MERIDIAN BIOSCIENCE INC - Quarter Report: 2019 March (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

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

For the Quarterly Period Ended March 31, 2019

OR

 

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

For the transition period from                      to                     

Commission file number    0-14902

MERIDIAN BIOSCIENCE, INC.

Incorporated under the laws of Ohio

31-0888197

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

3471 River Hills Drive

Cincinnati, Ohio 45244

(513) 271-3700

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

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

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

 

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

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

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

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, no par value		VIVO		NASDAQ Global Select Market

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

 

Class		Outstanding April 30, 2019
Common Stock, no par value		42,628,582

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q

 

				Page(s)
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Statements of Operations Three and Six Months Ended March  31, 2019 and 2018			1
		Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended March 31, 2019 and 2018			2
		Condensed Consolidated Statements of Cash Flows Six Months Ended March  31, 2019 and 2018			3
		Condensed Consolidated Balance Sheets March 31, 2019 and September 30, 2018			4-5
		Condensed Consolidated Statements of Changes in Shareholders’ Equity Three and Six Months Ended March 31, 2019 and 2018			6
		Notes to Condensed Consolidated Financial Statements			7-16
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17-26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.		Controls and Procedures			26
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 6.		Exhibits			27-28
Signature					28

FORWARD-LOOKING STATEMENTS

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

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2019				2018				2019				2018
NET REVENUES		$	50,248			$	56,451			$	101,728			$	108,734
COST OF SALES			20,910				21,882				40,818				42,155
GROSS PROFIT			29,338				34,569				60,910				66,579
OPERATING EXPENSES
Research and development			3,816				4,491				7,700				8,895
Selling and marketing			6,911				8,647				14,474				17,461
General and administrative			7,388				8,842				16,286				18,090
Acquisition and restructuring costs			785				3,458				872				4,192
Litigation costs			603				1,453				1,192				2,202
Total operating expenses			19,503				26,891				40,524				50,840
OPERATING INCOME			9,835				7,678				20,386				15,739
OTHER INCOME (EXPENSE)
Interest income			204				90				353				162
Interest expense			(347	)			(379	)			(710	)			(774	)
Other, net			(445	)			(165	)			(306	)			(245	)
Total other income (expense)			(588	)			(454	)			(663	)			(857	)
EARNINGS BEFORE INCOME TAXES			9,247				7,224				19,723				14,882
INCOME TAX PROVISION			2,153				1,936				4,523				3,292
NET EARNINGS		$	7,094			$	5,288			$	15,200			$	11,590
BASIC EARNINGS PER COMMON SHARE		$	0.17			$	0.12			$	0.36			$	0.27
DILUTED EARNINGS PER COMMON SHARE		$	0.17			$	0.12			$	0.35			$	0.27
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC			42,496				42,323				42,472				42,289
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS			450				409				453				404
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED			42,946				42,732				42,925				42,693
ANTI-DILUTIVE SECURITIES:
Common share options and restricted share units			771				1,021				742				1,015
DIVIDENDS DECLARED PER COMMON SHARE		$	0.125			$	0.125			$	0.250			$	0.250

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

 

Page 1

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(dollar amounts in thousands)

 

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2019				2018				2019				2018
NET EARNINGS		$	7,094			$	5,288			$	15,200			$	11,590
Other comprehensive income (loss):
Foreign currency translation adjustment			377				926				(339	)			1,217
Unrealized gain (loss) on cash flow hedge			(310	)			424				(887	)			765
Income taxes related to items of other comprehensive income			78				(107	)			223				(219	)
Other comprehensive income (loss), net of tax			145				1,243				(1,003	)			1,763
COMPREHENSIVE INCOME		$	7,239			$	6,531			$	14,197			$	13,353

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

 

Page 2

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollar amounts in thousands)

 

