Washington, D.C. 20549
Form 10Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2000
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14902
MERIDIAN BIOSCIENCE, INC.
Incorporated under the laws of Ohio | 31-088810 |
(I.R.S. Employer Identification No.)
Cincinnati, Ohio 45244
(513) 271-3700
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding February 9, 2001Common Stock, no par value 14,598,470
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10Q
Page(s)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3-4
Consolidated Balance Sheets
December 31, 2000 and September 30, 2000
Consolidated Statements of Operations 5
Three Months Ended December 31, 2000 and 1999
Consolidated Statement of Shareholders' Equity 6
Three Months Ended December 31, 2000
Consolidated Statements of Cash Flows 7
Three Months Ended December 31, 2000 and 1999
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of 11-15
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward looking statements accompanied by meaningful cautionary statements. These statements identify important factors that could cause actual results to differ materially from those that might be projected. Meridian’s continued growth depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s competition. While Meridian has introduced approximately 35 internally-developed products since 1991, there can be no assurance that it will be successful in the future in introducing such products on a timely basis. Ongoing consolidations of reference laboratories and formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Costs and difficulties in complying with laws and regulations administered by the United States Food and Drug Administration can result in unanticipated expenses and delays and interruptions to the sale of new and existing products. One of Meridian’s main growth strategies is acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses successfully integrated into Meridian’s operations.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
($000)
ASSETS
December 31, September 30,
2000 2000
----------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,595 $ 4,766
Investments 4 13
Accounts receivable and notes receivable,
less allowance of $777
in 2001 and $438 in 2000 for
doubtful accounts 14,188 13,889
Inventories 13,020 15,808
Income tax refunds 4,306 5,010
Deferred income taxes 1,930 -
Other current assets 679 680
---------- ---------
Total current assets 38,722 40,166
---------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land 501 494
Buildings and improvements 14,268 14,236
Machinery, equipment and furniture 13,465 13,853
Construction in progress 413 454
---------- ---------
Total property, plant and equipment 28,647 29,037
Less-accumulated depreciation and
amortization 11,546 11,150
---------- ---------
Net property, plant and equipment 17,101 17,887
---------- ---------`
OTHER ASSETS:
Deferred debenture offering costs, net 753 787
Goodwill, net 4,771 5,972
Other intangible assets, net 11,102 18,141
Other assets 1,594 1,515
---------- ---------
Total other assets 18,220 26,415
---------- ---------
TOTAL ASSETS $ 74,043 $ 84,468
=========== ============
The accompanying notes are an integral part of these balance sheets.
Page 3 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
($000)
LIABILITIES AND SHAREHOLDERS EQUITY
December 31, September 30,
2000 2000
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term obligations $ 1,839 $ 1,700
Borrowings under bank lines of credit 6,352 6,230
Accounts payable 2,227 3,251
Accrued payroll costs 2,440 2,731
Reserve for European restructuring 760 499
Other accrued expenses 4,178 2,574
Deferred income taxes - 17
--------- ---------
Total current liabilities 17,796 17,002
--------- ---------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 26,787 27,105
--------- ---------
DEFERRED TAX LIABILITIES 979 3,750
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares authorized;
none issued - -
Common stock, no par value,
50,000,000 shares authorized;
14,598,470 and 14,587,434 shares
issued and outstanding,
respectively, stated at 2,535 2,530
Additional paid-in capital 20,947 20,941
Retained earnings 5,820 14,889
Accumulated other comprehensive loss (821) (1,749)
--------- ---------
Total shareholders' equity 28,481 36,611
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,043 $ 84,468
=========== =========
The accompanying notes are an integral part of these balance sheets.
