SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-K

 

 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

x

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015.2018.

 

¨

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

FOR THE TRANSITION PERIOD FROM                    TO                    

Commission FileNo. 0-14902

 

 

MERIDIAN BIOSCIENCE, INC.

 

 

3471 River Hills Drive

Cincinnati, Ohio 45244

IRS Employer IDNo. 31-0888197

Incorporated under the Laws of Ohio

Phone: (513)271-3700

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange of which  registered

Common Shares, No Par Value 

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     YES  x    NO  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act.    YES  ¨    NO  x

Indicate by 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, and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.  YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company or emerging growth company. See definitions of “large accelerated filer”filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer x  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)  Smaller reporting company ¨
Emerging growth company

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule12b-2).    YES  ¨    NO  x

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.  ☐

The aggregate market value of Common Shares held bynon-affiliates as of March 31, 20152018 was $786,958,969$592,033,599 based on a closing sale price of $19.08$14.20 per share on March 31, 2015.2018. As of October 31, 2015, 41,846,0492018, 42,402,912 no par value Common Shares were issued and outstanding.

Documents Incorporated by ReferenceDOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended September 30, 2015 furnished to the Commission pursuant to Rule14a-3(b) are incorporated by reference in Part II as specified and portions of the Registrant’s Proxy Statementregistrant’s proxy statement to be filed with the Commission for its 20162019 Annual Shareholders’ Meeting are incorporated by reference in Part III as specified.

 

 

 


MERIDIAN BIOSCIENCE, INC.

INDEX TO ANNUAL REPORT

ON FORM10-K

 

Part I    Page 
Item 1Business5
Item 1A    Risk Factors17
Item 1BUnresolved Staff Comments26
Item 2Properties26
Item 3Legal Proceedings27
Item 4Mine Safety Disclosures27

Part III

  

Item 1

Business

5 

Item 1A

Risk Factors

14

Item 1B

Unresolved Staff Comments

26

Item 2

Properties

26

Item 3

Legal Proceedings

27

Item 4

Mine Safety Disclosures

28

Part II

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   2729 

Item 6

 

Selected Financial Data

   2830 

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   2831 

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

46
Item 8Financial Statements and Supplementary Data

   47 

Item 98

 

Financial Statements and Supplementary Data

48

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   7580 

Item 9A

 

Controls and Procedures

   7580 

Item 9B

 

Other Information

   7580 

Part III

  

Item 10

 

Directors, Executive Officers and Corporate Governance

   7681 

Item 11

 

Executive Compensation

   7681 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   7681 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

   7681 

Item 14

 

Principal AccountingAccountant Fees and Services

   7681 

Item 15

 

Exhibits and Financial Statement Schedules

   7782

Item 16

Form10-K Summary

85 

FORWARD-LOOKING STATEMENTS

This Annual Report on Form10-K contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. All statements that address operating performance or events or developments that Meridian expects or anticipates will occur in the future, including, but not limited to, statements relating to per share diluted earnings and revenue, are forward-looking statements. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Specifically, Meridian’s forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance. Meridian assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following: Meridian’s operating results, financial condition and continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition, and its ability to effectively sell such products.products and its ability to successfully expand and effectively manage increased sales and marketing operations. While Meridian has introduced a number of internally developed products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis.basis or in protecting its intellectual property, and unexpected or costly manufacturing costs associated with the ramp up of new products could cause actual results to differ from expectations. Meridian relies on proprietary, patented and licensed technologies, andtechnologies. 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.products, as can the uncertainty of regulatory approvals and the regulatory process. The international scope of Meridian’s operations, including changes in the relative strength or weakness of the U.S. dollar and general economic conditions in foreign countries, can impact results and make them difficult to predict. One of Meridian’s growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses will be successfully integrated into Meridian’s operations. There may be risks that acquisitions may disrupt operations and may pose potential difficulties in employee retention, and there may be additional risks with respect to Meridian’s ability to recognize the benefits of acquisitions, including potential synergies and cost savings or the failure of acquisitions to achieve their plans and objectives. Meridian cannot predict the outcome of goodwill impairment testing and the impact of possible goodwill impairments on Meridian’s earnings and financial results. Meridian cannot predict the possible impact of U.S. health care legislation enacted in 2010 – the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act – and any modification or repeal of any of the provisions thereof initiated by Congress or the presidential administration, and any similar initiatives in other countries on its results of operations. Efforts to reduce the U.S. federal deficit, breaches of Meridian’s information technology systems, 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 this Annual Report on Form10-K contains a list and description of uncertainties, risks and other matters that may affect the Company. Readers should carefully review these forward-looking statements and risk factors and not place undue reliance on our forward-looking statements.


PART I.

This Annual Report on Form10-K includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See “Forward-Looking Statements” above. Factors that could cause or contribute to such differencesrisks and uncertainties include those discussed in Item 1A. Risk“Risk Factors. In addition to the risk factors discussed herein, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these risks and uncertainties develops into actual events, our business, financial condition or results of operations could be adversely affected.

Unless the context requires otherwise, references in this Annual Report onForm 10-K to “Meridian,” “we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries.

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

This Annual Report on Form10-K refers to trademarks such as Alethia, Curian, ImmunoCard®, ImmunoCard STAT!®, LeadCare®, MyTaq, PREMIER®, and SensiFAST, which are protected under applicable intellectual property laws and are our property. Solely for convenience, our trademarks and tradenames referred to in this Form10-K may appear without the® or symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames. Our molecular diagnostic test platform, formerly known under the tradenamesillumigene andillumipro, is being rebranded under the tradename Alethia. References to Alethia throughout this Annual Report on Form10-K refer to our molecular diagnostic tests and instrumentation formerly marketed and sold under theillumigene andillumipro brands.

ITEM 1.

BUSINESS

Overview

Meridian is a fully-integrated life science company with principal businesses inin: (i) the development, manufacture, sale and distribution of diagnostic test kits, primarily for certain gastrointestinal viral,and respiratory infectious diseases, and parasitic infectious diseases;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;manufacturers and (iii) the contract developmentresearchers in immunological and manufacture of proteinsmolecular tests for human, animal, plant and other biologicals under cGMP conditions for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.environmental applications. The Company was incorporated in Ohio in 1976. Our principal corporate offices are located near Cincinnati, Ohio, USA.

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Our website iswww.meridianbioscience.com. We make available our Annual Reports on Form10-K, Quarterly Reports on Form10-Q, Current Reports on Form8-K, Proxy Statements and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission (SEC)(“SEC”). These reports may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing these filings and other information regarding Meridian atwww.sec.gov. The information on our website is not and should not be considered part of this Annual Report on Form10-K.

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Reportable Segments

Our reportable segments are Diagnostics and Life Science, both of which are headquartered in Cincinnati, Ohio. The Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, andDetailed information related to the sale and distribution of diagnostic test kitsreportable segments can be found in the countries comprising North, Central and South America (the “Americas”); Europe, Middle East and Africa (“EMEA”); and other countries outside of the Americas and EMEA (rest of the world, or “ROW”). The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad, including sales and business development offices in Singapore and Beijing, China to further pursue growing revenue opportunities in Asia. The Life Science 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. Financial information for Meridian’s reportable segments is included in Note 7 to the consolidated financial statements.following locations within this Annual Report on Form10-K:

Type of Segment Information

Location within Annual Report onForm 10-K

Physical locations and activitiesItem 2. “Properties”
Revenue by geographic regionItem 7. “Management’s Discussion and Analysis of Financial Condition & Results of Operations” (hereafter “MD&A”)
Financial informationNote 9 of Consolidated Financial Statements

Diagnostics Segment

Overview of Products and Markets

Our primarylargest source of revenues continues to beis clinical diagnostic products, with our Diagnostics segment providing 75%70% of consolidated net revenues for fiscal 2015. Third-party revenues for this segment were $146,000, $142,000 and $145,000 for fiscal 2015, 2014 and 2013, respectively, reflecting a three-year compound annual growth rate of 4%.2018. As of September 30, 2015,2018, our Diagnostics segment had approximately 360400 employees in seven countries.

Our clinical diagnostic products provide accuracy, simplicity and speed; enable early diagnosis and treatment of common, acute medical conditions; and provide for better patient outcomes at reduced costs. We target diagnostics for disease states thatthat: (i) are acute conditions where rapid diagnosis impacts patient outcomes; (ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; andand/or (iv) have difficult sample handling requirements (stool, blood, urine and other body fluids)(e.g., stool). This approach has allowed us to establish significant market share in our target disease states.states, gastrointestinal and respiratory illnesses, and tests for elevated lead levels in blood.

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Our clinical diagnostic products span a broad menu of testing platforms and technologies, and also include transport media that store and preserve specimen samples from patient collection to laboratory testing. Our testing platforms include:

 

  

Isothermal DNA Amplification (Alethia brand, formerly (illumigene®)brand) – high sensitivity, molecular platform that is suitable for virtually any sizemoderately-complex laboratory, whether centralized or decentralized; provides flexibility to process from 1 to 10 tests per run in generally under one hour; and requires no batching of samples.

 

  

Rapid Immunoassay (TRU®, Immuno (ImmunoCard®and ImmunoCardSTAT!®brands)single-use immunoassays that can be used in point-of-care settings; these tests have fast turnaround times (generally under 20 minutes); and can reduce expensive send-outs for hospitals and outpatient clinics.

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Enzyme-linked Immunoassay (Premier® brand) – batch immunoassay platform that can process up to 96 tests per run; is highly accurate and economical; and is adaptable to automation.

Enzyme-linked Immunoassay (PREMIER brand) – batch immunoassay platform that can process up to 96 tests per run; is highly accurate and economical; and is adaptable to automation.

Anodic Stripping Voltammetry (LeadCare brand)– electrical chemical sensor platform for quantitative determination of lead levels in blood.

Our clinical diagnostic products are comprised of products used principally in the detection of infectious diseases caused by various bacteria, viruses, parasites and pathogens. Our focuspathogens, along with the LeadCare brand of tests for quantitative determination of blood lead levels. These products are grouped into the following product familiesfamilies:

Gastrointestinal Assays

Includes tests for the following, among others:C. difficile, EnterohemorrhagicE. coli,Campylobacter jejuni (Campy),H. pylori,Cryptosporidium, giardia lamblia, andcalprotectin.

Respiratory Illness Assays

Includes tests for the following, among others: Group AStreptococcus (strep throat), Influenza,M. pneumoniae (Mycoplasma),Bordetella pertussis (whooping cough), and respiratory syncytial virus (RSV).

Blood Chemistry Assays

Tests for elevated lead levels in Diagnostics are:blood.

Other Assays

1.C. difficile – causative agent for antibiotic-associated diarrhea from a hospital-acquired infection

2.Foodborne – EnterohemorrhagicE. coli (EHEC) andCampylobacter jejuni (Campy)

3.H. pylori – stomach ulcers

4.Respiratory – Group AStreptococcus,M. pneumonia (Mycoplasma) andBordetella pertussis, amongIncludes tests for other diseases

5.Women’s Health & Sexually Transmitted Diseases (“STD”) – Group BStreptococcus, Chlamydia trachomatis,Neisseria gonorrhea, Herpes Simplex Virus Type 1 & Type 2

Revenues within these focus product families accounted for 79%the following, among others: Group BStreptococcus, Chlamydia trachomatis,Neisseria gonorrhea, 77%Herpes Simplex Virus Type 1 & Type 2, and 77% of our Diagnostics segment’s third-party revenues during fiscal 2015, 2014 and 2013, respectively. These same product families accounted for 59%, 58% and 59% of consolidated net revenues in fiscal 2015, 2014 and 2013, respectively.Malaria.

Our product portfolio includes over 140 diagnostic tests and transport media, and is marketed to acute care hospitals, reference laboratories, and outpatient clinics and physician office laboratories in over 70 countries around the world.

We continue to invest in new product development for our molecular testing platform,illumigene. This platform now has the following commercialized tests (assays):

1.illumigene® C. difficile – commercialized in August 2010

2.illumigene® Group BStreptococcus (Group B Strep or GBS) – commercialized in December 2011

3.illumigene® Group AStreptococcus (Group A Strep) – commercialized in September 2012

4.illumigene® Mycoplasma (M. pneumonia; walking pneumonia) – commercialized in June 2013

5.illumigene®Bordetella pertussis (whooping cough) – commercialized in March 2014

6.illumigene®Chlamydia trachomatis – commercialized outside of U.S. in February 2015

7.illumigene®Neisseria gonorrhea – commercialized outside of U.S. in February 2015

8.illumigene® HSV 1&2 (Herpes Simplex Virus Type 1 & Type 2) – commercialized outside of U.S. in May 2015; commercialized in U.S. in July 2015

We have several additionalillumigene tests in development, including bloodborne pathogens that are the causative agents for malaria. We have a robust pipeline ofillumigene opportunities and continue to add new assays to ourillumigene platform menu.

 

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We believeOur current research and development pipeline for immunoassay products includes a new instrument that ourillumigene system has been well-accepted in our global markets. We now have approximately 1,465 customer account placements. Of these account placements, approximately 1,300 accounts have completed evaluationsutilizes fluorescent chemistry, which improves workflow and validations and are regularly purchasing product,test result readability. This new platform is being branded under the “Curian” name. During fiscal 2019, we expect to submit a 510(k) to the FDA for one or more rapid immunoassay tests for use with the balanceCurian instrument. We expect to develop additional rapid immunoassay tests for use with the Curian instrument beyond 2019. Our current research and development pipeline for molecular products includes a combination test for the detection of our account placements being in some stageH. pyloriand the resistance of product evaluation and/or validation. Of our account placements, we have over 400 accounts that are regularly purchasing, evaluating and/or validating twoone or more assays.antibiotics. Our congenital cytomegalovirus (CMV) test is currently awaiting FDA 510(k) clearance.

Market Trends

The global market for infectious disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. More importantly, within this market, there is a continuing shift from conventional testing, which requires highly trained personnel and lengthy turnaround times for test results, to more technologically advanced testing, which can be performed by less highly trained personnel and completed in minutes or hours.

The increasinggrowing global pressures to contain total health care costs have accelerated the increased use of diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and lower overall treatment cost. The creation of Accountable Care Organizations (ACOs)Integrated Delivery Networks (“IDNs”) in our U.S. market in particular, hashave the goal of increasing the efficiency of health care delivery, reducing spending and improving clinical outcomes. We believe our product portfolio positions us competitively with ACOsIDNs and health care systems that are transitioning fromfee-for-service compensation models to compensation models based on the total outcome costs of a given patient.value-based reimbursement. OurC. difficile, Group BStreptococcus, Group AStreptococcus, andH. pylori products are all examples of how a highly accurate diagnostic test on the front end can mitigate or reduce down-stream costs forof antibiotic use, symptom-relieving drugs and hospital stays.

We also continue to see aggregation of buying power in our U.S. market via multi-hospital group purchasing organizations and integrated delivery networks,IDNs, consolidation among reference laboratories, hospital laboratories being operated by large reference laboratories, and acquisition of physician practices by hospitals. We utilize multi-year supply agreements to secure our business where possiblehospitals, health systems and appropriate.for-profit specialty health care companies.

Cost containment pressures have also affected health care systems outside the U.S., particularly in Europe, where the health care systems are generallygovernment-run. The level of government budget deficits can have an adverse effect on the amount of government health care spend.

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Sales, Marketing and Focus Product FamiliesDistribution

Our Diagnostics segment’s sales and distribution network consists of the following for each of the broad geographic regions we serve:

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North AmericaAmericas

In North America,the Americas, our sales and distribution network consists of a direct sales force (U.S. only) complemented by independent distributors. The use of independent distributors in the U.S. allows our products to reach any size health care facility and also provides our customers the option to purchase our products directly from Meridian or through an authorized distributor. Two independent distributors in the U.S. accounted for 10% or more of consolidated net revenues in fiscal 2015, 20142018, 2017 and 2013:2016: Cardinal Healthcare Corporation (“Cardinal”) and Thermo Fisher Scientific.Scientific (“Fisher”). Our Diagnostics segment revenues from Cardinal were approximately $29,000, $28,000$21,000, $22,000 and $35,000$20,000 during fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Our Diagnostics segment revenues from Thermo Fisher were approximately $25,000, $23,000$22,000, $18,000 and $25,000$20,000 during fiscal 2015, 20142018, 2017 and 2013,2016, respectively.

EMEA

In EMEA,Europe, the Middle East and Africa (“EMEA”), our sales and distribution network consists of direct sales forcespersonnel in Belgium, France Holland and Italy, and independent distributors in other European countries, Africa and the Middle East. We have implemented a direct sales presence in Germany and the U.K. for our illumigene products, and utilize independent distributors for our immunoassay products. We maintain a distribution center near Milan, Italy.

ROW

With the exception of Australia in whichand China, where we utilize a direct sales force,personnel, we utilize independent distributors throughout the ROW.

Our Diagnostics segment’s focus product families are described below:

C. difficile

C. difficile, causative agentrest of serious hospital acquired bacterial infections, is our largest product family, generating approximately $31,000 in global revenues for fiscal 2015, a 12% decrease from fiscal 2014 – reflecting a combination of sales of our molecular-based and traditional immunoassay products, with our molecular product now representing approximately 80% of this product category. This product family has experienced significant competition in recent years from new technologies, primarily other molecular testing platforms. See Competition discussion below.

Foodborne

Our foodborne product family achieved approximately $25,000 in global revenues for fiscal 2015, an increase of 8%, with over 95% of such sales occurring in the U.S. Our foodborne products include tests for EnterohemorrhagicE. coli (EHEC) andCampylobacter jejuni (Campy)world (“ROW”). In the U.S. market, we believe that there are potentially 20 million stool cultures that are tested annually for foodborne illnesses. We believe that we have less than a 20% market share for EHEC and less than a 5% market share for Campy.

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We are continuing to re-emphasize the benefits of increased sensitivity and faster turnaround time versus culture methods in our marketing programs. The primary competition for our foodborne products is laboratory culture methods and an immunoassay EHEC shiga toxin test from one of our competitors. We believe that our test offers better workflow, less hands-on time and quicker results, in addition to being fully compliant with CDC-recommended testing methods.

Helicobacter pylori

H. pylori, a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to duodenal ulcers and stomach cancer.H. pylori represents our second largest product family, generating approximately $30,000 in global revenues for 2015, or 6% growth. We offer both antibody and direct antigen tests in alternative formats (single-use and high volume batch). Our major competition in this product family is alternative test methods, serology and urea breath, and the prescription of symptom-relieving medications. Over 75% of ourH. pylori product sales are in the U.S., where our strategy for this product line has been to partner with managed care companies to promote the health and economic benefits of a test and treat strategy, and to move physician behavior away from serology-based testing toward direct antigen testing. In the U.S. market, we believe that there are potentially 30 million people suffering from peptic ulcers and we believe that we currently have an approximate 5% market share.

The patents for ourH. pylori products are owned by us and expire in May 2016 in the U.S. and in 2017 in countries outside the U.S. We expect competition with respect to ourH. pylori products to increase upon the expiration of these patents in 2016 and 2017 as we currently market the only FDA-cleared test to detectH. pylori antigen in stool samples. Such competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. In order to mitigate any loss in revenues upon patent expiration, among other things, we are researching and experimenting with new products (e.g., detection ofH. pylori on molecular platforms) and attempting to secure significant customers under long-term contracts. We are unable to provide any assurances that we will be successful with any mitigation strategy or that any mitigation strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.

Respiratory

In addition to our immunoassay tests to detect influenza, which have been part of our product portfolio for a number of years, during the last three years we have also introduced three molecular-based products on ourillumigene platform to detect various respiratory conditions. These molecular products, which are less seasonally-dependent than our influenza products, includeillumigene Group A Strep (2012),illumigene Mycoplasma (2013) andillumigene Pertussis (2014). Since their commercialization, these products have been widely accepted in the marketplace and during fiscal 2015 grew to represent over 40% of our total Respiratory product family revenues of $22,000.

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Women’s Health & STD

In December 2011, we introduced ourillumigene Group B Strep product to detect Group BStreptococcus (GBS) in expectant mothers. Early detection of GBS, a major perinatal pathogen for both mothers and their infants that is associated with significant morbidity and mortality, is critical to the prevention and treatment of serious disease in infants. During fiscal 2015, we expanded ourillumigene molecular product platform to include three additional tests directly related to women’s health; these include tests forChlamydia trachomatis(Chlamydia),Neisseria gonorrhea (Gonorrhea) and Herpes Simplex Virus Type 1 & Type 2. With the GBS and HSV tests available worldwide, and the Chlamydia and Gonorrhea tests currently commercialized only outside the U.S., revenues from these women’s health & STD products grew to over $7,000 during 2015, and are currently expected to exceed $10,000 in fiscal 2016.

Competition

Our major competitors in molecular diagnostics are Cepheid (acquired by Danaher) and Becton Dickinson, whowhich have systems with multiple-assay menus. We also face competition in molecular diagnostics, but to a lesser degree, from companies such as Alere, Great Basin, NanosphereAbbott (Alere) and Quidel. These latter companies have a limited commercial menu and tend to compete strictly on price. We believe that our molecular platform offers a number of competitive features:

Molecular assay sensitivity that is comparable to higher costing PCR;

Low capital investment with no instrument service cost;

Small footprint that is portable and does not consume much laboratory space; and

Product menu that fits with initiatives to improve clinical and economic outcomes.

Our major competitors in rapid immunoassay diagnostics are primarily AlereAbbott (Alere) and Quidel. TheseIn recent years, companies tendsuch as BioMerieux have captured market share in our gastrointestinal category via multi-plex panel tests. However, since their introduction to compete strictly on price.the market, payors have begun to raise concerns over reimbursement levels relative to clinical utility. For blood lead testing, we believe we have the onlyFDA-cleared, CLIA-waivedpoint-of-care test available commercially. Other blood lead testing systems in use, marketed by our competitors, include Graphite Furnace Atomic Absorption Spectroscopy, which requires a highly-skilled technician and larger laboratory space to operate, in addition to not being portable or suitable forpoint-of-care use. We believe that with the breadth and depth of our product portfolio, we are well positioned to capitalize onfor the migration to molecular testing.clinical laboratory.

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Research and Development

Our Diagnostics segment’s research and development organization whichfor infectious disease products is located at our corporate headquarters in Newtown, Ohio, a suburb of Cincinnati, and has expertise in biochemistry, immunology, mycology, bacteriology, virology, parasitology, and molecular biology. Research and development expenses for the Diagnostics segment for fiscal 2015, 2014 and 2013 were approximately $10,000, $10,000 and $8,000, respectively. ThisOur blood-chemistry products have a dedicated research and development organization focuses itsteam in Billerica, Massachusetts. Our research and development activities are focused on new product and new technology development, new applications for our existing technologies, and improvements to existing products. Research and development efforts may occurin-house or with collaborative partners. We believe that new product development is a key source for sustaining revenue growth. The products within ourillumigene Alethia molecular platform,H. pylori product family and H. pylori productblood lead testing family were developed solely in-house.in-house, or substantially so. See “Operating Expenses” section within MD&A on page 39.

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Manufacturing

Our immunoassay and molecular assay products require the production of highly specific and sensitive antigens, antibodies,specialized reagents, primers and enzymes. While weWe produce substantially allthe vast majority of our own requirements including monoclonal and polyclonal antibodies, and a variety of fungal, bacterial and viral antigens, currently a number of the raw materials used inimmunoassay requirements. Primers for our products, including ourillumigeneAlethia molecular assay products are purchased from outside vendors. WithOur blood lead testing products require the recent expansionproduction of our molecular diagnostic manufacturing capacity at our Cincinnati, Ohio location,electrical chemical sensors, which we brought in-house certain molecular component manufacturing that was previously outsourced.manufacture using critical raw materials purchased from outside vendors. We believe that we have sufficient manufacturing and sourcing capacity for anticipated growth over the next several years.

Intellectual Property, Patents and Licenses

We own or license U.S. and foreign patents, most of which are for select products manufactured by our Diagnostics segment. These patents are used in our manufacturing processes for selectedselect products (method(e.g., method patents) or may relate to the design of the test device technology format (design(e.g., design patents). In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our production and manufacturing technologies and processes. Our employees are required to sign confidentiality andnon-disclosure agreements designed to protect our proprietary products. Revenues from these products in fiscal 2015 and fiscal 2014 were as follows:

Product/Technology Family

  Number of
products
   % of fiscal year
consolidated revenues
 
       2015  2014 

illumigene

   8    21  20

H. pylori

   2    14  14

Respiratory immunoassay

   4    2  2

Other

   5    1  1
  

 

 

   

 

 

  

 

 

 

Total patented products

   19    38  37
  

 

 

   

 

 

  

 

 

 

The patents for theillumigeneour Alethia products, which represented 16%, 17% and 20% of consolidated revenues for fiscal 2018, 2017 and 2016, respectively, are licensed from a third party, Eiken Chemical Co., Ltd., under anon-exclusive license agreement and expire between 2020 and 2022. These patents were issued in the U.S., European Community and other countries. The term of our license agreement runs until the last patent expires in 2022, at which point we will be free to practice the patents without any restriction or royalty obligation.

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The patents for ourH. pylori products, are owned by us and expirewhich represented approximately 16%, 15% and 16% of consolidated revenues for fiscal 2018, 2017 and 2016, respectively, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. (principally, Australia, Canada, European Community and Japan). We expect competition with respect to ourH. pylori products to increase uponin the expiration of these patents in 2016near future, and 2017 as we currently market the only FDA-cleared test to detectH. pylori antigen in stool samples. Suchsuch competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. In order to mitigate any loss in revenues upon patent expiration, we are researching and experimenting withOur product development pipeline includes new products (e.g.,product initiatives for the detection ofH. pylori in samples other than stool, and detection ofwe recently entered into a strategic collaboration with DiaSorin to sellH. pylori on molecular platforms).tests. We have executed multi-year supply agreements with our two largest reference laboratory customers forH. pylori tests to secure volume, albeit at lower selling prices. We are unable to provide any assurances that we will be successful with any mitigation strategy or that any mitigation strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.

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The patents for our immunoassay respiratory products are owned by us and expire in 2022 (two products) and 2027 (one product). These patents were issued in the U.S. and European Community, among other jurisdictions.

The remaining five patented products are spread over multiple product families. These patents are either owned by us, or we are free to practice the patents without any restriction or royalty obligation. These patents, where still in effect, collectively expire between 2016 and 2027.

Government Regulation

Our diagnostic products are regulated by the Food & Drug Administration (FDA)FDA as “devices” pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA)(“FDCA”). Under the FDCA, medical devices are classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly approved by the FDA, but, instead, are “cleared” for marketing. Class III devices generally must receive “pre-market“pre-market approval” from the FDA as to safety and effectiveness. Our diagnostics manufacturing facilities in Cincinnati and Billerica are subject to periodic inspection by the FDA. See page 32 within MD&A for discussion regarding the FDA’s inspection of our Billerica facility.

Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe that most, but not all, products under development will be classified as Class I or II medical devices and, in the case of most of our Class I and all Class II devices, will be eligible for 510(k) clearance; however, we can make no assurances in this regard. Meridian’s TRU FLU® rapid influenza assay was cleared in 2006 as a Class I device. In May 2014, the FDA proposed reclassifying rapid influenza assays as a Class II device, requiring the submission of a new 510(k) application and subjecting TRU FLU and similar competitive devices to increased requirements for sensitivity. If the proposed rule becomes effective, Meridian will have one year to bring its assay up to the new requirements or remove it from the market. Sales of the TRU FLU product totaled approximately $2,000 in fiscal 2015.

Sales of our diagnostic products in foreign countries are subject to foreign government regulation, largelywhich is similar to that of the FDA.

Meridian’s Cincinnati manufacturing facility isOur Diagnostics facilities are certified to ISO 13485:2012.

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Medical Device Tax

On January 1, 2013, the medical device tax established as part of the U.S. health care reform legislation became effective and as a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2015, 2014 and 2013, the Company recorded to cost of sales approximately $1,900, $1,750 and $1,300, respectively, of medical device tax expense related to this legislation.2016.

Seasonal Factors and Sporadic Outbreaks

Our principal business is the sale of a broad range of clinical diagnostic test kits for common gastrointestinal viral, upperand respiratory infectious diseases, and parasitic infectious diseases.elevated blood lead levels. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses or pandemics such as the H1N1an influenza outbreak during fiscal 2009.outbreak. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be impacted period over period by such factors.

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Life Science Segment

Overview of Products and Markets

Our Life Science segment’s businesssegment focuses on the development, manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents used by researchers,agri-bio companies and other diagnostic manufacturing companies, as well as contract development and manufacturing services under clinical cGMP conditions. Third-party revenues for this segment were approximately $49,000, $47,000 and $44,000 for fiscal 2015, 2014 and 2013, respectively.companies. As of September 30, 2015,2018, our Life Science segment had approximately 220185 employees in sevenfive countries.

Most of the revenues for our Life Science segment currently come from the manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents used by researchers and other diagnostic manufacturing companies focused on the development of immunoassay and molecular assay tests. Approximately 65%76% of Life Science revenues are generated from the industrial market, defined as diagnostic manufacturers and the agriculture industry.manufacturers. This iscontinues to be an increasing focus offor our Bioline molecular component business,reagent products, which historically focused onhave been marketed to the academic/research marketcustomers that comprisescomprise the remaining 35%24% of Life Science revenues. We utilize direct sales teams in key countries such as the U.S., the U.K., France, Germany, France, Australia and Singapore. Opened in 2013, the Singapore sales and business development office is designed to increase our presence and our revenue opportunities in Asia for both molecular and immunoassay components. Additionally, inAustralia. In order to further pursue revenue opportunities in Asia, and China in particular, during fiscal 20152017 we openedestablished a wholly foreign owned enterprise (“WFOE”) location in Beijing, China, after having operated a representative office there since fiscal 2015. The WFOE employs a business development staff and imports product for sale to customers in Beijing, China. We utilize a network of distributors in other major countries. During fiscal 2015, 16%2018, 18% of third-party revenues for this segment were from two diagnostic manufacturing customers.

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Products such as antibodies, antigens and reagents are marketed primarily to diagnostic manufacturing customers as a source of raw materials for their immunoassay products, or as an outsourced step in their manufacturing processes. For example, we supply a number of major diagnostic manufacturers with proteins used to detect hepatitis A virus and rubella.rubella virus. These products are typically sold in bulk quantities, and may also be custom-designed for a particular manufacturer’s requirements. Sales efforts are focused on multi-year supply arrangements in order to provide stability in volumes and pricing. We believe this benefits both us and our customers.

Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed to academic/research and industrial customers. These products are used in measuring DNA and RNA in clinicalhuman, animal, plant and agriculturalenvironmental applications. These reagents improve the purity, yield and speed of PCR reactions. Products such as MyTaq™MyTaq and SensiFAST™SensiFAST are examples of this type of PCR/qPCR reagent.

Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling technology for process development and large-scale manufacturing for biologicals used in new drugs and vaccines. The size of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials for biopharmaceutical, biotechnology and government agency customers. Our revenues for contract services were approximately $3,000 in each of fiscal 2015, 2014 and 2013.

Market Trends

Globally, sales of molecular components are growing at a faster pace than immunoassay components, and this is consistent with our business in constant-currency. GeographicAs certain global markets become increasingly accessible to us, most notably the Asia-Pacific region, geographic expansion iscontinues to be a significant strategy for our Life Science segment, along with further penetration into industrial markets with our molecular component products.

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Competition

The market for bulk biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service and reputation. We face competitors, many of which have greater financial, research and development, sales and marketing, and manufacturing resources, and where sole-source supply arrangements do not exist. Customers also may choose to manufacture their biomedical reagentsin-house rather than purchase from outside vendors such as Meridian.

The academic/research market is highly fragmented. Individual purchases are typically of small quantities. The breadth of product offerings, quality, price and service, includingon-line capabilities and technical resources, are important factors to building customer loyalty and repeat purchases.

The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, is also competitive. Important competitive factors include reputation, customer service and price. Although the product application for this facility was built from our existing expertise in cell culture manufacturing techniques, we face competitors with greater experience in contract manufacturing in a clinical cGMP environment.

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Research and Development

Research and development expenses for our Life Science segment for eachThe focus of fiscal 2015, 2014 and 2013 were approximately $3,000. Thisthis research and development organizationactivity is involved in activities for our cGMP facility and development of new molecular and immunological reagent products. See “Operating Expenses” section within MD&A on page 39.

Manufacturing and Government Regulation

Our Life Science facilities are ISO 9001:2008 certified, and13485:2016 certified. Additionally, where appropriate, our Life Science facilities comply with Regulation EC 1069:2009.

The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. Following clinical trials, approval and licensing of these products is the responsibility of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, not Meridian Life Science.

Acquisitions

Acquisitions have played an important role in the growth of our businesses. Our acquisition objectives include, among other things: (i) enhancing product offerings; (ii) improving product distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide any assurance that we will consummate any additional acquisitions in the future, nor can we provide any assurance that any acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenue and earnings growth in the future.

During November 2015,March 2016, we made a minority investmentacquired all of the outstanding common stock of Magellan. Details of the Magellan acquisition are set forth in Oasis Diagnostics® Corporation in order to evaluate our interest in saliva diagnostics and collection devices. Oasis is located in Vancouver, Washington.Note 3 of the accompanying Consolidated Financial Statements.

International Markets

International markets are an important source of revenues and future growth opportunities for both of our segments. For both segments combined, revenues from customers located outside of North Americathe Americas approximated $49,000$66,000 or 25%31% of consolidated fiscal 20152018 revenues, $55,000$61,000 or 29%30% of consolidated fiscal 20142017 revenues, and $54,000$53,000 or 29%27% of consolidated fiscal 20132016 revenues. We expect to continue to look to internationalkey European markets and China as a source of new revenues andrevenue growth in the future.

 

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During fiscal 2015,Fluctuations in foreign currency exchange rates since fiscal 2017 had an approximate $4,700 unfavorable$2,200 favorable impact on fiscal 2018 revenues; $3,200$1,400 within the Diagnostics segment and $1,500$800 within the Life Science segment. This compares toyear-to-year currency exchange rates having an approximate $850 favorable$1,200 unfavorable impact on revenues in fiscal 2014; $600 favorable2017; $400 within the Diagnostics segment and $250$800 within the Life Science segment. Due to natural hedge relationships with expenses, both cost of sales and operating expenses, the overall impact of exchange rate fluctuations on net earningsoperating income was not materialsignificant during fiscal 2015, 20142018, 2017 or 2013.2016.

Environmental

We are a conditionally exempt, small quantity generator of hazardous waste and have a U.S. EPA identification number. We are in compliance with applicable portions of the federal and state hazardous waste regulations and have never been a party to any environmental proceeding.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause our actual results to vary materially from recent results or from anticipated future results. The risks described below are not the only risks facing our company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition and/or operating results.

Risks Affecting Growth and Profitability of our Business

We may be unable to develop new products and services or acquire products and services on favorable terms.

The medical diagnostic and life science industries are characterized by ongoing technological developments and changing customer requirements. As such, our results of operations and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products and services, or new products and services that incorporate technological advances, meet customer requirements and/or respond to products developed by our competition. We cannot provide any assurance that we will be successful in developing or acquiring such rights to products and services on a timely basis, or that such products and services will adequately address the changing needs of the marketplace, either of which could adversely affect our results of operations.

In addition, we must regularly allocate considerable resources to research and development of new products, services and technologies. The research and development process generally takes a significant amount of time from design stageresearch to product launch. This process is conducted in various stages. During each stage, there is a risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial resources.

 

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We may be unable to successfully integrate operations or to achieve expected cost savings from acquisitions we make.

One of our growth strategies is the acquisition of companies and/or products. Although additional acquisitions of companies and products may enhance the opportunity to increase net earnings over time, such acquisitions could result in greater administrative burdens, increased exposure to the uncertainties inherent in marketing new products, and financial risks of additional operating costs.costs, and risk of asset impairments if future revenues and cash flows are deficient. The principal benefits expected to result from any acquisitions we make will not be achieved fully unless we are able to successfully integrate the operations of the acquired entities with our operations and realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses into our existing businesses. We cannot provide any assurance that we will be able to identify and complete additional acquisitions on terms we consider favorable or that, if completed, will be successfully integrated into our operations. Furthermore, we cannot predict the outcome of goodwill impairment testing and the impact of goodwill impairments on the Company’s earnings and financial results.

Revenues for our Diagnostics segment may be impacted by our reliance upon two key distributors in North America, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions.

Key Distributors

Our Diagnostics segment’s revenues from sales through two U.S. distributors were 37%approximately 29% and 36%, respectively,28% of the Diagnostics segment’s total revenues for fiscal 20152018 and fiscal 2014,2017, respectively, or 28% and 27%, respectively,approximately 20% of oureach fiscal year’s consolidated revenues for fiscal 2015 and fiscal 2014.revenues. These parties distribute our products and other laboratory products toend-user customers. The loss of either of these distributors could negatively impact our revenues and results of operations unless suitable alternatives were timely found or lost sales to one distributor were absorbed by another distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our industry’s competitive environment. As an alternative, we could expand our efforts to distribute and market our products directly. This alternative, however, would require substantial investment in additional sales, marketing and logistics resources, including hiring additional sales and customer service personnel, which would significantly increase our future selling, general and administrative expenses, but would not necessarily result in lower net income levels.expenses.

In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, potentially leading to uneven concentration levels on a quarterly basis.

Seasonal Factors and Sporadic Outbreaks

Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal viral, upperand respiratory infectious diseases, and parasitic infectious diseases.elevated blood lead levels. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses or pandemics such as H1N1 influenza.an influenza outbreak. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be negatively impacted period over period by such factors.

 

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Changing Diagnostic Market Conditions

Changes in the U.S. health care delivery system have resulted in consolidation among reference laboratories, hospital laboratories being operated by large reference laboratories, and the formation of multi-hospital alliances, reducing the number of institutional customers for diagnostic test products. Consolidation in the U.S. health care industry has also led to the creation of group purchasing organizations (GPOs)(“GPOs”) and integrated delivery networks (IDNs)IDNs that aggregate buying power for hospital groups and put pressure on our selling prices. Due to such consolidation, we may not be able to enter into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory commercial basis with institutional customers, GPOs and IDNs, which could adversely affect our results of operations.

We could be adversely affected by health care reform legislation.

Third-party payers for medical products and services, including state, federal and foreign governments, are increasingly concerned about escalating health care costs and can indirectly affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. Following years of increasing pressure, during 2010 the U.S. government enacted comprehensive health care reform. At present, wereform with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, which made changes that significantly impact the pharmaceutical and medical device industries. The Protecting Access to Medicare Act of 2014 requires applicable laboratories to report all private payor reimbursement rates and the volumes for each test they perform. The statute requires that Medicare establish reimbursement rates based on the weighted median of private insurance reimbursement rates effective January 1, 2017. The new Medicare rates would be subject to a maximum reduction of 10% a year for the initial three year period and a maximum of 15% a year for the subsequent three year period. There is no limit on the amount of potential rate increases. As a result, some of our customers in the United States may experience lower Medicare reimbursement rates for our products, which may adversely affect our business, financial condition and results of operations. We are unable to predict whatseeing some effect on the legislation might ultimately have on reimbursement rates for our products. If reimbursement amounts for diagnostic testing services are decreaseddecrease further in the future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for such services and consequently, could place constraints on the levels of overall pricing, which could have a material effect on our revenues and/or results of operations.

In addition, on January 1, 2013,Having been subject to thenow-repealed 2.3% medical device tax originally established as part of the U.S. health care reform legislation became effectivethrough December 31, 2015, the Company is unable to predict any future legislative changes or developments related to this excise tax or any other excise tax.

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Additional state and federal health care reform measures may be adopted in the future, any of which could have a material adverse effect on our ability to successfully commercialize our products and on our industry in general. For example, the United States government has in the past considered, is currently considering and may in the future consider, health care policies and proposals intended to curb rising health care costs, including those that could significantly affect both private and public reimbursement for health care services. Further, state and local governments, as well as a result, the Company made its first required tax deposit near the endnumber of January 2013. During fiscal 2015, 2014 and 2013, the Company recorded approximately $1,900, $1,750 and $1,300, respectively,foreign governments, are also considering or have adopted similar types of Medical Device Tax expense, which is reflected as a component of cost of salespolicies. Future significant changes in the accompanying Consolidated Statementshealth care system in the United States or elsewhere, and current uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether health care policies, including policies stemming from legislation or regulations affecting our business, may be proposed or enacted in the future, what effect such policies would have on our business, or the effect that ongoing uncertainty about these matters will have on the purchasing decisions of Operations.our customers.

Efforts to reduce the U.S. federal deficit could adversely affect our results of operations.

As part of the Budget Control Act passed in August 2011 to extend the federal debt limit and reduce government spending, $1.2 trillion in automatic spending cuts (known as sequestration) were implemented in 2013. The sequestration requires a 2% cut in Medicare payments for all services, including our diagnostic tests, which, due to subsequent legislative amendments to the statute, will remain in effect through 2024 unless Congressional action is otherwise taken. Government research funding has also been reduced as a result of the sequestration. On January 2, 2013, the American Taxpayer Relief Act of 2012 also was signed into law, which, among other things, further reduces Medicare payments to providers such as hospitals, imaging centers and cancer treatment centers, and increases the statute of limitations period for the government to recover overpayments to providers from three to five years.

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Such reductions in government health care spending or research funding could result in reduced demand for our products or additional pricing pressure. Further, there is ongoing uncertainty regarding the federal budget and federal spending levels, including the possible impacts of a failure to increase the “debt ceiling.” Any U.S. government default on its debt could have broad macroeconomic effects that could, among other things, raise our borrowing costs. Any future shutdown of the federal government or failure to enact annual appropriations could also have a material adverse impact on our business.

Revenues for our Life Science segment may be impacted by customer concentrations and buying patterns.

Our Life Science segment’s revenues from sales of purified antigens and reagents to two diagnostic manufacturing customers were 16%18% and 17% of the Life Science segment’s total revenues for each of fiscal 20152018 and fiscal 2014, or 4%2017, respectively; and 5% of our consolidated revenues for each of fiscal 20152018 and fiscal 2014.2017. Our Life Science segment has fourfive other significant customers, who purchase antigens, antibodies and reagents, which together comprised 10%12% and 8%, respectively,10% of the segment’s total revenues for fiscal 20152018 and fiscal 2014.2017, respectively. Any significant alteration of buying patterns from these customers could adversely affect our period over period revenues and results of operations.

Revenues relating to research, development and manufacturing services for our Life Science segment are generated on a contract by contract basis. The nature of this business is such that each contract provides a unique product and/or service and corresponding revenue stream. While this business has historically generated annual revenues of approximately $2,000 to $4,000, there can be no assurance that future contracts will be secured, and if secured, will be profitable.

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Intense competition could adversely affect our profitability.

The markets for our products and services are characterized by substantial competition and rapid change. Hundreds of companies around the world supply diagnostic tests and immunoassay and molecular reagents. These companies range from multinational health care entities, for which diagnostics is one line of business, to smallstart-up companies. Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. We cannot provide any assurance that our products and services will be able to compete successfully with the products and services of our competitors.

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We mayexpect to face increased competition uponresulting from expiration of our H. pylori patents in 2016 and 2017.patents.

OurThe patents related tofor ourH. pylori products, expireowned by us, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. Revenues from ourH. pylori products were approximately $30,000 in fiscal 2015. We expect competition with respect to ourH. pylori products, high margin products which represent approximately 16% of our total revenues, to increase uponin the expiration of these patents in 2016 and 2017near future, as we currently market theare one of only four companies that marketFDA-cleared test tests to detectH. pylori antigen in stool samples.samples in the U.S. market, one of which is DiaSorin Inc., with whom we recently entered a collaboration agreement to sellH. pylori tests. At present, we are also aware of at least one other company that has commenced clinical trials ofH. pyloriproducts in the U.S. Such competition may have an adverse impact on our selling prices for these products, andor our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. In order to mitigate any loss in revenues upon patent expiration,Therefore, among other things, we have entered into the above-noted collaboration agreement with DiaSorin, and we are researching and experimenting with new products (e.g., detection of H. pylori on molecular platforms) and attemptingworking to secure significant customers under long-term contracts. We are unable to provide any assurances that we will be successful with any mitigation strategy or that any mitigation strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.

We depend on international revenues, and our financial results may be adversely impacted by foreign currency, regulatory or other developments affecting international markets.

We sell products and services into approximately 70 countries. Approximately 25%31% and 29%30% of our net revenues for fiscal 20152018 and 2014,2017, respectively, were attributable to markets outside of North America.the Americas. For fiscal 2015,2018, approximately 35%20% of our internationalconsolidated revenues were from sales madetransacted in Euros and 40% were from sales made incurrencies other than the U.S. dollars, with the remaining 25% primarily being a combination of sales made in British pounds, Australian dollars and Singapore dollars.dollar. We are subject to the risks associated with fluctuations in the exchange rates for the Australian dollar, British pound, EuroChinese yuan and Singapore dollar to the U.S. dollar.Euro. We are also subject to other risks associated with international operations, including longer customer payment cycles, tariff regulations,trade wars, increased tariffs, requirements for export licenses, instability of foreign governments, and governmental requirements with respect to the importation and distribution of medical devices and immunodiagnostic and molecular biology reagents, all of which may vary by country.

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Risks Affecting our Manufacturing Operations

We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations.

Medical device diagnostics is a highly regulated industry. We cannot provide any assurance that we will be able to obtain necessary governmental clearances or approvals, or timely clearances or approvals, to market future products in the United States and other countries. Costs and difficulties in complying with laws and regulations administered by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the Centers for Disease Control, or other regulators can result in unanticipated expenses and delays, and interruptions to the sale of new and existing products.

Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs of approvals difficult to predict. The failureFailure to comply with these regulations can result in delays in obtaining authorization to sell products, seizure or recall of products, suspension or revocation of authority to manufacture or sell products, and other civil or criminal sanctions.

If we or our third-party vendors fail to comply with FDA regulations relating to the manufacturing of our products or any component part, we may be subject to fines, injunctions and penalties, and our ability to commercially distribute and sell our products may be negatively impacted.

Our diagnostics manufacturing facilities, and the manufacturing facilities of any of our third-party diagnostic component manufacturers or critical suppliers, are required to comply with the FDA’s Quality System Regulation (“QSR”) which sets forth minimum standards for the procedures, execution and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of the products we sell. The FDA may evaluate our compliance with the QSR, among other ways, through periodic announced or unannounced inspections which could disrupt our operations and interrupt our manufacturing. If in conducting an inspection of our manufacturing facilities, or the manufacturing facilities of any of our third-party component manufacturers or critical suppliers, an FDA investigator observes conditions or practices believed to violate the QSR, the investigator may document their observations on a Form FDA 483 that is issued at the conclusion of the inspection. A manufacturer that receives an FDA 483 may respond in writing and explain any corrective actions taken in response to the inspectional observations. The FDA will typically review the facility’s written response and mayre-inspect to determine the facility’s compliance with the QSR and other applicable regulatory requirements. Failure to take adequate and timely corrective actions to remedy objectionable conditions listed on an FDA 483 could result in the FDA taking administrative or enforcement actions. Among these may be the FDA’s issuance of a Warning Letter to a manufacturer, which informs it that the FDA considers the observed violations to be of “regulatory significance” that, if not corrected, could result in further enforcement action.

FDA enforcement actions, which include seizure, injunction and criminal prosecution, could result in total or partial suspension of a facility’s production and/or distribution, product recalls, fines, suspension of the FDA’s review of product applications, and/or the FDA’s issuance of adverse publicity. Thus, an adverse inspection could force a shutdown of our manufacturing operations or a recall of our products. Adverse inspections could also delay FDA approval of our products and could have an adverse effect on our production, sales and profitability.

 

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We and any of our third-party vendors may also encounter other problems during manufacturing including failure to follow specific protocols and procedures, equipment malfunction, and environmental factors, any of which could delay or impede our ability to meet demand. The manufacture of our product also subjects us to risks that could harm our business, including problems relating to our facilities and errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in shipment of our products. Any interruption or delay in the manufacture of the product, or any of its components could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products, which could, therefore, have a material adverse effect on our business, financial condition and results of operations.

On June 29, 2017, the FDA, in connection with its Safety Notification related to Magellan’s lead testing systems for venous blood samples, issued its Form 483, Inspectional Observations, to Magellan. This was followed by the FDA issuing a Warning Letter related to the matter on October 23, 2017. While we remain committed to strengthening Magellan’s quality system and ensuring that all aspects of the system are in full compliance, we can provide no assurance that our remediation efforts will be successful to a degree acceptable by the FDA.

Additionally, as set forth in Item 3. “Legal Proceedings”, 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 are cooperating with the DOJ in this matter. We maintain rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements, and are working with the DOJ to promptly respond to the subpoena. However, we cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on Meridian.

See a more detailed discussion of these matters within MD&A on page 32.

Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities would adversely affect our business and operating results.

Products and services manufactured at facilities we own or lease comprised a majority of our revenues. Our global supply of these products and services is dependent on the uninterrupted and efficient operation of these facilities. In addition, we currently rely on a small number of third-party manufacturers to produce certain of our diagnostic products and product components. The operations of our facilities or these third-party manufacturing facilities could be adversely affected by power failures, or natural or other disasters such as earthquakes, floods, tornadoes or terrorist threats. Although we carry insurance to protect against certain business interruptions at our facilities, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Any significant interruption in the Company’s or a third-party supplier’s manufacturing capabilities could materially and adversely affect our operating results.

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We depend on sole-source suppliers for certain critical raw materials, and components and finished products. A supply interruption could adversely affect our business.

Raw Materials and Components

Our diagnostic products are made from a wide variety of raw materials that are biological or chemical in nature, and that generally are available from multiple sources of supply. We sole-source certain raw materials and components, due to FDA regulations, which makemakes it time consuming and costly to switch raw materials and components in FDA clearedFDA-cleared products. If certain suppliers fail to supply required raw materials or components, we will need to secure other sources which may require us to conduct additional development and testing and obtain regulatory approval. These activities require significant time and resources, and there is no assurance that new sources will be secured or regulatory approvals, if necessary, will be obtained.

We utilize third-party manufacturers for our instrumentation. One third party manufactures our proprietaryillumipro-10™ Incubator Alethia Incubator/Reader (instrument), a component of ourillumigene Alethia molecular system. This instrument issystem, and a separate third party currently assembles our proprietary LeadCare instruments. Upon commercialization in fiscal 2019, an additional third party will manufacture our Curian instrument. These instruments are manufactured exclusively for Meridian according to our specifications. While other manufacturers for this typethese types of instrumentinstruments are available, we source each instrument solely from one manufacturer due to limit the FDA regulations and costs involved in clearing the system for marketing in the United States. If thisthese third-party manufacturer failsmanufacturers fail to supply us with instruments, we will need to secure another manufacturer, and it may take as long as 12 months to transfer instrument manufacturing. As revenues for ourillumigene molecular system accounted for $41,000 or 21% of consolidated revenues for fiscal 2015, $37,000 or 20% for fiscal 2014 and $34,000 or 18% for fiscal 2013, anAn interruption in the manufacturing of this systemthese instruments could have a material adverse effect on our operating results.

Additionally, one third party manufactures onea certain reagent for use with ourillumigene Alethia assays. While alternative suppliers exist, we elect to utilize this third party exclusively in order to maintain consistency in our materials, which is critical in complying with FDA regulatory requirements. An interruption in the manufacturing of these reagents could have a material adverse effect on our operating results.

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Finished Products

We outsource the manufacturing for certain finished diagnostic products to third parties. A disruption in the supply of these finished products could have a material adverse effect on our business until we find another supplier or bring manufacturingin-house.

Four products manufactured exclusively for us by threetwo separate and independent companies accounted for 18%11%, 17%11% and 17%12% of consolidated revenues in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Meridian owns all rights and title to the FDA 510(k) clearances for these products.

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Activities undertaken by Meridian to reduce the risk of these sole-supplier arrangements include maintaining adequate inventory levels, supplier qualification procedures, supplier audits, site visits, and frequent communication. Additionally, we have identified potential alternate suppliers.

Risks Related to Intellectual Property and Product Liability

We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize.

In developing and manufacturing our products, we employ a variety of proprietary and patented technologies. In addition, we have licensed, and expect to continue to license, various complementary technologies and methods from academic institutions and public and private companies. We cannot provide any assurance that the technologies that we own or license provide protection from competitive threats or from challenges to our intellectual property. In addition, we cannot provide any assurances that we will be successful in obtaining and retaining licenses or proprietary or patented technologies in the future.

See Item 3. “Legal Proceedings” for a discussion of the status of certain litigation related to our intellectual property.

Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our products.

Litigation over intellectual property rights is prevalent in the diagnostic industry. As the market for diagnostics continues to grow and the number of participants in the market increases, we may increasingly be subject to patent infringement claims. It is possible that a third party may claim infringement against us. If found to infringe, we may attempt to obtain a license to such intellectual property; however, we may be unable to do so on favorable terms, or at all. Additionally, if our products are found to infringe on third-party intellectual property, we may be required to pay damages for past infringement and lose the ability to sell certain products, causing our revenues to decrease. We currently carry intellectual property insurance that covers damages and defense costs from our potential infringement on certain other third-party patents at levels that we believe are commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our reputation in the industry could have a material adverse effect on our business.

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If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may have to limit or cease sales of our products.