Six Months Ended March 31,		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings		$	15,200			$	11,590
Non-cash items included in net earnings:
Depreciation of property, plant and equipment			2,562				2,236
Amortization of intangible assets			1,658				1,883
Amortization of deferred instrument costs			—				401
Stock-based compensation			2,368				1,975
Deferred income taxes			(677	)			(1,576	)
Change in:
Accounts receivable			(951	)			(4,185	)
Inventories			832				(2,370	)
Prepaid expenses and other current assets			286				754
Accounts payable and accrued expenses			(1,267	)			3,746
Income taxes payable			1,108				(775	)
Other, net			(149	)			160
Net cash provided by operating activities			20,970				13,839
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment			(2,113	)			(2,160	)
Net cash used for investing activities			(2,113	)			(2,160	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(10,612	)			(10,577	)
Payments on term loan			(2,250	)			(2,250	)
Proceeds and tax benefits from exercises of stock options			524				—
Net cash used for financing activities			(12,338	)			(12,827	)
Effect of Exchange Rate Changes on Cash and Equivalents and Restricted Cash			(185	)			476
Net Increase (Decrease) in Cash and Equivalents and Restricted Cash			6,334				(672	)
Cash and Equivalents and Restricted Cash at Beginning of Period			60,763				58,072
Cash and Equivalents and Restricted Cash at End of Period		$	67,097			$	57,400
Cash and Equivalents		$	66,097			$	56,400
Restricted Cash			1,000				1,000
Cash and Equivalents and Restricted Cash at End of Period		$	67,097			$	57,400

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

 

Page 3

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollar amounts in thousands)

ASSETS

 

		March 31, 2019 (Unaudited)				September 30, 2018
CURRENT ASSETS
Cash and equivalents		$	66,097			$	59,763
Accounts receivable, less allowances of $437 and $310			33,031				32,336
Inventories			40,866				41,993
Prepaid expenses and other current assets			4,671				4,961
Total current assets			144,665				139,053
PROPERTY, PLANT AND EQUIPMENT, at Cost
Land			1,155				1,160
Buildings and improvements			32,454				32,444
Machinery, equipment and furniture			60,394				50,606
Construction in progress			1,806				1,631
Subtotal			95,809				85,841
Less: accumulated depreciation and amortization			65,039				55,846
Net property, plant and equipment			30,770				29,995
OTHER ASSETS
Goodwill			54,642				54,637
Other intangible assets, net			21,452				23,113
Restricted cash			1,000				1,000
Deferred instrument costs, net			—				1,239
Fair value of interest rate swap			835				1,722
Deferred income taxes			110				130
Other assets			490				488
Total other assets			78,529				82,329
TOTAL ASSETS		$	253,964			$	251,377

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

 

Page 4

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollar amounts in thousands)

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

		March 31, 2019 (Unaudited)				September 30, 2018
CURRENT LIABILITIES
Accounts payable		$	7,838			$	6,260
Accrued employee compensation costs			5,357				7,263
Other accrued expenses			3,724				5,065
Current portion of long-term debt			6,000				5,250
Income taxes payable			1,163				335
Total current liabilities			24,082				24,173
NON-CURRENT LIABILITIES
Post-employment benefits			2,476				2,646
Long-term debt			41,946				44,930
Long-term income taxes payable			736				441
Deferred income taxes			3,079				3,769
Total non-current liabilities			48,237				51,786
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred stock, no par value; 1,000,000 shares authorized; none issued			—				—
Common shares, no par value; 71,000,000 shares authorized, 42,515,142 and 42,399,962 shares issued, respectively			—				—
Additional paid-in capital			131,951				129,193
Retained earnings			54,074				49,602
Accumulated other comprehensive loss			(4,380	)			(3,377	)
Total shareholders’ equity			181,645				175,418
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	253,964			$	251,377

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

 

Page 5

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

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

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

 

