Annual Statements Open main menu

MERIDIAN BIOSCIENCE INC - Quarter Report: 2007 December (Form 10-Q)

MERIDIAN BIOSCIENCE, INC. 10-Q
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to
Commission file number 0-14902
MERIDIAN BIOSCIENCE, INC.
 
Incorporated under the laws of Ohio

31-0888197
 
(I.R.S. Employer Identification No.)
3471 River Hills Drive
Cincinnati, Ohio 45244
(513) 271-3700
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o                    Accelerated filer þ                    Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding January 31, 2008
Common Stock, no par value
  40,079,848
 
 

 


 

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
                     
                Page(s)
PART I   FINANCIAL INFORMATION            
 
                   
Item 1.   Financial Statements            
 
      Consolidated Statements of Operations Three Months Ended December 31, 2007 and 2006         3  
 
                   
 
      Consolidated Statements of Cash Flows Three Months Ended December 31, 2007 and 2006         4  
 
                   
 
      Consolidated Balance Sheets December 31, 2007 and September 30, 2007         5-6  
 
                   
 
      Consolidated Statement of Changes in Shareholders’ Equity Three Months Ended December 31, 2007         7  
 
                   
 
      Notes to Consolidated Financial Statements         8-13  
 
                   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations         14-18  
 
                   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk         19  
 
                   
Item 4.   Controls and Procedures         19  
 
                   
PART II.   OTHER INFORMATION            
 
                   
Item 1A.   Risk Factors         20  
 
                   
Item 6.   Exhibits         20  
 
                   
                21  
 EX-3.1
 EX-31.1
 EX-31.2
 EX-32
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 which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. The Company assumes no obligation to publicly update any forward-looking statements. 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 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. While Meridian has introduced a number of internally developed products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Costs and difficulties in complying with laws and regulations administered by the United States Food and Drug Administration can result in unanticipated expenses and delays and interruptions to the sale of new and existing products. Changes in the relative strength or weakness of the US dollar can change expected results. One of Meridian’s main growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses successfully integrated into Meridian’s operations. In addition to the factors described in this paragraph, Part I, Item 1A Risk Factors contains a list of uncertainties and risks that may affect the financial performance of the Company.

Page 2 of 21


Table of Contents

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
                 
 
Three Months Ended December 31   2007   2006
 
NET SALES
  $ 33,847     $ 28,720  
 
               
COST OF SALES
    12,095       11,108  
 
 
               
GROSS PROFIT
    21,752       17,612  
 
 
               
OPERATING EXPENSES:
               
Research and development
    1,536       1,315  
Selling and marketing
    4,690       4,195  
General and administrative
    4,333       4,044  
 
Total operating expenses
    10,559       9,554  
 
 
               
OPERATING INCOME
    11,193       8,058  
 
               
OTHER INCOME (EXPENSE):
               
Interest income
    455       395  
Interest expense
          (30 )
Other, net
    (80 )     64  
 
Total other income (expense)
    375       429  
 
 
               
EARNINGS BEFORE INCOME TAXES
    11,568       8,487  
 
               
INCOME TAX PROVISION
    4,112       2,914  
 
               
 
NET EARNINGS
  $ 7,456     $ 5,573  
 
 
               
BASIC EARNINGS PER COMMON SHARE
  $ 0.19     $ 0.14  
 
               
DILUTED EARNINGS PER COMMON SHARE
  $ 0.18     $ 0.14  
 
               
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC
    39,910       39,284  
 
               
DILUTIVE COMMON SHARE OPTIONS
    1,057       956  
 
 
               
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED
    40,967       40,240  
 
 
               
ANTI-DILUTIVE SECURITIES:
               
Common share options
    2       158  
Shares from convertible debentures
          231  
 
 
               
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.11     $ 0.08  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 3 of 21


Table of Contents

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
                 
 
Three Months Ended December 31   2007   2006
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net earnings
  $ 7,456     $ 5,573  
Non-cash items:
               
