☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulationand post such files). Yes ☒ No ☐Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
Class | Outstanding January 0 ,2023 | |
Common Stock, no par value |
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM10-Q
Page(s) | ||||||
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements (Unaudited) | |||||
Condensed Consolidated Statements of Operations | | 1 | | |||
2 | ||||||
Condensed Consolidated Statements of Cash Flows | 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. | OTHER INFORMATION | |||||
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 “continues”, “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “signals”, “should”, “can” 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 Bioscience, Inc. (“Meridian” or “the Company”) expects or anticipates will occur in the future, including, but not limited to, statements relating to per share diluted net earnings, sales, product demand, net revenues, operating margin, other guidance and revenue,the impact of COVID-19 on its business and prospects, are forward-looking statements. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Specifically, Meridian’s forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance. Meridian assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following:
Meridian’s operating results, financial condition and continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition, its ability to effectively sell such products and its ability to successfully expand and effectively manage increased sales and marketing operations. While Meridian has introduced a number of internally developed products and acquired products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis or in protecting its intellectual property, and unexpected or costly manufacturing costs associated with the ramp upits introduction of new products or acquired products could cause actual results to differ from expectations. Meridian relies on proprietary, patented and licensed technologies. As such, the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would impact its results. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which ourthe Company’s 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, and in
complying with the ongoing investigation of the Department of Justice described in Meridian’s reports filed with the SEC, 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 that 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 future 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,of current U.S. health care legislation, and any similar initiatives in other countries on itsMeridian’s results of operations. Efforts to reduce the U.S. federal deficit, breaches of Meridian’s information technology systems, trade wars, increased tariffs, and natural disasters and other events could have a materially adverse effect on Meridian’s results of operations and net revenues. We have identifiedThe Company can make no assurances that a material weakness in ourits internal control over financial reporting that,will not be identified in the future, which if identified and not properly corrected, could materially and adversely affect ourits operations and result in material misstatements in ourits consolidated financial statements. Meridian also is subject to risks and uncertainties related to the acquisition by SD Biosensor, Inc., as well as disruptions to or reductions in business operations or prospects due to pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as COVID-19, including, without limitation, related supply chain interruptions. In addition to the factors described in this paragraph, as well as those factors identified from time to time in ourthe Company’s filings with the Securities and Exchange Commission, Part I, Item 1A Risk Factors of ourthe Company’s 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 ourthe Company’s forward-looking statements.
NET REVENUES COST OF SALES GROSS PROFIT OPERATING EXPENSES Research and development Selling and marketing General and administrative CEO transition and litigation costs Total operating expenses OPERATING INCOME OTHER INCOME (EXPENSE) Interest income Interest expense Other, net Total other expense EARNINGS BEFORE INCOME TAXES INCOME TAX PROVISION NET EARNINGS BASIC EARNINGS PER COMMON SHARE DILUTED EARNINGS PER COMMON SHARE WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED ANTI-DILUTIVE SECURITIES: Common share options and restricted share units DIVIDENDS DECLARED PER COMMON SHARE Three Months Ended December 31, NET EARNINGS Other comprehensive income (loss): Foreign currency translation adjustment Unrealized gain on cash flow hedge Income taxes related to items of other comprehensive income Other comprehensive income (loss), net of tax COMPREHENSIVE INCOME Three Months Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net earnings Non-cash items included in net earnings: Depreciation of property, plant and equipment Amortization of intangible assets Amortization of deferred instrument costs Stock-based compensation Deferred income taxes Change in: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable and accrued expenses Income taxes payable Other, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment Net cash used for investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid Payments on term loan Proceeds and tax benefits from exercises of stock options Net cash used for financing activities Effect of Exchange Rate Changes on Cash and Equivalents Net (Decrease) Increase in Cash and Equivalents Cash and Equivalents at Beginning of Period Cash and Equivalents at End of Period CURRENT ASSETS Cash and equivalents Accounts receivable, less allowances of $306 and $307 Inventories Prepaid expenses and other current assets Total current assets PROPERTY, PLANT AND EQUIPMENT, at Cost Land Buildings and improvements Machinery, equipment and furniture Construction in progress Subtotal Less: accumulated depreciation and amortization Net property, plant and equipment OTHER ASSETS Goodwill Other intangible assets, net Restricted cash Deferred instrument costs, net Fair value of interest rate swap Deferred income taxes Other assets Total other assets TOTAL ASSETS CURRENT LIABILITIES Accounts payable Accrued employee compensation costs Current portion of acquisition consideration Other accrued expenses Current portion of long-term debt Income taxes payable Total current liabilities NON-CURRENT LIABILITIES Acquisition consideration Post-employment benefits Long-term debt Long-term income taxes payable Deferred income taxes Totalnon-current liabilities 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 Additionalpaid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Balance at September 30, 2017 Cash dividends paid Conversion of restricted share units Stock compensation expense Net earnings Foreign currency translation adjustment Hedging activity, net of tax Balance at December 31, 2017 Institutional money market funds Cash on hand - Restricted Unrestricted Total Raw materials Work-in-process Finished goods - instruments Finished goods - kits and reagents Total Manufacturing technologies, core products and cell lines Trade names, licenses and patents Customer lists, customer relationships and supply agreements Non-compete agreements manufacturers and researchers. levels in blood. Anticipated recall-related costs primarily include temporary labor costs, product replacement and/or refund costs, mailing/shipping costs, attorneys’ fees and other miscellaneous costs. Information utilized in the accrual estimation process includes observable inputs such as customer Three Months Ended December 31, 2017 Net revenues - Third-party Inter-segment Operating income Goodwill (December 31, 2017) Other intangible assets, net (December 31, 2017) Total assets (December 31, 2017) Three Months Ended December 31, 2016 Net revenues - Third-party Inter-segment Operating income Goodwill (September 30, 2017) Other intangible assets, net (September 30, 2017) Total assets (September 30, 2017) Three Months Ended December 31, 2017 2016 $ 52,283 $ 46,809 20,497 17,770 31,786 29,039 4,496 3,597 8,842 7,618 8,904 7,739 1,483 — 23,725 18,954 8,061 10,085 72 22 (395 ) (423 ) (80 ) (25 ) (403 ) (426 ) 7,658 9,659 1,356 3,380 $ 6,302 $ 6,279 $ 0.15 $ 0.15 $ 0.15 $ 0.15 42,263 42,159 399 376 42,662 42,535 1,034 715 $ 0.125 $ 0.20
