Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Acquisitions

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Note 3 - Acquisitions
9 Months Ended
Mar. 31, 2017
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.
$6.7
million was paid on the acquisition date and the remaining
$2.3
million will be paid on
July
1,
2017.
Space was a long-time distribution partner of Bio-Techne 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.
 
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
  $
2,127
 
Equipment
   
159
 
Intangible assets:
       
Customer relationships
   
6,769
 
Goodwill
   
3,100
 
Total assets acquired
   
12,155
 
Liabilities
   
1,444
 
Deferred income taxes, net
   
1,708
 
Net assets acquired
  $
9,003
 
         
Cash paid, net of cash acquired
  $
6,747
 
Consideration payable
   
2,256
 
 
Advanced Cell Diagnostics (ACD)
On
August
1,
2016,
Bio-Techne acquired all of the outstanding stock of ACD for approximately
$258
million, net of cash acquired, 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.
 
During the
third
quarter, management determined that the calendar year
2016
revenue milestone was met. Refer to Note
4
for discussion of this item as well as discussion of the changes to the estimate for the calendar year
2017
revenue milestone as of
March
31,
2017.
  
Bio-Techne paid
$246.9
million on the acquisition date. The remaining
$11.0
million will be payed to current employees who held ACD stock at the acquisition date in quarterly installments from
March
31,
2017
through
March
31,
2018.
This liability recorded on the Bio-Techne balance sheet under the caption “Related party note payable, current”.
 
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 to goodwill of
$4.7
million to the preliminary purchase price allocation have been recorded. These net
$4.7
million adjustment is comprised of a
$11.0
million adjustment to record additional consideration payable which was part of the purchase agreement and a
$0.7
million working capital adjustment which were partially offset by a
$7.0
million decrease in net deferred tax liabilities based on updated estimates.
 
 
 
Preliminary
Allocation at
Acquisition Date
 
 
Adjustments to
Fair Value
 
 
Updated Opening
Balance Sheet
Allocation at
March 31, 2017
 
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
     
4,677
     
138,457
 
Total assets acquired
   
366,745
     
 
     
371,422
 
Liabilities
   
3,591
     
 
     
3,591
 
Deferred income taxes, net
   
78,761
     
(7,027
)
   
71,734
 
Net assets acquired
  $
284,393
     
 
    $
296,097
 
                         
Cash paid, net of cash acquired
  $
246,193
     
734
    $
246,927
 
Consideration payable
   
-
     
10,970
     
10,970
 
Fair value contingent consideration
   
38,200
     
 
     
38,200
 
Net assets acquired
  $
284,393
     
 
    $
296,097
 
 
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
 
 
Nine Months
Ended
 
 
 
March 31,
 
 
March 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Net sales
  $
144,037
    $
136,850
    $
407,642
    $
381,550
 
Net income
   
26,062
     
30,585
     
66,308
     
81,498
 
 
Prior Year Acquisitions
 
 
During the
nine
months ended
March
31,
2017,
we made certain purchase accounting adjustments 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
nine
months ended
March
31,
2017
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 from 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 finalized the purchase accounting for this acquisition during the
third
quarter.