Page 4 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(000, except earnings per share)
Three Months Ended
December 31,
---------------------------------
2000 1999
---------- ----------
NET SALES $ 15,254 $ 14,329
COST OF SALES:
Sale of product 5,821 5,207
Inventory write-off 4,000 -
---------- ----------
Total cost of sales 9,821 5,207
---------- ----------
Gross profit 5,433 9,122
---------- ----------
OPERATING EXPENSES:
Research and development 1,039 522
Selling and marketing 3,207 3,127
General and administrative 3,073 2,772
Asset impairment and
FDA related charges 9,271 -
European restructuring 758 -
---------- ----------
Total operating expenses 17,348 6,421
---------- ----------
Operating income (loss) (11,915) 2,701
OTHER INCOME (EXPENSE):
Interest income 55 69
Interest expense (728) (475)
Other, net 334 80
---------- ----------
Total other income (expense) (339) (326)
---------- ----------
Earnings (loss) before income taxes (12,254) 2,375
INCOME TAX PROVISION (BENEFIT) (4,062) 905
---------- ----------
NET EARNINGS (LOSS) $ (8,192) $ 1,470
============= ==========
BASIC EARNINGS PER COMMON SHARE $ (0.56) $ 0.10
DILUTED EARNINGS PER COMMON SHARE $ (0.56) $ 0.10
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,589 14,502
DILUTIVE COMMON STOCK OPTIONS - 78
---------- ----------
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED 14,589 14,580
========= =========
ANTI-DILUTIVE SECURITIES:
Common stock options 970 406
Shares from convertible debentures 1,243 1,243
The accompanying notes are an integral part of these statements.
Page 5 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity (Unaudited)
For the Three Months Ended December 31, 2000
($000)
Number of Accumulated
Shares Additional Other
Issued and Comprehensive Common Paid in Comprehensive Retained
Outstanding Income (Loss) Stock Capital (Loss) Earnings Total
----------- ------------- --------- ---------- ------------- -------- --------
Balance at September 30, 2000 14,587 $ --- $2,530 $20,941 $ (1,749) $14,889 $36,611
Exercise of Stock Options, net 11 --- 5 6 --- --- 11
Dividends --- --- --- --- --- (877) (877)
Comprehensive Loss
Net loss --- (8,192) --- --- --- (8,192) (8,192)
Other comprehensive
income (loss)
Foreign currency
translation adjustment --- 928 --- --- 928 --- 928
Comprehensive Loss $(7,264)
------- ======== -------- -------- -------- ------ --------
Balance at December 31, 2000 14,598 $2,535 $20,947 $(821) $5,820 $28,481
======= ======== ======= ======== ====== =======
The accompanying notes are an integral part of these statements.
Page 6 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
($000)
Three Months Ended
December 31,
-----------------------
2000 1999
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (8,192) $ 1,470
Non cash items:
Depreciation of property,
plant and equipment 560 833
Amortization of intangible assets 705 763
Deferred income taxes (4,718) (172)
Asset impairment and other
costs related to FDA matters 13,271
European restructuring charges 758 --
Change in current assets
excluding cash and investments (1,142) (376)
Change in current liabilities,
excluding debt obligations (412) (1,219)
Other 171 133
-------- --------
Net cash provided by
operating activities 1,001 1,432
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment, net (440) (1,289)
Proceeds from sale (purchase)
of short term investments 9 (1)
-------- --------
Net cash used for investing activities (431) (1,290)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations 900 3,478
Repayment of debt obligations (956) (145)
Dividends paid (877) (729)
Proceeds from exercise of stock options 11 170
-------- --------
Net cash provided by (used for)
financing activities (922) 2,774
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 181 (114)
-------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (171) 2,802
CASH & CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,766 6,229
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 4,595 $ 9,031
======== ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes paid (received) $ (102) $ 358
Interest 167 113
Non-cash items
Capital lease -- 522
The accompanying notes are an integral part of these statements.