December 31, NET REVENUES $ 56,902 $ 88,341 COST OF SALES 25,397 39,182 GROSS PROFIT 31,505 49,159 OPERATING EXPENSES Research and development 6,177 6,194 Selling and marketing 8,294 7,741 General and administrative 11,073 14,660 Acquisition and transaction related costs 1,188 — Litigation and select legal costs 32,888 281 Total operating expenses 59,620 28,876 OPERATING INCOME (LOSS) (28,115 ) 20,283 OTHER INCOME (EXPENSE) Interest income 3 1 Interest expense (148 ) (372 ) Other, net (837 ) (161 ) Total other expense, net (982 ) (532 ) (29,097 ) 19,751 INCOME TAX PROVISION 724 4,411 NET EARNINGS (LOSS) $ (29,821 ) $ 15,340 BASIC EARNINGS (LOSS) PER COMMON SHARE $ (0.68 ) $ 0.35 DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (0.68 ) $ 0.35 43,896 43,439 EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS — 589 43,896 44,028 ANTI-DILUTIVE SECURITIES: Common share options and restricted share units 813 425 2017 2016 $ 6,302 $ 6,279 291 (1,423 ) 341 1,560 (112 ) (589 ) 520 (452 ) $ 6,822 $ 5,827
December 31, NET EARNINGS (LOSS) $ (29,821 ) $ 15,340 Other comprehensive income (loss): Foreign currency translation adjustment 3,481 (58 ) (68 ) 550 Income taxes related to items of other comprehensive income (loss) 17 (135 ) Other comprehensive income, net of tax 3,430 357 COMPREHENSIVE INCOME (LOSS) $ (26,391 ) $ 15,697 2017 2016 $ 6,302 $ 6,279 1,146 1,078 938 968 201 257 1,759 1,884 (1,624 ) 2,091 (2,989 ) 2,191 (2,353 ) (169 ) 87 (406 ) 1,315 (913 ) 497 44 (108 ) (311 ) 5,171 12,993 (1,234 ) (1,392 ) (1,234 ) (1,392 ) (5,288 ) (8,440 ) (1,125 ) (750 ) — 301 (6,413 ) (8,889 ) 115 (662 ) (2,361 ) 2,050 57,072 47,226 $ 54,711 $ 49,276
December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (29,821 ) $ 15,340 Depreciation of property, plant and equipment 1,643 1,700 Amortization of intangible assets 2,541 2,483 Stock compensation expense 1,393 1,903 Deferred income taxes 216 927 Estimated litigation costs 32,000 — Change in the following, net of acquisition: Accounts receivable 6,083 9,424 Inventories (3,496 ) 2,093 Prepaid expenses and other current assets 894 200 Accounts payable and accrued expenses (10,833 ) 1,018 Income taxes payable (2,023 ) 1,113 Other, net (946 ) (646 ) (2,349 ) 35,555 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (2,654 ) (1,708 ) Acquisition, net of holdback (2,000 ) — Net cash used in investing activities (4,654 ) (1,708 ) CASH FLOWS FROM FINANCING ACTIVITIES Payment on revolving credit facility — (10,000 ) Payment of deferred financing costs — (404 ) Proceeds from exercise of stock options 799 80 Employee taxes paid upon net share settlement of restricted share units (3,323 ) (763 ) Net cash used in financing activities (2,524 ) (11,087 ) Effect of Exchange Rate Changes on Cash and Cash Equivalents 2,172 198 Net Increase (Decrease) in Cash and Cash Equivalents (7,355 ) 22,958 Cash and Cash Equivalents at Beginning of Period 81,453 49,771 Cash and Cash Equivalents at End of Period $ 74,098 $ 72,729 December 31,
2017
(Unaudited) September 30,
2017 $ 54,711 $ 57,072 32,136 29,106 43,644 41,493 6,126 6,204 136,617 133,875 1,164 1,162 32,244 32,207 49,367 48,836 2,374 1,895 85,149 84,100 54,749 53,590 30,400 30,510 54,997 54,926 25,777 26,704 1,000 1,000 1,415 1,368 1,156 815 146 158 443 421 84,934 85,392 $ 251,951 $ 249,777 CURRENT ASSETS Cash and cash equivalents $ 74,098 $ 81,453 41,573 47,235 Inventories, net 72,663 67,814 Prepaid expenses and other current assets 13,200 14,095 Total current assets 201,534 210,597 PROPERTY, PLANT AND EQUIPMENT Land 979 968 Buildings and improvements 33,068 32,983 Machinery, equipment and furniture 86,732 79,517 Construction in progress 5,693 10,589 Subtotal 126,472 124,057 Less: accumulated depreciation and amortization 81,051 79,199 Net property, plant and equipment 45,421 44,858 OTHER ASSETS Goodwill 120,567 116,302 Other intangible assets, net 71,572 74,131 6,041 5,850 Deferred income taxes 9,650 9,278 Other assets 1,978 2,081 Total other assets 209,808 207,642 TOTAL ASSETS $ 456,763 $ 463,097 dollarsdollar amounts in thousands) December 31,
2017
(Unaudited) September 30,
2017 $ 8,507 $ 7,719 4,801 4,536 2,095 2,095 2,795 2,789 4,500 4,500 776 1,248 23,474 22,887 235 235 2,551 2,468 49,030 50,147 854 — 2,929 4,455 55,599 57,305 — — — — 127,367 125,608 47,937 46,923 (2,426 ) (2,946 ) 172,878 169,585 $ 251,951 $ 249,777
2022
2022 CURRENT LIABILITIES Accounts payable $ 14,413 $ 17,759 Accrued employee compensation costs 9,894 17,682 Accrued estimated litigation costs 42,000 10,000 Accrued product recall costs 997 1,157 Current operating lease obligations 1,954 1,830 Current government grant obligations 799 667 Other accrued expenses 6,288 5,048 Income taxes payable 2,232 3,808 Total current liabilities 78,577 57,951 Post-employment benefits 1,728 1,673 Long-term operating lease obligations 4,187 4,127 Long-term debt 25,000 25,000 Government grant obligations 4,521 4,620 Long-term income taxes payable 395 395 Deferred income taxes 1,104 578 712 692 37,647 37,085 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, 43,999,659 and 43,755,188 shares issued and outstanding, respectively — — 154,533 155,664 Treasury stock, at cost, 9,655 shares (259 ) (259 ) Retained earnings 193,339 223,160 Accumulated other comprehensive loss (7,074 ) (10,504 ) Total shareholders’ equity 340,539 368,061 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 456,763 $ 463,097 StatementStatements of Changes in Shareholders’ Equity (Unaudited)dollarsdollar and sharesshare amounts in thousands) Common
Shares
Issued Additional
Paid-In
Capital Retained
Earnings Accumulated Other
Comprehensive
Income (Loss) Total
Shareholders’
Equity 42,207 $ 125,608 $ 46,923 $ (2,946 ) $ 169,585 — — (5,288 ) — (5,288 ) 100 — — — — — 1,759 — — 1,759 — — 6,302 — 6,302 — — — 291 291 — — — 229 229 42,307 $ 127,367 $ 47,937 $ (2,426 ) $ 172,878
Shares
Capital
Earnings
Income (Loss)
Shareholders’
Equity 43,755 $ 155,664 (10 ) $ (259 ) $ 223,160 $ (10,504) $ 368,061 Conversion of restricted share units and exercise of stock options 245 (2,524 ) — — — — (2,524 ) Stock compensation expense — 1,393 — — — — 1,393 Net loss — — — — (29,821 ) — (29,821 ) Foreign currency translation adjustment — — — — — 3,481 3,481 Hedging activity, net of tax — —�� — — — (51 ) (51 ) 44,000 $ 154,533 (10 ) $ (259 ) $ 193,339 $ (7,074) $ 340,539 43,362 $ 147,403 — $ — $ 180,701 $ 198 $ 328,302 Conversion of restricted share units and exercise of stock options 152 (683 ) — — — — (683 ) Stock compensation expense — 1,903 — — — — 1,903 Net earnings — — — — 15,340 — 15,340 Foreign currency translation adjustment — — — — — (58 ) (58 ) Hedging activity, net of tax — — — — — 415 415 43,514 $ 148,623 — $ — $ 196,041 $ 555 $ 345,219 BasisPresentationBusinessThe 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 condensedomitted 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 December 31, 2017, the results of its operations for the three month periods ended December 31, 2017 and 2016, and its cash flows for the three month periods ended December 31, 2017 and 2016. 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 Form 10-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 PoliciesA 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.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.Page 7Reclassifications –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 EquivalentsCash and equivalents include the following components: December 31, 2017 September 30, 2017 Cash and
Equivalents Other
Assets Cash and
Equivalents Other
Assets $ 20,155 $ — $ 20,104 $ — — 1,000 — 1,000 34,556 — 36,968 — $ 54,711 $ 1,000 $ 57,072 $ 1,000 4.InventoriesInventories are comprised of the following: December 31,
2017 September 30,
2017 $ 7,989 $ 6,575 12,110 11,559 1,271 1,460 22,274 21,899 $ 43,644 $ 41,493 5.Intangible AssetsA summary of our acquired intangible assets subject to amortization, as of December 31, 2017 and September 30, 2017, is as follows: December 31, 2017 September 30, 2017 Gross