Depreciation of property, plant and equipment
    705       684  
Amortization of intangible assets and deferred costs
    426       409  
Stock based compensation
    273       423  
Deferred income taxes
    (188 )     215  
Loss on disposition of fixed assets
          2  
Change in accounts receivable, inventory, and prepaid expenses
    1,863       347  
Change in accounts payable, accrued expenses, and income taxes payable
    (1,808 )     (2,918 )
Other
    (177 )     (132 )
 
Net cash provided by operating activities
    8,550       4,603  
 
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisitions of property, plant and equipment
    (736 )     (364 )
Acquisitions of license agreements
          (265 )
Proceeds from sales of short-term investments
          4,000  
Purchase of short-term investments
    (5,000 )      
 
Net cash provided by (used for) investing activities
    (5,736 )     3,371  
 
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Dividends paid
    (4,392 )     (3,015 )
Proceeds and tax benefits from exercise of stock options
    598       922  
 
Net cash used for financing activities
    (3,794 )     (2,093 )
 
 
               
Effect of Exchange Rate Changes on Cash and Equivalents
    90       35  
 
               
 
Net Increase (Decrease) in Cash and Equivalents
    (890 )     5,916  
 
               
Cash and Equivalents at Beginning of Period
    49,400       36,348  
 
               
 
Cash and Equivalents at End of Period
  $ 48,510     $ 42,264  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 4 of 21


Table of Contents

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
ASSETS
                 
 
    December 31,   September 30,
    2007   2007
 
CURRENT ASSETS:
               
Cash and equivalents
  $ 48,510     $ 49,400  
Short term investments
    5,000        
Accounts receivable, less allowances of $223 and $258
    19,424       22,651  
Inventories
    20,042       18,171  
Prepaid expenses and other current assets
    1,971       2,147  
Deferred income taxes
    1,485       1,376  
 
 
               
Total current assets
    96,432       93,745  
 
 
               
PROPERTY, PLANT AND EQUIPMENT:
               
Land
    895       890  
Buildings and improvements
    16,967       16,907  
Machinery, equipment and furniture
    25,090       24,619  
Construction in progress
    1,440       1,290  
 
Subtotal
    44,392       43,706  
Less: accumulated depreciation and amortization
    26,032       25,395  
 
 
               
Net property, plant and equipment
    18,360       18,311  
 
 
               
OTHER ASSETS:
               
Goodwill
    9,965       9,964  
Other intangible assets, net
    9,032       9,457  
Restricted cash
    1,000       1,000  
Other assets
    222       221  
 
 
               
Total other assets
    20,219       20,642  
 
 
               
TOTAL ASSETS
  $ 135,011     $ 132,698  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 5 of 21


Table of Contents

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
 
    December 31,   September 30,
    2007   2007
 
CURRENT LIABILITIES:
               
Accounts payable
  $ 4,374     $ 4,704  
Accrued payroll costs
    4,116       7,541  
Purchase business combination liability
    153       152  
Other accrued expenses
    4,545       4,008  
Income taxes payable
    2,436       662  
 
 
               
Total current liabilities
    15,624       17,067  
 
 
               
DEFERRED INCOME TAXES
    2,611       2,683  
 
               
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, 39,969,556 and 39,847,391 shares issued, respectively
           
 
               
Additional paid-in capital
    83,146       82,209  
Retained earnings
    33,134       30,375  
Accumulated other comprehensive income
    496       364  
 
 
               
Total shareholders’ equity
    116,776       112,948  
 
 
               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 135,011     $ 132,698  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 6 of 21


Table of Contents

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
(dollars and shares in thousands)
                                                 
 
                            Accumulated                
    Common     Additional             Other             Total  
    Shares     Paid-in     Retained     Comprehensive     Comprehensive     Shareholders’  
    Issued     Capital     Earnings     Income (Loss)     Income (Loss)     Equity  
 
