10-K 1 blud20150531_10k.htm FORM 10-K blud20150531_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, 2015  
  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 21, 2015, 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 Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

There may be other factors of which we are currently unaware 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.

 

Our Company

 

On August 19, 2011, Immucor was acquired (the “Immucor Acquisition”) by investment funds from TPG Capital, L.P. (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. 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.

 

Acquisitions

 

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.

 

 
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Acquiring LIFECODES strengthened our position in the global in vitro diagnostics market by creating a single source for transfusion and transplantation-related testing products, and signaled 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 have completed the acquisition of three LIFECODES distribution businesses, one in the United Kingdom and one in Italy, both of which were completed on January 31, 2014, and one in India which was completed on August 1, 2014. These acquisitions enable us to streamline the distribution of our LIFECODES products in Europe and in India. We paid $6.8 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. The total cash purchase price to acquire this business was $12.0 million which was funded from cash flows from operating activities.

 

Sentilus

 

On October 1, 2014, we completed the acquisition of Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, FemtoarraysTM. Among other uses, Sentilus has been developing FemtoarraysTM and the underlying technology for use in a variety of in vitro diagnostics areas, including transfusion diagnostics, and could potentially serve as a next generation technology platform for our transfusion diagnostics business. The total purchase price for the Sentilus business was $6.0 million which was paid in cash.

 

Other Investments

 

Sirona Collaboration

 

On October 3, 2014, we entered into a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) for the commercialization of Sirona’s human leukocyte antigen (“HLA”) typing sample preparation and bioinformatics offering for next generation sequencing. As part of this collaborative arrangement, the Company paid $0.7 million for a warrant with an exclusive option to acquire 100% of the common stock of Sirona and loaned $4.6 million bearing interest to Sirona for development funding. The collaborative arrangement includes the potential for future interest bearing loans from the Company of up to $6.7 million over a two year period from the date of the arrangement, subject to the achievement of certain development milestones and other terms of the arrangements, of which, $3.1 million was paid to Sirona as an additional loan on June 1, 2015. As of May 31, 2015, the total cash investment in the collaborative arrangement with Sirona was $5.3 million which was paid in cash and financed with a combination of debt (borrowings from our Term Loan Facility) and 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 a similar class of consumer, economic characteristics, nature of products, and nature of production and distribution methods.    

 

 
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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 55% 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 $1.8 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.

 

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 HLA 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.

 

 
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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, cross match, 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.

 

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.

 

In July of 2015, Medicare approved coverage of our PreciseType product for pretransfusion molecular testing for four designated types of use in the Medicare Administrative Contractor jurisdiction which includes North Carolina, South Carolina, West Virginia and most counties within Virginia. In order to receive reimbursement for the service, healthcare providers are required to demonstrate that it is a medically necessary test for that particular patient.   

 

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).

 

 
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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, 2015, our backlog was not material.

 

Suppliers

 

We obtain raw materials from numerous 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 long-term contractual relationship with Luminex is significant 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 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.

 

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 13485:2003. In addition, our manufacturing facility in Germany is also certified to ISO 9001:2008. 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.

 

 
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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 years 2015, 2014, and 2013, we spent approximately $28.8 million, $29.1 million, and $21.3 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, the results of research and development efforts, 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.  

 

Employees

 

At May 31, 2015, 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 four 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 any of our manufacturing facilities would prevent us from producing many of our reagent products.

 

Substantially all of our diagnostic products are produced at single sites. While we have reliable supplies of most raw materials, our reagent production is highly dependent on the uninterrupted and efficient operation of each 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 any of our facilities, 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.

 

Acquisitions could cause diversion of management’s 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.

 

The long-term success of our 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 these businesses or realize the expected synergies or anticipated growth targets from acquisitions. In addition, 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 U.S. manufactured products internationally, we could be adversely affected by fluctuations in foreign currency exchange rates.

 

In the fiscal year ended May 31, 2015, revenue outside the U.S. was approximately 39% 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 for our international affiliates. 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 foreign 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.

 

 
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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.

 

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.

 

 
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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.

 

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, and in July 2015, Medicare approved coverage for our product for pretransfusion molecular testing for four designated types of use in the Medicare Administrative Contractor jurisdiction which includes North Carolina, South Carolina, West Virginia and most counties within Virginia. However, 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.

 

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

 

The upgrade of our business information system could pose a risk to our ability to effectively operate and manage our business.

