MERIDIAN BIOSCIENCE INC - Quarter Report: 2011 March (Form 10-Q)

 

 

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

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

Commission file number 0-14902

MERIDIAN BIOSCIENCE, INC.

Incorporated under the laws of Ohio

31-0888197

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ           No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company 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 April 30, 2011
Common Stock, no par value		41,003,719

 

 

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q

		Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations Three and Six Months Ended March 31, 2011 and 2010			1
Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 2011 and 2010			2
Condensed Consolidated Balance Sheets March 31, 2011 and September 30, 2010			3-4
Condensed Consolidated Statement of Changes in Shareholders’ Equity Six Months Ended March 31, 2011			5
Notes to Condensed Consolidated Financial Statements			6-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			21
Item 4. Controls and Procedures			21
PART II. OTHER INFORMATION
Item 1A. Risk Factors			22
Item 6. Exhibits			22
Signature			23
Exhibit 10.22
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. 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 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 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. Recessionary pressures on the economy and the markets in which our customers operate, as well as adverse trends in buying patterns from customers can change expected results. Costs and difficulties in complying with laws and regulations 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 U.S. dollar can also 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 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. The Company cannot predict the possible impact of recently-enacted United States healthcare legislation and any similar initiatives in other countries on its results of operations. In addition to the factors described in this paragraph, Part I, Item 1A Risk Factors of our Form 10-K contains a list and description of uncertainties, risks and other matters that may affect the Company.

PART I. FINANCIAL INFORMATION

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
NET SALES		$	41,059			$	31,147			$	78,322			$	73,604
COST OF SALES			14,803				11,006				28,518				28,019
GROSS PROFIT			26,256				20,141				49,804				45,585
OPERATING EXPENSES
Research and development			2,359				2,337				4,726				4,448
Selling and marketing			6,060				4,356				11,862				9,298
General and administrative			5,635				4,323				11,924				8,958
European and global sales & marketing leadership reorganization			1,240				—				1,240				—
Total operating expenses			15,294				11,016				29,752				22,704
OPERATING INCOME			10,962				9,125				20,052				22,881
OTHER INCOME (EXPENSE)
Interest income			27				30				44				61
Other, net			118				110				321				(8	)
Total other income (expense)			145				140				365				53
EARNINGS BEFORE INCOME TAXES			11,107				9,265				20,417				22,934
INCOME TAX PROVISION			3,847				3,285				7,132				8,033
NET EARNINGS		$	7,260			$	5,980			$	13,285			$	14,901
BASIC EARNINGS PER COMMON SHARE		$	0.18			$	0.15			$	0.33			$	0.37
DILUTED EARNINGS PER COMMON SHARE		$	0.18			$	0.15			$	0.32			$	0.36
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC			40,686				40,514				40,647				40,504
EFFECT OF DILUTIVE STOCK OPTIONS			662				663				672				674
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED			41,348				41,177				41,319				41,178
ANTI-DILUTIVE SECURITIES:
Common share options			211				215				176				193
DIVIDENDS DECLARED PER COMMON SHARE		$	0.19			$	0.19			$	0.38			$	0.36

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

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Six Months Ended March 31,		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings		$	13,285			$	14,901
Non-cash items:
Depreciation of property, plant and equipment			1,711				1,530
Amortization of intangible assets			1,226				734
Stock-based compensation			1,324				921
Deferred income taxes			(1,320	)			(1,135	)
Loss on disposition of fixed assets			6				13
Unrealized loss on auction-rate securities and rights, net			—				12
Change in current assets			(7,128	)			2,944
Change in current liabilities			2,309				(3,853	)
Other, net			(1,072	)			560
Net cash provided by operating activities			10,341				16,627
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment			(5,260	)			(2,124	)
Purchases of intangibles and other assets			(12	)			—
Purchases of short-term investments			—				(1,000	)
Net cash used for investing activities			(5,272	)			(3,124	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(15,451	)			(14,580	)
Proceeds and tax benefits from exercises of stock options			829				522
Net cash used for financing activities			(14,622	)			(14,058	)
Effect of Exchange Rate Changes on Cash and Equivalents			53				(681	)
Net Decrease in Cash and Equivalents			(9,500	)			(1,236	)
Cash and Equivalents at Beginning of Period			37,879				54,030
Cash and Equivalents at End of Period		$	28,379			$	52,794