Balance at September 30, 2007
    39,847     $ 82,209     $ 30,375     $ 364             $ 112,948  
Adoption of FASB Interpretation No. 48
                (305 )                   (305 )
Dividends paid
                (4,392 )                   (4,392 )
Exercise of stock options, net of tax
    122       664                           664  
Stock based compensation
          273                           273  
Comprehensive income:
                                               
Net earnings
                7,456           $ 7,456       7,456  
Hedging activity
                      (75 )     (75 )     (75 )
Other comprehensive income taxes
                      (74 )     (74 )     (74 )
Foreign currency translation adjustment
                      281       281       281  
 
                                             
Comprehensive income
                                  $ 7,588          
 
                                               
 
Balance at December 31, 2007
    39,969     $ 83,146     $ 33,134     $ 496             $ 116,776  
 
The accompanying notes are an integral part of these consolidated financial statements.

Page 7 of 21


Table of Contents

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
The consolidated financial statements included herein have not been audited by an independent registered public accounting firm, but include all adjustments (consisting of normal recurring entries), which are, in the opinion of management, necessary for a fair presentation of the results for such periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the requirements of the Securities and Exchange Commission. Meridian believes that the disclosures included in these financial statements are adequate to make the information not misleading.
It is suggested that these consolidated interim financial statements be read in conjunction with the consolidated annual financial statements and notes thereto, included in Meridian’s Annual Report on Form 10-K for the Year Ended September 30, 2007.
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year.
2. Significant Accounting Policies:
(a) Revenue Recognition —
Revenue is generally recognized from sales when product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at the date of sale for estimated rebates that will be claimed by customers. We estimate accruals for rebate agreements based on historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Our rebate accruals were $4,300,000 at December 31, 2007 and $2,415,000 at September 30, 2007.
Life Science revenue for contract services may come from standalone arrangements for process development and/or optimization work (contract research and development services) or custom manufacturing, or multiple-deliverable arrangements that include process development work followed by larger-scale manufacturing (both contract research and development services and contract manufacturing services). Revenue is recognized based on the nature of the arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple Deliverables. The framework in EITF 00-21 is based on each of the multiple deliverables in a given arrangement having distinct and separate fair values. Fair values are determined via consistent pricing between standalone arrangements and multiple deliverable arrangements, as well as a competitive bidding process. Contract research and development services may be performed on a “time and materials” basis or

Page 8 of 21


Table of Contents

“fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and acceptance by the customer. For contract manufacturing services, revenue is generally recognized upon delivery of product and acceptance by the customer.
(b) Comprehensive Income —
Comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders. Our comprehensive income is comprised of net earnings, foreign currency translation, and changes in the fair value of forward exchange contracts accounted for as cash flow hedges.
Assets and liabilities of foreign operations are translated using period-end exchange rates with gains or losses resulting from translation included in accumulated other comprehensive income or loss. Revenues and expenses are translated using exchange rates prevailing during the period. We also recognize foreign currency transaction gains and losses on certain assets and liabilities that are denominated in the Euro currency. These gains and losses are included in other income and expense in the accompanying consolidated statements of operations.
Comprehensive income for the interim periods was as follows (in thousands):
                 
 
    Three Months
    Ended December 31,
    2007   2006
 
Net earnings
  $ 7,456     $ 5,573  
Hedging activity
    (75 )     (39 )
Income taxes
    (74 )     (84 )
Foreign currency translation adjustment
    281       275  
 
Comprehensive income
  $ 7,588     $ 5,725  
 
(c) Income Taxes —
The provision for income taxes includes federal, foreign, state, and local income taxes currently payable and those deferred because of temporary differences between income for financial reporting and income for tax purposes. We prepare estimates of permanent and temporary differences between income for financial reporting purposes and income for tax purposes which are adjusted to actual upon filing of our tax returns, which typically occurs in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates.
On October 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant facts by the applicable tax authorities. The cumulative effect of adopting FIN 48, $305,000, was charged to opening retained earnings. As of October 1, 2007, Meridian’s liability for uncertain tax positions was $856,000, including estimated penalties and interest. Meridian’s liability for uncertain

