SECURITIES AND EXCHANGE COMMISSION
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2019March 31, 2020
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
MERIDIAN BIOSCIENCE, INC.INC.
Incorporated under the laws of Ohio
(I.R.S. Employer Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, no par value | | | | NASDAQ Global Select Market |
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
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| | | | Smaller reporting company | | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act)
. Yes
☐
No
☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
| | Outstanding July 31, 2019April 30, 2020 |
Common Stock, no par value | | |
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM
10-Q
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Item 1. | | | | | | |
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Item 2. | | | | | 20-27 | |
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Item 3. | | | | | 27 | |
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Item 4. | | | | | 27-28 | |
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Item 1. | | | | | 28 | |
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Item 1A. | | | | | 28 | |
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Item 6. | | | | | 28 | |
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “continues”, “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “signals”, “should”
, “can” and similar expressions or the negative versions thereof and which also may be identified by their context. All statements that address operating performance or events or developments that Meridian expects or anticipates will occur in the future, including, but not limited to, statements relating to per share diluted earnings,
sales, product demand, revenue and
revenue,the impact ofCOVID-19
on our business and prospects, are forward-looking statements. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. Specifically, Meridian’s forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance. Meridian assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following:
Meridian’s operating results, financial condition and continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition, its ability to effectively sell such products and its ability to successfully expand and effectively manage increased sales and marketing operations. While Meridian has introduced a number of internally developed products and acquired products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis or in protecting its intellectual property, and unexpected or costly manufacturing costs associated with its introduction of new products or acquired products could cause actual results to differ from expectations. Meridian relies on proprietary, patented and licensed technologies. As such, the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would impact its results. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which our customers operate, as well as adverse trends in buying patterns from customers, can change expected results. Costs and difficulties in complying with laws and regulations, including those administered by the United States Food and Drug Administration, can result
unanticipated
expenses and delays and interruptions to the sale of new and existing products, as can the uncertainty of regulatory approvals and the regulatory process (including the currently ongoing study and other FDA actions regarding the Company’s LeadCare products). The international scope of Meridian’s operations, including changes in the relative strength or weakness of the U.S. dollar and general economic conditions in foreign countries, can impact results and make them difficult to predict. One of Meridian’s growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses will be successfully integrated into Meridian’s operations. There may be risks that acquisitions may disrupt operations and may pose potential difficulties in employee retention, and there may be additional risks with respect to Meridian’s ability to recognize the benefits of acquisitions, including potential synergies and cost savings or the failure of acquisitions to achieve their plans and objectives. Meridian cannot predict the outcome of goodwill impairment testing and the impact of possible goodwill impairments on Meridian’s earnings and financial results. Meridian cannot predict the possible impact of U.S. health care legislation enacted in 2010 – the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act – and any modification or repeal of any of the provisions thereof initiated by Congress or the presidential administration, and any similar initiatives in other countries on its results of operations. Efforts to reduce the U.S. federal deficit, breaches of Meridian’s information technology systems, trade wars, increased tariffs, and natural disasters and other events could have a materially adverse effect on Meridian’s results of operations and revenues. In the past, the Company has identified a material weakness in our internal control over financial reporting, which has been remediated, but the Company can make no assurances that a material weakness will not be identified in the future, which if identified and not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements.
Meridian also is subject to risks and uncertainties related to disruptions to or reductions in business operations or prospects due to pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as the coronavirus diseaseCOVID-19.
In addition to the factors described in this paragraph, as well as those factors identified from time to time in our filings with the Securities and Exchange Commission, Part I, Item 1A Risk Factors of our most recent Annual Report on Form
10-K
contains a list and description of uncertainties, risks and other matters that may affect the Company. Readers should carefully review these forward-looking statements and risk factors, and not place undue reliance on our forward-looking statements.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(dollar and share amounts in thousands, except per share data)
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General and administrative | | | | | | | | | | | | | | | | |
Acquisition-related costs | | | | | | | | | | | | | | | | |
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Total other income (expense) | | | | | | | | ) | | | | ) | | | | ) |
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EARNINGS BEFORE INCOME TAXES | | | | | | | | | | | | | | | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
BASIC EARNINGS PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | |
DILUTED EARNINGS PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | | | | | | | | | | | | | | | | |
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS | | | | | | | | | | | | | | | | |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | | | | | | | | | | | | | | | | |
ANTI-DILUTIVE SECURITIES: | | | | | | | | | | | | | | | | |
Common share options and restricted share units | | | | | | | | | | | | | | | | |
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DIVIDENDS DECLARED PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
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General and administrative | | | | | | | | | | | | | | | | |
Acquisition-related costs | | | | | | | | | | | | | | | | |
Change in fair value of contingent consideration obligation | | | | ) | | | | | | | | ) | | | | |
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Total other income (expense) | | | | | | | | ) | | | | ) | | | | ) |
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EARNINGS BEFORE INCOME TAXES | | | | | | | | | | | | | | | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
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BASIC EARNINGS PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | |
DILUTED EARNINGS PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | | | | | | | | | | | | | | | | |
EFFECT OF DILUTIVE STOCK OPTIONS AND RESTRICTED SHARE UNITS | | | | | | | | | | | | | | | | |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | | | | | | | | | | | | | | | | |
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ANTI-DILUTIVE SECURITIES: | | | | | | | | | | | | | | | | |
Common share options and restricted share units | | | | | | | | | | | | | | | | |
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DIVIDENDS DECLARED PER COMMON SHARE | | $ | | | | $ | | | | $ | | | | $ | | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES | |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) | |
(dollar amounts in thousands) | |
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(dollar amounts in thousands)
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| | $ | | | | $ | | | | $ | | | | $ | | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | ) | | | | | | | | ) |
Unrealized gain (loss) on cash flow hedge | | | | ) | | | | | | | | ) | | | | |
Income taxes related to items of other comprehensive income | | | | | | | | ) | | | | | | | | ) |
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Other comprehensive income (loss), net of tax | | | | | | | | ) | | | | | | | | ) |
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| | $ | 9,359 | | | $ | 7,094 | | | $ | 12,186 | | | $ | 15,200 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | ) | | | | | | | | ) | | | | ) |
Unrealized loss on cash flow hedge | | | | ) | | | | ) | | | | ) | | | | ) |
Reclassification of gain on cash flow hedge | | | | ) | | | | | | | | ) | | | | |
Income taxes related to items of other comprehensive income | | | | | | | | | | | | | | | | |
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Other comprehensive income (loss), net of tax | | | | ) | | | | | | | | ) | | | | ) |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)
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Nine Months Ended June 30, | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
| | $ | | | | $ | | |
Non-cash items included in net earnings: | | | | | | | | |
Depreciation of property, plant and equipment | | | | | | | | |
Amortization of intangible assets | | | | | | | | |
Amortization of deferred instrument costs | | | | | | | | |
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Loss on disposition and write-down of fixed assets | | | | | | | — | |
Change in the following, net of acquisition: | | | | | | | | |
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Prepaid expenses and other current assets | | | | ) | | | | ) |
Accounts payable and accrued expenses | | | | ) | | | | |
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Net cash provided by operating activities | | | | | | | | |
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CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchase of property, plant and equipment | | | | ) | | | | ) |
Acquisition of GenePOC business | | | | ) | | | | |
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Net cash used for investing activities | | | | ) | | | | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
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Proceeds from revolving credit facility | | | | | | | | |
Payment of debt issuance costs | | | (489 | ) | | | — | |
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Proceeds and tax benefits from exercises of stock options | | | | | | | | |
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Net cash provided by (used for) financing activities | | | | | | | | ) |
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Effect of Exchange Rate Changes on Cash and Equivalents and Restricted Cash | | | | ) | | | | ) |
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Net Increase (Decrease) in Cash and Equivalents and Restricted Cash | | | | ) | | | | |
Cash and Equivalents and Restricted Cash at Beginning of Period | | | | | | | | |
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Cash and Equivalents and Restricted Cash at End of Period | | $ | | | | $ | | |
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Cash and Equivalents and Restricted Cash at End of Period | | $ | | | | $ | | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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Six Months Ended March 31, | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
| | $ | | | | $ | | |
Non-cash items included in net earnings: | | | | | | | | |
Depreciation of property, plant and equipment | | | | | | | | |
Amortization of intangible ass e ts | | | | | | | | |
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Change in accrued contingent consideration | | | | ) | | | | |
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Prepaid expenses and other current assets | | | | | | | | |
Accounts payable and accrued expenses | | | | | | | | ) |
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Net cash provided by operating activities | | | | | | | | |
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CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchase of property, plant and equipment | | | | ) | | | | ) |
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Net cash used for investing activities | | | | ) | | | | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
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Payment on revolving credit facility | | | (27,000 | | | | — | |
Payment of debt issuance costs | | | (116 | | | | — | |
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Proceeds from exercise of stock options | | | | | | | | |
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Net cash used for financing activities | | | | ) | | | | ) |
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Effect of Exchange Rate Changes on Cash and Equivalents and Restricted Cash | | | | | | | | ) |
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Net Increase (Decrease) in Cash and Equivalents and Restricted Cash | | | | ) | | | | |
Cash and Equivalents and Restricted Cash at Beginning of Perio d | | | 62,397 | | | | 60,763 | |
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Cash and Equivalents and Restricted Cash at End of Period | | $ | | | | $ | | |
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| | $ | | | | $ | | |
| | | | | | | 1,000 | |
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Cash and Equivalents and Restricted Cash at End of Period | | $ | | | | $ | | |
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
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Accounts receivable, less allowances of $421 and $310 | | | | | | | | |
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Prepaid expenses and other current assets | | | | | | | | |
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PROPERTY, PLANT AND EQUIPMENT, at Cost | | | | | | | | |
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Buildings and improvements | | | | | | | | |
Machinery, equipment and furniture | | | | | | | | |
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Less: accumulated depreciation and amortization | | | | | | | | |
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Net property, plant and equipment | | | | | | | | |
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Other intangible assets, net | | | | | | | | |
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Deferred instrument costs, net | | | | | | | | |
Fair value of interest rate swap | | | | | | | | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
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| | $ | | | | $ | | |
Accounts receivable, less allowances of $521 and $537, respectivel y | | | | | | | | |
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Prepaid expenses and other current asset s | | | | | | | | |
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PROPERTY, PLANT AND EQUIPMENT, at Cost | | | | | | | | |
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Buildings and improvements | | | | | | | | |
Machinery, equipment and furniture | | | | | | | | |
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Less: accumulated depreciation and amortization | | | | | | | | |
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Net property, plant and equipment | | | | | | | | |
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Other intangible assets, net | | | | | | | | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Accrued employee compensation costs | | | | | | | | |
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Current portion of long-term debt | | | | | | | | |
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Total current liabilities | | | | | | | | |
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Long-term income taxes payable | | | | | | | | |
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Acquisition consideration | | | | | | | | |
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Total non-current liabilities | | | | | | | | |
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COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Preferred stock, no par value; 1,000,000 shares authorized; none issued | | | | | | | | |
Common shares, no par value; 71,000,000 shares authorized, 42,670,805 and 42,399,962 shares issued, respectively | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accumulated other comprehensive loss | | | | ) | | | | ) |
| | | | | | | | |
Total shareholders’ equity | | | | | | | | |
| | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | | | | $ | | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollar amounts in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
| | | | | | | | |
| | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
Accrued employee compensation costs | | | | | | | | |
| | | | | | | | |
Current portion of acquisition consideration | | | | | | | | |
Current operating lease obligations | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total current liabilities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Acquisition consideration | | | | | | | | |
| | | | | | | | |
Fair value of interest rate swaps | | | | | | | | |
Long-term operating lease obligations | | | | | | | | |
| | | | | | | | |
Long-term income taxes payable | | | | | | | | |
| | | | | | | | |
Total non-current liabilities | | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Preferred stock, no par value; 1,000,000 shares authorized; 0ne issued | | | | | | | | |
Common shares, no par value; 71,000,000 shares authorized, 42,831,267 and 42,712,296 shares issued, respectively | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accumulated other comprehensive loss | | | | ) | | | | ) |
Total shareholders’ equity | | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | | | | $ | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollar and share amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | |
THREE MONTHS ENDED MARCH 31, 2020 | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Conversion of restricted share units | | | | | | | | ) | | | | | | | | | | | | ) |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) |
Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) |
Balance at March 31, 2020 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
THREE MONTHS ENDED MARCH 31, 2019 | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Cash dividends paid $0.125 per share | | | | | | | | | | | | ) | | | | | | | | ) |
Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | |
Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) |
Balance at March 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | |
SIX MONTHS ENDED MARCH 31, 2020 | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Conversion of restricted share units | | | | | | | | ) | | | | | | | | | | | | ) |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) |
Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) |
Balance at March 31, 2020 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
SIX MONTHS ENDED MARCH 31, 2019 | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2018 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Cash dividends paid - $0.250 per share | | | | | | | | | | | | ) | | | | | | | | ) |
Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) |
Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) |
| | | | | | | | | | | | ) | | | | | | | | ) |
Balance at March 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | |
THREE MONTHS ENDED JUNE 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | |
Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) |
| | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
THREE MONTHS ENDED JUNE 30, 2018 | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Cash dividends paid - $0.125 per share | | | | | | | | | | | | ) | | | | | | | | ) |
Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) |
Hedging activity, net of tax | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
NINE MONTHS ENDED JUNE 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2018 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Cash dividends paid - $0.250 per share | | | | | | | | | | | | ) | | | | | | | | ) |
Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | |
Hedging activity, net of tax | | | | | | | | | | | | | | | | ) | | | | ) |
| | | | | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
NINE MONTHS ENDED JUNE 30, 2018 | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2017 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
Cash dividends paid - $0.375 per share | | | | | | | | | | | | ) | | | | | | | | ) |
Conversion of restricted share units and exercise of stock options | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | ) | | | | ) |
Hedging activity, net of tax | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Dollars in Thousands, Except Per Share Amounts
The interim condensed consolidated financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Management, the interim financial statements include all normal adjustments and disclosures necessary to present fairly the Company’s financial position as of
June 30, 2019,March 31, 2020, the results of its operations for the
threethree- and
nine month six-month
periods ended
June 30,March 31, 2020 and 2019,
and 2018, and its cash flows for the
nine monthsix-month periods ended
June 30, 2019March 31, 2020 and
2018.2019. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s fiscal
20182019 Annual Report on Form
10-K.
