---

---

		February 29, 2016				May 31, 2015
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	12,190				18,363
Trade accounts receivable, net of allowance for doubtful accounts of $1,978 and $1,669 at February 29, 2016 and May 31, 2015, respectively			59,970				67,674
Inventories, net			47,844				41,847
Deferred income tax assets, current portion			6,021				5,931
Prepaid expenses and other current assets			9,817				11,161
Total current assets			135,842				144,976
PROPERTY AND EQUIPMENT, net			72,788				73,574
GOODWILL			840,841				842,258
INTANGIBLE ASSETS, net			608,832				650,294
DEFERRED FINANCING COSTS, net			21,072				26,399
OTHER ASSETS			17,305				15,185
Total assets		$	1,696,680				1,752,686
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	17,555				13,866
Accrued interest and interest rate swap liability			7,764				19,288
Accrued expenses and other current liabilities			19,503				26,208
Income taxes payable			3,108				3,496
Deferred revenue, current portion			2,656				2,703
Current portion of long-term debt, net of debt discounts			8,878				4,469
Total current liabilities			59,464				70,030
LONG-TERM DEBT, net of debt discounts			1,030,478				1,033,276
DEFERRED INCOME TAX LIABILITIES			219,351				236,487
OTHER LONG-TERM LIABILITIES			30,765				29,212
Total liabilities			1,340,058				1,369,005
COMMITMENTS AND CONTINGENCIES (Note 19)
EQUITY:
Shareholders' equity of Immucor, Inc.:
Common stock, $0.00 par value, 100 shares authorized, issued and outstanding as of February 29, 2016 and May 31, 2015, respectively			-				-
Additional paid-in capital			753,279				755,234
Accumulated deficit			(359,425	)			(331,989	)
Accumulated other comprehensive loss			(42,995	)			(39,564	)
Total shareholders' equity of Immucor, Inc.			350,859				383,681
Equity of noncontrolling interest (Note 4)			5,763				-
Total equity			356,622				383,681
Total liabilities and equity		$	1,696,680				1,752,686

---

		Three Months Ended
		February 29				February 28
		2016				2015
NET SALES		$	88,893				95,605
COST OF SALES (exclusive of amortization shown separately below)			34,130				33,971
GROSS PROFIT			54,763				61,634
OPERATING EXPENSES
Research and development			6,910				7,280
Selling and marketing			13,251				13,513
Distribution			4,155				4,986
General and administrative			11,779				9,362
Amortization expense			13,575				13,615
Total operating expenses			49,670				48,756
INCOME FROM OPERATIONS			5,093				12,878
NON-OPERATING (EXPENSE) INCOME
Interest income			48				42
Interest expense			(22,329	)			(21,793	)
Other, net			(317	)			177
Total non-operating net expense			(22,598	)			(21,574	)
LOSS BEFORE INCOME TAXES			(17,505	)			(8,696	)
(BENEFIT) PROVISION FOR INCOME TAXES			(8,845	)			30,744
NET LOSS		$	(8,660	)			(39,440	)
Net loss attributable to noncontrolling interest			(237	)			-
NET LOSS ATTRIBUTABLE TO IMMUCOR, INC.		$	(8,423	)			(39,440	)

---

		Nine Months Ended
		February 29				February 28
		2016				2015
NET SALES		$	281,854				294,323
COST OF SALES (exclusive of amortization shown separately below)			106,660				106,571
GROSS PROFIT			175,194				187,752
OPERATING EXPENSES
Research and development			20,500				21,474
Selling and marketing			42,057				43,942
Distribution			12,969				15,342
General and administrative			33,133				30,943
Amortization expense			40,745				40,948
Total operating expenses			149,404				152,649
INCOME FROM OPERATIONS			25,790				35,103
NON-OPERATING (EXPENSE) INCOME
Interest income			132				131
Interest expense			(67,275	)			(66,913	)
Other, net			(366	)			465
Total non-operating net expense			(67,509	)			(66,317	)
LOSS BEFORE INCOME TAXES			(41,719	)			(31,214	)
(BENEFIT) PROVISION FOR INCOME TAXES			(14,046	)			22,783
NET LOSS			(27,673	)			(53,997	)
Net loss attributable to noncontrolling interest			(237	)			-
NET LOSS ATTRIBUTABLE TO IMMUCOR, INC.		$	(27,436	)			(53,997	)