Page 9 of 21


Table of Contents

tax positions was increased to $891,000 as of December 31, 2007, related to activity during the first quarter of fiscal 2008. This liability is included in current income taxes payable in the accompanying consolidated balance sheet. Penalties and interest are a component of the income tax provision. The full amount of $891,000 would favorably affect our effective tax rate if recognized. The amount of Meridian’s liability for uncertain tax positions expected to be paid or settled in the next 12 months is uncertain.
We are subject to examination by the tax authorities in the US (both federal and state) and the countries of Belgium, France, Holland and Italy. In the US, open tax years are for fiscal 2004 and forward. We are currently under examination by the IRS for fiscal 2006. This audit is expected to be completed during fiscal 2008. In countries outside the US, open tax years generally range from fiscal 2002 and forward. However, in Belgium, the utilization of local net operating loss carryforwards extends the statute of limitations for examination well into the foreseeable future.
(d) Stock-based Compensation —
We account for stock-based compensation pursuant to SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires recognition of compensation expense for all share-based awards made to employees and outside directors, based upon the fair value of the share-based award on the date of the grant.
(e) Cash equivalents —
We consider short-term investments with original maturities of 90 days or less, including overnight repurchase agreements, investments in municipal variable rate demand notes that have a seven-day put feature and institutional money market funds to be cash equivalents.
(f) Short-term investments —
Auction-rate securities are classified as short-term investments in the consolidated balance sheets and are accounted for as available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. As such, unrealized holding gains and losses are reported as a component of other comprehensive income until realized. The carrying value of these securities was equal to their fair value as of December 31, 2007. We did not hold any auction-rate securities at September 30, 2007.
(g) Derivative financial instruments —
We account for foreign currency forward exchange contracts in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. These instruments are designated as cash flow hedges, and therefore, the effective portion of the net gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For the ineffective portion of the hedge, gains or losses are charged to earnings in the current period. All derivative instruments are recognized as either assets or liabilities at fair value in the consolidated balance sheets. Cash flows from our hedging instruments are classified in Operating

Page 10 of 21


Table of Contents

Activities, consistent with cash flows from the related items being hedged. See Note 6.
(h) Reclassifications —
Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation.
(i) New Accounting Pronouncements —
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, as part of a joint project with the International Accounting Standards Board. Statement 141(R) provides for several significant changes to existing accounting practices for business combinations. Most notably, (i) acquisition-related transaction costs such as legal and professional fees, shall be expensed rather than accounted for as part of the acquisition cost; (ii) acquired in-process research and development shall be capitalized rather than expensed at the acquisition date; and (iii) contingent consideration shall be recorded at fair value at the acquisition date rather than the points in time that payment becomes probable. Statement 141(R) is effective for fiscal years beginning after December 15, 2008. Thus, for Meridian, it will affect any acquisitions after October 1, 2009.
3. Inventories:
Inventories are comprised of the following (in thousands):
                 
 
    December 31,   September 30,
    2007   2007
 
Raw materials
  $ 6,112     $ 4,816  
Work-in-process
    4,536       5,141  
Finished goods
    9,394       8,214  
 
 
  $ 20,042     $ 18,171  
 
Effective July 1, 2007, we changed our method of accounting for certain inventories from the LIFO method to the FIFO method, so that substantially all of our inventories are reflected at the lower of cost or market with cost determined by the FIFO method. We changed to the FIFO method for these inventories because: it conformed substantially all of our worldwide inventories to a consistent basis of accounting; and it provides better comparability to our industry peers, many of whom use the FIFO method of accounting for inventories. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, this change in accounting has been retrospectively applied to the three-month period ended December 31, 2006. The effect of this change was to increase gross profit and net earnings by $15,000 and $9,000, respectively.
4. Major Customers and Segment Information:
Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa

