in 2004, had reached its natural replacement cycle of five to seven years. Like Galileo, NEO is targeted at high volume customers: large hospitals, donor centers and reference laboratories. We believe NEO will have broader market appeal in the hospital segment than Galileo due to added functionality and faster turnaround times. We have received regulatory approval in all our direct markets for NEO. In the European Union, NEO received CE Mark approval in February 2010, and in the U.S., NEO received FDA clearance in April 2010.

Continued market penetration of the Echo instrumentWe launched our third generation automated instrument for serology testing, Echo, in the first quarter of fiscal 2008. Echo features STAT functionality, exceptional mean time between failures and what we believe is the fastest turnaround time in the industry. Echo is targeted at small- to medium-sized hospitals, the largest segment of our market, as well as at integrated delivery networks, in combination with NEO, to facilitate standardization across facilities.

 
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FDA Administrative Action – In June 2009, we announced that the FDA, in an administrative action based on a January 2009 inspection, issued a notice of intent to revoke (“NOIR”) our biologics license with respect to our Reagent Red Blood Cells and Anti-E (Monoclonal) Blood Grouping Reagent products. Under this administrative action, we have the opportunity to demonstrate or achieve compliance before the FDA initiates revocation proceedings or takes other action. The FDA did not order the recall of any of our products or restrict us from selling these products. This administrative action was a follow up to a warning letter that we received in May 2008. We had been working on an FDA-approved remediation plan, submitted after the warning letter, but had failed to make adequate progress at the time of the FDA’s follow up inspection in January 2009. In early calendar 2009 (during our third quarter of fiscal 2009), we formalized efforts to improve our quality system through the Quality Process Improvement Project, which is discussed in further detail below. In August 2009, in response to the June 2009 administrative action, we submitted a detailed remediation plan that outlined our actions and timelines to correct the FDA’s noted deficiencies from the January 2009 inspection. The Quality Process Improvement Project served as the basis for the detailed remediation plan. During our third fiscal quarter of 2010, we completed the portion of the Project designed to remediate the deficiencies from the January 2009 inspection as well as other high-risk compliance areas.  During June 2010, the FDA conducted an inspection of our facilities. During September 2010, we were notified by the FDA that while the June 2010 inspection “disclosed that substantive corrections have been made, some deviations continue.” Therefore, the FDA stated that the conditions outlined in the June 2009 NOIR administrative action remain in effect. The FDA stated it will evaluate our overall compliance status at its next inspection.

Quality Process Improvement Project – During our third quarter of fiscal 2009, we formalized our efforts to improve the processes and procedures of our quality system through the establishment of the Quality Process Improvement Project. The Project expanded the role of consultants hired in April 2008. The Project’s objective is to both remediate the deficiencies noted by FDA and to deliver on our commitment of maintaining a world-class quality system. During fiscal 2010 and fiscal 2009, we spent approximately $5.9 million and $2.4 million, respectively, on the Project. These costs were reflected in cost of sales and primarily represent the cost of external consultants who were assisting us with the Project. During our third fiscal quarter of 2010, we completed the first phase of the Project, which was designed to remediate the deficiencies from the January 2009 inspection as well as other high-risk compliance areas. The second phase of the Project continues with a focus on ongoing quality systems improvements as well as the deficiencies noted in the FDA’s June 2010 inspection. We are using primarily internal resources on the Project going forward.

Performance

   
Three Months Ended
               
Nine Months Ended
             
   
February 28,
   
February 28,
   
Change
   
February 28,
   
February 28,
   
Change
 
   
2011
   
2010
   
Amount
   
%
   
2011
   
2010
   
Amount
   
%
 
   
($ in thousands)
         
($ in thousands)
       
Net sales
  $ 83,349     $ 80,499     $ 2,850     4%     $ 248,536     $ 246,141     $ 2,395     1%  
Gross margin
    59,019       55,714       3,305     6%       177,071       173,543       3,528     2%  
Gross margin percentage
    70.8 %     69.2 %                   71.2 %     70.5 %              
Operating expenses
    25,152       24,840       312     1%       79,045       78,664       381     0%  
Income from operations
    33,867       30,874       2,993     10%       98,026       94,879       3,147     3%  
Non-operating income (expense)
    51       (481 )     532     -111%       437       (228 )     665     -292%  
Income before income tax
    33,918       30,393       3,525     12%       98,463