---

		Three Months Ended
		February 29 2016				February 28 2015
NET LOSS		$	(8,423	)			(39,440	)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax:
Foreign currency translation adjustment			1,795				(13,915	)
Changes in fair value of cash flow hedges:
Portion of cash flow hedges recognized in other comprehensive income			108				186
Less: reclassification adjustment for (losses) gains included in net income			3				(72	)
Net changes in fair value of cash flow hedges			111				114
OTHER COMPREHENSIVE INCOME (LOSS)			1,906				(13,801	)
COMPREHENSIVE LOSS			(6,517	)			(53,241	)
Comprehensive loss attributable to the noncontrolling interest			(237	)			-
COMPREHENSIVE LOSS ATTIBUTABLE TO SHAREHOLDERS OF IMMUCOR, INC.		$	(6,280	)			(53,241	)

---

		Nine Months Ended
		February 29 2016				February 28 2015
NET LOSS		$	(27,436	)			(53,997	)
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax:
Foreign currency translation adjustment			(3,680	)			(27,677	)
Changes in fair value of cash flow hedges:
Portion of cash flow hedges recognized in other comprehensive income			417				553
Less: reclassification adjustment for losses included in net income			(168	)			(242	)
Net changes in fair value of cash flow hedges			249				311
OTHER COMPREHENSIVE LOSS			(3,431	)			(27,366	)
COMPREHENSIVE LOSS			(30,867	)			(81,363	)
Comprehensive loss attributable to the noncontrolling interest			(237	)			-
COMPREHENSIVE LOSS ATTIBUTABLE TO SHAREHOLDERS OF IMMUCOR, INC.		$	(30,630	)			(81,363	)

---

																		Accumulated
										Additional				Retained				Other				Non-
		Common Stock								Paid-In				Earnings				Comprehensive				controlling
		Shares (1)				Amount (1)				Capital (1)				(1)				Income (Loss) (1)				Interest				Total
Audited:
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			-				-				-				-				340								340
BALANCE, MAY 31, 2014			100				-				753,147				(271,264	)			(13,267	)							468,616
Share-based compensation expense			-				-				2,087				-				-								2,087
Net loss			-				-				-				(60,725	)			-								(60,725	)
Other comprehensive loss (net of taxes):
Foreign currency translation adjustments			-				-				-				-				(26,712	)							(26,712	)
Cash flow hedges, net of tax			-				-				-				-				415								415
BALANCE, May 31, 2015			100				-				755,234				(331,989	)			(39,564	)							383,681
Unaudited:
Share-based compensation expense			-				-				4,045				-				-								4,045
Non-cash dividend											(6,000	)															(6,000	)
Equity of noncontrolling interest																							6,000				6,000
Net loss			-				-				-				(27,436	)			-				(237	)			(27,673	)
Other comprehensive loss (net of taxes):
Foreign currency translation adjustments			-				-				-				-				(3,680	)							(3,680	)
Cash flow hedges, net of tax			-				-				-				-				249								249
BALANCE, FEBRUARY 29, 2016			100			$	-				753,279				(359,425	)			(42,995	)			5,763				356,622

---

		Nine Months Ended
		February 29 2016				February 28 2015
OPERATING ACTIVITIES:
Net loss		$	(27,673	)			(53,997	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			51,417				53,843
Noncash interest expense			8,178				7,557
Loss on disposition and retirement of fixed assets			526				237
Provision for doubtful accounts			456				372
Share-based compensation expense			4,045				1,800
Deferred income taxes			(16,953	)			21,496
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, trade			6,774				(9,259	)
Income taxes			(495	)			526
Inventories			(11,034	)			(6,017	)
Other assets			1,477				1,101
Accounts payable			4,165				(3,284	)
Deferred revenue			(20	)			129
Accrued expenses and other liabilities			(14,022	)			(11,712	)
Cash provided by operating activities			6,841				2,792
INVESTING ACTIVITIES:
Purchases of property and equipment			(7,050	)			(7,519	)
Other investments			(4,850	)			(5,300	)
Acquisitions of businesses, net of cash acquired			(750	)			(6,396	)
Cash used in investing activities			(12,650	)			(19,215	)
FINANCING ACTIVITIES:
Repayments of long-term debt			(4,982	)			(4,993	)
Proceeds from Revolving Facility			48,000				49,500
Repayments of Revolving Facility			(43,500	)			(36,500	)
Cash (used in) provided by financing activities			(482	)			8,007
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			118				(3,714	)
DECREASE IN CASH AND CASH EQUIVALENTS			(6,173	)			(12,130	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			18,363				23,621
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	12,190				11,491
SUPPLEMENTAL INFORMATION:
Income taxes paid, net of refunds		$	3,232				2,621
Interest paid			70,275				70,657
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Movement from inventory to property and equipment of instruments placed on rental agreements		$	4,552				5,728
Non-cash dividend			6,000				-