Carrying
Value Accumulated
Amortization Gross
Carrying
Value Accumulated
Amortization $ 22,341 $ 13,117 $ 22,332 $ 12,807 8,699 4,632 8,689 4,398 24,586 12,190 24,562 11,854 720 630 720 540 $ 56,346 $ 30,569 $ 56,303 $ 29,599 Page 8The actual aggregate amortization expense for these intangible assets was $938 and $968 for the three months ended December 31, 2017 and 2016, 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, fiscal 2019 – $3,343, fiscal 2020 – $3,178, fiscal 2021 – $2,561, 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 account 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 fiscal 2018, we incurred approximately $500 in Quality System remediation costs, primarily related to regulatory consultants.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”“the Company”). 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.6.Income TaxesOn 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 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 quarter ended December 31, 2017 reflect these effects of the tax reform act as provisional based on a reasonable estimate of the income tax effects. We have included a provisional non-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 December 31, 2017. We recorded aone-time tax benefit of $1,695 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 rate of 24.5%. The remaining temporary differences werere-measured at 21%.Page 97.Bank Credit ArrangementsIn 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, 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 December 31, 2017 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 December 31, 2017 and September 30, 2017, the fair value of the interest rate swap was $1,156 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.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 December 31, 2017 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 December 31, 2017, 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 Segment and Major Customers InformationMeridian was formed in 1976 and functions as a fully-integrated life science company with principal businesses inin: (i) the development, manufacture, sale and distribution of diagnostic testtesting systems and kits, primarily for certain gastrointestinal viral,and respiratory and parasitic infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCRimmunoassay blocking reagents, various Polymerase Chain Reaction (“PCR”) master mixes, isothermal mixes, enzymes, nucleotides, competent cells, and bioresearch reagents used by researchers and other diagnostic manufacturers.ofof: (i) manufacturing operations for infectious disease products in Cincinnati, Ohio; Magellan’sQuebec City, Canada; and Modi’in, Israel; (ii) manufacturing operations for blood chemistry products detecting elevated lead levels in blood in Billerica, Massachusetts (near Boston);Massachusetts; and (iii) 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.ofof: (i) manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; North Brunswick, New Jersey; London, England; and Luckenwalde, Germany;Sydney, Australia; and(ii) the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents domestically and abroad, including a sales and business development andfacility, with outsourced distribution facilitiescapabilities, 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 in vitro medical device manufacturing, microRNA detection, next-gennext-generation sequencing, plant genotyping, and mutation detection, among others).Page 10Amounts due from two Diagnostics distributor customers accounted25%interim financial information, and 11%the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the Condensed Consolidated Financial Statements include all normal adjustments and disclosures necessary to present fairly the Company’s consolidated accounts receivable atfinancial position as of December 31, 20172022, and the results of its operations, cash flows, and shareholders’ equity for the three months ended December 31, 2022 and 2021. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s fiscal 2022 Annual Report on Form Americas $ 33,182 $ 26,613 25 % EMEA 5,694 6,093 (7 )% ROW 490 498 (2 )% Total Diagnostics 39,366 33,204 19 % Life Science- Americas 5,859 8,137 (28 )% EMEA 6,944 28,648 (76 )% ROW 4,733 18,352 (74 )% Total Life Science 17,536 55,137 (68 )% Consolidated $ 56,902 $ 88,341 (36 )% Molecular assays $ 4,490 $ 4,752 (6 )% 34,876 28,452 23 % Total Diagnostics 39,366 33,204 19 % Life Science- Molecular reagents 7,574 31,488 (76 )% Immunological reagents 9,962 23,649 (58 )% Total Life Science 17,536 55,137 (68 )% Consolidated $ 56,902 $ 88,341 (36 )% Diagnostics- Gastrointestinal assays $ 21,273 $ 21,619 (2 )% Respiratory illness assays 6,714 6,380 5 % Blood chemistry assays 4,620 78 5823 % Other 6,759 5,127 32 % Total Diagnostics $ 39,366 $ 33,204 19 % 2017, respectively. Revenues from these two distributor customers accounted for 38% and 23%2022 Condensed Consolidated Balance Sheets, respectively:
Inputs Considered as Interest rate swap agreements - $ 1,353 $ — $ 1,353 $ — $ 1,421 $ — $ 1,421 $ — Diagnosticsassets of Estel for $3,500 in cash, of which $2,000 was paid at closing, with the remainder held back pending the achievement of certain milestones, which is payable within 18 months of the acquisition date. The amount held back is recorded in other accrued expenses ($1,125) and otherthird-party revenuesand is not expected to be deductible for income tax purposes. The preliminary purchase price allocation may change in the future as the fair valuing of assets is completed.20172022. 2016, respectively,is payable within 18 months of the acquisition date. EUPROTEIN offers custom development and represented 27%production of high-quality bioresearch reagents, with a particular focus on human and 17%other mammalian proteins and recombinant monoclonal antibodies. The acquired assets of consolidated revenues forEUPROTEIN are included within the fiscal 2018 and 2017 first quarters, respectively.Within our Life Science segment two diagnostic manufacturingand are expected to help the Company accelerate its pipeline of new immunological reagents, while expanding recombinant capabilities. The acquired assets, which are comprised of goodwill, property, plant and equipment, prepaid expenses, and inventories, were valued on April 30, 2022, on a preliminary basis at $3,947, $279, $14 and $10, respectively. The goodwill for EUPROTEIN is attributable to combining EUPROTEIN and Meridian’s products and capabilities to give the Company’s customers accountedaccess to new immunological reagents. The goodwill is not expected to be deductible for 15% and 19%income tax purposes. The preliminary purchase price allocation may change in the future as the fair valuing of assets is completed.segment’s third-party revenuespreliminary purchase price allocation during the three months ended December 31, 20172022. 2016,EUPROTEIN businesses, Estel and EUPROTEIN are not expected to contribute materially to net revenues and net earnings
2022
2022 Institutional money market funds $ 1,027 $ 1,027 Cash on hand, unrestricted 73,071 80,426 Total $ 74,098 $ 81,453
2022
2022 Raw materials $ 18,063 $ 15,726 25,329 21,570 Finished goods - instruments 2,126 1,796 Finished goods - kits and reagents 27,145 28,722 Total $ 72,663 $ 67,814
Carrying
Value
Amortization
Carrying
Value
Amortization Manufacturing technologies, core products and cell lines $ 56,380 $ 21,366 $ 56,289 $ 20,321 Trade names, licenses and patents 18,363 10,906 18,257 10,491 Customer lists, customer relationships and supply agreements 52,829 23,779 52,703 22,363 110 59 110 53 Total $ 127,682 $ 56,110 $ 127,359 $ 53,228 Lease costs within cost of sales $ 226 $ 225 Lease costs within operating expenses 349 388 423 218
2022
2022 Weighted average remaining lease term 3.6 years 3.9 years Average discount rate 3.5 % 3.5 % 2023 (represents remainder of fiscal year) $ 1,571 2024 1,796 2025 1,519 2026 796 2027 545 Thereafter 136 Total lease payments 6,363 Less amount of lease payments representing interest (222 ) Total present value of lease payments $ 6,141 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 580 $ 627
