Annual report pursuant to Section 13 and 15(d)

Note 4 - Acquisitions

v3.19.3
Note 4 - Acquisitions
12 Months Ended
Jun. 30, 2019
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
Note
4
.
Acquisitions:
 
We periodically complete business combinations that align with our business strategy. Acquisitions are accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date and that the results of operations of each acquired business be included in our consolidated statements of comprehensive income from their respective dates of acquisitions. Acquisition costs are recorded in selling, general and administrative expenses as incurred.
 
2019
Acquisitions
 
Quad Technologies
 
On
July 2, 2018,
the Company acquired QT Holdings Corporation (Quad) for approximately
$20.5
million, net of cash acquired, plus contingent consideration of up to
$51.0
million, subject to certain product development milestones and revenue thresholds. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the
first
quarter of fiscal year
2019.
Purchase accounting was finalized during the
fourth
 quarter of fiscal
2019.
The preliminary and final fair values of the assets acquired and liabilities assumed are as follows (in thousands):
 
   
Preliminary
Allocation at
Acquisition
Date
   
Adjustments to
Fair Value
   
Final Opening
Balance Sheet
Allocation
 
Current assets, net of cash
  $
36
     
 
    $
36
 
Equipment and other long-term assets
   
284
     
(56
)
   
228
 
Intangible assets:
                       
Developed technology
   
20,000
     
(7,744
)
   
12,256
 
Goodwill
   
9,790
     
4,691
     
14,481
 
Total assets acquired
   
30,110
     
(3,109
)
   
27,001
 
Liabilities
   
765
     
(469
)
   
296
 
Deferred income taxes, net
   
3,741
     
(2,798
)
   
943
 
Net assets acquired
  $
25,604
    $
158
    $
25,762
 
                         
Cash paid, net of cash acquired
  $
20,404
    $
58
    $
20,462
 
Fair value of contingent consideration
   
5,200
     
100
     
5,300
 
Net assets acquired
  $
25,604
    $
158
    $
25,762
 
 
As summarized in the table, there were adjustments totaling
$4.7
 million to goodwill during the measurement period. These adjustments primarily relate to refinements made to acquired intangible asset cash flow models, an update in the discount rate used in the contingent consideration calculation based on refinements made in the acquired intangible asset cash flow models, and adjustments to preliminary deferred tax amounts based on updated assessments of the applicability of certain NOLs. Tangible assets and liabilities acquired were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology was estimated based on management's forecasted cash inflows and outflows using a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology asset is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. The amortization period for intangible assets acquired in fiscal
2019
are 
14
years for developed technology. The net deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized as intangible asset amortization, which is
not
deductible for income tax purposes offset by the deferred tax asset for our calculation of acquired net operating losses (NOLs).
 
Exosome Diagnostics
 
On
August 1, 2018,
the Company acquired Exosome Diagnostics, Inc. (ExosomeDx) for approximately
$251.6
 million, net of cash acquired, plus contingent consideration of up to
$325.0
million as follows:
 
● Up to
$250
million if calendar year
2020
EBITA is between
$45
million and
$58
million or greater.
 
● Up to
$45
million if calendar year
2022
EBITA for a new instrument product is between
$54
million and
$70
million or greater.
 
● Up to
$30
million if calendar year
2022
EBITA for the remaining business is between
$150
million and
$190
million or greater.
 
The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’ product portfolio and the expected revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Diagnostics and Genomics reportable segment in the
first
quarter of fiscal year
2019.
Purchase accounting was finalized during the
fourth
 quarter of fiscal
2019.
The preliminary and final fair values of the assets acquired and liabilities assumed are as follows (in thousands): 
 
   
Preliminary
Allocation at
Acquisition
Date
   
Adjustments to
Fair Value
   
Final Opening
Balance Sheet
Allocation
 
Current assets, net of cash
 
$
5,118
     
(2,507
)
 
$
2,611
 
Equipment and other long-term assets
   
2,212
     
-
     
2,212
 
Intangible assets:
                       
Developed technology
   
180,000
     
(75,000
)
   
105,000
 
Trade name
   
-
     
58,000
     
58,000
 
Customer relationships
   
-
     
2,300
     
2,300
 
Goodwill
   
96,592
     
8,770
     
105,362
 
Total assets acquired
   
283,922
     
(8,437
)
   