Page 7 of 17
Notes to Consolidated Financial Statements (Unaudited)
1. Corporate Name Change:
On January 23, 2001, the Company’s shareholders approved a change in the corporate name to Meridian Bioscience, Inc. Also during January 2001, the Company changed its Nasdaq symbol from KITS to VIVO. These changes were implemented to more accurately reflect the Company’s expansion of its capabilities in bioscience, research reagent development and other services that will enable drug discovery and realization of new pharmaceuticals, vaccines and diagnostics. |
2. Basis of Presentation:
The consolidated financial statements included herein have not been audited by independent public accountants, but include all adjustments (consisting of normal recurring entries) which are, in the opinion of management, necessary for a fair presentation of the results for such periods. |
Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in these financial statements are adequate to make the information not misleading. |
It is suggested that these consolidated financial statements be read in conjunction with consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K. |
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. |
3. Acquisition of Viral Antigens, Inc.:
On September 15, 2000, Meridian acquired all of the outstanding common stock of Viral Antigens, Inc. for $9 million in cash. VAI manufactures infectious disease antigens that are used in common diagnostic technologies and manufactures and distributes a Pseudorabies Virus antibody test kit for the veterinary market. VAI’s facilities include specialty laboratories for gene expression, providing Meridian the opportunity to serve as an enabler to biopharmaceutical companies in the development of new drugs and vaccines. The purchase agreement provides for additional consideration, up to a maximum of $8.25 million, contingent upon VAI’s future earnings through September 30, 2006. The $9 million purchase price was funded with bank debt from the Company’s existing credit facilities. |
The acquisition has been accounted for as a purchase, and the results of operations of VAI are included in the Company’s consolidated results from September 15, 2000 forward. A summary of the preliminary purchase price allocation is included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2000. |
4. European Restructuring:
During the fourth quarter of fiscal 2000, a plan was implemented to restructure European distribution operations and improve operating results. Effective October 1, 2000, the European export business was transferred from Germany to Belgium. Also during the first quarter of fiscal 2001, the Company commenced the transfer of the German business to an independent distributor. In connection with the shutdown of the German business, the Company has recorded a restructuring charge in the amount of $758,000 during the first quarter of fiscal 2001. The charge includes future lease costs, severance costs and asset impairment writedowns for fixed assets. Total charges for European restructuring have been $1,558,000, including $800,000 in the fourth quarter of fiscal 2000. Accrued European restructuring costs were $760,000 at December 31, 2000, after consideration of reclasses to the cumulative translation account ($497,000) and intangible assets ($301,000). The Company expects to incur additional restructuring costs during the remainder of fiscal 2001 primarily related to employee severance. Such costs are not expected to exceed $250,000. The on-going savings from the closure of the German operations are expected to be significant. |
5. FDA Matters:
During the first quarter of fiscal 2001, the Company recorded charges for asset impairment and other costs in the aggregate amount of $13,271,000 ($8,539,000 after tax) related to actions taken in response to an FDA follow-up inspection of Meridian’s compliance with the Quality System Regulation that governs the manufacturing of in vitro diagnostics. This inspection included a review of, among other things, procedures for validation, document control, corrective actions and design control. In response to observations resulting from the inspection, and its own internal audits, the Company has recommitted itself to improving its overall quality systems. To concentrate and focus resources, the Company has suspended the manufacture and distribution of approximately 30 products and is in the process of determining which of these products to revalidate for future sale. |
As a result of these decisions, the Company will not be able to recover the cost of certain assets, and consequently, has recorded the following pre-tax charges (in thousands): |
Product inventory that is not saleable $ 4,000
Reserve for product recalls 700
Reserve for sales-type lease receivables 336
Impaired instrumentation equipment 666
Impaired intangible assets 7,569
-------
$13,271
=======
Impaired intangible assets include portions of manufacturing technologies, core products, customer lists and goodwill related to these products. Impairment amounts for long-lived assets were measured by comparing discounted future cash flow projections to the net book value of the assets. The tax effects of these charges were recorded as a reduction in non-current deferred tax liabilities ($2,773,000) and an increase to current deferred tax assets ($1,959,000). |
In addition to these charges, on an annual basis, the lost revenue and operating income impact is estimated to be approximately $9,000,000 and $2,500,000, respectively. In an effort to compensate, in part, for lost revenue the Company plans to revalidate certain products, pursue contract manufacturing and OEM relationships, offer alternative product formats, restructure its Cincinnati manufacturing operations and reduce its workforce. |