 

In an effort to streamline our processes and gain efficiencies, the Company made the decision to reduce the number of business information systems we operate. We are currently in the process of migrating our existing businesses to a single business information system.  The business information system is also being upgraded to the next generation application. The introduction of a new business information system or upgrading existing systems poses multiple risks. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and to keep pace with continuing changes in information processing technology, evolving industry, and regulatory standards. If the information we rely upon to run our businesses was found to be inaccurate or unreliable or if we fail to maintain our information systems and data integrity effectively, we could have operational disruptions which could result in inaccurate or untimely reporting of financial and operational results, an inability to effectively manage the ongoing operations of the business, adversely affect our ability to adequately service the needs of our existing customer’s or attract new customers, or suffer other damaging consequences. We depend on independent third parties for significant portions of our systems-related support. This dependence makes our operations vulnerable to such third parties' failure to perform adequately under the contract, due to internal or external factors.

 

Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions and services.

 

Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Depending on their nature and scope, such threats could potentially lead to the compromising of confidential information, improper use of our systems and networks, manipulation and destruction of data and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.

 

 

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.

 

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.

 

 
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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 2015, approximately 61% 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.

 

 
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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 consist of senior credit facilities (“Senior Credit Facilities”) and unsecured notes (“Notes”). Our Senior Credit Facilities, as amended, are comprised of: (a) a $100.0 million senior secured revolving loan facility (the “Revolving Facility”) which matures in August 2017, and (b) a $663.3 million senior secured term loan facility (the “Term Loan Facility”) which matures in August 2018. We have $400.0 million in aggregate principal of unsecured 11.125% Notes due in August 2019. As of May 31, 2015, total principal indebtedness outstanding was $1,048.4 million and we had unused commitments of $100.0 million under our Revolving 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) of which the availability is subject to certain conditions including bank approval. In addition, the Revolving Facility includes borrowing capacity in the form of letters of credit and borrowings on same-day notice, referred to as swing line loans, in each case, up to $25.0 million, and is available in U.S. dollars, GBP, Euros, Yen, Canadian dollars and in such other currencies as the Company and the Administrative Agent under the Revolving Facility may agree (subject to a sublimit for such non-U.S. currencies).

 

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, 2015, 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 require 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 will remain 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 $0.8 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 one of our Belgium sales offices. 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.

 

We (Immucor, Inc. and BioArray) are defendants in an action brought in August 2014 by Rutgers, the State University of New Jersey (“Rutgers”), in the Superior Court of New Jersey for Middlesex County, alleging breach of contract and fraud claims under a patent license between Rutgers and BioArray. We believe the claims are without merit and that we have meritorious defenses. We believe that liability is unlikely and that the amount of any liability is not now reasonably estimable, but that any potential liability would not be material to our operations or to our financial condition.

 

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

 

 

Item 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. (the “Parent”) 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 TPG Capital, L.P.

 

 

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 financial tables present selected consolidated financial data for Immucor. The data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes, included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report.

 

As a result of the Immucor Acquisition on August 19, 2011, our stock is no longer publicly traded. Currently, the issued and outstanding shares of Immucor are indirectly owned by TPG Capital, L.P. and certain co-investors. Our financial data is labeled as “Predecessor” for financial periods prior to the Immucor Acquisition, and “Successor” for financial periods after the Immucor Acquisition. In the following financial tables, we have presented the results of operations for the twelve month periods ended May 31, 2015 (the fiscal 2015 period), 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), as well as May 31, 2011 (the fiscal 2011 period). This data has been derived from our audited consolidated financial statements and is in thousands of dollars.

 

                           

Successor

   

Predecessor

 
                            August 20,     June 1,          
                           

 2011

   

2011

         
                            through     through          
   

Year Ended May 31

   

May 31,

   

August 19,

   

Year Ended

 
   

2015

   

2014

   

2013

   

 2012

   

 2011

   

May 31, 2011

 
                                                 
                                                 

Net sales

  $ 389,300       388,056       347,788       261,814       74,910       333,091  

Cost of sales (exclusive of amortization shown separately below)

    143,659       139,634       120,027       105,698       22,955       96,175  

Gross margin

    245,641       248,422       227,761       156,116       51,955       236,916  
                                                 

Operating expenses:

                                               

Research and development

    28,791       29,070       21,313       13,929       4,895       15,900  

Selling and marketing

    57,833       59,057       50,129       32,913       10,510       35,931  

Distribution

    20,022       20,165       18,718       14,333       3,952       16,508  

General and administrative

    41,191       41,603       42,801       36,954       19,312       37,747  

Amortization expense

    54,531       52,965       50,765       39,224       931       4,333  

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

 

202,368

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

Income (loss) from operations

 

43,273

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

Non-operating (expense) income:

                                               

Interest income

    145       36       28       7       142       706  

Interest expense

    (89,421 )     (88,304 )     (90,830 )     (77,048 )     -       (70 )