The testing, manufacturing and marketing of medical diagnostic products involves an inherent risk of product liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease sales of our products. We currently carry product liability insurance at a level we believe is commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. In certain customer contracts, we indemnify third parties for certain product liability claims related to our products. These indemnification obligations may cause us to pay significant sums of money for claims that are covered by these indemnifications. In addition, a defect in the design or manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our reputation in the industry could have a material adverse effect on our business.

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Other Risks Affecting Our Business

Our business could be negatively affected if we are unable to attract, hire and retain key personnel.

Our future success depends on our continued ability to attract, hire and retain highly qualified personnel, including our executive officers and scientific, technical, sales and marketing employees, and their ability to manage growth successfully. If such key employees were to leave and we were unable to obtain adequate replacements, our operating results could be adversely affected.

Our bank credit agreement imposesagreements impose restrictions with respect to our operations.

Our bank credit agreement containsagreements contain a number of financial covenants that require us to meet certain financial ratios and tests. If we fail to comply with the obligations in the credit agreement,agreements, we would be in default under the credit agreement.agreements. If an event of default is not cured or waived, it could result in acceleration of any indebtedness under our credit agreement,agreements, which could have a material adverse effect on our business. At September 30, 2018, we have $50,250 outstanding on a five-year term loan entered into in connection with the present time,Magellan acquisition and no borrowings are outstanding under our $30,000 bank revolving credit agreement.facility.

We face risks related to global economic conditions.

We currently generate significant operating cash flows, which combined with access to the credit markets, provides us with discretionary funding capacity for research and development and other strategic activities. However, as an enterprise with global operations and markets, our operations and financial performance are in part dependent upon global economic conditions, and we could be negatively impacted by a global, regional or national economic crisis, including sovereign risk in the event of deterioration in the credit worthiness of or a default by local governments. We are particularly susceptible to the economic conditions in countries where government-sponsored health care systems are the primary payers for health care, including those countries within the European Union that are reducing their public expenditures in an effort to achieve cost savings. The uncertainty in global economic conditions poses a risk to the overall economy that could impact demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. As such, if global economic conditions deteriorate significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, supplier or customer disruptions resulting from tighter credit markets, and/or temporary interruptions in our ability to conductday-to-day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers. Whileto-date such factors have not had a significant negative impact on our results or operations, we continue to monitor and plan for the potential impact of these global economic factors.

 

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Approximately $1,600 and $2,700While the impact of our accounts receivable at September 30, 2015 and September 30, 2014, respectively, was due from Italian hospital customers whose funding ultimately comesthe United Kingdom’s planned separation from the Italian government. In addition, the amount of our annual revenuesEuropean Union (commonly referred to as “Brexit”), a final agreement on which is expected in the countryvery near future, remains uncertain, the resulting immediate changes in foreign currency exchange rates have had a limited overall impact due to natural hedging. However, any predicted deterioration in the United Kingdom and European economic outlook may have an adverse effect on revenue growth, but the extent of Greecesuch effect cannot yet be quantified. In the longer term, it is possible that we will be directly impacted in a number of key areas including, without limitation, the hiring and retention of qualified staff, regulatory affairs, manufacturing, logistics, and increased tariffs. We are closely monitoring the corresponding amount of customer receivables outstanding at any pointBrexit developments in time is not significant,order to determine, quantify and therefore,proactively address changes as they become clear. Despite the Brexit developments, we do not expect any meaningfulmacroeconomic conditions to have a significant impact on our liquidity needs, financial condition or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements and dividends from current cash flows from operating activities and cash on hand. If needed, we also have an additional source of liquidity through our $30,000 bank revolving credit facility. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial crisis inmarkets tightens for an extended period of time, and such conditions impact the countrycollectability of Greece.our customer accounts receivable or impact credit terms with our vendors, or disrupt the supply of raw materials and services.

Breaches of our information technology systems could have a material adverse effect on our operations.

We rely on information technology systems to process, transmit and store electronic information in ourday-to-day operations. The secure processing, maintenance and transmission of this information is critical to our operations. Like many multinational corporations, our information technology systems may be subjected to computer viruses or other malicious codes, unauthorized access attempts, and cyber- or phishing-attacks. We also store certain information with third parties that could be subject to these types of attacks. Any such breach could compromise our networks, and the information stored therein could be accessed, publicly disclosed, lost or stolen. Such attacks could result in our intellectual property and other confidential information being lost or stolen, disruption of our operations, and other negative consequences, such as increased costs for security measures or remediation costs, and diversion of management attention. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of our operations, damage to our reputation, and/or cause a loss of confidence in our products and services, all of which could adversely affect our business revenues and competitive position. While we will continue to implement additional protective measures to reduce the risk of and detect cyber incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. There can be no assurances that our protective measures will prevent attacks that could have a significant impact on our business.

Natural disasters, war and other events could adversely affect our future revenues and operating income.

Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by the United States and other governments or by our customers or suppliers in response to such events, could cause significant economic disruption and political and social instability in the United States and in areas outside of the United States in which we operate. These events could result in decreased demand for our products, adversely affect our manufacturing and distribution capabilities, or increase the costs for, or cause interruptions in, the supply of materials from our suppliers.

 

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Risks Related to Our Common Stock

Material weaknesses in our internal control over financial reporting could be identified, which if not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements.

During fiscal 2017, the Company identified a material weakness in internal control over financial reporting, which has been remediated. However, the Company can make no assurances that a material weakness will not be identified in the future or that, if identified, it will be properly corrected. In the event we are unable to remediate a material weakness identified in the future, we may be unable to provide holders of our securities with required financial information in a timely and reliable manner, and we may incorrectly report financial information. Either of these events could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information and/or the trading price of our common stock.

Additional stock issuance authorizations.

Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of such shares without any future vote or action by the shareholders. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a change in control of our company. Ohio corporation law contains provisions that may discourage takeover bids for our company that have not been negotiated with the board of directors. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, sales of substantial amounts of such shares in the public market could adversely affect the market price of our common stock and our ability to raise additional capital at a price favorable to us.

The market price of our common stock may be volatile and fluctuate significantly, which could result in substantial losses for stockholders and subject us to litigation.

The market price of our common stock may be subject to significant fluctuations due to numerous factors, including but not limited to the risks described in this “Risk Factors” section. In addition, the stock market in general, The NASDAQ Global Market and the market for diagnostics companies in particular may experience a loss of investor confidence. A loss of investor confidence may result in extreme price and volume fluctuations in our common stock that are unrelated or disproportionate to the operating performance of our business, our financial condition or results of operations. These broad market and industry factors may materially harm the market price of our common stock and expose us to securities class-action litigation. Class-action litigation, even if unsuccessful, could be costly to defend and divert management’s attention and resources, which could further materially harm our financial condition and results of operations.

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There can be no assurance that we will continue to pay dividends.

The declaration, amount and timing of the Company’s dividends are subject to capital availability and determinations by our board of directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws and our agreements applicable to the declaration and payment of cash dividends. Our continuing ability to pay dividends will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, debt service requirements, results of operations, financial condition and other factors beyond our control that our board of directors may deem relevant. A reduction in or elimination of our dividend payments, or our dividend program could have a negative effect on our stock price.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our corporate offices, infectious disease Diagnostics manufacturing facility, and infectious disease Diagnostics research and development facility are located in five buildings totaling approximately 120,000 square feet on 10 acres of land in the Village of Newtown, a suburb of Cincinnati, Ohio. These properties are owned by us. Our blood-chemistry manufacturing and research and development operations are located in an approximately 30,000 square foot leased facility in Billerica, Massachusetts. We also operate a Diagnostics sales and distribution center near Milan, Italy in an approximately 18,000 square foot two-story building. This facility is owned by our wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in Paris, France andBraine-l’Alleud, Belgium for sales and administrative functions.

Our Life Science operations are conducted in several facilities in Memphis, Tennessee; Boca Raton, Florida; Taunton, Massachusetts; London, England; Luckenwalde, Germany; Sydney, Australia; Singapore; and Beijing, China. Our facility in Memphis, Tennessee consists of two buildings totaling approximately 44,000 square feet and is owned by us. Our leased facility in Boca Raton, Florida contains approximately 7,500 square feet of manufacturing space. Following are details of our other Life Science facilities, all of which are leased: Taunton – approximately 10,000 square feet of sales and warehouse space; London – approximately 20,00021,000 square feet of sales, warehouse, distribution, research and development, manufacturing and administrative office space; Luckenwalde – approximately 10,000 square feet of sales, warehouse and manufacturing space; Sydney – approximately 8,000 square feet of sales, warehouse, research and development and manufacturing space; Singapore – approximately 2,0005,000 square feet of sales and business developmentwarehouse space; Beijing – less than 1,000 square feet of representative office space maintained forsales and business development purposes.

space.

 

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ITEM 3.

LEGAL PROCEEDINGS

We are a party to various litigation matters that we believe are in the normal course of business. TheAside from the matters discussed below, the ultimate resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Noflows, and no material provision has been made in the accompanying consolidated financial statementsConsolidated Financial Statements for these 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. Meridian has filed a motion to dismiss the Complaint, to which the plaintiff responded on August 14, 2018. The motion has been fully briefed and remains pending before the court. 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 the accompanying Consolidated Statement of Operations for fiscal 2018 or 2017.

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 the accompanying Consolidated Statement of Operations for fiscal 2018 or 2017.

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Approximately $600 of expense for attorneys’ fees related to the above two class action matters is included within the accompanying Consolidated Statement of Operations for fiscal 2018. 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. However, the Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately $775 of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated Statement of Operations for fiscal 2018.

On October 9, 2018, the Company and DiaSorin Inc. entered into a strategic collaboration to sell DiaSorin’sHelicobacter pylori stool antigen test to detectH. 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, ofco-developed products in major countries in continental Europe.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

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PART II.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON

EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Refer to “Forward-Looking Statements” following the Index in front of this Form10-K and Item 1A “Risk Factors” on Pages 17pages 14 through 26 of this Annual Report.

“Common Stock Information”Market Information

Our common stock trades on the inside back coverNASDAQ Global Select Market under the symbol VIVO.

Holders of the Annual Report to Shareholders for 2015our Common Stock

As of September 30, 2018, there were approximately 635 holders of record and “Quarterlyapproximately 13,200 beneficial owners of our common shares.

Dividends

“Quarterly Financial Data (Unaudited)” relating to our dividends in Note 9 to11 of the Consolidated Financial Statements are incorporated herein by reference. Except as may otherwise be prohibited by applicable law, there are no restrictions on cash dividend payments.

During fiscal 2015, our2018 and 2017, the indicated annual cash dividend rate ofwas established at $0.50 per share (down from $0.80 per share approximated 94% of full year diluted earnings per share, exceeding our long-standing policy of establishing a cash dividend payout ratio of between 75% and 85% of eachin fiscal year’s expected net earnings. Despite there being certain individual fiscal years in which our payout ratio has fallen outside of this policy range, since adopting this policy in November 2002, our cumulative cash dividend payout has approximated 85% of cumulative net earnings during this timeframe.2016). The declaration and amount of dividends will be determined by the board of directors in its discretion based upon its evaluation of earnings, cash flow requirements and future business developments and opportunities, including acquisitions. At its meeting on November 4, 2015,7, 2018, the board of directors announced a continuation of the $0.80$0.50 indicated annual dividend rate per share for fiscal 2016.2019. We paid dividends of $0.50, $0.575 and $0.80 per share in fiscal 2015, $0.79 per2018, 2017 and 2016, respectively. Except as may otherwise be prohibited by applicable law, there are no restrictions on cash dividend payments.

Stock Total Return Performance

The following graph shows the yearly percentage change in Meridian’s cumulative total shareholder return on its common stock as measured by dividing the sum of (A) the cumulative amount of dividends, assuming dividend reinvestment, during the periods presented, and (B) the difference between Meridian’s share in fiscal 2014price at the end and $0.76 perthe beginning of the periods presented; by the share in fiscal 2013.

Asprice at the beginning of September 30, 2015, there were approximately 800 holdersthe periods presented with the NASDAQ Composite Index and a Peer Group Index. The 2017 Peer Group consists of recordbioMerieux S.A.,Bio-Rad Laboratories, Inc., GenMark Diagnostics, Inc., IDEXX Laboratories, Inc., Luminex Corporation, Myriad Genetics, Inc., Neogen Corporation, OraSure Technologies, Inc., Quidel Corporation and approximately 16,500 beneficial ownersTrinity Biotech Plc. The 2018 Peer Group consists of our common shares.

bioMerieux S.A.,Bio-Rad Laboratories, Inc., GenMark Diagnostics, Inc., Luminex Corporation, Myriad Genetics, Inc., OraSure Technologies, Inc., Quidel Corporation and Trinity Biotech Plc.

 

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LOGO

ITEM 6.

SELECTED FINANCIAL DATA

Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2015.

Income Statement Information (Amounts in thousands, except per share data) 

For the Year Ended September 30,

  2018   2017   2016   2015   2014 

Net revenues

  $213,571  $200,771  $196,082  $194,830  $188,832

Gross profit

   130,461   124,292   127,212   121,882   117,243

Operating income

   31,584   37,382   51,378   56,060   52,392

Net earnings

   23,849   21,557   32,229   35,540   34,743

Basic earnings per share

  $0.56  $0.51  $0.77  $0.85  $0.84

Diluted earnings per share

  $0.56  $0.51  $0.76  $0.85  $0.83

Cash dividends declared per share

  $0.500  $0.575  $0.800  $0.800  $0.790

Book value per share

  $4.14  $4.02  $3.95  $3.96  $3.87

Balance Sheet Information 

As of September 30,

  2018   2017   2016   2015   2014 

Current assets

  $139,053  $133,875  $126,791  $119,422  $108,832

Current liabilities

   24,173   22,887   22,571   15,251   13,735

Total assets

   251,377   249,777   252,028   183,282   176,929

Long-term debt obligations

   50,180   54,647   58,360   —     —  

Shareholders’ equity

   175,418   169,585   166,472   165,873   161,029

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Refer to “Forward-Looking Statements” following the Index in front of this Form10-K and Item 1A “Risk Factors” on Pages 17pages 14 through 26 of this Annual Report.

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

Results of Operations:

Fourth Quarter

Net earnings for the fourth quarter of fiscal 2015 increased 3%2018 decreased 5% to $8,467,$5,434, or $0.20$0.13 per diluted share, from net earnings for the fourth quarter of fiscal 20142017 of $8,182,$5,726, or $0.20$0.13 per diluted share. The fiscal 2018 fourth quarter results include $4,576 of costs associated with the transition to our new CEO, other restructuring costs and litigation costs (collectively, “restructuring and litigation costs”), along with certainone-time tax effects of the U.S. tax reform act enacted in December 2017 (combined impact on net earnings of $3,145, or $0.07 per diluted share). The fiscal 2017 fourth quarter results included $762 of restructuring and litigation costs (impact on net earnings of $495, or $0.01 per diluted share). Consolidated revenues for the fourth quarter of fiscal 2015 increased $376, or 1%, to $47,0682018 totaled $53,100, an increase of 7% compared to the fourth quarter of fiscal 2014;2017, also increasing 4%7% on a constant-currency basis.

Included within the fourth quarter 2015 results were revenues from ourillumigene®molecular platform of products totaling $10,215, representing a 12% increase from the fiscal 2014 fourth quarter. Also contributing to the consolidated revenues increase were increased revenues in three of our diagnostic focus product families (foodborne, respiratory and women’s health & STD) and our Life Science segment’s molecular components business. Serving to partially offset these increases were decreased revenues in ourC. difficile andH. pylori focus product families and our Life Science segment’s immunoassay components business.

Revenues for the Diagnostics segment for the fourth quarter of fiscal 20152018 increased 1%2% compared to the fourth quarter of fiscal 2014 (3%2017 (also 2% on a constant-currency basis), reflecting the following for eachcomprised of our focus product families:a 6% growthdecrease in our foodborne products, 39% in our women’s health & STD products, 42% growth in our respiratory products, 5% decline in ourH. pylorimolecular assay products and 17% declinea 5% increase in ourC. difficileimmunoassay and blood chemistry assay products. As it relates to our respiratory products, the growth was driven by several products in both our molecular and immunoassay categories. Our molecular products (illumigene Group A Strep,illumigene Mycoplasma andillumigene Pertussis) experienced volume growth from new assay placements. Our immunoassay products (influenza and Mycoplasma) experienced growth in distribution channels. With growtha 9% increase in its molecular components businessreagents products and a decline27% increase in its immunoassay components business,immunological reagents products, revenues offor our Life Science segment were flatincreased 19% in the fourth quarter of fiscal 20152018 compared to the fourth quarter of fiscal 2014; increasing 4% on2017. On a constant-currency basis.

basis, revenues for our Life Science Segment increased 20%.

The fourth quarter revenues reflect improvement in our respiratory illness and blood chemistry assay product lines, being partially offset by decreased revenues for our gastrointestinal assays. Both Life Science product categories performed well, reflecting continued growth in the Asia-Pacific region and high volume sales to IVD manufacturer customers.

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Fiscal Year

Net earnings for fiscal 20152018 increased 2%11% to $35,540,$23,849, or $0.85$0.56 per diluted share, from net earnings for fiscal 20142017 of $34,743,$21,557, or $0.83$0.51 per diluted share. Fiscal 2018 results include $13,051 of restructuring and litigation costs, along with certainone-time tax effects of the U.S. tax reform act enacted in December 2017 (combined impact on net earnings of $7,856, or $0.18 per diluted share). Fiscal 2017 results include $762 of restructuring and litigation costs, and a $6,628 impairment charge against Diagnostics segment goodwill (combined impact on net earnings of $7,123, or $0.17 per diluted share). Consolidated revenues increased 6% to $213,571 for fiscal 2018 compared to fiscal 2017, increasing 5% on a constant-currency basis.

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In fiscal 2018, revenues for the Diagnostics segment increased 5% compared to fiscal 2017 (4% on a constant-currency basis). This increase is comprised of relatively flat revenues for our molecular assay products and a 6% increase in immunoassay and blood chemistry assay products. With a 12% increase in its molecular reagents business and a 9% increase in its immunological reagents business, revenues of our Life Science segment increased 10% during fiscal 2018 compared to fiscal 2017, increasing 9% on a constant-currency basis.

Update on Lead Testing

We offer multiple lead testing systems that are capable of processing both capillary and venous blood samples. Our LeadCare Plus and LeadCare Ultra systems, which accounted for approximately 10% of lead testing annual revenues in fiscal 2016, are used predominantly with venous blood samples. Typically, the Ultra and Plus systems are used in a reference lab setting. Our LeadCare II system is predominantly used with capillary blood samples and is typically used in a physician office setting. LeadCare II system revenue represented approximately 90% of our lead testing product revenues in fiscal 2016. The LeadCare II system is the onlypoint-of-care system for testing lead exposure, receiving CLIA-waived status. Other methods for testing blood lead levels include Graphite Furnace Atomic Absorption Spectroscopy and Mass Spectrometry, which are typically performed in hospital and reference laboratory settings.

On May 17, 2017, the FDA issued a field safety notice advising customers to discontinue use of our lead testing systems with venous blood samples. This field safety notice was followed by product recall notices on May 25th and June 5th. Subsequent to the issuances of these field safety and product recall notices, the FDA completed an inspection of our Quality System for our lead testing manufacturing facility in Billerica, Massachusetts, and issued its Form 483, Inspectional Observations, on June 29, 2017, which was expectedly followed by a Warning Letter issued on October 23, 2017. During our 2017 third fiscal quarter, it was determined that a potential impairment of goodwill recorded in connection with the acquisition of Magellan had occurred (i.e., a “triggering event”). An impairment charge of $6,628, on both apre-tax andafter-tax basis, was recorded during the fiscal 2017 third quarter as set forth in Note 1(h)“Summary of Significant Accounting Policies – Intangible Assets” of the accompanying Consolidated Financial Statements.

The Warning Letter requires periodic reporting on our remediation progress. To date, we have satisfied our post-Warning Letter reporting requirements with the FDA. During fiscal 2018 and 2017, we incurred approximately $1,600 in aggregate remediation costs, primarily related to regulatory consultants and studies required to reinstate our venous blood sample claim, and we expect to incur additional costs during fiscal 2019. In the course of remediation, we may encounter additional matters that warrant notifications to the FDA and/or customers regarding the use of its products. At this time, we do not believe that any such notifications would impact the ability to use the LeadCare systems with capillary blood samples.

- 32 -


As set forth in Item 3. “Legal Proceedings”, 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 are cooperating with the DOJ in this matter. We maintain rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements, and are working with the DOJ to promptly respond to the subpoena. However, we cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on Meridian.

USE OFNON-GAAP MEASURES

We have supplemented our reported GAAP financial information with information on net earnings, basic earnings per share and diluted earnings per share excluding the effects of: (i) restructuring and litigation costs (fiscal 2018, 2017 and 2016); (ii) the impairment charge against Diagnostics segment goodwill (fiscal 2017); (iii) acquisition-related costs (fiscal 2016); and (iv) certainone-time tax effects of the tax reform act – each of which is anon-GAAP measure. We have provided in the tables below reconciliations to the 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 thesenon-routine items; and

2.

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

Revenue reported on a constant-currency basis is also anon-GAAP measure and is calculated by applying current period average foreign currency exchange rates to each of the 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 anon-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.

- 33 -


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

   2018   2017   2016 

Net Earnings -

      

U.S. GAAP basis

  $23,849  $21,557  $32,229

Restructuring costs(1)

   6,430   87   431

Litigation costs(1)

   3,205   408   —   

Goodwill impairment charge(2)

   —      6,628   —   

Acquisition-related costs(1)

   —      —      1,233

One-time benefit from tax law change

   (2,655   —      —   

Repatriation transition tax

   876   —      —   
  

 

 

   

 

 

   

 

 

 

Adjusted earnings

  $31,705  $28,680  $33,893
  

 

 

   

 

 

   

 

 

 

Net Earnings per Basic Common Share -

      

U.S. GAAP basis

  $0.56  $0.51  $0.77

Restructuring costs(1)

   0.15   —      0.01

Litigation costs(1)

   0.08   0.01   —   

Goodwill impairment charge(2)

   —      0.16   —   

Acquisition-related costs(1)

   —      —      0.03

One-time benefit from tax law change

   (0.06   —      —   

Repatriation transition tax

   0.02   —      —   
  

 

 

   

 

 

   

 

 

 

Adjusted Basic EPS

  $0.75  $0.68  $0.81
  

 

 

   

 

 

   

 

 

 

Net Earnings per Diluted Common Share -

      

U.S. GAAP basis

  $0.56  $0.51  $0.76

Restructuring costs(1)

   0.15   —      0.01

Litigation costs(1)

   0.07   0.01   —   

Goodwill impairment charge(2)

   —      0.16   —   

Acquisition-related costs(1)

   —      —      0.03

One-time benefit from tax law change

   (0.06   —      —   

Repatriation transition tax

   0.02   —      —   
  

 

 

   

 

 

   

 

 

 

Adjusted Diluted EPS(3)

  $0.74  $0.67  $0.80
  

 

 

   

 

 

   

 

 

 

(1)

These restructuring costs, litigation costs, and acquisition-related costs are net of income tax effects of $3,416, $267 and $494 in fiscal 2018, 2017 and 2016, respectively, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

(2)

Since the goodwill impairment charge was not deductible for tax purposes, there are no income tax effects.

(3)

Net Earnings per Diluted Common Share for fiscal 2017 does not sum to the total Adjusted Diluted EPS due to rounding.

- 34 -


REVENUE OVERVIEW

Below are analyses of the Company’s revenue, by reportable segment, provided for each of the following:

- By Reportable Segment & Geographic Region

- By Product Platform/Type

- By Disease Family (Diagnostics only)

Revenue Overview- By Reportable Segment & Geographic Region

Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease diagnostic products in Cincinnati, Ohio and the sale and distribution ofmanufacturing operations for products detecting elevated lead levels in blood in Billerica, Massachusetts (near Boston). These diagnostic test kitsproducts are sold and distributed in the countries comprising North Central and SouthLatin America (the “Americas”); Europe, Middle East and Africa (“EMEA”); and other countries outside of the Americas and EMEA (rest of the world, or “ROW”). The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany; and Sydney, Australia,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 officesfacility, with outsourced distribution capabilities, in Singapore and Beijing, China to further pursue growing revenue opportunities in Asia. The Life Science segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.

Revenues for the Diagnostics segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and strengththe severity of certainseasonal diseases and outbreaks, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from quarter to quarter by 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, and foreign currency exchange rates. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated revenues due to these factors.

- 29 -


Revenues for each of our segments and the geographic regions therein are shown below.

 

        2018 vs.
2017
 2017 vs.
2016
 
  2015 2014 2013 2015 vs.
2014
Inc (Dec)
 2014 vs.
2013
Inc (Dec)
   2018 2017 2016 Inc (Dec) Inc (Dec) 

Diagnostics-

            

Americas

  $123,366  $114,754  $116,509  8 (2)%   $126,647 $119,685 $123,187 6 (3)% 

EMEA

   19,135  21,807  21,378  (12)%  2   21,231 20,273 19,024 5 7

ROW

   3,613  4,939  6,742  (27)%  (27)%    2,576 3,563 2,903 (28)%  23
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total Diagnostics

   146,114  141,500  144,629   (2)%    150,454 143,521 145,114 5 (1)% 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Life Science-

            

Americas

   22,363  19,040  17,688  17    20,792 19,978 19,484 4 3

EMEA

   17,845  20,005  18,721  (11)%     24,530 21,968 20,075 12 9

ROW

   8,508  8,287  7,648  3    17,795 15,304 11,409 16 34
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total Life Science

   48,716  47,332  44,057  3    63,117 57,250 50,968 10 12
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Consolidated

  $194,830  $188,832  $188,686  3 —    $213,571 $200,771 $196,082 6 2
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

% of total revenues-

            

Diagnostics

   75 75 77     70 71 74  

Life Science

   25 25 23     30 29 26  
  

 

  

 

  

 

     

 

  

 

  

 

   

Total

   100 100 100     100 100 100  
  

 

  

 

  

 

     

 

  

 

  

 

   

Ex-Americas

   25 29 29     31 30 27  
  

 

  

 

  

 

     

 

  

 

  

 

   

- 35 -


Revenue Overview- By Product Platform/Type

The revenues generated by each of our reportable segments result primarily from the sale of the following segment-specific categories of products:

Diagnostics

 

 1)

Molecular testsassays that operate on our Alethia platform (formerly branded asillumillumiigene platform)

 

 2)Immunoassay tests

Immunoassays and blood chemistry assays on multiple technology platforms

Life Science

 

 1)

Molecular componentsreagents

 

 2)Immunoassay components

Immunological reagents

            

2018 vs.

2017

  

2017 vs.