---

1.	NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

 

Nature of Business

 

Immucor, Inc. (“Immucor” or the “Company”) develops, manufactures and sells transfusion and transplantation diagnostics products used by hospitals, donor centers and reference laboratories around the world. The Company’s products are used in a number of tests performed in the typing and screening of blood, organs or stem cells to ensure donor-recipient compatibility for blood transfusion, and organ and stem cell transplantations. The Company operates manufacturing facilities in North America with both direct and third-party distribution arrangements worldwide.

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and the Securities and Exchange Commission’s (“SEC”) instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Company’s interim results are not necessarily indicative of the Company’s expected full year results. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and related notes for the year ended May 31, 2015, included in the Company’s Annual Report on Form 10-K filed with the SEC on August 21, 2015.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of Immucor, Inc., its wholly owned subsidiaries, and a variable interest entity (“VIE”) that is required to be consolidated in accordance with U.S. GAAP (Refer to Note 4 for additional information on our consolidated VIE). All significant intercompany balances and transactions have been eliminated in consolidation. There are no other entities controlled by the Company, either directly or indirectly.

 

 

Impact of Recently Issued Accounting Standards

 

Accounting Updates Not Yet Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, which will replace most existing lease accounting guidance in U.S. GAAP. The core principle of ASU 2016-02 is that an entity should recognize the rights and obligations resulting from leases as assets and liabilities. ASU 2016-02 requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which corresponds to the Company’s first quarter of fiscal year 2020. Early adoption is permitted. The Company is evaluating the effect of the adoption of ASU 2016-02 on its consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which corresponds to the Company’s first quarter of fiscal year 2018. Earlier adoption is permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-17 is not expected to have a material impact on the Company’s financial statements.

 

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, which corresponds to the Company’s first quarter of fiscal year 2017. Early adoption is permitted. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of this update be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which corresponds to the Company’s first quarter of fiscal year 2018. Early adoption is permitted. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest — Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 changes the presentation of debt issuance costs for term debt in the balance sheet by requiring the debt issuance costs to be presented as a direct deduction from the related debt liability, rather than recorded as an asset. In August 2015, ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), was issued to provide clarification to ASU 2015-03. The standard specifies that the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, which corresponds to the Company’s first quarter of fiscal year 2017. This standard is to be applied retrospectively and early adoption is permitted. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s financial statements.

 

In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. The Company will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. An amendment was made in July 2015 to change the effective date of this standard from the first interim period within annual reporting periods beginning after December 15, 2016 to December 15, 2017, which corresponds to the Company’s first quarter of fiscal year 2019. In March 2016, the FASB issued ASU 2016-08, which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. No early adoption is permitted under this standard, and it is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the effect of the adoption of ASU 2014-09 on its consolidated financial statements.

 

2.	BUSINESS COMBINATIONS

 

Business combinations completed in fiscal 2016:

 

Acquisition of reference lab – On August 3, 2015, the Company completed the asset purchase of a U.S. reference lab for a total cash purchase price of $0.8 million. This acquisition will enable the Company to deliver current Immucor products as a service to customers as well as commercialize newly developed products. The fair values of the acquired assets were $0.3 million for equipment, $0.2 million for identifiable intangible assets and $0.3 million for goodwill. The goodwill is deductible for tax purposes.

 

 

Business combinations completed in fiscal 2015:

 

Acquisition of Sentilus – On October 1, 2014, the Company completed the acquisition of Sentilus, Inc. (“Sentilus”). Sentilus was a privately-held company focused on developing a novel, inkjet-printed antibody microarray-based technology, Femtoarrays^TM. Among other uses, Sentilus has been developing Femtoarrays^TM 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 cash purchase price of the Sentilus business was $6.0 million which was paid in the second quarter of fiscal year 2015. The purchase agreement includes two contingent consideration arrangements, one for achieving certain regulatory milestones with a potential earn-out for $4.0 million in cash over the next three years, and the other in the form of performance payments based on a percentage of net future sales of the to-be-developed products over approximately the next twenty years. Management estimated that the fair value of the contingent consideration arrangements, as of the acquisition date, was approximately $6.3 million, which is included in Other long-term liabilities on the Company’s consolidated balance sheet. This was determined by applying a form of the income approach, based upon the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the financial performance targets. The key assumptions were the earn-out period payment probabilities, projected revenues, discount rate and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments. These assumptions are considered to be level 3 inputs by ASC Topic 820, Fair Value Measurement (“ASC Topic 820”), which are not observable in the market. Including the contingent consideration, the aggregate estimated fair value of the consideration paid was approximately $12.3 million. The other identifiable intangible assets include in-process research and development (“IPR&D”) and a non-competition agreement, which was valued at $18.8 million in the aggregate. Goodwill was valued at $0.6 million and the long-term deferred tax liability was valued at $7.2 million. The goodwill arising from this acquisition is not deductible for tax purposes.