Page 11 of 21


Table of Contents

and the Middle East. The European Diagnostics operating segment consists of the sale and distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida; and the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically and abroad. The Life Science operating segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
Two customers accounted for 60% and 57% of the US Diagnostics operating segment third-party sales during the three months ended December 31, 2007 and 2006, respectively. One customer accounted for 40% and 26% of the Life Science operating segment third-party sales during the three months ended December 31, 2007 and 2006, respectively.
Segment information for the interim periods is as follows (in thousands):
                                         
 
    US   European                
    Diagnostics   Diagnostics   Life Science   Eliminations(1)   Total
 
Three Months December 31, 2007
                                       
Net sales-
                                       
Third-party
  $ 22,219     $ 6,099     $ 5,529     $     $ 33,847  
Inter-segment
    2,300             142       (2,442 )      
Operating income
    8,936       1,159       991       107       11,193  
Total assets (December 31, 2007)
    117,657       14,852       46,256       (43,754 )     135,011  
Three Months December 31, 2006
                                       
Net sales-
                                       
Third-party
  $ 18,954     $ 5,255     $ 4,511     $     $ 28,720  
Inter-segment
    2,220             269       (2,489 )      
Operating income
    7,091       976       34       (43 )     8,058  
Total assets (September 30, 2007)
    115,297       13,600       45,410       (41,609 )     132,698  
 
 
(1)   Eliminations consist of intersegment transactions.
Transactions between operating segments are accounted for at established intercompany prices for internal and management purposes with all intercompany amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science operating segments include goodwill of $1,492,000 and $8,473,000, respectively, at December 31, 2007, and $1,492,000 and $8,472,000, respectively, at September 30, 2007.

Page 12 of 21


Table of Contents

5. Intangible Assets:
A summary of our acquired intangible assets subject to amortization, as of December 31, 2007 and September 30, 2007 is as follows (in thousands):
                                         
 
            December 31, 2007   September 30, 2007
    Wtd Avg Amort   Gross   Accumulated           Accumulated
    Period (Yrs)   Carrying Value   Amortization   Gross Carrying Value   Amortization
 
 
Core products and cell lines
    15     $ 4,698     $ 2,385     $ 4,698     $ 2,313  
Manufacturing technologies
    15       5,907       4,178       5,907       4,089  
Trademarks, licenses and patents
    12       2,270       1,730       2,270       1,694  
Customer lists and supply agreements
    13       10,644       6,194       10,641       5,963  
 
 
 
          $ 23,519     $ 14,487     $ 23,516     $ 14,059  
 
The actual aggregate amortization expense for these intangible assets for the three months ended December 31, 2007 and 2006 was $426,000 and $407,000, respectively.
6. Hedging Transactions:
We designate forward exchange contracts as cash flow hedges under SFAS No. 133. The purpose of these contracts is to hedge cash flows related to forecasted intercompany sales denominated in the Euro currency.
The following table presents our hedging portfolio as of December 31, 2007 (in thousands).
                                 
 
Notional   Contract   Estimated Fair   Average    
Amount   Value   Value   Exchange Rate   Maturity
 
3,600
  $ 4,958     $ 5,252       1.3772     FY 2008
900
  $ 1,289     $ 1,309       1.4322     FY 2009
 
At December 31 2007, $346,000 of unrealized losses were included in accumulated other comprehensive income in the consolidated balance sheet, compared to unrealized losses of $270,000 at September 30, 2007. This amount is expected to be reclassified into net earnings during the next 12 months. The estimated fair value of forward contracts outstanding at December 31, 2007 and September 30, 2007 is based on quoted amounts provided by the counterparties to these contracts.

