Company Quick10K Filing
Quick10K
Meridian Bioscience
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$11.68 43 $498
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-06-06 Regulation FD, Exhibits
8-K 2019-06-03 M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-05-24 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-04-29 Enter Agreement, Regulation FD, Exhibits
8-K 2019-04-26 Enter Agreement, Earnings, Officers, Other Events, Exhibits
8-K 2019-04-02 Earnings, Officers, Exhibits
8-K 2019-01-24 Shareholder Vote
8-K 2019-01-24 Shareholder Vote
8-K 2019-01-24 Earnings, Regulation FD, Exhibits
8-K 2019-01-24 Earnings, Regulation FD, Exhibits
8-K 2019-01-07 Earnings, Exhibits
8-K 2018-12-06 Officers, Exhibits
8-K 2018-11-08 Earnings, Regulation FD, Exhibits
8-K 2018-10-26 Officers
8-K 2018-09-20 Officers, Amend Bylaw, Exhibits
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-04-24 Earnings, Exhibits
8-K 2018-03-21 Other Events, Exhibits
8-K 2018-02-22 Officers, Exhibits
8-K 2018-01-25 Earnings, Shareholder Vote, Exhibits
COP ConocoPhillips 69,550
CQP Cheniere Energy Partners 20,710
KEY Keycorp 17,430
ABG Asbury Automotive Group 1,560
VSTM Verastem 140
UAMY United States Antimony 34
VVPR VivoPower 17
UAVS Ageagle Aerial Systems 5
FLF Federal Life Group 0
FIND Findex Com 0
VIVO 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-2.1 d720029dex21.htm
EX-31.1 d720029dex311.htm
EX-31.2 d720029dex312.htm
EX-32 d720029dex32.htm

Meridian Bioscience Earnings 2019-03-31

VIVO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d720029d10q.htm 10-Q 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number    0-14902

MERIDIAN BIOSCIENCE, INC.

Incorporated under the laws of Ohio

31-0888197

(I.R.S. Employer Identification No.)

3471 River Hills Drive

Cincinnati, Ohio 45244

(513) 271-3700

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, no par value   VIVO   NASDAQ Global Select Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding April 30, 2019

Common Stock, no par value   42,628,582


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q

 

          Page(s)  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements (Unaudited)   
  

Condensed Consolidated Statements of Operations
Three and Six Months Ended March  31, 2019 and 2018

     1  
  

Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended March 31, 2019 and 2018

     2  
  

Condensed Consolidated Statements of Cash Flows
Six Months Ended March  31, 2019 and 2018

     3  
  

Condensed Consolidated Balance Sheets
March 31, 2019 and September 30, 2018

     4-5  
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity
Three and Six Months Ended March 31, 2019 and 2018

     6  
  

Notes to Condensed Consolidated Financial Statements

     7-16  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      17-26  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      26  

Item 4.

   Controls and Procedures      26  

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      27  

Item 1A.

   Risk Factors      27  

Item 6.

   Exhibits      27-28  

Signature

        28  

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “continues”, “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. All statements that address operating performance or events or developments that Meridian expects or anticipates will occur in the future, including, but not limited to, statements relating to per share diluted earnings and revenue, are forward-looking statements. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Specifically, Meridian’s forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance. Meridian assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following: Meridian’s operating results, financial condition and continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition, its ability to effectively sell such products and its ability to successfully expand and effectively manage increased sales and marketing operations. While Meridian has introduced a number of internally developed products and acquired products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis or in protecting its intellectual property, and unexpected or costly manufacturing costs associated with its introduction of new products or acquired products could cause actual results to differ from expectations. Meridian relies on proprietary, patented and licensed technologies. As such, the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would impact its results. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which our customers operate, as well as adverse trends in buying patterns from customers, can change expected results. Costs and difficulties in complying with laws and regulations, including those administered by the United States Food and Drug Administration, can result in unanticipated expenses and delays and interruptions to the sale of new and existing products, as can the uncertainty of regulatory approvals and the regulatory process (including the currently ongoing study and other FDA actions regarding the Company’s LeadCare products). The international scope of Meridian’s operations, including changes in the relative strength or weakness of the U.S. dollar and general economic conditions in foreign countries, can impact results and make them difficult to predict. One of Meridian’s growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses will be successfully integrated into Meridian’s operations. There may be risks that acquisitions may disrupt operations and may pose potential difficulties in employee retention, and there may be additional risks with respect to Meridian’s ability to recognize the benefits of acquisitions, including potential synergies and cost savings or the failure of acquisitions to achieve their plans and objectives. Meridian cannot predict the outcome of goodwill impairment testing and the impact of possible goodwill impairments on Meridian’s earnings and financial results. Meridian cannot predict the possible impact of U.S. health care legislation enacted in 2010 – the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act – and any modification or repeal of any of the provisions thereof initiated by Congress or the presidential administration, and any similar initiatives in other countries on its results of operations. Efforts to reduce the U.S. federal deficit, breaches of Meridian’s information technology systems, trade wars, increased tariffs, and natural disasters and other events could have a materially adverse effect on Meridian’s results of operations and revenues. In the past, the Company has identified a material weakness in our internal control over financial reporting, which has been remediated, but the Company can make no assurances that a material weakness will not be identified in the future, which if identified and not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements. In addition to the factors described in this paragraph, as well as those factors identified from time to time in our filings with the Securities and Exchange Commission, Part I, Item 1A Risk Factors of our most recent Annual Report on Form 10-K contains a list and description of uncertainties, risks and other matters that may affect the Company. Readers should carefully review these forward-looking statements and risk factors, and not place undue reliance on our forward-looking statements.

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

     Three Months Ended     Six Months Ended  
     March 31,     March 31,  
     2019     2018     2019     2018  

NET REVENUES

   $ 50,248   $ 56,451   $ 101,728   $ 108,734

COST OF SALES

     20,910     21,882     40,818     42,155
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     29,338     34,569     60,910     66,579
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

        

Research and development

     3,816     4,491     7,700     8,895

Selling and marketing

     6,911     8,647     14,474     17,461

General and administrative

     7,388     8,842     16,286     18,090

Acquisition and restructuring costs

     785     3,458     872     4,192

Litigation costs

     603     1,453     1,192     2,202
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,503     26,891     40,524     50,840
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     9,835     7,678     20,386     15,739

OTHER INCOME (EXPENSE)

        

Interest income

     204     90     353     162

Interest expense

     (347     (379     (710     (774

Other, net

     (445     (165     (306     (245
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (588     (454     (663     (857
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

     9,247     7,224     19,723     14,882

INCOME TAX PROVISION

     2,153     1,936     4,523     3,292
  

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

   $ 7,094   $ 5,288   $ 15,200   $ 11,590
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC EARNINGS PER COMMON SHARE

   $ 0.17   $ 0.12   $ 0.36   $ 0.27

DILUTED EARNINGS PER COMMON SHARE

   $ 0.17   $ 0.12   $ 0.35   $ 0.27

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC

     42,496     42,323     42,472     42,289

EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS

     450     409     453     404
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED

     42,946     42,732     42,925     42,693
  

 

 

   

 

 

   

 

 

   

 

 

 

ANTI-DILUTIVE SECURITIES:

        

Common share options and restricted share units

     771     1,021     742     1,015
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.125   $ 0.125   $ 0.250   $ 0.250
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 1


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(dollar amounts in thousands)

 

     Three Months Ended     Six Months Ended  
     March 31,     March 31,  
     2019     2018     2019     2018  

NET EARNINGS

   $ 7,094   $ 5,288   $ 15,200   $ 11,590

Other comprehensive income (loss):

        

Foreign currency translation adjustment

     377     926     (339     1,217

Unrealized gain (loss) on cash flow hedge

     (310     424     (887     765

Income taxes related to items of other comprehensive income

     78     (107     223     (219
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     145     1,243     (1,003     1,763
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 7,239   $ 6,531   $ 14,197   $ 13,353
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 2


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollar amounts in thousands)

 

Six Months Ended March 31,

   2019     2018  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net earnings

   $ 15,200   $ 11,590

Non-cash items included in net earnings:

    

Depreciation of property, plant and equipment

     2,562     2,236

Amortization of intangible assets

     1,658     1,883

Amortization of deferred instrument costs

     —       401

Stock-based compensation

     2,368     1,975

Deferred income taxes

     (677     (1,576

Change in:

    