275,485
 
Liabilities
   
2,624
     
1,092
     
3,716
 
Deferred income taxes, net
   
27,673
     
(11,327
)
   
16,346
 
Net assets acquired
 
$
253,625
   
$
1,798
   
$
255,423
 
                         
Cash paid, net of cash acquired
 
$
251,825
   
$
(202
)
 
$
251,623
 
Fair value of contingent consideration
   
1,800
     
2,000
     
3,800
 
Net assets acquired
 
$
253,625
   
$
1,798
   
$
255,423
 
 
As summarized in the table, there were adjustments totaling
$8.8
 million to goodwill during the measurement period. As previously disclosed, the intangible value associated with the ExosomeDx trade name and determination of the related estimated useful life was under assessment as part of purchase accounting review. During the period, the Company updated our intangible assessment to include a
$58.0
million value for the ExosomeDx trade name. Due to our updated assessments and further refinements in our intangible asset cash flow models, the fair value of the developed technology intangible asset decreased by
$75.0
million. When applying our final assumptions in our intangible asset cash flow models to the Company's contingent consideration recorded in the Opening Balance Sheet, the estimated contingent consideration increased by
$2.0
million. Additionally, we recorded a Customer Relationships intangible asset of
$2.3
million for the established physician network ordering ExosomeDx laboratory services that existed at the acquisition date. Adjustments to the opening balance sheet fair value also included updates to preliminary deferred tax amounts and working capital adjustments, primarily attributable to updates for the net realizable value of certain acquired receivables based on factors existing on the acquisition date.
 
Tangible assets and liabilities acquired were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology, trade names, and customer relationships was based on management's forecasted cash inflows and outflows and using either a relief-from-royalty or a multiperiod excess earnings method to calculate the fair value of assets purchased. The preliminary amount recorded for developed technology is being amortized with the expense reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income. Preliminary amortization expense related to trade names, and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The preliminary amortization periods for intangible assets acquired in fiscal
2019
are
15
years for developed technology and trade names, and
14
years for customer relationships. The net deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized as intangible asset amortization, which is
not
deductible for income tax purposes offset by the deferred tax asset for the preliminary calculation of acquired NOLs.
 
B-MoGen Biotechnologies
 
On
June 4, 2019,
the Company acquired the remaining interest in B-MoGen Biotechnologies Inc. (B-MoGen) for approximately
$17.5
 million, net of cash acquired, plus contingent consideration of up to
$38.0
million, subject to certain product development milestones and revenue thresholds. The Company previously held an investment of
$1.4
million in B-MoGen and recognized a gain of approximately
$3.7
million on the transaction within other non-operating income in the consolidated statements of earnings and comprehensive income representing the adjustment of our historical investment to its fair value. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the
fourth
 quarter of fiscal year
2019.
 

Certain estimated fair values are
not
yet finalized and are subject to change, which could be significant. The Company expects to finalize our purchasing accounting by the end of the
second
 quarter of fiscal year
2020
 when we have completed our assessment of the working capital adjustment and we have finalized our income tax assessment of acquired net operating losses (NOLs) with the completion of the stub period tax returns. Amounts for acquired current assets and liabilities, deferred tax liabilities, acquired NOLs, and goodwill also remain subject to change. The preliminary estimated fair values of the assets acquired and liabilities assumed are as follows (in thousands):
 
   
Preliminary
Allocation at
Acquisition
Date
 
Current assets, net of cash
  $
504
 
Equipment and other long-term assets
   
269
 
Intangible assets:
       
Developed technology
   
14,000
 
Customer relationships    
400
 
Goodwill
   
16,457
 
Total assets acquired
   
31,630
 
Liabilities
   
211
 
Deferred income taxes, net
   
3,377
 
Net assets acquired
  $
28,042
 
         
Cash paid, net of cash acquired
  $
17,448
 
Fair value of contingent consideration
   
5,500
 
Fair value of historical investment in B-MoGen    
5,094
 
Net assets acquired
  $
28,042
 
 
Tangible assets and liabilities acquired were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology was estimated based on management's forecasted cash inflows and outflows and using a multi-period excess earnings method to calculate the fair value of assets purchased. The preliminary amount recorded for developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. The amortization periods for intangible assets acquired in fiscal
2019
are estimated to be
14
 years for developed technology. The net deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized as intangible asset amortization, which is
not
deductible for income tax purposes offset by the deferred tax asset for the preliminary calculation of acquired NOLs.
 