Page 13 of 21


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Refer to “Forward Looking Statements” following the Index in front of this Form 10-Q.
Overview:
For the first quarter of fiscal 2008, we continued our consistency in delivering double-digit sales and earnings growth. Our diagnostics operating segments continue to provide the largest share of consolidated revenues, 84%, for both the first quarter of fiscal 2008 and 2007.
Our sales growth continues to be organic and driven by new diagnostic products, market expansions, increased market share in targeted disease states, and volume increases for antibodies, antigens and reagents supplied to large diagnostic manufacturing companies. During the first quarter of fiscal 2008, we received FDA clearance to begin marketing and distributing Influenza and Respiratory Syncytial Virus tests using our proprietary TRU® rapid test technology that improves laboratory technician safety and reduces laboratory testing space requirements. These products are expected to improve gross profit margins for our upper respiratory diagnostic products in the latter half of fiscal 2008 and into fiscal 2009 as certain existing upper respiratory products sold by us are manufactured by an outside vendor. ImmunoCard STAT!® EHEC, a rapid test developed in collaboration with Merck for detection of toxin-producing E. coli in patients that may have ingested contaminated produce or meat products, was launched in fiscal 2007 and continues to contribute to significant growth in fiscal 2008 to date. We expect to launch two Epstein-Barr virus (Mononucleosis) tests using our proprietary TRU® rapid test technology later this fiscal year.
Besides these new diagnostic products, we continue to see growth in the C. difficile and H. pylori testing markets where we hold market leadership positions. The C. difficile market has expanded as testing increases due to more virulent strains of this toxin and heightened focus by hospitals on this dangerous pathogen. New AGA guidelines are creating increased focus on direct antigen testing for H. pylori as this infection is a known cause of ulcers. Our line of patented H. pylori products includes both rapid and batch method noninvasive direct testing formats.
Finally, buying patterns of one of our major distributors of diagnostic products in the US and one of our major diagnostic manufacturer customers in our Life Science operating segment also contributed to the volume increases during the first quarter of fiscal 2008. These buying patterns resulted in a favorable sales mix that was more heavily weighted towards higher margin rapid diagnostic tests and bulk antigens and reagents for these customers. This sales mix led to the overall gross profit margin of 64% for the first quarter of fiscal 2008.

Page 14 of 21


Table of Contents

Operating Segments:
Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the sale and distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida; the sale and distribution of bulk antigens, antibodies, and bioresearch reagents domestically and abroad. The Life Science operating segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
Revenues for the Diagnostics operating segments, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and strength of certain diseases and foreign currency exchange rates. Revenues for the Life Science operating segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of arrangements for contract services work, which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers. We believe that the overall breadth of our product lines serve to reduce the variability in consolidated sales from quarter to quarter.
Results of Operations:
Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006
Net sales
Overall, net sales increased 18% to $33,847,000 for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. Net sales for the US Diagnostics operating segment increased $3,265,000, or 17%, for the European Diagnostics operating segment increased $844,000, or 16%, and for the Life Science operating segment increased $1,018,000, or 23%.
For the US Diagnostics operating segment, the sales growth was primarily related to volume increases across C. difficile products, H. pylori products, and food borne products. Volume increases for C. difficile products were driven by market share growth and buying patterns of one national distributor. Volume increases for H. pylori products continue to be driven by increased managed care efforts and issuance of AGA guidelines recommending direct testing. Volume increases for food borne products were driven by the fiscal 2007 launch of ImmunoCard STAT!® EHEC. Two national distributors accounted for 60% and 57% of total sales for the US Diagnostics operating segment for the first quarters of fiscal 2008 and 2007, respectively.
For the European Diagnostics operating segment, the sales increase includes currency translation gains in the amount of $670,000. Sales in local currency increased 3% for the first quarter of fiscal 2008. The increase in local currency was primarily driven by volume growth in C. difficile and H. pylori products.