2022
2022 Current liabilities $ 799 $ 667 $ 4,521 $ 4,620 Diagnostics Life
Science Eliminations(1) Total $ 37,490 $ 14,793 $ — $ 52,283 121 192 (313 ) — 5,291 2,784 (14 ) 8,061 35,213 19,784 — 54,997 24,202 1,575 — 25,777 179,943 72,480 (472 ) 251,951 $ 33,808 $ 13,001 $ — $ 46,809 79 125 (204 ) — 6,643 3,267 175 10,085 35,213 19,713 — 54,926 24,973 1,731 — 26,704 180,226 69,938 (387 ) 249,777 Net revenues - Third-party $ 39,366 $ 17,536 $ — $ — $ 56,902 Inter-segment 86 8 — (94 ) — 3,160 5,383 (36,693 ) 35 (28,115 ) Goodwill (December 31, 2022) 94,432 26,135 — — 120,567 Other intangible assets, net (December 31, 2022) 71,570 2 — — 71,572 Total assets (December 31, 2022) 353,997 102,775 — (9 ) 456,763 Net revenues - Third-party $ 33,204 $ 55,137 $ — $ — $ 88,341 Inter-segment 34 55 — (89 ) — Operating income (loss) (1,763 ) 26,602 (4,571 ) 15 20,283 Goodwill (September 30, 2022) 94,412 21,890 — — 116,302 Other intangible assets, net (September 30, 2022) 74,129 2 — — 74,131 Total assets (September 30, 2022) 357,630 105,511 — (44 ) 463,097 (1) Includes acquisition and transaction related costs and litigation and select legal costs of $34,048 and $281 in the three months ended December 31, 2022 and 2021, respectively. (2) Eliminations consist of inter-segment transactions. Diagnostics segment $ 3,160 $ (1,763) Life Science segment 5,383 26,602 Eliminations 35 15 Total operating income 8,578 24,854 Corporate expenses (36,693 ) (4,571 ) Interest income 3 1 Interest expense (148 ) (372 ) Other, net (837 ) (161 ) $ (29,097 ) $ 19,751 2021 Customer A 7 % 10 % Customer B 10 % 11 % Customer C 12 % 11 % — % 23 % 4 % 14 % 12 % 5 % 2021 Customer D — % 14 % 9.Legal MattersMay 17, 2017,July 7, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”) with SD Biosensor, Inc., a corporation with limited liability organized under the laws of the Republic of Korea (“SDB”), Columbus Holding Company, a Delaware corporation (“Parent”), and Madeira Acquisition Corp., an Ohio corporation and a direct wholly owned subsidiary of Parent (“Merger Sub,” and together with SDB and Parent, the “Parent Parties”). Pursuant to the Merger Agreement, Merger Sub merged with and into Meridian filed(the “Merger”), with Meridian surviving the Merger as a complaintdirect wholly owned subsidiary of Parent.United States District Court forMerger Agreement through the Southern Districtcompletion of Ohio, Western Division (Cincinnati) naming DiaSorin Inc. (“DiaSorin”) as a defendant. Meridian’s complaint alleges DiaSorin has breached the 2010Co-DevelopmentMerger. Under the Letter Agreement, Meridian and License Agreement (the “Agreement”) between it and Meridian relatingthe Parent Parties also agreed to, among other things, consummate theco-development Merger on January 31, 2023.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 Merger Agreement and used,the Letter Agreement, and Parent, which at the time of Closing was wholly-owned and controlled by SDB, became the sole shareholder of Meridian. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Meridian’s common stock (subject to certain exceptions set forth in the Merger Agreement) was canceled and converted into the right to receivecurrently using,subject to, and qualified in its entirety by, the full text of (i) the Merger Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s proprietary informationCurrent Report on Formtherefore seeks injunctive reliefis incorporated herein by reference, and (ii) the Letter Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to protect Meridian’s intellectual propertyCurrent Report on Forminformation with respect to its diagnostics products. Approximately $730is incorporated herein by reference.expenseapproximately $1,160 during the three months ended December 31, 2022 related to this matterthe Merger, which is included withinrecorded in acquisition and transaction related costs in the accompanying Condensed Consolidated Statement of Operations forOperations.fiscal quarter ended December 31, 2017.Page 11On November 15, 2017, Barbara Forman filed a class action complaintMerger was consummated in accordance with 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. 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 complaint seeks compensatory damages, injunctive relief and attorneys’ fees to all membersterms of the proposed class. BecauseMerger Agreement and the litigationLetter Agreement, as described in Note 17. Upon completion of the Merger, effective January 31, 2023:related discovery are in preliminary stages, we do not have sufficient information to determine or predictAndrew Kitzmiller as 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 quarter ended December 31, 2017.On December 6, 2017, Michael Edelson filed a class action complaint in the United States District Court for the Southern District of Ohio naming Meridian, its Chief Executive Officer, Chief Financial Officer and certain memberssole directors of Meridian’s Board of Directors (the “Board”), and Audit Committee (inall other previously named directors tendered their capacities as such) as defendants. The complaint allegesresignations and resigned from the Board effective January 31, 2023;Meridian made false and misleading representations concerning certain of Magellan’s lead test systems at or around the timeNasdaq (A) suspend trading of Meridian’s acquisitioncommon stock effective before the opening of Magellantrading on January 31, 2023, and subsequent thereto,(B) file with the SEC a Form 25 Notification of Removal from Listing and/or Registration to delist and deregister the complaint alleges that certain membersShares under Section 12(b) of the BoardSecurities Exchange Act of Directors1934, as amended (the “Exchange Act”);Audit Committee breached their fiduciary dutiesRestated Credit Agreement, dated as of October 25, 2021, by and among Meridian, as borrower, the guarantors party thereto, the lenders party thereto, PNC Bank,oversightentirety by reference to the respective agreements, articles of incorporation and other documents, each of which are attached as an exhibit to our Current Report on FormCompany’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 quarter ended December 31, 2017.SEC on February 1, 2023.
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
The purpose of Management’s Discussion and Analysis is a discussion and analysisto provide an understanding 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.operations of Meridian Bioscience, Inc. (“Meridian”, the “Company”, “We”). 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 highlighted by the following, the effects of which are discussed throughout this MD&A:
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RESULTS OF OPERATIONS
Three Months Ended December 31, 2017
Net earnings for the first quarter of fiscal 2018 totaled $6,302, 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 per diluted share. The fiscal 2018 first quarter results include $1,483 of costs associated with the transition to our new CEO and litigation costs (collectively, “CEO transition and litigation costs”) (see Note 9 of the accompanying Condensed Consolidated Financial Statements), along withStatements and notes. It should be noted that the terms revenue and/or revenues are utilized throughout the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) to indicate net revenue and/or net revenues. In addition, throughout the MD&A, we refer to certainone-time tax effects product tradenames and trademarks, which are protected under applicable intellectual property laws and are our property. Solely for convenience, these tradenames and trademarks are referred to without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent of the recently-enacted U.S. tax reform act. These items impacted earnings by $239, or less than $0.01 per diluted share on a net basis (see “USE OFNON-GAAP MEASURES” below). Consolidated revenues increased 12%law, our rights to $52,283 for the first quarter of fiscal 2018 compared to the same period of the prior year (10% on a constant-currency basis).these tradenames and trademarks.