 

Acquisition of LIFECODES distribution business – The Company completed the acquisition of the LIFECODES distribution business in India effective August 1, 2014. This acquisition enables the Company to streamline the distribution of its LIFECODES products in that region. The Company acquired the assets of the India distribution business for a total cash purchase price of $0.4 million, of which a total of $0.2 million was paid in both the first and second quarters of fiscal 2015. The purchase price also included a potential earn-out of up to $0.2 million if certain financial targets are met during the two year period ending July 2016.

 

The operating results of these acquired businesses have been included in the Company’s consolidated results of operations since their dates of acquisition.

 

3.	OTHER INVESTMENTS

 

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 antigen (“HLA”) typing sample preparation and bioinformatics offering for next generation sequencing. As part of the 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 Sirona $9.5 million to fund development efforts of its existing projects. Of the $9.5 million loan, $1.8 million was funded in the third quarter of fiscal 2016. The loan to Sirona bears interest at a market rate. The collaborative arrangement also included the potential for future interest bearing loans from the Company of up to $1.8 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. The outstanding loan and the warrant asset are both included in Other assets on the Company’s consolidated balance sheet as of February 29, 2016.

 

Sirona is considered to be a VIE. However, because Sirona retains sole responsibility for and control of the operations of the business and for achieving product commercialization, the Company is not required to consolidate the results of Sirona. The maximum loss exposure associated with this VIE as of February 29, 2016 was $12.0 million, which included the outstanding loan to Sirona of $9.5 million, the amount paid for the warrant of $0.7 million, and the maximum amount of future potential loans that could be required under the arrangement.

 

In March 2016, the Company exercised its warrant to acquire 100% of the common stock of Sirona. Refer to Note 20 of the consolidated financial statements for additional information.

 

---

4.	CONSOLIDATED VARIABLE INTEREST ENTITY

 

In February 2016, the Company contributed the assets acquired in the Sentilus acquisition to a newly formed company, Sentilus Holdco LLC (“Sentilus LLC”). The Company then distributed its interest in Sentilus LLC via a dividend, indirectly, to IVD Intermediate Holdings A Inc., which is the owner of Immucor’s Parent company, IVD Intermediate Holdings B Inc.

 

Sentilus LLC will continue developing Femtoarrays^TM and the underlying technology for use in a variety of in vitro diagnostics areas. This business was spun-off from Immucor to be able to separately market the anticipated new product offerings that are expected to have application outside of the Company’s current Transfusion and Transplant markets. The book value of the assets and liabilities transferred was $6.0 million. The book value includes assets of $1.0 million of cash, $0.5 million of equipment, $18.8 million of identifiable intangible assets, and $0.1 million of goodwill, and liabilities of $7.2 million of deferred income tax liabilities, and a $7.2 million obligation to Immucor for contingent consideration liabilities. 

 

Sentilus LLC is considered to be a VIE.  Sentilus LLC will be operated as a separate business with Immucor as its only current customer. Sentilus LLC and the Company have entered into management services agreements (the “Management Contracts”) pursuant to which Immucor will provide management, financial, legal and human resource services as well as personnel, materials and business locations to Sentilus LLC in exchange for management fees at Immucor’s cost plus a specified “arms-length” margin (which is subject to periodic adjustment). Immucor’s executive management will control and operate the Sentilus LLC business. Immucor is considered the primary beneficiary of Sentilus LLC because it is managing the Sentilus LLC business and providing the necessary personnel and support to operate the business under the terms of the Management Contracts. Accordingly, the financial results of Sentilus LLC are included in the consolidated financial results of the Company.   

