SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended DecemberMarch 31, 20172018
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 number0-14902
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-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 Rule12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding | |
Common Stock, no par value |
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM10-Q
Page(s) | ||||||
PART I. | ||||||
Item 1. | ||||||
1 | ||||||
2 | ||||||
3 | ||||||
Condensed Consolidated Balance Sheets | 4-5 | |||||
6 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
PART II. | ||||||
Item 1. | ||||||
Item 1A. | ||||||
Item 6. | ||||||
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form10-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 “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, 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 the ramp up of new 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. 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 and natural disasters and other events could have a materially adverse effect on Meridian’s results of operations and revenues. We haveIn 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 Form10-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.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Three Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||
December 31, | March 31, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
NET REVENUES | $ | 52,283 | $ | 46,809 | $ | 56,451 | $ | 54,125 | $ | 108,734 | $ | 100,934 | ||||||||||||
COST OF SALES | 20,497 | 17,770 | 21,882 | 20,648 | 42,379 | 38,418 | ||||||||||||||||||
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GROSS PROFIT | 31,786 | 29,039 | 34,569 | 33,477 | 66,355 | 62,516 | ||||||||||||||||||
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OPERATING EXPENSES | ||||||||||||||||||||||||
Research and development | 4,496 | 3,597 | 4,222 | 3,951 | 8,702 | 7,548 | ||||||||||||||||||
Selling and marketing | 8,842 | 7,618 | 8,648 | 8,066 | 17,458 | 15,684 | ||||||||||||||||||
General and administrative | 8,904 | 7,739 | 9,110 | 7,274 | 18,062 | 15,013 | ||||||||||||||||||
CEO transition and litigation costs | 1,483 | — | ||||||||||||||||||||||
Executive transition and realignment costs | 3,458 | — | 4,192 | — | ||||||||||||||||||||
Litigation costs | 1,453 | — | 2,202 | — | ||||||||||||||||||||
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Total operating expenses | 23,725 | 18,954 | 26,891 | 19,291 | 50,616 | 38,245 | ||||||||||||||||||
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OPERATING INCOME | 8,061 | 10,085 | 7,678 | 14,186 | 15,739 | 24,271 | ||||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||
Interest income | 72 | 22 | 90 | 29 | 162 | 51 | ||||||||||||||||||
Interest expense | (395 | ) | (423 | ) | (379 | ) | (408 | ) | (774 | ) | (831 | ) | ||||||||||||
Other, net | (80 | ) | (25 | ) | (165 | ) | 383 | (245 | ) | 358 | ||||||||||||||
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Total other expense | (403 | ) | (426 | ) | ||||||||||||||||||||
Total other income (expense) | (454 | ) | 4 | (857 | ) | (422 | ) | |||||||||||||||||
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EARNINGS BEFORE INCOME TAXES | 7,658 | 9,659 | 7,224 | 14,190 | 14,882 | 23,849 | ||||||||||||||||||
INCOME TAX PROVISION | 1,356 | 3,380 | 1,936 | 4,878 | 3,292 | 8,258 | ||||||||||||||||||
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NET EARNINGS | $ | 6,302 | $ | 6,279 | $ | 5,288 | $ | 9,312 | $ | 11,590 | $ | 15,591 | ||||||||||||
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BASIC EARNINGS PER COMMON SHARE | $ | 0.15 | $ | 0.15 | $ | 0.12 | $ | 0.22 | $ | 0.27 | $ | 0.37 | ||||||||||||
DILUTED EARNINGS PER COMMON SHARE | $ | 0.15 | $ | 0.15 | $ | 0.12 | $ | 0.22 | $ | 0.27 | $ | 0.37 | ||||||||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | 42,263 | 42,159 | 42,323 | 42,202 | 42,289 | 42,177 | ||||||||||||||||||
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS | 399 | 376 | 409 | 366 | 404 | 362 | ||||||||||||||||||
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | 42,662 | 42,535 | 42,732 | 42,568 | 42,693 | 42,539 | ||||||||||||||||||
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ANTI-DILUTIVE SECURITIES: | ||||||||||||||||||||||||
Common share options and restricted share units | 1,034 | 715 | 1,021 | 1,001 | 1,015 | 871 | ||||||||||||||||||
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DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.125 | $ | 0.20 | $ | 0.125 | $ | 0.125 | $ | 0.250 | $ | 0.325 | ||||||||||||
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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)
(dollars in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
Three Months Ended December 31, | March 31, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
NET EARNINGS | $ | 6,302 | $ | 6,279 | $ | 5,288 | $ | 9,312 | $ | 11,590 | $ | 15,591 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation adjustment | 291 | (1,423 | ) | 926 | 512 | 1,217 | (911 | ) | ||||||||||||||||
Unrealized gain on cash flow hedge | 341 | 1,560 | 424 | 128 | 765 | 1,688 | ||||||||||||||||||
Income taxes related to items of other comprehensive income | (112 | ) | (589 | ) | (107 | ) | (24 | ) | (219 | ) | (613 | ) | ||||||||||||
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Other comprehensive income (loss), net of tax | 520 | (452 | ) | |||||||||||||||||||||
Other comprehensive income, net of tax | 1,243 | 616 | 1,763 | 164 | ||||||||||||||||||||
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COMPREHENSIVE INCOME | $ | 6,822 | $ | 5,827 | $ | 6,531 | $ | 9,928 | $ | 13,353 | $ | 15,755 | ||||||||||||
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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)
(dollars in thousands)
Three Months Ended December 31, | 2017 | 2016 | ||||||||||||||
Six Months Ended March 31, | 2018 | 2017 | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net earnings | $ | 6,302 | $ | 6,279 | $ | 11,590 | $ | 15,591 | ||||||||
Non-cash items included in net earnings: | ||||||||||||||||
Depreciation of property, plant and equipment | 1,146 | 1,078 | 2,236 | 2,154 | ||||||||||||
Amortization of intangible assets | 938 | 968 | 1,883 | 1,904 | ||||||||||||
Amortization of deferred instrument costs | 201 | 257 | 401 | 500 | ||||||||||||
Stock-based compensation | 1,759 | 1,884 | 1,975 | 2,360 | ||||||||||||
Deferred income taxes | (1,624 | ) | 2,091 | (1,576 | ) | 1,982 | ||||||||||
Change in: | ||||||||||||||||
Accounts receivable | (2,989 | ) | 2,191 | (4,185 | ) | (298 | ) | |||||||||
Inventories | (2,353 | ) | (169 | ) | (2,370 | ) | 2,248 | |||||||||
Prepaid expenses and other current assets | 87 | (406 | ) | 754 | 2,684 | |||||||||||
Accounts payable and accrued expenses | 1,315 | (913 | ) | 3,746 | (3,415 | ) | ||||||||||
Income taxes payable | 497 | 44 | (775 | ) | 146 | |||||||||||
Other, net | (108 | ) | (311 | ) | 160 | (724 | ) | |||||||||
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Net cash provided by operating activities | 5,171 | 12,993 | 13,839 | 25,132 | ||||||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Purchase of property, plant and equipment | (1,234 | ) | (1,392 | ) | (2,160 | ) | (2,273 | ) | ||||||||
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Net cash used for investing activities | (1,234 | ) | (1,392 | ) | (2,160 | ) | (2,273 | ) | ||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Dividends paid | (5,288 | ) | (8,440 | ) | (10,577 | ) | (13,715 | ) | ||||||||
Payments on term loan | (1,125 | ) | (750 | ) | (2,250 | ) | (1,500 | ) | ||||||||
Proceeds and tax benefits from exercises of stock options | — | 301 | — | 303 | ||||||||||||
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Net cash used for financing activities | (6,413 | ) | (8,889 | ) | (12,827 | ) | (14,912 | ) | ||||||||
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Effect of Exchange Rate Changes on Cash and Equivalents | 115 | (662 | ) | 476 | (428 | ) | ||||||||||
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Net (Decrease) Increase in Cash and Equivalents | (2,361 | ) | 2,050 | (672 | ) | 7,519 | ||||||||||
Cash and Equivalents at Beginning of Period | 57,072 | 47,226 | 57,072 | 47,226 | ||||||||||||
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Cash and Equivalents at End of Period | $ | 54,711 | $ | 49,276 | $ | 56,400 | $ | 54,745 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 3
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
ASSETS
December 31, 2017 (Unaudited) | September 30, 2017 | March 31, 2018 (Unaudited) | September 30, 2017 | |||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and equivalents | $ | 54,711 | $ | 57,072 | $ | 56,400 | $ | 57,072 | ||||||||