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

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

ASSETS

		March 31,				September 30,
		2011				2010
CURRENT ASSETS
Cash and equivalents		$	28,379			$	37,879
Accounts receivable, less allowances of $169 and $241			25,398				22,064
Inventories			32,244				28,420
Prepaid expenses and other current assets			5,506				5,071
Deferred income taxes			2,296				1,871
Total current assets			93,823				95,305
PROPERTY, PLANT AND EQUIPMENT, at Cost
Land			1,190				991
Buildings and improvements			20,924				20,670
Machinery, equipment and furniture			33,124				31,945
Construction in progress			4,644				1,320
Subtotal			59,882				54,926
Less: accumulated depreciation and amortization			35,072				33,689
Net property, plant and equipment			24,810				21,237
OTHER ASSETS
Goodwill			23,525				23,376
Other intangible assets, net			12,213				13,327
Restricted cash			1,000				1,000
Other assets			1,800				470
Total other assets			38,538				38,173
TOTAL ASSETS		$	157,171			$	154,715

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

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY

		March 31,				September 30,
		2011				2010
CURRENT LIABILITIES
Accounts payable		$	5,676			$	4,466
Accrued employee compensation costs			4,313				3,451
Other accrued expenses			5,726				5,521
Income taxes payable			1,252				1,160
Total current liabilities			16,967				14,598
DEFERRED INCOME TAXES			2,614				2,756
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, 40,953,194 and 40,654,286 shares issued, respectively			—				—
Additional paid-in capital			96,360				94,529
Retained earnings			40,011				42,177
Accumulated other comprehensive income			1,219				655
Total shareholders’ equity			137,590				137,361
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	157,171			$	154,715

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

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

														Accumulated
		Common				Additional								Other								Total
		Shares				Paid-In				Retained				Comprehensive				Comprehensive				Shareholders’
		Issued				Capital				Earnings				Income (Loss)				Income (Loss)				Equity
Balance at September 30, 2010			40,654			$	94,529			$	42,177			$	655							$	137,361
Cash dividends paid			—				—				(15,451	)			—								(15,451	)
Exercise of stock options			132				616				—				—								616
Issuance of restricted shares			167				—				—				—								—
Stock compensation expense			—				1,215				—				—								1,215
Comprehensive income:
Net earnings			—				—				13,285				—			$	13,285				13,285
Foreign currency translation adjustment			—				—				—				868				868				868
Other comprehensive income taxes			—				—				—				(304	)			(304	)			(304	)
Comprehensive income																		$	13,849
Balance at March 31, 2011			40,953			$	96,360			$	40,011			$	1,219							$	137,590

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

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

(Unaudited)

1. Basis of Presentation

The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of March 31, 2011, the results of its operations for the three and six month periods ended March 31, 2011 and 2010, and its cash flows for the six month periods ended March 31, 2011 and 2010. These statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s fiscal 2010 Annual Report on Form 10-K. Financial information as of September 30, 2010 has been derived from the Company’s audited consolidated financial statements.

The results of operations for interim periods are not necessarily indicative of the results to be expected for the year.

2. Significant Accounting Policies

(a)

Revenue Recognition and Accounts Receivable —

Revenue is generally recognized from sales when product is shipped and title has passed to the buyer. Revenue for the U.S. Diagnostics operating segment is reduced at the date of sale for estimated rebates that will be claimed by customers. Management estimates 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 $5,001 at March 31, 2011 and $5,273 at September 30, 2010.

Revenue for our Diagnostics operating segments includes bundled product revenue for our illumigene® molecular test system. The bundled product includes a reader instrument, instrument accessories, and test kits. In many instances, amounts invoiced for the illumigene® test kits cover the reader instrument, accessories, and test kits. Revenue is recognized upon shipment of the individual components of the bundled product in accordance with pricing agreements. Costs for the reader are recognized in earnings over the period that we have a pricing agreement in effect with the customer, generally three years.

Life Science revenue for contract services may come from research and development services or manufacturing services, including process development work, or a combination of both. Revenue is recognized based on each of the deliverables in a given arrangement having distinct and separate customer pricing. Pricing is often subject to a competitive bidding process. Contract research and development services may be performed on a “time and materials” basis or “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. In some cases, customers may request that we store on their behalf clinical grade biologicals that we produce under contract manufacturing agreements. These cases arise when customers do not have clinical grade storage facilities or do not want to risk contamination during transport. For such cases, revenue may be recognized on a bill-and-hold basis.

Trade accounts receivable are recorded in the accompanying Condensed Consolidated Balance Sheets at invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historical write-off experience. The allowance for doubtful accounts and related metrics, such as days’ sales outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed individually for collectibility. Customer invoices are charged off against the allowance when we believe it is probable that the invoices will not be paid.