Loss on extinguishment of debt

    -       -       (9,111 )     -       -       -  

Other, net

    878       45       (539 )     447       2,673       3,997  

Total non-operating net (expense) income

    (88,398 )     (88,223 )     (100,452 )     (76,594 )     2,815       4,633  
                                                 

(Loss) income before income taxes

    (45,125 )     (198,173 )     (63,708 )     (81,193 )     (3,693 )     130,630  

Provision (benefit) for income taxes

    15,600       (15,916 )     (24,566 )     (31,546 )     2,681       41,303  

Net (loss) income

  $ (60,725 )     (182,257 )     (39,142 )     (49,647 )     (6,374 )     89,327  

 

 

 

   

The following data is as of the dates indicated below:

 
                           

Successor

   

Predecessor

 
   

May 31

   

May 31

   

August 19

   

May 31

 
   

2015

   

2014

   

2013

   

2012

   

2011

   

2011

 
                                                 

Working capital

  $ 74,946       91,917       87,069       71,295       381,259       378,979  

Total assets

    1,752,686       1,824,414       2,000,970       1,949,153       652,395       633,127  

Long-term debt, net of debt discounts

    1,033,276       1,037,183       1,039,278       986,361       -       -  

Shareholders’ equity

    383,681       468,616       644,706       637,378       576,646       568,872  

 

 
19

 

 

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 2015

 

The following is a summary of significant factors affecting our business in fiscal 2015:

 

 

Acquisitions and Investments –

 

 

o

Sentilus Acquisition – On October 1, 2014, the Company paid $6.0 million in cash to acquire Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, FemtoarraysTM. Sentilus has been developing FemtoarraysTM and the underlying technology for use in a variety of in vitro diagnostics areas, including transfusion diagnostics, and could potentially serve as a next-generation technology platform for our molecular transfusion diagnostics business.

 

 

o

Sirona Collaboration – On October 3, 2014, the Company entered into a collaborative arrangement with Sirona Genomics, Inc. (“Sirona”) for the commercialization of Sirona’s human leukocyte antigens (“HLA”) typing sample preparation and bioinformatics offering for next-generation sequencing. As part of the collaboration, the Company paid $0.7 million for a warrant with an exclusive option to acquire 100% of the common stock of Sirona at a future date, and loaned $4.6 million to Sirona for development funding. The collaborative arrangement also includes the potential to provide additional future funding in the form of a loan of up to $6.7 million over a two year period from the date of the arrangement, subject to the achievement of certain development milestones and other terms of the arrangement, of which $3.1 million was paid to Sirona as an additional loan on June 1, 2015.

 

 

Income Tax Expense Item –

 

 

o

During fiscal 2015, the Company decided to change its election with regard to the treatment of its foreign tax credits (“FTCs”). This decision is expected to generate a significant reduction in cash income tax payments related to the fiscal 2014, fiscal 2015 and fiscal 2016 years as a result of the Company changing from the credit method to the deduction method for its FTCs in various tax periods. As a result of this change in election, the Company recognized a discrete charge of additional income tax expense of $23.7 million during fiscal 2015. In addition, the Company recorded a valuation allowance of $7.6 million during fiscal 2015 related to uncertainties in the Company’s ability to utilize its FTC carryovers prior to their expiration.

 

 
20

 

 

 

Fluctuations in Foreign Currency Exchange Rates –

 

 

o

Certain of the foreign markets in which we operate have experienced significant fluctuations in foreign currency exchange rates in fiscal 2015 which caused an unfavorable impact on our consolidated operating results, balance sheet and cash flows in that period. Our foreign markets could continue to see significant fluctuations in foreign currency exchange rates in future periods which could cause a decline in expected future consolidated operating results, statement of position and cash flows.

 

 

Results of Operations

 

The operating results presented in the table below are in thousands of dollars, except percentages.

 

                           

Change

 
   

Year Ended May 31

   

2015 vs 2014

   

2014 vs 2013

 
   

2015

   

2014

   

2013

   

Amount

   

%

   

Amount

   

%

 
                                                         

Net sales

  $ 389,300       388,056       347,788       1,244       0.3       40,268       11.6  

Cost of sales (*)

    143,659       139,634       120,027       4,025       2.9       19,607       16.3  

Gross margin

    245,641       248,422       227,761       (2,781 )     (1.1 )     20,661       9.1  
                                                         

Operating expenses:

                                                       

Research and development

    28,791       29,070       21,313       (279 )     (1.0 )     7,757       36.4  

Selling and marketing

    57,833       59,057       50,129       (1,224 )     (2.1 )     8,928       17.8  

Distribution

    20,022       20,165       18,718       (143 )     (0.7 )     1,447       7.7  

General and administrative

    41,191       41,603       42,801       (412 )     (1.0 )     (1,198 )     (2.8 )