Accounts receivable, less allowances of $306 and $307 | 32,136 | 29,106 | ||||||||||||||
Accounts receivable, less allowances of $326 and $307 | 33,793 | 29,106 | ||||||||||||||
Inventories | 43,644 | 41,493 | 43,794 | 41,493 | ||||||||||||
Prepaid expenses and other current assets | 6,126 | 6,204 | 5,485 | 6,204 | ||||||||||||
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Total current assets | 136,617 | 133,875 | 139,472 | 133,875 | ||||||||||||
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PROPERTY, PLANT AND EQUIPMENT, at Cost | ||||||||||||||||
Land | 1,164 | 1,162 | 1,169 | 1,162 | ||||||||||||
Buildings and improvements | 32,244 | 32,207 | 32,293 | 32,207 | ||||||||||||
Machinery, equipment and furniture | 49,367 | 48,836 | 50,366 | 48,836 | ||||||||||||
Construction in progress | 2,374 | 1,895 | 2,356 | 1,895 | ||||||||||||
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Subtotal | 85,149 | 84,100 | 86,184 | 84,100 | ||||||||||||
Less: accumulated depreciation and amortization | 54,749 | 53,590 | 55,923 | 53,590 | ||||||||||||
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Net property, plant and equipment | 30,400 | 30,510 | 30,261 | 30,510 | ||||||||||||
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OTHER ASSETS | ||||||||||||||||
Goodwill | 54,997 | 54,926 | 55,409 | 54,926 | ||||||||||||
Other intangible assets, net | 25,777 | 26,704 | 24,885 | 26,704 | ||||||||||||
Restricted cash | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
Deferred instrument costs, net | 1,415 | 1,368 | 1,388 | 1,368 | ||||||||||||
Fair value of interest rate swap | 1,156 | 815 | 1,580 | 815 | ||||||||||||
Deferred income taxes | 146 | 158 | 107 | 158 | ||||||||||||
Other assets | 443 | 421 | 445 | 421 | ||||||||||||
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Total other assets | 84,934 | 85,392 | 84,814 | 85,392 | ||||||||||||
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TOTAL ASSETS | $ | 251,951 | $ | 249,777 | $ | 254,547 | $ | 249,777 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
December 31, 2017 (Unaudited) | September 30, 2017 | March 31, 2018 (Unaudited) | September 30, 2017 | |||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable | $ | 8,507 | $ | 7,719 | $ | 7,564 | $ | 7,719 | ||||||||
Accrued employee compensation costs | 4,801 | 4,536 | 8,355 | 4,536 | ||||||||||||
Current portion of acquisition consideration | 2,095 | 2,095 | 2,095 | 2,095 | ||||||||||||
Other accrued expenses | 2,795 | 2,789 | 2,899 | 2,789 | ||||||||||||
Current portion of long-term debt | 4,500 | 4,500 | 4,500 | 4,500 | ||||||||||||
Income taxes payable | 776 | 1,248 | 368 | 1,248 | ||||||||||||
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Total current liabilities | 23,474 | 22,887 | 25,781 | 22,887 | ||||||||||||
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NON-CURRENT LIABILITIES | ||||||||||||||||
Acquisition consideration | 235 | 235 | 235 | 235 | ||||||||||||
Post-employment benefits | 2,551 | 2,468 | 2,492 | 2,468 | ||||||||||||
Long-term debt | 49,030 | 50,147 | 47,914 | 50,147 | ||||||||||||
Long-term income taxes payable | 854 | — | 854 | — | ||||||||||||
Deferred income taxes | 2,929 | 4,455 | 2,935 | 4,455 | ||||||||||||
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Totalnon-current liabilities | 55,599 | 57,305 | 54,430 | 57,305 | ||||||||||||
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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, 42,307,542 and 42,207,317 shares issued, respectively | — | — | ||||||||||||||
Common shares, no par value; 71,000,000 shares authorized, 42,344,042 and 42,207,317 shares issued, respectively | — | — | ||||||||||||||
Additionalpaid-in capital | 127,367 | 125,608 | 127,583 | 125,608 | ||||||||||||
Retained earnings | 47,937 | 46,923 | 47,936 | 46,923 | ||||||||||||
Accumulated other comprehensive loss | (2,426 | ) | (2,946 | ) | (1,183 | ) | (2,946 | ) | ||||||||
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Total shareholders’ equity | 172,878 | 169,585 | 174,336 | 169,585 | ||||||||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 251,951 | $ | 249,777 | $ | 254,547 | $ | 249,777 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 5
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
(dollars and shares in thousands)
Common Shares Issued | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | Common Shares Issued | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
Balance at September 30, 2017 | 42,207 | $ | 125,608 | $ | 46,923 | $ | (2,946 | ) | $ | 169,585 | 42,207 | $ | 125,608 | $ | 46,923 | $ | (2,946 | ) | $ | 169,585 | ||||||||||||||||||||
Cash dividends paid | — | — | (5,288 | ) | — | (5,288 | ) | — | — | (10,577 | ) | — | (10,577 | ) | ||||||||||||||||||||||||||
Conversion of restricted share units | 100 | — | — | — | — | 137 | — | — | — | — | ||||||||||||||||||||||||||||||
Stock compensation expense | — | 1,759 | — | — | 1,759 | — | 1,975 | — | — | 1,975 | ||||||||||||||||||||||||||||||
Net earnings | — | — | 6,302 | — | 6,302 | — | — | 11,590 | — | 11,590 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 291 | 291 | — | — | — | 1,217 | 1,217 | ||||||||||||||||||||||||||||||
Hedging activity, net of tax | — | — | — | 229 | 229 | — | — | — | 546 | 546 | ||||||||||||||||||||||||||||||
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Balance at December 31, 2017 | 42,307 | $ | 127,367 | $ | 47,937 | $ | (2,426 | ) | $ | 172,878 | ||||||||||||||||||||||||||||||
Balance at March 31, 2018 | 42,344 | $ | 127,583 | $ | 47,936 | $ | (1,183 | ) | $ | 174,336 | ||||||||||||||||||||||||||||||
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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 DecemberMarch 31, 2017,2018, the results of its operations for the three and six month periods ended DecemberMarch 31, 20172018 and 2016,2017, and its cash flows for the threesix month periods ended DecemberMarch 31, 20172018 and 2016.2017. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s fiscal 2017 Annual Report on Form10-K. Financial information as of September 30, 2017 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 2017 Annual Report on Form10-K.
Recent Accounting Pronouncements –
In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers, which supersedes and replaces nearly all currently-existing U.S. GAAP revenue recognition guidance including related disclosure requirements. This guidance, including any clarification guidance thereon, will be effective for the Company beginning October 1, 2018 (fiscal 2019). The Company has prepared an inventory of its existing revenue streams and a preliminary analysis of the revenue recognition criteria applying ASU2014-09. This analysis is preliminary and our overall assessment is not yet complete. However, based on the analysis completed to date, aside from certain expanded disclosure requirements, the Company does not currently anticipate that its planned adoption of ASU2014-09 on a modified retrospective basis will have a material impact on its reported revenues.
In February 2016, the FASB issued ASU2016-02,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. The Company expects to begin its assessment of the impact that adoption of this guidance will have on its financial statements later in fiscal 2018.2019.
In March 2016, the FASB issued ASU2016-09,Improvements to Employee Share-Based Payment Accounting, which amends the accounting for share-based payment transactions. These changes, which are designed for simplification, involve several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance in the first quarter of fiscal 2018, and as a result recorded $160 to the income tax provision, which under the previous guidance would have been recorded within additionalpaid-in capital. While the future effect of the guidance is dependent upon numerous factors (e.g., the market price of the Company’s common stock on the equity award grant date, the exercise/lapse dates of equity awards, and the market price of the Company’s common stock on such exercise/lapse dates), the effect is not expected to be material. During the first six months of fiscal 2018, our tax provision included a $170 charge for application of ASU2016-09.
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In February 2018, the FASB issued ASU2018-02,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 address adoption of this guidance later in fiscal 2018 in connection with the finalization of other matters related to the recent tax legislation (see Note 6“Income Taxes”) but does not expect adoption to have a significant impact on the Company’s consolidated results of operations, cash flows or financial position.