(b)

Comprehensive Income (Loss) —

Our comprehensive income or loss is comprised of net earnings, foreign currency translation and the related income tax effects.

Assets and liabilities of foreign operations are translated using period-end exchange rates with gains or losses resulting from translation included as a separate component of 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 Australian dollar, British pound and Euro currencies. These gains and losses are included in other income and expense in the accompanying Condensed Consolidated Statements of Operations.

Comprehensive income for the interim periods was as follows:

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2011				2010				2011				2010
Net earnings		$	7,260			$	5,980			$	13,285			$	14,901
Foreign currency translation adjustment			1,804				(885	)			868				(1,142	)
Income taxes			(629	)			310				(304	)			399
Comprehensive income		$	8,435			$	5,405			$	13,849			$	14,158

(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. These differences are adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates.

We account for uncertain tax positions using a benefit recognition model with a two-step approach: (i) a more-likely-than-not recognition criterion; and (ii) a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit is recorded. We recognize accrued interest and penalties related to unrecognized tax benefits as a portion of our income tax provision in the Condensed Consolidated Statements of Operations.

(d)

Stock-based Compensation —

We recognize compensation expense for all stock-based awards made to employees, based upon the fair value of the stock-based award on the date of the grant. Shares are expensed over their requisite service period.

(e)

Cash, Cash Equivalents and Investments —

Our investment portfolio includes the following components:

		March 31, 2011								September 30, 2010
		Cash and								Cash and
		Equivalents				Other				Equivalents				Other
Taxable investments -
Overnight repurchase agreements		$	2,949			$	—			$	14,862			$	—
Money market funds			10,258				—				10,249				—
Cash on hand -
Restricted			—				1,000				—				1,000
Unrestricted			15,172				—				12,768				—
Total		$	28,379			$	1,000			$	37,879			$	1,000

(f)

Reclassifications —

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

3. Acquisition of Bioline Group

On July 20, 2010, we acquired all of the outstanding common stock of the Bioline group of companies (collectively the “Bioline Group”). We paid $23,849 from cash and equivalents on hand to acquire the Bioline Group. Headquartered in London, England, the Bioline Group is a leading manufacturer and distributor of molecular biology reagents with additional operations in Germany, Australia and the United States. The highly specialized molecular biology reagents it supplies to the life science research, biotech, pharmaceutical and commercial diagnostics markets are the critical components used in PCR testing for DNA, RNA and other genomic testing.

As a result of the consideration paid exceeding the fair value of the net assets being acquired, goodwill in the amount of $13,064 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. This goodwill results largely from the addition of key global operations and direct sales capabilities, management talent and a research-oriented customer base, to complement our existing Life Science operations. In addition to the Bioline Group’s results of operations, which are included in our Condensed Consolidated Statement of Operations for the three and six months ended March 31, 2011 and reported as part of the Life Science operating segment, the consolidated results for the three and six months ended March 31, 2011 also include:

i)

$237 and $587 of Cost of Sales for the three and six months, respectively, related to the roll-out of fair value inventory adjustments for sales of products that were in the Bioline Group’s inventory on the date of acquisition and, therefore, were valued at fair value, rather than manufactured cost, in the opening balance sheet; and

ii)

$255 and $507 of General and Administrative Expenses for the three and six months, respectively, related to the amortization of specific identifiable intangible assets recorded on the opening balance sheet, including customer relationships, license agreements, non-compete agreements, manufacturing processes and trade names.

The results of the Bioline Group included in the consolidated results of the Company for the three and six months ended March 31, 2011 are as follows, reflecting the items noted above:

		Three				Six
		Months				Months
		Ended				Ended
		March 31,				March 31,
		2011				2011
Net Sales		$	3,683			$	7,061
Net Earnings		$	177			$	59

The recognized amounts of identifiable assets acquired and liabilities assumed in the acquisition of the Bioline Group are as follows:

		July 20,
		2010				Measurement				July 20,
		(as initially				Period				2010
		reported)				Adjustments				(as adjusted)
Fair value of assets acquired -
Cash and equivalents		$	3,445							$	3,445
Accounts receivable			1,897								1,897
Inventories			2,807								2,807
Other current assets			371			$	(21	)			350
Property, plant and equipment, net			816								816
Goodwill			13,166				(102	)			13,064
Other intangible assets (estimated useful life):
Customer relationships (10 years)			3,898								3,898
Manufacturing processes (6 years)			1,467								1,467
License agreements (approx. 8 year wtd. avg.)			718								718
Non-compete agreements (1 year)			122								122
Trade names (10 years)			995								995
			29,702				(123	)			29,579
Fair value of liabilities assumed -
Accounts payable and accrued expenses			2,817				436				3,253
Deferred income tax liabilities			3,036				(559	)			2,477
Total consideration paid		$	23,849			$	—			$	23,849