 

The operations of Sentilus LLC will be primarily funded through either additional future dividends from Immucor or from additional capital contributions from IVD Holdings Inc. (“Holdings”), the Parent company of IVD Intermediate Holdings A Inc. The Company could be exposed to a loss related to the Sentilus LLC business if there are expenses which are incurred by the Company on behalf of Sentilus LLC under the terms of the Management Contracts and are not reimbursed.  This risk is deemed unlikely since all of the entities involved in this arrangement are under the common control of Holdings.

 

The following table includes the carrying amounts and classification of the assets and liabilities of Sentilus LLC that are included in the Company’s consolidated balance sheet as of February 29, 2016 that cannot be used to settle the obligations of Immucor, and are not Immucor’s obligation to pay (amounts in thousands):

 

 

 

5.	RELATED PARTY TRANSACTIONS

 

In connection with the acquisition of Immucor in fiscal 2012, the Company entered into a management services agreement with TPG Capital, L.P. (the “Sponsor”). Pursuant to such agreement and in exchange for on-going consulting and management advisory services that are being provided to the Company, the Sponsor receives an aggregate annual monitoring fee of approximately $3.0 million. In the three months and nine months ended February 29, 2016, approximately $0.8 million, and $2.4 million, respectively, was recorded for the monitoring fees, additional services provided by the Sponsor, and out-of-pocket expenses. In the three months and nine months ended February 28, 2015, $0.9 million, and $2.9 million, respectively, was recorded for these same types of fees and expenses. These expenses are included in general and administrative expenses in the Company’s consolidated statements of operations. As of February 29, 2016 and May 31, 2015, the Company owed $0.8 million and $0.7 million, respectively, to the Sponsor for these fees and expenses.

 

---

6.	INVENTORIES, net

 

Inventories, net are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Inventories, net consist of the following (in thousands):

 

 

7.	PROPERTY AND EQUIPMENT, net

 

Property and equipment, net consist of the following (in thousands):

 

 

 

 

Depreciation expense was $3.6 million and $10.7 million in the three months and nine months ended February 29, 2016, respectively, and $4.1 million and $12.9 million in the three months and nine months ended February 28, 2015, respectively. Depreciation expense is primarily included in cost of sales in the Company’s consolidated statements of operations.

 

---

8.

GOODWILL

 

The consolidated financial statements include the goodwill resulting from the acquisition of Immucor in the first quarter of fiscal 2012, and the acquisition of various businesses since that date. The following table presents the changes in the carrying amount of goodwill during the nine months ended February 29, 2016 and the fiscal year ended May 31, 2015 (in thousands):

 

 

In the first nine months of fiscal year 2016 and in fiscal year 2015, there were no significant changes in goodwill other than the impact of changes in foreign currency exchange rates, and an increase in goodwill from business acquisitions completed in those periods. As of February 29, 2016 and May 31, 2015, the Company had $160.0 million of accumulated impairment losses on goodwill.

 

9.	OTHER INTANGIBLE ASSETS, net

 

Other intangible assets, net consist of the following (in thousands):

 

 

A portion of the Company’s customer relationships is held in functional currencies outside the U.S. Therefore, the stated cost as well as the accumulated amortization is affected by the fluctuation in foreign currency exchange rates.

 

Amortization expense related to these intangible assets for the three months and nine months ended February 29, 2016 was $13.6 million and $40.7 million, respectively, and for the three months and nine months ended February 28, 2015 was $13.6 million and $40.9 million, respectively. Expected amortization expense for the remainder of fiscal year 2016 and for each of the five succeeding years is as follows (in thousands):

 

 

 

---

10.	DEFERRED FINANCING COSTS, net

 

Changes in deferred financing costs, net during the nine months ended February 29, 2016 and the fiscal year ended May 31, 2015 are as follows (in thousands):

 

 

 

Deferred financing costs are capitalized and are amortized over the life of the related debt agreements using the effective interest rate method, except the senior secured revolving loan facility which uses the straight line method.

 

11.	LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

 

 

 

Senior Secured Credit Facilities, Security Agreement and Guaranty  

 

The Company is party to a credit agreement and related security and other agreements as subsequently amended, with a bank syndicate of lenders, and Citibank N.A. as the Administrative Agent. The credit agreement, as amended, provides for (1) a $663.3 million senior secured term loan facility (the “Term Loan Facility”) and (2) a $100.0 million senior secured revolving loan facility (the “Revolving Facility,” and together with the Term Loan Facility, the “Senior Credit Facilities”). In addition to borrowings upon prior notice, 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).