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:
December 31, 2017 | September 30, 2017 | March 31, 2018 | September 30, 2017 | |||||||||||||||||||||||||||||
Cash and Equivalents | Other Assets | Cash and Equivalents | Other Assets | Cash and Equivalents | Other Assets | Cash and Equivalents | Other Assets | |||||||||||||||||||||||||
Institutional money market funds | $ | 20,155 | $ | — | $ | 20,104 | $ | — | $ | 20,224 | $ | — | $ | 20,104 | $ | — | ||||||||||||||||
Cash on hand - | ||||||||||||||||||||||||||||||||
Restricted | — | 1,000 | — | 1,000 | — | 1,000 | — | 1,000 | ||||||||||||||||||||||||
Unrestricted | 34,556 | — | 36,968 | — | 36,176 | — | 36,968 | — | ||||||||||||||||||||||||
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Total | $ | 54,711 | $ | 1,000 | $ | 57,072 | $ | 1,000 | $ | 56,400 | $ | 1,000 | $ | 57,072 | $ | 1,000 | ||||||||||||||||
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4. | Inventories |
Inventories are comprised of the following:
December 31, 2017 | September 30, 2017 | March 31, 2018 | September 30, 2017 | |||||||||||||
Raw materials | $ | 7,989 | $ | 6,575 | $ | 7,645 | $ | 6,575 | ||||||||
Work-in-process | 12,110 | 11,559 | 12,781 | 11,559 | ||||||||||||
Finished goods - instruments | 1,271 | 1,460 | 1,027 | 1,460 | ||||||||||||
Finished goods - kits and reagents | 22,274 | 21,899 | 22,341 | 21,899 | ||||||||||||
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Total | $ | 43,644 | $ | 41,493 | $ | 43,794 | $ | 41,493 | ||||||||
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5. | Intangible Assets |
A summary of our acquired intangible assets subject to amortization, as of DecemberMarch 31, 20172018 and September 30, 2017, is as follows:
December 31, 2017 | September 30, 2017 | |||||||||||||||
Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||
Manufacturing technologies, core products and cell lines | $ | 22,341 | $ | 13,117 | $ | 22,332 | $ | 12,807 | ||||||||
Trade names, licenses and patents | 8,699 | 4,632 | 8,689 | 4,398 | ||||||||||||
Customer lists, customer relationships and supply agreements | 24,586 | 12,190 | 24,562 | 11,854 | ||||||||||||
Non-compete agreements | 720 | 630 | 720 | 540 | ||||||||||||
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$ | 56,346 | $ | 30,569 | $ | 56,303 | $ | 29,599 | |||||||||
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March 31, 2018 | September 30, 2017 | |||||||||||||||
Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||
Manufacturing technologies, core products and cell lines | $ | 22,391 | $ | 13,469 | $ | 22,332 | $ | 12,807 | ||||||||
Trade names, licenses and patents | 8,758 | 4,905 | 8,689 | 4,398 | ||||||||||||
Customer lists, customer relationships and supply agreements | 24,721 | 12,611 | 24,562 | 11,854 | ||||||||||||
Non-compete agreements | 720 | 720 | 720 | 540 | ||||||||||||
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$ | 56,590 | $ | 31,705 | $ | 56,303 | $ | 29,599 | |||||||||
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The actual aggregate amortization expense for these intangible assets was $938$945 and $968$936 for the three months ended DecemberMarch 31, 2018 and 2017, respectively, and 2016,$1,883 and $1,904 for the six months ended March 31, 2018 and 2017, respectively. The estimated aggregate amortization expense for these intangible assets for each of the fiscal years through fiscal 2023 is as follows: remainder of fiscal 2018 – $2,628,$1,701, fiscal 2019 – $3,343,$3,361, fiscal 2020 – $3,178,$3,193, fiscal 2021 – $2,561,$2,562, fiscal 2022 – $2,182, and fiscal 2023 – $2,170.
On May 17, 2017, the FDA issued a field safety notice advising customers to discontinue use of Magellan’s lead testing systems with venous blood samples. This field safety notice was followed by product recall notices on May 25th and June 5th.Magellan’s lead testing systems are capable of processing both capillary and venous blood samples. Magellan’s LeadCare Plus and LeadCare Ultra systems, which accountaccounted for approximately 10% of Magellan’s annual revenues, are used predominantly with venous blood samples. Magellan’s LeadCare and LeadCare II systems are predominantly used with capillary blood samples.
Subsequent to the issuances of these field safety and product recall notices, the FDA completed an inspection of Magellan’s Quality System, and issued its Form 483, Inspectional Observations, on June 29, 2017, which was expectedly followed by a Warning Letter issued on October 23, 2017. The Warning Letter requires periodic reporting on our remediation progress. To date, we have satisfied our post-Warning Letter reporting requirements with the FDA. During the first quarter of fiscalthree and six months ended March 31, 2018, we incurred approximately $500$300 and $800, respectively, in Quality System remediation costs, primarily related to regulatory consultants.consultants and studies required to reinstate our venous blood sample claim.
As a result of these matters, we expect to experience delays in reinstating venous blood sample testing on our LeadCare products, as well as in obtaining 510(k) clearance for new Magellan products. We also expect delays in obtaining export certifications for Magellan products during the remediation period. In light of these factors and their impacts, during our 2017 third fiscal quarter, it was determined that a potential impairment of goodwill recorded in connection with the acquisition of Magellan had occurred (i.e., a “triggering event”). With the assistance of an independent valuation firm, Magellan’s fair value was calculated via both market (comparable company) and income (discounted cash flows) approaches. Based upon these approaches, it was determined that the carrying value of the Magellan reporting unit did, in fact, exceed its fair value. As a result, an impairment charge of $6,628, on both apre-tax andafter-tax basis, was recorded during the fiscal 2017 third quarter.
Given all of the factors considered, we do not anticipate, at this time, any further goodwill impairment charge from the Magellan acquisition. See Note 10“Subsequent Events”.
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6. | 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, we followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), regarding the application of ASC Topic 740 – Income Taxes 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.
We completed the accounting for the effects of the tax reform act during the quarter ended December 31, 2017, except for the effects related to theone-time deemed repatriation transition tax on unrepatriated foreign earnings (the “repatriation transition tax”). As a result, our financial statements for the quartersix months ended DecemberMarch 31, 20172018 reflect these effects of the tax reform act as provisional based on a reasonable estimate of the income tax effects. We have included a provisionalnon-current income tax payable in the amount of $854 related to the repatriation transition tax. The provisional amount is based on tax attribute information currently available from foreign investments. We continue to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries, in order to complete the accounting for the effects of the estimated repatriation transition tax.
Accounting for the remaining income tax effects of the tax reform act which impact our tax provision has been substantially completed and are included in the accompanying Condensed Consolidated Financial Statements as of DecemberMarch 31, 2017.2018. We recorded aone-time tax benefit of $1,695 in the first quarter resulting from the tax reform act, including an adjustment from there-measurement of deferred tax assets and liabilities. Thisre-measurement includes an estimate of the temporary differences expected to be realized during fiscal 2018 at a transitional blended federal rate of 24.5%. The remaining temporary differences werere-measured at the 21%.
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7. | Bank Credit Arrangements |
In connection with the acquisition of Magellan Biosciences, Inc., and its wholly-owned subsidiary Magellan Diagnostics, Inc. (collectively, “Magellan”), on March 22, 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 2018 - $3,375,– $2,250, fiscal 2019 -– $5,250, 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 DecemberMarch 31, 20172018 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 DecemberMarch 31, 20172018 and September 30, 2017, the fair value of the interest rate swap was $1,156$1,580 and $815, respectively, and is reflected as anon-current asset in the accompanying Condensed Consolidated Balance Sheets. This fair value was determined by reference to a third party valuation, and is considered a Level 2 input within the fair value hierarchy of valuation techniques.
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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 DecemberMarch 31, 20172018 or September 30, 2017.
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 DecemberMarch 31, 2017,2018, 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.
8. | Reportable |
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, viral, respiratory, and parasitic 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; Magellan’s manufacturing operations for products detecting elevated lead levels in blood 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.
The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia; and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents domestically and abroad, including sales, business development and distribution facilities in Singapore and Beijing, China to further pursue growing 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).
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Amounts due from two Diagnostics distributor customers accounted for 25% and 11% of consolidated accounts receivable at DecemberMarch 31, 20172018 and September 30, 2017, respectively. Revenues from these two distributor customers accounted for 38%27% and 23%28% of the Diagnostics segment third-party revenues during the three months ended DecemberMarch 31, 20172018 and 2016,2017, respectively, and 30% and 27% during the six month periods ended March 31, 2018 and 2017, respectively. These distributors represented 27% and 17%19% of consolidated revenues for each of the fiscal 2018 and 2017 firstsecond quarters and 21% and 19% for the respectiveyear-to-date six month periods, respectively.