Accounts receivable

     (951     (4,185

Inventories

     832     (2,370

Prepaid expenses and other current assets

     286     754

Accounts payable and accrued expenses

     (1,267     3,746

Income taxes payable

     1,108     (775

Other, net

     (149     160
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,970     13,839
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchase of property, plant and equipment

     (2,113     (2,160
  

 

 

   

 

 

 

Net cash used for investing activities

     (2,113     (2,160
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Dividends paid

     (10,612     (10,577

Payments on term loan

     (2,250     (2,250

Proceeds and tax benefits from exercises of stock options

     524     —  
  

 

 

   

 

 

 

Net cash used for financing activities

     (12,338     (12,827
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Equivalents and Restricted Cash

     (185     476
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Equivalents and Restricted Cash

     6,334     (672

Cash and Equivalents and Restricted Cash at Beginning of Period

     60,763     58,072
  

 

 

   

 

 

 

Cash and Equivalents and Restricted Cash at End of Period

   $ 67,097   $ 57,400
  

 

 

   

 

 

 

Cash and Equivalents

   $ 66,097   $ 56,400

Restricted Cash

     1,000     1,000
  

 

 

   

 

 

 

Cash and Equivalents and Restricted Cash at End of Period

   $ 67,097   $ 57,400
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 3


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollar amounts in thousands)

ASSETS

 

     March 31,
2019

(Unaudited)
     September 30,
2018
 

CURRENT ASSETS

     

Cash and equivalents

   $ 66,097    $ 59,763

Accounts receivable, less allowances of $437 and $310

     33,031      32,336

Inventories

     40,866      41,993

Prepaid expenses and other current assets

     4,671      4,961
  

 

 

    

 

 

 

Total current assets

     144,665      139,053
  

 

 

    

 

 

 

PROPERTY, PLANT AND EQUIPMENT, at Cost

     

Land

     1,155      1,160

Buildings and improvements

     32,454      32,444

Machinery, equipment and furniture

     60,394      50,606

Construction in progress

     1,806      1,631
  

 

 

    

 

 

 

Subtotal

     95,809      85,841

Less: accumulated depreciation and amortization

     65,039      55,846
  

 

 

    

 

 

 

Net property, plant and equipment

     30,770      29,995
  

 

 

    

 

 

 

OTHER ASSETS

     

Goodwill

     54,642      54,637

Other intangible assets, net

     21,452      23,113

Restricted cash

     1,000      1,000

Deferred instrument costs, net

     —        1,239

Fair value of interest rate swap

     835      1,722

Deferred income taxes

     110      130

Other assets

     490      488
  

 

 

    

 

 

 

Total other assets

     78,529      82,329
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 253,964    $ 251,377
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 4


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollar amounts in thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

     March 31,
2019

(Unaudited)
    September 30,
2018
 

CURRENT LIABILITIES

    

Accounts payable

   $ 7,838   $ 6,260

Accrued employee compensation costs

     5,357     7,263

Other accrued expenses

     3,724     5,065

Current portion of long-term debt

     6,000     5,250

Income taxes payable

     1,163     335
  

 

 

   

 

 

 

Total current liabilities

     24,082     24,173
  

 

 

   

 

 

 

NON-CURRENT LIABILITIES

    

Post-employment benefits

     2,476     2,646

Long-term debt

     41,946     44,930

Long-term income taxes payable

     736     441

Deferred income taxes

     3,079     3,769
  

 

 

   

 

 

 

Total non-current liabilities

     48,237     51,786
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value; 1,000,000 shares authorized; none issued

     —       —  

Common shares, no par value; 71,000,000 shares authorized, 42,515,142 and 42,399,962 shares issued, respectively

     —       —  

Additional paid-in capital

     131,951     129,193

Retained earnings

     54,074     49,602

Accumulated other comprehensive loss

     (4,380     (3,377
  

 

 

   

 

 

 

Total shareholders’ equity

     181,645     175,418
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 253,964   $ 251,377
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 5


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollar and share amounts in thousands, except per share data)

 

     Common
Shares
Issued
     Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

THREE MONTHS ENDED MARCH 31, 2019

            

Balance at December 31, 2018

     42,489    $ 130,876    $ 52,291   $ (4,525   $ 178,642

Cash dividends paid - $0.125 per share

     —          —          (5,311     —         (5,311

Conversion of restricted share units and exercise of stock options

     26      377      —         —         377

Stock compensation expense

     —          698      —         —         698

Net earnings

     —          —          7,094     —         7,094

Foreign currency translation adjustment

     —          —          —         377     377

Hedging activity, net of tax

     —          —          —         (232     (232
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     42,515    $ 131,951    $ 54,074   $ (4,380   $ 181,645
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

THREE MONTHS ENDED MARCH 31, 2018

            

Balance at December 31, 2017

     42,307    $ 127,367    $ 47,937   $ (2,426   $ 172,878

Cash dividends paid - $0.125 per share

     —          —          (5,289     —         (5,289

Conversion of restricted share units

     37      —          —         —         —    

Stock compensation expense

     —          216      —         —         216

Net earnings

     —          —          5,288     —         5,288

Foreign currency translation adjustment

     —          —          —         926     926

Hedging activity, net of tax

     —          —          —         317     317
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     42,344    $ 127,583    $ 47,936   $ (1,183   $ 174,336
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     Common
Shares
Issued
     Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

SIX MONTHS ENDED MARCH 31, 2019

            

Balance at September 30, 2018

     42,400    $ 129,193    $ 49,602   $ (3,377   $ 175,418

Cash dividends paid - $0.250 per share

     —          —          (10,612     —         (10,612

Conversion of restricted share units and exercise of stock options

     115      390      —         —         390

Stock compensation expense

     —          2,368      —         —         2,368

Net earnings

     —          —          15,200     —         15,200

Foreign currency translation adjustment

     —          —          —         (339     (339

Hedging activity, net of tax

     —          —          —         (664     (664

Adoption of ASU 2014-09

     —          —          (116     —         (116
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     42,515    $ 131,951    $ 54,074   $ (4,380   $ 181,645
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

SIX MONTHS ENDED MARCH 31, 2018

            

Balance at September 30, 2017

     42,207    $ 125,608    $ 46,923   $ (2,946   $ 169,585

Cash dividends paid - $0.250 per share

     —          —          (10,577     —         (10,577

Conversion of restricted share units

     137      —          —         —         —    

Stock compensation expense

     —          1,975      —         —         1,975

Net earnings

     —          —          11,590     —         11,590

Foreign currency translation adjustment

     —          —          —         1,217     1,217

Hedging activity, net of tax

     —          —          —         546     546
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

     42,344    $ 127,583    $ 47,936   $ (1,183   $ 174,336
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 6


MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Dollars in Thousands, Except Per Share Amounts

(Unaudited)

 

1.

Basis of Presentation

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2019, the results of its operations for the three and six month periods ended March 31, 2019 and 2018, and its cash flows for the six month periods ended March 31, 2019 and 2018. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s fiscal 2018 Annual Report on Form 10-K. Financial information as of September 30, 2018 has been derived from the Company’s audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year.

 

2.

Significant Accounting Policies

A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal 2018 Annual Report on Form 10-K and should be referred to for a description of the Company’s current significant accounting policies, with the exception of Revenue Recognition, which is set forth below.

Revenue Recognition –

Adoption of New Standard

On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective transition method applied to those contracts that were not completed as of that date. Results for reporting periods beginning on or after October 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previously applicable guidance.

Upon adoption, we recorded a reduction of $116 to the opening balance of retained earnings as of October 1, 2018. This adjustment is related to writing off the book value of clinical diagnostic testing instruments located at customers for which there is no contractual arrangement for the instrument to be returned to the Company. Instruments placed with customers under an agreement to return the instrument to the Company were reclassified to machinery and equipment. Prior to adoption of the new guidance, all instruments placed with customers were capitalized and amortized over an estimated three-year utilization period, with the net balance reflected as deferred instrument costs.

 

Page 7


The following table summarizes the impact of the new revenue standard on our opening balance sheet:

 

     Balance at
September 30,
2018
     New Revenue
Standard
Adjustment
     Balance at
October 1,
2018
 

PROPERTY, PLAN AND EQUIPMENT

        

Machinery, equipment and furniture

   $ 50,606      $ 8,696      $ 59,302  

Accumulated depreciation and amortization

     (55,846      (7,611      (63,457

OTHER ASSETS

        

Deferred instrument costs, net

     1,239        (1,239      —  

NON-CURRENT LIABILITIES

        

Deferred income taxes

     (3,769      38        (3,731

SHAREHOLDERS’ EQUITY

        

Retained earnings

     (49,602      116        (49,486

The adoption of this new standard had an immaterial impact on our reported total revenues and operating income, as compared to what would have been reported under the prior standard. Our accounting policies under the new standard were applied prospectively and are noted below following the discussion of Revenue Disaggregation.