2016

 
   2018  2017  2016  Inc (Dec)  Inc (Dec) 

Diagnostics-

      

Molecular assays

  $34,011 $33,901 $38,302  —    (11)% 

Immunoassays & blood chemistry assays

   116,443  109,620  106,812  6  3
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Diagnostics

  $150,454 $143,521 $145,114  5  (1)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Life Science-

      

Molecular reagents

  $24,613 $21,998 $20,506  12  7

Immunological reagents

   38,504  35,252  30,462  9  16
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Life Science

  $63,117 $57,250 $50,968  10  12
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of Diagnostics revenues-

      

Molecular assays

   23  24  26  

Immunoassays & blood chemistry assays

   77  76  74  
  

 

 

  

 

 

  

 

 

   

Total Diagnostics

   100  100  100  
  

 

 

  

 

 

  

 

 

   

% of Life Science revenues-

      

Molecular reagents

   39  38  40  

Immunological reagents

   61  62  60  
  

 

 

  

 

 

  

 

 

   

Total Life Science

   100  100  100  
  

 

 

  

 

 

  

 

 

   

 

- 3036 -


Revenues for each product platform/type, as well as its relative percentage of segment revenues, are shown below.

   2015  2014  2013  2015 vs.
2014
Inc (Dec)
  2014 vs.
2013
Inc (Dec)
 

Diagnostics-

      

Molecular tests

  $40,880  $36,981  $33,597   11  10

Immunoassay tests

   105,234   104,519   111,032   1  (6)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Diagnostics

  $146,114  $141,500  $144,629   3  (2)% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Life Science-

      

Molecular components

  $20,601  $20,824  $18,777   (1)%   11

Immunoassay components

   28,115   26,508   25,280   6  5
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Life Science

  $48,716  $47,332  $44,057   3  7
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of Diagnostics revenues-

      

Molecular tests

   28  26  23  

Immunoassay tests

   72  74  77  
  

 

 

  

 

 

  

 

 

   

Total Diagnostics

   100  100  100  
  

 

 

  

 

 

  

 

 

   

% of Life Science revenues-

      

Molecular components

   42  44  43  

Immunoassay components

   58  56  57  
  

 

 

  

 

 

  

 

 

   

Total Life Science

   100  100  100  
  

 

 

  

 

 

  

 

 

   

Following is a discussion of the revenues generated by each of these product platforms/types:types and/or disease states:

Diagnostics Products

illumigene Molecular Platform ProductsGastrointestinal Assays

During fiscal 2015,2018, revenues from our gastrointestinal products, which include tests forillumiC. difficile,geneH. pylori molecular platform of productsand certain foodborne pathogens, among others, totaled $40,880, representing an 11%$78,803. This represents a 1% increase from the fiscal 2014. We have approximately 1,465 customer account placements. Of these account placements, approximately 1,300 accounts have completed evaluations2017 and validations and are regularly purchasing product, with the balance of our account placements being in some stage of product evaluation and/or validation. Of our account placements, we have over 400 accounts that are regularly purchasing, evaluating and/or validating two or more assays.

follows a 12% decrease during fiscal 2017. We continue to invest in newface pricing and volume pressures within this product developmentcategory that will carry into fiscal 2019 and beyond for our molecular testing platform,illumigene. This platform now has the following commercialized tests:

1.illumigene® C. difficile – commercialized in August 2010

2.illumigene® Group B Streptococcus (Group B Strep or GBS) – commercialized in December 2011

3.illumigene® Group A Streptococcus (Group A Strep) – commercialized in September 2012

- 31 -


4.illumigene® Mycoplasma (M. pneumonia; walking pneumonia) – commercialized in June 2013

5.illumigene® Bordetella pertussis (whooping cough) – commercialized in March 2014

6.illumigene® Chlamydia trachomatis – commercialized outside of U.S. in February 2015

7.illumigene® Neisseria gonorrhea – commercialized outside of U.S. in February 2015

8.illumigene® HSV 1&2 (Herpes Simplex Virus Type 1 & Type 2) – commercialized outside of U.S. in May 2015; commercialized in U.S. in July 2015

current products. We have several additionalillumigene tests in development, including bloodborne pathogens that are the causative agentsexecuted multi-year supply agreements with our two largest reference laboratory customers for malaria. We have a robust pipeline ofillumigene opportunities and continue to add new assays to ourillumigene platform menu.

We believe that the diagnostic testing market is continuing to selectively move away from culture and immunoassay testing to molecular testing for diseases where there is a favorable cost/benefit position for the total cost of health care. While this market is competitive, with molecular companies such as Cepheid and Becton Dickinson and others such as Quidel, Great Basin, Nanosphere, and Alere, we believe we are well positioned to capitalize on the migration to molecular testing. Our simple, easy-to-use,illumigene platform, with its expanding menu, requires no expensive equipment purchase and little to no maintenance cost. We believe these features, along with its small footprint and the performance of theillumigene assays, makeillumigene an attractive molecular platform to any size hospital or physician office laboratory that runs moderately-complex tests.

Immunoassay Products

Revenues from our Diagnostics segment’s immunoassay products increased 1% in fiscal 2015, following a 6% decrease in fiscal 2014. As described in the product discussions below, the current year increase results primarily from the revenue growth of our foodborne andH. pylori products, partially offset by the decline in revenues from ourC. difficile and respiratory immunoassay products.

Life Science Products

During fiscal 2015, revenues from our Life Science segment increased 3%, with revenues from molecular components sales decreasing 1% from fiscal 2014 and revenues from immunoassay components sales increasing 6%. Life Science segment revenues increased 7% in fiscal 2014, with revenues from molecular component sales increasing 11% over fiscal 2013 and revenues from immunoassay component sales increasing 5%. Our molecular components business’ growth was negatively impacted by the movement in currency exchange rates since fiscal 2014, with revenues increasing 6% on a constant-currency basis over fiscal 2014. Our Life Science segment continuedtests to benefit from increased sales into China, with such sales totaling approximately $2,100 during fiscal 2015 (approximately $600 in the molecular components business and $1,500 in the immunoassay components business).

- 32 -


Diagnostics Revenue Overview- By Disease Family

Revenues from our focus families (C. difficile, foodborne,H. pylori, respiratory and women’s health & STD) comprised 79%, 77% and 77% of our Diagnostics segment’s revenues during fiscal 2015, 2014 and 2013, respectively. Following is a discussion of the revenues generated by each product family:

C. difficile Products

During fiscal 2015, revenues for ourC. difficile product family decreased 12%secure volume, albeit at lower selling prices. We continue to $31,000. This followed a decrease of 12% in fiscal 2014. Our molecular products now represent approximately 80% of this product category. TheC. difficile test market continuesbelieve there are ongoing benefits to be highly competitive, with over 10 suppliers in the United States, certain of which choose to compete solely on price. During fiscal 2015, the amount and rate of decline in constant-currency revenues has decreased. We believe this is due largely to the expansion of ourillumigene molecular platform menu having a positive effect on defending ourC. difficile business.

Foodborne Products

Revenues for our foodborne products (EnterohemorrhagicE. coli(EHEC) andCampylobacter), all of which are immunoassay products, totaled $25,000 during fiscal 2015, an 8% increaserealized from fiscal 2014 (9% in constant-currency). During fiscal 2014, this product line experienced a 3% decrease in revenues from the previous year. Revenues for our foodborne products on a quarterly basis (up 5% in the first quarter, up 27% in the second quarter, down 2% in the third quarter and up 6% in the fourth quarter) have been affected by distributor ordering patterns and our inside and field sales programs, which are designed to protect and expand our current customer base. We are continuing to re-emphasize the benefits of increased sensitivity and faster turnaround time versus culture methods in our marketing programs. The primary competition for our foodborne products is laboratory culture methods and an immunoassay EHEC shiga toxin test from one of our competitors. We believe that our test offers better workflow, less hands-on time and quicker results, in addition to being fully compliant with CDC-recommended testing methods.

H. pylori Products

During fiscal 2015, revenues from ourH. pylori products, all of which are immunoassay products, increased 6% (10% in constant-currency) to $30,000, which followed a 7% increase during fiscal 2014. This increase continues to reflect the benefits of our partnerships with managed care companies in promotingpromoting: (i) the health and economic benefits of a test and treat strategy; (ii) changes in policies that discourage the use of traditional serology methods and promote the utilization of active infection testing methods; and (iii) physician behavior movement away from serology-based testing and toward direct antigen testing. A significant amount of

Contributing to theH. pylori competitive pressures being faced in this product revenues are to reference labs, whose buying patterns may not be consistent period to period.

- 33 -


Thecategory, the patents for ourH. pylori products, are owned by us, and expireexpired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to ourH. pylori products to increase uponin the expiration of these patents in 2016near future, and 2017 as we currently market the only FDA-cleared test to detectH. pylori antigen in stool samples. Suchsuch competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and gross profit. In order to mitigate any loss in revenues upon patent expiration, among other things, we are researching and experimenting withOur product development pipeline includes new products (e.g.,product initiatives for the detection ofH. pylori on molecular platforms), and attemptingwe recently entered into a strategic collaboration with DiaSorin to secure significant customers under long-term contracts.sellH. pylori tests. We are unable to provide any assurances that we will be successful with any mitigation strategy or that any mitigation strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.

Respiratory ProductsIllness Assays

TotalIncluding tests for influenza, RSV, Group A Strep, Pertussis, and Mycoplasma pneumonia, among others, our respiratory illness product revenues increased 22% in fiscal 2018, following a 2% increase in fiscal 2017. These increased revenues reflect volume growth from a particularly strong 2017 – 2018 flu season, as measured by the rate of laboratory-confirmed influenza hospitalizations (published by the CDC).

Blood Chemistry Assays

Revenues from our Diagnostics segmentsale of products to test for elevated levels of lead in blood increased 27% to $22,0005% during fiscal 2015, following2018 to a 5% decrease in thetotal of $19,109. This follows fiscal 2017 revenues from such products in fiscal 2014. Growth was driven by several products in both our molecular and immunoassay categories. Our molecular products (illumigene Group A Strep,illumigene Mycoplasma andillumigene Pertussis) experienced volume growth from new assay placements. Our immunoassay products (influenza and Mycoplasma) experienced growth as a resultincreasing 2% over the twelve months ended September 30, 2016, of which the six months ended March 31, 2016 were prior to Meridian’s ownership of Magellan. These increases in Japanese orders of our Mycoplasma product and a large purchase by a distributor of influenza product in advancewere achieved despite the effect on venous blood testing revenue of the influenza season.previously-notedFDA-related activities.

Women’s Health & STD

- 37 -


Life Science Products

During fiscal 2015,2018, revenues from our women’s health & STD products, all of which areLife Science segment increased 10%, with revenues from molecular products,reagent sales increasing 12% compared to fiscal 2017 and revenues from immunological reagent sales increasing 9%. Life Science segment revenues increased 20%12% in fiscal 2017, with revenues from molecular reagent sales increasing 7% compared to $7,000. Thisfiscal 2016 and revenues from immunological reagent sales increasing 16%. Our Life Science segment’s growth reflectswas impacted by the movement in currency exchange rates since fiscal 2017, with revenues increasing 9% on a constant-currency basis over fiscal 2017. During fiscal 2018, our commercializationLife Science segment continued to benefit from increased revenue from sales into China, with such sales totaling approximately $8,300 during fiscal 2015 of three illumigene tests for sexually transmitted diseases (Chlamydia, Gonorrhea and HSV), along with revenue growth for ourillumigene Group B Strep product, which was introduced to the market in December 2011.2018 – representing an approximate 41% increase over fiscal 2017.

Foreign Currency

DuringFluctuations in foreign currency exchange rates since fiscal 2015, currency exchange2017 had an approximate $4,700 unfavorable$2,200 favorable impact on fiscal 2018 revenues; $3,200$1,400 within the Diagnostics segment and $1,500$800 within the Life Science segment. This compares toyear-to-year currency exchange rates having an approximate $850 favorable$1,200 unfavorable impact on revenues in fiscal 2014; $600 favorable2017; $400 within the Diagnostics segment and $250$800 within the Life Science segment. Due to natural hedge relationships with expenses, both cost of sales and operating expenses, the overall impact of exchange rate fluctuations on net earnings was not materialsignificant during fiscal 2015, 20142018, 2017 or 2013.2016.

- 34 -


Significant Customers

Two U.S. distributors accounted for 37%, 36% and 42% ofRevenue concentrations related to certain customers within our Diagnostics segment’s total revenues for fiscal 2015, 2014 and 2013, respectively. These revenues represented 28%, 27% and 32% of consolidated revenues for fiscal 2015, 2014 and 2013, respectively.

Within our Life Science segment, two diagnostic manufacturing customers accounted for 16%, 16% and 17%segments are set forth in Note 9 of the segment’s total revenues for fiscal 2015, 2014 and 2013, respectively. These revenues represented 4% of our consolidated revenues for each of fiscal 2015, 2014 and 2013.

Medical Device Tax

On January 1, 2013, the medical device tax established as part of the U.S. health care reform legislation became effective, and as a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2015, 2014 and 2013, the Company recorded approximately $1,900, $1,750 and $1,300, respectively, of medical device tax expense, which is reflected as a component of cost of sales in the accompanying Consolidated Statements of Operations.Financial Statements.

Gross Profit:

 

  2015 2014 2013 2015 vs.
2014
Inc (Dec)
 2014 vs.
2013
Inc (Dec)
   2018 2017 2016 2018 vs.
2017
Inc (Dec)
 2017 vs.
2016
Inc (Dec)
 

Gross Profit

  $121,882  $117,243  $121,044  4 (3)%   $130,461 $124,292 $127,212 5 (2)% 

Gross Profit Margin

   63 62 64 1 point    -2 points     61 62 65 -1 point  -3 points 

The overall gross profit margin increasedecrease during fiscal 20152018 primarily results from the combined effects ofof: (i) pricing pressure in our Diagnostics segment; (ii) mix of products sold; (ii) realizationsold, particularly decreased contribution from certain of manufacturing facility efficiencies;our higher margin gastrointestinal assays; and (iii) favorable effects of currency rates related to products where the purchase cost is denominated in Euros but the customer sales are billed in U.S. dollars.operating segment mix. The overall decrease in the gross profit margin from fiscal 20132016 to fiscal 20142017 reflects the combined effects ofof: (i) mix of revenuesproducts sold, particularly decreased contribution from the Company’s segments;certain of our higher margin gastrointestinal assays; (ii) mixcustomer mix; (iii) operating segment mix; and (iv) decreased production levels in certain of products sold; (iii) declines in pricing on selected products; (iv) unfavorable manufacturing facility overhead absorption; and (v) the medical device tax, which did not exist during the first quarter of fiscal 2013.our production facilities designed to reduce inventory levels.

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Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, PCR/qPCR reagents, nucleotides, competent cells, and proficiency panels, and contract research and development, and contract manufacturing services.panels. Product revenue mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.

Operating Expenses -

Segment Detail

   Research &
Development
   Selling &
Marketing
   General &
Administrative
   Other   Total Operating
Expenses
 

Fiscal 2016:

          

Diagnostics

  $11,412  $21,339  $21,483  $—     $54,234

Life Science

   2,779   8,717   7,946   —     19,442

Unallocated expenses

   —     —     —     2,158   2,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total 2016 Expenses

  $14,191  $30,056  $29,429  $2,158  $75,834
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2017:

          

Diagnostics

  $13,433  $22,942  $23,603  $—     $59,978

Life Science

   2,603   9,446   7,493   —     19,542

Unallocated expenses

   —     —     —     7,390   7,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total 2017 Expenses

  $16,036  $32,388  $31,096  $7,390  $86,910
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2018:

          

Diagnostics

  $13,772  $24,990  $26,257  $—     $65,019

Life Science

   3,098   9,478   8,231   —     20,807

Unallocated expenses

   —     —     —     13,051   13,051
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total 2018 Expenses

  $16,870  $34,468  $34,488  $13,051  $98,877
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Operating Expenses:Expenses -

Comparisons to Prior Year

Periods

 

  Research &
Development
 Selling &
Marketing
 General &
Administrative
 Total Operating
Expenses
             

2013 Expenses

  $ 10,787  $ 22,424  $ 30,519  $ 63,730 
  Research &
Development
 Selling &
Marketing
 General &
Administrative
 Other Total Operating
Expenses
 

2016 Expenses

  $14,191 $30,056 $29,429 $2,158 $75,834
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

% of Revenues

   6 12 16 34   7 15 15 1 39

Fiscal 2014 Increases (Decreases):

     

Fiscal 2017 Increases (Decreases):

      

Diagnostics

   1,701  1,289  (2,036 954    2,021 1,603 2,120  —   5,744

Life Science

   64  1,197  (1,094 167    (176 729 (453  —   100

Restructuring costs

   —    —    —   (543 (543

Litigation costs

   —    —    —   628 628

Goodwill impairment charge

   —    —    —   6,628 6,628

Acquisition-related costs

   —    —    —   (1,481 (1,481
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

2014 Expenses

  $12,552  $24,910  $27,389  $64,851 
  

 

  

 

  

 

  

 

 

% of Revenues

   7 13 15 34

% Increase (Decrease)

   16 11 (10%)  2

Fiscal 2015 Increases (Decreases):

     

Diagnostics

   (306 730  745  1,169 

Life Science

   359  (39 (518 (198
  

 

  

 

  

 

  

 

 

2015 Expenses

  $12,605  $25,601  $27,616  $65,822 

2017 Expenses

  $16,036 $32,388 $31,096 $7,390 $86,910
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

% of Revenues

   6 13 14 34   8 16 15 4 43

% Increase

   —     3 1 1   13 8 6 242 15

Fiscal 2018 Increases (Decreases):

      

Diagnostics

   339 2,048 2,654  —   5,041

Life Science

   495 32 738  —   1,265

Restructuring costs

   —    —    —   8,572 8,572

Litigation costs

   —    —    —   3,717 3,717

Goodwill impairment charge

   —    —    —   (6,628 (6,628
  

 

  

 

  

 

  

 

  

 

 

2018 Expenses

  $16,870 $34,468 $34,488 $13,051 $98,877
  

 

  

 

  

 

  

 

  

 

 

% of Revenues

   8 16 16 6 46

% Increase

   5 6 11 77 14

Total operating expenses increased during both fiscal 20152018 and fiscal 2014, while remaining consistent as a percentage of consolidated revenues. Fiscal 2015 expenses2017, resulting primarily reflect the combined net effects of our (i) ongoing efforts to control spending in each of our segments; and (ii) favorable effects of currency rates.

During fiscal 2014, the increase in operating expenses resulted in large part from the combined net effects of our (i) ongoing efforts to control spending in each of our segments, while investing the necessary resources in our strategic areas of growth, including increased investment in Research & Development for our molecular platform products and increased investment in Sales and Marketing personnel and programs; and (ii) decreased incentive compensation compared to fiscal 2013 in light of the decline in corporate-wide operating profits.

Operating expenses for the Diagnostics segment increased $1,169 for fiscal 2015 compared to fiscal 2014, and increased $954 for fiscal 2014 compared to fiscal 2013. These overall increases result largely from the combined effects of (i) currency exchange rates (decrease of $1,100 for fiscal 2015 and increase of $200 for fiscal 2014); and (ii) the following:

Diagnostics

Fiscal 20152018 increase

Increased Selling & Marketing

Increase in personnel costs, resulting fromreflecting increased Salescommission and Marketing headcount, and increased sales commissionbonus payments made in connection with the increased sales levels.revenue levels, along with costs associated with the new branding strategy; and

Increased General & Administrative costs due in large part to the cash incentive compensation resulting from the revenue and net earnings results achieved, along with increased Quality System remediation costs related to Magellan.

 

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General & Administrative

Increase in legal spending over the prior year, largely related to a foreign distributor matter, partially offset by a decrease in various personnel related costs resulting in part from the death of our Executive Chairman during the fourth quarter of fiscal 2014.

Fiscal 20142017 increase

Incremental Magellan operating expenses due to six additional months of Meridian ownership in fiscal 2017; and

Increased Research & Development

Overall increase in spending on new product development activities, related primarily to the previously noted products for ourillumigene molecular platform, as well as immunoassay products in development.

Selling & Marketing

Addition of field sales force and other personnel, including the filling of open territorial positions, along with increased product sample expense.

General & Administrative

A decrease in bonus expense as a result of the previously noted decline in corporate-wide operating profits, partially offset by an approximate $1,100 increase in stock-based compensation including $429 of stock-based compensation expense related to the accelerated vesting of certain stock-based awards held by our Executive Chairman at the time of his death in the fourth quarter of fiscal 2014, and other less significant general operating expense increases.

The amount of stock-based compensation expense reported for fiscal 2015, 2014 and 2013 was $3,324, $3,557 and $2,502, respectively. During fiscal 2012, we granted restricted share units and options to certain executive management employees to reward them for meeting Company revenue targets in advance of planned expectations. These awards could only be earned if specified cumulative revenue thresholds were achieved, with the three measurement dates for ratably earning one-third of the grant being (i) the 21-month period ended June 30, 2013; (ii) the 33-month period ended June 30, 2014; and (iii) the 45-month period ended June 30, 2015. With the exception of the final tranche of these awards being held by our Executive Chairman at the time of his death in the fourth quarter of fiscal 2014, no expense was recognized for these restricted share units and options, and as a result of none of the cumulative thresholds being met, all of these restricted share units and options granted have been cancelled.

During fiscal 2013 through fiscal 2015, we granted restricted share units to certain employees, generally with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for each respective fiscal year. Although dividend equivalents were paid on these units throughout each of the respective fiscal years, because Meridian’s net earnings did not reach the minimum levels in any of these three fiscal years, the performance-based awards were not earned and no stock-based compensation was recorded for the performance-based awards, except for those performance-based restricted share units being held by our Executive Chairman at the time of his death in the fourth quarter of fiscal 2014.

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Additionally, during fiscal 2015 costs in connection with instrumentation development programs.

Life Science

Fiscal 2018 increase

Increased Research & Development costs related to new molecular reagent products; and

Increased General & Administrative costs due in large part to the extension of an Amendedcash incentive compensation resulting from the revenue and Restated Employment Agreement we granted tonet earnings results achieved.

Fiscal 2017 increase

Increased investment in Sales & Marketing activities, including costs associated with the WFOE established in Beijing, China during fiscal 2017.

Other

Fiscal 2018 and fiscal 2017 activity

Restructuring costs (reflected within “Other” in the above tables) totaled $8,706 and $134 in fiscal 2018 and fiscal 2017, respectively. These costs reflect: (i) compensation and benefits for our previous Executive Chairman and Chief Executive Officer (i) restricted share units to be earned only if specified revenueCEO throughout fiscal 2018, the period during which we also have the compensation and earnings per share targets were achieved for fiscal 2015;benefits of a new CEO; and (ii) time-vested options,the costs of terminations and related expenses incurred in connection with half vesting September 30, 2015realigning our business structure.

Litigation costs (reflected within “Other” in the above tables) totaled $4,345 and half vesting September 30, 2016. As a result of$628 in fiscal 2018 and fiscal 2017, respectively, and relate to the fiscal 2015 performance targets being achieved, the restricted share units have been earned and the related compensation expensematters discussed in Item 3. “Legal Proceedings”.

A goodwill impairment charge totaling $6,628 was recorded in fiscal 2015.2017, with no such additional charges occurring in fiscal 2018.

Costs were incurred in fiscal 2016 in connection with: (i) acquisition activities, most notably related to the acquisition of Magellan; and (ii) restructuring Sales & Marketing leadership, primarily related to severance obligations for former employees.

Operating Income

Operating income increased 7%decreased 15% and decreased 9%27% in fiscal 20152018 and 2014,2017, respectively, as a result of the factors discussed above.above, including the restructuring and litigation costs in fiscal 2018 and the Magellan goodwill impairment charge and restructuring and litigation costs in fiscal 2017.

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Other Income and Expense

In fiscal 2015, otherOther income and expense included $1,100 of foreign currency losses, which related primarily to a foreign subsidiary intercompany loan being marked-to-market. This compares to $300 of foreign currency losses in fiscal 2014.2018 and fiscal 2017 includes interest costs on the term loan used to fund the acquisition of Magellan. The effective interest rate on this term loan is 2.76%.

Income Taxes

The effective rate for income taxes was 35%21%, 33%41% and 34%36% for fiscal 2015, 20142018, 2017 and 2013,2016, respectively. OurThe lower fiscal 2018 taxes primarily result from the combined net impact of the following effects of the recently-enacted tax reform act (see Note 6“Income Taxes” of the accompanying Consolidated Financial Statements):

Application of an approximate 24.5% blended federal rate due to the lowering of the applicable federal rate from 35% to 21%;

Recognizing aone-time $2,655 tax benefit including there-measurement of deferred tax balances at the lower rate; and

Recording aone-time $876 tax expense related to the estimated repatriation transition tax on foreign earnings.

The increased fiscal 2017 rate results primarily from thenon-deductibility of the Magellan goodwill impairment charge. Excluding the effects of the Magellan goodwill impairment charge, the effective tax rate has ranged from 33% towas 35% over the last threefor fiscal years as a result of (i) increased apportionments in certain state taxing jurisdictions (2015); (ii) reversal of valuation allowances on net operating loss benefits in certain non-U.S. jurisdictions (2014); (iii) net benefits on dividends from a non-U.S. subsidiary (2014); and (iv) the timing of renewal/expiration of the research and experimentation credit in the U.S. during this three year period.2017.

In September 2013, the Internal Revenue Service issued Treasury Decision 9636, which enacted final tax regulations regarding the capitalization and expensing of amounts paid to acquire, produce or improve tangible property. The regulations also include guidance regarding the retirement of depreciable property. Our adoption of these regulations on October 1, 2014 did not have a significant impact on the Company’s consolidated results of operations, cash flows or financial position.

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Impact of Inflation

To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services. Inflation and changing prices did not have a material adverse impact on our gross margin, revenues or operating income in fiscal 2015, 20142018, 2017 or 2013.2016.

Liquidity and Capital Resources:Resources:

Liquidity

Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, debt service, consideration of acquisition plans, and consideration of common share dividends. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities. Our investment portfolio presently consists of overnight repurchase agreements.

- 42 -


We have an investment policy that guides the holdings of our investment portfolio.portfolio, which presently consists of bank savings accounts and institutional money market mutual funds. Our objectives in managing the investment portfolio are toto: (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective.

WeConsidering the various worldwidegeo-political andgeo-economic conditions (including Brexit, as more fully discussed within the “Risk Factors” section of Part 1A), we do not expect current conditions in the financial markets, or overall economicmacroeconomic conditions to have a significant impact on our liquidity needs, financial condition or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements and dividends from current cash flows from operating activities and cash on hand. If needed, we also have an additional source of liquidity through our $30,000 bank revolving credit facility. Approximately $1,600 and $2,700 of our accounts receivable at September 30, 2015 and September 30, 2014, respectively, was due from Italian hospital customers whose funding ultimately comes from the Italian government. In addition, the amount of our annual revenues in the country of Greece and the corresponding amount of customer receivables outstanding at any point in time is not significant, and therefore, we do not expect any meaningful impact from the financial crisis in the country of Greece. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tighttightens for an extended period of time, and such conditions impact the collectibilitycollectability of our customer accounts receivable, or impact credit terms with our vendors, or disrupt the supply of raw materials and services.