Financial information as of September 30, 20182019 has been derived from the Company’s audited consolidated financial statements.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the year.
In December 2019, the SARS-CoV-2 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designatedCOVID-19
(the disease caused by SARS-CoV-2) a global pandemic. Governments have implemented lockdown andshelter-in-place
orders, requiring manynon-essential
businesses to shut down operations for the time being. The Company’s business, however, is deemed “essential” and it has continued to operate, manufacture and distribute its products to customers globally. WhileCOVID-19
has not had a material negative impact on the Company’s operations, financial condition or cash flows as of the date of this filing, we cannot reasonably predict the extent of the impact ofCOVID-19
on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein for additional discussion of the effects of the COVID-19 pandemic on the Company and its results of operations. 2. | Significant Accounting Policies |
A summary of the Company’s significant accounting policies is included in Note 1 to the audited consolidated financial statements of the Company’s fiscal
20182019 Annual Report on Form
10-K
and should be referred to for a description of the Company’s current significant accounting policies, with the exception of Revenue Recognition
and Fair Value Measurements
, which
(a) Revenue Recognition –
On October 1, 2018, we adopted ASU No. 2014-09,
Revenue from Contracts with Customers
, using the modified retrospective transition method applied to those contracts that were not completed as of that date. Results for reporting periods beginning on or after October 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previously applicable authoritative guidance.Upon adoption, we recorded a reduction of $116 to the opening balance of retained earnings as of October 1, 2018. This adjustment is related to writing off the book value of clinical diagnostic testing instruments located at customers for which there is no contractual arrangement for the instrument to be returned to the Company. Instruments placed with customers under an agreement to return the instrument to the Company were reclassified to machinery and equipment. Prior to adoption of the new guidance, all instruments placed with customers were capitalized and amortized over an estimated three-year utilization period, with the net balance reflected as deferred instrument costs.
The following table summarizes the impact of the new revenue standard on our opening balance sheet:
| | | | | | | | | | | | |
| | Balance at September 30, 2018 | | | New Revenue Standard Adjustment | | | | |
PROPERTY, PLAN AND EQUIPMENT | | | | | | | | | | | | |
Machinery, equipment and furniture | | $ | | | | $ | | | | $ | | |
Accumulated depreciation and amortization | | | | ) | | | | ) | | | | ) |
OTHER ASSETS | | | | | | | | | | | | |
Deferred instrument costs, net | | | | | | | | ) | | | | |
NON-CURRENT LIABILITIES | | | | | | | | | | | | |
Deferred income taxes | | | | ) | | | | | | | | ) |
SHAREHOLDERS’ EQUITY | | | | | | | | | | | | |
Retained earnings | | | | ) | | | | | | | | ) |
The adoption of this new standard had an immaterial impact on our reported total revenues and operating income, as compared to what would have been reported under the prior standard. Our accounting policies under the new standard were applied prospectively and are noted below following the discussion of Revenue Disaggregation.
The following tables present our revenues disaggregated by major geographic region, major product platform and disease state (Diagnostics only):
Revenue by Reportable Segment & Geographic Region
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, | | | Three Months Ended March 31, | | Six Months Ended March 31, | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% |
| | | | | | | | | | | | )% | | | | | | | | | | | | )% | | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | )% | | | | | | | | | | | | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | )% | | | | | | | | | | | | )% | | | | | | | | | | | | % | | | | | | | | | | | | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | )% | | | | | | | | | | | | )% | |
| | | | | | | | | | | | % | | | | | | | | | | | | % | |
| | | | | | | | | | | | % | | | | | | | | | | | | )% | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | % | | | | | | | | | | | | % | |
| | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | )% | | | | | | | | | | | | )% |
| | | | | | | | | | | | % | | | | | | | | | | | | )% |
| | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Product Platform/Type
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, | | | Three Months Ended March 31, | | Six Months Ended March 31, | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% |
Immunoassays & blood chemistry assays | | | | | | | | | | | | )% | | | | | | | | | | | | )% | | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | )% | | | | | | | | | | | | ) % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | | | |
Revenue by Disease State (Diagnostics only)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, | | | Three Months Ended March 31, | | Six Months Ended March 31, | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% |
Respiratory illness assays | | | | | | | | | | | | )% | | | | | | | | | | | | )% | | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | )% | | | | | | | | | | | | % | | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | % | | | | | | | | | | | | )% | | | | | | | | | | | | % | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | )% |
| | | | | | | | | | | | | | | | | | | |
Revenue from contracts with customers is recognized in an amount that reflects the consideration we expect to receive in exchange for products when obligations under such contracts are satisfied. Revenue is generally recognized at a
point-in-time
when products are shipped and
titlecontrol has passed to the customer. Such contracts can include various combinations of products that are generally accounted for as distinct performance obligations.
Revenue is reduced in the period of sale for fees paid to distributors, which are inseparable from the distributor’s purchase of our product and for which we receive no goods or services in return. Revenue for the Diagnostics segment is reduced at the date of sale for product price adjustments duepayable to certain distributors under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Such accruals are netted against accounts receivable.
Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
Our payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 90 days from the date of shipment or satisfaction of the performance obligation. Trade accounts receivable are recorded in the accompanying
Consolidated Balance Sheets at invoiced amounts less provisions for distributor price adjustments under local contracts and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historical
write-off
experience and known conditions that would likely lead to
non-payment.
Customer invoices are charged off against the allowance when we believe it is probable that the invoices will not be paid.
Practical Expedients and Exemptions
Revenue is recognized net of any taxes collected from customers (sales tax, value added tax, etc.), which are subsequently remitted to government authorities.
Our diagnostic assay products are generally not subject to a customer right of return except for product recall events under the rules and regulations of the Food and Drug Administration or equivalent agencies outside the United States. In this circumstance, the costs to replace affected products would be accrued at the time a loss was probable and estimable.
We expense as incurred the costs to obtain contracts, as the amortization period would be one year or less. These costs, recorded within selling and marketing expense, include our internal sales force compensation programs and certain partner sales incentive programs, as we have determined that annual compensation is commensurate with annual selling activities.
Reagent Rental Arrangements
Our revogene™
, alethia™
and LeadCareCertain of our Diagnostics segment’s product platforms require the use of instruments for the tests to be processed. In many cases, a customer is given use of the instrument provided they continue purchasing the associated tests, also referred to as “consumables” or “reagents”. If a customer stops purchasing the consumables, the instrument must be returned to
Meridian.us. Such arrangements are common practice in the diagnostics industry and are referred to as “Reagent
Rental” agreements. These agreementsRentals”. Reagent Rentals may also include instrument related services such as a limited replacement warranty, training and installation. We concluded that the use of the instrument and related services (collectively known as “lease elements”) are not within the scope of
ASU No. 2014-09 Accounting StandardsCodification (“ASC”) 606,Revenue from Contracts with Customers but rather
ASU 2016-02,ASC 842,
. Accordingly, we first allocate the transaction price between the lease elements and the
non-lease
elements based on estimates of relative standalone selling prices. Lease revenue is derived solely from the sale of consumables and is therefore recognized monthly as earned, which coincides with the transfer of control of the
non-lease
elements.
For the portion of the transaction price allocated to the
non-lease
elements, which are principally the test kits, the related revenue
will beis recognized at a
point-in-time
when control transfers.
Revenue allocated to the lease elements of these Reagent Rental arrangements
represent less than 1% of totaltotaled approximately $1,125 and $1,050 in the three months ended March 31, 2020 and 2019, respectively, and $2,250 and $2,100 in the six months ended March 31, 2020 and 2019
, respectively. Such revenue
and areis included as part of net revenues in our Condensed Consolidated Statements of
Income.Operations. | | Fair Value Measurements – |
Fair Value Measurements –Certain assets
Assets and liabilities are recorded at fair value in accordance with
Accounting Standards Codification (“ASC”) ASC 820-10,
Fair Value Measurements and Disclosures
. ASC
820-10
defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC
820-10 requires
establishes a
three levelthree-level hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each asset and liability is based on the assessment of the transparency and reliability of the inputs used in the valuation of such items at the measurement date based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(level(Level 1 measurements) and the lowest priority to unobservable inputs
(level(Level 3 measurements).
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Quoted prices in markets that are not active and financial instruments for which all significant inputs are observable, either directly or indirectly
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable
As indicateddescribed in Note 3, we have recently acquired the business of GenePOC Inc.in fiscal 2019. The fair value of the acquired accounts receivable and other current assets and the fair value of the assumed accounts payable and accrued expenses approximated their carrying value at the acquisition date. Inventories, property, plant and equipment, intangible assets and contingent consideration were valued using Level 3 inputs.