Revenues for the Diagnostics segment for the first quarter of fiscal 2018 increased 11% compared to the first quarter of fiscal 2017 (10% on a constant-currency basis), comprised of a 12% increase in molecular assay products and a 10% increase in immunoassay and lead testing products. With 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 for 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 utilizing capillary blood samples have been placed in physician offices and clinics. Quality System remediation costs in the first quarter 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 costs in the remainder of fiscal 2018 are expected 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. 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 this time, we do not anticipate any further significant impact on our results of operations or financial condition.
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 CEO transition 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 fiscal quarters ended December 31, 2017 and December 31, 2016.
We believe that this information is useful to those who read our financial statements and evaluate our operating results because:
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 Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net Earnings - | ||||||||
U.S. GAAP basis | $ | 6,302 | $ | 6,279 | ||||
CEO transition and litigation costs (1) | 1,080 | — | ||||||
One-time benefit from tax law change | (1,695 | ) | — | |||||
Repatriation transition tax | 854 | — | ||||||
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Adjusted earnings | $ | 6,541 | $ | 6,279 | ||||
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Net Earnings per Basic Common Share - | ||||||||
U.S. GAAP basis | $ | 0.15 | $ | 0.15 | ||||
CEO transition and litigation costs (1) | 0.03 | — | ||||||
One-time benefit from tax law change | (0.04 | ) | — | |||||
Repatriation transition tax | 0.02 | — | ||||||
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Adjusted Basic EPS (2) | $ | 0.15 | $ | 0.15 | ||||
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Net Earnings per Diluted Common Share - | ||||||||
U.S. GAAP basis | $ | 0.15 | $ | 0.15 | ||||
CEO transition and litigation costs (1) | 0.03 | — | ||||||
One-time benefit from tax law change | (0.04 | ) | — | |||||
Repatriation transition tax | 0.02 | — | ||||||
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Adjusted Diluted EPS (2) | $ | 0.15 | $ | 0.15 | ||||
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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 RegionSegments
Our reportable segments are Diagnostics and Life Science, withScience. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio; Quebec City, Canada; and Modi’in, Israel; and manufacturing operations for blood chemistry products in Billerica, Massachusetts. These diagnostic test products are 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 descriptionThe Life Science segment consists of our segmentsmanufacturing operations in Memphis, Tennessee; Boca Raton, Florida; North Brunswick, New Jersey; London, England; and Luckenwalde, Germany, and the sale and distribution of bulk antigens, antibodies, immunoassay blocking reagents, various Polymerase Chain Reaction (“PCR”) and isothermal amplification master mixes, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to further pursue growing revenue opportunities in Asia.
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Recent Developments
Agreement and Plan of Merger
On July 7, 2022, the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the “Merger Agreement”) with SD Biosensor, Inc., a corporation with limited liability organized under the laws of the Republic of Korea (“SDB”), Columbus Holding Company, a Delaware corporation (“Parent”), and Madeira Acquisition Corp., an Ohio corporation and a direct wholly owned subsidiary of Parent (“Merger Sub,” and together with SDB and Parent, the “Parent Parties”). Pursuant to the Merger Agreement, Merger Sub merged with and into Meridian (the “Merger”), with Meridian surviving the Merger as a direct wholly owned subsidiary of Parent.
On December 9, 2022, Meridian and the Parent Parties entered into a Letter Agreement (the “Letter Agreement”), modifying the Merger Agreement, such that all of the conditions to the Parent Parties’ obligation to complete the Merger have been satisfied (and are deemed to remain satisfied through the completion of the Merger), provided that Meridian is required to comply with certain covenants in the Merger Agreement through the completion of the Merger. Under the Letter Agreement, Meridian and the Parent Parties also agreed to, among other things, consummate the Merger on January 31, 2023.
On January 31, 2023, the Merger was consummated in accordance with the terms of the Merger Agreement and the Letter Agreement, and Parent, which at the time of Closing was wholly-owned and controlled by SDB, became the sole shareholder of Meridian. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Meridian’s common stock (subject to certain exceptions set forth in the Merger Agreement) was canceled and converted into the right to receive $34.00 in cash, without interest (the “Merger Consideration”). See Note 818, “Subsequent Events” of the accompanying Condensed Consolidated Financial Statements.Statements regarding consummation of the Merger.
The foregoing description of the Merger, the Merger Agreement, and the Letter Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of (i) the Merger Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s Current Report on Form 8-K filed on July 7, 2022 and is incorporated herein by reference, and (ii) the Letter Agreement, a copy of which was filed by Meridian as Exhibit 2.1 to Meridian’s Current Report on Form 8-K filed on December 12, 2022 and is incorporated herein by reference.
The Company incurred transaction related costs of approximately $1,160 during the three months ended December 31, 2022 related to the Merger, which is recorded in acquisition and transaction related costs in the Condensed Consolidated Statement of Operations.
Impact of COVID-19 Pandemic
Starting in the latter half of fiscal 2020 and continuing to the date of this filing, the ongoing COVID-19 pandemic has had both positive and negative effects on our business.
Our Life Science segment’s products were well positioned to respond to in vitro device (“IVD”) manufacturers’ increased demand for reagents used in the manufacture of molecular, rapid antigen and serology tests. Consequently, through the end of the second quarter of fiscal 2022, our Life Science segment consistently delivered significantly higher levels of net revenues and operating income than those achieved prior to the COVID-19 pandemic, with the peak to date in such levels occurring during the second quarter of fiscal 2022. This revenue peak has been followed by a significant decrease in such net revenue levels since the second quarter of fiscal 2022, reflecting the softening in demand for COVID-19 related reagents.
Our Diagnostics segment, on the other hand, has generally been negatively impacted by health systems’ increased focus on COVID-19 testing over traditional infectious disease testing. Revenues from our respiratory illness assays were most dramatically impacted by the COVID-19 pandemic. However, we are continuing to experience what we believe to be a continuation of a return to pre-pandemic activity levels.
There continues to be many uncertainties surrounding the COVID-19 pandemic, and we can provide no assurances with respect to our views of the longevity or severity of the positive or negative impacts to our consolidated financial condition of the ongoing COVID-19 pandemic.
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Employee Safety
While the majority of our employee base has returned to working on-site at our facilities, we have implemented a hybrid work-from-home program for certain personnel whose on-site presence has been deemed to be non-essential. We also continue to utilize enhanced cleaning and sanitizing procedures, and provide additional personal hygiene supplies at all our sites. We have implemented policies for employees to adhere to Centers for Disease Control and Prevention (“CDC”) guidelines on social distancing, and similar guidelines by authorities outside the U.S. To date, we have been able to manufacture and distribute products globally, and all our sites have continued to operate with little, if any, impact on shipments to customers. As the COVID-19 pandemic continues, along with continuing governmental restrictions which vary by locale and jurisdiction, there is an increased risk of employee absenteeism, which could materially impact our operations at one or more sites. To date, the steps we have taken, including our work-from-home processes, have not materially impacted the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls.
Supply Chains
Supply chains supporting our products have generally remained intact, providing access to sufficient inventory of the key materials needed for manufacturing. While we have experienced extended lead times for certain select raw materials, delays and allocations for raw materials have to date been limited and have not had a material impact on our results of operations. From time to time, we identify alternative suppliers to address the risk of a current supplier’s inability to deliver materials in volumes sufficient to meet our manufacturing needs; or we may choose to purchase certain materials in bulk volumes where we have supply chain scarcity concerns. It remains possible that we may experience some sort of interruption to our supply chains, and such an interruption could materially affect our ability to timely manufacture and distribute our products and unfavorably impact our results of operations.