The Company has submitted a comprehensive plan to the FDA outlining specific steps to improve its quality systems and is currently in the process of executing the plan. The cost of implementing the plan will include costs for outside consultants with experience in the quality system regulations, revalidation, computer software and equipment. These charges will be reflected in operating results as they are incurred over the next 12 to 18 months. Although the Company is unable to estimate the amount of these costs at this time, such costs are expected to be significant. Contingent upon the successful restructuring of operations and reduction of operating costs, and the acceptance of the plan by the FDA, the Company expects cash flows from operations to be sufficient to fund working capital needs and debt servicing. The Company is communicating with the FDA to advise it on the progress of the plan implementation. At present, it is uncertain whether the Company’s actions will be sufficient so that no further remedial action or enforcement action by the FDA will occur. |
6. Inventories:
Inventories are comprised of the following (in thousands): |
December 31, 2000 September 30, 2000
----------------- ------------------
Raw materials $ 3,063 $ 3,771
Work-in-process 5,119 6,313
Finished goods 4,838 5,724
--------- --------
$ 13,020 $ 15,808
========== =========
7. Translation of Foreign Currency:Assets and liabilities of foreign operations are translated using period-end exchange rates with gains or losses resulting from translation included in a separate component of accumulated other comprehensive loss. Revenues and expenses are translated using exchange rates prevailing during the period. |
8. Comprehensive Income (Loss):
Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity. For the Company, this reporting involves gains and losses resulting from the translation of assets and liabilities of foreign operations which are currently included in a separate component of accumulated other comprehensive loss. |
9. Segment Information:
Meridian operates in two geographic segments: Meridian Bioscience, Inc. (MBI) and Meridian Bioscience Europe (MBE). MBI operations consist of the manufacture and sale of diagnostic test kits in the U.S. and countries outside of Europe, Africa and the Middle East. It also includes sales of bioresearch reagents and sales of proficiency tests. MBE distributes diagnostic test kits in Europe, Africa and the Middle East. Sales are attributed to the geographic area based on the location from which the product is shipped to the customer. |
Segment information for the quarters ended December 31, 2000 and 1999 is as follows: |
($ in thousands) MBI MBE ELIM(1) Total
--------------------------- --------- ------- --------- --------
2000
Net sales $13,793 $3,299 $(1,838) $15,254
Operating income (loss) (2) (10,979) (670) (266) (11,915)
Total assets 83,186 12,082 (21,225) 74,043
1999
Net sales 12,123 3,590 (1,384) 14,329
Operating income 2,552 10 139 2,701
Total assets 99,838 11,943 (36,667) 75,114
(1) Eliminations consist of intersegment transactions.
(2) MBI includes $13,271 of asset impairment and other charges related to
FDA matters; MBE includes $758 of European restructuring charges.
Transactions between geographic segments are accounted for as intercompany sales at established intercompany prices for internal and management purposes with all intercompany amounts eliminated in consolidation. The MBI segment data for total assets includes corporate goodwill and intangibles of $15,873,000 and $23,634,000 for the quarters ended December 31, 2000 and 1999 respectively. |
10. Recently Issued Accounting Standards:
In fiscal 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS No.133). Historically, the Company has not utilized derivative instruments in order to hedge foreign currency or interest rate risk exposures and therefore, adoption of SFAS no. 133 had no effect on the financial statements. In fiscal 2001, the Company intends to implement a hedging strategy to address foreign currency risk exposures. SFAS No.133 will require that the derivative instrument used to hedge the exposure, as well as the hedged exposure itself, be marked to market in the financial statements. The Company expects that implementation of a hedging strategy and the accounting prescribed by SFAS No.133 will mitigate the impact of currency fluctuations related to intercompany transactions. On an overall basis, SFAS No.133 is not expected to have a significant effect on the Company’s consolidated financial position but could increase volatility of future reported earnings. |
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations:
Net Earnings Overview
Operating results for the first quarter of fiscal 2001 were a net loss of $8,192,000, or $0.56 per diluted share, compared to net earnings of $1,470,000, or $0.10 per diluted share in the first quarter of fiscal 2000. Operating results for the first quarter of fiscal 2001 include charges of $0.58 per diluted share for asset impairment and other costs related to actions taken in response to FDA matters more fully discussed below, and charges of $0.04 per diluted share for the European restructuring plan. Operating results for the first quarter of fiscal 2001 also include the impact of the acquisition of Viral Antigens, Inc., which became effective September 15, 2000. VAI contributed net sales of $1,778,000 and net earnings of $8,000 for the quarter, after consideration of interest costs on acquisition debt and amortization of purchase accounting fair value adjustments. Prior to these items, VAI earnings were $167,000 for the quarter. The following table provides an overview of operating results for the quarter (in thousands except per share data).