Revenue Disaggregation

The following tables present our revenues disaggregated by major geographic region, major product platform and disease state (Diagnostics only):

Revenue by Reportable Segment & Geographic Region

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2019      2018      Inc (Dec)     2019      2018      Inc (Dec)  

Diagnostics-

                

Americas

   $ 27,278    $ 33,351      (18 )%    $ 58,425    $ 64,926      (10 )% 

EMEA

     5,535      5,912      (6 )%      10,620      11,327      (6 )% 

ROW

     687      519      32     1,120      1,019      10
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Diagnostics

     33,500      39,782      (16 )%      70,165      77,272      (9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Life Science-

                

Americas

     5,453      5,121      6     9,975      10,373      (4 )% 

EMEA

     7,901      7,478      6     15,376      12,659      21

ROW

     3,394      4,070      (17 )%      6,212      8,430      (26 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Life Science

     16,748      16,669      —       31,563      31,462      —  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Consolidated

   $ 50,248    $ 56,451      (11 )%    $ 101,728    $ 108,734      (6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

Page 8


Revenue by Product Platform/Type

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2019      2018      Inc (Dec)     2019      2018      Inc (Dec)  

Diagnostics-

                

Molecular assays

   $ 7,132    $ 9,976      (29 )%    $ 14,434    $ 18,692      (23 )% 

Immunoassays & blood chemistry assays

     26,368      29,806      (12 )%      55,731      58,580      (5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Diagnostics

   $ 33,500    $ 39,782      (16 )%    $ 70,165    $ 77,272      (9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Life Science-

                

Molecular reagents

   $ 5,390    $ 6,143      (12 )%    $ 11,998    $ 11,832      1

Immunological reagents

     11,358      10,526      8     19,565      19,630      —  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Life Science

   $ 16,748    $ 16,669      —     $ 31,563    $ 31,462      —  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Revenue by Disease State (Diagnostics only)

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2019      2018      Inc (Dec)     2019      2018      Inc (Dec)  

Diagnostics-

                

Gastrointestinal assays

   $ 16,177    $ 19,149      (16 )%    $ 34,792    $ 39,419      (12 )% 

Respiratory illness assays

     7,553      9,543      (21 )%      15,534      17,029      (9 )% 

Blood chemistry assays

     4,330      4,257      2     8,760      8,523      3

Other

     5,440      6,833      (20 )%      11,079      12,301      (10 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Diagnostics

   $ 33,500    $ 39,782      (16 )%    $ 70,165    $ 77,272      (9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Revenue Policies

Product Sales

Revenue from contracts with customers is recognized in an amount that reflects the consideration we expect to receive in exchange for products when obligations under such contracts are satisfied. Revenue is generally recognized at a point-in-time when products are shipped and title has passed to the customer. Such contracts can include various combinations of products that are generally accounted for as distinct performance obligations.

Revenue is reduced in the period of sale for fees paid to distributors, which are inseparable from the distributor’s purchase of our product and for which we receive no goods or services in return. Revenue for the Diagnostics segment is reduced at the date of sale for product price adjustments due to certain distributors under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Such accruals are netted against accounts receivable.

Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.

Our payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 90 days from the date of shipment or satisfaction of the performance obligation. Trade accounts receivable are recorded in the accompanying Consolidated Balance Sheets at invoiced amounts less provisions for distributor price adjustments under local contracts and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historical write-off experience and known conditions that would likely lead to non-payment. Customer invoices are charged off against the allowance when we believe it is probable that the invoices will not be paid.

 

Page 9


Practical Expedients and Exemptions

Revenue is recognized net of any taxes collected from customers (sales tax, value added tax, etc.), which are subsequently remitted to government authorities.

Our products are generally not subject to a customer right of return except for product recall events under the rules and regulations of the Food and Drug Administration or equivalent agencies outside the United States. In this circumstance, the costs to replace affected products would be accrued at the time a loss was probable and estimable.

We expense as incurred the costs to obtain contracts, as the amortization period would have been one year or less. These costs, recorded within selling and marketing expense, include our internal sales force compensation programs and certain partner sales incentive programs, as we have determined that annual compensation is commensurate with annual selling activities.

Reagent Rental Arrangements

Our Alethia and LeadCare product platforms require the use of instruments for the tests to be processed. In many cases, a customer is given use of the instrument provided they continue purchasing the associated tests, also referred to as “consumables” or “reagents”. If a customer stops purchasing the consumables, the instrument must be returned to Meridian. Such arrangements are common practice in the diagnostics industry and are referred to as “Reagent Rental” agreements. These agreements may also include instrument related services such as a limited replacement warranty, training and installation. We concluded that the use of the instrument and related services (collectively known as “lease elements”) are not within the scope of ASU No. 2014-09 but rather ASU 2016-02, Leases. Accordingly, we first allocate the transaction price between the lease elements and the non-lease elements based on estimates of relative standalone selling prices. Lease revenue is derived solely from the sale of consumables and is therefore recognized monthly as earned, which coincides with the transfer of control of the non-lease elements.

For the portion of the transaction price allocated to the non-lease elements, which are principally the test kits, the related revenue will be recognized at a point-in-time when control transfers.

Revenue allocated to the lease elements of these Reagent Rental arrangements represent less than 1% of total revenue and are included as part of net revenues in our Condensed Consolidated Statements of Income.

Recent Accounting Pronouncements –

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the accounting guidance related to leases. These changes, which are designed to increase transparency and comparability among organizations for both lessees and lessors, include, among other things, requiring recognition of lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Adoption and implementation of the guidance is not required by the Company until the beginning of fiscal 2020, although early adoption is permitted. During the second quarter of fiscal 2019, the Company commenced the process of gathering and summarizing its corporate-wide lease information in order to assess the impact that adoption of this guidance will have on its financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The update addresses certain specific cash flows and their treatment, with the objective being to reduce the existing diversity in how the items are presented and classified within the statement of cash flows. The Company adopted this guidance in the first quarter of fiscal 2019, with the Condensed Consolidated Statements of Cash Flows reflecting such adoption, including the information related to restricted cash.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address certain of the recent U.S. federal income tax legislation’s impact on Accumulated Other Comprehensive Income (“AOCI”). The guidance specifically provides the option of reclassifying “stranded tax effects” related to the tax legislation from AOCI to retained earnings. Adoption and implementation of the optional guidance is not effective for the Company until the beginning of fiscal 2020, although early adoption is permitted. The Company plans to adopt this guidance in fiscal 2020 as required but does not expect adoption to have a significant impact on the Company’s consolidated results of operations, cash flows or financial position.

 

Page 10


Reclassifications –

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Such reclassifications had no impact on net earnings or shareholders’ equity.

 

3.

Cash and Equivalents

Cash and equivalents include the following components:

 

     March 31, 2019      September 30, 2018  
     Cash and
Equivalents
     Other
Assets
     Cash and
Equivalents
     Other
Assets
 

Institutional money market funds

   $ 20,668    $ —        $ 20,421    $ —    

Cash on hand -

           

Restricted

     —        1,000      —        1,000

Unrestricted

     45,429      —        39,342      —  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,097    $ 1,000    $ 59,763    $ 1,000
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4.

Inventories

Inventories are comprised of the following:

 

     March 31,
2019
     September 30,
2018
 

Raw materials

   $ 7,473    $ 6,689

Work-in-process

     11,810      12,098

Finished goods - instruments

     965      1,191

Finished goods - kits and reagents

     20,618      22,015
  

 

 

    

 

 

 

Total

   $ 40,866    $ 41,993
  

 

 

    

 

 

 

 

5.

Intangible Assets

A summary of our acquired intangible assets subject to amortization, as of March 31, 2019 and September 30, 2018, is as follows:

 

     March 31, 2019      September 30, 2018  
     Gross
Carrying
Value
     Accumulated
Amortization
     Gross
Carrying
Value
     Accumulated
Amortization
 

Manufacturing technologies, core products and cell lines

   $ 22,298    $ 14,571    $ 22,297    $ 13,974

Trade names, licenses and patents

     8,647      5,717      8,647      5,267

Customer lists, customer relationships and supply agreements

     24,463      13,668      24,461      13,051
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,408    $ 33,956    $ 55,405    $ 32,292
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 11


The actual aggregate amortization expense for these intangible assets was $829 and $945 for the three months ended March 31, 2019 and 2018, respectively, and $1,658 and $1,883 for the six months ended March 31, 2019 and 2018, respectively. The estimated aggregate amortization expense for these intangible assets for each of the fiscal years through fiscal 2024 is as follows: remainder of fiscal 2019 – $1,664, fiscal 2020 – $3,165, fiscal 2021 – $2,560, fiscal 2022 – $2,182, fiscal 2023 – $2,170, and fiscal 2024 – $2,166.