The above estimated fair values of the assets acquired and liabilities assumed continue to be preliminary and are based on the information that was available as of the acquisition date and the subsequent filing of this Form 10-Q and are reflected in the accompanying Condensed Consolidated Balance Sheets, including retrospective adjustment of the September 30, 2010 Condensed Consolidated Balance Sheet. We believe that the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, however the preliminary measurements of fair value set forth above are subject to change. We expect to complete the purchase price allocation as soon as practicable, but no later than one year from the date of acquisition.

The consolidated pro forma results of the combined entities of Meridian and the Bioline Group, had the acquisition date been October 1, 2009, are as follows for the periods indicated:

		Three				Six
		Months				Months
		Ended				Ended
		March 31,				March 31,
		2010				2010
Net Sales		$	34,436			$	79,847
Net Earnings		$	6,343			$	15,578
Diluted Earnings Per Common Share		$	0.15			$	0.38

4. Inventories

Inventories are comprised of the following:

		March 31,				September 30,
		2011				2010
Raw materials		$	6,982			$	6,221
Work-in-process			7,270				6,784
Finished goods			19,317				16,545
Gross inventory			33,569				29,550
Less: Reserves			(1,325	)			(1,130	)
Net inventory		$	32,244			$	28,420

5. Major Customers and Segment Information

Meridian was formed in 1976 and functions as a fully-integrated research, development, manufacturing, marketing and sales organization with primary emphasis in the field of life science. Our principal businesses are (i) the development, manufacture and distribution of diagnostic test kits primarily for gastrointestinal, viral, respiratory and parasitic infectious diseases; (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract development and manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.

Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, Africa 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; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad. 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 50% and 48% of the U.S. Diagnostics operating segment third-party sales during the three months ended March 31, 2011 and 2010, respectively, and 51% and 61% during the six months ended March 31, 2011 and 2010, respectively. Four customers accounted for 18% and 39% of the Life Science operating segment third-party sales during the three months ended March 31, 2011 and 2010, respectively, and 21% and 38% during the six months ended March 31, 2011 and 2010, respectively.

Segment information for the interim periods is as follows:

		U.S.				European
		Diagnostics				Diagnostics				Life Science				Eliminations(1)				Total
Three Months Ended March 31, 2011
Net sales -
Third-party		$	25,528			$	6,385			$	9,146			$	—			$	41,059
Inter-segment			2,455				3				105				(2,563	)			—
Operating income			9,807				50				923				182				10,962
Goodwill (March 31, 2011)			1,381				—				22,144				—				23,525
Other intangible assets, net (March 31, 2011)			1,923				2				10,288				—				12,213
Total assets (March 31, 2011)			71,090				20,423				92,642				(26,984	)			157,171
Three Months Ended March 31, 2010
Net sales -
Third-party		$	18,193			$	6,591			$	6,363			$	—			$	31,147
Inter-segment			2,550				3				169				(2,722	)			—
Operating income			6,571				1,093				1,320				141				9,125
Goodwill (September 30, 2010)			1,381				—				21,995				—				23,376
Other intangible assets, net (September 30, 2010)			2,283				9				11,035				—				13,327
Total assets (September 30, 2010)			72,030				18,044				90,462				(25,821	)			154,715
Six Months Ended March 31, 2011
Net sales -
Third-party		$	48,178			$	12,314			$	17,830			$	—			$	78,322
Inter-segment			5,063				7				318				(5,388	)			—
Operating income			18,381				803				702				166				20,052
Six Months Ended March 31, 2010
Net sales -
Third-party		$	48,897			$	12,885			$	11,822			$	—			$	73,604
Inter-segment			5,477				4				261				(5,742	)			—
Operating income			18,701				2,063				2,224				(107	)			22,881

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

6. Intangible Assets

A summary of our acquired intangible assets subject to amortization, as of March 31, 2011 and September 30, 2010 is as follows:

		March 31, 2011								September 30, 2010
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Value				Amortization				Value				Amortization
Manufacturing technologies, core products and cell lines		$	11,665			$	8,141			$	11,644			$	7,693
Trademarks, licenses and patents			3,633				1,239				3,547				997
Customer lists and supply agreements			12,326				6,073				12,537				5,816
Non-compete agreements			128				86				126				21
		$	27,752			$	15,539			$	27,854			$	14,527

The actual aggregate amortization expense for these intangible assets was $631 and $339 for the three months ended March 31, 2011 and 2010, respectively, and $1,226 and $734 for the six months ended March 31, 2011 and 2010, respectively. The estimated aggregate amortization expense for these intangible assets for each of the fiscal years through fiscal 2015 is as follows: fiscal 2011 — $2,321, fiscal 2012 — $2,072, fiscal 2013 — $2,071, fiscal 2014 — $1,635 and fiscal 2015 — $1,386.