The following table provides information by level for financial assets and liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |
| | | | | | | | | | | | |
Interest rate swaps (see Note 9) - | | | | | | | | | | | | | | | | |
| | | | ) | | $ | | | | $ | | ) | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Contingent consideration - | | | | | | | | | | | | | | | | |
| | $ | | ) | | $ | | | | $ | | | | $ | | ) |
| | $ | | ) | | $ | | | | $ | | | | $ | | ) |
In connection with the acquisition of the business of GenePOC and as described in Note 3, the Company is required to make contingent consideration payments of up to $70,000, comprised of up to $20,000 for achievement of product development milestones and up to $50,000 for achievement of certain financial targets. The fair value for the contingent payments recognized upon the acquisition as part of the purchase accounting opening balance sheet totaled $27,202. The fair value of thedevelopment milestone payments was estimated by disco
unting the probability-weighted contingent payments to present value. Assumptions used in the calculations include probability of success, duration of theearn-out
and discount rate. The fair value of the financial performance target payments was determined using a Monte Carlo simulation-based model. Assumptions used in these calculations include expected revenue, probability of certain developments, expected expenses and discount rate. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. The liability is considered to be a Level 3 financial liability that isre-measured
each reporting period, resulting in a value of $25,898 as of March 31, 2020. Recent Accounting Pronouncements –
In February 2016,
| Recent Accounting Pronouncements – |
On October 1, 2019, the
FASB issued ASU 2016-02,Company adopted ASC 842,Leases
, which amends the accounting guidance related to leases. These changes, which are designed . ASC 842 was issued to increase transparency and comparability among
organizations for both lesseesentities by recognizingright-of-use
assets (“ROU assets”) and
lessors, include, among other things, requiring recognition of lease
assets and liabilities on the balance sheet and disclosing key information about
leasinglease arrangements.
AdoptionThe Company elected to adopt ASC 842 effective October 1, 2019 using the modified retrospective transition method, which was applied to leases that existed or will be entered into on or after such date, with no adjustment made to prior comparative periods. The comparative periods presented herein reflect the former lease accounting guidance and
implementationthe required comparative disclosures are included in Note 7,. There was no cumulative-effect adjustment to beginning retained earnings as a result of adopting ASC 842, and additional operating lease ROU assets and obligations of approximately $5,880 were recognized as of October 1, 2019. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term. The Company elected the package of practical expedients permitted under the new guidance to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior to October 1, 2019. Additionally, the elections were made to not use hindsight to determine lease terms and to not separatenon-lease
components within the lease portfolio. See Note 7 for further information. Pronouncements Issued but Not Yet Adopted as of March 31, 2020
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
, to provide temporary optional guidance relating to reference rate reform, particularly as it relates to easing the potential burden resulting from the expected discontinuation of the LIBOR rate. The guidance provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met, which may be applied through December 31, 2022. The Company plans to apply this guidance to such transactions and modifications of arrangements but does not expect application to have a material impact on financial condition, results of operations or cash flows. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments
, which changes the impairment model used to measure credit losses for most financial assets. We will be required to use a new forward-looking expected credit loss model that will replace the existing incurred credit loss model for our accounts receivables. The guidance is not required byeffective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years (fiscal 2021 for the Company until the beginning of fiscal 2020, althoughCompany), with early adoption is permitted. DuringThe Company does not anticipate that the third quarter of fiscal 2019, the Company continued the process of gathering and summarizing its corporate-wide lease information in order to assess the impact that adoption of this guidance will have a material impact on its consolidated financial statements.
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. The Company adopted this guidance in the first quarter of fiscal 2019, with the Condensed Consolidated Statements of Cash Flows reflecting such adoption, including the information related to restricted cash.In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, to address certain of the recent U.S. federal income tax legislation’s impact on Accumulated Other Comprehensive Income (“AOCI”). The guidance specifically provides the option of reclassifying “stranded tax effects” related to the tax legislation from AOCI to retained earnings. Adoption and implementation of the optional guidance is not effective for the Company until the beginning of fiscal 2020, although early adoption is permitted. The Company elected to adopt this guidance in the third quarter of fiscal 2019. An election was made to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings, and an entry was made to increase AOCI and decrease retained earnings by $148
. The Company’s accounting policy is to release the income tax effects in other comprehensive income as financial amounts are removed.Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Such reclassifications had no impact on net earnings or shareholders’ equity.
| Acquisition of Business of GenePOC |
On June 3, 2019, we acquired the business of GenePOC Inc. (“GenePOC”), a Quebec City, Quebec Province, Canada based provider of molecular diagnostic instruments and assays
.assays. The purchase agreement contemplates a
maximum total consideration of up to $120,000, which based upon the current preliminary valuation iswas estimated at a total
fair value
of approximately $77,502.$77,526 as of the acquisition date. Pursuant to the purchase agreement, the maximum
consideration is comprised of the following (noting that the
current preliminary valuation
values set
the contingent consideration identified in (ii) and (iii) below at an aggregate amount of
approximately $27,200) $27,202 as of the acquisition date):
| (i) | a $50,000 cash payment on June 3, 2019, subject to a working capital adjustment and a holdback of $5,000 to secure selling party’s performance of certain post-closing obligations; |
| (ii) | two $10,000 installments contingent upon the achievement of certain product development milestones if achieved by September 30, 2020 and March 31, 2021, respectively; and |
| (iii) | up to $50,000 of contingent consideration payable if certain financial performance targets are achieved during the twelve-month period ending September 30, 2022. |
The total of the holdback identified in (i) above and the currently estimated value of the contingent consideration identified in (ii) and (iii) above are reflected as acquisition consideration within the non-current liabilities section of the accompanying Condensed Consolidated Balance Sheets.
Sheets as of March 31, 2020 as follows:Reflects anticipated settlement of the first product milestone payment and the holdback amounts in the first quarter of fiscal 2021.
Non-current liabilities
-
$17,242Reflects anticipated settlement of the second product milestone payment and the financial performance targets payments in the third quarter of fiscal 2021 and first quarter of fiscal 2023, respectively.
To finance the acquisition,
was made utilizingwe utilized cash and equivalents on hand and proceeds drawn from our
new $125,000 revolving credit facility
which replaced our previous;
see Note 9 for a discussion of subsequent amendments to the credit facility. Proceeds from the
new credit facility were also utilized to repay and settle the outstanding principal and interest due on our term loan (see Note 9). As a result of
currently estimated total consideration exceeding the
preliminary fair value of the net assets acquired, goodwill in the amount
of $34,482$34,582 was
recorded in connection with this acquisition,
most of
which pending certain tax planning,
is expected towill be deductible for U.S. tax purposes ratably over 15 years.
The
goodwill results largely from
Meridian’s our ability to market and sell
GenePOC’s
technology
and
instrument platform through
itsour established customer base and distribution
channels. Our Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2019 include $473 and $1,445, respectively, of acquisition-related costs related to the acquisition of the GenePOC business, which are reflected as Operating Expenses.channels.
Most of these costs relate to professional fees for attorneys, tax advisors and regulatory advisors during due diligence and the preparation and negotiation of acquisition agreements.The Company’s consolidated results for both the three and nine months ended June 30, 2019 include
$15
ofnet revenues and
$599
ofnet loss
from theGenePOC
business sincethe date of acquisition. These results, which are reported as part of the Diagnostics segment, include $291 of amortization of specific identifiable assets recorded in the opening balance sheet, including a license agreement, technology and a government grant.
Preliminary Purchase Price Allocation
The recognized preliminary amounts of identifiable assets acquired and liabilities assumed in the acquisition of
the GenePOC business
are as follows:
| | | | | | | | | | |
| | | | | | | | Measurement Period Adjustments | | | | |
Fair value of assets acquired - | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
Property, plant and equipment | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
Other intangible assets (estimated useful life): | | | | | | | | | | | | | | | | |
License agreement (10 years) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Government grant (1.33 years) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Fair value of liabilities assumed - | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
Total consideration (including contingent consideration currently estimated at $27,200) | | $ | | | |
Total consideration paid (including contingent consideration originally estimated at $27,202) | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
The allocation of the purchase price and estimated useful lives of property, plant and equipment, and intangible assets shown above are preliminary and subject to adjustments to goodwill within the permitted measurement period.
The following table provides the unaudited consolidated pro forma results for the periods presented as if the business of GenePOC had been acquired as of the beginning of fiscal 2018.2019. Pro forma results do not include the effect of any synergies anticipated to be achieved from the acquisition, and accordingly, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated or that may result in the future.
Page 12These pro forma amounts have been calculated by including the results of GenePOC, and adjusting the combined results to give effect to the following, as if the acquisition had been consummated on October 1, 2018, together with the consequential tax effects thereon:
| | | | | | | | |
| | | | | | |
Adjustments to Net Revenues | | | | | | | | |
GenePOC pre-acquisition revenues | | $ | | | | $ | | |
Adjustments to Net Earnings | | | | | | | | |
GenePOC pre-acquisition net loss | | $ | | ) | | $ | | ) |
| | | | | | | | |
Expenses related to non-continuing personnel, locations or activities | | | | | | | | |
Incremental depreciation and amortization | | | | ) | | | | ) |
Incremental interest costs | | | | ) | | | | ) |
Tax effects of pro forma adjustments | | | | | | | | |
| | | | | | | | |
Total Adjustments to Net Earnings | | $ | | ) | | $ | | ) |
| | | | | | | | |
The following table identifies the adjustments made to historical Meridian results to arrive at the pro forma results set forth above. These adjustments include: (i) GenePOC pre-acquisition results; and (ii) pro forma adjustments:
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Adjustments to Net Revenues | | | | | | | | | | | | | | | | |
GenePOC pre-acquisition revenues | | $ | 65 | | | $ | 34 | | | $ | 208 | | | $ | 113 | |
| | | | | | | | | | | | | | | | |
Adjustments to Net Earnings | | | | | | | | | | | | | | | | |
GenePOC pre-acquisition net loss | | $ | (3,263 | ) | | $ | (3,838 | ) | | $ | (9,578 | ) | | $ | (9,834 | ) |
Pro forma adjustments: | | | | | | | | | | | | | | | | |
Meridian acquisition-related costs | | | 473 | | | | — | | | | 1,445 | | | | — | |
GenePOC transaction-related costs | | | 1,245 | | | | — | | | | 1,245 | | | | — | |
Expenses related to non-continuing personnel, locations or activities | | | 385 | | | | 659 | | | | 1,576 | | | | 1,982 | |
Incremental depreciation and amortization | | | (585 | ) | | | (878 | ) | | | (2,341 | ) | | | (2,638 | ) |
Incremental interest costs | | | (123 | ) | | | (211 | ) | | | (546 | ) | | | (634 | ) |
Tax effects of pro forma adjustments | | | (82 | ) | | | 48 | | | | (211 | ) | | | 148 | |
| | | | | | | | | | | | | | | | |
Total Adjustments to Net Earnings | | $ | (1,950 | ) | | $ | (4,220 | ) | | $ | (8,410 | ) | | $ | (10,976 | ) |
| Cash and EquivalentsRestructuring |
Cash and equivalents include the following components:
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Institutional money market funds | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
Inventories are comprised of the following:
| | | | | | | | |
| | | | | | |
|
| | $ | | | | $ | | |
| | | | | | | | |
Finished goods - instruments | | | | | | | | |
Finished goods - kits and reagents | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
A summary of our acquired intangible assets subject to amortization, as of June 30, 2019 and September 30, 2018, including the assets added in the GenePOC transaction (see Note 3) is as follows:
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Manufacturing technologies, core products and cell lines | | $ | | | | $ | | | | $ | | | | $ | | |
Trade names, licenses and patents | | | | | | | | | | | | | | | | |
Customer lists, customer relationships and supply agreements | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
The actual aggregate amortization expense for these intangible assets was $1,120 and $849 for the three months ended June 30, 2019 and 2018, respectively, and $2,778 and $2,732 for the nine months ended June 30, 2019 and 2018, respectively. The estimated aggregate amortization expense for these intangible assets for each of the fiscal years through fiscal 2024 is as follows: remainder of fiscal 2019 – $1,715, fiscal 2020 – $6,701, fiscal 2021 – $5,489, fiscal 2022 – $5,111, fiscal 2023 – $5,099, and fiscal 2024 – $5,094.