Amortization expense

    54,531       52,965       50,765       1,566       3.0       2,200       4.3  

Acquisition-related items

    -       (4,638 )     2,616       4,638       (100.0 )     (7,254 )     **  

Impairment loss

    -       160,150       3,500       (160,150 )     (100.0 )     156,650       **  

Loss on disposition of fixed assets

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

Total operating expenses

    202,368       358,372       191,017       (156,004 )     (43.5 )     167,355       87.6  
                                                         

Income (loss) from operations

    43,273       (109,950 )     36,744       153,223       **       (146,694 )     **  
                                                         

Non-operating (expense) income:

                                                       

Interest income

    145       36       28       109       **       8       28.6  

Interest expense

    (89,421 )     (88,304 )     (90,830 )     (1,117 )     1.3       2,526       (2.8 )

Loss on extinguishment of debt

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

Other, net

    878       45       (539 )     833       **       584       **  

Total non-operating net expense

    (88,398 )     (88,223 )     (100,452 )     (175 )     0.2       12,229       (12.2 )
                                                         

Loss before income taxes

    (45,125 )     (198,173 )     (63,708 )     153,048       (77.2 )     (134,465 )     211.1  

Provision (benefit) for income taxes

    15,600       (15,916 )     (24,566 )     31,516       (198.0 )     8,650       (35.2 )

Net loss

  $ (60,725 )     (182,257 )     (39,142 )     121,532       (66.7 )     (143,115 )     365.6  

 

 

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

(**) Calculation is not meaningful.

 

 
21

 

 

Years Ended May 31, 2015 and 2014:

 

Net sales were $389.3 million in fiscal 2015 as compared with $388.1 million in fiscal 2014, an increase of $1.2 million, or 0.3%. 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):

 

   

Year Ended May 31

   

Change

 
   

2015

   

2014

   

Amount

   

%

 

Net sales by product group:

                               

Transfusion

  $ 326,850       330,547       (3,697 )     (1.1 )

Transplant & Molecular

    62,450       57,509       4,941       8.6  

Total

  $ 389,300       388,056       1,244       0.3  

 

Transfusion: Net sales of our Transfusion products were $326.8 million in fiscal 2015 as compared with $330.5 million in fiscal 2014, a decrease of $3.7 million, or 1.1%. Transfusion product net sales were lower in fiscal 2015 primarily due to a lower number of ship cycles, and an unfavorable effect of changes in foreign currency exchange rates on our international operations as compared with the same period in fiscal 2014, partially offset by the residual benefit of an increase in our installed base of instruments. Our Transfusion net sales had a higher concentration of sales from our Capture reagent products (reagents used in our semi-automated diagnostic testing instruments), and a lower concentration of sales from our Red Cell products (reagents used in our traditional, manual diagnostic testing instruments) in fiscal 2015 as compared with fiscal 2014. This shift in product mix reflects a growing trend of users moving to our automated diagnostic solution. In addition, net sales of our Red Cell products were lower in fiscal 2015 as compared with fiscal 2014 due to an increase in pricing pressures in the U.S. market. After adjusting for the impact of ship cycles and foreign currency exchange rate fluctuations, net sales for fiscal 2015 would have increased by 2.1% when compared to fiscal 2014.

 

Transplant & Molecular: Net sales of our Transplant and Molecular products were $62.4 million in fiscal 2015 as compared with $57.5 million in fiscal 2014, an increase of $4.9 million, or 8.6%. The increase in net sales in fiscal 2015 was primarily driven by continued efforts to expand our market reach and strong customer acceptance of our Transplant and Molecular products in the European, and Emerging markets. This increase in net sales was partially offset by an unfavorable effect of changes in foreign currency exchange rates on our international operations as compared with the same period in fiscal 2014. The increase in net sales was largely due to a higher volume of Transplant product shipments which partially offset lower volume of sales of our Molecular products. Management believes that the lower volume of Molecular products sold in fiscal 2015 reflects a delay in orders as our customers converted their existing systems to incorporate our new blood typing assay, the PreciseTypeTM human erythrocyte antigen (“HEA”) test, which was approved for commercial use by the FDA in May 2014. Net sales of our Molecular products increased in each quarter of fiscal 2015, with reported net sales in the fourth quarter nearly double that of the first quarter of fiscal 2015. After adjusting for the impact of the foreign currency exchange rate fluctuations, net sales for fiscal 2015 compared to fiscal 2014, would have increased by 13.3%.