Page 15 of 21


Table of Contents

For the Life Science operating segment, sales growth for the quarter was driven by buying patterns from one diagnostic manufacturing customer for whom we supply bulk viral antigens and assay reagents. Sales to this customer accounted for 40% and 26% of total Life Science operating segment sales for the first quarters of fiscal 2008 and 2007, respectively. This customer recently reduced their forecasted antigen requirements due to their internal inventory management initiatives and their market factors. We believe the impact during calendar 2008 could be a reduction of revenue of up to $1.8 million. This matter does not affect our fiscal 2008 guidance regarding expectations for net sales of $140 to $142 million and diluted earnings per share of $0.72 to $0.75.
For all operating segments combined, international sales were $9,460,000, or 28% of total sales, for the first quarter of fiscal 2008, compared to $8,533,000, or 30% of total sales, for the first quarter of fiscal 2007. Combined domestic exports for the US Diagnostics and Life Science operating segments were $3,361,000 for the first quarter of fiscal 2008, compared to $3,278,000 for the first quarter of fiscal 2007. The remaining international sales were generated by the European Diagnostics operating segment.
Gross Profit
Gross profit increased 24% to $21,752,000 for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. Gross profit margins improved 3 points for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. This improvement was driven by a favorable sales mix that was more heavily weighted towards higher margin rapid diagnostic tests and bulk antigens and reagents for certain customers, and automation initiatives and related efficiencies in diagnostic production areas.
Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, proficiency panels, and contract research and development and contract manufacturing services. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.
Operating Expenses
Operating expenses increased 11% to $10,559,000, for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. The overall increase in operating expenses for the first quarter of fiscal 2008 is discussed below.
Research and development expenses increased 17% to $1,536,000 for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007, and as a percentage of sales, were 5% for the first quarters of fiscal 2008 and fiscal 2007. Of this increase, $364,000 related to the US Diagnostics operating segment offset by a $143,000 decrease related to the Life Science operating segment. The increase for the US Diagnostics operating segment was primarily related to salaries and benefits for additional headcount for new product development, as well as related supplies and clinical trial costs.
Selling and marketing expenses increased 12% to $4,690,000 for the first quarter of fiscal 2008

Page 16 of 21


Table of Contents

compared to the first quarter of fiscal 2007, and as a percentage of sales, decreased from 15% for the first quarter of fiscal 2007 to 14% for the first quarter of fiscal 2008. Of this increase, $539,000 related to the US Diagnostics operating segment and $41,000 related to the European Diagnostics operating segment, offset by a decrease of $85,000 related to the Life Science operating segment. The increase for the US Diagnostics operating segment relates to salaries and benefits, including incentive compensation tied to sales growth.
General and administrative expenses increased 7% to $4,333,000 for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007, and as a percentage of sales, were 13% for the first quarter of fiscal 2008 and 14% for the first quarter of fiscal 2007. Of this increase, $64,000 related to the US Diagnostics operating segment, $72,000 related to the European Diagnostics segment, and $153,000 related to the Life Science operating segment.
Operating Income
Operating income increased 39% to $11,193,000 for the first quarter of fiscal 2008, as a result of the factors discussed above.
Other Income and Expense
Interest income increased 15% to $455,000 for the first quarter of fiscal 2008, compared to $395,000 for the first quarter of fiscal 2007. This increase was driven by higher average investment balances during the first quarter of fiscal 2008, somewhat offset by lower interest yields in the current interest rate environment. We currently invest in short-term fixed income securities such as overnight repurchase agreements, institutional money-market mutual funds, municipal variable rate demand notes with a seven-day put feature and municipal auction rate securities with a 35-day interest rate reset interval.
Income Taxes
The effective rate for income taxes was 35.5% for the first quarter of fiscal 2008 compared to 34.3% for the first quarter of fiscal 2007. The increase in the effective tax rate was primarily attributable to additional federal research and development tax credits recorded in the first quarter of fiscal 2007 upon renewal and extension by Congress and the President in December 2006. For the fiscal year ending September 30, 2008, Meridian expects the effective tax rate to range from 35% to 36%.
Effective October 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant facts by the applicable tax authorities. The cumulative effect of adopting FIN 48, $305,000, was charged to opening retained earnings. See Note 2 to the consolidated financial statements herein.
Liquidity and Capital Resources:
Comparative Cash Flow Analysis
Our cash flow and financing requirements are determined by analyses of operating and capital