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, a planteam. Since that has continued to be refined through the third quarter of fiscal 2019. Astime and as part of this plan, certain functions and locations within both business units werehave 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 our 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. Further restructuring costs were incurred in fiscal 2019 and the first half of fiscal 2020, as refinements to each business unit’s cost structure continued to be made and the Company incurred severance payment obligations relating to the transition of its previous chief financial officer.
As a result of these activities, restructuring costs totaling
$252$2,839 were
recorded during the three and six months ended March 31, 2020 and the fiscal year ended September 30, 2018,2019, respectively.
A reconciliation of the changes in the liabilities associated with an additional $1,801 recorded duringthe restructuring charges from September 30, 2019 through March 31, 2020 is as follows:
| | | | | | | | | | | | | | | | |
| | Employee Separation and Related Costs | | | Lease and Other Contract Termination Fees | | | | | | | |
Balance at September 30, 2019 | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
Reversal of prior period accruals | | | | ) | | | | | | | | | | | | ) |
| | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
Cash and equivalents include the following:
| | | | | | | | |
| | | | | | |
|
Institutional money market funds | | $ | | | | $ | | |
Cash on hand, unrestricted | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
Inventories are comprised of the following:
| | | | | | | | |
| | | | | | |
|
| | $ | | | | $ | | |
| | | | | | | | |
Finished goods - instruments | | | | | | | | |
Finished goods - kits and reagents | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
The Company is party to a number of operating leases, the majority of which are related to office, warehouse and manufacturing space. The related operating lease assets and obligations are reflected withinright-of-use
assets, current operating lease obligations and long-term operating lease obligations on the Condensed Consolidated Balance Sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. Our Condensed ConsolidatedOperations for the three
and nine month periodsmonths ended
June 30, 2019.March 31, 2020 reflect lease costs for these operating leasesof
$
130and $
292within cost of sales and
Approximately $270operating expenses, respectively
; and $20
$259 and $559 within cost of
accrued restructuring costs was reversed duringsales and operating expenses, respectively, for the
fiscal quarterssix months ended March 31,
20192020. In addition, the Company has periodically entered into other short-term operating leases, generally with an initial term of twelve months or less. These leases are not recorded on the balance sheet and June 30, 2019, respectively, andthe related lease expense is reflected as a reduction of the Restructuring Costs within the Condensed Consolidated Statements of Operationsimmaterial for the three and ninesix months ended June 30, 2019. A summary of the accrued liability associatedMarch 31, 2020.
The Company often has options to renew lease terms, with the
restructuring costsexercise of lease renewal options generally at the Company’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion. We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for our operating leases as of
JuneMarch 31, 2020w
as 4.4 years.
The discount rate implicit within our leases is generally not determinable and, therefore, the Company determines the discount rateusing
its incremental borrowing rate. The weighted average discount rate used to measure our operating leases as of March 31, 2020 was 3.7%.
Supplemental cash flow information related to the Company’s operating leases are as follows:
| | | | | | | | | | | | | | | | |
| | Three Months | | | Six Months | |
| | | | | | |
| | | | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | | | | | |
Operating cash flows from operating leases | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
Maturities of lease liabilities by fiscal year for the Company’s operating lease liabilities were as follows as of March 31, 2020:
| | | | |
| | | |
|
| | $ | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Less amount of lease payment representing interest | | | | ) |
| | | | |
Total present value of lease payments | | $ | | |
| | | | |
As of September 30, 2019, and September 30, 2018, isfuture minimum lease payments under noncancelable operating leases were as follows:
| | | | | | | | |
| | | | | | |
|
Severance, other termination benefits and related costs | | $ | | | | $ | | |
Lease and other contract termination fees | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “tax reform act”).
In
applying the tax reform act during the three months ended December 31, 2017, we followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), regarding the application of ASC Topic 740,Income Taxes
, in situations where a company does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effectslight of the
tax reform act for economic impacts ofCOVID-19,
the
reporting periodCompany performed a review of the assets on our consolidated balance sheet as of March 31, 2020, including goodwill, intangible and other long-lived assets. Based on our review, we do not believe that a triggering event exists at this time and, therefore, we believe that we will be able to realize the full value of our assets. As such, no impairments or other write-downs related toCOVID-19
have been recorded during fiscal 2020. Our assessment was based on information currently available and relies on various assumptions based on estimates of future cash flows and the probability of achieving the estimated cash flows. Future changes in
which the tax reform act was enacted. SAB 118 provides for a measurement period beginningmarket, economic or other conditions may lead to impairments in the
reporting period that includes the tax reform act’s enactment datefuture.A summary of our acquired intangible assets subject to amortization, as of March 31, 2020 and ending when a company has obtained, preparedSeptember 30, 2019, is as follows:
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Manufacturing technologies, core products and cell lines | | $ | | | | $ | | | | $ | | | | $ | | |
Trade names, licenses and patents | | | | | | | | | | | | | | | | |
Customer lists, customer relationships and supply agreements | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
The actual aggregate amortization expense for these intangible assets was $1,727 and analyzed the information needed in order to complete the accounting requirements, but in no circumstances should the measurement period extend beyond one year from the enactment date.
As a result, our financial statements$829 for the three months ended DecemberMarch 31, 2017 reflected the effects of the tax reform act as provisional based on a reasonable estimate of the income tax effects2020 and included a provisional noncurrent income tax payable in the amount of $854 related to the repatriation transition tax. Subsequent to the quarter ended December 31, 20172019, respectively, and prior to September 30, 2018, we completed the accounting$3,449 and $1,658 for the effects of the tax reform act. As a result, our repatriation transition tax liability was increased to $876, which is reflected as follows in the accompanying Condensed Consolidated Balance as of June 30, 2019, after our having paid the amount estimated for fiscal 2018: $65 of current income taxes payable and $736 long-term income taxes payable.
In addition, we recorded a one-time tax benefit of $2,347 during the ninesix months ended June 30, 2018 resulting from the tax reform act, including an adjustment from the re-measurement of deferred taxMarch 31, 2020 and 2019, respectively. The estimated aggregate amortization expense for these intangible assets and liabilities. Of this adjustment, $1,695 was recorded during first quarter of fiscal 2018 and $652 was recorded during the third quarter, reflecting adjustments from finalizationfor each of the fiscal 2017 federal tax return. This re-measurement included an estimateyears through fiscal 2025 is as follows: remainder of the temporary differences expected to be realized during fiscal 2018 at a transitional blended rate of 24.5%. The remaining temporary differences were re-measured at the fully phased-in rate of 21%.2020 – $3,306, fiscal 2021 – $5,490, fiscal 2022 – $5,113, fiscal 2023 – $5,100, fiscal 2024 – $5,096, and fiscal 2025 – $5,096.
In anticipation of the acquisition
of GenePOC (see Note
the Company entered into a credit facility agreement with a commercial bank.bank
. The Company amended the credit facility agreement
on February 19, 2020 in anticipation of the Company’s pending acquisition of Exalenz Bioscience Ltd. (see Note 12). The credit facility
which expires in May 2024,
and as amended makes available to the Company a revolving credit facility in an aggregate principal amount not
to exceed $125,000,
160,000
(originally $125,000), with outstanding principal amounts
bearing interest at a fluctuating rate tied to, at the Company’s option, either the federal funds rate or LIBOR. AsLIBOR, resulting in an effective
interest rate of
June 4.15%, we have made two drawsand 4.04% on the credit facility during the three and six months ended March 31, 2020, respectively.
Since entering into the credit facility through March 31, 2020
$75,824 have been made on the credit facility, with a January 2020 principal repayment resulting in an outstanding principal balance of $75,824.$48,824 at March 31, 2020
(see Note 12 for activity subsequent to quarter-end)
. The proceeds from these draws
used
toto: (i) repay and settle the outstanding principal and interest due on our
previously-existingpreviously existing $60,000 five-year term
loanloan; and
(ii) along with cash
on-hand,
fund the GenePOC acquisition closing payment. In light of the
recent execution date of the credit facility and interest being determined on a variable rate basis, the fair value of the borrowings under the credit facility at
June March
31, 2020 approximates the current carrying value reflected in the accompanying Condensed Consolidated Balance Sheet.Sheet
.
The revolving credit facility is collateralized by the business assets of the Company’s U.S. subsidiaries and requires compliance with financial covenants that limit the amount of debt obligations and require a minimum level of coverage of fixed charges, as defined in the credit facility agreement. As of June
,March 31, 2020, the Company is in compliance with all covenants.
In order to limit exposure to volatility in the LIBOR interest rate, during March 2020 the Company and the commercial bank entered into two interest rate swap agreements that will effectively convert the variable interest rate on $25,000 of the outstanding principal to a fixed rate of 2.31%(
at the current credit spread)
beginning May 24, 2020, the effective date of the swap agreements. With an initial notional balance of $25,000, the interest rate swap agreements were established with critical terms identical to borrowings under the credit facility, including: (i) one-month
LIBOR settlement rates, as to be elected by the Company throughout the remaining term of the credit facility; (ii) rate reset dates; and (iii) term/maturity. Consequently
, the interest rate swaps have been designated as effective cash flow hedges, with changes in fair
values
reflected as a separate component of other comprehensive income in the accompanying Condensed Consolidated Statements of Comprehensive Income. At March 31, 2020, the fair value of the interest rate swaps
was reported as
a liability of $313, which is reflected as anon-current
liability in the accompanying Condensed Consolidated Balance Sheet. This fair value was determined by information provided by the counterparty and is considered a Level 2 input within the fair value hierarchy of valuation techniques. In connection with the Company’s term loan repayment in May 2019, the Company also settled the interest rate swap that had been entered into to limit exposure to volatility in the term loan’s LIBOR interest rate. At the time of settlement, the Company received a cash payment in an amount equal to the
$563
then-current fair value of the interest rate
swap
.swap. Accordingly, there is no
balance for thethis interest rate swap reflected within assets or liabilities within the accompanying Condensed Consolidated Balance SheetSheets as of June
2019
tMarch 31, 2020 or September
2018
, there was an asset balance of $1,722 related to
the
interest rate swap. 2019. The
c
orresponding fair value
amountof the swap that had been reflected within a separate component of other comprehensive income in the accompanying
Condensed Consolidated Statements of Comprehensive Income, as a result of the interest rate swap having been designated as an effective cash flow hedge,
will beis being released ratably into income through March
31,
,
2021,
, the interest rate swap’s original term.
The
balance reflected within accumulated other comprehensive income related to the interest rate swap
balance reflected within other comprehensive incomeagreements associated with both the current credit facility and the former term loan totaled ($6)
and $461 at
June 30
,
2019
March 31, 2020 and September 30, 2019, respectively.
30
,
2018
totaled $538 and $1,722, respectively.
10. | Reportable Segments and Major Customers Information |
Meridian was formed in 1976 and functions as a fully-integrated life science company with principal businesses in: (i) the development, manufacture, sale and distribution of diagnostic test kits, primarily for certain gastrointestinal and respiratory infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells, and bioresearch reagents used by researchers and other diagnostic manufacturers.
Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease products in Cincinnati, Ohio
and Quebec City, Canada,
, manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston), and the sale and distribution of diagnostics products domestically and abroad. This segment’s products are used by hospitals, reference labs and physician offices to detect infectious diseases and elevated lead levels in blood.