7. Fair Value Measurements

We use fair value measurements to value our financial assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs, developed using our estimates and assumptions, which reflect those that the market participants would use. Such inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Determining where an asset or liability falls within the hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and we consider counterparty credit risk in the assessment of fair value.

Financial assets and liabilities carried at fair value at March 31, 2011 and September 30, 2010 and are classified in the tables below into one of the three categories described above:

Balances as of March 31, 2011

		Level 1				Level 2				Level 3				Total
Money market funds		$	10,258			$	—			$	—			$	10,258
Total		$	10,258			$	—			$	—			$	10,258

Balances as of September 30, 2010

		Level 1				Level 2				Level 3				Total
Money market funds		$	10,249			$	—			$	—			$	10,249
Total		$	10,249			$	—			$	—			$	10,249

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. In the discussion that follows, all amounts are in thousands (both tables and text), except per share data and percentages.

Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of Meridian’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.

Results of Operations

Three Months Ended March 31, 2011

Net earnings for the second quarter of fiscal 2011 increased 21% to $7,260, or $0.18 per diluted share, from net earnings for the second quarter of fiscal 2010 of $5,980, or $0.15 per diluted share. This increase reflects the combined effects of both increased sales and increased operating expenses, resulting primarily from inclusion of the Bioline Group, which was acquired in July 2010, as well as costs related to the reorganization of our European and global sales and marketing leadership. Consolidated sales increased 32% to $41,059 for the second quarter of fiscal 2011 compared to the same period of the prior year, reflecting increases in sales across all four of our diagnostic focus product families: C. difficile, Foodborne, H. pylori and Upper Respiratory.

Sales for the U.S. Diagnostics operating segment for the second quarter of fiscal 2011 increased 40% compared to the second quarter of fiscal 2010, reflecting significant growth across all four of our focus product families — ranging from low double digit growth in our C. difficile products to greater than 100% growth in our foodborne products. Second quarter 2011 sales for our European Diagnostics operating segment decreased 3% compared to the second quarter of fiscal 2010 due in large part to a negative currency effect and decreased C. difficile and H. pylori product sales, while, as a result of the Bioline Group acquisition, our Life Science segment experienced a 44% increase in sales during this period. Excluding the effect of the Bioline Group, sales of our core Life Science operating segment decreased by 14% during the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, as this business continues to experience elements of pricing pressure and reduced order volumes in several key product lines.

Six Months Ended March 31, 2011

For the six month period ended March 31, 2011, net earnings decreased 11% to $13,285, or $0.32 per diluted share, from net earnings for the comparable fiscal 2010 period of $14,901, or $0.36 per diluted share. This decrease reflects the impact of a modest increase in total sales being more than offset by the increase in operating expenses that resulted from inclusion of the Bioline Group, which was acquired in July 2010, as well as costs related to the reorganization of our European and global sales and marketing leadership. Consolidated sales increased 6% to $78,322 for the first six months of fiscal 2011 compared to the same period of the prior fiscal year. This increase primarily results from strong growth in foodborne and H. pylori product sales being partially offset by a 39% decrease in respiratory product sales.

During the first six months of fiscal 2011, sales for the U.S. Diagnostics operating segment decreased 1% from the comparable fiscal 2010 period. This slight decrease reflects sales growth in our C. difficile, foodborne and H. pylori product families being more than offset by the significant decrease in respiratory product sales, which resulted from the dramatic impact on the fiscal 2010 first quarter of the novel A (H1N1) influenza outbreak and the abrupt halt of the outbreak in December 2009. Sales of our European Diagnostics operating segment for the first six months of fiscal 2011 decreased 4% compared to the first six months of fiscal 2010 largely due to negative currency effect, while, as a result of the Bioline Group acquisition, our Life Science segment experienced a 51% increase in sales during this period. Excluding the effect of the Bioline Group, sales of our core Life Science operating segment decreased by 9% during the first half of fiscal 2011 compared to the first half of fiscal 2010, as this business continues to experience elements of pricing pressure and reduced order volumes in several key product lines.