 

On December 9, 2015, the Company entered into Amendment No. 5 to the credit agreement to modify the financial covenant associated with the Revolving Facility. The amendment provides that beginning with the period ending November 30, 2015, for purposes of calculating its compliance with the senior secured net leverage ratio covenant for any trailing twelve-month period for bank reporting purposes, the Company may calculate EBITDA on a constant currency basis, as defined in the amendment. The use of the constant currency adjustment is subject to the Company’s compliance with certain restrictions.

 

 

Borrowings under the Senior Credit Facilities bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (a) in the case of borrowings in U.S. dollars, a base rate determined by reference to the highest of (1) the prime rate of Citibank, N.A., (2) the federal funds effective rate plus 0.50% and (3) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (b) in the case of borrowings in U.S. dollars or another currency, a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which, in the case of the Term Loan Facility only, shall be no less than 1.25%. The applicable margin for borrowings under the Term Loan Facility is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings. The applicable margin for borrowings under the Revolving Facility is 2.75% with respect to base rate borrowings and 3.75% with respect to LIBOR borrowings. The applicable margin for borrowings under the Revolving Facility is subject to a 0.25% step-down, when the Company’s senior secured net leverage ratio at the end of a fiscal quarter is less than or equal to 3:00 to 1:00. The Revolving Facility matures on August 19, 2017.

 

The interest rate on the Term Loan Facility was 5.00% as of February 29, 2016 and May 31, 2015. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Term Loan Facility is 6.11% for the nine months ended February 29, 2016. During the first nine months of fiscal 2016, the Company borrowed $48.0 million and repaid $43.5 million from our Revolving Facility. The weighted average interest rate on the borrowings from the Revolving Facility during the first nine months of fiscal 2016 was approximately 4.73%. At February 29, 2016, there were $4.5 million of outstanding borrowings under the Revolving Facility and no outstanding letters of credit.

 

The Company is required to make scheduled principal payments on the last business day of each calendar quarter equal to 0.25% of the original principal amount of loans under the Term Loan Facility with the balance due and payable on August 19, 2018. Currently scheduled principal payments are $1.7 million per quarter. The Company is also required to repay loans under the Term Loan Facility based on annual excess cash flows as defined in the credit agreement governing the Term Loan Facility and upon the occurrence of certain other events set forth in that credit agreement. The additional principal due under the terms of the excess cash flow requirement was zero for fiscal year 2015 and fiscal year 2014. The terms of the Senior Credit Facilities provide that any principal paid as a result of the excess cash flow requirement, shall be applied to the scheduled installments of principal following the date of prepayment in direct order of maturity.

 

All obligations under the Senior Credit Facilities are unconditionally guaranteed by the parent company of Immucor, IVD Intermediate Holdings B Inc. (the “Parent”), and certain of Immucor’s existing and future wholly owned domestic subsidiaries (such subsidiaries collectively, the “Subsidiary Guarantors”), and are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Parent and Subsidiary Guarantors, subject in each case to customary exceptions and exclusions. Neither the assets nor the equity of Sentilus LLC is collateral for the Senior Credit Facility.

 

 

Indenture and the Senior Notes Due 2019

 

The Company has also issued $400.0 million in principal amount of Senior Notes (the “Notes”). The Notes bear interest at a rate of 11.125% per annum, and interest is payable semi-annually on February 15 and August 15 of each year. Including the amortization of deferred financing costs and the original issue discount, the effective interest rate on the Notes is 11.70% for the nine months ended February 29, 2016. The Notes mature on August 15, 2019.

 

Subject to certain exceptions, the Notes are guaranteed on a senior unsecured basis by each of Immucor’s current and future wholly owned domestic restricted subsidiaries (and non-wholly owned subsidiaries if such non-wholly owned subsidiaries guarantee the Company’s or another guarantor’s other capital market debt securities) that is a guarantor of certain debt of the Company or another guarantor, including the Senior Credit Facilities. The Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future indebtedness that is not expressly subordinated in right of payment thereto. The Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Company’s existing and future secured indebtedness, including the Senior Credit Facilities described above, to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Company’s non-guarantor subsidiaries.

 

The Company is not aware of any violations of the covenants pursuant to the terms of the indenture governing the Notes or the credit agreement governing the Senior Credit Facilities. 