 

6.

Restructuring

During the second quarter of fiscal 2018, the Company began implementation of a plan to realign its business structure into two business units, Diagnostics and Life Science, supported by a global corporate team. As part of this plan, certain functions and locations within both business units were streamlined, including: (i) the elimination of certain executive management and commercial sales positions; (ii) the closing of Life Science locations in Taunton, Massachusetts and Singapore, the operations of which were transferred to locations in Memphis, Tennessee and London, England, respectively; and (iii) the transfer of certain functions performed in the Billerica, Massachusetts Diagnostics facility to the corporate headquarters in Cincinnati, Ohio. As a result of these activities, restructuring costs totaling $6,332 were recorded during the fiscal year ended September 30, 2018.

During the second quarter of fiscal 2019, approximately $270 of restructuring accrual was reversed and is reflected as a reduction of the Acquisition and Restructuring Costs within the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019. A summary of the accrued liability associated with the restructuring costs as of March 31, 2019 and September 30, 2018, is as follows:

 

     March 31,
2019
     September 30,
2018
 

Severance, other termination benefits and related costs

   $ 78    $ 987

Lease and other contract termination fees

     —        33

Other

     —        6
  

 

 

    

 

 

 

Total

   $ 78    $ 1,026
  

 

 

    

 

 

 

 

7.

Income Taxes

On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “tax reform act”). In applying the tax reform act during the three months ended December 31, 2017, we followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), regarding the application of ASC Topic 740 in situations where a company does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the tax reform act for the reporting period in which the tax reform act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the tax reform act’s enactment date and ending when a company has obtained, prepared and analyzed the information needed in order to complete the accounting requirements, but in no circumstances should the measurement period extend beyond one year from the enactment date.

As a result, our financial statements for the three months ended December 31, 2017 reflected the effects of the tax reform act as provisional based on a reasonable estimate of the income tax effects and included a provisional noncurrent income tax payable in the amount of $854 related to the repatriation transition tax. Subsequent to the quarter ended December 31, 2017 and prior to September 30, 2018, we completed the accounting for the effects of the tax reform act. As a result, our repatriation transition tax liability was increased to $876, which is reflected as follows in the accompanying Condensed Consolidated Balance as of March 31, 2019, after our having recently paid the amount estimated for fiscal 2018: $65 of current income taxes payable and $736 long-term income taxes payable.

 

Page 12


In addition, during the three months ended December 31, 2017 we recorded a one-time tax benefit of $1,695 resulting from the tax reform act, including an adjustment from the re-measurement of deferred tax assets and liabilities. This re-measurement included an estimate of the temporary differences expected to be realized during fiscal 2018 at a transitional blended rate of 24.5%. The remaining temporary differences were re-measured at 21%.

 

8.

Bank Credit Arrangements

In March 2016, the Company entered into a $60,000 five-year term loan with a commercial bank. The term loan requires quarterly principal and interest payments, with interest at a variable rate tied to LIBOR, and a balloon principal payment due March 31, 2021. The required principal payments on the term loan for each of the remaining fiscal years are as follows: remainder of fiscal 2019 - $3,000, fiscal 2020 - $6,000, and fiscal 2021 - $39,000. In light of the term loan’s interest being determined on a variable rate basis, the fair value of the term loan at March 31, 2019 approximates the current carrying value reflected in the accompanying Condensed Consolidated Balance Sheet.

In order to limit exposure to volatility in the LIBOR interest rate, the Company and the commercial bank also entered into an interest rate swap that effectively converts the variable interest rate on the term loan to a fixed rate of 2.76%. With an initial notional balance of $60,000, the interest rate swap was established with critical terms identical to those of the term loan, including: (i) notional reduction amounts and dates; (ii) LIBOR settlement rates; (iii) rate reset dates; and (iv) term/maturity. Due to this, the interest rate swap has been designated as an effective cash flow hedge, with changes in fair value reflected as a separate component of other comprehensive income in the accompanying Condensed Consolidated Statements of Comprehensive Income. At March 31, 2019 and September 30, 2018, the fair value of the interest rate swap was $835 and $1,722, respectively, and is reflected as a non-current asset in the accompanying Condensed Consolidated Balance Sheets. This fair value was determined by information provided by the counterparty, and is considered a Level 2 input within the fair value hierarchy of valuation techniques.

In addition, the Company maintains a $30,000 revolving credit facility with a commercial bank, which expires March 31, 2021. There were no borrowings outstanding on this credit facility at March 31, 2019 or September 30, 2018.

The term loan and the revolving credit facility are collateralized by the business assets of the Company’s U.S. subsidiaries and require compliance with financial covenants that limit the amount of debt obligations and require a minimum level of coverage of fixed charges, as defined in the borrowing agreement. As of March 31, 2019, the Company is in compliance with all covenants. The Company is also required to maintain a compensating cash balance with the bank in the amount of $1,000, and is in compliance with this requirement.

See Note 12, “Subsequent Event”.

 

9.

Reportable Segments and Major Customers Information

Meridian was formed in 1976 and functions as a fully-integrated life science company with principal businesses in: (i) the development, manufacture, sale and distribution of diagnostic test kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents used by researchers and other diagnostic manufacturers.

Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio, manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston), and the sale and distribution of diagnostics products domestically and abroad. This segment’s products are used by hospitals, reference labs and physician offices to detect infectious diseases and elevated lead levels in blood.

The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents domestically and abroad, including a sales and business development facility in Beijing, China to further pursue revenue opportunities in Asia. This segment’s products are used by manufacturers and researchers in a variety of applications (e.g., in-vitro medical device manufacturing, microRNA detection, next-gen sequencing, plant genotyping, and mutation detection, among others).

 

Page 13


Amounts due from two Diagnostics distributor customers accounted for 14% and 12% of consolidated accounts receivable at March 31, 2019 and September 30, 2018, respectively. Revenues from these two distributor customers accounted for 25% and 27% of the Diagnostics segment third-party revenues during the three months ended March 31, 2019 and 2018, respectively, and 30% during each of the six month periods ended March 31, 2019 and 2018. These distributors represented 17% and 19% of consolidated revenues for the fiscal 2019 and 2018 second quarters, respectively, and 21% for each of the respective year-to-date six month periods.

Within our Life Science segment, two diagnostic manufacturing customers accounted for 27% and 22% of the segment’s third-party revenues during the three months ended March 31, 2019 and 2018, respectively, and 27% and 19% during the six months ended March 31, 2019 and 2018, respectively.

Segment information for the interim periods is as follows:

 

     Diagnostics      Life Science      Corporate(1)     Eliminations(2)     Total  

Three Months Ended March 31, 2019

 

Net revenues -

            

Third-party

   $ 33,500    $ 16,748    $ —       $ —       $ 50,248

Inter-segment

     89      53      —       (142     —  

Operating income

     7,561      5,361      (3,101     14       9,835

Goodwill (March 31, 2019)

     35,213      19,429      —       —       54,642

Other intangible assets, net (March 31, 2019)

     20,705      747      —       —       21,452

Total assets (March 31, 2019)

     183,234      70,152      —       578       253,964

Three Months Ended March 31, 2018

            

Net revenues -

            

Third-party

   $ 39,782    $ 16,669    $ —       $ —       $ 56,451

Inter-segment

     80      75      —       (155     —  

Operating income

     10,684      3,638      (6,723     79       7,678

Goodwill (September 30, 2018)

     35,213      19,424      —       —       54,637

Other intangible assets, net (September 30, 2018)

     22,068      1,045      —       —       23,113

Total assets (September 30, 2018)

     180,978      70,341      —       58       251,377

Six Months Ended March 31, 2019

 

Net revenues -

            

Third-party

   $ 70,165    $ 31,563    $ —       $ —       $ 101,728

Inter-segment

     252      229      —       (481     —  

Operating income

     16,346      10,492      (6,493     41       20,386

Six Months Ended March 31, 2018

 

Net revenues -

            

Third-party

   $ 77,272    $ 31,462    $ —       $ —       $ 108,734

Inter-segment

     201      267      —       (468     —  

Operating income

     19,310      6,580      (10,334     183     15,739

 

(1)

Includes Acquisition, Restructuring and Litigation Costs of $1,488 and $4,911 in the three months ended March 31, 2019 and 2018, respectively, and $2,164 and $6,394 in the six months ended March 31, 2019 and 2018, respectively.