The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; and Luckenwalde, Germany, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides,
competent cells, and bioresearch reagents domestically and abroad, including a sales and business development facility in Beijing, China to further pursue revenue opportunities in Asia. This segment’s products are used by manufacturers and researchers in a variety of applications (e.g.,
in-vitro
medical device manufacturing, microRNA detection,
next-gen
sequencing, plant genotyping, and mutation detection, among others).
Amounts due from
two
2 Diagnostics distributor customers accounted for
11% and 12%13% of consolidated accounts receivable at
June 30, 2019both
March 31, 2020 and September 30,
2018, respectively.2019. Revenues from these
two
2 distributor customers accounted for
18%23% and
28%25% of the Diagnostics segment third-party revenues during the three months ended
June 30,March 31, 2020 and 2019,
and 2018, respectively, and
26% 25% and 29%
30% during the
nine six-
month periods ended
June 30,March 31, 2020 and 2019
and 2018, respectively., respectively
. These distributors represented
12%14% and
19%17% of consolidated revenues for the fiscal
2020 and 2019
and 2018 thirdsecond quarters, respectively, and
18% 17% and
21% for the
fiscal 2019 and fiscal 2018respectiveyear-to-date
nine six-
month
periods, respectively.periods.Within our Life Science segment, two diagnostic manufacturing customers accounted for
22% 17% and
17% 27% of the segment’s third-party revenues during the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and
25% 16% and
18% 27% during the ninesix months ended June 30,March 31, 2020 and 2019, and 2018, respectively.
Segment information for the interim periods is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Diagnostics | | | Life Science | | | | | | | | | Total | |
Three Months Ended March 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
Goodwill (March 31, 2020) | | | | | | | | | | | | | | | | | | | | |
Other intangible assets, net (March 31, 2020) | | | | | | | | | | | | | | | | | | | | |
Total assets (March 31, 2020) | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2019 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
Goodwill (September 30, 2019) | | | | | | | | | | | | | | | | | | | | |
Other intangible assets, net (September 30, 2019) | | | | | | | | | | | | | | | | | | | | |
Total assets (September 30, 2019) | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended March 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended March 31, 2019 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Other intangible assets, net (June 30, 2019) | | | | | | | | | | | | | | | | | | | | |
Total assets (June 30, 2019) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2018 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
Goodwill (September 30, 2018) | | | | | | | | | | | | | | | | | | | | |
Other intangible assets, net (September 30, 2018) | | | | | | | | | | | | | | | | | | | | |
Total assets (September 30, 2018) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended June 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Net revenues - | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended June 30, 2018 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | | | | | |
(1) | Includes Restructuring Costs and LitigationSelected Legal Costs of $1,080$685 and $1,832$603 inthe three months ended June 30,March 31, 2020 and 2019, respectively, and $1,055 and 2018, respectively, and $2,272 and $6,028$1,192 in the ninesix months ended June 30,March 31, 2020 and 2019, and 2018, respectively. |
(2) | Eliminations consist of inter-segment transactions. |
A reconciliation of segment operating income to consolidated earnings before income taxes for the three
and six months ended March 31, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months | | | Six Months | |
| | Ended March 31, | | | Ended March 31, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Corporate operating expenses | | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | |
Consolidated earnings before income taxes | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
Transactions between segments are accounted for at established intercompany prices for internal and management purposes, with all intercompany amounts eliminated in consolidation.
On November 15, 2017, Barbara Forman filed a class action complaint in the United States District Court for the Southern District of Ohio
(the Court) naming Meridian, its
former Chief Executive Officer and
former 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 andOn July 9, 2019, a settlement was reached with the
amended complaint are hereafter referred to asplaintiff that provides for a $2,100 payment by the
“Complaint”. The Complaint seeks compensatory damages and attorneys’ fees.Company. On February 13,October 9, 2019, the Court granted Meridian’sa motion to dismissfor preliminary approval of the settlement, and dismissedon November 7, 2019, the Complaint in its entirety. Plaintiff filedsettlement amount was paid from the Company’s directors and officers insurance policy into a Motion to Reconsider, Set Aside, Alter, Amend, or Vacate the Judgment of dismissalplaintiff escrow account.
After
a final approval hearingon
March 2020, on March 13, 2019. Meridian opposed the Plaintiff’s motion on April 3, 2019 and the Plaintiff filed a reply on April 17, 2019.
On May 20, 2019,2020, the Court
granted Plaintiffs’ motion. On June 24, 2019, the parties submitted a joint motion advising the Court that the parties had reached a tentative agreement to resolve the matterissued an order and
were seeking an extension of all deadlines and a stay pending finalization ofjudgment approving the settlement
.
documents. We expectBecause the settlement
to be fully funded bywas a covered claim under our directors and officers insurance
and accordingly,policy, no provision for litigation losses has been included within either of the accompanying Condensed Consolidated Statements of Operations for the three and ninesix months ended June 30, 2019March 31, 2020 or June 30, 2018.March 31, 2019.
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
former Chief Executive Officer,
former 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
seekssought compensatory damages, equitable relief relating to corporate governance matters and attorneys’ fees.
The case was stayed by agreement ofOn October 9, 2019, the
parties pending resolution of theCourt granted plaintiff’s motion
to dismiss the class action described above. The motion to dismiss the class action was resolved as noted above and no action has been taken to reinstate the derivative action. The parties are currently negotiating a possible resolution of this litigation but no settlement has been reached. We are unable to determine or predict the ultimate outcome or estimate the range of possible losses, if any. for voluntary dismissal.Accordingly, no provision for litigation losses has been included within either of the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2019 or June 30, 2018.
Approximately $10 and $50 of expense for attorneys’ fees related to the above two class action matters is included within the accompanying Condensed Consolidated Statements of Operations for the three and ninesix months ended June 30, 2019, respectively, with approximately $85 and $630 of related expense being reflected within the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2018, respectively. The Company maintains an insurance policy covering these matters, which has a $500 deductible.March 31, 2020 or March 31, 2019.
On April 17, 2018,
Meridian’s wholly-owned subsidiary, Magellan
Diagnostics, Inc. received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and the Company is cooperating with the DOJ in this matter. The Company maintains rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements, and is working with the DOJ to promptly respond to the subpoena, including responding to additional information
requests and executing a requests. The Company has executedmultiple
tolling
agreementagreements to extend the statute of limitations.
However, theThe Company cannot predict when the investigation will be resolved, the outcome of the investigation, or its potential impact on the Company. Approximately
$170$725 and
$1,270$560 of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated Statements of Operations for the three
and nine months ended
June 30,March 31, 2020
and March 31
, 2019 respectively, with
, respectively; approximately $270 of related expense being reflected within$1,005
and $1,100
for the accompanying Condensed Consolidated Statements of Operations for both the three and ninesix months ended June 30, 2018.March 31
, 2020
and March 31
, 2019
, respectively.
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 terminationTable of all pending legal disputes between the two parties and will expand the previous agreement between DiaSorin and Meridian, which focused on the sale, by DiaSorin, of co-developed products in major countries in continental Europe. Approximately $0 and $50 of expense for attorneys’ fees related to this matter is included within the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2019, respectively, and approximately $815 and $2,470 of related expense is included within the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2018, respectively.Contents12. | FDA Matters Related to LeadCare |
As previously disclosed, on June 29, 2017, the FDA, in connection with its Safety Notification related to Magellan’s LeadCare testing systems for venous blood samples, issued to Magellan its Form 483, Inspectional Observations. The FDA issued a related Warning Letter on October 23, 2017. As also previously disclosed, on April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we continue to cooperate with the DOJ in this matter, including responding to additional information requests and executing a tolling agreement to extend the statute of limitations.
Page 18On April 30
, 2020, the Company acquiredall of the outstanding capital stock of
Magellan submitted 510(k) applicationsa urea breath diagnostic testing platform headquartered in
December 2018, seeking to reinstate venous blood sample-typesModi’in, Israel, for
its LeadCare®
II, LeadCare®
Plus™
and LeadCare Ultra®
testing systems. In the second fiscal quarter of 2019 the FDA informed Magellan that each of these 510(k) applications has been put on Additional Information hold. On July 15, 2019, we provided responses to FDA’s requests for Additional Information. The timing and outcome of FDA’s further review of these 510(k)s is not clear. Further, while Magellan’s LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of Magellan’s LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by FDA or the Centers for Disease Control and Prevention is necessary to protect the public health. Meridian intends to fully cooperate with the FDA as FDA completes its third-party study and continues to work to complete remediation actions at Magellan’s blood–chemistry manufacturing facility to the FDA’s full and complete satisfaction.While we remain confident in the performance of the Magellan LeadCare testing systems, there can be no assurance that FDA will allow us to reinstate use of our LeadCare testing systems with venous blood samples, or that the ongoing investigation and study of the DOJ and FDA, respectively, or future exercise of their respective enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, settlements or changes to our business practices, product offerings or operations that could have a material adverse effect on our business, financial condition or results of operations; or eliminate altogether our ability to operate our lead testing business, or on terms substantially similar to those on which we currently operate.
in cash. In addition, the Company paid approximately $8,000 in cash for Exalenz to repay two bank loans
. During 2019, Exalenz generated approximately $14,000 of revenue from sales of its BreathID®
Breath Test Systems. This purchase will be included in our Diagnostics operating segment and accounted for as a business combination. In connection with the merger consideration for the acquisition and repayment of the Exalenz bank loans, the Company executed two forward contracts with a total notional amount of 187,000 New Israeli Shekels, both of which settled on April 20, 2020
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Refer to “Forward-Looking Statements” following the Table of Contents in front of this Form
10-Q.
In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data.
FollowingThe purpose of Management’s Discussion and Analysis is a discussion and analysis of the financial statements and other statistical data that management believes will enhance theto provide an understanding of Meridian’s financial condition, changes in financial condition and results of operations. Unless otherwise noted, increases or decreases are measured over the corresponding period of the prior fiscal year. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.notes.
QUARTERLY HIGHLIGHTSImpact ofCOVID-19
PandemicIn December 2019, the SARS-CoV-2 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designatedCOVID-19
(the disease caused by SARS-CoV-2) a global pandemic. Governments have implemented lockdown andshelter-in-place
orders, requiring manynon-essential
businesses to shut down operations for the time being. Our business, however, is deemed “essential” and has continued to operate and manufacture and distribute products to customers globally. We have developed a comprehensive plan that enables us to maintain operational continuity with an emphasis on manufacturing, product distribution and new product development during this crisis. We continually assessCOVID-19
related developments and adjust risk mitigation planning and business continuity activities as needed. Inmid-March
2020, we instituted a work from home process for employees whose on-site presence is designated asnon-essential
to the ongoing function of our manufacturing site, distribution centers, and new product development facilities. We have implemented enhanced cleaning and sanitizing procedures, and provided additional personal hygiene supplies at all of our sites. We have implemented policies for employees to adhere to the Centers for Disease Control and Prevention (“CDC”) guidelines on social distancing and any employees experiencing any symptoms ofCOVID-19
are required to stay home and seek medical attention. Any employee who tests positive forCOVID-19
is required to quarantine and is not allowed to return to our facilities without a physician’s release. We have closed our facilities to outside persons who are not critical to continuing our operations. To date, we have been able to manufacture and distribute products globally, and our sites continue to operate without interruption. As the pandemic continues to spread over time, there is an increased risk of employee absenteeism, which could materially impact our operations at one or more sites. To date, our work from home processes have not materially impacted the Company’s financial reporting systems, internal controls over financial reporting or disclosure controls. Currently and as anticipated for the near future, our supply chains supporting our products remain intact, providing access to sufficient inventory of the key materials needed for manufacturing. To date, delays and allocations for certain raw materials of higher demand have been limited, and have not had a material impact on our results of operations. We are regularly communicating with our suppliers, third-party partners, customers, health care providers
and government officials in order to respond rapidly to issues as they arise. The thirdlonger the current situation continues, it is more likely that we may experience some sort of interruption to our supply chains, and such an interruption could materially affect our ability to timely manufacture and distribute our products and unfavorably impact our results of operations.
