Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Acquisitions

v3.6.0.2
Note 3 - Acquisitions
 6 Months Ended
Dec. 31, 2016
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
Note
3.
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 the results of operations of each acquired business are included in our consolidated statements of comprehensive income from their respective dates of acquisition. Acquisition costs are recorded in selling, general and administrative expenses as incurred.
    
Space Import-Export, Srl
On
July
1,
2016
Bio-Techne acquired all the outstanding stock of Space Import-Export, Srl (Space) of Milan, Italy for the equivalent of approximately
$9
million. Space is a long and trusted partner of Bio-Techne, distributing its products since
1985
and creating a very effective and visible presence in the Italian market. The acquisition resulted in goodwill as we expect strategic benefits from expected revenue growth from increased market penetration from future 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.
 
Certain estimated fair values are not yet finalized and are subject to change, which could be significant. The Company expects to finalize these by the filing of the
2017
Form
10
-K when our valuation models for acquired intangible assets are completed, including the determination of related estimated useful lives. Amounts for intangible assets, and related deferred tax liabilities, and goodwill remain subject to change. The preliminary estimated fair values of the assets acquired and liabilities assumed in each acquisition, pending final valuation of intangible assets, are as follows (in thousands):
 
 
 
Space
 
Current assets, net of cash
   $
2,128
  
Equipment
    
159
  
Intangible assets:
        
Customer relationships
    
6,769
  
Goodwill
    
3,100
  
Total assets acquired
    
12,156
  
Liabilities
    
1,884
  
Deferred income taxes, net
    
1,708
  
Net assets acquired
   $
9,004
  
         
Cash paid, net of cash acquired
   $
9,004
  
 
Advanced Cell Diagnostics (ACD)
On
August
1,
2016,
Bio-Techne acquired all of the outstanding stock of ACD for approximately
$250
million, plus contingent consideration of up to
$75
million as follows:
●
$25
million can be earned if calendar year
2016
revenues equal or exceed
$30
million.
●
an additional
$50
million can be earned if calendar year
2017
revenues equal or exceed
$45
million.
 
If the revenue hurdle related to the
2016
calendar year is not met, the
$25
million can be earned if the calendar year
2017
revenue hurdle is met. If the
2016
revenue hurdle is met, and calendar year
2017
revenues exceed
$40
million but are less than
$45
million, a reduced earn-out payment will be made for calendar year
2017,
calculated on a sliding scale. Changes to this estimate as of
December
31,
2016
are discussed in Note
4.
  
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.
 
Certain estimated values are not yet finalized and are subject to change, which could be significant. The Company will finalize the amounts recognized as information necessary to complete the analysis is obtained. The Company expects to finalize these by the filing of the
2017
Form
10
-K when our valuation models for acquired intangible assets are completed, including the determination of related estimated useful lives. Amounts for inventory, intangible assets, deferred tax assets and liabilities, and goodwill remain subject to change.
 
The following table (in thousands) summarizes the value of ACD assets acquired and liabilities assumed as of the acquisition date. Also summarized in the table, subsequent to the acquisition, net adjustments of
$7.0
million have been made to the preliminary purchase price allocation of deferred taxes based on updated estimates, with a corresponding adjustment to goodwill. Additionally, we made a
$0.7
million
working capital adjustment payment made during the
second
quarter.
 
 
 
Preliminary
Allocation at
Acquisition Date
 
 
Adjustments to
Fair Value
 
 
Updated Allocation at
December 31, 2016
 
Current assets, net of cash
   $
25,196
      
 
     $
25,196
  
Equipment
    
2,757
      
 
      
2,757
  
Other long-term assets
    
3,812
      
 
      
3,812
  
Intangible assets:
                        
Developed technology
    
107,000
      
 
      
107,000
  
Trade name
    
17,000
      
 
      
17,000
  
Customer relationships
    
77,000
      
 
      
77,000
  
Non-compete agreement
    
200
      
 
      
200
  
Goodwill
    
133,780
      
6,293
      
127,487
  
Total assets acquired
    
366,772
      
 
      
360,479
  
Liabilities
    
3,591
      
 
      
3,591
  
Deferred income taxes, net
    
78,761
      
(7,027
)
    
71,734
  
Net assets acquired
   $
284,393
      
 
     $
285,127
  
                         
Cash paid, net of cash acquired
   $
246,193
      
734
     $
246,927
  
Fair value contingent consideration
    
38,200
      
 
      
38,200
  
Net assets acquired
   $
284,393
      
 
     $
285,127
  
 
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisitions 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 Condensed 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 preliminary amortization periods for intangible assets acquired in fiscal
2017
are estimated to be
15
years for developed technology,
7.5
years for trade names,
10
years for customer relationships, and
2
years for non-competes. 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.
 
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.
 
 
 
 
Quarter
Ended
 
 
Six Months
Ended
 
 
 
December 31,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Net sales
   $
131,807
     $
127,008
     $
263,605
     $
244,698
  
Net income
    
30,170
      
26,918
      
50,161
      
49,470
  
 
Prior Year Acquisitions
 
During the
six
months ended
December
31,
2016,
we made certain purchase accounting for the acquisition of Zephyrus Biosciences, Inc. (Zephyrus), which was acquired in
March
2016
for which purchase accounting was still open as of
June
30,
2016.
Further information regarding this acquisition can be found under the caption “Note
2:
Acquisitions” in the Notes to Consolidated Financial Statements appearing in the
2016
Form
10
-K. The adjustments recorded during
six
months ended
December
31,
2016
included a
$3.0
million increase to the contingent consideration liability resulting from the finalization of the valuation model, a
$0.9
million increase to intangible assets resulting valuation model adjustments, and a
$0.3
million increase to net deferred tax assets. A corresponding
$1.8
million increase was recorded to goodwill from the preliminary amount recorded as of
June
30,
2016.
The Company will finalize the purchase accounting for this acquisition during the
third
quarter when our valuation models for acquired intangible assets are completed, including the determination of related estimated useful lives. Amounts for intangible assets, related deferred tax liabilities, and goodwill remain subject to change.