FY 2001 FY 2000
-------------------- -----------------------
Dollars Per Share* Dollars Per Share
--------- --------- --------- ---------
Core business earnings $ 996 $ 0.07 $ 1,470 $ 0.10
Viral Antigens contribution 8 - - -
Asset impairment charges
and other costs
related to FDA matters (8,539) (0.58) - -
European restructuring charges (657) (0.04) - -
Net earnings (loss) $ (8,192) $ (0.56) $ 1,470 $ 0.10
========== ======== ========= =======
* Total does not equal the sum of the components due to rounding.
Core business earnings for the first quarter of fiscal 2001 were impacted by the negative effects of currency, as compared to the first quarter of fiscal 2000, reducing sales by $641,000. However, the strengthening of the Euro during the latter part of December 2000 generated currency gains of $485,000 related to intercompany debt obligations that are denominated in foreign currencies. Revenues and expenses of foreign operations are translated using the average exchange rates in effect during the period. Assets and liabilities of foreign operations, including intercompany debt obligations, are translated using the period-end exchange rates. For the first quarter of fiscal 2001, the Euro was weak relative to the US dollar for most of the period, but strengthened during the latter part of December, resulting in the currency gains and losses described above.
Operating results for the first quarter were negatively impacted by asset impairment charges and other costs in the aggregate amount of $13,271,000 ($8,539,000 after tax), or $0.58 per diluted share related to actions taken in response to an FDA follow-up inspection of Meridian’s compliance with the Quality System Regulation that governs the manufacturing of in vitro diagnostics. This inspection included a review of, among other things, procedures for validation, document control, corrective actions and design control. In response to observations resulting from the inspection, and its own internal audits, the Company has recommitted itself to improving its overall quality systems. To concentrate and focus resources, the Company has suspended the manufacture and distribution of approximately 30 products and is in the process of determining which of these products to revalidate for future sale.
As a result of these decisions, the Company will not be able to recover the cost of certain assets, and consequently, has recorded the following pre-tax charges (in thousands):
Product inventory that is not saleable $ 4,000
Reserve for product recalls 700
Reserve for sales-type lease receivables 336
Impaired instrumentation equipment 666
Impaired intangible assets 7,569
-----------
$ 13,271
===========Impaired intangible assets include portions of manufacturing technologies, core products, customer lists and goodwill related to these products. Impairment amounts for long-lived assets were measured by comparing discounted future cash flow projections to the net book value of the assets.
In addition to these charges, on an annual basis, the lost revenue and operating income impact is estimated to be approximately $9,000,000 and $2,500,000, respectively. In an effort to compensate, in part, for lost revenue the Company plans to revalidate certain products, pursue contract manufacturing and OEM relationships, offer alternative product formats, restructure its Cincinnati manufacturing operations and reduce its workforce.
The Company has submitted a comprehensive plan to the FDA outlining specific steps to improve its quality systems and is currently in the process of executing the plan. The cost of implementing the plan will include costs for outside consultants with experience in the quality system regulations, revalidation, computer software and equipment. These charges will be reflected in operating results as they are incurred over the next 12 to 18 months. Although the Company is unable to estimate the amount of these costs at this time, such costs are expected to be significant. Contingent upon the successful restructuring of operations and reduction of operating costs, and the acceptance of the plan by the FDA, the Company expects cash flows from operations to be sufficient to fund working capital needs and debt servicing. The Company is communicating with the FDA to advise it on the progress of the plan implementation. At present, it is uncertain whether the Company’s actions will be sufficient so that no further remedial action or enforcement action by the FDA will occur.