Non-GAAP Information

The tables below provide information on net earnings, basic earnings per share and diluted earnings per share, excluding the effect of costs associated with reorganizing our European and Global Sales and Marketing Leadership, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:

1.

These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of non-routine costs related to reorganizing our European and Global Sales and Marketing Leadership; and

2.

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

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2011				2010				2011				2010
Net Earnings -
U.S. GAAP basis		$	7,260			$	5,980			$	13,285			$	14,901
European and Global Sales & Marketing Leadership Reorganization costs, inclusive of the income tax effect (1)			872				—				872				—
Excluding Leadership Reorganization costs		$	8,132			$	5,980			$	14,157			$	14,901
Net Earnings per Basic Common Share -
U.S. GAAP basis		$	0.18			$	0.15			$	0.33			$	0.37
European and Global Sales & Marketing Leadership Reorganization costs, inclusive of the income tax effect (1)			0.02				—				0.02				—
Excluding Leadership Reorganization costs		$	0.20			$	0.15			$	0.35			$	0.37
Net Earnings per Diluted Common Share -
U.S. GAAP basis		$	0.18			$	0.15			$	0.32			$	0.36
European and Global Sales & Marketing Leadership Reorganization costs, inclusive of the income tax effect (1)			0.02				—				0.02				—
Excluding Leadership Reorganization costs		$	0.20			$	0.15			$	0.34			$	0.36

Revenue Overview

Our Diagnostics operating segments provide the largest share of our consolidated revenues, 78% and 80% for the second quarters of fiscal 2011 and 2010, respectively, and 77% and 84% for the first six months of fiscal 2011 and 2010, respectively. The percentage declines in both the quarterly and fiscal year-to-date periods result primarily from the addition of the Bioline Group to our Life Science operating segment and, in the case of year-to-date comparisons, the impact of the novel A (H1N1) influenza outbreak in 2010. Sales from our four focus families (C. difficile, Foodborne, H. pylori and Upper Respiratory) comprised 73% and 72% of our Diagnostics operating segments’ revenues during the second quarters of fiscal 2011 and 2010, respectively, and 72% and 74% for the six month periods ended March 31, 2011 and 2010, respectively.

Overall revenue change for the fiscal 2011 second quarter for our Diagnostics operating segments was an increase of 29%, reflecting growth across all four of our focus product families. The levels of growth in the focus products ranged from mid-single digit growth in our C. difficile products, to greater than 100% growth in our foodborne products. On an organic basis, which excludes the effects of currency translation, sales for our European Diagnostics operating segment decreased by 2% during the second quarter, reflecting the combined effects of decreases in our C. difficile and H. pylori product families, partially offset by growth in our upper respiratory and foodborne product sales.

For the first six months of fiscal 2011, revenue for our Diagnostics operating segments decreased 2% from the comparable fiscal 2010 period, primarily due to a relatively mild worldwide flu season in the first quarter of fiscal 2011 compared to the fiscal 2010 first quarter, including the effects on the prior year of the world-wide outbreak of novel A (H1N1) influenza. The dramatic impact of this decrease in flu-related product sales was largely offset by double digit sales increases in our H. pylori and foodborne product families. Excluding the effects of currency translation, our European Diagnostics operating segment’s sales during the six months ended March 31, 2011 were flat relative to the comparable fiscal 2010 period.

C. difficile Products

During the third quarter of fiscal 2010, we launched our illumigene^® molecular C. difficile product in non-U.S. markets, with launch of the product into U.S. markets following in the fourth quarter of fiscal 2010, upon receiving FDA clearance. As a result, we currently have in excess of 300 customer accounts and others that are evaluating our illumigene^® molecular C. difficile product. We expect sales of the product, which totaled approximately $1,985 and $2,760 in the three and six months ended March 31, 2011, respectively, to continue to grow significantly throughout fiscal 2011.

As a result of competitive pressures in this disease family over the last several years from new competitive products, including molecular assays, we have experienced only single digit growth in the sales of our C. difficile products; growth of 6% for all of our Diagnostics operating segments during the second quarter of fiscal 2011 and 1% for the first six months of fiscal 2011. However, this rate of growth is a marked improvement over the declines experienced in recent periods and results from the growing market acceptance of our illumigene^® molecular C. difficile product and the fact that sales of our molecular product outpaced the decline in sales of our traditional immunoassay C. difficile products.