(2)

Eliminations consist of inter-segment transactions.

Transactions between segments are accounted for at established intercompany prices for internal and management purposes, with all intercompany amounts eliminated in consolidation.

 

Page 14


10.

Litigation Matters

On November 15, 2017, Barbara Forman filed a class action complaint in the United States District Court for the Southern District of Ohio naming Meridian, its Chief Executive Officer and Chief Financial Officer (in their capacities as such) as defendants. An amended complaint was filed on April 16, 2018 and the Company believes the essential elements of the amended complaint are the same. The complaint and the amended complaint are hereafter referred to as the “Complaint”. The Complaint seeks compensatory damages and attorneys’ fees. On February 13, 2019 the Court granted Meridian’s motion to dismiss and dismissed the Complaint in its entirety. Plaintiff filed a Motion to Reconsider, Set Aside, Alter, Amend, or Vacate the Judgment of dismissal on March 13, 2019. Meridian opposed the Plaintiff’s motion on April 3, 2019 and the Plaintiff filed a reply on April 17, 2019. The motion remains pending before the Court. Accordingly, no provision for litigation losses has been included within either of the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019 or March 31, 2018.

On December 6, 2017, Michael Edelson filed a derivative complaint in the United States District Court for the Southern District of Ohio naming Meridian, its Chief Executive Officer, Chief Financial Officer and certain members of Meridian’s Board of Directors and Audit Committee (in their capacities as such) as defendants. The complaint alleges that Meridian made false and misleading representations concerning certain of Magellan’s lead test systems at or around the time of Meridian’s acquisition of Magellan and subsequent thereto, and the complaint alleges that certain members of the Board of Directors and Audit Committee breached their fiduciary duties in their oversight of the Company’s public disclosures and corporate governance matters. The complaint seeks compensatory damages, equitable relief relating to corporate governance matters and attorneys’ fees. The case has been stayed by agreement of the parties pending resolution of the motion to dismiss the class action described above. We are unable to determine or predict the ultimate outcome or estimate the range of possible losses, if any. Accordingly, no provision for litigation losses has been included within either of the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019 or March 31, 2018.

Approximately $40 of expense for attorneys’ fees related to the above two class action matters is included within the accompanying Condensed Consolidated Statements of Operations for both the three and six months ended March 31, 2019, with approximately $530 and $545 of related expense being reflected within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2018, respectively. The Company maintains an insurance policy covering these matters, which has a $500 deductible.

On April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and the Company is cooperating with the DOJ in this matter. The Company maintains rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements, and is working with the DOJ to promptly respond to the subpoena, including responding to additional information requests and executing a tolling agreement to extend the statute of limitations. However, the Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately $560 and $1,100 of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019, respectively, with no related expense being reflected within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2018.

On October 9, 2018, the Company and DiaSorin Inc. entered into a strategic collaboration to sell DiaSorin’s Helicobacter pylori stool antigen test to detect H. pylori for use on its automated LIAISON platform under the Meridian brand name worldwide. The new collaboration results in the termination of all pending legal disputes between the two parties and will expand the previous agreement between DiaSorin and Meridian, which focused on the sale, by DiaSorin, of co-developed products in major countries in continental Europe. Approximately $0 and $50 of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019, respectively, and approximately $925 and $1,655 of related expense is included within the accompanying Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2018, respectively.

 

Page 15


11.

FDA Matters Related to LeadCare

As previously disclosed, on June 29, 2017, the FDA, in connection with its Safety Notification related to Magellan’s LeadCare testing systems for venous blood samples, issued to Magellan its Form 483, Inspectional Observations. The FDA issued a related Warning Letter on October 23, 2017. As also previously disclosed, on April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we continue to cooperate with the DOJ in this matter, including responding to additional information requests and executing a tolling agreement to extend the statute of limitations.

Magellan submitted 510(k) applications in December 2018, seeking to reinstate venous blood sample-types for its LeadCare® II, LeadCare® Plus and LeadCare Ultra® testing systems. In the second fiscal quarter of 2019 the FDA informed Magellan that each of these 510(k) applications has been put on Additional Information hold. Further, while Magellan’s LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of Magellan’s LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by FDA or the Centers for Disease Control and Prevention is necessary to protect the public health. Meridian intends to fully cooperate with the FDA as FDA completes its third-party study and continues to work to complete remediation actions at Magellan’s blood–chemistry manufacturing facility to the FDA’s full and complete satisfaction.

While we remain confident in the performance of the Magellan LeadCare testing systems, there can be no assurance that the ongoing investigation and study of the DOJ and FDA, respectively, or future exercise of their respective enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to our business practices, product offerings or operations that could have a material adverse effect on our business, financial condition or results of operations; or eliminate altogether our ability to operate our lead testing business, or on terms substantially similar to those on which we currently operate.

See Part II, Item 1A Risk Factors below.

 

12.

Subsequent Event

On April 29, 2019, we signed a definitive agreement to acquire substantially all of the assets, as well as selected liabilities, of GenePOC Inc., a molecular diagnostics company located in Quebec City, Quebec Province, Canada. This purchase will be included in our Diagnostics operating segment. The maximum purchase price is $120,000, which consists of: (i) $50,000 to be paid at closing (subject to a working capital adjustment and a $5,000 hold-back to secure seller’s post-closing obligations); (ii) up to $20,000 to be paid in fiscal 2021, contingent upon the achievement of product development milestones; and (iii) up to $50,000 to be paid in fiscal 2023 based on certain sales and profit margin thresholds to be measured in fiscal 2022. GenePOC’s molecular diagnostics testing system is branded under the name revogene, and currently includes three FDA-cleared assays (C. difficile, Group A Strep and Group B Strep). The purchase is expected to close no later than early fourth quarter fiscal 2019, pending the satisfaction of certain closing conditions.

In connection with the proposed acquisition of GenePOC, we also expect to execute a new five-year $125,000 revolving credit facility that would replace our existing $30,000 credit facility. We expect the new credit facility will be secured by substantially all of our assets and will include certain restrictive financial covenants. We expect to draw down approximately $73,000 from this new facility and use approximately $20,000 of cash on-hand to repay the existing term loan outstanding at March 31, 2019 and fund the closing payment for the acquisition of GenePOC.

Also, our Board of Directors suspended the declaration and payment of quarterly dividends by Meridian to invest in new product development activities for the revogene molecular diagnostics platform, among other investments in the business, and to preserve our capital resources and liquidity for general corporate purposes.

 

Page 16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Refer to “Forward-Looking Statements” following the Table of Contents in front of this Form 10-Q. In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data.

Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of Meridian’s financial condition, changes in financial condition and results of operations. Unless otherwise noted, increases or decreases are measured over the corresponding period of the prior fiscal year. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2019

Net earnings for the second quarter of fiscal 2019 increased 34% to $7,094, or $0.17 per diluted share, from net earnings for the second quarter of fiscal 2018 of $5,288, or $0.12 per diluted share. The fiscal 2019 second quarter results include $1,388 of costs associated with acquisition and restructuring activities, and litigation costs, while the fiscal 2018 second quarter results include $4,911 of costs associated with restructuring activities and litigation costs. These items had a combined impact on net earnings of $1,065, or $0.02 per diluted share, in the fiscal 2019 quarter and $3,575, or $0.08 per diluted share, in the fiscal 2018 quarter (see “USE OF NON-GAAP MEASURES” below). Consolidated revenues for the second quarter of fiscal 2019 totaled $50,248, a decrease of 11% compared to the second quarter of fiscal 2018 (10% decrease on a constant-currency basis).

Revenues for the Diagnostics segment for the second quarter of fiscal 2019 decreased 16% compared to the second quarter of fiscal 2018 (15% on a constant-currency basis), comprised of a 29% decrease in molecular assay products and a 12% decrease in immunoassay and blood chemistry assay products. With a 12% decrease in its molecular reagents products and an 8% increase in its immunological reagents products, revenues for our Life Science segment were flat during the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. On a constant-currency basis, revenues for the Life Science segment increased 2%.

The second quarter Diagnostics revenues reflect modest growth in our blood chemistry assay product line being more than offset by decreased revenues for our gastrointestinal and respiratory assays. Life Science revenues reflect inconsistent buying patterns with a number of our multi-national IVD manufacturing customers and general market softness in China.

