Note 2 - Business Combinations

12 Months Ended

May 31, 2014

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

2. BUSINESS COMBINATIONS

Business combinations completed in fiscal 2014:

Acquisition of Organ-i – On May 30, 2014, the Company completed the acquisition of Organ-i, Inc. (“Organ-i”) a privately-held company focused on developing non-invasive tests to monitor and predict organ health for transplant recipients. This acquisition expands our product offering for post-transplant testing and directly complements our existing LIFECODES business. The total cash purchase price of this business was $12.0 million plus a potential earn-out of up to $18.0 million if certain product and financial targets during fiscal years 2015 through 2020 are met. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $11.3 million. This was determined by applying a form of the income approach, based on the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions were the earn-out period payment probabilities and an appropriate discount rate. These assumptions are considered to be level 3 inputs by ASC Topic 820, Fair Value Measurement, which is not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration paid was approximately $23.3 million. The other identifiable intangible assets including existing technology, IPR&D and non-competition agreements are valued at $26.7 million. Goodwill is valued at $5.8 million and the long-term deferred tax liability is valued at $9.1 million. The purchase price allocation for this acquisition is preliminary as of May 31, 2014 and is subject to material valuation adjustments or tax matters that may be identified within the measurement period. The goodwill arising from this acquisition is not deductible for tax purpose. The operating results of the acquired business are not reflected in the Company’s consolidated results of operations since the acquisition occurred on the last business day of fiscal 2014. The contingent consideration liability is considered long-term and is included in long-term liabilities in the Company’s consolidated balance sheet as of May 31, 2014.

Acquisition of LIFECODES distribution businesses – The Company completed the acquisition of both the LIFECODES distribution businesses in the United Kingdom (“UK”) and Italy on January 31, 2014. These acquisitions enable Immucor to streamline the distribution of its LIFECODES products in Europe.

The Company acquired the stock of the UK distribution business for a total cash purchase price of $4.0 million, including acquired cash of $1.2 million. The Company acquired the assets of the Italy distribution business for a total cash purchase price of $2.4 million. In total, the Company acquired other identifiable intangible assets of $3.5 million and $1.1 million of goodwill in these acquisitions.  The other identifiable intangible assets are mainly customer relationships, which represent the fair value of the existing customer base. The tangible assets acquired in these acquisitions were not material to the Company’s consolidated financial statements. All of the goodwill arising from the Italy asset acquisition is deductible for income tax purposes.  The goodwill arising from the UK acquisition is not deductible for tax purpose. The operating results of the acquired businesses have been included in the Company’s consolidated results of operations since their dates of acquisition.

Business combinations completed in fiscal 2013:

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

Purchase Price Allocation

The total cash purchase price of the LIFECODES business was $86.2 million, of which $87.3 was paid in fiscal 2013, and $1.1 million was returned by the seller in the first quarter of fiscal 2014 as a result of finalizing certain purchase price adjustments. The purchase agreement included a contingent consideration arrangement for a potential earn-out totaling $10.0 million in cash based upon the LIFECODES business attaining certain operating targets for fiscal year 2013. Management estimated that the fair value of the contingent consideration arrangement as of the acquisition date was approximately $4.4 million. This was determined by applying a form of the income approach, based on the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions were the earn-out period payment probabilities, and an appropriate discount rate. These assumptions are considered to be level 3 inputs which are not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration was approximately $90.6 million. The contingent consideration liability was included in current liabilities in the Company’s consolidated balance sheet as of May 31, 2013.

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

During fiscal 2014, the fair value of the contingent consideration liability was decreased to zero to reflect a change in the earn-out payment probabilities, and the accretion of the fair value amount. These decreases in the contingent consideration liability are reflected as a gain of $4.6 million in the acquisition-related items in the consolidated statements of operations in fiscal 2014. The LIFECODES acquisition was recorded under the acquisition method of accounting by the Company and pushed-down to the acquired businesses by allocating the purchase consideration of $90.6 million to the cost of the assets acquired, including intangible assets, based on their estimated fair values at the acquisition date. The allocation of purchase price was based on management’s judgment after evaluating several factors including valuation assessments of tangible and intangible assets. The excess of the total purchase price over the fair value of assets acquired and the liabilities assumed of $36.9 million was recorded as goodwill. The goodwill resulting from the LIFECODES acquisition is largely attributable to the synergies it is expected to achieve with the existing Immucor business, future technologies management expects to develop, and the value of its assembled workforce.

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

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

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

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

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

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

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

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

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

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

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

Identifiable Intangible Assets

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

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

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

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

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

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

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

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

Sources and Uses of Funds

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

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

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

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

Financial Information

The Company included the operating results of LIFECODES in the consolidated statement of operations since the acquisition date on March 22, 2013. The results for fiscal 2013 included net sales of $9.5 million and a loss before income taxes of $2.6 million.