2018
Acquisitions
 
Trevigen
 
On
September 5, 2017
the Company acquired the stock of Trevigen Inc. for approximately
$10.6
million, net of cash received. The Company has had a long-standing business relationship with Trevigen as a distributor of its product line. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the
first
quarter of fiscal
2018.
 
 
Atlanta Biologicals
 
On
January 2, 2018
the Company acquired the stock of Atlanta Biologicals, Inc. and its affiliated company, Scientific Ventures, Inc., for approximately
$51.3
million, net of cash acquired. The transaction was financed through available cash on hand and an additional draw from the Company’s line-of-credit. Atlanta Biologicals fetal bovine serum (FBS) product line strengthens and complements our current tissue culture reagents offering and furthers our efforts to provide more complete solutions to our research customers. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the
third
quarter of fiscal
2018.
Purchase accounting was finalized during fiscal
2018.
 
Tangible assets acquired in the acquisition, net of liabilities assumed, were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology, trade names, and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. Amortization expense related to trade names, and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The amortization periods for intangible assets acquired in fiscal 
2018
 are 
13
 years for developed technology, 
12
 years for customer relationships, and 
15
years for trade names. The deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are 
not
 deductible for income tax purposes.
 
Eurocell Diagnostics
 
On
February 1, 2018,
the Company acquired Eurocell Diagnostics SAS, a company based in Rennes, France, for approximately
$7.3
million, net of cash acquired. The Company paid
$6.0
million on the acquisition date and the remaining
$1.3
million was paid on
February 1, 2019.
The Company has had a long-standing business relationship with Eurocell as a distributor of its product line. Eurocell sells directly to the laboratory markets in the French region as well as servicing the EMEA markets via a network of distributors. The transaction was financed through cash on hand.  The primary asset in this acquisition is the customer relationships; however, the acquisition resulted in some goodwill as we expect strategic benefits of revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Company’s Diagnostics and Genomics reportable segment in the
third
quarter of fiscal
2018.
Purchase accounting was finalized during fiscal
2018.
 
 
Tangible assets acquired, net of liabilities assumed, were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to customer relationships was based on management's forecasted cash inflows and outflows using a multi-period excess earnings method to calculate the fair value of assets purchased. Amortization expense related customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The amortization period for customer relationships acquired in fiscal 
2018
 is 
7
 years. The deferred income tax liability represents the net amount of the estimated future impact of intangible asset amortization, which is 
not
 deductible for income tax purposes.
 
2017
Acquisitions
 
Advanced Cell Diagnostics (ACD)
 
On
August 1, 2016,
the Company acquired ACD for approximately
$258.0
million, net of cash acquired, plus contingent consideration of up to
$75.0
million as follows:
 
$25.0
million if calendar year
2016
revenues equal or exceed
$30.0
million.
an additional
$50.0
million if calendar year
2017
revenues equal or exceed
$45.0
million.
 
The Company paid approximately
$247.0
million, net of cash acquired and the working capital adjustments, as of the acquisition date. The remaining
$11.0
million was paid to current employees who held ACD unvested stock as of the acquisition date. In order to receive payment for unvested shares, the individuals had to remain employees of ACD over an
18
-month vesting period which extended from the acquisition date through
March 31, 2018.
Any amounts that would have been owed to individuals who left the company during the vesting period was pooled together and distributed amongst the other former ACD shareholders at the end of the vesting period. Management determined that
$3.6
million of the
$11.0
million represented purchase price consideration paid for pre-acquisition services. However, the remaining
$7.4
million represented compensation expense as the amount the individual employees received was tied to future service. This liability recorded on the Consolidated Balance Sheets under the caption “Salaries, wages and related accruals” for the fiscal year ended
June 30, 2017.
 
During the
third
quarter of fiscal
2017,
management determined that the calendar year
2016
revenue milestone was met. During the
third
quarter of fiscal
2018,
management determined that the calendar year
2017
revenue milestone was met. Refer to Note
4
for discussion of this item as well as discussion of the changes to the fair value estimate for the calendar year revenue milestones as of
June 30, 2018
and
2017.
 