Since the second half of fiscal 2021, we have experienced input cost inflation, including materials, labor and transportation costs. Pricing actions and supply chain productivity initiatives have mitigated and are expected to continue to mitigate some of these inflationary pressures, but we may not be successful in fully offsetting these incremental costs, which could have an impact on the Company’s results of operations and cash flows in the future.
Product Development and Clinical Trials
Our Diagnostics segment’s new product development programs are continuing to progress at a slower pace than normal, due in part to the prevalence of certain infectious diseases having been lower than normal during the COVID-19 pandemic. These matters continue to impact our timing for filing applications for product clearances with the U.S. Food and Drug Administration (“FDA”), as well as related timing of FDA clearances of such filings. Additionally, the ongoing COVID-19 pandemic has slowed and could continue to slow down our efforts to expand our product portfolio, impacting the speed with which we are able to bring additional products to market.
Lead Testing Matters
On September 1, 2021, the Company’s wholly owned subsidiary Magellan announced the expansion of the Class I voluntary recall of its LeadCare test kits for the detection of lead in blood, which it had initiated in May 2021 after identifying an issue in certain manufactured lots of its LeadCare test kits. As a result of the identified issue, impacted test kit lots could potentially underestimate blood lead levels when processing patient blood samples. Although it was initially believed that the root cause of the issue related to the plastic containers used for the treatment reagent, additional studies have indicated that the root cause related to the third-party-sourced cardboard trays that held the treatment reagent containers. Upon correction of the identified supplier issue, shipment of product resumed during the second quarter of fiscal 2022. The Company continues to work closely with the FDA in its execution of the recall activities, which has included Magellan notifying customers and distributors affected by the recall and providing instructions for the return of impacted test kits. Remaining accrued LeadCare product recall costs totaling approximately $177 and $430 are reflected within the Condensed Consolidated Balance Sheets at December 31, 2022 and September 30, 2022, respectively. Anticipated recall-related costs primarily include temporary labor costs, product replacement and/or refund costs, mailing/shipping costs, attorneys’ fees and other miscellaneous costs.
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On April 17, 2018, the Company’s wholly owned subsidiary Magellan received a subpoena from the U.S. Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlined documents to be produced, and the Company is cooperating with the DOJ in this matter. The Company maintains rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements and is working with the DOJ to promptly respond to the subpoena, including responding to additional information requests that have followed receipt of the subpoena in April 2018. The Company has executed tolling agreements to extend the statute of limitations. In March and April 2021, DOJ issued two subpoenas, both to former employees of Magellan, calling for witnesses to testify before a federal grand jury related to this matter. In September and October 2021, DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. It is the Company’s understanding that multiple witnesses have testified before the federal grand jury and the DOJ’s investigation is ongoing. Discussions continue with the DOJ to explore resolution of the matter. The Company believes a loss is probable in the DOJ LeadCare legal matter and, in accordance with applicable accounting guidance, has accrued $42,000 and $10,000 as of December 31, 2022 and September 30, 2022, respectively, as an estimate of the cost to resolve the DOJ LeadCare legal matter. The increase in the estimated cost to resolve the DOJ LeadCare legal matter is based upon additional information received by the Company during discussions held with the DOJ subsequent to September 30, 2022. The $32,000 expense resulting from the increase in the accrual is reflected in litigation and select legal costs within the Condensed Consolidated Statement of Operations for the three months ended December 31, 2022. The Company cannot predict when the investigation will be resolved or the outcome of the investigation, and the ultimate resolution of the DOJ LeadCare legal matter may exceed the amount accrued at December 31, 2022 and could be material to the Company. Approximately $814 and $281 of expense for attorneys’ fees related to this matter is included within the Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and 2021, respectively.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2022
A net loss of $29,821, or $0.68 per diluted share, was generated during the first quarter of fiscal 2023, compared to $15,340 of net earnings, or $0.35 per diluted share, during the first quarter of fiscal 2022. The net loss in the first quarter of fiscal 2023 reflects primarily the overall increase in operating expenses described in the Operating Expenses section below, along with the decline in net revenues and operating income in our Life Science segment, stemming from the dramatic softening in demand for COVID-19 related reagents during the quarter.
Consolidated net revenues for the first quarter of fiscal 2023 totaled $56,902, a decrease of 36% compared to the first quarter of fiscal 2022.
Net revenues from the Diagnostics segment for the first quarter of fiscal 2023 increased 19% to $39,366, compared to the first quarter of fiscal 2022, comprised of a 23% increase in non-molecular assay products, partially offset by a 6% decrease in molecular assay products. The first quarter of fiscal 2023 represents the seventh consecutive quarter our Diagnostics segment has shown positive revenue growth versus the same quarter in the prior fiscal year. Our Diagnostics segment generated $3,160 of operating income in the first quarter of fiscal 2023, compared to an operating loss of $1,763 in the first quarter of fiscal 2022, reflecting the increase in net revenues and gross profit margins, along with relatively flat operating expenses, as described in the respective sections below.
With a 76% decrease in net revenues from molecular reagents products and a 58% decrease in net revenues from immunological reagents products, net revenues for our Life Science segment decreased 68% during the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. Our Life Science segment generated $5,383 of operating income, or a margin of 31%, for the first quarter of fiscal 2023, a decrease of $21,219 from $26,602, or a margin of 48%, achieved in the first quarter of fiscal 2022. This decrease primarily results the decrease in net revenues and associated gross profit, which result in large part from the aforementioned dramatic softening in demand for COVID-19 related reagents.
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REVENUE OVERVIEW
Below are analyses of the Company’s net revenues, provided for each of the following:
- By Reportable Segment & Geographic Region
- By Product Platform/Type
Revenue Overview- By Reportable Segment & Geographic Region
Revenues for the Diagnostics segment, in the normal course of business, may be affected from quarteryear to quarteryear by buying patterns of major distributors and reference laboratories, seasonality and the severity of seasonal diseases and outbreaks (including the ongoing COVID-19 pandemic), and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from quarteryear to quarteryear by buying patterns of major IVD manufacturing customers, severity of disease outbreaks (specifically the ongoing COVID-19 pandemic), and foreign currency exchange rates. We believe that
See the overall breadth“Revenue Disaggregation” section of our product lines serves to reduce the variability in consolidated revenues due to these factors.
Three Months Ended December 31, | ||||||||||||
2017 | 2016 | Inc (Dec) | ||||||||||
Diagnostics - | ||||||||||||
Americas | $ | 31,462 | $ | 27,569 | 14 | % | ||||||
EMEA | 5,341 | 5,662 | (6 | )% | ||||||||
ROW | 687 | 577 | 19 | % | ||||||||
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Total Diagnostics | 37,490 | 33,808 | 11 | % | ||||||||
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Americas | 5,351 | 5,399 | (1 | )% | ||||||||
EMEA | 5,106 | 4,898 | 4 | % | ||||||||
ROW | 4,336 | 2,704 | 60 | % | ||||||||
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Total Life Science | 14,793 | 13,001 | 14 | % | ||||||||
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Consolidated | $ | 52,283 | $ | 46,809 | 12 | % | ||||||
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Diagnostics | 72 | % | 72 | % | ||||||||
Life Science | 28 | % | 28 | % | ||||||||
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Total | 100 | % | 100 | % | ||||||||
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Note 4, “Revenue Overview – By Product Platform/Type
The revenues generated by each of our reportable segments result primarily from the saleRecognition” of the following segment-specific categories of products:
Diagnostics
Life Science
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RevenuesCondensed Consolidated Financial Statements for each product platform/type, as well as its relative percentage of segment revenues, are shown below.detailed revenue disaggregation information.
