Research and development expenses increased $453,000 or 103%, to $892,000 in the second quarter of fiscal 2001, and as a percentage of sales, increased from 3% of sales in fiscal 2000 to 6% in fiscal 2001. This increase primarily relates to the addition of VAI’s costs, costs for the outsourcing arrangement with OraSure for product development using the Uplink technology and costs for certain clinical trials.
Selling and marketing expenses increased $314,000 or 11%, to $3,205,000 in the second quarter of fiscal 2001, and as a percentage of sales, increased from 20% in fiscal 2000 to 23% in fiscal 2001. This increase primarily relates to the addition of VAI’s costs. The Company has also experienced a reduction in selling and marketing expenses related to the closure of German distribution operations.
General and administrative expenses increased $770,000 or 34%, to $3,008,000 in the second quarter of fiscal 2001, and as a percentage of sales, increased from 15% in fiscal 2000 to 22% in fiscal 2001. This increase primarily relates to the addition of VAI’s costs, including amortization of goodwill, and non-recurring costs for trade secrets litigation ($139,000), offset somewhat by reduced amortization on impaired intangible assets from the first quarter.
Operating income was a loss of $1,632,000 for the second quarter of fiscal 2001, reflecting the negative effects of plan implementation costs to improve quality systems, European restructuring costs and lower sales and gross profit for Cincinnati operations. Operating income for the second quarter of fiscal 2000 was $3,400,000.
Interest income decreased $145,000 or 72%, to $56,000 in the second quarter of fiscal 2001. This decrease is attributable to lower average cash balances and lower interest rates.
Interest expense increased $158,000 or 34%, to $618,000 in the second quarter of fiscal 2001. This increase is primarily due to interest on the debt that funded the VAI acquisition and interest on the debt assumed in the VAI acquisition, offset somewhat by lower interest rates.
Other expense, net in the second quarter of fiscal 2001 includes currency losses related to intercompany debt obligations that are denominated in foreign currencies. These losses reflect the reversal of $485,000 of currency gains that occurred in the first quarter of fiscal 2001 based on the weakening of the Euro during the second quarter of fiscal 2001, compared to December 31, 2000.
The effective rate for income tax credits is 40% in the second quarter of fiscal 2001, compared to an effective rate of 41% for the income tax provision in fiscal 2000. The one percentage point decrease reflects the unfavorable effect of certain permanent differences, primarily goodwill amortization. The effective rate in fiscal 2000 includes a benefit for operating losses in certain European jurisdictions. Such losses have not been benefited during fiscal 2001.
Net sales increased $214,000 or 1%, to $29,120,000 for the first six months of fiscal 2001 compared to fiscal 2000. This increase was comprised of volume growth of 4% or $996,000, aggregate price increases of $117,000 and currency losses of (3%) or ($899,000).
Volume growth resulted from the VAI acquisition, which contributed sales of $3,448,000 for the first six months of fiscal 2001. VAI’s contribution was mostly offset by volume declines in the US core business that were caused by the suspension of manufacturing and distribution of approximately 30 products and manufacturing output inefficiencies described above.
International sales were $8,699,000, or 30% of total sales for the first six months of fiscal 2001, compared to $9,629,000, or 33% of total sales, in fiscal 2000. Domestic exports were $2,019,000 for the first six months of fiscal 2001, compared to $2,345,000 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 Profit
Gross profit, including the effects of the inventory write-off of $4,000,000, decreased $5,745,000 or 32%, to $12,345,000 for the first six months of fiscal 2001 compared to fiscal 2000. Gross profit margins decreased from 63% for the first six months of fiscal 2000 to 42% in fiscal 2001. The $4,000,000 inventory write-off accounts for 14 margin points. The remaining decrease of 7 points is primarily attributable to the Cincinnati manufacturing output inefficiencies described above and currency translation losses.
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.
Gross profit margin was also impacted by the VAI acquisition. VAI generates lower gross profit margins than traditional Meridian products; however, their selling and marketing costs are lower, as a percentage of sales, than the traditional Meridian business.
Operating Expenses
Operating expenses, inclusive of asset impairment charges related to FDA matters, plan implementation costs to improve quality systems and European restructuring costs for the first six months of fiscal 2001, increased $13,903,000 or 116%, and as a percentage of sales, increased from 41% in fiscal 2000 to 89% in fiscal 2001. Excluding these special charges, operating expenses increased $2,349,000 or 20%, and as a percentage of sales, increased to 49%. The increase in operating expenses, excluding the special charges, is primarily attributable to the VAI acquisition (accounts for approximately 65% of the 20% increase), costs for the outsourcing arrangement with OraSure for product development, costs of certain clinical trials and normal salary and wage increases.
Research and development expenses increased $970,000 or 101%, to $1,931,000 for the first six months of fiscal 2001, and as a percentage of sales, increased from 3% of sales in fiscal 2000 to 7% in fiscal 2001. This increase primarily relates to the addition of VAI’s costs, costs for the outsourcing arrangement with OraSure for product development using the Uplink technology and costs for certain clinical trials.