Within our Life Science segment, two diagnostic manufacturing customers accounted for 15%22% and 19%21% of the segment’s third-party revenues during the three months ended DecemberMarch 31, 2018 and 2017, respectively, and 2016,19% and 20% during the six months ended March 31, 2018 and 2017, respectively.
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Segment information for the interim periods is as follows:
Diagnostics | Life Science | Eliminations(1) | Total | Diagnostics | Life Science | Unallocated Costs and Eliminations(1) | Total | |||||||||||||||||||||||||
Three Months Ended December 31, 2017 | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2018 | Three Months Ended March 31, 2018 |
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Net revenues - | ||||||||||||||||||||||||||||||||
Third-party | $ | 37,490 | $ | 14,793 | $ | — | $ | 52,283 | $ | 39,782 | $ | 16,669 | $ | — | $ | 56,451 | ||||||||||||||||
Inter-segment | 121 | 192 | (313 | ) | — | 80 | 75 | (155 | ) | — | ||||||||||||||||||||||
Operating income | 5,291 | 2,784 | (14 | ) | 8,061 | 8,986 | 3,576 | (4,884 | ) | 7,678 | ||||||||||||||||||||||
Goodwill (December 31, 2017) | 35,213 | 19,784 | — | 54,997 | ||||||||||||||||||||||||||||
Other intangible assets, net (December 31, 2017) | 24,202 | 1,575 | — | 25,777 | ||||||||||||||||||||||||||||
Total assets (December 31, 2017) | 179,943 | 72,480 | (472 | ) | 251,951 | |||||||||||||||||||||||||||
Three Months Ended December 31, 2016 | ||||||||||||||||||||||||||||||||
Goodwill (March 31, 2018) | 35,213 | 20,196 | — | 55,409 | ||||||||||||||||||||||||||||
Other intangible assets, net (March 31, 2018) | 23,430 | 1,455 | — | 24,885 | ||||||||||||||||||||||||||||
Total assets (March 31, 2018) | 179,825 | 75,288 | (566 | ) | 254,547 | |||||||||||||||||||||||||||
Three Months Ended March 31, 2017 | Three Months Ended March 31, 2017 |
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Net revenues - | ||||||||||||||||||||||||||||||||
Third-party | $ | 33,808 | $ | 13,001 | $ | — | $ | 46,809 | $ | 37,772 | $ | 16,353 | $ | — | $ | 54,125 | ||||||||||||||||
Inter-segment | 79 | 125 | (204 | ) | — | 128 | 107 | (235 | ) | — | ||||||||||||||||||||||
Operating income | 6,643 | 3,267 | 175 | 10,085 | 9,595 | 4,571 | 20 | 14,186 | ||||||||||||||||||||||||
Goodwill (September 30, 2017) | 35,213 | 19,713 | — | 54,926 | 35,213 | 19,713 | — | 54,926 | ||||||||||||||||||||||||
Other intangible assets, net (September 30, 2017) | 24,973 | 1,731 | — | 26,704 | 24,973 | 1,731 | — | 26,704 | ||||||||||||||||||||||||
Total assets (September 30, 2017) | 180,226 | 69,938 | (387 | ) | 249,777 | 180,226 | 69,938 | (387 | ) | 249,777 | ||||||||||||||||||||||
Six Months Ended March 31, 2018 | Six Months Ended March 31, 2018 |
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Net revenues - | ||||||||||||||||||||||||||||||||
Third-party | $ | 77,272 | $ | 31,462 | $ | — | $ | 108,734 | ||||||||||||||||||||||||
Inter-segment | 201 | 267 | (468 | ) | — | |||||||||||||||||||||||||||
Operating income | 15,760 | 6,360 | (6,381 | ) | �� | 15,739 | ||||||||||||||||||||||||||
Six Months Ended March 31, 2017 | Six Months Ended March 31, 2017 |
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Net revenues - | ||||||||||||||||||||||||||||||||
Third-party | $ | 71,580 | $ | 29,354 | $ | — | $ | 100,934 | ||||||||||||||||||||||||
Inter-segment | 207 | 232 | (439 | ) | — | |||||||||||||||||||||||||||
Operating income | 16,238 | 7,838 | 195 | 24,271 |
(1) | Unallocated costs for the three and six months ended March 31, 2018 total $4,911 and $6,394, respectively, and are comprised of Executive Transition and Realignment Costs, and Litigation Costs, as set forth within the accompanying Condensed Consolidated Statements of Operations. 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.
9. |
On May 17, 2017, Meridian filed a complaint in the United States District Court for the Southern District of Ohio, Western Division (Cincinnati) naming DiaSorin Inc. (“DiaSorin”) as a defendant. Meridian’s complaint alleges DiaSorin has breached the 2010Co-Development and License Agreement (the “Agreement”) between it and Meridian relating to theco-development of certain tests and diagnostic products, pursuant to which Meridian disclosed certain trade secrets and proprietary information. The lawsuit underlying Meridian’s complaint alleges that DiaSorin breached the Agreement and used, and is currently using, Meridian’s proprietary information and therefore seeks injunctive relief to protect Meridian’s intellectual property and information with respect to its diagnostics products. Approximately $730$925 and $1,655 of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated StatementStatements of Operations for the fiscal quarterthree and six months ended DecemberMarch 31, 2017.2018, respectively.
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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 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. The lawsuit underlying plaintiff’s class action complaintComplaint seeks compensatory damages, injunctive relief and attorneys’ fees to all members of the proposed class. Because the litigation and related discovery are in preliminary stages, we do not have sufficient information 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 the accompanying Condensed Consolidated Statement of Operations for the fiscal quarteryear-to-date period ended DecemberMarch 31, 2017.2018.
On December 6, 2017, Michael Edelson filed a class actionderivative 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 lawsuit underlying plaintiff’s class action complaint seeks compensatory damages, injunctive relief, equitable relief and attorneys’ fees to all members of the proposed class. Because the litigation and related discovery are in preliminary stages, we do not have sufficient information 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 the accompanying Condensed Consolidated Statement of Operations for the fiscal quarteryear-to-date period ended DecemberMarch 31, 2018.
Approximately $500 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, 2018. The Company maintains insurance covering these matters, which has a $500 deductible.
See Note 10“Subsequent Events”.
10. | Subsequent Events |
As discussed in Note 5“Intangible Assets” and Item 2“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Magellan lead tests have been the subject of a series of FDA activities including (i) a Field Safety Notice on May 17, 2017; (ii) product recall notices on May 25, 2017 and June 5, 2017; (iii) an inspection and resulting Form 483, Inspection Observations; and (iv) a Warning Letter on October 23, 2017. 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. However, the Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company.
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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 Form10-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.
QUARTERLY HIGHLIGHTS
The first quarter of fiscal 2018 proved to be a successful quarter; a quarter highlightedHighlighted by the following, the effects of which are discussed throughout this MD&A:&A, the second quarter of fiscal 2018 continued the success and positive momentum of the first quarter:
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RESULTS OF OPERATIONS
Three Months Ended DecemberMarch 31, 20172018
Net earnings for the firstsecond quarter of fiscal 2018 totaled $6,302,were $5,288, or $0.15 per diluted share, relatively flat compared to the net earnings for the first quarter of fiscal 2017 of $6,279, or $0.15$0.12 per diluted share. The fiscal 2018 firstsecond quarter results include $1,483$4,911 of costs associated with the transition to our new CEO and the realignment of other executive positions, and litigation costs (collectively, “CEO“Executive transition and realignment costs, and litigation costs”) (see Note 9“Litigation Matters” of the accompanying Condensed Consolidated Financial Statements). These items impacted earnings by $3,575, or approximately $0.08 per diluted share on a net basis (see “USE OFNON-GAAP MEASURES” below). Consolidated revenues increased 4% to $56,451 for the second quarter of fiscal 2018 compared to the same period of the prior year (3% on a constant-currency basis). On an operating segment basis, revenues increased 5% (3% in constant-currency) and 2% (1% in constant-currency) for Diagnostics and Life Science, respectively.
Six Months Ended March 31, 2018
For the six month period ended March 31, 2018, net earnings were $11,590, or $0.27 per diluted share. Theyear-to-date fiscal 2018 results include $6,394 of costs associated with the transition to our new CEO and the realignment of other executive positions, and litigation costs (collectively, “Executive transition and realignment costs, and litigation costs”) (see Note 9“Litigation Matters” of the accompanying Condensed Consolidated Financial Statements), along with certainone-time tax effects of the recently-enacted U.S. tax reform act. These items impacted earnings by $239,$3,814, or less than $0.01approximately $0.09 per diluted share on a net basis (see “USE OFNON-GAAP MEASURES” below). Consolidated revenues increased 12%8% to $52,283$108,734 for the first quartersix months of fiscal 2018 compared to the same period of the prior year (10%(6% on a constant-currency basis). On an operating segment basis, revenues increased 8% (6% in constant-currency) and 7% (5% in constant-currency) for Diagnostics and Life Science, respectively.