As a result of the pandemic, certain clinical trials which were underway or scheduled to begin have been temporarily placed on hold. Such delays will impact our timing for filing applications for product clearances with the FDA, as well as related timing of FDA clearances of such filings. Additionally, the pandemic could slow down our efforts to expand our product portfolio through acquisitions and distribution opportunities, impacting the speed with which we are able to bring additional products to market.
Our Life Science segment manufactures, markets and sells a number of immunoassay and molecular reagents to IVD customers, including those who are making both molecular and immunoassayCOVID-19
tests. During our second quarter of fiscal
2019 was highlighted2020, we began seeing unprecedented demand for certain of our molecular reagents (e.g., ribonucleic acid (“RNA”) master mixes and nucleotides), and such demand has continued into our third fiscal quarter. Although we are unable to predict when this demand may subside, we expect materially higher revenue levels for these products during the next three to six months. These products are currently being used by
over 35 IVD companies around the
two following major developments (each referencingworld in the
related footnotedevelopment ofCOVID-19
molecular tests. In addition, during April we announced the launch of several recombinant antigens critical for the development of antibody tests forCOVID-19.
Based upon the launch of these immunological reagent products and the strong demand for molecular reagent products noted above, we are currently expecting third quarter Life Science revenues of at least double that of normal quarterly levels. Our Diagnostics segment manufactures, markets and sells a number of molecular, immunoassay and blood chemistry assays for various infectious diseases and blood-lead levels. We expect near-term sales volumes for a number of these assays to be adversely affected by theCOVID-19
pandemic as such assays are often used innon-critical
care settings. In addition, theCOVID-19
pandemic has greatly slowed our instrument placements as diagnostic testing sites have turned their attention to critical care testing. During the month of April, our weekly shipments of Diagnostic products were approximately 50% of expected volume levels. Given the nature of our diagnostic assays (i.e., infectious disease and blood-lead), we expect to return to expected sales volume levels within
three to six months assuming shelter in place orders relax and health care facilities return to normal,pre-pandemic
operations in the
accompanying Condensed Consolidated Financial Statements):near term. However, no assurances can be made in this regard. Completed on June 3, 2019 the previously announced acquisitionIn light of the
businesseconomic impacts of
GenePOC, Inc.COVID-19,
the Company performed a review of
Quebec City, Quebec, Canada,the assets on our consolidated balance sheet as of March 31, 2020, including
intangible and other long-lived assets. Based on our review, we do not believe that a triggering event exists at this time and, therefore, we believe that we will be able to realize the full value of our assets. As such, no impairments or other write-downs related toCOVID-19
were recorded during fiscal 2020. Our assessment was based on information currently available and relies on various assumptions based on estimates of future cash flows and the probability of achieving the estimated cash flows. Future changes in market, economic or other conditions may lead to future impairments.As of March 31, 2020, the Company’s outstanding debt balance on its
revogene™
molecular diagnostics platform, for a currently-estimated total purchase price of approximately $77,502 (see Note 3,“Acquisition of Business of GenePOC”
). GenePOC currently has fourFDA-cleared
assays for, Group A, Group Band Carbapenemase. Entered into arevolving credit facility
agreement with a commercial bankwas $48,824. The impacts ofCOVID-19
have adversely affected the capital markets and the ability of many companies to access capital and liquidity on
May 24, 2019, which makes availablefavorable terms or at all. The Company believes it has sufficient liquidity and cash flows to
meet its operating and debt service requirements for at least the
Company anext twelve months. We drew $50,000 on our revolving credit facility in
an aggregate principal amount notApril to
exceed $125,000. Wecomplete the acquisition of Exalenz Bioscience Ltd. (“Exalenz”) described in Note 12, “of the accompanying condensed consolidated financial statements. The Company expects to be in compliance with its financial covenants during the same period. However, the Company is currently unable to predict the impact thatCOVID-19
will have
made two draws totaling $75,824on its ability to access capital in the future. If the Company is unable to access additional capital and liquidity on acceptable terms, it could adversely impact the Company’s results of operations and ability to meet its future obligations beyond the next twelve months.
Based on the
facility asforegoing, the Company cannot reasonably predict the extent of
June 30, 2019 (see Note 9,the impact ofCOVID-19
on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic. The“Bank Credit Arrangements”COVID-19
).situation is changing rapidly and future impacts may materialize that are not yet known.
Three and Six Months Ended June 30, 2019March 31, 2020
Net earnings for the
thirdsecond quarter of fiscal
2019 decreased 26%2020 increased 32% to
$5,079,$9,359, or
$0.12$0.22 per diluted share, from net earnings for the
thirdsecond quarter of fiscal
20182019 of
$6,825,$7,094, or
$0.16$0.17 per diluted share. For thesix-month
period ended March 31, 2020, net earnings were $12,186, or $0.28 per diluted share. The
level of net earnings in the second quarter (“QTD”) and first six months (“YTD”) of fiscal
2019 third quarter results include $2,452 of costs associated with acquisition and restructuring activities, and litigation costs, while2020 were affected by several factors, including most notably the
fiscal 2018 third quarter results include $2,081 of costs associated with restructuring activities and litigation costs, along with certainone-time
taxcombined effects of the
U.S. tax reform act enacted in December 2017. These items hadfollowing (amounts presented on a
combined impact on net earnings of $1,881, or $0.04 per diluted share, in the fiscal 2019 quarter and $897, or $0.02 per diluted share, in the fiscal 2018 quarter (see “USE OFNON-GAAPpre-tax
MEASURES” below). basis): | (i) | significantly higher revenue in the Life Science operating segment, due in large part to supplying key molecular components to diagnostic test manufacturers for use in COVID-19 related tests; |
| (ii) | higher research and development spending in the Diagnostics segment ($1,618 QTD; $2,731 YTD); |
| (iii) | increased cash-based incentive compensation ($2,045 QTD; $2,570 YTD); |
| (iv) | increased intangible asset amortization, primarily resulting from purchase accounting amortization related to the acquisition of the GenePOC business in June 2019 ($825 QTD; $1,715 YTD); |
| (v) | increased acquisition-related costs in connection with the fiscal 2020 Exalenz transaction, as compared to those related to the GenePOC transaction in fiscal 2019 ($902 QTD; $815 YTD); |
| (vi) | a decrease in the fair value of the earnout obligation for the acquisition of the GenePOC business ($2,491 QTD; $1,304 YTD); and |
| (vii) | significantly higher gains related to foreign currency, particularly as it relates to the British pound sterling ($1,704 QTD; $643 YTD). |
Consolidated revenues for the thirdsecond quarter of fiscal 2020 totaled $57,296, an increase of 14% compared to the second quarter of fiscal 2019 totaled $48,440, a decrease of 6% compared to the third quarter of fiscal 2018 (5% decrease(15% increase on a constant-currency basis).
Revenues for the Diagnostics segment for the
thirdsecond quarter of fiscal 2020 increased 4% compared to the second quarter of fiscal 2019
decreased 9% compared to the third quarter of fiscal 2018 (8%(5% increase on a constant-currency basis), comprised of a
21% decrease2% increase in molecular assay products and a
6% decrease5% increase in immunoassay and blood chemistry assay products.
As previously noted, theCOVID-19
pandemic dramatically slowed the placement of our molecular assay products during the quarter, resulting in 35 Revogene®
systems being installed during the second quarter of fiscal 2020 and a total Revogene system install base of 148 systems as of March 31, 2020. With a
9% decrease114% increase in
its molecular reagents products and a 5%
increasedecrease in
its immunological reagents products, revenues for our Life Science segment
were flatincreased 33% during the
thirdsecond quarter of fiscal
20192020 compared to the
thirdsecond quarter of fiscal
2018.2019. On a constant-currency basis, revenues for the Life Science segment increased
1%34%.
The third quarter Diagnostics revenues primarily reflect decreased revenues for our gastrointestinal assays, while Life Science revenues reflect a
return to revenue growthsignificant increase in the
China marketsales of key molecular components such as RNA master mixes and
softness within the Americas region, particularlydeoxyribonucleotide triphosphates (“dNTPs”) to diagnostic test manufacturers for use in
our distribution channel.COVID-19
related tests, including a fourfold increase in revenue from sales into China.Nine Months Ended June 30, 2019
For the nine month period ended June 30, 2019, net earnings were $20,279, or $0.47 per diluted share. Theyear-to-date
fiscal 2019 results include $4,516 of costs associated with acquisition and restructuring activities, and litigation costs, while the comparable fiscal 2018 results include $8,475 of costs associated with restructuring activities and litigations costs, along with certainone-time
tax effects of the U.S. tax reform act enacted in December 2017. These items had a combined impact on net earnings of $3,464, or $0.08 per diluted share, in the fiscal 2019year-to-date
period and $4,711, or $0.11 per diluted share, in the comparable fiscal 2018 period (see “USE OFNON-GAAP
MEASURES” below). Consolidated revenues
decreased 6%increased 3% to
$150,168$104,717 for the first
ninesix months of fiscal
20192020 compared to the same period of the prior year
(5%(also 3% on a constant-currency basis). On an operating segment basis, Diagnostics revenues decreased
9% (8% in constant-currency)1% (flat on a constant-currency basis) and Life Science revenues
were flat (2%increased 11% (12% increase
in constant-currency)on a constant-currency basis).
USE OFNON-GAAPLead Testing Matters
MEASURESOn June 29, 2017, the United States Food and Drug Administration (“FDA”), in connection with its Safety Notification related to Magellan’s LeadCare testing systems for venous blood samples, issued to Magellan its Form 483, Inspectional Observations. The FDA issued a related Warning Letter on October 23, 2017. On April 17, 2018, Magellan received a subpoena from the United States Department of Justice (“DOJ”) regarding its LeadCare product line. The subpoena outlines documents to be produced, and we continue to cooperate with the DOJ in this matter, including responding to additional information requests. We have supplemented our reported GAAP financial informationexecuted multiple tolling agreements to extend the statute of limitations.
Magellan submitted 510(k) applications in December 2018, seeking to reinstate venous blood sample-types for its LeadCare®
II, LeadCare®
Plus™
and LeadCare Ultra®
testing systems. In the second fiscal quarter of 2019 the FDA informed Magellan that each of these 510(k) applications had been put on Additional Information hold. On July 15, 2019, we provided responses to the FDA’s requests for Additional Information. These 510(k) applications have since expired and are no longer under FDA review. Further, while Magellan’s LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with
information on operating expenses, operating income, net earnings, basic earnings per sharecapillary blood samples, the FDA advised that it has commissioned a third-party study of Magellan’s LeadCare testing systems using both venous and
diluted earnings per share excludingcapillary blood samples. According to the
effects of: (i) acquisition-related costs (fiscal 2019); (ii) restructuring costs (fiscal 2019 and 2018); (iii) litigation costs (fiscal 2019 and 2018); and (iv) certainone-time
tax effectsFDA, the results of the
tax reform act (fiscal 2018) –field study will be used in conjunction with other information, including review by an FDA Advisory Committee, to determine whether further action by the FDA or the CDC is necessary to protect the public health. Meridian intends to fully cooperate with the FDA as the third-party study and Advisory Committee review are completed. During October 2019, the FDA performed afollow-up
inspection of Magellan’s manufacturing facility. The FDA issued five Form FDA 483 observations. In November 2019, we submitted to the FDA our written responses to the five Form FDA 483 observations and have implemented a remediation plan that we are actively working. In January and February 2020, we submitted to the FDA additional written responses to the Form FDA 483 observations. On March 18, 2020, we participated in a regulatory meeting with the FDA at the FDA’s request to further discuss the Form FDA 483 observations and our remediation efforts. 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. In the course of remediation, we may encounter additional matters that warrant notifications to the FDA and/or customers regarding the use of our 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. While we remain confident in the performance of the Magellan LeadCare testing systems using capillary samples, we do not expect that the FDA will reinstate our venous blood claims. We can provide no assurance that the ongoing investigation and study of the DOJ and FDA, respectively, or future exercise of their respective enforcement, regulatory, discretionary or other powers will not result in findings or alleged violations of federal laws that could lead to enforcement actions, proceedings or litigation and the imposition of damages, fines, penalties, restitution, other monetary liabilities, sanctions, injunctions, settlements or changes to our business practices, product offerings or operations that could have a material adverse effect on our business, financial condition or results of operations; or eliminate altogether our ability to operate our lead testing business, or on terms substantially similar to those on which we currently operate.