With the launch of our molecular product, we believe we are in a unique position to offer a full line of testing solutions to our clinical laboratory customers around the world to counter the competitive pressures surrounding this market, as substantiated by our receiving clearance from the FDA during the second quarter to market our illumigene^® molecular C. difficile test for use with pediatric patients under the age of two years. Over the next 12 months, we expect three additional tests for our illumigene^® molecular platform to clear formal clinical trial and be submitted to the FDA for marketing clearance — tests for Group B Streptococcus, Group A Streptococcus and Mycoplasma pneumoniae.

Upper Respiratory Products

During the three and six month periods ended March 31, 2011, upper respiratory product sales for our Diagnostics operating segments increased 58% and decreased 39%, respectively, relative to the comparable fiscal 2010 periods. The dramatic quarter-over-quarter sales increase for this family of products was driven by increased demand for rapid tests other than those for influenza. The sales decrease in the comparable year-to-date periods, on the other hand, was a direct result of influenza test kit sales; in particular the abrupt halt, in December 2009, of the outbreak of the novel A (H1N1) influenza virus that began to spread across the countries in the northern hemisphere during the second half of fiscal 2009. The outbreak also created an increased interest in influenza testing in European markets where rapid testing has not been traditionally performed and resulted in significant sales activity for these products during the fiscal 2010 first quarter. However, similar to U.S. markets, these sales levels were not repeated in fiscal 2011, as evidenced by the approximate 14% decline in this operating segment’s upper respiratory product sales on an organic basis (excluding effects of currency translation) compared to the first six months of fiscal 2010.

Foodborne Products

Increased demand for our foodborne illness testing products throughout the first half of fiscal 2011 resulted in our U.S. Diagnostics operating segment experiencing sales increases for these products totaling 122% and 49% for the three and six month periods ended March 31, 2011, respectively. During these same periods, our European Diagnostics operating segment experienced sales increases of approximately 19% and 29%, respectively, on an organic basis.

H. pylori Products

During the second quarter of fiscal 2011, sales of our H. pylori products grew 20% for our U.S. Diagnostics operating segment; 18% during the six month fiscal year-to-date period. This increase continues to reflect the benefits of our partnerships with managed care companies in promoting the health and economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving physician behavior away from serology-based testing toward direct antigen testing. Due to significant competitive pressures related to these products on the international front, sales of H. pylori products for our European Diagnostics operating segment declined 8% on an organic basis for the fiscal 2011 second quarter, compared to the second quarter of fiscal 2010, and declined 3% during the year-over-year six month periods ended March 31.

Group Purchasing Organizations

In our U.S. Diagnostics operating segment, consolidation of the U.S. healthcare industry over the last several years has led to the creation of group purchasing organizations (GPOs) that aggregate buying power for hospital groups and put pressure on our selling prices. We have multi-year supply agreements with several GPOs. During the first three and six months of fiscal 2011, we have experienced approximately $245 and $796, respectively, in unfavorable price variance, as a result of these agreements. However, these agreements help secure our products with these customers and have led to new business. While in the near term this has negatively impacted gross profit, further increases in volumes are expected from these contracts.

Foreign Currency

Sales for our European Diagnostics operating segment included the effect of less favorable currency rates, which led to currency translation losses in the amount of approximately $75 for the second quarter of fiscal 2011, compared to $315 of currency translation gains in the fiscal 2010 second quarter. During the first six months of fiscal 2011, translation losses of approximately $515 were experienced, compared to $900 of currency translation gains during the comparable prior year period.

Life Science Operating Segment

Sales for our Life Science operating segment increased 44% for the second quarter of fiscal 2011 and 51% for the six month fiscal year-to-date period, due primarily to the revenue contribution of the Bioline Group acquired in July 2010. Excluding the impact of the Bioline Group, sales for the operating segment declined 14% and 9% during the three and six month periods, respectively, as this business continues to experience elements of pricing pressure and reduced order volumes in several key product lines. Including the effect of the addition of the Bioline Group, we expect approximately 50% revenue growth for this operating segment in fiscal 2011, compared to fiscal 2010, and an approximate 3% decrease in sales excluding the effects of the Bioline Group.

Significant Customers

Two national distributors in our U.S. Diagnostics operating segment accounted for 50% and 48% of total sales for this operating segment for the second quarters of fiscal 2011 and 2010, respectively, and 51% and 61% during the six months ended March 31, 2011 and 2010, respectively. The lower percentage of sales during the first six months of fiscal 2011 reflects the comparative decline in the distributors’ inventory stocking of influenza and other products.