Revenues for the Diagnostics segment for the first quarter of fiscal 2018 increased 11% compared to the first quarter of fiscal 2017 (10%
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Update on a constant-currency basis), comprised of a 12% increase in molecular assay products and a 10% increase in immunoassay andMagellan Lead Testing
Magellan offers multiple lead testing products. Withsystems that are capable of processing both capillary and venous blood samples. Magellan’s LeadCare Plus and LeadCare Ultra systems, which accounted for approximately 10% of Magellan’s annual revenues in fiscal 2016, are used predominantly with venous blood samples. Typically, the Ultra and Plus systems are used in a 12% increase in its molecular components business and a 15% increase in its immunoassay components business, revenues of our Life Science segment increased by 14% during the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017, increasing 12% on a constant-currency basis.
Our outlook forreference lab setting. Magellan’s LeadCare II testing volume continues to be healthy. In the time period since the FDA released its Safety Notification (which pertained to venous blood lead testing performed on the systems produced by Magellan), nearly 700 new LeadCare II systems utilizingsystem is predominantly used with capillary blood samples have been placedand is typically used in a physician officesoffice setting. LeadCare II system revenue represented approximately 90% of revenues in fiscal 2016. The LeadCare II system is the onlypoint-of-care system for testing lead exposure, receiving CLIA-waived status. Other methods for testing blood lead levels include Graphite Furnace Atomic Absorption Spectroscopy and clinics.Mass Spectrometry, which are typically performed in hospital and reference laboratory settings.
On May 17, 2017, the FDA issued a field safety notice advising customers to discontinue use of Magellan’s lead testing systems with venous blood samples. This field safety notice was followed by product recall notices on May 25th and June 5th. Subsequent to the issuances of these field safety and product recall notices, the FDA completed an inspection of Magellan’s Quality System, and issued its Form 483, Inspectional Observations, on June 29, 2017, which was expectedly followed by a Warning Letter issued on October 23, 2017. During our 2017 third fiscal quarter, it was determined that a potential impairment of goodwill recorded in connection with the acquisition of Magellan had occurred (i.e., a “triggering event”). An impairment charge of $6,628, on both apre-tax andafter-tax basis, was recorded during the fiscal 2017 third quarter as set forth in Note 5“Intangible Assets” of the accompanying Condensed Consolidated Financial Statements.
The Warning Letter requires periodic reporting on our remediation progress. To date, we have satisfied our post-Warning Letter reporting requirements with the FDA. During the three and six months ended March 31, 2018, we incurred approximately $300 and $800, respectively, in remediation costs, primarily related to regulatory consultants and studies required to reinstate our venous blood sample claim. We expect remediation costs in the first quartersecond half of fiscal 2018 associated with the Magellan FDA matter totaled approximately $500pre-tax, resulting in a total impact of less than $0.01 on diluted earnings per share for the quarter. Remediation costsyear to be in the remainder of fiscal 2018 are expected$200 to be approximately $250pre-tax, or less than $0.01 impact on diluted earnings per share. Remediation costs relate primarily to professional fees for regulatory consultants and periodic Quality System audits.$400 range. In the course of remediation, Magellan may encounter additional matters that warrant notifications to the FDA and/or customers regarding the use of its products. At this time, we do not believe that any such notifications would impact the ability to use the LeadCare systems with capillary blood samples. In addition, at
Revenues for Magellan for the six month period ending March 31, 2018 were $8,344, compared to $8,844 in the same period of the prior fiscal year, reflecting reduced revenues as a result of removing the venous blood claimas noted above. Revenues of LeadCare II, utilizing capillary blood samples, increased 7% during the six month period ending March 31, 2018, compared to the same period of the prior fiscal year, reflecting the continued placement of new LeadCare II systems in physician offices.
As set forth in Note 10“Subsequent Events” of the accompanying Condensed Consolidated Financial Statements, 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 time, we do not anticipate any further significantmatter. 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. However, the Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on our results of operations or financial condition.the Company.
USE OFNON-GAAP MEASURES
We have supplemented our reported GAAP financial information with information on net earnings, basic earnings per share and diluted earnings per share excluding the effects of CEOexecutive transition and realignment costs, litigation costs and certainone-time tax effects of the tax reform act, each of which is anon-GAAP measure. We have provided in the tables below reconciliations of net earnings, basic earnings per share and diluted earnings per share, with and without the effects of thesenon-routine items, for the fiscalsecond quarters and six month periods ended DecemberMarch 31, 20172018 and DecemberMarch 31, 2016.2017.
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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 thesenon-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. |
Thesenon-GAAP measures may be different fromnon-GAAP measures used by other companies. In addition, thesenon-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.
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Three Months | Six Months | |||||||||||||||||||||||
Three Months Ended December 31, | Ended March 31, | Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net Earnings - | ||||||||||||||||||||||||
U.S. GAAP basis | $ | 6,302 | $ | 6,279 | $ | 5,288 | $ | 9,312 | $ | 11,590 | $ | 15,591 | ||||||||||||
CEO transition and litigation costs (1) | 1,080 | — | ||||||||||||||||||||||
Executive transition and realignment costs (1) | 2,517 | — | 3,052 | — | ||||||||||||||||||||
Litigation costs (1) | 1,058 | — | 1,603 | — | ||||||||||||||||||||
One-time benefit from tax law change | (1,695 | ) | — | — | — | (1,695 | ) | — | ||||||||||||||||
Repatriation transition tax | 854 | — | — | — | 854 | — | ||||||||||||||||||
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Adjusted earnings | $ | 6,541 | $ | 6,279 | $ | 8,863 | $ | 9,312 | $ | 15,404 | $ | 15,591 | ||||||||||||
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Net Earnings per Basic Common Share - | ||||||||||||||||||||||||
U.S. GAAP basis | $ | 0.15 | $ | 0.15 | $ | 0.12 | $ | 0.22 | $ | 0.27 | $ | 0.37 | ||||||||||||
CEO transition and litigation costs (1) | 0.03 | — | ||||||||||||||||||||||
Executive transition and realignment costs (1) | 0.06 | — | 0.07 | — | ||||||||||||||||||||
Litigation costs (1) | 0.02 | — | 0.04 | — | ||||||||||||||||||||
One-time benefit from tax law change | (0.04 | ) | — | — | — | (0.04 | ) | — | ||||||||||||||||
Repatriation transition tax | 0.02 | — | — | — | 0.02 | — | ||||||||||||||||||
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Adjusted Basic EPS (2) | $ | 0.15 | $ | 0.15 | $ | 0.21 | $ | 0.22 | $ | 0.36 | $ | 0.37 | ||||||||||||
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Net Earnings per Diluted Common Share - | ||||||||||||||||||||||||
U.S. GAAP basis | $ | 0.15 | $ | 0.15 | $ | 0.12 | $ | 0.22 | $ | 0.27 | $ | 0.37 | ||||||||||||
CEO transition and litigation costs (1) | 0.03 | — | ||||||||||||||||||||||
Executive transition and realignment costs (1) | 0.06 | — | 0.07 | — | ||||||||||||||||||||
Litigation costs (1) | 0.02 | — | 0.04 | — | ||||||||||||||||||||
One-time benefit from tax law change | (0.04 | ) | — | — | — | (0.04 | ) | — | ||||||||||||||||
Repatriation transition tax | 0.02 | — | — | — | 0.02 | — | ||||||||||||||||||
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Adjusted Diluted EPS (2) | $ | 0.15 | $ | 0.15 | $ | 0.21 | $ | 0.22 | $ | 0.36 | $ | 0.37 | ||||||||||||
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(1) | These |
(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. |
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REVENUE OVERVIEW
Below are analyses of the Company’s revenue, provided for each of the following:
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 8“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. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated revenues due to these factors.