Six Months Ended March 31, 2019

For the six month period ended March 31, 2018, net earnings were $15,200, or $0.35 per diluted share. The year-to-date fiscal 2019 results include $2,064 of costs associated with acquisition and restructuring activities, and litigation costs, while the comparable fiscal 2018 results include $6,394 of costs associated with restructuring activities and litigations costs, along with certain one-time tax effects of the U.S. tax reform act enacted in December 2017. These items had a combined impact on net earnings of $1,583, or $0.04 per diluted share, in the fiscal 2019 year-to-date period and $3,814, or $0.09 per diluted share, in the comparable fiscal 2018 period (see “USE OF NON-GAAP MEASURES” below). Consolidated revenues decreased 6% to $101,728 for the first six months of fiscal 2019 compared to the same period of the prior year (also 6% on a constant-currency basis). On an operating segment basis, Diagnostics revenues decreased 9% (also 9% in constant-currency) and Life Science revenues were flat (2% increase in constant-currency).

 

Page 17


USE OF NON-GAAP MEASURES

We have supplemented our reported GAAP financial information with information on operating expenses, operating income, net earnings, basic earnings per share and diluted earnings per share excluding the effects of: (i) acquisition transaction costs (fiscal 2019); (ii) restructuring costs (fiscal 2019 and 2018); (iii) litigation costs (fiscal 2019 and 2018); and (iv) certain one-time tax effects of the tax reform act (fiscal 2018) – each of which is a non-GAAP measure. We have provided in the tables below reconciliations to the operating expenses, operating income, net earnings, basic earnings per share and diluted earnings per share amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:

 

  1)

These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impacts of these non-routine items; and

 

  2)

These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from period to period in presentations to our board of directors, and as a basis for strategic planning and forecasting.

Revenue reported on a constant-currency basis is also a non-GAAP measure and is calculated by applying current period average foreign currency exchange rates to each of the prior comparable periods. Management analyzes revenue on a constant-currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on revenue, management believes that evaluating revenue changes on a constant-currency basis provides an additional and meaningful assessment of revenue to both management and investors.

These non-GAAP measures may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations, in that they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should only be used to evaluate our results in conjunction with corresponding GAAP measures.

 

Page 18


     Three Months      Six Months  
     Ended March 31,      Ended March 31,  
     2019      2018      2019      2018  

Operating Expenses -

           

U.S. GAAP basis

   $ 19,503    $ 26,891    $ 40,524      $ 50,840  

Acquisition & restructuring costs

     (785      (3,458      (872      (4,192

Litigation costs

     (603      (1,453      (1,192      (2,202
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Expenses

   $ 18,115    $ 21,980    $ 38,460      $ 44,446  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Income -

           

U.S. GAAP basis

   $ 9,835    $ 7,678    $ 20,386      $ 15,739  

Acquisition & restructuring costs

     785      3,458      872        4,192  

Litigation costs

     603      1,453      1,192        2,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Operating Income

   $ 11,223    $ 12,589    $ 22,450      $ 22,133  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Earnings -

           

U.S. GAAP basis

   $ 7,094    $ 5,288    $ 15,200      $ 11,590  

Acquisition & restructuring costs (1)

     602      2,517      669      3,052  

Litigation costs (1)

     463      1,058      914      1,603  

One-time benefit from tax law change

     —        —        —          (1,695

Repatriation transition tax

     —        —        —          854  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Earnings

   $ 8,159    $ 8,863    $ 16,783      $ 15,404  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Earnings per Basic Common Share -

           

U.S. GAAP basis

   $ 0.17    $ 0.12    $ 0.36    $ 0.27

Acquisition & restructuring costs

     0.01      0.06      0.02      0.07

Litigation costs

     0.01      0.02      0.02      0.04

One-time benefit from tax law change

     —        —        —        (0.04

Repatriation transition tax

     —        —        —        0.02
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Basic EPS (2)

   $ 0.19    $ 0.21    $ 0.40    $ 0.36
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Earnings per Diluted Common Share -

           

U.S. GAAP basis

   $ 0.17    $ 0.12    $ 0.35    $ 0.27

Acquisition & restructuring costs

     0.01      0.06      0.02      0.07

Litigation costs

     0.01      0.02      0.02      0.04

One-time benefit from tax law change

     —        —        —        (0.04

Repatriation transition tax

     —        —        —        0.02
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Diluted EPS (2)

   $ 0.19    $ 0.21    $ 0.39    $ 0.36
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

These acquisition and restructuring costs, and litigation costs are net of the following income tax effects: $183 and $140, respectively, for the three months ended March 31, 2019; $941 and $395, respectively, for the three months ended March 31, 2018; $203 and $278, respectively, for the fiscal 2019 year-to-date period; and $1,140 and $599, respectively, for the fiscal 2018 year-to-date period. These tax effects were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

(2)

Neither Net Earnings per Basic Common Share nor Net Earnings per Diluted Common Share for the fiscal 2018 quarterly period sum to their respective Adjusted EPS amounts due to rounding.

 

Page 19


REVENUE OVERVIEW

Below are analyses of the Company’s revenue, provided for each of the following:

 

   

By Reportable Segment & Geographic Region

 

   

By Product Platform/Type

Revenue Overview- By Reportable Segment & Geographic Region

Our reportable segments are Diagnostics and Life Science, with products sold and distributed in the countries comprising North and Latin America (the “Americas”); Europe, Middle East and Africa (“EMEA”); and other countries outside of the Americas and EMEA (rest of the world, or “ROW”). A full description of our segments is set forth in Note 9, “Reportable Segments and Major Customers Information” of the accompanying Condensed Consolidated Financial Statements.

Revenues for the Diagnostics segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and the severity of seasonal diseases and outbreaks, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major customers, and foreign currency exchange rates.

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2019     2018     Inc (Dec)     2019     2018     Inc (Dec)  

Diagnostics -

            

Americas

   $ 27,278   $ 33,351     (18 )%    $ 58,425   $ 64,926     (10 )% 

EMEA

     5,535     5,912     (6 )%      10,620     11,327     (6 )% 

ROW

     687     519     32     1,120     1,019     10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Diagnostics

     33,500     39,782     (16 )%      70,165     77,272     (9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Life Science -

            

Americas

     5,453     5,121     6     9,975     10,373     (4 )% 

EMEA

     7,901     7,478     6     15,376     12,659     21

ROW

     3,394     4,070     (17 )%      6,212     8,430     (26 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Life Science

     16,748     16,669     —       31,563     31,462     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 50,248   $ 56,451     (11 )%    $ 101,728   $ 108,734     (6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total revenues -

            

Diagnostics

     67     70       69     71  

Life Science

     33     30       31     29  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

Ex-Americas

     35     32       33     31  
  

 

 

   

 

 

     

 

 

   

 

 

   

Revenue Overview- By Product Platform/Type

The revenues generated by each of our reportable segments result primarily from the sale of the following segment-specific categories of products:

Diagnostics

 

  1)

Molecular assays that operate on our Alethia platform (formerly branded as illumigene)

 

  2)

Immunoassays and blood chemistry assays on multiple technology platforms

Life Science

 

  1)

Molecular reagents

 

  2)

Immunological reagents

 

Page 20


Revenues for each product platform/type, as well as its relative percentage of segment revenues, are shown below.

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2019     2018     Inc (Dec)     2019     2018     Inc (Dec)  

Diagnostics-

            

Molecular assays

   $ 7,132   $ 9,976     (29 )%    $ 14,434   $ 18,692     (23 )% 

Immunoassays & blood chemistry assays

     26,368     29,806     (12 )%      55,731     58,580     (5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Diagnostics

   $ 33,500   $ 39,782     (16 )%    $ 70,165   $ 77,272     (9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Life Science-

            

Molecular reagents

   $ 5,390   $ 6,143     (12 )%    $ 11,998   $ 11,832     1

Immunological reagents

     11,358     10,526     8     19,565     19,630     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Life Science

   $ 16,748   $ 16,669     —     $ 31,563   $ 31,462     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Diagnostics revenues-

            

Molecular assays

     21     25       21     24  

Immunoassays & blood chemistry assays

     79     75       79     76  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total Diagnostics

     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

% of Life Science revenues-

            

Molecular reagents

     32     37       38     38  

Immunological reagents

     68     63       62     62  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total Life Science

     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

Following is a discussion of the revenues generated by each of these product platforms/types and disease states:

Diagnostics Products

Gastrointestinal Assays

During the second quarter and first six months of fiscal 2019, revenues from our gastrointestinal products, which include tests for C. difficile, H. pylori and certain foodborne pathogens, among others, totaled $16,177 and $34,792, respectively. These revenue levels represent 16% and 12% decreases for this product category from the fiscal 2018 quarterly and year-to-date periods, respectively. Our C. difficile products continue to experience pressure as a result of competition, particularly our Alethia product, which experienced volume declines impacting both the quarterly and year-to-date periods. For our stool antigen H. pylori products, we have executed multi-year supply agreements with a number of customers, including our two largest reference laboratory customers, to secure volume, albeit at lower selling prices. As a consequence of this strategy, such products experienced price declines for the quarterly and year-to-date periods. We continue to believe there are ongoing benefits to be realized from our partnerships with managed care companies in promoting: (i) the health and economic benefits of a test and treat strategy; (ii) changes in policies that discourage the use of traditional serology methods and promote the utilization of active infection testing methods; and (iii) physician behavior movement away from serology-based testing and toward direct antigen testing. We experienced a favorable volume increase for the quarterly period as a result of promoting this test and treat strategy.