 

Gross margin decreased by $2.8 million in fiscal 2015 as compared with fiscal 2014, or 1.1%, reflecting an increase in cost of sales in the fiscal 2015 period. And, in fiscal 2014, gross margin included $2.9 million of costs for the amortization of the fair value of inventory related to the acquisition of our LIFECODES business that was not included in fiscal 2015.  Gross margin as a percentage of consolidated net sales was approximately 0.9% lower in fiscal 2015 as compared with fiscal 2014. The lower gross margin percentage was primarily due to a less favorable product mix and an unfavorable effect of changes in foreign currency exchange rates on the conversion of net sales from our international operations partially offset by lower destruction and medical device excise tax costs in fiscal 2015. 

 

Research and development expenses were $28.8 million in fiscal 2015 as compared with $29.1 million in fiscal 2014, a decrease of $0.3 million, or 0.9%. The decrease was primarily due to the completion of certain significant development projects in fiscal 2014, including the development work related to the PreciseTypeTM HEA test that was completed in the fourth quarter of fiscal 2014. This decrease in research and development expenses was partially offset by additional expenses associated with development activities from recently acquired businesses, and the development of new technologies in transplant diagnostics as well as the development of new technologies for our transfusion products. The development costs related to new technologies in transplant diagnostics were mainly for the study of antigens and proteins that appear to be associated with renal transplant rejections to determine their commercial applications. The development costs related to new technologies for our transfusion products were primarily for the development of new products, such as ABO titrations, and to improve certain existing assay products that are sold in our international markets.

 

 
22

 

 

Selling and marketing expenses were $57.8 million in fiscal 2015 as compared with $59.0 million in fiscal 2014, a decrease of $1.2 million, or 2.1%. The decrease in selling and marketing expenses is due to a reduction in expenses from cost containment efforts initiated by management and a more favorable effect of changes in foreign currency exchange rates on international expenses in fiscal 2015. These decreases were partially offset by additional marketing expenses related to business acquisitions completed since May 2014.

 

Distribution expenses were $20.0 million in fiscal 2015 as compared with $20.1 million in fiscal 2014, a decrease of $0.1 million, or 0.7%. The decrease in distribution expenses was primarily due to a more favorable effect of changes in foreign currency exchange rates on international expenses partially offset by higher distribution costs recorded in our European market. The higher distribution costs recorded in our European market were primarily driven by improvements in the packaging materials of our temperature sensitive products, and a one-time increase in costs from a strategic initiative to consolidate and outsource the distribution process in Europe. This strategic initiative is expected to reduce distribution costs on a long-term basis. Distribution costs in the fourth quarter of fiscal 2015 were lower than any of the previous quarters in fiscal 2015 and fiscal 2014.

 

General and administrative expenses were $41.2 million in fiscal 2015 as compared with $41.6 million in fiscal 2014, a decrease of $0.4 million, or 1.0%. This decrease was mainly due to a more favorable effect of changes in foreign currency exchange rates on international expenses in fiscal 2015 partially offset by higher acquisition-related costs, and additional bad debt expense recorded in fiscal 2015 and a one-time credit that was recorded in fiscal 2014 that was not included in fiscal 2015. The higher acquisition-related transaction costs reflect the increase in acquisition activities in fiscal 2015 as compared with fiscal 2014. The increase in bad debt expense in fiscal 2015 reflects an additional allowance for international distributors with past due amounts and the one-time credit recorded in fiscal 2014 reduced bad debt expense by $1.9 million which resulted from a change in estimate of our allowance for doubtful accounts to better reflect our actual bad debt experience.

 

Amortization expense was $54.5 million in the fiscal 2015 period as compared with $52.9 million in the fiscal 2014 period, an increase of $1.6 million, or 3.0%. The increase was primarily due to additional costs related to acquisitions completed since May 30, 2014.

 

Non-operating net expense was $88.4 million in fiscal 2015 and $88.2 million in fiscal 2014, an increase of $0.2 million, or 0.2%. The increase in non-operating net expense was mainly due to a favorable change in exchange gains and losses partially offset by an increase in interest expense in fiscal 2015. The increase in interest expense was primarily due to higher interest accreted on the contingent consideration liabilities in 2015 resulting from the three acquisitions completed since May 30, 2014. Exchange gains and losses are recorded for foreign currency transactions denominated in a currency other than the functional currency of the reporting entity, and the ineffective portion of our interest rate swap arrangements used to hedge against interest rate exposure.

 

The effective tax rate for fiscal 2015 and fiscal 2014 was (34.6)% and 8.0%, respectively. The effective tax rate for fiscal 2015 was lower than the effective tax rate for the corresponding period in fiscal 2014 primarily due to the impact of discrete items recorded during the third quarter of fiscal 2015. These discrete items primarily consisted of $23.7 million due to the Company’s change in election related to its treatment of foreign tax credits (“FTCs”) and a $7.6 million change in the valuation allowance for its FTC carryovers. Excluding these discrete items, the effective tax rate for fiscal 2015 would have been 34.8%. The effective tax rate for fiscal 2014 was primarily impacted by the impairment of goodwill which is not deductible for income tax purposes. Excluding the impairment of goodwill, the effective tax rate for fiscal 2014 would have been 36.3%.