Below are analyses of the Company’s revenue, provided for each of
which is anon-GAAP
measure. We have provided in the
tables below reconciliations to the operating expenses, operating income, net earnings, basic earnings per share and diluted earnings per share amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:following: | 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; andBy Reportable Segment & Geographic Region |
| 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.By Product Platform/Type |
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 prior comparable periods. Management analyzes revenue on a constant-currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have 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.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.Revenue Overview- By Reportable Segment & Geographic Region
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| | $ | | | | $ | | | | $ | | | | $ | | |
Acquisition-related costs | | | | ) | | | | | | | | ) | | | | |
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Adjusted Operating Expenses | | $ | | | | $ | | | | $ | | | | $ | | |
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Acquisition-related costs | | | | | | | | | | | | | | | | |
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Adjusted Operating Income | | $ | | | | $ | | | | $ | | | | $ | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
Acquisition-related costs (1) | | | | | | | | | | | | | | | | |
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One-time benefit from tax law change | | | | | | | | ) | | | | | | | | ) |
Repatriation transition tax | | | | | | | | | | | | | | | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
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Net Earnings per Basic Common Share - | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Acquisition-related costs | | | | | | | | | | | | | | | | |
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One-time benefit from tax law change | | | | | | | | ) | | | | | | | | ) |
Repatriation transition tax | | | | | | | | | | | | | | | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
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Net Earnings per Diluted Common Share - | | | | | | | | | | | | | | | | |
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Acquisition-related costs | | | | | | | | | | | | | | | | |
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One-time benefit from tax law change | | | | | | | | ) | | | | | | | | ) |
Repatriation transition tax | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
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(1) | These acquisition-related costs, restructuring costs, and litigation costs are net of the following income tax effects: $110, $420 and $41, respectively, for the three months ended June 30, 2019; $0, $228 and $304, respectively, for the three months ended June 30, 2018; $337, $396 and $319, respectively, for the fiscal 2019year-to-date
period; and $0, $1,368 and $903, respectively, for the fiscal 2018year-to-date
period. These tax effects were calculated using the effective tax rates of the jurisdictions in which the costs were incurred. |
(2) | Net Earnings per Diluted Common Share for the fiscal 2018year-to-date
period does not sum to the Adjusted EPS amounts due to rounding. |
Our reportable segments are Diagnostics and Life
Science, withScience. The Diagnostics segment consists of manufacturing operations for infectious disease diagnostic products
in Cincinnati, Ohio and Quebec City, Canada, and manufacturing operations for blood chemistry products in Billerica, Massachusetts (near Boston). These diagnostic test products are sold and distributed in the countries comprising North and Latin America (the “Americas”); Europe, Middle East and Africa (“EMEA”); and other countries outside of the Americas and EMEA (rest of the world, or “ROW”).
A full descriptionThe Life Science segment consists of
our segments is set forthmanufacturing operations in
Note 10,“Reportable SegmentsMemphis, Tennessee; Boca Raton, Florida; London, England; and Major Customers Information”
Luckenwalde, Germany, and the sale and distribution of
the accompanying Condensed Consolidated Financial Statements.bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, in Beijing, China to further pursue growing revenue opportunities in Asia.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 the severity of seasonal 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 buying patterns of major IVD manufacturing customers and foreign currency exchange rates.
See the “Revenue Disaggregation” section of Note 2,
“Significant Accounting Policies”
of the accompanying Condensed Consolidated Financial Statements for detailed revenue disaggregation information.
Following is a discussion of the revenues generated by each of these product platforms/types andand/or disease states:
The acquisition of the Revogene molecular diagnostics platform, the development of the Curian®
immunoassay platform, and the expansion of the related assay-menu for each of these platforms are important steps in addressing competitive pressures in our gastrointestinal and respiratory illness assay families. We are actively converting our existing Alethia®
install base to the Revogene platform for, Group A(“Group A Strep”) and Group B(“Group B Strep”) assays. As previously noted, theCOVID-19
pandemic dramatically slowed the placement of our molecular assay products during the quarter, resulting in 35 Revogene systems being installed during the second quarter of fiscal 2020 and a total Revogene system install base of 148 systems as of March 31, 2020. In March 2020, we received clearance from the FDA for the Curian immunoassay diagnostics instrument and its first assay, a test forantigen in stool. We believe the advantages of the Curian analyzer will help protect our existing rapid test accounts. During the
thirdsecond quarter and first
ninesix months of fiscal
2019,2020, revenues from our gastrointestinal products, which include tests for
,
and certain foodborne pathogens, among others, totaled
$17,232$14,014 and
$52,024,$30,060, respectively. These revenue levels represent
15%13% and
13%14% decreases for this product category from the fiscal
20182019 quarterly and
year-to-date
periods, respectively.
OurproductsThese decreases result in large part from the pricing and volume pressures we continue to
experience pressure as a result of competition, particularly our alethia™
face within this product
which experienced volume declines impacting both the quarterly andyear-to-date
periods. For our stool antigenproducts, wecategory. We have executed multi-year supply agreements with
a number of customers, including our two largest reference laboratory customers
fortests to secure volume, albeit at lower selling prices.
As a consequence of this strategy, such products experienced price declines for the quarterly andyear-to-date
periods. We continue to believe there are ongoing benefits to be realized
from our partnerships with managed care companies in promoting:from: (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.
Beginning in April, we began seeing lower order demand for most of our gastrointestinal products as a result of theCOVID-19
pandemic.TheContributing to the competitive pressures being faced in this product category, the patents for our
products, owned by us, expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect competition with respect to our
products to continue to increase,
in the near future, and 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.
Our product development pipeline includes new product initiativesWe intend for
our Curian HpSA®
assay, cleared by the
detection of, and earlyFDA in
the first quarter of fiscal 2019 we entered intoMarch 2020, to help protect our existing customer base using lateral flow tests. We also maintain a strategic collaboration with DiaSorin to sell
tests (see Note 11,of the accompanying Condensed Consolidated Financial Statements).tests. We are unable to provide assurances that we will be successful with any strategy or that any strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.
Respiratory Illness Assays
IncludingOvercoming lower sales volumes in the first quarter of fiscal 2020, revenues for our respiratory illness products, which include tests for Group A Strep, Mycoplasma pneumonia,
influenza,Influenza, and Pertussis, among others,
our respiratory illness product revenues decreased 1%increased 44% and
7%20% in the
thirdsecond quarter and first
ninesix months of fiscal
2019,2020, respectively.
These increases primarily reflect volume increases in Group A Strep, Influenza and Mycoplasma related products from a very strong respiratory season, including theCOVID-19
pandemic.
Revenues from our sale of products to test for elevated levels of lead in blood
decreased 5%remained flat during the
thirdsecond quarter of fiscal
2019 to2020 at a
totallevel of
$4,750,$4,329 and
were flatincreased 8% for the fiscal
year-to-date
period
at $13,510. In late December 2018,to $9,479. During the
documents to reinstatelatter part of March, we began seeing lower order demand for our
venous blood claims removed in fiscal 2017 were submitted to the FDA, and in March 2019, we were informed by the FDA that eachblood-lead test as a result of the
submitted 510(k) applications has been put on Additional Information (AI) hold. Further, while our LeadCare testing systems remain cleared for marketing by the FDA for use with capillary blood samples, the FDA advised that it has commissioned a third-party studyCOVID-19
pandemic.
See Note 11,of the accompanying Condensed Consolidated Financial Statements for additional information related to the Company’s LeadCare product line.During the
thirdsecond quarter of fiscal
2019,2020, revenues from our Life Science segment
remained flatincreased 33% compared to the fiscal
2018 third2019 second quarter, with revenues from molecular reagent sales
decreasing 9%increasing 114% and revenues from immunological reagent sales
increasingdecreasing 5%. Life Science segment revenues
also remained flatincreased 11% for the first
ninesix months of fiscal
2019,2020, reflecting a
2% decrease41% increase in revenues from molecular reagent sales
being offset by a 2% increaseand an 8% decrease in immunological reagent sales. Our Life Science segment’s revenue growth was slightly impacted by the movement in currency exchange rates since the fiscal
20182019 periods, with revenues increasing
1%34% and
2% on a constant-currency basis12% over the
thirdsecond quarter and first
nine months of fiscal 2018, respectively. Our Life Science segment was also impacted by buying patterns of certain IVD manufacturing customers in China, with such sales totaling approximately $2,750 and $5,100 during the third quarter and first ninesix months of fiscal 2019, respectively,
– representing anon a constant-currency basis. The increase
in revenues was primarily attributable to the increased demand for key molecular components such as RNA master mixes and dNTPs from diagnostic test manufacturers for use inCOVID-19
related tests. Largely as a result of
thisCOVID-19
related demand, revenue from sales into China totaled approximately
14%$5,300 for the second quarter of fiscal 2020, a fourfold increase over the comparable fiscal
2018 quarterly period and2019 quarter. For the first six months of fiscal 2020, revenue from sales into China totaled approximately $7,100, or a
14% decreasethreefold increase over the comparable fiscal 2019 period.Additionally, order patterns fornon-COVID-19
related products from
many of our top IVD manufacturing customers returned to more normal levels during the current quarter. However, it remains unclear whether the shortfall experienced from these customers during the fiscal
2018year-to-date
period.2020 first quarter will be overcome throughout the remainder of the fiscal year. Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 10,
“Reportable Segments and Major Customers Information”
of the accompanying Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Nine Months Ended June 30, | |
| | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | )% | | $ | | | | $ | | | | | | )% |
| | | | % | | | | % | | | | | | | | % | | | | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | Six Months Ended March 31, | |
| | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | | | % | | $ | | | | $ | | | | | | % |
| | | | % | | | | % | | | | | | | | % | | | | % | | | | |
The gross profit margin
decreasesincrease experienced in
the second quarter of fiscal
2019 result2020 results primarily from the
impactpositive impacts of
a significantly higher percentage of the
Life Science segment’s revenue relating to sales of molecular products and the segment’s manufacturing of larger-than-normal batch sizes for the RNA master mixes, both in response to theCOVID-19
pandemic demand. The decrease during the six month fiscalyear-to-date
period primarily reflects the effect of this increasedCOVID-19
demand being more than offset by the combined effects of: (i) previously-noted pricing changes within our
product
line, along with the combined effects ofline; (ii) mix of products sold,
particularly decreased contribution from certain of our higher margin gastrointestinal assays; and
operating segment mix.(iii) production capacityramp-up
costs for our Quebec facility where Revogene instruments and test devices are made.