 

 

Future Commitments

 

The following is a summary of the combined principal maturities of all long-term debt and principal payments to be made under the Company’s capital lease agreements for the remainder of fiscal year 2016 and each of the fiscal years presented in the table below (in thousands):

 

 

 

Interest Expense

 

The significant components of interest expense are as follows (in thousands):

 

 

 

12.	DERIVATIVE FINANCIAL INSTRUMENTS

 

As of February 29, 2016, the Company has an interest rate swap agreement to hedge $70.0 million of its future interest commitments resulting from the Company’s Term Loan Facility, and to protect the Company from variability in cash flows attributable to changes in LIBOR interest rates. The purpose of entering into a swap agreement is to match the LIBOR floor in the swaps with the terms of the Term Loan Facility. Consistent with the terms of the Company’s Term Loan Facility, the swap includes a LIBOR floor of 1.25%. The swap agreement hedges a portion of contractual floating rate interest commitments through the expiration of the agreement in September of each year through 2016. As a result of the agreement, the LIBOR rate associated with the hedged amount of the Company’s indebtedness has been fixed at 1.91% until September 30, 2016.

 

Prior to October 1, 2014, the Company had swap agreements that hedged $240.0 million of its floating rate interest commitments at a weighted average fixed LIBOR rate of 1.67%. Effective October 1, 2014 through September 30, 2015, the Company had swap agreements that hedged $155.0 million of the Company’s floating rate interest commitments at a weighted average fixed LIBOR rate of 1.77%.  Effective October 1, 2015 through September 30, 2016, the Company has swap agreements to hedge $70.0 million of the Company’s floating rate interest commitments at a fixed LIBOR rate of 1.91%.

 

The Company designated these interest rate swap agreements as cash flow hedges. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these swaps are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses will be recorded as a component of interest expense. Future realized gains and losses in connection with each required interest payment will be reclassified from accumulated other comprehensive income or loss to interest expense.

 

 

The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into interest expense in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in the fair values of derivatives that do not qualify as effective are immediately recognized in earnings.

 

The gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. As of February 29, 2016, approximately $0.3 million of the deferred net loss on derivative instruments accumulated in other comprehensive loss is expected to be reclassified as interest expense during the next twelve months. This expectation is based on the expected timing of the occurrence of the hedged forecasted transactions.

 

The fair values of the interest rate swap agreements are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (level 2). A summary of the recorded liabilities included in the consolidated balance sheets is as follows (in thousands):

 

 

The losses from accumulated other comprehensive loss (“AOCI”) was reclassified to the consolidated statement of operations and appears as follows (in thousands):

 

 

13.	FAIR VALUE

 

The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

•

Level 2—Observable inputs, other than quoted prices included in Level 1, such as quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

 

 

 

 

 

The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short-term maturity of these instruments. Of the $12.2 million and $18.4 million of cash and cash equivalents at February 29, 2016 and May 31, 2015, respectively, approximately 26% and 37% was located in the U.S., respectively.

 

The Company uses derivative financial instruments, primarily in the form of floating-to-fixed interest rate swap agreements, in order to mitigate the risks associated with interest rate fluctuations on the Company’s floating rate indebtedness. The estimated fair value of the Company’s derivative instruments is based on quoted market prices for similar instruments (a level 2 input) and are reflected at fair value in the consolidated balance sheets. The level 2 inputs used to calculate fair value were interest rates, volatility and credit derivative markets. The Company’s derivative financial instrument liabilities are included in Accrued interest and interest rate swap liability in the Company’s consolidated balance sheets.

 

The fair value of the Company’s Notes and the Term Loan Facility (collectively referred to as the Company’s debt instruments) is estimated to be $295.3 million and $588.7 million at February 29, 2016, respectively, based on recent trades of similar instruments. The fair value of the Notes and the Term Loan Facility was estimated to be $424.3 million and $653.3 million at May 31, 2015, respectively, based on the fair value of these instruments at that time.

 

Management believes that these liabilities can be liquidated without restriction.

 

As of February 29, 2016, the Company had $19.4 million in contingent consideration liabilities for earn-out provisions resulting from acquisitions included in Other long-term liabilities on the Company’s consolidated balance sheet.

 

As of May 31, 2015, the Company had $18.6 million in contingent consideration liabilities for earn-out provisions, of which $0.1 million was included in Accrued expenses and other current liabilities and $18.5 million was included in Other long-term liabilities on the Company’s consolidated balance sheet.

 

The fair value of these contingent consideration liabilities was determined by applying a form of the income approach (a level 3 input), based upon the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions included in the calculations were the earn-out period payment probabilities, projected revenues, discount rate and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments.