- 39 -


Fluctuations in overall stock market valuations may raise questions as to the potential impairment of goodwill and other long-lived assets. Our annual goodwill impairment review takes place as of June 30th each year, and is performed at the reporting unit level. There have been no impairments fromWhile these annual reviews.reviewsto-date have not resulted in the recording of any impairments, a $6,628 impairment charge was recorded in fiscal 2017 on the goodwill resulting from the Magellan acquisition due to certain FDA activities related to our lead testing system utilizing venous blood samples (see full description previously within this MD&A). As of September 30, 2015,2018, our stock price was $17.10$14.90 per share, compared to our book value per share of $3.96 as of September 30, 2015.$4.14. This relationship, stock price trading at a 4.3x3.6x multiple of book value, is an indicator that the fluctuation in overall stock market valuations and its impact on our stock price has not been a triggering event for further impairment of our goodwill and other long-lived assets.

During fiscal 2015, our overall cash position increased by approximately $7,000 to $50,000 atAs of September 30, 2015. Net2018, our cash provided by operating activities totaled $42,809 forand equivalents balance is $59,763 or $2,691 higher than at the end of fiscal 2015, a 12% increase over the $38,262 provided during fiscal 2014.2017. This $4,547 increase results in large part from approximately $5,500 of incentive bonus payments relatedthe cash flows from operating activities being more than sufficient to fiscal 2013 being made in the first quarter of fiscal 2014, with no such payments having been made during fiscal 2015.

cover capital expenditures, shareholder dividends and debt service. Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements, capital expenditures and shareholder dividends during the next twelve12 months. During fiscal 2015, the per share amount of our

The indicated annual cash dividend paid represented 94% of our diluted earningsrate for fiscal 2018 was established at $0.50 per share, exceeding our long-standing policy of establishingshare. Consistent with this annual indicated dividend rate, a cash dividend payout ratio between 75% and 85% of diluted earnings per share. Despite there being certain individual$0.125 was declared for each of the quarters of fiscal years in which our payout ratio has fallen outside of this policy range, since adopting this policy in November 2002, our cumulative cash dividend payout has approximated 85% of cumulative net earnings during this timeframe.2018.

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Capital Resources

We haveIn connection with the acquisition of Magellan, the Company entered into a $30,000 credit facility$60,000 five-year term loan and related interest rate swap agreement with a commercial bank, the details of which are set forth in Note 5 of the accompanying Consolidated Financial Statements. In addition, we have a $30,000 revolving credit facility (discussed above) with a commercial bank that expires April 21, 2018.March 31, 2021. As of November 23, 2015,22, 2018, there were no borrowings outstanding on this facility and we had 100% borrowing capacity available to us. We have had no borrowings outstanding under this revolving credit facility during fiscal 2015, 20142018, 2017 or 2013.2016.

Our capital expenditures totaled $4,201 for fiscal 2018 and were largely related to laboratory equipment, manufacturing equipment and a new business intelligence system. During fiscal 2019 our capital expenditures are estimated to range between approximately $3,000$4,000 to $4,000 for fiscal 2016,$5,000, with the actual amount dependingdependent upon actual operating results and the phasing of certain projects. Such expenditures may be funded with cash and equivalents on hand, operating cash flows and/or availability under the $30,000 revolving credit facility discussed above.

During June 2015, we sold the land and building related to our former Life Science facility in Saco, Maine. Net proceeds from the sale were approximately $1,138.

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Known Contractual Obligations:Obligations:

Known contractual obligations and their related due dates were as follows as of September 30, 2015:2018:

 

   Total   Less than 1
Year
   1-3 Years   4-5 Years   More than
5 Years
 

Operating leases (1)

  $4,143   $1,632   $2,422   $89   $—   

Purchase obligations (2)

   8,463    8,226    237    —      —   

Uncertain income tax positions liability and interest (3)

   275    275    —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $12,881   $10,133   $2,659   $89   $—   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Total   Less than 1
Year
   1-3 Years   4-5 Years   More than
5 Years
 

Operating leases(1)

  $7,914  $1,866  $4,139  $1,480  $429

Purchase obligations(2)

   11,398   11,271   117   10   —  

Loan principal payments(3)

   50,250   5,250   45,000   —     —  

Scheduled interest payments(3)

   3,094   1,358   1,736   —     —  

Uncertain income tax positions liability and interest(4)

   423   423   —     —     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $73,079  $20,168  $50,992  $1,490  $429
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Meridian and its subsidiaries are lessees ofof: (i) office and warehouse buildings in Ohio, Massachusetts, Florida, Australia, Belgium, France, Holland, Germany, Singapore, China and the U.K.; (ii) automobiles for use by the diagnostic direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile machines and copier machines across all business units, under operating lease agreements that expire at various dates.

(2)Meridian’s purchase

Purchase obligations arerelate primarily to outstanding purchase orders for inventory, including instruments, service items, and service items.research and development activities. These contractual commitments are not in excess of expected production requirements over the next twelve months.

(3)As

These principal and interest payments relate to the $60,000 five-year term loan with a commercial bank entered into in connection with the acquisition of September 30, 2015, our liabilities for uncertain tax positionsMagellan, and relatedreflect the impact of an interest rate swap agreement with the commercial bank, which effectively converts the variable interest rate on the term loan to a fixed rate of 2.76%. The details of the loan and penalties were $238 and $37, respectively. the interest rate swap are set forth in Note 5 of the accompanying Consolidated Financial Statements.

(4)

Due to inherent uncertainties in the timing of settlement of tax positions, we are unable to estimate the timing of the effective settlement of these obligations.

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Other Commitments andOff-Balance Sheet Arrangements:

License Agreements

Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products (1%products. Approximately 86% of our royalty expenses relate to 14%)our Diagnostics operating segment, where the royalty rates range from 4% to 8%. Meridian expects that payments under these agreements will amount to approximately $4,000$2,700 in fiscal 2016. These royalty payments primarily relate to the Diagnostics segment.2019.

Off-Balance Sheet Arrangements

Except for the operating lease arrangements noted above, weWe do not utilize special-purpose financing vehicles or have no undisclosedoff-balance sheet arrangements.

Market Risk Exposure:

Foreign Currency Risk

We have market risk exposure related to foreign currency transactions from our operations outside the United States, as well as certain suppliers to our domestic businesses located outside the United States. The foreign currencies where we have market risk exposure are the Australian dollar, the British pound, the Euro,Chinese yuan and the Singapore dollar.Euro. Assessing foreign currency exposures is a component of our overall ongoing risk management process, with such currency risks managed as we believedeem appropriate.

- 41 -


Concentration of Customers/Products Risk

Our Diagnostics segment’s revenues from sales through two U.S. distributors were 37%29% of the segment’s total revenues or 28%20% of consolidated revenues for fiscal 2015. OurC. difficile,foodborne,H. pylori, respiratory and women’s health & STD2018. Additionally, our three major product families – gastrointestinal, respiratory illnesses and blood chemistry – accounted for 79%84% of our Diagnostics segment’s third-party revenues during fiscal 2015,2018, and 59% of our fiscal 20152018 consolidated revenues.

Our Life Science segment’s revenues from sales of purified antigens and reagents to two diagnostics manufacturing customers were 16%18% of the segment’s total revenues for fiscal 2015 or 4%2018, and 5% of our fiscal 20152018 consolidated revenues. Our Life Science segment has four other significant customers who purchase antigens, antibodies and reagents, which together comprised 10% of the segment’s total revenues for fiscal 2015.

Critical Accounting Policies:Policies:

The consolidated financial statements included in this Annual Report on Form10-K have been prepared in accordance with accounting principles generally accepted in the United States. Such accounting principles require management to make judgments about estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Management believes thatListed below are the following accounting policies aremanagement believes to be critical to understanding the accompanying consolidatedConsolidated Financial Statements, along with reference to location of the policy discussion within the accompanying financial statements becausestatements. The listed policies are considered critical due to the fact that application of such polices requires the use of significant estimates and assumptions, and the carrying values of related assets and liabilities are material.

Revenue Recognition

Our revenue is generally recognized from sales when product is shipped and title has passed to the customer. Revenue for the Diagnostics segment is reduced at the date of sale for product price adjustments due certain distributors under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, estimates of inventories of certain of our products held by distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known.

Revenue for our Diagnostics segment includes revenue for ourillumigene molecular test system. This system includes an instrument, instrument accessories and test kits. In markets where the test system is sold via multiple deliverable arrangements, the cost of the instrument and instrument accessories is deferred upon placement at a customer and amortized on a straight-line basis into cost of sales over the expected utilization period, generally three years.

 

- 4245 -


We evaluate whether each deliverable in the arrangement is a separate unit of accounting. The significant deliverables are an instrument, instrument accessories (e.g., printer) and test kits. An instrument and instrument accessories are delivered to the customer prior to the start of the customer utilization period, in order to accommodate customer set-up and installation. There isde minimis consideration received from the customer at the time of instrument placement. We have determined that the instrument and instrument accessories are not a separate unit of accounting because such equipment can only be used to process and read the results from ourillumigene diagnostic tests (i.e., our instrument and test kits function together to deliver a diagnostic test result), and therefore the instrument and instrument accessories do not have standalone value to the customer. Consequently, there is no revenue allocated to the placement of the instrument and instrument accessories. Test kits are delivered to the customer over the utilization period of the instrument, which we estimate has a useful life of three years. Our average customer contract period, including estimated renewals, is at least equal to the estimated three-year utilization period. Revenue for the sale of test kits is recognized upon shipment and transfer of title to the customers.

In markets where the test system is not sold via multiple deliverable arrangements, the cost of the instrument and instrument accessories is charged to cost of sales at the time of shipment and transfer of title to the customer. Revenue for the sales of instruments and instrument accessories and test kits is recognized upon shipment and transfer of title to the customers. In these markets, ourillumigenemolecular test system is sold to independent distributors who inventory the instruments, instrument accessories and test kits for resale to end-users.

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.

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. Depending on the nature of the arrangement, revenue is recognized as services are performed and billed, upon completion and acceptance by the customer, or upon delivery of product and acceptance by the customer.

Inventories

Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) basis. We establish reserves against cost for excess and obsolete materials, finished goods whose shelf life may expire before sale to customers, and other identified exposures. We estimate these reserves based on assumptions about future demand and market conditions. If actual demand and market conditions were to be less favorable than such estimates, additional inventory write-downs would be required and recorded in the period known. Such adjustments would negatively affect gross profit margin and overall results of operations.

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Intangible Assets

Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include customer lists, supply agreements, manufacturing technologies, patents, licenses and trade names. All of Meridian’s identifiable intangibles have finite lives.

Goodwill is subject to an annual impairment review (or more frequently if impairment indicators arise). There have been no impairments from these analyses.

Identifiable intangibles with finite lives are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their current carrying value. Whether an event or circumstance triggers impairment is determined by comparing an estimate of the asset’s undiscounted future cash flows to its carrying value. If impairment has occurred, it is measured by a fair-value based test. There were no events or circumstances in fiscal 2015, 2014 or 2013 indicating that the carrying value of such assets may not be recoverable.

Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent upon the future cash flows of the related acquired businesses and assets. We are required to make judgments and assumptions regarding future cash flows, including sales levels, gross profit margins, operating expense levels, working capital levels, and capital expenditures. With respect to identifiable intangibles, we also make judgments and assumptions regarding useful lives.

We consider the following factors in evaluating events and circumstances for possible impairment: (i) significant under-performance relative to historical or projected operating results; (ii) negative industry trends; (iii) sales levels of specific groups of products (related to specific identifiable intangibles); (iv) changes in overall business strategies; and (v) other factors.

If actual cash flows decrease, this could trigger impairment of intangible assets and other long-lived assets. If impairment were to occur, this would negatively affect overall results of operations.

Income Taxes

Our 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 purposes 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.

- 44 -


Our deferred tax assets include net operating loss carryforwards in foreign jurisdictions. The realization of tax benefits related to net operating loss carryforwards is dependent upon the generation of future taxable income in the applicable jurisdictions. We assess the level of deferred tax asset valuation allowance needed, if any, by taking into consideration historical and future projected operating results, future reversals of taxable temporary differences, and tax planning strategies. The amount of net deferred tax assets considered realizable could be reduced in future years if estimates of future taxable income during the carryforward period are reduced.

Undistributed earnings in our non-U.S. subsidiaries are considered by us to be permanently re-invested in such subsidiaries. Consequently, U.S. deferred tax liabilities on such earnings have not been recorded.

From time to time, our tax returns in federal, state and foreign jurisdictions are examined by the applicable tax authorities. To the extent that adjustments result from the completion of these examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the period known. We believe that the results of any tax authority examinations would not have a significant adverse impact on our financial condition or results of operations.

In September 2013, the Internal Revenue Service issued Treasury Decision 9636, which enacted final tax regulations regarding the capitalization and expensing of amounts paid to acquire, produce or improve tangible property. The regulations also include guidance regarding the retirement of depreciable property. Our adoption of these regulations on October 1, 2014 did not have a significant impact on the Company’s consolidated results of operations, cash flows or financial position.

Accounting Policy

Location

Within Consolidated
Financial Statements

Examples of Key Estimate Assumptions

InventoriesNote 1(f)Slow-moving, excess & obsolete inventories
Intangible AssetsNote 1(h)Triggering events and impairment conditions
Revenue RecognitionNote 1(i)Distributor price adjustments and fee accruals
Income TaxesNote 1(k) and Note 6Uncertain tax positions and state apportionment factors

Recent Accounting Pronouncements:Pronouncements:

In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers, which supersedes and replaces nearly all currently-existing U.S. GAAP revenue recognition guidance including related disclosure requirements. This guidance, will beincluding any clarification guidance thereon, is effective for the Company beginning October 1, 2018 (fiscal 2019). The Company hasanticipates that adoption of ASU 2014-09 on a modified retrospective basis will result in the recording of an immaterial adjustment to retained earnings of approximately $150 and expanding certain disclosures, as required.

In February 2016, the FASB issued ASU2016-02,Leases, which amends the accounting guidance related to leases. These changes, which are designed to increase transparency and comparability among organizations for both lessees and lessors, include, among other things, requiring recognition of lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Adoption and implementation of the guidance is not yet completedrequired by the Company until the beginning of fiscal 2020, although early adoption is permitted. The Company expects to begin its assessment of the impact that adoption of this guidance will have on its financial statements.statements in fiscal 2019.

In September 2015,March 2016, the FASB issued ASU No. 2015-16,2016-09,Business Combinations – Simplifying theImprovements to Employee Share-Based Payment Accounting for Measurement-Period Adjustments, which amends currently-existing U.S. GAAP business combinations guidance. Thisthe accounting for share-based payment transactions. These changes, which are designed for simplification, involve several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance in the first quarter of fiscal 2018, and as a result recorded $160 to the income tax provision, which removesunder previous guidance would have been recorded in additionalpaid-in capital. While the requirementfuture effect of this guidance is dependent on numerous factors (e.g., the market price of the Company’s common stock on the equity award grant date, the exercise/lapse dates of equity awards, and the market price of the Company’s common stock on such exercise/lapse dates), the effect is not expected to retroactively apply adjustments identified duringbe material. During fiscal 2018, our tax provision included a $180 charge for application of ASU2016-09.

- 46 -


In August 2016, the measurement period, will be effective forFASB issued ASU2016-15,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. Adoption and implementation of the guidance is not required by the Company until the beginning October 1, 2016 (fiscal 2017). We do not expectof fiscal 2019, although early adoption is permitted. Adoption of this guidance is not expected to have a significant impact on the Company’s consolidated resultsstatement of operations, cash flows or financial position.flows.

- 45 -


ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Market Risk Exposure and Capital Resources under Item 7 above.

above beginning on page 31.

 

- 4647 -



Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule13a-15(f).

The Company’s internal control over financial reporting includes those policies and procedures thatthat: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2018, based on the framework and criteria in the 2013Internal Control – Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). Based on management’s evaluation and those criteria, the Company concluded that its system of internal control over financial reporting was effective as of September 30, 2015.2018.

The Company’s independent registered public accounting firm has issued an attestation report on the registrant’s internal control over financial reporting.

 

/s/ John A. KraeutlerJack Kenny

  

/s/ Melissa A. Lueke

John A. KraeutlerJack Kenny  Melissa A. Lueke
Chief Executive Officer  Executive Vice President and
November 30, 201529, 2018  Chief Financial Officer
  November 30, 201529, 2018

 

- 4849 -


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Meridian Bioscience, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 20152018 and 2014, and2017, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2015. Our audits of2018, and the basic consolidated financial statements included therelated notes and financial statement schedule listed in the index and appearing under Schedule No. II. II (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2015,2018, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”), and our report dated November 29, 2018 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Cincinnati, Ohio
November 29, 2018

- 50 -


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Meridian Bioscience, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Meridian Bioscience, Inc. (an Ohio corporation) and subsidiaries (the “Company”) as of September 30, 2018, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in the 2013Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended September 30, 2018, and our report dated November 29, 2018 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

- 4951 -


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Meridian Bioscience, Inc. and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015, based on criteria established in the 2013Internal Control—Integrated Framework issued by COSO.

/s/ GRANT THORNTON LLP

Cincinnati, Ohio

November 30, 2015

/s/ GRANT THORNTON LLP
Cincinnati, Ohio
November 29, 2018

 

- 5052 -


CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)

Meridian Bioscience, Inc. and Subsidiaries

 

For the Year Ended September 30,

  2015 2014 2013   2018 2017 2016 

Net Revenues

  $194,830  $188,832  $188,686   $213,571 $200,771 $196,082

Cost of Sales

   72,948  71,589  67,642    83,110 76,479 68,870
  

 

  

 

  

 

   

 

  

 

  

 

 

Gross Profit

   121,882  117,243  121,044    130,461 124,292 127,212
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating Expenses:

        

Research and development

   12,605  12,552  10,787    16,870 16,036 14,191

Selling and marketing

   25,601  24,910  22,424    34,468 32,388 30,056

General and administrative

   27,616  27,389  30,519    34,488 31,096 29,429

Restructuring costs

   8,706 134 677

Litigations costs

   4,345 628  —  

Goodwill impairment charge

   —   6,628  —  

Acquisition-related costs

   —    —   1,481
  

 

  

 

  

 

   

 

  

 

  

 

 

Total operating expenses

   65,822  64,851  63,730    98,877 86,910 75,834
  

 

  

 

  

 

   

 

  

 

  

 

 

Operating Income

   56,060  52,392  57,314    31,584 37,382 51,378

Other Income (Expense):

        

Interest income

   23  25  44    418 171 67

Interest expense

   (1,520 (1,642 (897

Other, net

   (1,020 (309 4    (102 518 96
  

 

  

 

  

 

   

 

  

 

  

 

 

Total other income (expense)

   (997 (284 48 

Total other expense

   (1,204 (953 (734
  

 

  

 

  

 

   

 

  

 

  

 

 

Earnings Before Income Taxes

   55,063  52,108  57,362    30,380 36,429 50,644

Income Tax Provision

   19,523  17,365  19,330    6,531 14,872 18,415
  

 

  

 

  

 

   

 

  

 

  

 

 

Net Earnings

  $35,540  $34,743  $38,032   $23,849 $21,557 $32,229
  

 

  

 

  

 

   

 

  

 

  

 

 

Earnings Per Share Data:

        

Basic earnings per common share

  $0.85  $0.84  $0.92   $0.56 $0.51 $0.77

Diluted earnings per common share

  $0.85  $0.83  $0.91   $0.56 $0.51 $0.76

Common shares used for basic earnings per common share

   41,659  41,455  41,226    42,325 42,188 42,010

Effect of dilutive stock options and restricted shares and units

   353  458  669 

Effect of dilutive stock options and restricted share units

   429 383 383
  

 

  

 

  

 

   

 

  

 

  

 

 

Common shares used for diluted earnings per common share

   42,012  41,913  41,895    42,754 42,571 42,393
  

 

  

 

  

 

   

 

  

 

  

 

 

Dividends declared per common share

  $0.80  $0.79  $0.76   $0.500 $0.575 $0.800

Anti-dilutive Securities:

        

Common share options and restricted shares and units

   551  272  254 

Common share options and restricted share units

   1,007 873 462

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

 

- 5153 -


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars(dollar amounts in thousands)

Meridian Bioscience, Inc. and Subsidiaries

 

For the Year Ended September 30,

  2015  2014  2013 

Net Earnings

  $35,540  $34,743  $38,032 

Foreign currency translation adjustment

   (2,639  (436  650 
  

 

 

  

 

 

  

 

 

 

Comprehensive Income

  $32,901  $34,307  $38,682 
  

 

 

  

 

 

  

 

 

 

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

- 52 -


CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)

Meridian Bioscience, Inc. and Subsidiaries

For the Year Ended September 30,

  2015  2014  2013 

Cash Flows From Operating Activities

    

Net earnings

  $35,540  $34,743  $38,032 

Non-cash items included in net earnings:

    

Depreciation of property, plant and equipment

   3,470   3,523   3,354 

Amortization of intangible assets

   1,748   2,039   2,269 

Amortization of deferredillumigeneinstrument costs

   1,391   1,702   1,529 

Stock-based compensation

   3,324   3,557   2,502 

Deferred income taxes

   (122  (140  (1,823

Loss on disposition and write-down of fixed assets and other assets

   94   6   30 

Change in current assets

   (6,079  (1,528  (3,486

Change in current liabilities

   3,238   (5,996  2,669 

Other, net

   205   356   (640
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   42,809   38,262   44,436 
  

 

 

  

 

 

  

 

 

 

Cash Flows From Investing Activities

    

Purchases of property, plant and equipment

   (4,613  (5,306  (3,234

Proceeds from sale of building

   1,138   —     —   

Purchases of intangibles and other assets

   (151  (1,696  (43
  

 

 

  

 

 

  

 

 

 

Net cash used for investing activities

   (3,626  (7,002  (3,277
  

 

 

  

 

 

  

 

 

 

Cash Flows From Financing Activities

    

Dividends paid

   (33,357  (32,762  (31,354

Proceeds and tax benefits from exercises of stock options

   2,614   1,009   2,752 
  

 

 

  

 

 

  

 

 

 

Net cash used for financing activities

   (30,743  (31,753  (28,602
  

 

 

  

 

 

  

 

 

 

Effect of Exchange Rate Changes on Cash and Equivalents

   (1,514  (742  132 

Net Increase (Decrease) in Cash and Equivalents

   6,926   (1,235  12,689 

Cash and Equivalents at Beginning of Period

   43,047   44,282   31,593 
  

 

 

  

 

 

  

 

 

 

Cash and Equivalents at End of Period

  $49,973  $43,047  $44,282 
  

 

 

  

 

 

  

 

 

 

Supplemental Cash Flow Information

    

Cash paid for income taxes

  $20,168  $19,952  $20,093 

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

- 53 -


CONSOLIDATED BALANCE SHEETS (dollars in thousands)

Meridian Bioscience, Inc. and Subsidiaries

As of September 30,

  2015   2014 

Assets

    

Current Assets:

    

Cash and equivalents

  $49,973   $43,047 

Accounts receivable, less allowances of $248 in 2015 and $272 in 2014

   26,254    23,232 

Inventories

   35,817    35,495 

Prepaid expenses and other current assets

   7,378    7,058 

Deferred income taxes

   3,431    3,916 
  

 

 

   

 

 

 

Total current assets

   122,853    112,748 
  

 

 

   

 

 

 

Property, Plant and Equipment, at Cost:

    

Land

   986    1,173 

Buildings and improvements

   30,056    29,146 

Machinery, equipment and furniture

   41,541    40,192 

Construction in progress

   1,139    652 
  

 

 

   

 

 

 

Subtotal

   73,722    71,163 

Less: accumulated depreciation and amortization

   46,230    43,553 
  

 

 

   

 

 

 

Net property, plant and equipment

   27,492    27,610 
  

 

 

   

 

 

 

Other Assets:

    

Goodwill

   22,349    23,193 

Other intangible assets, net

   5,931    7,813 

Restricted cash

   1,000    1,000 

Deferredillumigeneinstrument costs, net

   1,750    2,740 

Deferred income taxes

   1,523    1,483 

Other assets

   384    342 
  

 

 

   

 

 

 

Total other assets

   32,937    36,571 
  

 

 

   

 

 

 

Total assets

  $183,282   $176,929 
  

 

 

   

 

 

 

For the Year Ended September 30,

  2018  2017  2016 

Net Earnings

  $23,849 $21,557 $32,229

Other comprehensive income (loss):

    

Foreign currency translation adjustment

   (1,075  1,616  (2,732

Unrealized gain (loss) on cash flow hedge

   907  1,544  (729

Income taxes related to items of other comprehensive income

   (263  (590  275
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss), net of tax

   (431  2,570  (3,186
  

 

 

  

 

 

  

 

 

 

Comprehensive Income

  $23,418 $24,127 $29,043
  

 

 

  

 

 

  

 

 

 

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

 

- 54 -


CONSOLIDATED BALANCE SHEETS (dollarsSTATEMENTS OF CASH FLOWS (dollar amounts in thousands)

Meridian Bioscience, Inc. and Subsidiaries

 

As of September 30,

  2015  2014 

Liabilities and Shareholders’ Equity

   

Current Liabilities:

   

Accounts payable

  $6,646  $4,966 

Accrued employee compensation costs

   5,132   4,761 

Other accrued expenses

   2,587   3,149 

Income taxes payable

   886   859 
  

 

 

  

 

 

 

Total current liabilities

   15,251   13,735 
  

 

 

  

 

 

 

Non-Current Liabilities

   2,158   2,165 

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; 41,838,399 and 41,622,216 issued, respectively

   —      —    

Additional paid-in capital

   117,151   111,851 

Retained earnings

   51,052   48,869 

Accumulated other comprehensive income (loss)

   (2,330  309 
  

 

 

  

 

 

 

Total shareholders’ equity

   165,873   161,029 
  

 

 

  

 

 

 

Total liabilities and shareholders’ equity

  $183,282  $176,929 
  

 

 

  

 

 

 

For the Year Ended September 30,

  2018  2017  2016 

Cash Flows From Operating Activities

    

Net earnings

  $23,849 $21,557 $32,229

Non-cash items included in net earnings:

    

Depreciation of property, plant and equipment

   4,491  4,342  3,937

Amortization of intangible assets

   3,433  3,776  2,690

Amortization of deferred instrument costs

   764  972  1,091

Stock-based compensation

   3,402  3,381  2,911

Goodwill impairment charge

   —     6,628  —   

Deferred income taxes

   (300  1,474  (233

Losses on long-lived assets

   —     —     659

Change in:

    