 

Page 21


The patents for our H. pylori products, owned by us, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to our H. pylori products to increase in the near future, and such competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. Our product development pipeline includes new product initiatives for the detection of H. pylori, and early in the first quarter of fiscal 2019 we entered into a strategic collaboration with DiaSorin to sell H. pylori tests (see Note 10, “Litigation Matters” of the accompanying Condensed Consolidated Financial Statements). We are unable to provide assurances that we will be successful with any strategy or that any strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.

Respiratory Illness Assays

Including tests for Group A Strep, Mycoplasma pneumonia, influenza, and Pertussis, among others, our respiratory illness product revenues decreased 21% and 9% in the second quarter and first six months of fiscal 2019, respectively. The quarterly decrease primarily results from a significant decrease in the volume of tests sold, reflecting the fact that the prior year 2017-2018 flu season was a particularly strong one, as measured by outpatient influenza-like illness surveillance data published by the CDC.

Blood Chemistry Assays

Revenues from our sale of products to test for elevated levels of lead in blood increased 2% during the second quarter of fiscal 2019 to a total of $4,330, and increased 3% for the fiscal year-to-date period to $8,760. In late December 2018, the documents to reinstate our venous blood claims removed in fiscal 2017 were submitted to the FDA, and in March 2019, we were informed by the FDA that each of the submitted 510(k) applications has been put on Additional Information (AI) hold. Further, while our LeadCare testing systems remain cleared for marketing by the FDA for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of the LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by FDA and CDC is necessary to protect the public health. We intend to fully cooperate with the FDA as it completes its third-party study and continue to work to complete remediation actions at our blood–chemistry manufacturing facility to the FDA’s full and complete satisfaction. We remain confident in the performance of the LeadCare products and believe that they serve a critical role in promoting the public health.

See Note 10, “Litigation Matters” of the accompanying Condensed Consolidated Financial Statements for additional information related to the Company’s LeadCare product line. See also Part II, Item 1A Risk Factors below.

Life Science Products

During the second quarter of fiscal 2019, revenues from our Life Science segment remained flat compared to the fiscal 2018 second quarter, with revenues from molecular reagent sales decreasing 12% and revenues from immunological reagent sales increasing 8%. Life Science segment revenues also remained flat for the first six months of fiscal 2019, reflecting a slight increase in revenues from molecular reagent sales being offset by a slight decrease in immunological reagent sales. Our Life Science segment’s revenue growth was slightly impacted by the movement in currency exchange rates since the fiscal 2018 periods, with revenues increasing 2% on a constant-currency basis over both the second quarter and first six months of fiscal 2018. Our Life Science segment was also impacted by buying patterns of certain IVD manufacturing customers in China, with such sales totaling approximately $1,350 and $2,350 during the second quarter and first six months of fiscal 2019, respectively – representing decreases of approximately 37% and 33%, respectively, from the comparable fiscal 2018 periods.

 

Page 22


Significant Customers

Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 9, “Reportable Segments and Major Customers Information” of the accompanying Condensed Consolidated Financial Statements.

Gross Profit

 

     Three Months Ended March 31,     Six Months Ended March 31,  
     2019     2018     Change     2019     2018     Change  

Gross Profit

   $ 29,338   $ 34,569     (15 )%    $ 60,910   $ 66,579     (9 )% 

Gross Profit Margin

     58     61     -3 points       60     61     -1 point  

The gross profit margin decreases experienced in fiscal 2019 result from the impact of the previously-noted pricing changes within our H. pylori product line, along with the combined effects of mix of products sold and operating segment mix.

Operating Expenses – Segment Detail

 

     Three Months Ended March 31, 2019  
     Research &
Development
     Selling &
Marketing
     General &
Administrative
     Other     Total Operating
Expenses
 

Fiscal 2018:

 

Diagnostics

   $ 3,735    $ 6,101    $ 4,795    $ —       $ 14,631

Life Science

     756      2,546      2,235      —       5,537

Corporate

     —        —        1,812      4,911     6,723
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Expenses (2018 Quarter)

   $ 4,491    $ 8,647    $ 8,842    $ 4,911   $ 26,891
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fiscal 2019:

 

Diagnostics

   $ 3,172    $ 5,481    $ 4,336    $ (125 )   $ 12,864

Life Science

     644      1,430      1,439      25     3,538

Corporate

     —        —        1,613      1,488     3,101
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Expenses (2019 Quarter)

   $ 3,816    $ 6,911    $ 7,388    $ 1,388   $ 19,503
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Six Months Ended March 31, 2019  
     Research &
Development
     Selling &
Marketing
     General &
Administrative
     Other     Total Operating
Expenses
 

Fiscal 2018:

 

Diagnostics

   $ 7,425    $ 12,526    $ 9,899    $ —       $ 29,850

Life Science

     1,470      4,935      4,251      —       10,656

Corporate

     —        —        3,940      6,394     10,334
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Expenses (2018 Year-to-Date)

   $ 8,895    $ 17,461    $ 18,090    $ 6,394   $ 50,840
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fiscal 2019:

 

Diagnostics

   $ 6,286    $ 11,523    $ 9,027    $ (125 )   $ 26,711

Life Science

     1,414      2,951      2,930      25     7,320

Corporate

     —        —        4,329      2,164     6,493
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Expenses (2019 Year-to-Date)

   $ 7,700    $ 14,474    $ 16,286    $ 2,064   $ 40,524
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

Page 23


Operating Expenses – Comparisons to Prior Year Periods

 

     Three Months Ended March 31, 2019  
     Research &
Development
    Selling &
Marketing
    General &
Administrative
    Other     Total Operating
Expenses
 

2018 Expenses

   $ 4,491     $ 8,647     $ 8,842     $ 4,911     $ 26,891  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Revenues

     8     15     16     9     48

Fiscal 2019 Increases/(Decreases):

          

Diagnostics

     (563     (620     (459     (125     (1,767

Life Science

     (112     (1,116     (796     25       (1,999

Corporate

     —         —         (199     (3,423     (3,622
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2019 Expenses

   $ 3,816     $ 6,911     $ 7,388     $ 1,388     $ 19,503  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Revenues

     8     14     15     3     39

% Decrease

     (15 )%      (20 )%      (16 )%      (72 )%      (27 )% 
     Six Months Ended March 31, 2019  
     Research &
Development
    Selling &
Marketing
    General &
Administrative
    Other     Total Operating
Expenses
 

2018 Expenses

   $ 8,895     $ 17,461     $ 18,090     $ 6,394     $ 50,840  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Revenues

     8     16     17     6     47

Fiscal 2019 Increases/(Decreases):

          

Diagnostics

     (1,139     (1,003     (872     (125     (3,139

Life Science

     (56     (1,984     (1,321     25       (3,336

Corporate

     —         —         389       (4,230     (3,841
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2019 Expenses

   $ 7,700     $ 14,474     $ 16,286     $ 2,064     $ 40,524  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Revenues

     8     14     16     2     40

% Decrease

     (13 )%      (17 )%      (10 )%      (68 )%      (20 )% 

Total operating expenses decreased during both the second quarter and first six months of fiscal 2019 compared to the respective fiscal 2018 periods, with overall decreases in spending in all of our segments, reflecting the following:

 

  1)

Decreased Research & Development costs due primarily to the timing of product development projects and the clinical trials for our cCMV test in fiscal 2018;

 

  2)

Decreased Selling & Marketing costs due to: (i) the effects of the fiscal 2018 organization streamlining initiatives; and (ii) lower sales commissions resulting from the decrease in sales levels;

 

  3)

Decreased General & Administrative costs due to: (i) the effects of the fiscal 2018 organization streamlining initiatives; and (ii) lower Quality System remediation costs related to our blood-lead manufacturing facility; and

 

  4)

Decreased restructuring & litigation costs (reflected within “Other” in the above tables).