Operating Expenses - Segment Detail
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
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| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2019 Quarter) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
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| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2020 Quarter) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended March 31, | |
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| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2019 Year-to-Date) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2020 Year-to-Date) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
Operating Expenses – Segment DetailComparisons to Prior Year Periods
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | |
| | | | | | | | | | | | | | | |
| |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2018 Quarter) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2019 Quarter) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | |
| | Nine Months Ended June 30, 2019 | |
| | | | | | | | | | | | | | | |
| |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2018 Year-to-Date) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses (2019 Year-to-Date) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| |
Operating Expenses – Comparisons to Prior Year Periods | |
| | | |
| | Three Months Ended June 30, 2019 | |
| | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | % | | | | % | | | | % | | | | % | | | | % |
Fiscal 2019 Increases/(Decreases): | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | ) | | | | ) | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | % | | | | % | | | | % | | | | % | | | | % |
| | | | % | | | | )% | | | | )% | | | | % | | | | )% |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | |
| | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | % | | | | % | | | | % | | | | % | | | | % |
Fiscal 2020 Increases/(Decreases): | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | ) | | | | | | | | ) | | | | |
| | | | ) | | | | ) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
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TotalThe changes in operating expenses decreased during both the third quarter and first nine months of fiscal 2019 compared to the respective fiscal 2018 periods, with overall decreases in spending in all of our segments, reflectingprimarily reflect the following:
| 1) | Decreased year-to-date Research & Development costs due primarily to the timing of product development projects and the clinical trials for our cCMV test in fiscal 2018, while the quarterly increase reflects the addition of the GenePOC business; |
Increased Research & Development costs, primarily for the development of the Revogene system GI and RI panel assays for the Diagnostics operating segment;
| 2) | Decreased Selling & Marketing costs due to: (i) the effects of the fiscal 2018 organizationDecreased Selling & Marketing costs, primarily reflecting the effects of reorganization and streamlining initiatives; and (ii) lower sales commissions resulting from the decrease in sales levels; |
| 3) | Decreased General & Administrative costs due to: (i) the effects of the fiscal 2018 organization streamlining initiatives;Increased General & Administrative costs, primarily reflecting additional investment in incentive compensation, along with the purchase accounting amortization from the acquisition of the GenePOC business; and (ii) lower Quality System remediation costs related to our blood-lead manufacturing facility; and |
| 4) | Decreased restructuring & litigation costs, along with the effects of the current year acquisition-related costs (reflected within “Other” in the above tables). |
Increased acquisition and restructuring costs, along with a decrease in fair value of the contingent consideration obligation for the GenePOC business, all of which are reflected within “Other” in the above tables.
Operating income decreased 26%increased 20% to $6,464$11,791 for the thirdsecond quarter of fiscal 2019,2020 and increased 10%decreased 16% to $26,850$17,185 for the first ninesix months of fiscal 2019,2020, as a result of the factors discussed above, including the costs associated with acquisition and restructuring activities, and litigation costs.above.
The effective rate for income taxes was
22%26% and
23%27% for the
fiscal 2019 thirdsecond quarter and
nine monthyear-to-date
period,first six months of fiscal 2020, respectively, compared to
21% and 22% during23% for both corresponding periods in fiscal 2019. This higher fiscal 2020 tax rate results largely from the
corresponding fiscal 2018 periods. These rates reflectnon-deductibility
of the
combinedacquisition-related costs related to Exalenz, along with the tax impact of restricted share units lapsing on a date when the share price was significantly lower than the share price on the date the restricted share units were granted. In accordance with current applicable guidance, the tax effect of
this difference is recorded directly to income tax expense. We expect our effective tax rate for the
various components of the tax reform act (see Note 8,of the accompanying Condensed Consolidated Financial Statements) including: (i) the lowering of the applicable tax rate; (ii) the accompanyingre-measurement
of deferred tax balances at the lower rate; and (iii) the various foreign income-related items, such as the repatriation transition tax and the tax relatedfull fiscal year to
Foreign Derived Intangible Income.approximate 25.5% to 26.5%.Liquidity and Capital Resources
Comparative Cash Flow AnalysisLiquidity
Our cash flow and financing requirements are determined by analyses of our anticipated operating and capital spending needs, expectedbudgets and debt service costs,service. We have historically maintained a credit facility to augment working capital requirements and consideration of potential acquisitions.to respond quickly to acquisition opportunities.
We have an investment policy that guides the holdings of our investment portfolio, which presently consists of bank savings accounts and institutional money market mutual funds. Our objectives in managing the investment portfolio
are to: (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective.
Considering the various worldwidegeo-political
andgeo-economic
conditions, we do not expect macroeconomic conditions to have a significant impact on our liquidity needs, financial condition or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements from current cash flows from operating activities and cash on hand. If needed, we also have an additional source of liquidity through
the amount remaining available on our
$125,000$160,000 bank revolving credit
facility.facility, which totaled approximately $61,200 as of April 30, 2020, following the additional $50,000 drawn on the credit facility in April to complete the acquisition of Exalenz. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services.
As of
June 30, 2019,March 31, 2020, our cash and equivalents balance
is $55,192was $49,550 or
$2,738 lower than at the end of the fiscal 2018 third quarter, and $10,905$17,547 lower than at the end of the fiscal 2019 second
quarter. These decreases are primarily duequarter, and $12,847 lower than at the end of fiscal 2019, resulting in large part from the $27,000 revolving credit facility payment in January 2020. As a result of the cash generated during the first six months of fiscal 2020, since the beginning of fiscal 2020, our balance of net debt (defined as bank debt and total contingent obligations related to
cash on hand used to fund the acquisition of the GenePOC,
business.net of cash and equivalentson-hand)
has decreased approximately $15,500 to approximately $30,200 at March 31, 2020. Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements,
and capital expenditures
and debt service during the next
12twelve months.
The impacts of COVID-19 have adversely affected the capital markets and the ability of many companies to access capital and liquidity on favorable terms or at all. The Company expects to be in compliance with its financial covenants for at least the next twelve months. However, the Company is currently unable to predict the impact that COVID-19 will have on its ability to access capital in the future. If the Company is unable to access additional capital and liquidity on acceptable terms, it could adversely impact the Company’s results of operations and ability to meet its future obligations beyond the next twelve months.
In April 2019, we suspended the payment of our quarterly cash dividend. The dividend was suspended as part of our regular evaluation of capital allocation, with the action taken in order to deploy cash into new product development activities for the Revogene molecular diagnostic platform, as well as the Curian and Pediastat®
platforms, among other investments, and to preserve capital resources and liquidity for general corporate purposes. As described in Note 9,
“Bank Credit Arrangements”
of the accompanying Condensed Consolidated Financial Statements
on May 24, 2019, in connection withand above, the
acquisition of the GenePOC business, we executedCompany maintains a
new five-year $125,000 revolving$160,000 credit facility,
to replace our previously-existing $30,000 credit facility. The new credit facilitywhich is secured by substantially all of our assets and includes certain restrictive financial covenants.
To-date,
we have drawn down $75,824 on this new facility, using the proceeds to repay our previously-existing term loan and, along with cashon-hand,
fund the acquisition of the GenePOC business.Our capital expenditures are estimated to range between approximately $4,000$3,000 to $5,000$4,000 for fiscal 2019,2020, with the actual amount dependent 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 $160,000 revolving credit facility discussed above.
We do not utilize
any special-purpose financing vehicles or have
any undisclosed
off-balance
sheet arrangements.
Also, as noted in previous filings, our Board
ContentsITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than the impact of the recent outbreak ofThereCOVID-19
on our business and results of operations as discussed elsewhere in this report, there have been no material changes in the Company’s exposure to market risk since September 30,
2018. 2019.ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of
June 30, 2019.March 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of
June 30, 2019.March 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended
June 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11,
of the accompanying Condensed Consolidated Financial Statements.
There have been no material changes from risk factors as previously disclosed in the Company’s fiscal
20182019 Annual Report on Form
10-K
and subsequent quarterly reports on Form10-Q
in response to Item 1A to Part I of Form
10-K.10-K,
except that we are adding the following risk factor discussion relating to coronavirusCOVID-19.
Our financial condition, results of operations and cash flows could be adversely affected by the ongoing coronavirus(COVID-19)
outbreak. Any outbreak of contagious diseases, such asCOVID-19,
or other adverse public health developments, could have material and adverse effects on our business operations. Such adverse effects could include diversion or prioritization of health care resources away from the conduct of diagnostic testing, disruptions of or restrictions on the ability of laboratories to process our tests, and delays with respect to or difficulties in patients accessing our tests, including those resulting from an inability to travel as a result of quarantines or other restrictions resulting fromCOVID-19.
AsCOVID-19
continues to affect individuals and businesses around the globe, we may experience disruptions that could severely impact our business, including: decreased volume of testing and related sales of certain of our Diagnostics products as a result of disruptions to health care providers and limitations on the ability of providers to administer tests;
disruptions or restrictions on the ability of our, our collaborators’, or our suppliers’ personnel to travel, and temporary closures of our facilities or the facilities of our collaborators or suppliers;
limitations on employee resources that would otherwise be focused on the development of our products, processing our diagnostic tests, and the conduct of our clinical trials, including because
| | of sickness of employees or their families or requirements imposed on employees to avoid contact with large groups of people; and |
delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees.
In addition, the continued spread ofCOVID-19
globally could adversely affect our manufacturing and supply chains. Parts of our direct and indirect supply chains are located overseas, including in China, and may accordingly be subject to disruption. Additionally, our results of operations could be adversely affected to the extent thatCOVID-19
or any other epidemic harms our business or the economy in general either domestically or in any other region in which we do business. The extent to whichCOVID-19
affects our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity ofCOVID-19,
and the actions to containCOVID-19
or treat its impact, among others, which could have an adverse effect on our business, results of operations and financial condition. To date, we are seeing that the outbreak has slowed our assay instrument placements and sales of related test kits as diagnostic testing sites have turned their attention to critical care testing. We are unable to predict when expected sales volume levels for our instruments and related test kits will return. Also, as a result of the pandemic, certain clinical trials related to our products which were underway or scheduled to begin have been temporarily placed on hold. Such delays will impact our timing for filing applications for product clearances with the FDA, as well as related timing of FDA clearances of such filings. Additionally, the pandemic could slow down our efforts to expand our product portfolio through acquisitions and distribution opportunities, impacting the speed with which we are able to bring additional products to market.
The following exhibits are being filed or furnished as a part of this Quarterly Report on Form
10-Q:
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| | | | The following financial information from Meridian Bioscience Inc.’s Quarterly Report on Form10-Q
for the quarter ended June 30, 2019 filed with the SEC on August 7, 2019, formatted in Inline XBRL includes: (i) Condensed Consolidated Statements of Operations for the threeInstance Document |
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| | | | Inline XBRL Instance Extension Schema |
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| | | | Inline XBRL Instance Extension Calculation Linkbase |
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| | | | Inline XBRL Instance Extension Definition Linkbase |
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| | | | Inline XBRL Instance Extension Label Linkbase |
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| | | | Inline XBRL Instance Extension Presentation Linkbase |
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| | | | Cover Page Interactive Data File (formatted as Inline XBRL and nine months ended June 30, 2019 and 2018; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2019 and 2018; (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2019 and 2018; (iv) Condensed Consolidated Balance Sheets as of June 30, 2019 and September 30, 2018; (v) Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended June 30, 2019 and 2018; and (vi) the Notes to Condensed Consolidated Financial Statementscontained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | MERIDIAN BIOSCIENCE, INC. |
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Date: August 7, 2019May 8, 2020
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| | | | | | |
| | | | | | InterimExecutive Vice President and Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer) |