Accounts receivable

   (4,447  (1,211  119

Inventories

   (1,142  3,467  (8,225

Prepaid expenses and other current assets

   323  1,225  (9

Accounts payable and accrued expenses

   4,124  (3,151  1,773 

Income taxes payable

   (524  (384  464 

Other, net

   810  (721  (183
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   34,783  41,355  37,223
  

 

 

  

 

 

  

 

 

 

Cash Flows From Investing Activities

    

Purchase of property, plant and equipment

   (4,201  (4,467  (4,004

Purchase of equity method investment

   —     —     (600

Acquisition of Magellan, net of cash acquired

   —     —     (62,091
  

 

 

  

 

 

  

 

 

 

Net cash used for investing activities

   (4,201  (4,467  (66,695
  

 

 

  

 

 

  

 

 

 

Cash Flows From Financing Activities

    

Dividends paid

   (21,170  (24,266  (33,649

Proceeds from term loan, net of issuance costs

   —     —     59,860

Payments on term loan

   (4,500  (3,750  (1,500

Proceeds and tax benefits from exercises of stock options

   187  303  2,494

Payment of acquisition consideration

   (2,110  —     —   
  

 

 

  

 

 

  

 

 

 

Net cash provided by (used for) financing activities

   (27,593  (27,713  27,205
  

 

 

  

 

 

  

 

 

 

Effect of Exchange Rate Changes on Cash and Equivalents

   (298  671  (480

Net Increase (Decrease) in Cash and Equivalents

   2,691  9,846  (2,747

Cash and Equivalents at Beginning of Period

   57,072  47,226  49,973
  

 

 

  

 

 

  

 

 

 

Cash and Equivalents at End of Period

  $59,763 $57,072 $47,226
  

 

 

  

 

 

  

 

 

 

Supplemental Cash Flow Information

    

Cash paid for interest

  $1,487 $1,605 $879

Cash paid for income taxes

  $6,555 $12,613 $17,915

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

 

- 55 -


CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands)

Meridian Bioscience, Inc. and Subsidiaries

As of September 30,

  2018   2017 

Assets

    

Current Assets:

    

Cash and equivalents

  $59,763  $57,072

Accounts receivable, less allowances of $310 and $307, respectively

   32,336   29,106

Inventories

   41,993   41,493

Prepaid expenses and other current assets

   4,961   6,204
  

 

 

   

 

 

 

Total current assets

   139,053   133,875
  

 

 

   

 

 

 

Property, Plant and Equipment, at Cost:

    

Land

   1,160   1,162

Buildings and improvements

   32,444   32,207

Machinery, equipment and furniture

   50,606   48,836

Construction in progress

   1,631   1,895
  

 

 

   

 

 

 

Subtotal

   85,841   84,100

Less: accumulated depreciation and amortization

   55,846   53,590
  

 

 

   

 

 

 

Net property, plant and equipment

   29,995   30,510
  

 

 

   

 

 

 

Other Assets:

    

Goodwill

   54,637   54,926

Other intangible assets, net

   23,113   26,704

Restricted cash

   1,000   1,000

Deferred instrument costs, net

   1,239   1,368

Fair value of interest rate swap

   1,722   815

Deferred income taxes

   130   158

Other assets

   488   421
  

 

 

   

 

 

 

Total other assets

   82,329   85,392
  

 

 

   

 

 

 

Total assets

  $251,377  $249,777
  

 

 

   

 

 

 

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

- 56 -


CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands)

Meridian Bioscience, Inc. and Subsidiaries

As of September 30,

  2018  2017 

Liabilities and Shareholders’ Equity

   

Current Liabilities:

   

Accounts payable

  $6,260 $7,719

Accrued employee compensation costs

   7,263  4,536

Current portion of acquisition consideration

   —     2,095

Other accrued expenses

   5,065  2,789

Current portion of long-term debt

   5,250  4,500

Income taxes payable

   335  1,248
  

 

 

  

 

 

 

Total current liabilities

   24,173  22,887
  

 

 

  

 

 

 

Non-Current Liabilities

   

Acquisition consideration

   —     235

Post-employment benefits

   2,646  2,468

Long-term debt

   44,930  50,147

Long-term income taxes payable

   441  —   

Deferred income taxes

   3,769  4,455
  

 

 

  

 

 

 

Totalnon-current liabilities

   51,786  57,305
  

 

 

  

 

 

 

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, 42,399,962 and 42,207,317 issued, respectively

   —     —   

Additionalpaid-in capital

   129,193  125,608

Retained earnings

   49,602  46,923

Accumulated other comprehensive loss

   (3,377  (2,946
  

 

 

  

 

 

 

Total shareholders’ equity

   175,418  169,585
  

 

 

  

 

 

 

Total liabilities and shareholders’ equity

  $251,377 $249,777
  

 

 

  

 

 

 

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

- 57 -


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars(dollar and sharesshare amounts in thousands, except per share data)

Meridian Bioscience, Inc. and Subsidiaries

 

  Common
Shares
Issued
 Additional
Paid-in
Capital
   Retained
Earnings
 Accum Other
Comp
Income
(Loss)
 Total   Common
Shares
Issued
   Additional
Paid-in
Capital
 Retained
Earnings
 Accum Other
Comp
Income
(Loss)
 Total 

Balance at September 30, 2012

   41,284  $102,443   $40,210  $95   $142,748 

Balance at September 30, 2015

   41,838  $117,151 $51,052 $(2,330 $165,873
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Cash dividends paid - $0.76 per share

   —     —      (31,354  —    (31,354

Cash dividends paid - $0.800 per share

   —      —    (33,649  —    (33,649

Exercise of stock options

   226  2,564    —     —    2,564    152   2,294  —     —    2,294

Conversion of restricted stock units

   8   —      —     —     —   

Conversion of restricted share units

   117   —     —     —     —   

Stock compensation expense

   —    2,405    —     —    2,405    —      2,911  —     —    2,911

Net earnings

   —     —      38,032   —    38,032    —      —    32,229  —    32,229

Foreign currency translation adjustment

   —     —      —    650  650    —      —     —    (2,732 (2,732

Hedging activity, net of tax

   —      —     —    (454 (454
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Balance at September 30, 2013

   41,518  107,412    46,888  745  155,045 

Balance at September 30, 2016

   42,107   122,356 49,632 (5,516 166,472
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Cash dividends paid - $0.79 per share

   —     —      (32,762  —    (32,762

Cash dividends paid - $0.575 per share

   —      —    (24,266  —    (24,266

Exercise of stock options

   78  882    —     —    882    18   (129  —     —    (129

Issuance of restricted shares, net of forfeitures

   (1  —      —     —     —   

Conversion of restricted stock units

   27   —      —     —     —   

Conversion of restricted share units

   82   —     —     —     —   

Stock compensation expense

   —    3,557    —     —    3,557    —      3,381  —     —    3,381

Net earnings

   —     —      34,743   —    34,743    —      —    21,557  —    21,557

Foreign currency translation adjustment

   —     —      —    (436 (436      1,616 1,616

Hedging activity, net of tax

   —      —     —    954 954
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Balance at September 30, 2014

   41,622  111,851    48,869  309  161,029 

Balance at September 30, 2017

   42,207   125,608 46,923 (2,946 169,585
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Cash dividends paid - $0.80 per share

   —     —      (33,357  —    (33,357

Cash dividends paid - $0.500 per share

   —      —    (21,170  —    (21,170

Exercise of stock options

   187  1,976    —     —    1,976    13   183  —     —    183

Conversion of restricted stock units

   29   —      —     —     —   

Conversion of restricted share units

   180   —     —     —     —   

Stock compensation expense

   —    3,324    —     —    3,324    —      3,402  —     —    3,402

Net earnings

   —     —      35,540   —    35,540    —      —    23,849  —    23,849

Foreign currency translation adjustment

   —     —      —    (2,639 (2,639      (1,075 (1,075

Hedging activity, net of tax

   —      —     —    644 644
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Balance at September 30, 2015

   41,838  $117,151   $51,052  $(2,330 $165,873 

Balance at September 30, 2018

   42,400  $129,193 $49,602 $(3,377 $175,418
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

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

 

- 5658 -


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Meridian Bioscience, Inc. and Subsidiaries

(dollarsdollar and sharesshare amounts in thousands, except per share data)

 

(1)

Summary of Significant Accounting Policies

 

(a)

Nature of Business- Meridian is a fully-integrated life science company whose principal businesses areare: (i) the development, manufacture and distribution of clinical diagnostic test kits primarily for certain gastrointestinal viral,and respiratory infectious diseases, and parasitic infectious diseases;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;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.researchers.

 

(b)

Principles of Consolidation - The consolidated financial statements include the accounts of Meridian Bioscience, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.eliminated in consolidation. Unless the context requires otherwise, references to “Meridian,” “we,” “us,” “our” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries.

 

(c)

Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

(d)

Foreign Currency Translation- Assets and liabilities of foreign operations are translated usingyear-end exchange rates with gains or losses resulting from translation included as a separate component of accumulated other comprehensive income or loss. Revenues and expenses are translated using exchange rates prevailing during the year. We also recognize foreign currency transaction gains and losses on certain assets and liabilities that are denominated in the Australian dollar, British pound, EuroChinese yuan and Singapore dollarEuro currencies. These gains and losses are included in other income and expense in the accompanying consolidated statementsConsolidated Statements of operations. Included within other income and expense in the consolidated statements of operations for the year ending September 30, 2015 is $1,174 in currency losses related to a foreign subsidiary intercompany loan being marked-to-market.Operations.

 

- 57 -


(e)

Cash, Cash Equivalents and Investments-The primary objectives of our investment activities are to preserve capital and provide sufficient liquidity to meet operating requirements and fund strategic initiatives such as acquisitions. We maintain a written investment policy that governs the management of our investments in fixed income securities. This policy, among other things, provides that we may purchase only high credit-quality securities that have short-term ratings of at leastA-2,P-2 andF-2, or better, and long-term ratings of at least A, Baa1 and A, or better, by Standard & Poor’s, Moody’s and Fitch, respectively, at the time of purchase. We consider short-term investments with original maturities of 90 days or less to be cash equivalents, including overnight repurchase agreements and institutional money market funds. At times our investments of cash and equivalents with various high credit quality financial institutions may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit.

- 59 -


Our investment portfolio includes the following components:

 

  September 30, 2015   September 30, 2014   September 30, 2018   September 30, 2017 
  Cash and
Equivalents
   Other   Cash and
Equivalents
   Other   Cash and
Equivalents
   Other   Cash and
Equivalents
   Other 

Overnight repurchase agreements

  $25,436   $—     $26,407   $—   

Institutional money market funds

  $20,421  $—     $20,104  $—   

Cash on hand –

              

Restricted

   —      1,000    —      1,000    —      1,000   —      1,000

Unrestricted

   24,537    —      16,640    —      39,342   —      36,968   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $49,973   $1,000   $43,047   $1,000   $59,763  $1,000  $57,072  $1,000
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(f)

Inventories - Inventories are stated at the lower of cost or market. Cost is determined on afirst-in,first-out (FIFO) basis.illumigene® Alethia instruments are carried in inventory until customer placement, at which time they are transferred to deferredillumigene instrument costs, unless sold outright. Similarly, blood lead testing instruments are carried in inventory until they are sold outright or placed with a customer under the customer reagent rental program, at which time they are transferred to property, plant and equipment.

We establish reserves against cost for excess and obsolete materials, finished goods whose shelf life may expire before sale to customers, and other identified exposures. Such reserves were $2,456$1,971 and $2,942$2,059 at September 30, 20152018 and 2014,2017, respectively. We estimate these reserves based on assumptions about future demand and market conditions. If actual demand and market conditions were to be less favorable than such estimates, additional inventory write-downs would be required and recorded in the period known. Such adjustments would negatively affect gross profit margin and overall results of operations.

 

(g)

Property, Plant and Equipment- Property, plant and equipment are stated at cost. Upon retirement or other disposition, of property, plant and equipment, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation is computed on the straight-line method in amounts sufficient towrite-off the cost over the estimated useful lives, generally as follows:

Buildings and improvements - 18 to 40 years

Leasehold improvements - life of the lease

Machinery, equipment and furniture - 3 to 10 years

Computer equipment and software - 3 to 5 years

Instruments under customer reagent rental arrangements - 5 years

 

- 5860 -


(h)

Intangible Assets - Goodwill is subject to an annual impairment review (or more frequently if impairment indicators arise) by first performing a qualitative assessment to determine whether it is more likely than not thatat the fair valuereporting unit level, which we perform annually as of aJune 30, the end of our third fiscal quarter. A reporting unit is less than its carrying value. Ingenerally an operating segment or one level below an operating segment that constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Following the event that afiscal 2018 restructuring and consolidation ofseparately-run businesses into two integrated global business units (see Note 2), at September 30, 2018, we had two reporting units (Diagnostics and Life Science), both of which contained goodwill. We review our reporting unit does not pass the qualitative assessment, the reporting unit’s carrying value is compared to its fair value, with fair value of the reporting unit estimated using marketstructure annually, or more frequently if facts and discounted cash flow approaches.circumstances warrant. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. We perform our annual impairment review as of June 30, the end of our third fiscal quarter. We have no intangible assets with indefinite lives other than goodwill. There have been no impairments from these analyses for fiscal 2015, 2014 or 2013.

During fiscal 2018, we performed quantitative assessments as of June 30, 2018 for each of our Diagnostics and Life Science reporting units. As part of this assessment, fair value, as determined through a valuation performed by a third party, was calculated via both market (comparable company) and income (discounted cash flows) approaches. Based upon these approaches, the fair value of each reporting unit exceeded its carrying value; therefore, each of the Diagnostics and Life Science reporting units satisfied the quantitative assessment for fiscal 2018.

Similarly, during fiscal 2017, we performed quantitative assessments as of June 30, 2017 for each of our Americas Diagnostics, Bioline and LifeScience-U.S. reporting units that existed at that time, noting the separate Magellan discussion below. As part of this assessment, fair value, as determined through a valuation performed by a third party, was calculated via both market (comparable company) and income (discounted cash flows) approaches. Based upon these approaches, the fair value of each reporting unit exceeded its carrying value; therefore, each of the Americas Diagnostics, Bioline and LifeScience-U.S. reporting units satisfied the quantitative assessment for fiscal 2017.

During the quarter ended June 30, 2017, the events described below occurred, indicating that impairment of the goodwill recorded as part of the Magellan acquisition had occurred.

On May 17, 2017, the FDA issued a field safety notice advising customers to discontinue use of Magellan’s lead testing systems with venous blood samples. This field safety notice was followed by product recall notices on May 25th and June 5th. Subsequent to the issuances of these field safety and product recall notices, the FDA completed an inspection of Magellan’s quality system, and issued its Form 483, Inspectional Observations, on June 29, 2017, which was expectedly followed by a Warning Letter issued on October 23, 2017. The changeWarning Letter requires periodic reporting on our remediation progress.

- 61 -


In light of these factors and their impacts, during the third quarter of fiscal 2017, it was determined that a potential impairment of goodwill recorded in connection with the acquisition of Magellan had occurred (i.e., a “triggering event”). With the assistance of an independent valuation firm, Magellan’s fair value was calculated via both market (comparable company) and income (discounted cash flows) approaches. Based upon these approaches, it was determined that the carrying value of the Magellan reporting unit did, in fact, exceed its fair value. As a result, an impairment charge of $6,628, on both apre-tax andafter-tax basis, was recorded during the third quarter and is reflected as a separate operating expense line item within the accompanying Consolidated Statement of Operations for the year ended September 30, 2017. This quantitative assessment as of May 31, 2017 was supplemented by a qualitative assessment of Magellan’s goodwill was a decreaseas of $844 inJune 30, 2017, with such assessment indicating that no additional impairment existed.

No impairments were indicated or recorded from the analyses performed for fiscal 2015 and an increase of $78 in2018 or 2016.

During fiscal 2014. Both years reflect2018, goodwill decreased $289, resulting solely from currency translation adjustments on the effectgoodwill of the Life Science segment’s Bioline Groupreporting unit. The decrease of $7,056 in fiscal 2017 reflects: (i) a $767 acquisition measurement period adjustment downward related to Magellan (Diagnostics segment; see Note 3); (ii) the $6,628 impairment charge related to Magellan; and (iii) a $339 increase from the currency translation adjustments thereon.adjustment on the goodwill of the Life Science segment.

A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, 20152018 and 20142017 is as follows.

 

   2015   2014 

As of September 30,

  Gross
Carrying
Value
   Accum.
Amort.
   Gross
Carrying
Value
   Accum.
Amort.
 

Manufacturing technologies, core products and cell lines

  $11,582   $10,906   $11,685   $10,568 

Trademarks, licenses and patents

   6,410    3,296    6,463    2,766 

Customer lists and supply agreements

   12,105    9,964    12,378    9,379 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $30,097   $24,166   $30,526   $22,713 
  

 

 

   

 

 

   

 

 

   

 

 

 

During fiscal 2014, we acquired the remaining licensing rights related to patents that are part of ourillumigene molecular technology for $1,638. These rights are being amortized over a weighted average period of approximately 8.5 years.

   2018   2017 

As of September 30,

  Gross
Carrying
Value
   Accum.
Amort.
   Gross
Carrying
Value
   Accum.
Amort.
 

Manufacturing technologies, core products and cell lines

  $22,297  $13,974  $22,332  $12,807

Tradenames, licenses and patents

   8,647   5,267   8,689   4,398

Customer lists, customer relationships and supply agreements

   24,461   13,051   24,562   11,854

Non-compete agreements

   720   720   720   540
  

 

 

   

 

 

  ��

 

 

   

 

 

 
  $56,125  $33,012  $56,303  $29,599
  

 

 

   

 

 

   

 

 

   

 

 

 

The actual aggregate amortization expense for these intangible assets for fiscal 2015, 20142018, 2017 and 20132016 was $1,748, $2,039$3,433, $3,776 and $2,269,$2,690, respectively. The estimated aggregate amortization expense for these intangible assets for each of the five succeeding fiscal years is as follows: fiscal 2016 - $1,411, fiscal 2017 - $1,116, fiscal 2018 - $1,095, fiscal 2019 - $1,054 and$3,328, fiscal 2020 - $880.$3,165, fiscal 2021 - $2,560, fiscal 2022 - $2,182 and fiscal 2023 - $2,170.

Long-lived assets, excluding goodwill, are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their carrying value. Whether an event or circumstance triggers an impairment is determined by comparing an estimate of the asset’s future undiscounted cash flows to its carrying value. If impairment has occurred, it is measured by a fair-value based test.

calculation.

 

- 5962 -


Our ability to recover the carrying value of our intangible assets, both identifiable intangibles and goodwill, is dependent upon the future cash flows of the related acquired businesses and assets. We make judgments and assumptions regarding future cash flows, including sales levels, gross profit margins, operating expense levels, working capital levels, and capital expenditures. With respect to identifiable intangibles and fixed assets, we also make judgments and assumptions regarding useful lives.

We consider the following factors in evaluating events and circumstances for possible impairment: (i) significant under-performance relative to historical or projected operating results; (ii) negative industry trends; (iii) sales levels of specific groups of products (related to specific identifiable intangibles); (iv) changes in overall business strategies; and (v) other factors.

If actual cash flows are less favorable than projections, this could trigger impairment of intangible assets and other long-lived assets. If impairment were to occur, this would negatively affect overall results of operations. NoAside from the Magellan matter noted above, no triggering events have been identified by the Company for fiscal 2015, 20142018, 2017 or 2013.2016.

 

(i)

Revenue Recognition and Accounts Receivable- Revenue is generally recognized from sales when product is shipped and title has passed to the customer. Revenue for the Diagnostics segment is reduced atin the dateperiod of sale for product price adjustments due certainfees paid to distributors, under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, estimates of inventories of certainwhich are inseparable from the distributor’s purchase of our products held by distributors, historical statistics, current trends,product and other factors. Changes to the accruals are recordedfor which we receive no goods or services in the period that they become known.return. Such accruals were $5,581 at September 30, 2015fees totaled $1,453, $787, and $4,220 at September 30, 2014,$339 in fiscal 2018, 2017 and have been netted against accounts receivable.2016, respectively.

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 were $4,303 at September 30, 2018 and $4,190 at September 30, 2017, and have been netted against accounts receivable.

Revenue for our Diagnostics segment includes revenue for our Alethiaillumigenemolecular test system. This system includes an instrument, instrument accessories and test kits. In markets where the test system is sold via multiple deliverable arrangements, the cost of the instrument and instrument accessories is deferred upon placement at a customer and amortized on a straight-line basis into cost of sales over the expected utilization period, generally three years.

- 63 -


We evaluate whether each deliverable in the arrangement is a separate unit of accounting. The significant deliverables are an instrument, instrument accessories (e.g., printer) and test kits. An instrument and instrument accessories are delivered to the customer prior to the start of the customer utilization period in order to accommodate customerset-up and installation. There isde minimis consideration received from the customer at the time of instrument placement. We have determined that the instrument and instrument accessories are not a separate unit of accounting because such equipment can only be used to process and read the results from ourillumigene Alethia diagnostic tests (i.e., our instrument and test kits function together to deliver a diagnostic test result), and therefore the instrument and instrument accessories do not have standalone value to the customer. Consequently, there is no revenue allocated to the placement of the instrument and instrument accessories. Test kits are delivered to the customer over the utilization period of the instrument, which we estimate has a useful life of three years. Our average customer contract period, including estimated renewals, is at least equal to the estimated three-year utilization period. Revenue for the sale of test kits is recognized upon shipment and transfer of title to the customers.

- 60 -


In markets where the test system is not sold via multiple deliverable arrangements, the cost of the instrument and instrument accessories is charged to cost of sales at the time of shipment and transfer of title to the customer. Revenue for the sales of instruments, and instrument accessories and test kits is recognized upon shipment and transfer of title to the customers. In these markets, ourillumigenemolecular Alethiamolecular test system is sold to independent distributors who inventory the instruments, instrument accessories and test kits for resale toend-users.

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.

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. Depending on the nature of the arrangement, revenue is recognized as services are performed and billed, upon completion and acceptance by the customer, or upon delivery of product and acceptance by the customer.

Trade accounts receivable are recorded in the accompanying consolidated balance sheetsConsolidated 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 historicalwrite-off experience and known conditions that would likely lead tonon-payment. 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.collectability. Customer invoices are charged off against the allowance when we believe it is probable that the invoices will not be paid.

 

(j)

Research and Development Costs- Research and development costs are charged to expense as incurred. Research and development costs include, among other things, salaries and wages for research scientists, materials and supplies used in the development of new products, costs for development of instrumentation equipment, costs for clinical trials, and costs for facilities and equipment.

 

- 6164 -


(k)

Income Taxes- The-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 atwo-step approach: (i) amore-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 ultimately 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 related to unrecognized tax benefits as a portion of our income tax provision in the consolidated statementsConsolidated Statements of operations.Operations. See Note 4.6.

 

(l)

Stock-Based Compensation - We recognize compensation expense for all share-based awards made to employees, based upon the fair value of the share-based award on the date of the grant. See Note 5(b)7(b).

 

(m)

Comprehensive Income (Loss)- Comprehensive income (loss) represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders. As reflected in the accompanying consolidated statementsConsolidated Statements of comprehensive income,Comprehensive Income, our comprehensive income or loss is comprised of net earnings, and foreign currency translation.translation, unrealized losses on our cash flow hedge, and the income taxes thereon.

 

(n)

Shipping and Handling Costs - Shipping and handling costs invoiced to customers are included in net revenues. Costs to distribute products to customers, including freight costs, warehousing costs, and other shipping and handling activities are included in cost of sales.

 

(o)

Non-Income Government-Assessed Taxes - We classify allnon-income, government-assessed taxes (sales, use and value-added) collected from customers and remitted by us to appropriate revenue authorities, on a net basis (excluded from net revenues) in the accompanying consolidated statementsConsolidated Statements of operations.Operations.

 

(p)

Recent Accounting Pronouncements - In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers, which supersedes and replaces nearly all currently-existing U.S. GAAP revenue recognition guidance including related disclosure requirements. This guidance, will beincluding any clarification guidance thereon, is effective for the Company beginning October 1, 2018 (fiscal 2019). The Company has not yet completed its assessment of the impactanticipates that adoption of this guidanceASU2014-09 on a modified retrospective basis will have on its financial statements.result in the recording of an immaterial adjustment to retained earnings of approximately $150 and expanding certain disclosures, as required.

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In February 2016, the FASB issued ASU2016-02,Leases, which amends the accounting guidance related to leases. These changes, which are designed to increase transparency and comparability among organizations for both lessees and lessors, include, among other things, requiring recognition of lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Adoption and implementation of the guidance is not required by the Company until the beginning of fiscal 2020, although early adoption is permitted. The Company expects to begin its assessment of the impact that adoption of this guidance will have on its financial statements in fiscal 2019.

In March 2016, the FASB issued ASU2016-09,Improvements to Employee Share-Based Payment Accounting, which amends the accounting for share-based payment transactions. These changes, which are designed for simplification, involve several aspects of the accounting for share-based transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance in the first quarter of fiscal 2018, and as a result recorded $160 to the income tax provision, which under previous guidance would have been recorded in additionalpaid-in capital. While the future effect of this guidance is dependent on numerous factors (e.g., the market price of the Company’s common stock on the equity award grant date, the exercise/lapse dates of equity awards, and the market price of the Company’s common stock on such exercise/lapse dates), the effect is not expected to be material. During fiscal 2018, our tax provision included a $180 charge for application of ASU2016-09.

In August 2016, the FASB issued ASU2016-15,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. Adoption and implementation of the guidance is not required by the Company until the beginning of fiscal 2019, although early adoption is permitted. Adoption of this guidance is not expected to have a significant impact on the Company’s statement of cash flows.

 

(q)

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

 

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(2)

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 have been 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.

A summary of the restructuring costs recorded in fiscal 2018 is as follows:

   Fiscal 2018
Restructuring
Costs
 

Severance, other termination benefits and related costs

  $5,012

Lease and other contract termination fees

   353

Loss on fixed asset disposals and inventory scrap

   225

Other

   742
  

 

 

 

Total

  $6,332
  

 

 

 

The above table does not include $2,374 of CEO transition costs, which primarily represents the compensation and benefits for our previous Executive Chairman and CEO, Mr. John A. Kraeutler, throughout fiscal 2018, the period during which we also have the compensation and benefits our new CEO, Mr. Jack Kenny, who began employment at the beginning of fiscal 2018. These CEO transition costs and the restructuring costs set forth in the table above comprise the $8,706 of restructuring costs set forth in the accompanying Consolidated Statement of Operations.