Three Months Ended December 31, | ||||||||||||
2017 | 2016 | Inc (Dec) | ||||||||||
Diagnostics - | ||||||||||||
Molecular assays | $ | 8,668 | $ | 7,711 | 12 | % | ||||||
Immunoassays & lead tests | 28,822 | 26,097 | 10 | % | ||||||||
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Total Diagnostics | $ | 37,490 | $ | 33,808 | 11 | % | ||||||
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Molecular components | $ | 5,705 | $ | 5,116 | 12 | % | ||||||
Immunoassay components | 9,088 | 7,885 | 15 | % | ||||||||
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Total Life Science | $ | 14,793 | $ | 13,001 | 14 | % | ||||||
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Molecular assays | 23 | % | 23 | % | ||||||||
Immunoassays & lead tests | 77 | % | 77 | % | ||||||||
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Total Diagnostics | 100 | % | 100 | % | ||||||||
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Molecular components | 39 | % | 39 | % | ||||||||
Immunoassay components | 61 | % | 61 | % | ||||||||
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Total Life Science | 100 | % | 100 | % | ||||||||
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Following is a discussion of the net revenues generated by each of these product platforms/types:types and/or disease states:
Diagnostics Products
Molecular Assay Products
Revenues for ourillumigene molecular platform of products increased 12% to $8,668 for the first quarter of fiscal 2018 (also 12% on a constant-currency basis). This increase primarily reflects strong revenue growth in our respiratory-related products and a continuation 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-
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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.
Immunoassay and Lead Testing Products
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, reflecting the ongoing conversion of serology testing to our antigen tests and buying patterns of certain customers. 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 also introduced capabilities to identify resistance to Clarithromycin, the antibiotic commonly used to treatH. pylori.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.
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 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. 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 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.
During the first quarter 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 experienced during the second 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.
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Life ScienceSegment Products
During the first quarter of fiscal 2018,2023, Diagnostics segment net revenues from our Life Science segment increased 14%$6,162, or 19%, with revenues from molecular component sales increasing 12% from the comparable fiscal 2017 quarter and revenues from immunoassay component sales increasing 15%. Our molecular component business’ growth was impacted by the movement in currency exchange rates sincecompared to the first quarter of fiscal 2017, with2022. This growth primarily resulted from the $4,542 increase in net revenues increasing 7% on a constant-currency basis overfrom sales of blood chemistry products, as sales of the LeadCare product have continued to rebound since shipment of the product resumed in the second quarter of fiscal 2022. LeadCare shipments resumed upon correction of the identified supplier issue that caused the LeadCare product recall, which commenced in May 2021 (see Note 7, “Lead Testing Matters” of the Condensed Consolidated Financial Statements).
Life Science Segment Products
During the first quarter of fiscal 2017. Our2023, net revenues for our Life Science segment continueddecreased 68% compared 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 $1,300of fiscal 2022. While the level of net revenues during the first quarter of fiscal 2023 reflects the significant decline in demand for COVID-19 related reagents, such level of quarterly net revenues significantly outpaced the pre-pandemic level of net revenues generated in the first quarter of fiscal 2018;2020; increasing 39% in total, 41% for molecular reagents and (ii) increased revenue from sales into China, with such sales totaling approximately $1,500 during first quarter of fiscal 2018 (approximately $200 in the molecular components business and $1,300 in the immunoassay components business) – representing an approximate 115% increase over the first quarter of fiscal 2017.37% for immunological reagents.
Significant Customers
Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 815, “Reportable Segment and Major Customers Information” of the accompanying Condensed Consolidated Financial Statements.
Gross Profit
Three Months Ended December 31, | Three Months Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | Change | 2022 | 2021 | Change | |||||||||||||||||||
Gross Profit | $ | 31,786 | $ | 29,039 | 9 | % | $ | 31,505 | $ | 49,159 | (36 | )% | ||||||||||||
Gross Profit Margin | 61 | % | 62 | % | -1 point | 55 | % | 56 | % | -1 point |
TheOverall gross profit 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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Total operating expenses increasedmargins during the first quarter of fiscal 2018 compared to2023 are relatively consistent with the fiscal 2022 first quarter margins, with the slight decline largely reflecting the shift in segment revenue mix. During the first quarter of fiscal 2017, relating primarily2023, approximately 31% of consolidated net revenues were generated from the Life Science segment, the products of which generally generate higher gross profit margins relative to overall increasesthe Diagnostics segment. This compares to the Life Science comprising approximately 62% of consolidated net revenues in spending in ourthe first quarter of fiscal 2022.
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In addition, Diagnostics segment reflectinggross profit margins were favorably impacted by the following:previously discussed resumption of blood chemistry product sales in the second quarter of fiscal 2022 (see “Diagnostics Segment Products” above). This resulted in $4,620 of net revenues from sales of such products in the first quarter of fiscal 2023, compared to only $78 in the fiscal 2022 first quarter.
Operating Expenses – Segment Detail and Corporate
Research & Development | Selling & Marketing | General & Administrative | Other | Total Operating Expenses | ||||||||||||||||
Fiscal 2023 First Quarter: |
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Diagnostics | $ | 5,230 | $ | 6,280 | $ | 6,010 | $ | — | $ | 17,520 | ||||||||||
Life Science | 947 | 2,014 | 2,418 | 28 | 5,407 | |||||||||||||||
Corporate | — | — | 2,645 | 34,048 | 36,693 | |||||||||||||||
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Total 2023 First Quarter Expenses | $ | 6,177 | $ | 8,294 | $ | 11,073 | $ | 34,076 | $ | 59,620 | ||||||||||
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Fiscal 2022 First Quarter: |
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Diagnostics | $ | 5,556 | $ | 6,009 | $ | 6,294 | $ | — | $ | 17,859 | ||||||||||
Life Science | 638 | 1,732 | 4,076 | — | 6,446 | |||||||||||||||
Corporate | — | — | 4,290 | 281 | 4,571 | |||||||||||||||
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Total 2022 First Quarter Expenses | $ | 6,194 | $ | 7,741 | $ | 14,660 | $ | 281 | $ | 28,876 | ||||||||||
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Compared to the prior year first quarter, operating expenses increased $30,744 to $59,620 in the first quarter of fiscal 2023. Major components of this increase were as follows:
A $32,607 increase in litigation and select legal costs, reflected within Corporate and primarily related to the previously discussed LeadCare legal matter (see “Lead Testing Matters” above); and
• | A $1,188 increase in acquisition and transaction related costs, |
Operating Income (Loss)
Operating income decreased 20% to $8,061 forAn operating loss of $28,115 was generated in the first quarter of fiscal 2018, as a2023, compared to $20,283 of operating income during the first quarter of fiscal 2022. These operating income (loss) levels result offrom the factors discussed above.
Income Taxes
The effective rate for income taxes was 18%(2%) and 22% for the three months ended December 31, 2022 and 2021, respectively. The negative effective rate for the three months ended December 31, 2022 relates primarily to the anticipated non-deductibility of the previously discussed LeadCare legal matter (see “Lead Testing Matters” above).