Pro forma Financial Information

The financial information in the table below summarizes the results of operations of the Company on a pro forma basis, as though the LIFECODES acquisition had occurred at June 1, 2012. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the LIFECODES acquisition had taken place at the beginning of the earliest period presented. Such pro forma financial information is based on the historical financial statements of the Company. This pro forma financial information is based on estimates and assumptions, which have been made solely for purposes of developing such pro forma information, including, without limitation, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of the Company’s tangible assets and identifiable intangible assets, and interest expense resulting from the LIFECODES acquisition. The unaudited pro forma financial information presented below does not reflect any synergies or operating cost reductions that may be achieved, or pro forma financial information from the UK or Italy distribution businesses or the Organ-i business acquired in fiscal 2014. These businesses are not reflected in the unaudited pro forma financial information below because the impact of these businesses was not significant to the Company’s consolidated net sales or results of operations. Also included in the table below are our actual results for fiscal 2014 (in thousands):

	Twelve Months Ended
	May 31
	2013			2012
	(Unaudited)
Net sales	$	385,916			382,368
Net loss	$	(39,326	)		(61,121	)

Business combinations completed in fiscal 2012:

Acquisition of Immucor – The Company was acquired on August 19, 2011 (the “Immucor Acquisition Date”) as described in Note 1.

Purchase Price Allocation

The Immucor acquisition was recorded under the acquisition method of accounting by the Parent and pushed-down to the Company by allocating the purchase consideration of $1.9 billion to the cost of the assets acquired, including intangible assets, based on their estimated fair values at the Immucor Acquisition Date. The allocation of purchase price is based on management’s judgment after evaluating several factors, including, but not limited to, valuation assessments of tangible and intangible assets. The excess of the total purchase price over the fair value of assets acquired and the liabilities assumed of $972.3 million is recorded as goodwill. The goodwill arising from the Immucor acquisition consists largely of the commercial potential of the Company and the value of the assembled workforce.

The following sets forth the Company’s purchase price allocation (in thousands):

Cash on hand	$	322,963
Accounts receivable		66,781
Inventories		60,000
Property and equipment		64,683
Intangible assets		779,860
Goodwill		972,295
Current liabilities		(53,429	)
Deferred revenue		(4,107	)
Deferred tax assets and liabilities - net		(273,962	)
Other assets and liabilities - net		4,303
Total purchase price allocation:	$	1,939,387

The Company has acquired intangible assets, not including goodwill, totaling approximately $779.9 million in the Immucor Acquisition.  The amortization of these intangibles is not deductible for tax purposes and hence the Company has recorded a deferred tax liability of approximately $291.9 million as of the acquisition date to offset the future book amortization related to these intangibles. None of the goodwill of approximately $972.3 million resulting from the Immucor acquisition is deductible for tax purposes.

Identifiable Intangible Assets

In performing the purchase price allocation, the Company considered, among other factors, the intended future use of acquired assets, analyses of historical financial performance and estimates of future performance. The following table sets forth the

components of intangible assets as of the date of the Immucor acquisition (in thousands): 

			Useful Life
Intangible Asset	Fair Value		in Years
Customer relationships	$	455,000		20
Existing technology and trade names		266,000		11
Corporate trade name		40,000		15
Below market leasehold interests		860		5
In-process research and development		18,000	n/a
	$	779,860

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

Existing technologies relate to the serology instrument platforms (Galileo, NEO, and Echo); the Company’s proprietary Capture reagent technology; and the molecular immunohematology testing technology.

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

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

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

In-process research and development relates primarily to the molecular immunohematology business. The other projects valued relate to technological improvements for the serology instrument platforms, and generally are applicable to the current NEO and Echo instruments, and thus will be able to yield a cash flow impact relatively quickly upon approval and launch. In-process research and development is not amortized, but will be evaluated on a periodic basis to determine which projects remain in process. When a project is completed, its value will be amortized over its useful life. If a project is abandoned, its value is written off.

Sources and Uses of Funds

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

Sources:
Proceeds from Term Loan	$	596,550
Proceeds from Notes		394,856
Proceeds from equity contributions		735,187
Company cash used in transaction		301,053
	$	2,027,646
Uses:
Equity purchase price	$	1,939,387
Transaction costs		88,259
	$	2,027,646

Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the Immucor acquisition. Transaction costs paid at closing totaled $88.3 million and include $42.5 million that was capitalized as deferred financing costs and $16.9 million which was incurred by the Company and included in general and administrative expense in the Predecessor fiscal 2012 period. The remaining $28.9 million was incurred by the Parent but paid by the Company out of equity proceeds. These costs have been reflected on the balance sheet as a reduction of the capital contribution from the Parent. In addition, the Company paid $2.0 million of transaction costs prior to closing that is also included in general and administrative expense in the Predecessor fiscal 2012 period.

Pro forma Financial Information

The financial information in the table below summarizes the results of operations of the Company on a pro forma basis, as though the Immucor Acquisition had occurred at June 1, 2011. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Immucor Acquisition had taken place at the beginning of the earliest period presented. Such pro forma financial information is based on the historical financial statements of the Company. This pro forma financial information is based on estimates and assumptions, which have been made solely for purposes of developing such pro forma information, including, without limitation, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of the Company’s tangible assets and identifiable intangible assets, interest expense and management fee resulting from the Immucor Acquisition. The unaudited pro forma financial information presented below does not reflect any synergies or operating cost reductions that may be achieved.

	Twelve Months Ended
	May 31, 2012			May 31, 2011
	(in thousands)
	Unaudited
Revenue	$	336,724			333,091
Net loss	$	(55,140	)		(3,858	)