Selling and marketing expenses increased $394,000 or 7%, to $6,412,000 for the first six months of fiscal 2001, and as a percentage of sales, increased from 21% in fiscal 2000 to 22% in fiscal 2001. This increase primarily relates to the addition of VAI’s costs.
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General and administrative expenses increased $985,000 or 20%, to $5,995,000 for the first six months of fiscal 2001, and as a percentage of sales, increased from 17% in fiscal 2000 to 21% in fiscal 2001. This increase primarily relates to the addition of VAI’s costs, including amortization of goodwill and non-recurring costs for trade secrets litigation ($222,000).
Operating Income
Operating income was a loss of $13,547,000 for the first six months of fiscal 2001, reflecting the negative effects of the asset impairment charges, plan implementation costs to improve quality systems, European restructuring costs and lower sales and gross profit for Cincinnati operations during the second quarter. Operating income for the first six months of fiscal 2000 was $6,101,000.
Other Income and Expense
Interest income decreased $159,000 or 59%, to $111,000 for the first six months of fiscal 2001. This decrease is attributable to lower average cash balances and lower interest rates.
Interest expense increased $411,000 or 44%, to $1,346,000 for the first six months of fiscal 2001. This increase is primarily due to interest on the debt that funded the VAI acquisition, interest on the debt assumed in the VAI acquisition and higher average working capital borrowings outstanding, offset somewhat by lower interest rates.
Income Taxes
The effective rate for income tax credits is 34% for the first six months of fiscal 2001, compared to an effective rate of 40% for the income tax provision in fiscal 2000. The six-percentage point decrease reflects the unfavorable effect of certain permanent differences, primarily goodwill amortization and the goodwill portion of the asset impairment charge. The effective rate in fiscal 2000 includes a benefit for operating losses in certain European jurisdictions. Such losses have not been benefited during fiscal 2001.
Liquidity and Capital Resources
The Company’s operating cash flow and financing requirements are determined by analyses of operating and capital spending budgets, consideration of acquisition plans and consideration of the recently announced stock buyback program. The Company has historically maintained significant levels of cash, investments and line of credit availability to quickly respond to acquisition opportunities.
Net cash provided by operating activities was $2,892,000 for the first six months of fiscal 2001, compared to $2,676,000 in fiscal 2000. Although the fiscal 2001 period includes a net loss, a substantial portion, related to asset impairment charges and European restructuring, is non-cash in nature. The Company also received a substantial tax refund during the second quarter of fiscal 2001.
Net cash used in investing activities was $811,000 the first six months of fiscal 2001 compared to $3,541,000 in fiscal 2000. Net cash used in investing activities in both periods primarily relates to capital expenditures. Capital expenditures were higher in the first six months of fiscal 2000 because of the renovation of the Cincinnati production facilities to accommodate the Gull products.
Net cash used in financing activities was $2,653,000 in the first six months of fiscal 2001 compared to $1,219,000 of net cash provided by such activities in fiscal 2000. Proceeds from debt obligations, net of repayments, were higher in the first six months of fiscal 2000 due to financing related to the renovation of the Cincinnati production facilities described above.
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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, debt service, dividends and the stock buyback program 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 line of credit facility with a commercial bank that expires in September 2001. As of May 8, 2001, borrowings of $5,543,000 were outstanding on this line of credit, and the current availability was $10,957,000. The Company is in the process of renewing this credit facility under customary terms.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company’s Annual Meeting of Shareholders was held on January 23, 2001. Each of the following matters was voted upon and approved by the Company’s shareholders as indicated below:
(1) | Election of the following six directors: |
| (a)
(b)
(c)
(d)
(e)
(f) | William J. Motto, 13,035,222 votes for, 200,539 withheld and 0 abstentions.
James A. Buzard, 13,029,513 votes for, 206,248 withheld and 0 abstentions.
Robert J. Ready, 13,046,605 votes for, 189,156 withheld and 0 abstentions.
Gary P. Kreider, 13,048,451 votes for, 187,310 withheld and 0 abstentions.
John A. Kraeutler, 13,036,447 votes for, 199,314 withheld and 0 abstentions.
David C. Phillips, 13,033,596 votes for, 202,165 withheld and 0 abstentions |
(2) | Amendment of the Articles of Incorporation to change the Company's name to Meridian Bioscience, Inc., 12,877,206 votes for, 326,001 against and 32,554 abstentions. |
(3) | Amendment to the 1996 Stock Option Plan, 11,632,613 votes for, 1,519,412 against and 83,736 abstentions. |
(4) | Ratification of the appointment of Arthur Andersen LLP as the Company’s independent public accountants for fiscal year 2001, 13,180,222 votes for, 25,181 against and 30,358 abstentions. |
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)
(b) | Exhibits:
None
Reports on Form 8-K:
None. |
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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: May 11, 2001 | MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
/s/Melissa Lueke
Melissa Lueke
Vice President and Chief Financial Officer |
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