Impact of Inflation
To the extent feasible, we have consistently followed the practice of reviewing our prices to consider the impacts of inflation on salaries and fringe benefits for employees, the cost of purchased materials and services, and transportation costs. Inflation and changing prices did not have a material adverse impact on our gross margin, revenues or operating income (loss) in the first quarter of fiscal 2018, compared to 35% for the first quarter of 2017. This lower2023 or fiscal 2018 tax primarily results from the combined net impact of the following effects of the recently-enacted tax reform act (see Note 6 of the accompanying Condensed Consolidated Financial Statements):2022.
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Excluding the effects of theseone-time tax effects, we expect the effective tax rate for the fiscal year ending September 30, 2018 to approximate26%-27%.
Liquidity and Capital Resources
Comparative Cash Flow AnalysisLiquidity
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets and debt service, consideration of acquisition plans, and consideration of common share dividends.service. 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 toto: (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. Ifhand, and such sources are anticipated to be adequate to fund working capital requirements, capital expenditures and debt service during the next twelve months. However, if needed, we also have an additional source of liquidity through the amount remaining available on our $30,000$200,000 bank revolving credit facility.facility, which totaled $175,000 as of December 31, 2022 (see Note 18, “Subsequent Events” of the Condensed Consolidated Financial Statements for a discussion of activities related to the Company’s bank credit arrangements occurring subsequent to the December 31, 2022 Condensed Consolidated Balance Sheet date). 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 collectibilitycollectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services.
NetAs of December 31, 2022, our cash provided by operating activities totaled $5,171 for the first three months of fiscal 2018, a 60%and cash equivalents balance was $74,098 or $7,355 lower than at September 30, 2022. This decrease primarily results primarily from the $12,993 provided duringcombined effects of: (i) $2,349 of cash used in operations; and (ii) using cash to acquire property, plant and equipment ($2,654) and the first three monthsassets of fiscal 2017. While reflectingEstel Biosciences, Inc. ($2,000) (see Note 6, “Business Combinations” of the timingCondensed Consolidated Financial Statements).
Considering these factors, our balance of payments from customers,cash and to supplierscash equivalents on hand exceeded our total debt (defined as bank debt, government grant obligations and taxing authorities, this decrease also results in large part from the net effects of (i) increased customer receivables from higher sales levels; (ii) increased inventory levels during the first quarter of fiscal 2018, largelyobligations related to continued expansion in Asia; and (iii) decreased accrued employee compensation costs during the first quarter of fiscal 2017, 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.acquisitions) by approximately $41,800 at December 31, 2022.
Following the release of results for the fiscal 2017 first quarter, the Board of Directors reduced the fiscal 2017 indicated annual cash dividend rate to $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’s net earnings. Consistent with this annual indicated dividend rate, a cash dividend of $0.125 per share was declared for the first quarter of fiscal 2018, representing 83% of the quarter diluted earnings per share.
Capital Resources
As described in Note 712, “Bank Credit Arrangements” of the accompanying Condensed Consolidated Financial Statements, in connection with the acquisition of Magellan, the Company entered intomaintains 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$200,000 revolving credit facility, with a commercial bank that expires March 31, 2021.which is secured by substantially all of our U.S. assets and includes certain restrictive financial covenants. As of JanuaryDecember 31, 2018, there were no borrowings outstanding2022, the Company was in compliance with all covenants. In addition, as of December 31, 2022, Meridian maintains a shelf registration statement on this facilityfile with the SEC. See Note 18, “Subsequent Events” of the Condensed Consolidated Financial Statements for a discussion of activities related to the Company’s bank credit arrangements and we had 100% borrowing capacity availablepublic company status occurring subsequent to us. We have had no borrowings outstanding under this revolving credit facility during the first three months ofDecember 31, 2022 Condensed Consolidated Balance Sheet date.
During fiscal 2018 or during the full year of fiscal 2017.
Our2023 our capital expenditures are estimated to range betweentotal approximately $4,000 to $5,000 for fiscal 2018, with$10,000, comprised of approximately $6,500 and $3,500 in the actual amount dependent upon actual operating resultsDiagnostics and the phasing of certain projects.Life Science segments, respectively. Such expenditures may be funded with cash and cash equivalents on hand, operating cash flows, and/or availability under the $30,000$200,000 revolving credit facility discussed above.
The Company has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products. During the first quarter of fiscal 2023, royalty expense totaled approximately $150, with 70% and 30% of such expense relating to our Diagnostics and Life Science segments, respectively. This compares to a total of approximately $800 of royalty expense in the first quarter of fiscal 2022, with 35% and 65% relating to our Diagnostics and Life Science segments, respectively. The Company expects that payments under these agreements will amount to approximately $700 in fiscal 2023, a decrease from the $2,300 in fiscal 2022, with the anticipated decrease largely resulting from the last of the licensed patents applicable to the Alethia product line having expired during fiscal 2022.
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Off-Balance Sheet Arrangements
We utilize foreign currency exchange forward contracts to limit exposure to volatility in foreign currency gains and losses related to financial assets denominated in other than the holding subsidiary’s functional currency. These contracts are generally settled within a 30-day time frame and are not formally designated or accounted for as accounting hedges. We also utilize interest rate swap agreements to limit exposure to volatility in the LIBOR interest rate in connection with the revolving credit facility. The interest rate swap agreements are designated and accounted for as accounting hedges (see Note 5, “Fair Value Measurements” of the Condensed Consolidated Financial Statements). Aside from these instruments, we do not utilize any special-purpose financing vehicles or have any material undisclosedoff-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have beenAs of December 31, 2022, there were no material changes to the information provided under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s exposure to market risk sinceForm 10-K for the year ended September 30, 2017.2022, filed with the SEC on November 22, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2017.2022. 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 December 31, 2017the period covered by this report.
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that control objectives are met. Because of inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Because of the inherent limitations in any cost-effective control system, misstatements due to the material weakness identified in our internal control over financial reporting described below.
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 designerrors or fraud may occur 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.
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 end of the fiscal year, we have taken steps to strengthen information technology security and user access 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 documentation to be maintained to evidence 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, the 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.detected.
Changes in Internal Control over Financial Reporting
Except as described above, thereIn the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. 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 December 31, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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SeeInformation with respect to legal proceedings can be found in Note 97, “Lead Testing Matters” of the accompanying Condensed Consolidated Financial Statements.Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the SEC on November 22, 2022, as may be supplemented by our Quarterly Reports on Form 10-Q, any or all of which could materially affect our business, financial condition or future results. The risks described therein are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results. There have been no material changes fromwith respect to the risk factors as previously disclosed in the Company’s fiscal 2017our Annual Report on Form10-K in response to Item 1A to Part I of for the year ended September 30, 2022, filed with the SEC on November 22, 2022, as may be supplemented by our Quarterly Reports on Form10-K.10-Q.
The following exhibits are being filed or furnished as a part of this Quarterly Report on Form10-Q.10-Q:
31.1 | Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule13a-14(a)/15d-14(a) | |
31.2 | Certification of Principal | |
32 | Certification of Chief Executive Officer and | |
101.SCH | Inline XBRL Instance Extension Schema | |
101.CAL | Inline XBRL Instance Extension Calculation Linkbase | |
101.DEF | Inline XBRL Instance Extension Definition Linkbase | |
101.LAB | Inline XBRL Instance Extension Label Linkbase | |
101.PRE | Inline XBRL Instance Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in |
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SIGNATURES
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:February | By: | /s/ | ||||
Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||
Date: February 9, 2023 | By: | /s/ Julie Smith | ||||
Julie Smith | ||||||
Senior Vice President and Controller (Principal Accounting Officer) |
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