Four diagnostic manufacturing customers in our Life Science operating segment accounted for 18% and 39% of total sales for this operating segment for the second quarters of fiscal 2011 and 2010, respectively, and 21% and 38% during the six months ended March 31, 2011 and 2010, respectively. The lower percentage of sales during both periods results primarily from the addition of the Bioline Group.

Operating Segment Revenues

Our reportable operating segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and countries outside of Europe, Africa 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; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science operating segment also includes the contract development and manufacture of 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 serves to reduce the variability in consolidated revenues.

The Company has experienced no material negative impact on revenue as a result of the recent disaster in Japan, nor is any material negative impact anticipated at this time, although no assurances can be given with regard to material negative impacts that may arise in the future despite being unanticipated as of the date of this report. In addition, the Company’s supply of product and product components has not been and is not expected to be adversely impacted by the disaster.

Revenues for each of our operating segments are shown below.

		Three Months Ended March 31,												Six Months Ended March 31,
		2011				2010				Inc (Dec)				2011				2010				Inc (Dec)
U.S. Diagnostics		$	25,528			$	18,193				40	%		$	48,178			$	48,897				(1	)%
European Diagnostics			6,385				6,591				(3	)%			12,314				12,885				(4	)%
Life Science			9,146				6,363				44	%			17,830				11,822				51	%
Consolidated		$	41,059			$	31,147				32	%		$	78,322			$	73,604				6	%
International -
U.S. Diagnostics		$	1,617			$	1,248				30	%		$	3,213			$	2,977				8	%
European Diagnostics			6,385				6,591				(3	)%			12,314				12,885				(4	)%
Life Science			5,284				2,792				89	%			9,873				5,252				88	%
Total		$	13,286			$	10,631				25	%		$	25,400			$	21,114				20	%
% of total sales			32	%			34	%							32	%			29	%

Gross Profit

		Three Months Ended March 31,												Six Months Ended March 31,
		2011				2010				Change				2011				2010				Change
Gross Profit		$	26,256			$	20,141				30	%		$	49,804			$	45,585				9	%
Gross Profit Margin			64	%			65	%		-1 point					64	%			62	%		+2 points

Gross profit margin improvement for the first six months of fiscal 2011 results primarily from the combined effects of continued operating efficiencies in our Cincinnati, Ohio diagnostic test manufacturing facility and the year-over-year decline in upper respiratory product sales. Our upper respiratory product family generally has a lower gross profit margin than our other focus product families (C. difficile, H. pylori and foodborne). Sales of upper respiratory products during the first six months of fiscal 2011 were approximately 13% of our consolidated sales, compared to 22% of consolidated sales for the comparable fiscal 2010 period. Specifically, sales of the Company’s influenza products represented approximately 2% of consolidated sales during the six months ended March 31, 2011, compared to approximately 11% in the first six months of fiscal 2010.

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, antibodies, PCR/qPCR reagents, nucleotides, competent cells, proficiency panels, 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

		Three Months Ended March 31, 2011
														European and
														Global Sales &
														Marketing
		Research &				Selling &				General &				Leadership				Total Operating
		Development				Marketing				Administrative				Reorganization				Expenses
2010 Expenses		$	2,337			$	4,356			$	4,323			$	—			$	11,016
% of Sales			8	%			14	%			14	%			—	%			35	%
Fiscal 2011 Increases (Decreases):
U.S. Diagnostics			(140	)			826				(14	)			365				1,037
European Diagnostics			—				14				(52	)			875				837
Life Science
- Bioline Group			144				857				1,390				—				2,391
- Other			18				7				(12	)			—				13
2011 Expenses		$	2,359			$	6,060			$	5,635			$	1,240			$	15,294
% of Sales			6	%			15	%			14	%			3	%			37	%
% Increase			1	%			39	%			30	%			—	%			39	%

Operating Expenses

		Six Months Ended March 31, 2011
														European and
														Global Sales &
														Marketing
		Research &				Selling &				General &				Leadership				Total Operating
		Development				Marketing				Administrative				Reorganization				Expenses
2010 Expenses		$	4,448			$	9,298			$	8,958			$	—			$	22,704
% of Sales			6	%			13	%			12	%			—	%			31	%
Fiscal 2011 Increases (Decreases):
U.S. Diagnostics			(180	)			926				244				365				1,355
European Diagnostics			—				(67	)			(88	)			875				720
Life Science
- Bioline Group			354				1,735				2,667				—				4,756
- Other			104				(30	)			143				—				217
2011 Expenses		$	4,726			$	11,862			$	11,924			$	1,240			$	29,752
% of Sales			6	%			15	%			15	%			2	%			38	%
% Increase			6	%			28	%			33	%			—	%			31	%