 

 
23

 

 

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 May 31

    Change  
   

2014

   

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 $20.1 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 achieved 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.

 

 
24

 

 

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.

 

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, or 12.2%. 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. 

 

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 2015, our cash and cash equivalents decreased by $5.3 million to $18.4 million as of May 31, 2015. The decrease was primarily due to $11.7 million of cash used for investments in new businesses and the Sirona collaboration, $11.4 million for the purchase of additional property and equipment, and $6.7 million used to repay long-term debt. These decreases in cash and cash equivalents were partially offset by $25.6 million of positive cash flow contributed by our operating activities. The cash balance at May 31, 2015 includes cash of $11.5 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 both fiscal 2015 and 2014. The increase in net cash provided by our operating results after adjusting for non-cash items was offset by an increase in working capital requirements in fiscal 2015. The increase in our working capital requirements was primarily driven by a decrease in collections on our accounts receivable balances and an increase in payments to our vendors mainly due to the timing of payments received and paid. These increases in our working capital requirements were partially offset by lower purchases of our inventories in fiscal 2015.

 

 
25

 

 

Investing activities

 

 

During the fiscal 2015, we used cash of $11.7 million for investments in new businesses and the Sirona collaboration, and $11.4 million for purchases of additional property and equipment, including the upgrade of certain financial systems and the implementation of a new financial consolidation application. During fiscal 2014, we used cash of $17.2 million to acquire new businesses and received $1.1 million due from the seller of LIFECODES as a result of finalizing certain purchase price adjustments. For other investing activities, we used cash of $9.2 million to purchase property and equipment in fiscal 2014.

 

Financing activities

 

In fiscal 2015, we used cash for financing activities of $6.7 million for repayments of our long-term debt. We also borrowed and repaid $55.5 million on our Revolving Facility during fiscal 2015. 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.

 

 

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.

 

Although, from time to time, we are a party to certain legal proceedings in the ordinary course of business, one or more of such matters, or any future legal matters, may have an adverse effect on our consolidated financial position, results of operations or cash flows. We are currently not involved in any material legal proceedings (see Part I, Item 3 – Legal Proceedings for further discussion).

Contingent liabilities are described in Note 23 of our consolidated financial statements.

 

Future Cash Requirements and Restrictions

 

Our Term Loan Facility requires quarterly principal payments equal to 0.25% of the original principal amount of the loan with the balance due and payable on August 19, 2018. Required principal and interest payments related to our Term Loan Facility are $6.6 million and $32.8 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, 2015, we had principal of $1,048.4 million of long-term borrowings outstanding under our Term Loan Facility and the Notes. Our net total available borrowings under our Revolving Facility were $100 million as of May 31, 2015.

 

We expect that recurring capital expenditures during fiscal 2016 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. These expenditures exclude the purchase of instrument assets that are used in equipment rental agreements with our customers, which is reflected in non-cash investing and financing activities in our consolidated statements of cash flows.

 

 

Management believes that existing cash and cash equivalent balances, cash provided from operations, and borrowings available under the Revolving 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.

 

As part of the Sirona collaboration, we have an exclusive option to acquire 100% of the common stock of Sirona, and have a potential obligation to provide additional funding of up to $3.6 million in the form of interest bearing loans. As of the date of this collaborative agreement in October 2014, we had lent Sirona $4.6 million. As of May 31, 2015, we had committed to lend an additional $3.1 million to Sirona, and funded that payment on June 1, 2015. Additional loans are subject to the achievement of certain development milestones and other terms of the arrangements. Refer to Note 3 of our consolidated financial statements for additional information on the Sirona collaboration.

 

 
26

 

 

Contractual Obligations and Commercial Commitments

 

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

 

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)

  $ 648,410       6,632       13,264       628,514       -  

Notes (2)

    400,000       -       -       400,000       -  

Purchase obligations

    45,328       16,611       17,784       8,366       2,567  

Operating and capital leases

    30,302       5,916       8,159       5,505       10,722  

Minimum royalty obligations

    14,717       2,553       5,199       5,345       1,620  

Unrecognized tax benefits (3)

    9,066       -       -       -       9,066  

Acquisition costs for earn-out provision (4)

    18,596       1,819       10,950       2,578       3,249  

Interest (5)

    311,832       78,469       154,316       79,047       -  

Total contractual cash obligations

  $ 1,478,251       112,000       209,672       1,129,355       27,224  

 

 

(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)

Approximately $13.8 million of unrecognized tax benefits, including accrued interest of $1.4 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 presented as due after 5 years. We recorded $4.7 million as an offset to long-term deferred tax liabilities and included $9.1 million in other long-term liabilities. In addition, certain payments related to unrecognized tax benefits would be partially offset by reductions in payments in other jurisdictions (see Note 18 to the consolidated financial statements for additional information).