		Common Shares Issued				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
THREE MONTHS ENDED MARCH 31, 2019
Balance at December 31, 2018			42,489			$	130,876			$	52,291			$	(4,525	)		$	178,642
Cash dividends paid - $0.125 per share			—				—				(5,311	)			—				(5,311	)
Conversion of restricted share units and exercise of stock options			26				377				—				—				377
Stock compensation expense			—				698				—				—				698
Net earnings			—				—				7,094				—				7,094
Foreign currency translation adjustment			—				—				—				377				377
Hedging activity, net of tax			—				—				—				(232	)			(232	)
Balance at March 31, 2019			42,515			$	131,951			$	54,074			$	(4,380	)		$	181,645
THREE MONTHS ENDED MARCH 31, 2018
Balance at December 31, 2017			42,307			$	127,367			$	47,937			$	(2,426	)		$	172,878
Cash dividends paid - $0.125 per share			—				—				(5,289	)			—				(5,289	)
Conversion of restricted share units			37				—				—				—				—
Stock compensation expense			—				216				—				—				216
Net earnings			—				—				5,288				—				5,288
Foreign currency translation adjustment			—				—				—				926				926
Hedging activity, net of tax			—				—				—				317				317
Balance at March 31, 2018			42,344			$	127,583			$	47,936			$	(1,183	)		$	174,336
		Common Shares Issued				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
SIX MONTHS ENDED MARCH 31, 2019
Balance at September 30, 2018			42,400			$	129,193			$	49,602			$	(3,377	)		$	175,418
Cash dividends paid - $0.250 per share			—				—				(10,612	)			—				(10,612	)
Conversion of restricted share units and exercise of stock options			115				390				—				—				390
Stock compensation expense			—				2,368				—				—				2,368
Net earnings			—				—				15,200				—				15,200
Foreign currency translation adjustment			—				—				—				(339	)			(339	)
Hedging activity, net of tax			—				—				—				(664	)			(664	)
Adoption of ASU 2014-09			—				—				(116	)			—				(116	)
Balance at March 31, 2019			42,515			$	131,951			$	54,074			$	(4,380	)		$	181,645
SIX MONTHS ENDED MARCH 31, 2018
Balance at September 30, 2017			42,207			$	125,608			$	46,923			$	(2,946	)		$	169,585
Cash dividends paid - $0.250 per share			—				—				(10,577	)			—				(10,577	)
Conversion of restricted share units			137				—				—				—				—
Stock compensation expense			—				1,975				—				—				1,975
Net earnings			—				—				11,590				—				11,590
Foreign currency translation adjustment			—				—				—				1,217				1,217
Hedging activity, net of tax			—				—				—				546				546
Balance at March 31, 2018			42,344			$	127,583			$	47,936			$	(1,183	)		$	174,336

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

 

Page 6

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Dollars in Thousands, Except Per Share Amounts

(Unaudited)

 

1.	Basis of Presentation

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

 

2.	Significant Accounting Policies

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

Revenue Recognition –

Adoption of New Standard

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

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

 

Page 7

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

 

		Balance at September 30, 2018				New Revenue Standard Adjustment				Balance at October 1, 2018
PROPERTY, PLAN AND EQUIPMENT
Machinery, equipment and furniture		$	50,606			$	8,696			$	59,302
Accumulated depreciation and amortization			(55,846	)			(7,611	)			(63,457	)
OTHER ASSETS
Deferred instrument costs, net			1,239				(1,239	)			—
NON-CURRENT LIABILITIES
Deferred income taxes			(3,769	)			38				(3,731	)
SHAREHOLDERS’ EQUITY
Retained earnings			(49,602	)			116				(49,486	)

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

Revenue Disaggregation

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

Revenue by Reportable Segment & Geographic Region

 

		Three Months Ended March 31,												Six Months Ended March 31,
		2019				2018				Inc (Dec)				2019				2018				Inc (Dec)
Diagnostics-
Americas		$	27,278			$	33,351				(18	)%		$	58,425			$	64,926				(10	)%
EMEA			5,535				5,912				(6	)%			10,620				11,327				(6	)%
ROW			687				519				32	%			1,120				1,019				10	%
Total Diagnostics			33,500				39,782				(16	)%			70,165				77,272				(9	)%
Life Science-
Americas			5,453				5,121				6	%			9,975				10,373				(4	)%
EMEA			7,901				7,478				6	%			15,376				12,659				21	%
ROW			3,394				4,070				(17	)%			6,212				8,430				(26	)%
Total Life Science			16,748				16,669				—	%			31,563				31,462				—	%
Consolidated		$	50,248			$	56,451				(11	)%		$	101,728			$	108,734				(6	)%