Page 17 of 21


Table of Contents

spending budgets, consideration of acquisition plans, and consideration of common share dividends. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities. This credit facility has been supplemented by the proceeds from a September 2005 common share offering, which are invested in short-term fixed income securities such as overnight repurchase agreements, institutional money-market mutual funds, municipal variable rate demand notes with a seven-day put feature and municipal auction rate securities.
Net cash provided by operating activities increased 86% to $8,550,000 for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. This increase was driven by growth in net earnings for the first quarter and working capital improvements relative to accounts receivable collections.
Net cash used in investing activities was $5,736,000 for the first quarter of fiscal 2008 compared to net cash provided by investing activities of $3,371,000 for the first quarter of fiscal 2007. The change primarily related to purchases of short-term investment securities during the first quarter of fiscal 2008 versus proceeds from the sales of such securities during the first quarter of fiscal 2007.
Net cash used for financing activities was $3,794,000 for the first quarter of fiscal 2008 compared to $2,093,000 for the first quarter of fiscal 2007. The increase primarily related to increased dividends paid on common shares.
Net cash flows from operating activities are anticipated to fund working capital requirements and dividends during fiscal 2008.
Capital Resources
Meridian has a $30,000,000 credit facility with a commercial bank which expires on September 15, 2012. As of January 31, 2008, there were no borrowings outstanding on this facility.
The OEM Concepts acquisition, completed in fiscal 2005, provides for additional purchase consideration up to a maximum remaining amount of $1,818,000, contingent upon future calendar-year sales and gross profit of OEM Concepts products through December 31, 2008. Earnout consideration is payable each year, following the period earned. Earnout consideration in the amount of $153,000 related to calendar 2007 is included in the accompanying consolidated balance sheet in purchase business combination liabilities. Such earnout consideration is expected to be paid from operating cash flows during the second quarter of fiscal 2008.
Our capital expenditures are estimated to be $5,000,000 for fiscal 2008 and may be funded with operating cash flows, availability under the $30,000,000 credit facility, or cash equivalents and short-term investments on-hand. Capital expenditures relate to manufacturing equipment to further automation initiatives, computer system improvements, and capacity expansion for the Maine facility.
We do not utilize any special-purpose financing vehicles or have any undisclosed off balance sheet arrangements. Similarly, we do not hold any fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair value techniques.

Page 18 of 21


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company’s exposure to market risk since September 30, 2007.
ITEM 4. CONTROLS AND PROCEDURES
As of December 31, 2007, an evaluation was completed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2007. There have been no changes in our internal controls over financial reporting identified in connection with the evaluation of internal controls that occurred during the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting, or in other factors that could materially affect internal controls subsequent to December 31, 2007, other than we implemented, as planned, new enterprise resource planning and general ledger and financial reporting systems for our Life Science facilities during the first quarter of fiscal 2008. These new system implementations provide the appropriate foundation to support future growth in our Life Science operating segment.

Page 19 of 21


Table of Contents

PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors as previously disclosed in the Registrant’s Form 10-K in response to Item 1A to Part I of Form 10-K.
ITEM 6. EXHIBITS
3.1 — Amended and Restated Code of Regulations
10.1 — 2004 Equity Compensation Plan Amended and Restated as of January 22, 2008 (incorporated by reference from Exhibit 10.1 of the Registrant’s filing of it’s Current Report on Form 8-K dated January 22, 2008)
31.1 — Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2 — Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32 — Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Page 20 of 21


Table of Contents

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  MERIDIAN BIOSCIENCE, INC.
 
 
Date: February 11, 2008  /s/ Melissa Lueke    
  Melissa Lueke   
  Vice President and Chief Financial Officer   
 

Page 21 of 21