At September 30, 2018, the accrued liability associated with the restructuring costs noted above consisted of the following:

   Balance as of 
   September 30, 
   2018 

Severance, other termination benefits and related costs

  $987

Lease and other contract termination fees

   33

Other

   6
  

 

 

 

Total accrued liability balance

  $1,026
  

 

 

 

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(3)

Magellan Acquisition

On March 24, 2016, we acquired all of the outstanding common stock of Magellan Biosciences, Inc., and its wholly-owned subsidiary Magellan Diagnostics, Inc. (collectively, “Magellan”), for $67,874, utilizing the proceeds from a new $60,000 five-year term loan and cash and equivalents on hand. During fiscal 2018, following the filing of our U.S. tax return and the realization of tax benefits for certain net operating loss carryforwards, the final amount of acquisition consideration totaling approximately $2,100 was paid to the sellers, resulting in no such amounts payable as of September 30, 2018. Headquartered near Boston, Massachusetts, Magellan is a leading manufacturer ofFDA-cleared products for thepoint-of-care testing of blood to diagnose lead poisoning in children and adults.

As a result of the consideration paid exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $40,591 was originally recorded in connection with this acquisition, none of which is deductible for tax purposes. As of June 30, 2017, the goodwill recorded in connection with the acquisition was written down to $33,963, which remains the balance at September 30, 2018 (see Note 1(h) for a discussion of the $6,628 impairment write-down). This goodwill results largely from the addition of Magellan’s complementary customer base and distribution channels, and its industry reputation in the U.S. as a leader in lead testing.

(4)

Inventories

Inventories are comprised of the following:

 

As of September 30,

  2015   2014   2018   2017 

Raw materials

  $7,095   $5,674   $6,689  $6,575

Work-in-process

   10,096    10,591    12,098   11,559

Finished goods -illumigene instruments

   1,890    1,710 

Finished goods - instruments

   1,191   1,460

Finished goods - kits and reagents

   16,736    17,520    22,015   21,899
  

 

   

 

   

 

   

 

 

Total

  $35,817   $35,495   $41,993  $41,493
  

 

   

 

   

 

   

 

 

 

(3)(5)

Bank Credit Arrangements

We haveIn connection with the acquisition of Magellan (see Note 3), on March 22, 2016 the Company entered into a $60,000 five-year term loan with a commercial bank. The term loan requires quarterly principal and interest payments, with interest at a variable rate tied to LIBOR, and a balloon principal payment due March 31, 2021. The required principal payments on the term loan for each of the remaining fiscal years are as follows: fiscal 2019 - $5,250, fiscal 2020 - $6,000, and fiscal 2021 - $39,000. In light of the term loan’s interest being determined on a variable rate basis, the fair value of the term loan at September 30, 2018 approximates the current carrying value reflected in the accompanying Consolidated Balance Sheet.

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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 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 Consolidated Statements of Comprehensive Income. At September 30, 2018 and 2017, the fair value of the interest rate swap was an asset of $1,722 and $815, respectively, and is reflected as anon-current asset in the accompanying Consolidated Balance Sheets. This fair value was determined by reference to a third-party valuation, and is considered a Level 2 input within the fair value hierarchy of valuation techniques.

In addition, the Company maintains a $30,000 revolving credit facility with a commercial bank, which expires in April 2018. This credit facility is collateralized by our business assets, except for those of non-U.S. subsidiaries, which totaled approximately $156,000 at September 30, 2015.March 31, 2021. There were no borrowings outstanding on this revolving credit facility at September 30, 20152018 or September 30, 2014. Available borrowings under this2017.

The term loan and revolving credit facility were $30,000 at September 30, 2015are collateralized by the business assets of the Company’s U.S. subsidiaries and September 30, 2014. In connection with this bank credit facility, we are required to complyrequire compliance with financial covenants that limit the amount of debt obligations and require a minimum amountlevel of tangible net worth. We arecoverage of fixed charges, as defined in the borrowing agreement. As of September 30, 2018, the Company is in compliance with all covenants. We areThe Company is also required to maintain a cash compensating balance with the bank in the amount of $1,000, pursuant to this bank credit facility and areis in compliance with this requirement.

 

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(4)(6)

Income Taxes

 

(a)

Earnings before income taxes, and the related provision for income taxes for the years ended September 30, 2015, 20142018, 2017 and 20132016 were as follows:

 

Year Ended September 30,

  2015   2014   2013   2018   2017   2016 

Domestic

  $50,653   $48,350   $53,963   $27,787  $31,885  $44,795

Foreign

   4,410    3,758    3,399    2,593   4,544   5,849
  

 

   

 

   

 

   

 

   

 

   

 

 

Total earnings before income taxes

  $55,063   $52,108   $57,362   $30,380  $36,429  $50,644
  

 

   

 

   

 

   

 

   

 

   

 

 

Provision (credit) for income taxes -

            

Federal -

            

Current

  $16,152   $15,021   $18,311   $6,030   $11,262  $16,178

Temporary differences

            

Fixed asset basis differences and depreciation

   50    108    121    410    (181   (45

Intangible asset basis differences and amortization

   (421   (210   (339   (4,052   (1,158   (744

Currently non-deductible expenses and reserves

   217    50    (425   1,206    884   (694

Stock-based compensation

   126    59    (282   1,379    (635   129

Tax credit carryforwards

   250    225    (717

Net operating loss carryforwards utilized

   61    1,831   —  

Tax credit carryforwards utilized

   181    67   41

Other, net

   19    66    43    (148   99   181
  

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   16,393    15,319    16,712    5,067   12,169   15,046

State and local

   2,236    1,762    2,013    1,066   1,900   2,421

Foreign

   894    284    605    398   803   948
  

 

   

 

   

 

   

 

   

 

   

 

 

Total income tax provision

  $19,523   $17,365   $19,330   $6,531  $14,872  $18,415
  

 

   

 

   

 

   

 

   

 

   

 

 

 

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(b)

The following is a reconciliation between the statutory U.S. income tax rate and the effective rate derived by dividing the provision for income taxes by earnings before income taxes:

 

Year Ended September 30,

  2015 2014 2013   2018 2017 2016 

Computed income taxes at statutory rate

  $19,264   35.0  $18,238  35.0  $20,078  35.0   $7,443  24.5 $12,750 35.0 $17,719 35.0

Increase (decrease) in taxes resulting from -

              

State and local income taxes

   1,365   2.5  1,061  2.0  1,270  2.2    982  3.2 1,093 3.0 1,329 2.6

Net benefit on foreign dividend

   —     —    (274 (0.5 (84 (0.2

U.S. tax law change

   (2,655  (8.7  —    —    —    —  

One-time repatriation tax

   876  2.9  —    —    —    —  

Foreign tax rate differences

   (217  (0.4 (430 (0.8 (18  —      (104  (0.3 (281 (0.8 (337 (0.7

Qualified domestic production incentives

   (1,197  (2.2 (1,175 (2.3 (1,621 (2.8   (550  (1.8 (1,012 (2.8 (1,290 (2.5

Acquisition-related costs

   —    —    —    —   215 0.4

Uncertain tax position activity

   (62  (0.2 134 0.4 122 0.2

Goodwill impairment charge

   —    —   2,320 6.4  —    —  

Valuation allowance

   (40  (0.1  —    —   327 0.7

Stock-based compensation

   447  1.4  —    —    —    —  

Other, net

   308   0.6  (55 (0.1 (295 (0.5   194  0.6 (132 (0.4 330 0.7
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 
  $19,523   35.5  $17,365  33.3  $19,330  33.7   $6,531  21.5 $14,872 40.8 $18,415 36.4
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “tax reform act”). We have completed the accounting for the tax reform act and the following effects are reflected within the consolidated financial statements for the year ended September 30, 2018: (i) a tax benefit of $2,655, primarily from there-measurement of deferred tax assets and liabilities; and (ii) $876 of tax expense for the mandatory U.S. repatriation transition tax. There-measurement of deferred tax assets and liabilities reflects the realization of temporary differences during fiscal 2018 at a transitional blended federal rate of 24.5%, with the remaining temporary differences beingre-measured at the 21% federal rate.

 

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(c)

The components of net deferred tax assetsliabilities were as follows:

 

As of September 30,

  2015   2014   2018   2017 

Deferred tax assets -

        

Valuation reserves and non-deductible expenses

  $1,931   $1,984   $1,473  $1,762

Stock compensation expense not deductible

   3,221    3,328    2,033   3,367

Net operating loss carryforwards

   348    544 

Tax credit carryforwards

   242    492 

Net operating loss and tax credit carryforwards

   433   743

Basis difference in equity-method investee

   302   302

Inventory basis differences

   1,186    1,340    383   1,269

Other

   8    8    (530   (289
  

 

   

 

   

 

   

 

 

Subtotal

   6,936    7,696    4,094   7,154

Less valuation allowance

   (15   (8   (302   (342
  

 

   

 

   

 

   

 

 

Deferred tax assets

   6,921    7,688    3,792   6,812
  

 

   

 

   

 

   

 

 

Deferred tax liabilities -

        

Fixed asset basis differences and depreciation

   (995   (951   (1,913   (1,325

Intangible asset basis differences and amortization

   (972   (1,338   (5,518   (9,784
  

 

   

 

   

 

   

 

 

Deferred tax liabilities

   (1,967   (2,289   (7,431   (11,109
  

 

   

 

   

 

   

 

 

Net deferred tax assets

  $4,954   $5,399 

Net deferred tax liabilities

  $(3,639  $(4,297
  

 

   

 

   

 

   

 

 

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For income tax purposes, we have recorded deferred tax benefitsassets related to operating loss and tax credit carryforwards in both U.S. and foreign jurisdictions totaling $303 and $130, respectively, as of September 30, 2018. At September 30, 2017, such deferred tax assets totaled $546 and $197, respectively. The operating loss carryforwards in foreign jurisdictions have no expiration date. The operating loss carryforwards in the countriesU.S. expire between 2023 and 2036 at the federal level, and between 2028 and 2036 at the state level. The aggregate amount of Australia, Belgiumfederal, state and Singapore, which have no expiration date, on which we have recorded deferred tax assets. We also have tax benefits related to tax creditforeign operating loss carryforwards intotaled $490, $2,186 and $381, respectively, at September 30, 2018. The use of the U.S., which expire in fiscal 2022, on which we have recorded deferred tax assets.federal and state losses is limited by the change of ownership provisions of the Internal Revenue Code.

The realization of deferred tax assets in foreign jurisdictions is dependent upon the generation of future taxable income in these countries.the applicable jurisdictions. We have considered the levels of currently anticipatedpre-tax income in U.S. and foreign jurisdictions in assessing the required level of the deferred tax asset valuation allowance.allowance including the characterization of the income as ordinary or capital. Taking into consideration historical and current operating results, and other factors, we believe that it is more likely than not that the net deferred tax asset for foreign jurisdictionsof $3,792 will be realized except for Singapore, for which a full valuation allowance has been recorded.realized. The amount of the net deferred tax asset considered realizable, in foreign jurisdictions, however, could be reduced in future years if estimates of future taxable income during the carryforward period are reduced.

Undistributed earnings reinvested indefinitely in our non-U.S. operations were approximately $10,000 and $8,000 at September 30, 2015 and September 30, 2014, respectively. U.S. deferred tax liabilities of approximately $1,800 and $1,300 on such earnings, after consideration of foreign tax credits, have not been recorded as of September 30, 2015 and September 30, 2014, respectively.

As described in Note 1, we utilize a comprehensive model for the recognition, measurement, presentation and disclosure of uncertain tax positions, assuming full knowledge of all relevant facts by the applicable tax authorities. The total amount of unrecognized tax benefits at September 30, 20152018 and September 30, 20142017 related to such positions was $275$262 and $372,$517, respectively, of which the full amounts$150 would favorably affectimpact the effective tax rate if recognized. We generally recognize interest and penalties related to uncertain tax positions as a component of our income tax provision. During fiscal 2015 we decreased our tax provision by2018 and 2017, such penalties and interest totaled approximately $19 for such interest$84 and penalties, while during fiscal 2014 they resulted in an approximate $26 increase in our tax provision.$35, respectively. We had approximately $37$162 accrued for the payment of interest and penalties at September 30, 20152018 compared to $56$165 accrued at September 30, 2014.2017. The amount of our liability for uncertain tax positions expected to be paid or settled in the next 12 months is uncertain.

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A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

  2015   2014   2018   2017 

Unrecognized income tax benefits beginning of year

  $372   $208   $517  $502

Additions for tax positions related to the current year

   —      11 

Additions for tax positions of prior years

   9    153    —     144

Reductions for tax positions of prior years

   (28   —   

Tax examination and other settlements

   (78   —      (161   (129

Expiration of statute of limitations

   (94   —  
  

 

   

 

   

 

   

 

 

Unrecognized income tax benefits at end of year

  $275   $372   $262  $517
  

 

   

 

   

 

   

 

 

We are subject to examination by the tax authorities in the U.S. (both federal and state) and the countries of Australia, Belgium, China, England, France, Germany, Holland, Italy and Singapore. In the U.S., open tax years are for fiscal 2012,2015, fiscal 20132016 and fiscal 2014.2017. In countries outside the U.S., open tax years generally range from fiscal 20102013 and forward. However, in Australia, Belgium and Singapore, the utilization of local net operating loss carryforwards extends the statute of limitations for examination well into the foreseeable future. To the extent that adjustments result from the completion of these examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the period known. We believe that the results of any tax authority examinations would not have a significant adverse impact on our financial condition or results of operations.

 

- 71 -


(5)(7)

Employee Benefits

 

(a)

Savings and Investment Plan - We have a profit sharing and retirement savings plan covering substantially all full-time U.S. employees. Profit sharing contributions to the plan, which are discretionary, are approved by the board of directors. The plan permits participants to contribute to the plan through salary reduction. Under terms of the plan, we match 50%100% of an employee’s contributions, up to a maximum match of 3%4% of eligible compensation.compensation (3% through December 31, 2016). Our discretionary and matching contributions to the plan amounted to approximately $1,567, $1,542$2,118, $1,912 and $1,539,$1,631, during fiscal 2015, 20142018, 2017 and 2013,2016, respectively.

 

(b)

Stock-Based Compensation Plans- During fiscal 2015,2018, we had two active stock-based compensation plans, the 2004 Equity Compensation Plan, which became effective December 7, 2004, as amended (the “2004 Plan”) and the 2012 Stock Incentive Plan, which became effective January 25, 2012 (the “2012 Plan”). In addition, we have an Employee Stock Purchase Plan (the “ESP Plan”), which became effective October 1, 1997. Under the ESP Plan, we sell shares of stock to our full-time and part-time employees up to the number of shares equivalent to a 1% to 15% payroll deduction from an employee’s base salary plus an additional 5% dollar match of this deduction by Meridian.

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Each of the 2004 Plan and 2012 Plan authorized the granting of new shares for options, restricted shares or restricted share units for up to 3,000 shares, with thenon-granted portion of the 2004 Plan permitted to be carried forward and added to the 2012 Plan authorized limit. As of September 30, 2015,2018, we have granted 1,5031,338 and 9031,955 shares under the 2004 Plan and 2012 Plan, respectively, thereby resulting in a remaining authorized limit of 3,5942,707 shares. Options may be granted at exercise prices not less than 100% of the closing market value of the underlying common shares on the date of grant and have maximum terms up to ten years. Vesting schedules for options, restricted shares and restricted share units are established at the time of grant and may be set based on future service periods, achievement of performance targets or a combination thereof. All options contain provisions restricting their transferability and limiting their exercise in the event of termination of employment or the disability or death of the optionee. We recognize compensation expense for all share-based payments made to employees, based upon the fair value of the share-based payment on the date of the grant.

During fiscal 2012,years 2016 through 2018, we granted, approximately 110 restricted share units (with a grant date fair value of $17.57 per share) and 1,035 options (with a weighted-average grant date fair value of $4.66 per option) to certain executive management employees to incentivize the achievement of Company revenue targets in advance of planned expectations. These awards could only be earned if specified cumulative revenue thresholds were achieved, with the three measurement dates for ratably earning one-third of the grant being (i) the 21-month period ended June 30, 2013; (ii) the 33-month period ended June 30, 2014; and (iii) the 45-month period ended June 30, 2015. With the exception of the final tranche of these awards being held by our Executive Chairman at the time of his death in the fourth quarter of fiscal 2014, no expense was recognizedaggregate for these restricted share units and options, and as a result of none of the cumulative thresholds being met, these restricted share units and options have been cancelled.

During fiscal 2013, we grantedthree-year period, approximately 2041,220 restricted share units (with a weighted-average grant date fair valuevalues of $19.38 per share)share in fiscal 2016, $16.93 per share in fiscal 2017 and $14.65 per share in fiscal 2018) to certain employees, generally with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for each fiscal 2013.period. While dividend equivalents were paid on these units throughout each fiscal 2013,period, the targettargets for each fiscal 2013 was not met and the performance-based portion of the restricted share units granted during fiscal 2013 have been cancelled.

During fiscal 2014, we granted approximately 270 restricted share units (with a weighted-average grant date fair value of $24.82 per share) to certain employees, generally with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2014. While dividend equivalentsperiod were paid on these units throughout fiscal 2014, the target for fiscal 2014 was not met and, with the exception of these awards being held by our Executive Chairman at the time of his death in the fourth quarter of fiscal 2014, the performance-based portion of the restricted share units granted during fiscal 2014 have been cancelled.

- 67 -


Similar to previous years, during fiscal 2015, we granted approximately 270 restricted share units (with a weighted-average grant date fair value of $17.91 per share) to certain employees, generally with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2015. While dividend equivalents were paid on these units throughout fiscal 2015, the target for fiscal 2015 was not met and the performance-based portion of these restricted share units granted duringwere cancelled.

- 72 -


During each of fiscal 20152016 and fiscal 2017 in connection with his Amended and Restated Employment Agreement, we also granted to our Chairman and Chief Executive Officer at that time, Mr. John A. Kraeutler, 25 restricted share units (with a grant date fair value of $17.03 per share in fiscal 2016 and $19.09 per share in fiscal 2017), with each respective grant to be earned only if specified revenue and earnings per share targets were achieved for each of fiscal 2016 and fiscal 2017. As a result of the performance targets not being achieved in either fiscal 2016 or fiscal 2017, the restricted share units related to both grants have been cancelled.

Additionally, during fiscal 20152018 in connection with the extensionOctober 9, 2017 employment of anthe Company’s new Chief Executive Officer, Mr. Jack Kenny, we granted to Mr. Kenny: (i) options to purchase 100 shares of common stock of the Company (with a grant date fair value of $3.19 per share) vesting on a pro rata basis over four years; and (ii) 13 restricted share units (with a grant date fair value of $14.50 per share) vesting 100% on the second anniversary of the grant. Also during fiscal 2018 in connection with his Amended and Restated Employment Agreement, we granted to our Chairman and Chief Executive Officer (i)at that time, Mr. John A. Kraeutler, 25 restricted share units (with a grant date fair value of $16.50$15.30 per share) to be earned only if specified revenue and earnings per share targets were achieved for fiscal 2015; and (ii) 100 time-vested options (with a weighted-average grant date fair value of $3.73 per share, as included in the options table below), with half vesting September 30, 2015 and half vesting September 30, 2016.2018. As a result of the fiscal 20152018 performance targets related to this grant being achieved, thethese restricted share units have been earned and the related compensation expense recorded in fiscal 2015.fully vested.

Giving effect to these grants, cancellations and certain other activities for restricted shares and restricted share units throughout the years, including conversions to common shares, forfeitures, and new hire and employee promotion grants, approximately 440555 restricted share units remain outstanding as of September 30, 2015,2018, with a weighted-average grant date fair value of $19.76$16.69 per share, a weighted-average remaining vesting period of 1.681.63 years and an aggregate intrinsic value of $7,466.$8,272. The weighted-average grant date fair value of the approximate 75175 restricted shares andshare units that vested during fiscal 20152018 was $22.90$21.32 per share.

The amount of stock-based compensation expense reported was $3,324, $3,557$3,402, $3,381 and $2,502$2,911 in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. The fiscal 20152018 expense is comprised of $591$793 related to stock options and $2,733$2,609 related to restricted shares andshare units; the fiscal 20142017 expense is comprised of $486$662 related to stock options and $3,071$2,719 related to restricted shares andshare units; and the fiscal 20132016 expense is comprised of $336$560 related to stock options $2,069and $2,351 related to restricted shares and units, and $97 related to the granting of unrestricted common shares to two executive officers.share units. The total income tax benefit recognized in the income statement for these stock-based compensation arrangements was $1,250, $1,185$303, $861 and $850,$1,100, for fiscal 2015, 20142018, 2017 and 2013,2016, respectively. As of September 30, 2015,2018, we expect future stock compensation expense for unvested options and unvested restricted stockshare units to total $277$571 and $2,029,$2,317, respectively, which will be recognized during fiscal years 20162019 through 2019.

2023.

 

- 6873 -


We recognize compensation expense only for the portion of shares that we expect to vest. As such, we apply estimated forfeiture rates to our compensation expense calculations. These rates have been derived using historical forfeiture data, stratified by several employee groups. During fiscal 2015, 20142018, 2017 and 2013,2016, we recorded $86, $108$106, $106 and $93,$76, respectively, in stock compensation expense to adjust estimated forfeiture rates to actual.actual, noting that total fiscal 2018 stock compensation expense reflects the effect of terminations made in connection with the restructuring activities discussed in Note 2.

We have elected to use the Black-Scholes option pricing model to determine grant-date fair value for stock options, with the following assumptions: (i) expected share price volatility based on the average of Meridian’s historical volatility over the options’ expected lives and implied volatility based on the value of tradable call options; (ii) expected life of options based on contractual lives, employees’ historical exercise behavior and employees’ historical post-vesting employment termination behavior; (iii) risk-free interest rates based on treasury rates that correspond to the expected lives of the options; and (iv) dividend yield based on the expected yield on underlying Meridian common stock.

 

Year ended September 30,

  2015 2014   2013   2018 2017 2016 

Risk-free interest rates

   2.07 1.80%     0.88%     2.10 1.34 1.63

Dividend yield

   3.7 3.5%     4.1%     3.3 4.1 4.4

Life of option

   6.33 yrs.   6.29 yrs.     6.23 yrs.     6.47 yrs.  6.44 yrs.  6.39 yrs. 

Share price volatility

   33 33%     36%     30 27 31

Forfeitures (by employee group)

   0%-15  0%-14%     0%-10%     0%-16 0%-19 0%-16

A summary of the status of our stock option plans atas of September 30, 20152018, and changes during the year ended September 30, 2018, is presented in the table and narrative below:

 

   Options   Wtd Avg
Exercise
Price
   Wtd Avg
Remaining
Life (Yrs)
   Aggregate
Intrinsic
Value
 

Outstanding beginning of period

   1,142   $19.11     

Grants

   247    17.48     

Exercises

   (187   13.28     

Forfeitures

   (12   20.11     

Cancellations

   (374   17.78     
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding end of period

   816   $20.54    4.86   $341 
  

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable end of period

   677   $20.98    4.02   $308 
  

 

 

   

 

 

   

 

 

   

 

 

 

   Options   Wtd Avg
Exercise
Price
   Wtd Avg
Remaining
Life (Yrs)
   Aggregate
Intrinsic
Value
 

Outstanding beginning of period

   942  $19.98    

Grants

   479   14.85    

Exercises

   (12   14.65    

Forfeitures

   (184   15.38    

Cancellations

   (130   28.36    
  

 

 

   

 

 

     

Outstanding end of period

   1,095  $17.56   7.02  $249
  

 

 

   

 

 

   

 

 

   

 

 

 

Exercisable end of period

   706  $18.70   5.98  $147
  

 

 

   

 

 

   

 

 

   

 

 

 

 

- 6974 -


A summary of the status of our nonvested options as of September 30, 2015,2018, and changes during the year ended September 30, 2015,2018, is presented below:

 

  Options   Weighted-
Average
Grant Date
Fair Value
   Options   Weighted-
Average
Grant Date
Fair Value
 

Nonvested beginning of period

   360   $4.78    281  $3.00

Granted

   247    3.95    479   3.27

Vested

   (131   4.36    (188   3.09

Forfeitures

   (1   5.03    (83   2.99

Cancelled

   (336   4.58    (100   3.22
  

 

   

 

   

 

   

 

 

Nonvested end of period

   139    $4.18    389  $3.24
  

 

   

 

   

 

   

 

 

The weighted average grant-date fair value of options granted was $3.95, $5.48$3.27, $2.65 and $4.19$3.46 for fiscal 2015, 20142018, 2017 and 2013,2016, respectively. The total intrinsic value of options exercised was $850, $1,110$2, $9 and $2,483,$616 for fiscal 2015, 20142018, 2017 and 2013,2016, respectively. The total grant-date fair value of options that vested during fiscal 2015, 20142018, 2017 and 20132016 was $571, $701$580, $494 and $712,$474, respectively.

Cash received from options exercised was $2,478, $567$183, $302 and $2,258$2,364 for fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Tax (expense) benefitsexpense recorded to additionalpaid-in capital from option exercises totaled ($502), $315$0, $431 and $306$70 for fiscal 2015, 20142018, 2017 and 2013,2016, respectively.

 

(6)(8)

Non-Current Liabilities

The Company andhas provided certain post-employment benefits to its former Executive Chairman (formerly Chairman and Chief Executive Officer are parties to an employment agreementOfficer), and a supplemental benefit agreement, under which we are obligated to provide certain post-retirement benefits. Thesethese obligations total $1,399$1,864 and $1,247$1,613 at September 30, 20152018 and September 30, 2014,2017, respectively. In addition, we are required by the governments of certain of the foreign countries in which we operate to maintain a level of reserves for potential future severance indemnity. These reserves total $668$713 and $831$652 at September 30, 20152018 and September 30, 2014,2017, respectively.

 

(7)(9)

Reportable Segments and Major Concentration Data

Our reportable segments are Diagnostics and Life Science, with segmentation between the two determined based upon the nature of products and the types of customers.Science. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio, and manufacturing operations for products detecting elevated lead levels in blood in Billerica, Massachusetts (near Boston), and the sale and distribution of diagnostic test kitsdiagnostics products domestically and abroad. The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany; and Sydney, Australia,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 officesfacility in Singapore and Beijing, China to further pursue growing revenue opportunities in Asia. The Life Science 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.

 

- 7075 -


Revenues from individual customers constituting 10% or more of consolidated net revenues are as follows:

 

Year Ended September 30,

  2015 2014 2013   2018 2017 2016 

Customer A

  $29,155    (15)%  $28,278    (15)%  $35,082    (19)%   $22,490   (11)%  $22,397   (11)%  $20,246   (10)% 

Customer B

  $25,276    (13)%  $22,780    (12)%  $25,457    (13)%   $22,040   (10)%  $17,825   (9)%  $19,585   (10)% 

Accounts receivable from these two Diagnostics distributor customers accounted for 21%12% and 15%11% of consolidated accounts receivable at September 30, 20152018 and September 30, 2014,2017, respectively. The Company’s international revenues totaled $52,313, $57,051,approximately $67,170, $61,812 and $56,224$54,606 in fiscal years 2015, 20142018, 2017 and 2013, respectively. Our diagnostic focus2016, respectively, and our three major product families – C. difficile,foodborne,H. pylori, gastrointestinal, respiratory illnesses and women’s health & STDblood chemistry – accounted for 59%, 58%60% and 59%66% of consolidated net revenues in fiscal 2015, 20142018, 2017 and 2013,2016, respectively. We currently purchase on a sole-source basis from a U.S. and an Italian manufacturer, respectively, theillumipro-10 instrument instruments on which ourillumigene Alethia molecular testing platform operates.operates and the LeadCare instruments used to test for blood lead levels. Additionally, two of our foodborne products sourced from another vendor accounted for 14%9%, 10% and 11% of third-party revenues for our Diagnostics segment in each of fiscal 2015, 20142018, 2017 and 2013.2016, respectively.