Three Months Ended December 31, | Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | Inc (Dec) | 2018 | 2017 | Inc (Dec) | 2018 | 2017 | Inc (Dec) | ||||||||||||||||||||||||||||
Diagnostics - | ||||||||||||||||||||||||||||||||||||
Americas | $ | 31,462 | $ | 27,569 | 14 | % | $ | 33,403 | $ | 31,842 | 5 | % | $ | 64,865 | $ | 59,411 | 9 | % | ||||||||||||||||||
EMEA | 5,341 | 5,662 | (6 | )% | 5,736 | 5,013 | 14 | % | 11,077 | 10,675 | 4 | % | ||||||||||||||||||||||||
ROW | 687 | 577 | 19 | % | 643 | 917 | (30 | )% | 1,330 | 1,494 | (11 | )% | ||||||||||||||||||||||||
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Total Diagnostics | 37,490 | 33,808 | 11 | % | 39,782 | 37,772 | 5 | % | 77,272 | 71,580 | 8 | % | ||||||||||||||||||||||||
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Life Science - | ||||||||||||||||||||||||||||||||||||
Americas | 5,351 | 5,399 | (1 | )% | 5,228 | 5,732 | (9 | )% | 10,579 | 11,131 | (5 | )% | ||||||||||||||||||||||||
EMEA | 5,106 | 4,898 | 4 | % | 7,440 | 6,722 | 11 | % | 12,546 | 11,620 | 8 | % | ||||||||||||||||||||||||
ROW | 4,336 | 2,704 | 60 | % | 4,001 | 3,899 | 3 | % | 8,337 | 6,603 | 26 | % | ||||||||||||||||||||||||
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Total Life Science | 14,793 | 13,001 | 14 | % | 16,669 | 16,353 | 2 | % | 31,462 | 29,354 | 7 | % | ||||||||||||||||||||||||
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Consolidated | $ | 52,283 | $ | 46,809 | 12 | % | $ | 56,451 | $ | 54,125 | 4 | % | $ | 108,734 | $ | 100,934 | 8 | % | ||||||||||||||||||
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% of total revenues - | ||||||||||||||||||||||||||||||||||||
Diagnostics | 72 | % | 72 | % | 70 | % | 70 | % | 71 | % | 71 | % | ||||||||||||||||||||||||
Life Science | 28 | % | 28 | % | 30 | % | 30 | % | 29 | % | 29 | % | ||||||||||||||||||||||||
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Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
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Ex-Americas | 30 | % | 30 | % | 32 | % | 31 | % | 31 | % | 30 | % | ||||||||||||||||||||||||
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Revenue Overview –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 ourillumigene platform |
2) | Immunoassays and lead tests on multiple technology platforms |
Life Science
1) | Molecular |
2) |
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Revenues for each product platform/type, as well as its relative percentage of segment revenues, are shown below.
Three Months Ended December 31, | Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | Inc (Dec) | 2018 | 2017 | Inc (Dec) | 2018 | 2017 | Inc (Dec) | ||||||||||||||||||||||||||||
Diagnostics - | ||||||||||||||||||||||||||||||||||||
Diagnostics- | ||||||||||||||||||||||||||||||||||||
Molecular assays | $ | 8,668 | $ | 7,711 | 12 | % | $ | 9,674 | $ | 9,477 | 2 | % | $ | 18,342 | $ | 17,188 | 7 | % | ||||||||||||||||||
Immunoassays & lead tests | 28,822 | 26,097 | 10 | % | 30,108 | 28,295 | 6 | % | 58,930 | 54,392 | 8 | % | ||||||||||||||||||||||||
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Total Diagnostics | $ | 37,490 | $ | 33,808 | 11 | % | $ | 39,782 | $ | 37,772 | 5 | % | $ | 77,272 | $ | 71,580 | 8 | % | ||||||||||||||||||
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Life Science - | ||||||||||||||||||||||||||||||||||||
Molecular components | $ | 5,705 | $ | 5,116 | 12 | % | ||||||||||||||||||||||||||||||
Immunoassay components | 9,088 | 7,885 | 15 | % | ||||||||||||||||||||||||||||||||
Life Science- | ||||||||||||||||||||||||||||||||||||
Molecular reagents | $ | 6,245 | $ | 5,339 | 17 | % | $ | 11,950 | $ | 10,455 | 14 | % | ||||||||||||||||||||||||
Immunological reagents | 10,424 | 11,014 | (5 | )% | 19,512 | 18,899 | 3 | % | ||||||||||||||||||||||||||||
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Total Life Science | $ | 14,793 | $ | 13,001 | 14 | % | $ | 16,669 | $ | 16,353 | 2 | % | $ | 31,462 | $ | 29,354 | 7 | % | ||||||||||||||||||
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% of Diagnostics revenues - | ||||||||||||||||||||||||||||||||||||
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Molecular assays | 23 | % | 23 | % | 24 | % | 25 | % | 24 | % | 24 | % | ||||||||||||||||||||||||
Immunoassays & lead tests | 77 | % | 77 | % | 76 | % | 75 | % | 76 | % | 76 | % | ||||||||||||||||||||||||
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Total Diagnostics | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
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% of Life Science revenues - | ||||||||||||||||||||||||||||||||||||
Molecular components | 39 | % | 39 | % | ||||||||||||||||||||||||||||||||
Immunoassay components | 61 | % | 61 | % | ||||||||||||||||||||||||||||||||
% of Life Science revenues- | ||||||||||||||||||||||||||||||||||||
Molecular reagents | 37 | % | 33 | % | 38 | % | 36 | % | ||||||||||||||||||||||||||||
Immunological reagents | 63 | % | 67 | % | 62 | % | 64 | % | ||||||||||||||||||||||||||||
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Total Life Science | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
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Following is a discussion of the revenues generated by each of these product platforms/types:
Diagnostics Products
Molecular Assay ProductsRespiratory
RevenuesThe 2017-2018 flu season was particularly strong, as measured by the rate of laboratory-confirmed influenza hospitalizations (published by the CDC). Our respiratory products, which include tests for ourillumigene molecular platform of products increased 12% to $8,668 forflu, RSV, Group A Strep, Pertussis, and Mycoplasma pneumonia, among others, were strong performers during the first quarterhalf of fiscal 2018, (also 12% on a constant-currency basis). This increase primarily reflects strong revenue growth in our respiratory-related productsup $1,333 (18%) during the second quarter and a continuation$3,173 (26%) during the first half of the revenue stabilization trend for ourC. difficile tests over the last four quarters.
We have over 1,650 customer account placements. Of these account placements, over 1,375 accounts have completed evaluations and validations and are regularly purchasing product, with the balance of our account placements being in some stage of product evaluation and/or validation. Of our account placements, we have approximately 600 accounts that are regularly purchasing, evaluating and/or validating two or more assays. Increasing the number of customers utilizing two or more assays is a key objective, as we believe broader menu utilization lessens the risk of displacement by competitors.
We continue to invest in new product development for our molecular testing platform, and this platform now has nine commercialized tests spanning hospital acquired infections, women’s health, respiratory, sexually transmitted diseases, and tropical diseases. As of December 31, 2017, ourillumigene Malaria test has been placed in nearly 175 accounts in the EMEA region for use as a screening test for travelers returning to Europe from endemic areas in Africa. Our efforts to develop market channels in the endemic areas of Africa continue, as we work to convince policy-makers of the advantages of a more accurate molecular test to assist in efforts to eradicate malaria.
We believe that the diagnostic testing market, particularly in the U.S., is continuing to selectively move away from culture and immunoassay testing to molecular testing for diseases where there is a favorable cost/benefit position for the total cost of health care. While this market is competitive, with molecular companies such as Cepheid and Becton Dickinson, and others such as Quidel, Luminex and Abbott (Alere division), we believe we are well-
Page 16
positioned. Our simple,easy-to-use,illumigene platform, with its expanding menu, requires no expensive equipment purchase and little to no maintenance cost. We believe these features, along with its small footprint and the performance of theillumigene assays, makeillumigene an attractive molecular platform for any size hospital or physician office laboratory that runs moderately-complex tests. We continue to invest in the development of additional assays for this platform and expect a test for congenital cytomegalovirus (CMV), a leading cause of deafness in infants, to be our nextFDA-cleared test on theillumigeneplatform.year.
Immunoassay and Lead Testing ProductsH. pylori
Revenues from our Diagnostics segment’s immunoassay and lead testing products increased 10% in the first quarter of fiscal 2018. These results reflect increased revenues in ourH. pyloriand other immunoassay product lines, partially offset by decreased revenue from Magellan’s lead testing products.
During the first quarter of fiscal 2018, revenues from ourH. pylori products increased 24% (22% on a constant-currency basis) to $8,860, reflectingReflecting the ongoing conversion of serology testing to our antigen tests and buying patterns of certain customers.customers, ourH. pylori products also showed solid revenue growth for the first half of fiscal 2018, up $273 (4%) during the second quarter and $1,977 (13%) during the first half of the fiscal year. 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. A significant amount of theH. pylori product revenues are sales to reference labs, whose buying patterns may not be consistent from period to period. During fiscal 2017, we alsoWe have introduced capabilities to identify resistance to Clarithromycin, the antibiotic commonly used to treatH. pylori.This. This is currently available in an Analyte Specific Reagent (ASR) format. We believe that partnering the ability to diagnoseH. pylori and identify resistance provides a competitive advantage.