 

(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 $89.3 million assuming that the full earn-out amount is achieved (see Note 16 to the consolidated financial statements for additional information).

 

(5)

Interest on the Term Loan Facility and Notes 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. Also, includes expected interest on the interest rate hedge at the stated rates and the unused line fees on the Revolving Facility assuming that the Revolving Facility is not used.

 

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, 2015.

 

 

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 (loss) as a measure of operating performance or to cash flows from operating activities as a measure of liquidity or any other performance measure derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

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

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

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

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

 

 
27

 

 

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 years ended May 31, 2015, 2014 and 2013 are as follows (in thousands):   

 

   

Year Ended May 31

 
   

2015

   

2014

   

2013

 
                         

Net loss

  $ (60,725 )     (182,257 )     (39,142 )

Interest expense (income), net

    89,276       88,268       90,802  

Income tax expense (benefit)

    15,600       (15,916 )     (24,566 )

Depreciation and amortization

    71,271       71,287       71,746  
                         

EBITDA

    115,422       (38,618 )     98,840  
                         

Adjustments to EBITDA:

                       

Share-based compensation (i)

    2,087       1,512       1,423  

Acquisition expenses, net (ii)

    2,272       (2,397 )     3,072  

Sponsor fee (iii)

    3,700       3,916       4,390  

Non-cash impact of purchase accounting (iv)

    442       3,284       2,119  

Impairments

    -       160,150       3,500  

Loss on extinguishment of debt

    -       -       9,111  

Certain non-recurring expenses and other (v)

    11,721       13,903       17,368  

Adjusted EBITDA

  $ 135,644       141,750       139,823  

 

 

 

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 TPG Capital, L.P.

 

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.

 

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. As of May 31, 2015, we were in compliance with our senior secured net leverage ratio covenant.

 

 
28

 

 

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 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.

 

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.

 

 
29

 

 

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

 

Refer to the section entitled, “Impact of Recently Issued Accounting Standards” in Note 1 of our consolidated financial statements.

 

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 loss of $26.7 million in fiscal 2015, a gain of $4.3 million in fiscal 2014, and a gain of $1.6 million in fiscal 2013.

 

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the Term Loan Facility outstanding under our Senior Credit Facilities. We have approximately $648.4 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 24% 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.

 

 
30

 

 

Item 8. — Financial Statements and Supplementary Data.

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

   

Report of Grant Thornton LLP Independent Registered Public Accounting Firm

32

   

Consolidated Balance Sheets as of May 31, 2015 and as of May 31, 2014

33

   

Consolidated Statements of Operations for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013

34

   

Consolidated Statements of Comprehensive (Loss) Income for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013

35

   

Consolidated Statements of Changes in Shareholders’ Equity for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013

36

   

Consolidated Statements of Cash Flows for the fiscal year ended May 31, 2015, fiscal year ended May 31, 2014, and fiscal year ended May 31, 2013

37

   

Notes to Consolidated Financial Statements

38

   

Consolidated Financial Statement Schedule

78

 

 
31

 

 

Report of Independent Registered Public Accounting Firm

 

 

Board of Directors and Shareholders

Immucor, Inc.

 

We have audited the accompanying consolidated balance sheets of Immucor, Inc. (a Georgia corporation) and subsidiaries (the “Company”) as of May 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2015. 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 the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits 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, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2015 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 21, 2015

 

 
32

 

 

Consolidated Financial Statements

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

    As of May 31  
   

2015

   

2014

 
                 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 18,363       23,621  

Trade accounts receivable, net of allowance for doubtful accounts of $1,669 and $898 at May 31, 2015 and 2014, respectively

    67,674       69,629  

Inventories, net

    41,847       49,151  

Deferred income tax assets, current portion

    5,931       8,251  

Prepaid expenses and other current assets

    11,161       12,582  

Total current assets

    144,976       163,234  
                 

PROPERTY AND EQUIPMENT, net

    73,574       76,311  

GOODWILL

    842,258       851,563  

OTHER INTANGIBLE ASSETS, net

    650,294       692,870  

DEFERRED FINANCING COSTS, net

    26,399       33,116  

OTHER ASSETS

    15,185       7,320  

Total assets

  $ 1,752,686       1,824,414  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Accounts payable