Operating results for the first quarter of fiscal 2001 were also impacted by the negative effects of the European restructuring charge in the amount of $657,000, after tax, or $0.04 per diluted share. During the fourth quarter of fiscal 2000, a plan was implemented to restructure European distribution operations and improve operating results. Effective October 1, 2000, the European export business was transferred from Germany to Belgium. Also during the first quarter of fiscal 2001, the Company commenced the transfer of the German business to an independent distributor. The restructuring charge includes future lease costs, severance costs and asset impairment writedowns for fixed assets, all related to the former German operation. The Company expects to incur additional restructuring costs during the remainder of fiscal 2001, primarily related to employee severance as the German operation is wound down. Such costs are not expected to exceed $250,000.
Net SalesNet sales increased $925,000 or 6%, to $15,254,000 in the first quarter of fiscal 2001 compared to fiscal 2000. This increase was comprised of volume growth of 9% or $1,346,000, aggregate price increases of 2% or $220,000 and currency losses of (5%) or ($641,000). Adjusted for currency, net sales increased 11%.
Volume growth resulted from the VAI acquisition, which contributed sales of $1,778,000. The impact from the VAI acquisition was partially offset by volume decreases in the US core business, principally the Para Pak, Virology and Immunology product groups, as well as reagent sales.
International sales were $3,921,000, or 26% of total sales, in the first quarter of fiscal 2001, compared to $4,385,000, or 31% of total sales, in fiscal 2000. Domestic exports were $622,000 in the first quarter of fiscal 2001, compared to $722,000 in fiscal 2000. The remaining international sales were generated by Meridian’s European distribution businesses (MBE). Although MBE’s sales include the unfavorable impact of currency translation losses discussed above, in most major European markets, except for Germany, MBE experienced strong volume growth driven in part by the Company’s Premier Platinum HpSA product.
Gross ProfitGross profit, including the effects of the inventory write-off in the amount of $4,000,000, decreased $3,689,000 or 40%, to $5,433,000 in the first quarter of fiscal 2001 compared to fiscal 2000. Gross profit margins declined from 64% in the first quarter of fiscal 2000 to 36% in fiscal 2001. This decrease is primarily due to the inventory write-off (26 points). Gross profit margins were also unfavorably impacted by currency translation losses coupled with higher scrap in certain production operations. Gross profit margin for the first quarter of fiscal 2001 was also impacted by the VAI acquisition. VAI generates lower margins than traditional Meridian products. However, their selling and marketing costs are lower, as a percentage of sales, than the historical Meridian business.
The Company’s manufacturing costs are predominantly incurred in US dollars whereas a significant portion of international sales are denominated in foreign currencies. Consequently, a significant portion of the currency translation losses discussed under “Net Sales” above, adversely affected gross profit margins. The Company is pursuing several actions to reduce the impact of currency, including price increases in Europe, billing where possible in US dollars and certain hedging strategies.
Operating expenses, inclusive of asset write-off charges and European restructuring costs in the first quarter of fiscal 2001, increased $10,927,000 or 170%, and as a percentage of sales, increased from 45% in fiscal 2000 to 114% in fiscal 2001. Operating expenses, excluding asset impairment charges and European restructuring costs, increased $898,000 or 14%, and as a percentage of sales, increased to 48%. Operating expenses in the first quarter of fiscal 2001 include $690,000 for VAI, accounting for 75% of the 14% increase. Costs for the outsourcing arrangement with OraSure for product development and costs for litigation accounted for 24% of the 14% increase.
Research and development expenses increased $517,000 or 99%, to $1,039,000 in the first quarter of fiscal 2001, and as a percentage of sales, increased from 4% in the first quarter of fiscal 2000 to 7% in fiscal 2001. This increase reflects VAI’s costs, costs for the outsourcing arrangement with OraSure for product development using the Uplink technology and costs of certain clinical trials.