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The patents for ourH. 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 ourH. pylori products, which represent approximately 15% of our total revenues, to increase in the near future, as we currently market the onlyFDA-cleared tests to detectH. pylori antigen in stool samples in the U.S. market. Suchand 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. In order to mitigate competition, our product development pipeline includes multiple new product initiatives for the detection ofH. pylori.We. We are unable to provide assurances that we will be successful with any mitigation strategy or that any mitigation strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit. See Note 9“Litigation Matters”of the accompanying Condensed Consolidated Financial Statements regarding related litigation.
DuringOther Product Families
Revenues for our other diagnostic products also performed well in the aggregate during the first quarterhalf of fiscal 2018, revenues from our other immunoassay products (includingC. difficile, foodborne and respiratory) increased 16% (14% in constant-currency) to $15,544. Although benefiting from the effects of strong seasonal respiratory sales, the extension of the growth experiencedincreasing $713 (3%) during the second quarter and $1,024 (2%) during the first half of fiscal 2017 continues to support our belief that this portion of our business has stabilized and is positioned for continued future growth.
Revenues from Magellan’s sale of products to test for elevated levels of lead in blood totaled $4,159 during the fiscal 2018 first quarter. This level of revenues reflects a 20% decrease from the three-month period ended December 31, 2016, primarily resulting from (i) the effect of the prior year quarter including an international bulk kit purchase that was not repeated during the current year quarter; and (2) decreased revenue from lead testing systems utilizing venous blood samples, in connection with the FDA matter noted above.year.
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Life Science Products
During the firstsecond quarter of fiscal 2018, revenues from our Life Science segment increased 14%2%, with revenues from molecular componentreagent sales increasing 12% from the comparable fiscal 2017 quarter17% and revenues from immunoassay componentimmunological reagent sales decreasing 5%. For the first six months of fiscal 2018, revenues from our Life Science segment increased 7%, with revenues from molecular reagent sales increasing 15%14% and revenues from immunological reagent sales increasing 3%. Our molecular component business’reagent products’ revenue growth was impacted by the movement in currency exchange rates since the first quarter of fiscal 2017 periods, with revenues increasing 7%12% and 8% on a constant-currency basis over the second quarter and first quartersix months of fiscal 2017. Our2017, respectively. Comparisons of our immunological reagents products’ revenue to the prior year quarter was impacted by the fact that the 2017 second quarter revenue for such products was extraordinarily high due to a high level of contract manufacturing activity and the timing of orders from certain large customers.Overall, our Life Science segment continued to benefit from (i) increased revenues in the steadily-expanding tropical disease product family, with sales of such products increasing 20% over the fiscal 2017 first quarter to approximately $1,300 in the first quarter of fiscal 2018; and (ii) increased revenue from sales into China, with such sales totaling approximately $1,500$2,100 during firstsecond quarter of fiscal 2018 (approximately $200 inand approximately $3,600 during the molecular components business and $1,300 in the immunoassay components business)year-to-date period – representing an approximate 115% increaseincreases of approximately 60% and 80% over the first quartercomparable periods of fiscal 2017.
Significant Customers
Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 8“Reportable Segments and Major Customers Information” of the accompanying Condensed Consolidated Financial Statements.
Gross Profit
Three Months Ended December 31, | Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||||||||||||||
Gross Profit | $ | 31,786 | $ | 29,039 | 9 | % | $ | 34,569 | $ | 33,477 | 3 | % | $ | 66,355 | $ | 62,516 | 6 | % | ||||||||||||||||||
Gross Profit Margin | 61 | % | 62 | % | -1 point | 61 | % | 62 | % | -1 point | 61 | % | 62 | % | -1 point |
The gross profit margin decreases experienced in fiscal 2018 primarily result from the combined effects of mix of products sold and operating segment mix.
Operating Expenses
Research & Development | Selling & Marketing | General & Administrative | Other | Total Operating Expenses | ||||||||||||||||
Fiscal 2017 First Quarter: |
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Diagnostics | $ | 2,973 | $ | 5,494 | $ | 5,805 | $ | — | $ | 14,272 | ||||||||||
Life Science | 624 | 2,124 | 1,934 | — | 4,682 | |||||||||||||||
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Total 2017 First Quarter Expenses | $ | 3,597 | $ | 7,618 | $ | 7,739 | $ | — | $ | 18,954 | ||||||||||
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Fiscal 2018 First Quarter: |
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Diagnostics | $ | 3,737 | $ | 6,445 | $ | 6,772 | $ | 1,483 | $ | 18,437 | ||||||||||
Life Science | 759 | 2,397 | 2,132 | — | 5,288 | |||||||||||||||
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Total 2018 First Quarter Expenses | $ | 4,496 | $ | 8,842 | $ | 8,904 | $ | 1,483 | $ | 23,725 | ||||||||||
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Fiscal 2017 First Quarter Expenses | $ | 3,597 | $ | 7,618 | $ | 7,739 | $ | — | $ | 18,954 | ||||||||||
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% of Revenues | 8 | % | 16 | % | 17 | % | — | % | 40 | % | ||||||||||
Fiscal 2018 First Quarter Increases: |
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Diagnostics | 764 | 951 | 967 | 1,483 | 4,165 | |||||||||||||||
Life Science | 135 | 273 | 198 | — | 606 | |||||||||||||||
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Fiscal 2018 First Quarter Expenses | $ | 4,496 | $ | 8,842 | $ | 8,904 | $ | 1,483 | $ | 23,725 | ||||||||||
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% of Revenues | 9 | % | 17 | % | 17 | % | 3 | % | 45 | % | ||||||||||
% Increase | 25 | % | 16 | % | 15 | % | NMF | 25 | % |
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Operating Expenses – Segment Detail
Three Months Ended March 31, 2018 | ||||||||||||||||||||
Research & Development | Selling & Marketing | General & Administrative | Other | Total Operating Expenses | ||||||||||||||||
Fiscal 2017: | ||||||||||||||||||||
Diagnostics | $ | 3,377 | $ | 5,625 | $ | 5,486 | $ | — | $ | 14,488 | ||||||||||
Life Science | 574 | 2,441 | 1,788 | — | 4,803 | |||||||||||||||
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Total Expenses (2017 Quarter) | $ | 3,951 | $ | 8,066 | $ | 7,274 | $ | — | $ | 19,291 | ||||||||||
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Fiscal 2018: | ||||||||||||||||||||
Diagnostics | $ | 3,530 | $ | 6,101 | $ | 6,795 | $ | — | $ | 16,426 | ||||||||||
Life Science | 692 | 2,547 | 2,315 | — | 5,554 | |||||||||||||||
Unallocated Expenses | — | — | — | 4,911 | 4,911 | |||||||||||||||
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Total Expenses (2018 Quarter) | $ | 4,222 | $ | 8,648 | $ | 9,110 | $ | 4,911 | $ | 26,891 | ||||||||||
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Six Months Ended March 31, 2018 | ||||||||||||||||||||
Research & Development | Selling & Marketing | General & Administrative | Other | Total Operating Expenses | ||||||||||||||||
Fiscal 2017: | ||||||||||||||||||||
Diagnostics | $ | 6,350 | $ | 11,119 | $ | 11,291 | $ | — | $ | 28,760 | ||||||||||
Life Science | 1,198 | 4,565 | 3,722 | — | 9,485 | |||||||||||||||
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Total Expenses (2017Year-to-Date) | $ | 7,548 | $ | 15,684 | $ | 15,013 | $ | — | $ | 38,245 | ||||||||||
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Fiscal 2018: | ||||||||||||||||||||
Diagnostics | $ | 7,251 | $ | 12,514 | $ | 13,615 | $ | — | $ | 33,380 | ||||||||||
Life Science | 1,451 | 4,944 | 4,447 | — | 10,842 | |||||||||||||||
Unallocated Expenses | — | — | — | 6,394 | 6,394 | |||||||||||||||
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Total Expenses (2018Year-to-Date) | $ | 8,702 | $ | 17,458 | $ | 18,062 | $ | 6,394 | $ | 50,616 | ||||||||||
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Operating Expenses – Comparisons to Prior Year Periods | ||||||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||
Research & Development | Selling & Marketing | General & Administrative | Other | Total Operating Expenses | ||||||||||||||||
2017 Expenses | $ | 3,951 | $ | 8,066 | $ | 7,274 | $ | — | $ | 19,291 | ||||||||||
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% of Revenues | 7 | % | 15 | % | 13 | % | — | % | 36 | % | ||||||||||
Fiscal 2018 Increases: |
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Diagnostics | 153 | 476 | 1,309 | — | 1,938 | |||||||||||||||
Life Science | 118 | 106 | 527 | — | 751 | |||||||||||||||
Unallocated Expenses | — | — | — | 4,911 | 4,911 | |||||||||||||||
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2018 Expenses | $ | 4,222 | $ | 8,648 | $ | 9,110 | $ | 4,911 | $ | 26,891 | ||||||||||
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% of Revenues | 7 | % | 15 | % | 16 | % | 9 | % | 48 | % | ||||||||||
% Increase | 7 | % | 7 | % | 25 | % | NMF | 39 | % |
Page 20
Six Months Ended March 31, 2018 | ||||||||||||||||||||
