Note 11 - Fair Value

3 Months Ended

Aug. 31, 2016

11.	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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

	As of August 31, 2016
	Fair Value Measurements of Assets (Liabilities) Using								Carrying
	(Level 1)		(Level 2)			(Level 3)			Amount
	(in thousands)

Derivative instruments	$	-		(38	)		-			(38	)
Contingent consideration liabilities	$	-		-			(41,333	)		(41,333	)

	As of May 31, 2016
	Fair Value Measurements of Assets (Liabilities) Using								Carrying
	(Level 1)		(Level 2)			(Level 3)			Amount
	(in thousands of dollars)

Derivative instruments	$	-		(155	)		-			(155	)
Contingent consideration liabilities	$	-		-			(40,356	)		(40,356	)

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 $9.7 million and $10.3 million of cash and cash equivalents at August 31, 2016 and May 31, 2016, respectively, approximately 17% and 38% 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 current and long-term derivative financial instrument liabilities are included in accrued interest and interest rate swap liability and other long-term liabilities in the Company’s consolidated balance sheets.

The fair value of the Notes and the Term Loan Facility (collectively referred to as the Company’s debt instruments) is estimated to be $368.8 million and $624.1 million at August 31, 2016, respectively, based on recent trades of similar instruments. The fair value of the Notes and the Term Loan Facility was estimated to be $364.3 million and $614.5 million at May 31, 2016, respectively, based on the fair value of these instruments at that time.

Management believes that these liabilities can be liquidated without restriction.

As of August 31, 2016 and May 31, 2016, the Company had $41.3 million and $40.4 million, respectively, in contingent consideration liabilities for earn-out provisions resulting from acquisitions 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 Company’s current and long-term contingent consideration liabilities are summarized in the following table (in thousands):

	Three Months Ended			Twelve Months Ended
	August 31, 2016			May 31, 2016
Balance at the beginning of the period	$	(40,356	)		(18,596	)
Additions due to acquisitions		-			(20,000	)
Payments		5			65
Accretion of fair value		(982	)		(1,825	)
Balance at the end of the period	$	(41,333	)		(40,356	)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

IMMUCOR INC 10-Q