Selling and marketing expenses increased $80,000 or 3%, to $3,207,000 in the first quarter of fiscal 2001, and as a percentage of sales, decreased from 22% in the first quarter of fiscal 2000 to 21% in fiscal 2001. This increase reflects VAI’s costs, partially offset by lower costs in certain US operations.
General and administrative expenses increased $301,000 or 11%, to $3,073,000 in the first quarter of fiscal 2001, and as a percentage of sales increased from 19% in the first quarter of fiscal 2000 to 20% in fiscal 2001. This increase is primarily due to the addition of VAI’s costs.
Operating IncomeOperating income was a loss of $11,915,000 in the first quarter of fiscal 2001, reflecting the negative effects of the asset impairment charges and other costs related to FDA matters and European restructuring costs. Excluding these items, operating income for the first quarter of fiscal 2001 was $2,114,000, a decrease of $587,000 or 22% from fiscal 2000. This decrease was principally attributable to the negative effects of currency coupled with higher research and development costs that are expected to generate revenue growth in future periods.
Other Income and ExpenseInterest expense increased $253,000 or 53%, to $728,000 in the first quarter of fiscal 2001. This increase is due to interest on the debt that funded the VAI acquisition, interest on debt assumed in the VAI acquisition and additional working capital borrowings outstanding on the line of credit facility.
Other income, net in the first quarter of fiscal 2001 includes currency gains of $485,000 related to intercompany debt obligations that are denominated in foreign currencies.
Income TaxesThe effective rate for income tax credits is 33% in the first quarter of fiscal 2001. The effective rate for the first quarter of fiscal 2001 reflects the unfavorable impact of the goodwill portion of the asset impairment charges and the European restructuring charge, a substantial portion of which are not tax deductible. The effective rate for the income tax provision for the first quarter of fiscal 2000 was 38% and includes the benefit for operating losses in certain European jurisdictions. Such losses in the current period have not been benefited.
Liquidity and Capital ResourcesThe Company’s operating cash flow and financing requirements are determined by analyses of operating and capital spending budgets and consideration of acquisition plans. The Company has historically maintained sufficient levels of cash, investments and line of credit availability to quickly respond to business needs and opportunities.
Net cash provided by operating activities was $1,001,000 in the first quarter of fiscal 2001 compared to $1,432,000 in fiscal 2000. Net cash provided by operating activities in the first quarter of fiscal 2001 was unfavorably impacted by lower core business earnings, lower depreciation and amortization and higher investments in accounts receivable and inventories, excluding the effect for the write-off related to certain FDA matters. Although the Company has reported a net loss for the first quarter, charges for asset impairment and other costs related to certain FDA matters ($8,539,000 after tax) and European restructuring ($657,000 after tax) are primarily non-cash in nature.
Net cash used in investing activities was $431,000 in the first quarter of fiscal 2001 compared to $1,290,000 in fiscal 2000. Net cash used in investing activities in both periods primarily relates to capital expenditures. Capital expenditures were higher in the first quarter of fiscal 2000 because of the renovation of the Cincinnati production facilities to accommodate the Gull products.
Net cash used in financing activities was $922,000 in the first quarter of fiscal 2001 compared to $2,774,000 of net cash provided by such activities in fiscal 2000. Proceeds from debt obligations, net of repayments, were higher in the first quarter of fiscal 2000 due to financing related to the renovation of the Cincinnati production facilities described above.
Contingent upon the successful restructuring of operations and reduction of operating costs, and the FDA’s acceptance of the Company’s comprehensive plan to improve it quality systems, net cash flows from operating activities are anticipated to fund working capital requirements and debt service for the remainder of fiscal 2001. Earnout payments, if any, under the VAI purchase agreement may require outside financing. The Company has a $22,500,000 credit facility with a commercial bank that expires in September 2001. Borrowings of $6,352,000 are currently outstanding on the revolving credit portion of this facility. The current availability is $10,401,000, after consideration of $5,747,000 of term debt outstanding.
PART II. OTHER INFORMATION
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None.
Signature:
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there-unto duly authorized.
Date: February 13, 2001
/s/ Melissa Lueke |