Research & Development | Selling & Marketing | General & Administrative | Other | Total Operating Expenses | ||||||||||||||||
2017 Expenses | $ | 7,548 | $ | 15,684 | $ | 15,013 | $ | — | $ | 38,245 | ||||||||||
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% of Revenues | 7 | % | 16 | % | 15 | % | — | % | 38 | % | ||||||||||
Fiscal 2018 Increases: |
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Diagnostics | 901 | 1,395 | 2,324 | — | 4,620 | |||||||||||||||
Life Science | 253 | 379 | 725 | — | 1,357 | |||||||||||||||
Unallocated Expenses | — | — | — | 6,394 | 6,394 | |||||||||||||||
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2018 Expenses | $ | 8,702 | $ | 17,458 | $ | 18,062 | $ | 6,394 | $ | 50,616 | ||||||||||
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% of Revenues | 8 | % | 16 | % | 17 | % | 6 | % | 47 | % | ||||||||||
% Increase | 15 | % | 11 | % | 20 | % | NMF | 32 | % |
Total operating expenses increased during both the second quarter and first quartersix months of fiscal 2018, comparedrelating primarily to (i) executive transition and realignment costs; (ii) litigation costs; (iii) overall impact of the weakening of the U.S. dollar relative to the first quarter of fiscal 2017, relating primarily toforeign currencies in which the Company’s foreign operations incur expenses; and (iv) overall increases in spending in our Diagnostics segment, with such increased Diagnostics spending reflecting the following:
• | Increased R&D costs in connection with instrumentation development programs for Curian andH. pylori Clarithromycin resistance in anFDA-cleared IVD format, and clinical trials for ourillumigene CMV test; |
Litigation costs (reflected within “Other” in the above tables), which totaled $749,$1,453 and $2,202 for the quarterly andyear-to-date periods, respectively, relate to the matters discussed in Note 9“Litigation Matters” of the accompanying Condensed Consolidated Financial Statements and Part II. Item 1 of this Quarterly Report on Form10-Q.
Operating Income
Operating income decreased 20%46% to $8,061$7,678 for the second quarter of fiscal 2018, and decreased 35% to $15,739 for the first quartersix months of fiscal 2018, as a result of the factors discussed above.
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Income Taxes
The effective rate for income taxes was 18%27% and 22% for the first quarter of fiscal 2018 second quarter and six monthyear-to-date periods, respectively, compared to 34% and 35% forduring the first quarter of 2017. Thiscorresponding fiscal 2017 periods. These lower fiscal 2018 taxtaxes primarily resultsresult from the combined net impact of the following effects of the recently-enacted tax reform act (see Note 6“Income Taxes” of the accompanying Condensed Consolidated Financial Statements):
Excluding the effects of theseone-time tax effects, we expect the overall effective tax rate for the fiscal year ending September 30, 2018 to approximate26%-27%.
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, consideration of acquisition plans, and consideration of common share dividends. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities.
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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 worldwidegeo-political andgeo-economic conditions (including Brexit), 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 and dividends 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 collectibility of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services.
Net cash provided by operating activities totaled $5,171$13,839 for the first threesix months of fiscal 2018, a 60%45% decrease from the $12,993$25,132 provided during the first threesix months of fiscal 2017. While reflecting the timing of payments from customers, and to suppliers and taxing authorities, this decrease also results in large part from the net effects of (i) increased customer receivables from higher sales levels; and (ii) increased inventory levels during the first quarterhalf of fiscal 2018, largely related to continued expansion in Asia; and (iii) decreasedpartially offset by the effects of increased accrued employee compensation costs during the first quarterfiscal 2018 period largely as a result of executive realignment activities, coupled with such accruals decreasing during the fiscal 2017 period, reflecting the payment of discretionary bonuses and the timing of regularly scheduled payroll payments. Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements, capital expenditures and dividends during the next 12 months.
Following the release of results for the
Page 22
During fiscal 2017, first quarter, the Board of Directors reduced the fiscal 2017 indicated annual cash dividend rate towas established at $0.50 per share (down from $0.80 per share) in order to align it with the stated policy guidelines of the payout ratio to range between 75% and 85% of each fiscal year’snon-GAAP net earnings. Consistent with this annual indicated dividend rate, a cash dividend of $0.125 per share was declared for each of the first quarterand second quarters of fiscal 2018, representing 83%104% and 93% of the second quarter and first six months diluted earnings per share.share, respectively; 60% and 69% of the periods’ diluted earnings per share on anon-GAAP basis (see “USE OFNON-GAAP MEASURES” above).
Capital Resources
As described in Note 7“Bank Credit Arrangements” of the accompanying Condensed Consolidated Financial Statements, in connection with the acquisition of Magellan, 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. In addition, we have a $30,000 revolving credit facility with a commercial bank that expires March 31, 2021. As of January 31,April 30, 2018, 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 threesix months of fiscal 2018 or during the full year of fiscal 2017.
Our capital expenditures are estimated to range between approximately $4,000 to $5,000 for fiscal 2018, 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 any special-purpose financing vehicles or have any undisclosedoff-balance sheet arrangements.
Page 20
ITEM 3. QUANTITATIVE3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company’s exposure to market risk since September 30, 2017.
ITEM 4. CONTROLS4.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 Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of DecemberMarch 31, 2017.2018. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of DecemberMarch 31, 2017 due to2018.
Remediation of the material weakness identified in our internal control over financial reporting described below.Prior Year Material Weakness
As previously disclosed in the Company’s Annual Report on Form10-K for the fiscal year ended September 30, 2017, a material weakness was identified in the design and operating effectiveness of the Company’s internal control over financial reporting. Specifically, deficiencies were identified related to Information Technology General Controls (“ITGC”) intended to restrict access to certain data and applications, resulting in inappropriate access at both the Information Technology and end user levels within an application impacting financial reporting functions and controls. As a result, we concluded that the Company’s disclosure controls and procedures were not effective in providing reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act was recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information was accumulated and communicated to our management to allow timely decisions regarding required disclosure.
TheIn response to this material weakness, the Company has implemented and continues to implement changes to its internal control over financial reporting to remediate the control deficiencies that gave rise to the material weakness. Since the endweakness originally identified as of the fiscal year, we have takenSeptember 30, 2017. Those changes included, but were not limited to, taking steps to strengthen information technology security and user access controls. We have tested the newly implemented controls and begin the remediation of the material weakness described above. We are working to complete our evaluation, fully implement these controls and identify the appropriate level of documentationfound them to be maintained to evidenceeffective and therefore, have concluded that as of March 31, 2018, the effectiveness of these controls. We believe the remediation measures will strengthen our internal control over financial reporting and remediate the material weakness identified. However, as we are still assessing the design and operating effectiveness of these measures, thepreviously identified material weakness has not been fully remediated as of December 31, 2017. We will continue to monitor the effectiveness of these remediation measures and will make any changes and take such other actions that we deem appropriate.remediated.
Page 23
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in our internal control over financial reporting (as that term is defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended DecemberMarch 31, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Page 21
ITEM 1. LEGAL1.LEGAL PROCEEDINGS
See Note 9“Litigation Matters” and Note 10“Subsequent Events”of the accompanying Condensed Consolidated Financial Statements.
There have been no material changes from risk factors as previously disclosed in the Company’s fiscal 2017 Annual Report onForm10-K in response to Item 1A to Part I of Form10-K.
The following exhibits are being filed or furnished as a part of this Quarterly Report on Form10-Q.
Page 24
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: | By: | /s/ Melissa A. Lueke | ||||
Melissa A. Lueke | ||||||
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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