 

Page 8

Revenue by Product Platform/Type

 

		Three Months Ended March 31,												Six Months Ended March 31,
		2019				2018				Inc (Dec)				2019				2018				Inc (Dec)
Diagnostics-
Molecular assays		$	7,132			$	9,976				(29	)%		$	14,434			$	18,692				(23	)%
Immunoassays & blood chemistry assays			26,368				29,806				(12	)%			55,731				58,580				(5	)%
Total Diagnostics		$	33,500			$	39,782				(16	)%		$	70,165			$	77,272				(9	)%
Life Science-
Molecular reagents		$	5,390			$	6,143				(12	)%		$	11,998			$	11,832				1	%
Immunological reagents			11,358				10,526				8	%			19,565				19,630				—	%
Total Life Science		$	16,748			$	16,669				—	%		$	31,563			$	31,462				—	%

Revenue by Disease State (Diagnostics only)

 

		Three Months Ended March 31,												Six Months Ended March 31,
		2019				2018				Inc (Dec)				2019				2018				Inc (Dec)
Diagnostics-
Gastrointestinal assays		$	16,177			$	19,149				(16	)%		$	34,792			$	39,419				(12	)%
Respiratory illness assays			7,553				9,543				(21	)%			15,534				17,029				(9	)%
Blood chemistry assays			4,330				4,257				2	%			8,760				8,523				3	%
Other			5,440				6,833				(20	)%			11,079				12,301				(10	)%
Total Diagnostics		$	33,500			$	39,782				(16	)%		$	70,165			$	77,272				(9	)%

Revenue Policies

Product Sales

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

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

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

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

 

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Practical Expedients and Exemptions

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

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

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

Reagent Rental Arrangements

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

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

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

Recent Accounting Pronouncements –

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

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

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

 

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Reclassifications –

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

 

3.	Cash and Equivalents

Cash and equivalents include the following components:

 

		March 31, 2019								September 30, 2018
		Cash and Equivalents				Other Assets				Cash and Equivalents				Other Assets
Institutional money market funds		$	20,668			$	—			$	20,421			$	—
Cash on hand -
Restricted			—				1,000				—				1,000
Unrestricted			45,429				—				39,342				—
Total		$	66,097			$	1,000			$	59,763			$	1,000

 

4.	Inventories

Inventories are comprised of the following:

 

		March 31, 2019				September 30, 2018
Raw materials		$	7,473			$	6,689
Work-in-process			11,810				12,098
Finished goods - instruments			965				1,191
Finished goods - kits and reagents			20,618				22,015
Total		$	40,866			$	41,993

 

5.	Intangible Assets

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

 

		March 31, 2019								September 30, 2018
		Gross Carrying Value				Accumulated Amortization				Gross Carrying Value				Accumulated Amortization
Manufacturing technologies, core products and cell lines		$	22,298			$	14,571			$	22,297			$	13,974
Trade names, licenses and patents			8,647				5,717				8,647				5,267
Customer lists, customer relationships and supply agreements			24,463				13,668				24,461				13,051
Total		$	55,408			$	33,956			$	55,405			$	32,292

 

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

 

6.	Restructuring

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

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

 

		March 31, 2019				September 30, 2018
Severance, other termination benefits and related costs		$	78			$	987
Lease and other contract termination fees			—				33
Other			—				6
Total		$	78			$	1,026

 

7.	Income Taxes

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

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

 

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

 

8.	Bank Credit Arrangements

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

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

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

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

See Note 12, “Subsequent Event”.