  $ 13,866       15,665  

Accrued interest and interest rate swap liability

    19,288       19,605  

Accrued expenses and other current liabilities

    26,208       23,716  

Income taxes payable

    3,496       4,927  

Deferred revenue, current portion

    2,703       2,813  

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

    4,469       4,591  

Total current liabilities

    70,030       71,317  
                 

LONG-TERM DEBT, net of debt discounts

    1,033,276       1,037,183  

DEFERRED INCOME TAX LIABILITIES

    236,487       223,379  

OTHER LONG-TERM LIABILITIES

    29,212       23,919  

Total liabilities

    1,369,005       1,355,798  

COMMITMENTS AND CONTINGENCIES (Note 23)

               

SHAREHOLDERS' EQUITY:

               

Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of May 31, 2015 and May 31, 2014, respectively

    -       -  

Additional paid-in capital

    755,234       753,147  

Accumulated deficit

    (331,989 )     (271,264 )

Accumulated other comprehensive loss

    (39,564 )     (13,267 )

Total shareholders' equity

    383,681       468,616  

Total liabilities and shareholders' equity

  $ 1,752,686       1,824,414  

 

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

 

 
33

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

   

Year Ended May 31

 
   

2015

   

2014

   

2013

 
                         

NET SALES

  $ 389,300       388,056       347,788  

COST OF SALES (exclusive of amortization shown separately below)

    143,659       139,634       120,027  

GROSS MARGIN

    245,641       248,422       227,761  
                         

OPERATING EXPENSES

                       

Research and development

    28,791       29,070       21,313  

Selling and marketing

    57,833       59,057       50,129  

Distribution

    20,022       20,165       18,718  

General and administrative

    41,191       41,603       42,801  

Amortization expense

    54,531       52,965       50,765  

Acquisition-related items

    -       (4,638 )     2,616  

Impairment loss

    -       160,150       3,500  

Loss on disposition of fixed assets

    -       -       1,175  

Total operating expenses

    202,368       358,372       191,017  
                         

INCOME (LOSS) FROM OPERATIONS

    43,273       (109,950 )     36,744  
                         

NON-OPERATING (EXPENSE) INCOME

                       

Interest income

    145       36       28  

Interest expense

    (89,421 )     (88,304 )     (90,830 )

Loss on extinguishment of debt

    -       -       (9,111 )

Other, net

    878       45       (539 )

Total non-operating net expense

    (88,398 )     (88,223 )     (100,452 )
                         

LOSS BEFORE INCOME TAXES

    (45,125 )     (198,173 )     (63,708 )

PROVISION (BENEFIT) FOR INCOME TAXES

    15,600       (15,916 )     (24,566 )

NET LOSS

  $ (60,725 )     (182,257 )     (39,142 )

 

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

 

 
34

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

   

Year Ended May 31

 
   

2015

   

2014

   

2013

 
                         

NET LOSS

  $ (60,725 )     (182,257 )     (39,142 )
                         

OTHER COMPREHENSIVE (LOSS) INCOME, net of tax:

                       

Foreign currency translation adjustment

    (26,712 )     4,315       1,644  
                         

Changes in fair value of cash flow hedges:

                       

Portion of cash flow hedges recognized in other comprehensive income

    672       (313 )     (535 )

Less: reclassification adjustment for losses included in net income

    (257 )     653       712  

Net changes in fair value of cash flow hedges

    415       340       177  
                         

OTHER COMPREHENSIVE (LOSS) INCOME

    (26,297 )     4,655       1,821  
                         

COMPREHENSIVE LOSS

  $ (87,022 )     (177,602 )     (37,321 )

 

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

 

 
35

 

 

IMMUCOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(in thousands)

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-In

   

Retained

   

Comprehensive

   

Shareholders’

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 

BALANCE, MAY 31, 2012

    100     $ -       706,986       (49,865 )     (19,743 )     637,378  

Capital contribution from Parent, net of costs

    -       -       42,500       -       -       42,500  

Share-based compensation expense

    -       -       1,423       -       -       1,423  

Net loss

    -       -       -       (39,142 )     -       (39,142 )

Tax benefit from tax deduction contributed by Holdings

    -       -       726       -       -       726  

Other comprehensive loss (net of taxes):

                                               

Foreign currency translation adjustments

    -       -       -       -       1,644       1,644  

Cash flow hedges, net of tax

    -       -       -       -       177       177  

BALANCE, MAY 31, 2013

    100       -       751,635       (89,007 )     (17,922 )     644,706  

Share-based compensation expense

    -       -       1,512       -       -       1,512  

Net loss

    -       -       -       (182,257 )     -       (182,257 )

Other comprehensive loss (net of taxes):

                                               

Foreign currency translation adjustments

    -       -       -       -       4,315       4,315  

Cash flow hedges, net of tax

    -       -       -       -