Operating Income

Operating income increased 28% to $9,835 for the second quarter of fiscal 2019, and increased 30% to $20,386 for the first six months of fiscal 2019, as a result of the factors discussed above, including the costs associated with acquisition and restructuring activities, and litigation costs.

 

Page 24


Income Taxes

The effective rate for income taxes was 23% for both the fiscal 2019 second quarter and six month year-to-date period, compared to 27% and 22% during the corresponding fiscal 2018 periods. These fluctuations in tax rates result from the fact that the fiscal 2019 periods reflect the lower U.S. federal tax rate of 21% being fully phased-in, while the fiscal 2018 periods reflect the combined net impact of the following effects of the tax reform act (see Note 7, “Income Taxes” of the accompanying Condensed Consolidated Financial Statements):

 

  1)

Application of an approximate 24.5% blended rate due to the lowering of the applicable rate from 35% to 21% on a phased-in basis;

 

  2)

Recognizing in the first quarter a one-time $1,695 tax benefit, including the re-measurement of deferred tax balances at the lower rate; and

 

  3)

Recording in the first quarter a provisional one-time $854 tax expense related to the estimated repatriation transition tax on foreign earnings.

Liquidity and Capital Resources

Comparative Cash Flow Analysis

Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, debt service, and consideration of acquisition plans, including our pending acquisition of GenePOC (see Note 12, “Subsequent Event” of the accompanying Condensed Consolidated Financial Statements).

We have an investment policy that guides the holdings of our investment portfolio, which presently consists of bank savings accounts and institutional money market mutual funds. Our objectives in managing the investment portfolio are to: (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective.

Considering the various worldwide geo-political and geo-economic conditions, we do not expect macroeconomic conditions to have a significant impact on our liquidity needs, financial condition or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements from current cash flows from operating activities and cash on hand. If needed, we also have an additional source of liquidity through our $30,000 bank revolving credit facility. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services.

As of March 31, 2019, our cash and equivalents balance is $66,097 or $9,697 higher than at the end of the fiscal 2018 second quarter, and $6,334 higher than at September 30, 2018. This increase results in large part from the cash flows from operating activities being more than sufficient to cover capital expenditures and debt service. Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements and capital expenditures during the next 12 months.

Capital Resources

In 2016, the Company entered into a $60,000 five-year term loan and related interest rate swap agreement with a commercial bank, the details of which are set forth in Note 8, “Bank Credit Arrangements” of the accompanying Condensed Consolidated Financial Statements. In addition, we have a $30,000 revolving credit facility (discussed above) with a commercial bank that expires March 31, 2021. As of April 30, 2019, there were no borrowings outstanding on this facility and we had 100% borrowing capacity available to us. We have had no borrowings outstanding under this revolving credit facility during the first six months of fiscal 2019 or during the full year of fiscal 2018.

 

Page 25


Our capital expenditures are estimated to range between approximately $4,000 to $5,000 for fiscal 2019, with the actual amount dependent upon actual operating results and the phasing of certain projects. Such expenditures may be funded with cash and equivalents on hand, operating cash flows, and/or availability under the $30,000 revolving credit facility discussed above.

We do not utilize special-purpose financing vehicles or have undisclosed off-balance sheet arrangements.

On April 29, 2019, we signed a definitive agreement to acquire substantially all of the assets, as well as selected liabilities, of GenePOC Inc., a molecular diagnostics company located in Quebec City, Quebec Province, Canada. This purchase will be included in our Diagnostics operating segment. The maximum purchase price is $120,000, which consists of: (i) $50,000 to be paid at closing (subject to a working capital adjustment and a $5,000 hold-back to secure seller’s post-closing obligations); (ii) up to $20,000 to be paid in fiscal 2021, contingent upon the achievement of product development milestones; and (iii) up to $50,000 to be paid in fiscal 2023 based on certain sales and profit margin thresholds to be measured in fiscal 2022. GenePOC’s molecular diagnostics testing system is branded under the name revogene, and currently includes three FDA-cleared assays (C. difficile, Group A Strep and Group B Strep). The purchase is expected to close no later than early fourth quarter fiscal 2019, pending the satisfaction of certain closing conditions.

In connection with the proposed acquisition of GenePOC, we also expect to execute a new five-year $125,000 revolving credit facility that would replace our existing $30,000 credit facility. We expect the new credit facility will be secured by substantially all of our assets and will include certain restrictive financial covenants. We expect to draw down approximately $73,000 from this new facility and use approximately $20,000 of cash on-hand to repay the existing term loan outstanding at March 31, 2019 and fund the closing payment for the acquisition of GenePOC.

Also, our Board of Directors suspended the declaration and payment of quarterly dividends by Meridian to invest in new product development activities for the revogene molecular diagnostics platform, among other investments in the business, and to preserve our capital resources and liquidity for general corporate purposes.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s exposure to market risk since September 30, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Page 26


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 10, “Litigation Matters” of the accompanying Condensed Consolidated Financial Statements.

ITEM 1A. RISK FACTORS

The following risk factor is added to the risk factors included in Item 1A of Part I of the Company’s Annual Report on Form 10-K:

The United States Department of Justice and FDA are investigating our Magellan lead testing systems, and any adverse finding, allegation, or exercise of enforcement or regulatory discretion by the DOJ or FDA could materially and adversely affect our business, financial condition, or results of operations.

As previously disclosed, on June 29, 2017, the FDA, in connection with its Safety Notification related to Magellan’s LeadCare testing systems for venous blood samples, issued to Magellan its Form 483, Inspectional Observations. The FDA issued a related Warning Letter on October 23, 2017. As also previously disclosed, on April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we continue to cooperate with the DOJ in this matter, including responding to additional information requests and executing a tolling agreement to extend the statute of limitations.

Magellan submitted 510(k) applications in December 2018, seeking to reinstate venous blood sample-types for its LeadCare® II, LeadCare® Plus and LeadCare Ultra® testing systems. In the second fiscal quarter of 2019 the FDA informed Magellan that each of these 510(k) applications has been put on Additional Information hold. Further, while Magellan’s LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of Magellan’s LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by FDA or the Centers for Disease Control and Prevention is necessary to protect the public health. Meridian intends to fully cooperate with the FDA as FDA completes its third-party study and continues to work to complete remediation actions at Magellan’s blood–chemistry manufacturing facility to the FDA’s full and complete satisfaction. 

While we remain confident in the performance of the Magellan LeadCare testing systems, there can be no assurance that the ongoing investigation and study of the DOJ and FDA, respectively, or future exercise of their respective enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to our business practices, product offerings or operations that could have a material adverse effect on our business, financial condition or results of operations; or eliminate altogether our ability to operate our lead testing business, or on terms substantially similar to those on which we currently operate.

ITEM 6. EXHIBITS

The following exhibits are being filed or furnished as a part of this Quarterly Report on Form 10-Q:

 

  2.1**    Share Purchase Agreement dated as of April  29, 2019 by and among GenePOC Inc., Meridian Bioscience Canada Inc., the shareholders of GenePOC Inc., Après-Demain Holding SA, as Shareholders’ Representative, and Meridian Bioscience, Inc.
31.1    Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2    Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)

 

Page 27


32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following financial information from Meridian Bioscience Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed with the SEC on May 7, 2019, formatted in XBRL includes: (i) Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019 and 2018; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2019 and 2018; (iii) Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2019 and 2018; (iv) Condensed Consolidated Balance Sheets as of March 31, 2019 and September 30, 2018; (v) Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended March 31, 2019 and 2018; and (vi) the Notes to Condensed Consolidated Financial Statements

 

** 

Schedules to and certain portions of Exhibit 2.1 have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The omitted information is not material and would likely cause competitive harm to the Registrant if publicly disclosed. The Registrant hereby agrees to furnish a copy of any omitted schedule or other portion to the SEC upon request.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      MERIDIAN BIOSCIENCE, INC.
Date: May 7, 2019     By:  

/s/ Bryan T. Baldasare

      Bryan T. Baldasare
     

Senior Vice President, Corporate Controller, Treasurer and Chief Accounting Officer

(Principal Accounting Officer)

 

Page 28