Significant revenue information by country for the Diagnostics and Life Science segments is as follows. Revenues are attributed to the geographic area based on the location to which the product is delivered.

 

Year Ended September 30,

  2015   2014   2013 

United States

  $120,599   $112,917   $114,935 

Italy

   7,090    8,469    7,427 

Japan

   2,603    2,097    3,937 

United Kingdom

   1,964    1,942    2,141 

France

   1,603    1,841    1,936 

Holland

   1,326    1,613    1,764 

Canada

   1,315    1,359    1,248 

Belgium

   1,289    1,241    1,285 

Other countries

   8,325    10,021    9,956 
  

 

 

   

 

 

   

 

 

 

Total Diagnostics

  $146,114   $141,500   $144,629 
  

 

 

   

 

 

   

 

 

 

Year Ended September 30,

  2015   2014   2013 

United States

  $21,918   $18,864   $17,527 

United Kingdom

   5,782    5,647    5,590 

Germany

   5,699    7,232    6,465 

Australia

   3,590    4,063    3,454 

China

   2,107    776    557 

France

   2,026    1,633    1,440 

Other countries

   7,594    9,117    9,024 
  

 

 

   

 

 

   

 

 

 

Total Life Science

  $48,716   $47,332   $44,057 
  

 

 

   

 

 

   

 

 

 

Year Ended September 30,

  2018   2017   2016 

United States

  $125,959  $119,332  $122,264

Italy

   7,648   6,601   6,717

France

   2,363   1,856   1,619

United Kingdom

   2,337   1,789   2,018

Belgium

   1,719   1,517   1,471

Holland

   1,460   1,297   1,215

Japan

   1,263   2,209   1,665

Other countries

   7,705   8,920   8,145
  

 

 

   

 

 

   

 

 

 

Total Diagnostics

  $150,454  $143,521  $145,114
  

 

 

   

 

 

   

 

 

 

Year Ended September 30,

  2018   2017   2016 

United States

  $20,442  $19,627  $19,212

China

   8,329   5,893   4,077

Germany

   8,198   7,400   6,999

United Kingdom

   5,190   5,574   5,581

Spain

   4,179   3,206   2,917

Australia

   3,617   3,999   3,163

South Korea

   2,040   2,306   1,043

France

   2,037   1,791   1,054

Japan

   1,928   1,374   1,542

Other countries

   7,157   6,080   5,380
  

 

 

   

 

 

   

 

 

 

Total Life Science

  $63,117  $57,250  $50,968
  

 

 

   

 

 

   

 

 

 

 

- 7176 -


Identifiable assets for our Italian distribution organization were $8,497 and $10,861 at September 30, 2015 and 2014, respectively. At September 30, 2015,In locations outside the U.S., the Company’s identifiable assets forwere concentrated as follows at the Bioline Group’s operations in the U.K.,end of most recent fiscal years:

As of September 30, 2018: U.K – $14,816; Germany – $7,706; Italy – $7,334; and Australia totaled approximately $15,647, $6,909– $3,543

As of September 30, 2017: U.K – $15,755; Germany – $6,915; Italy – $7,712; and $3,891, respectively; and totaled $14,985, $7,713 and $4,171, respectively, at September 30, 2014.Australia – $4,376

Segment information for the years ended September 30, 2015, 20142018, 2017 and 20132016 is as follows:

 

  Diagnostics   Life Science   Elim (1)   Total   Diagnostics   Life Science   Unallocated
Costs and
Eliminations
(1)
   Total 

Fiscal Year 2015 -

        

Net revenues -

        

Third-party

  $146,114   $48,716   $—     $194,830 

Inter-segment

   334    1,300    (1,634   —   

Operating income

   43,305    12,888    (133   56,060 

Depreciation and amortization

   4,099    2,510    —      6,609 

Capital expenditures

   3,112    1,501    —      4,613 

Goodwill

   1,250    21,099    —      22,349 

Other intangible assets

   2,364    3,567    —      5,931 

Total assets

   119,939    63,670    (327   183,282 

Fiscal Year 2014 -

        

Fiscal Year 2018 -

        

Net revenues –

                

Third-party

  $141,500   $47,332   $—     $188,832   $150,454  $63,117  $—     $213,571

Inter-segment

   432    1,009    (1,441   —      392   397   (789   —   

Operating income

   41,629    10,861    (98   52,392    29,701   14,912   (13,029   31,584

Depreciation and amortization

   4,283    2,981    —      7,264    6,557   2,131   —      8,688

Capital expenditures

   4,176    1,130    —      5,306    2,477   1,724   —      4,201

Goodwill

   1,250    21,943    —      23,193    35,213   19,424   —      54,637

Other intangible assets

   2,756    5,057    —      7,813    22,068   1,045   —      23,113

Total assets

   109,350    67,834    (255   176,929    180,978   70,341   58   251,377

Fiscal Year 2013 -

        
  

 

   

 

   

 

   

 

 

Fiscal Year 2017 -

        

Net revenues –

                

Third-party

  $144,629   $44,057   $—     $188,686   $143,521  $57,250  $—     $200,771

Inter-segment

   533    1,223    (1,756   —      389   537   (926   —   

Operating income

   46,735    10,627    (48   57,314    23,848   14,086   (552   37,382

Depreciation and amortization

   4,328    2,824    —      7,152    7,037   2,053   —      9,090

Capital expenditures

   2,031    1,203    —      3,234    2,554   1,913   —      4,467

Goodwill

   1,250    21,865    —      23,115    35,213   19,713   —      54,926

Other intangible assets

   1,561    6,496    —      8,057    24,973   1,731   —      26,704

Total assets

   111,719    65,393    (364   176,748    180,226   69,938   (387   249,777
  

 

   

 

   

 

   

 

 

Fiscal Year 2016 -

        

Net revenues –

        

Third-party

  $145,114  $50,968  $—     $196,082

Inter-segment

   289   893   (1,182   —   

Operating income

   38,202   12,997   179   51,378

Depreciation and amortization

   5,471   2,247   —      7,718

Capital expenditures

   2,690   1,314   —      4,004

Goodwill

   42,608   19,374   —      61,982

Other intangible assets

   27,534   2,321   —      29,855

Total assets

   185,446   66,624   (42   252,028

 

(1)

Unallocated costs for the fiscal years 2018 and 2017 total $13,051 and $762, respectively, and are comprised of Restructuring and Litigation Costs, as set forth within the accompanying Condensed Consolidated Statements of Operations. Eliminations consist of intersegmentinter-segment transactions.

 

- 7277 -


A reconciliation of segment operating expenses to consolidated earnings before income taxes for the years ended September 30, 2015, 20142018, 2017 and 20132016 is as follows:

 

Year Ended September 30,

  2015   2014   2013   2018   2017   2016 

Segment operating income

  $56,060   $52,392   $57,314   $44,635  $38,144  $51,378

Restructuring and litigation costs

   (13,051   (762   —  

Interest income

   23    25    44    418   171   67

Interest expense

   (1,520   (1,642   (897

Other, net

   (1,020   (309   4    (102   518   96
  

 

   

 

   

 

   

 

   

 

   

 

 

Consolidated earnings before income taxes

  $55,063   $52,108   $57,362   $30,380  $36,429  $50,644
  

 

   

 

   

 

   

 

   

 

   

 

 

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

 

(8)(10)

Commitments and Contingencies

 

(a)

Royalty Commitments - - We have entered into various license agreements that require payment of royalties based on a specified percentage of the sales of licensed products (1%products. Approximately 86% of our royalty expenses relate to 14%)our Diagnostics operating segment, where the royalty rates range from 4% to 8%. These royalty expenses are recognized on anas-earned basis and recorded in the year earned as a component of cost of sales. Annual royalty expenses associated with these agreements were approximately $3,106, $3,482$2,579, $2,600 and $3,611, respectively,$3,134 for the fiscal years ended September 30, 2015, 20142018, 2017 and 2013.2016, respectively.

 

(b)

Purchase Commitments- Excluding the operating lease commitments reflected in Note 8(c)10(c) below, we have purchase commitments primarily for inventory and service items as part of the normal course of business. Commitments made under these obligations are $8,226 and $237$11,271 for fiscal 20162019 and 2017, respectively.$127 for fiscal 2020 through fiscal 2023. No purchase commitments have been made beyond fiscal 2017.2023.

 

(c)

Operating Lease Commitments- Meridian and its subsidiaries are lessees ofof: (i) certain office and warehouse buildings in the U.S., Europe, Australia Singapore and China; (ii) automobiles for use by the direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile and copier machines across all business units, under operating lease agreements that expire at various dates. Amounts charged to expense under operating leases were $1,797, $1,951$2,457, $2,140 and $1,744$1,966 for fiscal 2015, 20142018, 2017 and 2013,2016, respectively. Operating lease commitments for each of the five succeeding fiscal years are as follows: fiscal 2016 - $1,632, fiscal 2017 - $1,395, fiscal 2018 - $787, fiscal 2019 - $240, and$1,866; fiscal 2020 - $89.$1,700; fiscal 2021 - $1,461; fiscal 2022 - $978; and fiscal 2023 - $876.

 

(d)

Litigation - - We are a party to various litigation matters from time to time that we believe are in the normal course of business. The ultimate resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows. See Item 3. “Legal Proceedings” for a discussion of the status of certain litigation.

 

- 7378 -


(e)

Indemnifications - - In conjunction with certain contracts and agreements, we provide routine indemnifications whoserelated to our performance obligations. The terms of these indemnifications range in duration and in some circumstances are not explicitly defined. The maximum obligation under some such indemnifications is not explicitly stated and, as a result of our having no history of paying such indemnifications, cannot be reasonably estimated. We have not made any payments for these indemnifications and no liability is recorded at September 30, 20152018 or September 30, 2014. We believe that if we were to incur a loss on any of these matters, the loss would not have a material effect on our financial condition.2017.

 

(9)(11)

Quarterly Financial Data (Unaudited)

The sum of the earnings per common share may not equal the corresponding annual amounts due to interim quarter rounding.

 

For the Quarter Ended in Fiscal 2015

  December 31   March 31   June 30   September 30 

For the Quarter Ended in Fiscal 2018

  December 31   March 31   June 30   September 30 

Net revenues

  $ 48,013   $ 51,545   $ 48,204   $ 47,068   $52,283  $56,451  $51,737  $53,100

Gross profit

   29,237     32,521    30,331    29,793    31,786   34,569   31,956   32,150

Net earnings

   7,901     10,070    9,102    8,467    6,302   5,288   6,825   5,434

Basic earnings per common share

   0.19     0.24    0.22    0.20    0.15   0.12   0.16   0.13

Diluted earnings per common share

   0.19     0.24    0.22    0.20    0.15   0.12   0.16   0.13

Cash dividends per common share

   0.20     0.20    0.20    0.20    0.125   0.125   0.125   0.125

For the Quarter Ended in Fiscal 2014

  December 31   March 31   June 30   September 30 

For the Quarter Ended in Fiscal 2017

  December 31   March 31   June 30   September 30 

Net revenues

  $ 44,794   $ 50,134   $ 47,212   $ 46,692   $46,809  $54,125  $50,140  $49,697

Gross profit

   28,007     31,593    29,242    28,401    29,039   33,477   31,146   30,630

Net earnings

   7,426     10,300    8,835    8,182    6,279   9,312   240   5,726

Basic earnings per common share

   0.18     0.25    0.21    0.20    0.15   0.22   0.01   0.14

Diluted earnings per common share

   0.18     0.24    0.21    0.20    0.15   0.22   0.01   0.13

Cash dividends per common share

   0.19     0.20    0.20    0.20    0.200   0.125   0.125   0.125

 

(10)(12)

Subsequent Events

We evaluated subsequent events afterOn October 9, 2018, the balance sheet dateCompany and DiaSorin Inc. entered into a strategic collaboration to sell DiaSorin’sHelicobacter pylori stool antigen test to detectH. pylori for use on its automated LIAISON platform under the Meridian brand name worldwide. The new collaboration results in the termination of September 30, 2015all pending legal disputes between the two parties and there were no material subsequent events that required recognition or additional disclosurewill expand the previous agreement between DiaSorin and Meridian, which focused on the sale, by DiaSorin, ofco-developed products in these financial statements.

During November 2015, we made a minority investmentmajor countries in Oasis Diagnostics® Corporation in order to evaluate our interest in saliva diagnostics and collection devices. Oasis is located in Vancouver, Washington.

continental Europe.

 

- 7479 -


ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

As of September 30, 2015,2018, an evaluation was completed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule13a-15(b) and15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended.amended (the “Exchange Act”). Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2015.2018. There have been no changes in our internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting, or in other factors that could significantly affect internal control subsequent to September 30, 2015.2018.

Our internal control report is included in this Annual Report on Form10-K after Item 8, under the caption “Management’s Report on Internal Control over Financial Reporting.”

ITEM 9B.

OTHER INFORMATION

Not applicable.

 

- 7580 -


PART III.

The information required by Items 10, 11, 12Items10,11,12 (other than that portion set forth below),13 and 14,and14, of Part III are incorporated by reference from the Registrant’s Proxy Statement for its 20162019 Annual Shareholders’ Meeting to be filed with the Commission pursuant to Regulation 14A.

The following information regarding the Company’s directors and executive officers is provided pursuant to Exchange Act Rule14a-3(b)(8):

DIRECTORS

James M. Anderson

David C. Phillips

Retired President and Chief Executive Officer,

Co-founder,

Cincinnati Children’s Hospital Medical Center

Cincinnati Works, Inc.

Dwight E. Ellingwood

John M. Rice, Jr.

President,

Managing Partner,

D.E.E. Strategy Consulting, LLC

Triathlon Medical Ventures Partners

Jack Kenny

Catherine A. Sazdanoff

Chief Executive Officer,

Business Advisor,

Meridian Bioscience, Inc.

Strata Oncology, Inc.

John C. McIlwraith

Felicia Williams

Managing Director,

Executive Vice President, Controller and Enterprise Risk,

Allos Ventures

Macy’s, Inc.

OFFICERS AND EXECUTIVES

Jack Kenny

Chief Executive Officer

Lawrence J. Baldini

Eric S. Rasmussen

Executive Vice President,

Executive Vice President,

Global Operations

Corporate Development

Melissa A. Lueke

Lourdes G. Weltzien

Executive Vice President,

Executive Vice President,

Chief Financial Officer and Secretary

Life Science

- 81 -


ITEM 12.

EQUITY COMPENSATION PLAN INFORMATION

The following table presents summary information as of September 30, 20152018 with respect to all of our equity compensation plans (number of securities information in thousands).

 

Plan Category

  (a)
Number of
Securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
   (b)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
   (c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
 

Equity compensation plans approved by security holders (1)

   816   $20.543    3,594 
  

 

 

   

 

 

   

 

 

 

Total (2)

   816   $20.543    3,594 
  

 

 

   

 

 

   

 

 

 

Plan Category

  (a)
Number of
Securities to be
issued upon
exercise of
outstanding
options, warrants
and  rights
   (b)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
   (c)
Number of securities
remaining available
for future issuance
under equity
compensation  plans
(excluding securities
reflected in column

(a))
 

Equity compensation plans approved by security holders(1)

   1,095  $17.561   2,707
  

 

 

   

 

 

   

 

 

 

Total(2)

   1,095  $17.561   2,707
  

 

 

   

 

 

   

 

 

 

 

(1)

2004 Equity Compensation Plan, as amended

    

2012 Stock Incentive Plan

(2)

Weighted-average remaining term of 4.867.02 years

- 76 -


ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)

(1) and (2) FINANCIAL STATEMENTS AND SCHEDULES.

All financial statements and schedules required to be filed by Item 8 of this Form and included in this report have been so identified under Item 8. No additional financial statements or schedules are being filed since the requirements of paragraph (c) under Item 15 are not applicable to Meridian.

 

(b)

(3) EXHIBITS.

 

Exhibit

Number

  

Description of Exhibit

  3.1

  Articles of Incorporation, including amendments not related to Company name change (Incorporated by reference to Registration StatementNo. 333-02613 on FormS-3 filed with the Securities and Exchange Commission on April  18, 1996and Meridian’s Form8-K filed with the Securities and Exchange Commission on May 16, 2007)

  3.2

  Amended and Restated Code of Regulations (Incorporated by reference to Meridian’s Form8-K filed with the Securities and Exchange Commission on November 13, 2012)September 24, 2018)

- 82 -


10.1*

  Savings and Investment Plan Prototype Adoption Agreement (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003)
10.2*Amendment No. 1 to Supplemental Benefit Agreement Dated September 23, 2014 between Meridian and John A. Kraeutler (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on September 25, 2014)
10.3*

10.2*

  Supplemental BenefitThird Amended and Restated Employment Agreement Dated October  3, 2016 between Meridian and John A. Kraeutler as amended April 24, 2001, December 29, 2008, August 3, 2011 and June 12, 2012 (referred to as the Salary Continuation Agreement prior to June 12, 2012) (Incorporated by reference to Meridian’s Form8-K filed with the Securities and Exchange Commission on June 14, 2012)October 5, 2016)
10.4

10.3*

  Employment Agreement dated October 9, 2017 between Meridian and John P. Kenny (Incorporated by reference to Meridian’s Form8-K filed with the Securities and Exchange Commission on October 11, 2017)

10.4*

Dividend Reinvestment Plan (Incorporated by reference to Meridian’s Annual Report on Form10-K for the Fiscal Year Ended September 30, 1999)
10.5*Second Amended and Restated Employment Agreement Dated January 15, 2015 between Meridian and John A. Kraeutler (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on January 20, 2015)

10.6*10.5*

  2004 Equity Compensation Plan, amended and restated effective January  25, 2012 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Quarterly Period Ended December 31, 2011)
10.7*

10.6*

  2012 Stock Incentive Plan, effective January 25, 2012 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Quarterly Period Ended December 31, 2011)
10.8*Fiscal 2016 Officer’s Performance Compensation Plan (Filed herewith)

- 77 -


Exhibit Number10.7*

  

DescriptionForm of Exhibit

Time-Based Restricted Share Unit Award Agreement (Filed herewith)
10.9

10.8*

  Form of Meridian Bioscience, Inc. Change in Control Agreement dated August  4, 2016 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Quarterly Period Ended June 30, 2016)

10.9

Agreement and Plan of Merger among Meridian Bioscience, Inc., Mariner Merger Sub, Inc., Magellan Biosciences, Inc. and Ampersand 2006 Limited Partnership as the Stockholder Representative dated as of March 24, 2016 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Quarterly Period Ended March 31, 2016)

10.10

Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc. Meridian Life Science, Inc. and Fifth Third Bank dated August 1, 2007 (Incorporated by reference to Meridian’s Annual Report on Form10-K for the Fiscal Year Ended September 30, 2007)

10.10.1

  Term Note among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc. Meridian Life Science, Inc., Bioline USA, Inc. and Fifth Third Bank dated March 22, 2016 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Fiscal Quarter Ended March 31, 2016)

10.10.2

Amended and Restated Revolving Note with Fifth Third Bank dated April 21, 2015March  22, 2016 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Fiscal Quarter Ended June 30, 2015)March 31, 2016)
10.10.2

10.10.3

  First Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth Third Bank dated September 2, 2010 (Incorporated by reference to Meridian’s Annual Report on Form10-K for the Fiscal Year Ended September 30, 2010)

- 83 -


10.10.310.10.4  Second Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth Third Bank dated December 1, 2010 (Incorporated by reference to Meridian’s AnnualQuarterly Report on Form 10-K10-Q for the Fiscal YearQuarter Ended September 30,December 31, 2010)
10.10.410.10.5  Third Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth Third Bank dated September 15, 2012 (Incorporated by reference to Meridian’s Annual Report on Form10-K for the Fiscal Year Ended September 30, 2012)
10.10.510.10.6  Fifth Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc., Bioline USA, Inc. and Fifth Third Bank dated April 21, 2015 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Fiscal Quarter Ended June 30, 2015)
10.11*10.10.7  Form of Time-Based Restricted Share Unit AwardSixth Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc., Bioline USA, Inc. and Fifth Third Bank dated November 4, 2015 (Filed herewith)March 22, 2016 (Incorporated by reference to Meridian’s Quarterly Report on Form10-Q for the Fiscal Quarter Ended March 31, 2016)
10.12*10.10.8  Form of Performance Award Restricted Share Unit AwardSeventh Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc., Bioline USA, Inc. and Fifth Third Bank dated November 4, 2015 (Filed herewith)February 6, 2017 (Incorporated by reference to Meridian’s Annual Report on Form10-K for the Fiscal Year Ended September 30, 2017)
10.13*10.10.9  Eighth Amendment to Loan and Security Agreement among Meridian Bioscience, Inc. Change in Control Severance Compensation Policy, Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc., Bioline USA, Inc. and Fifth Third Bank dated March 18, 2011July 20, 2017 (Incorporated by reference to Meridian’s Annual Report on Form 8-K filed with10-K for the Securities and Exchange Commission on March 24, 2011)Fiscal Year Ended September 30, 2017)
1310.10.10  2015 Annual ReportNinth Amendment to Shareholders (1)Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc., Bioline USA, Inc. and Fifth Third Bank dated September 24, 2018 (Filed herewith)
14
  Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form10-K for the Fiscal Year Ended September 30, 2003)
21  Subsidiaries of the Registrant (Filed herewith)
23  Consent of Independent Registered Public Accounting Firm (Filed herewith)
31.1  Certification of Principal Executive Officer required by Rule13a-14(a) (Filed herewith)
31.2  Certification of Principal Financial Officer required by Rule13a-14(a) (Filed herewith)
32  Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (Filed herewith)

- 84 -


101

  The following financial information from Meridian Bioscience Inc.’s Annual Report on Form10-K for the fiscal year ended September 30, 20152018 filed with the SEC on November 30, 2015,29, 2018, formatted in XBRL includes: (i) Consolidated Statements of Operations for the years ended September 30, 2015, 20142018, 2017 and 2013;2016; (ii) Consolidated Statements of Comprehensive Income for the years ended September 30, 2015, 20142018, 2017 and 2013;2016; (iii) Consolidated Statements of Cash Flows for the years ended September 30, 2015, 20142018, 2017 and 2013;2016; (iv) Consolidated Balance Sheets as of September 30, 20152018 and 2014;2017; (v) Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2015, 20142018, 2017 and 2013;2016; and (vi) the Notes to Consolidated Financial Statements

 

- 78 -


*

Management Compensatory Contracts

(1)Only specific portions of the 2015 Annual Report to Shareholders are incorporated by reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2015 Annual Report to Shareholders has been furnished to the Securities and Exchange Commission for informational purposes only.

Meridian will provide shareholders with any exhibit upon the payment of a specified reasonable fee, which fee shall be limited to Meridian’s reasonable expenses in furnishing such exhibit.

ITEM 16.

FORM10-K SUMMARY

None.

 

- 7985 -


SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MERIDIAN BIOSCIENCE, INC.
By: 

/s/ John A. KraeutlerJack Kenny

Date:November 30, 201529, 2018
John A. Kraeutler
Chairman of the Board andJack Kenny
Chief Executive Officer

We, the undersigned directors and officers of the Registrant, hereby severally constitute John A. KraeutlerJack Kenny and Melissa A. Lueke, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to the Annual Report on Form10-K filed with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

  

Capacity

 

Date

/s/ John A. Kraeutler

John A. KraeutlerJack Kenny

  Chairman of the Board and Chief Executive Officer and Director November 30, 201529, 2018
Jack Kenny

/s/ Melissa A. Lueke

Melissa A. Lueke

  Executive Vice President, ChiefNovember 29, 2018
Melissa A. Lueke

Financial Officer, and Secretary (Principal

(Principal Financial and Accounting Officer)

/s/ David C. Phillips

Chairman of the Board November 30, 201529, 2018
David C. Phillips

/s/ James M. Anderson

James M. Anderson

  Director November 30, 201529, 2018
James M. Anderson

/s/ Dwight E. Ellingwood

Dwight E. Ellingwood

  Director November 30, 201529, 2018
Dwight E. Ellingwood

/s/ John C. McIlwraith

John C. McIlwraith

  Director November 30, 201529, 2018
John C. McIlwraith

/s/ David C. Phillips

David C. PhillipsJohn M. Rice, Jr.

  Director November 30, 201529, 2018
John M. Rice, Jr.

/s/ Catherine A. Sazdanoff

DirectorNovember 29, 2018
Catherine A. Sazdanoff

/s/ Felicia Williams

  Director November 30, 201529, 2018
Felicia Williams

 

- 8086 -


SCHEDULE II

Meridian Bioscience, Inc.

and Subsidiaries

Valuation and Qualifying Accounts

(Dollars in thousands)

Years Ended September 30, 2015, 20142018, 2017 and 20132016

 

Description

  Balance at
Beginning
of Period
   Charged to
Costs and
Expenses
 Deductions Other (a) Balance at
End of
Period
   Balance at
Beginning
of Period
   Charged to
Costs and
Expenses
   Deductions Other (a) Balance at
End of
Period
 

Year Ended September 30, 2015:

       

Year Ended September 30, 2018:

        

Allowance for doubtful accounts

  $272   $73  $(41 $(56 $248   $307  $39  $(32 $(4 $310

Inventory realizability reserves

   2,942    208  (590 (104 2,456    2,059   321   (405 (4 1,971

Valuation allowances – deferred taxes

   8    7   —     —    15    342   —     (40  —   302

Year Ended September 30, 2014:

       

Year Ended September 30, 2017:

        

Allowance for doubtful accounts

  $233   $116  $(68 $(9 $272   $334  $90  $(134 $17 $307

Inventory realizability reserves

   2,499    1,325  (834 (48 2,942    2,680   35   (661 5 2,059

Valuation allowances – deferred taxes

   296    8  (296  —    8    342   —     —    —   342

Year Ended September 30, 2013:

       

Year Ended September 30, 2016:

        

Allowance for doubtful accounts

  $574   $(116 $(239 $14  $233   $248  $139  $(69 $16 $334

Inventory realizability reserves

   2,271    1,132  (938 34  2,499    2,456   1,285   (1,072 11 2,680

Valuation allowances – deferred taxes

   450    150  (289 (15 296    15   327   —    —   342

 

(a)

Balances reflect the effects of currency translation.translation and in 2016, the acquisition of Magellan.

 

- 8187 -