 

9.	Reportable Segments and Major Customers Information

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

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

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

 

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

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

Segment information for the interim periods is as follows:

 

		Diagnostics				Life Science				Corporate(1)				Eliminations(2)				Total
Three Months Ended March 31, 2019
Net revenues -
Third-party		$	33,500			$	16,748			$	—			$	—			$	50,248
Inter-segment			89				53				—				(142	)			—
Operating income			7,561				5,361				(3,101	)			14				9,835
Goodwill (March 31, 2019)			35,213				19,429				—				—				54,642
Other intangible assets, net (March 31, 2019)			20,705				747				—				—				21,452
Total assets (March 31, 2019)			183,234				70,152				—				578				253,964
Three Months Ended March 31, 2018
Net revenues -
Third-party		$	39,782			$	16,669			$	—			$	—			$	56,451
Inter-segment			80				75				—				(155	)			—
Operating income			10,684				3,638				(6,723	)			79				7,678
Goodwill (September 30, 2018)			35,213				19,424				—				—				54,637
Other intangible assets, net (September 30, 2018)			22,068				1,045				—				—				23,113
Total assets (September 30, 2018)			180,978				70,341				—				58				251,377
Six Months Ended March 31, 2019
Net revenues -
Third-party		$	70,165			$	31,563			$	—			$	—			$	101,728
Inter-segment			252				229				—				(481	)			—
Operating income			16,346				10,492				(6,493	)			41				20,386
Six Months Ended March 31, 2018
Net revenues -
Third-party		$	77,272			$	31,462			$	—			$	—			$	108,734
Inter-segment			201				267				—				(468	)			—
Operating income			19,310				6,580				(10,334	)			183				15,739

 

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

(2)	Eliminations consist of inter-segment transactions.

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

 

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10.	Litigation Matters

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

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

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

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

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

 

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11.	FDA Matters Related to LeadCare

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

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

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

See Part II, Item 1A Risk Factors below.

 

12.	Subsequent Event

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

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

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

 

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

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

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

RESULTS OF OPERATIONS

Three Months Ended March 31, 2019

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

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

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

Six Months Ended March 31, 2019

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

 

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USE OF NON-GAAP MEASURES

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

 

1)

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

 

2)

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

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

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

 

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		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2019				2018				2019				2018
Operating Expenses -
U.S. GAAP basis		$	19,503			$	26,891			$	40,524			$	50,840
Acquisition & restructuring costs			(785	)			(3,458	)			(872	)			(4,192	)
Litigation costs			(603	)			(1,453	)			(1,192	)			(2,202	)
Adjusted Operating Expenses		$	18,115			$	21,980			$	38,460			$	44,446
Operating Income -
U.S. GAAP basis		$	9,835			$	7,678			$	20,386			$	15,739
Acquisition & restructuring costs			785				3,458				872				4,192
Litigation costs			603				1,453				1,192				2,202
Adjusted Operating Income		$	11,223			$	12,589			$	22,450			$	22,133
Net Earnings -
U.S. GAAP basis		$	7,094			$	5,288			$	15,200			$	11,590
Acquisition & restructuring costs (1)			602				2,517				669				3,052
Litigation costs (1)			463				1,058				914				1,603
One-time benefit from tax law change			—				—				—				(1,695	)
Repatriation transition tax			—				—				—				854
Adjusted Net Earnings		$	8,159			$	8,863			$	16,783			$	15,404
Net Earnings per Basic Common Share -
U.S. GAAP basis		$	0.17			$	0.12			$	0.36			$	0.27
Acquisition & restructuring costs			0.01				0.06				0.02				0.07
Litigation costs			0.01				0.02				0.02				0.04
One-time benefit from tax law change			—				—				—				(0.04	)
Repatriation transition tax			—				—				—				0.02
Adjusted Basic EPS (2)		$	0.19			$	0.21			$	0.40			$	0.36
Net Earnings per Diluted Common Share -
U.S. GAAP basis		$	0.17			$	0.12			$	0.35			$	0.27
Acquisition & restructuring costs			0.01				0.06				0.02				0.07
Litigation costs			0.01				0.02				0.02				0.04
One-time benefit from tax law change			—				—				—				(0.04	)
Repatriation transition tax			—				—				—				0.02
Adjusted Diluted EPS (2)		$	0.19			$	0.21			$	0.39			$	0.36

 

(1)

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

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

 

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