 

The changes in the contingent consideration liabilities are summarized in the following table (in thousands):

 

 

---

14.	ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The changes in accumulated other comprehensive loss are as follows (in thousands):

 

 

 

The components of accumulated other comprehensive loss are as follows (in thousands):

 

 

15.	SHARE-BASED COMPENSATION

 

The Company has granted nonvested restricted stock, stock options, and stock appreciation rights to key employees and directors under its 2011 Equity Incentive Plan.  The Company granted stock awards with an aggregate fair value of approximately zero and $17.2 million during the three months and nine months ended February 29, 2016 and $0.1 million and $0.7 million during the three months and nine months ended February 28, 2015, respectively. During fiscal 2016, the Compensation Committee approved an increase in the shares eligible for grant under the Company’s 2011 Equity Incentive Plan from 514,631 shares to 808,444 shares, and as of February 29, 2016, a total of 66,166 shares were available for future grants.

 

Restricted stock units typically vest over a two-year period (50% per year) and do not expire. Upon vesting, restricted stock units are settled in shares of IVD Holdings Inc.’s common stock. Stock option awards are granted with service-based vesting conditions (“service-based options”), and performance-based or market-based vesting conditions (“performance-based options”).  The service-based options contain tiered vesting terms over the service period. The performance-based options vest in tranches upon the achievement of certain performance or market objectives, which are measured over a three or four year period. 

 

On September 24, 2015, the Company’s Compensation Committee approved a modification to the Company’s 2011 Equity Incentive Plan (“Plan”) effective November 1, 2015. This modification added an alternative service-based vesting opportunity to all previously granted but unvested performance-based options. On October 16, 2015, the Company’s Compensation Committee approved an additional modification to its Plan that converted all stock appreciation rights granted prior to November 1, 2015 to service-based option awards and performance-based option awards. These awards will vest from the original grant through May 31, 2021. This modification resulted in a total increase in stock-based compensation expense of $4.6 million.

 

 

Stock options with service-based vesting conditions

 

The Company has granted awards that contain service-based vesting conditions.  These awards contain tiered vesting terms over the service period. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. Activity for the service-based vesting options was as follows for the nine months ended February 29, 2016:

 

 

 

(1)

The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal year. Options with a market value less than its exercise value are not included in the intrinsic value amount.

 

 

The weighted-average grant-date fair value of share options granted during the first nine months of fiscal year 2016 was $25.25.

 

As of February 29, 2016, there was $11.0 million of total unrecognized compensation cost related to nonvested service-based stock option awards. This compensation cost is expected to be recognized over a weighted average period of approximately 3.2 years.

 

Stock options with performance-based or market-based vesting conditions

 

The Company has granted awards that contain either performance-based or market-based conditions. Compensation cost for the performance-based or market-based stock options is recognized based on either the achievement of the performance conditions, if they are considered probable, or if they are not considered probable, on the achievement of the market-based condition. Awards granted which vest upon either the satisfaction of the performance or market conditions were measured based upon the achievement of the market condition during fiscal 2016 since the Company believes that the achievement of the performance conditions are not probable. Activity for the performance-based or market-based options was as follows for the nine months ended February 29, 2016:

 

 

(1)     The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal year. Options with a market value less than its exercise value are not included in the intrinsic value amount.

 

The weighted-average grant-date fair value of share options granted during the first nine months of fiscal year 2016 was $23.82.

 

 

As of February 29, 2016, there was $0.1 million of total unrecognized compensation cost related to nonvested performance-based or market-based vesting conditions awards. This compensation cost is expected to be recognized over a weighted average period of approximately 0.5 years.

 

Restricted stock units

 

The fair value of restricted stock is estimated using the Monte Carlo simulation approach described above and is then discounted due to non-marketability. The following is a summary of the changes in non-vested restricted stock units for the first nine months of fiscal year 2016:

 

 

 

As of February 29, 2016, there was $3.1 million of total unrecognized compensation cost related to nonvested restricted stock awards. This compensation cost is expected to be recognized over the weighted average period of approximately 3.3 years.

 

Stock appreciation rights

 

As of November 1, 2015, the Company canceled all its existing stock appreciation rights and converted them to service-based and performance-based option awards.

 

 

 

 

The Company recognized expense of $1.3 million and $4.0 million in the three months and nine months ended February 29, 2016 and $0.3 million and $1.8 million in the three months and nine months ended February 28, 2015, respectively, before income tax benefits, for all the Company’s stock awards.