The goodwill recorded as a result of the ACD acquisition represents the strategic benefits of growing the Company's product portfolio and the expected revenue growth from increased market penetration from future products and customers. The goodwill is
not
deductible for income tax purposes. The business became part of the Company’s Biotechnology reportable segment in the
first
quarter of
2017.
 
As previously disclosed, ACD was acquired on
August 1, 2016.
The unaudited pro forma financial information below summarizes the combined results of operations for Bio-Techne and ACD as though the companies were combined as of the beginning fiscal
2016.
The pro forma financial information for all periods presented includes the purchase accounting effects resulting from these acquisitions except for the increase in inventory to fair value and the fair value adjustments to contingent consideration as these are
not
expected to have a continuing impact on cost of goods sold or selling, general and administrative expense, respectively. The pro forma financial information as presented below is for informational purposes only and is
not
indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal
2016.
 
 
   
Year Ended
 
   
June 30,
 
   
2017
   
2016
 
Net sales
 
$
564,220
   
$
523,840
 
Net income
   
99,380
     
110,536
 
 
Space Import-Export, Srl
 
On
July 1, 2016,
the Company acquired Space Import-Export, Srl (Space) of Milan, Italy for approximately
$9.0
million.
$6.7
million was paid on the acquisition date and the remaining
$2.3
million was paid during the
first
quarter of fiscal year
2018.
Space was a long-time distribution partner of the Company in the Italian market. The acquisition resulted in goodwill as we expect strategic benefits of revenue growth from increased market penetration. The goodwill is
not
deductible for income tax purposes. The business became part of the Company’s Biotechnology reportable segment in the
first
quarter of
2017.
 
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management's assessment. The purchase price allocated to developed technology, trade names, non-compete agreements and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statements of Earnings and Comprehensive Income. Amortization expense related to trade names, the non-compete agreement and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statements of Earnings and Comprehensive Income. The deferred income tax liability represents the estimated future impact of adjustments for the cost to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are
not
deductible for income tax purposes, and the future tax benefit of net operating loss and tax credit carryforwards which will be deductible by the Company in future periods.
 
The aggregate purchase price of the acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of the fiscal year
2018
and
2017
acquisitions (in thousands):
 
    Trevigen     Atlanta Biologicals    
Eurocell Diagnostics
    ACD    
Space
 
Current assets, net of cash
$
1,662
  $
15,722
    $
512
    $
15,824
    $
2,128
 
Equipment and other long-term assets
 
53
   
4,901
     
188
     
6,569
     
159
 
Intangible assets:
                                   
Developed technology  
5,100
   
23,000
     
-
     
150,000
     
-
 
Trade name  
160
   
2,300
     
-
     
21,900
     
-
 
Customer relationships
 
260
   
3,600
     
6,272
     
6,300
     
6,769
 
Goodwill
 
5,991
   
10,195
     
2,910
     
143,967
     
3,517
 
Total assets acquired
 
13,226
   
59,718
     
9,882
     
344,560
     
12,573
 
                                     
Liabilities
 
387
   
90
     
483
     
4,179
     
1,445
 
Deferred income taxes, net
 
2,195
   
8,354
     
2,070
     
52,743
     
2,125
 
Net assets acquired
$
10,644
  $
51,274
    $
7,329
    $
287,638
    $
9,003
 
                                     
Cash paid, net of cash acquired
 
10,644
   
51,274
    $
5,933
    $
247,038
    $
6,747
 
Consideration payable
 
-
   
-
     
1,396
     
3,600
     
2,256
 
Contingent consideration payable  
-
   
-
     
-
     
37,000
     
-
 
Net assets acquired $
10,644
  $
51,274
    $
7,329
    $
287,638
    $
9,003
 
 
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management's assessment. The purchase price allocated to developed technology, trade names, non-compete agreements and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of good sold in the Consolidated Statements of Earnings and Comprehensive Income. Amortization expense related to trade names, the non-compete agreement and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statements of Earnings and Comprehensive Income. The deferred income tax liability represents the estimated future impact of adjustments for the cost to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are
not
deductible for income tax purposes, and the future tax benefit of net operating loss and tax credit carryforwards which will be deductible by the Company in future periods.