SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) |
For the Quarterly Period Ended March 31, 2002
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the transition period from to
Commission file number0-14902
3471 River Hills Drive
Cincinnati, Ohio 45244
(513) 271-3700
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding May 1, 2002 |
Page 1 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIESINDEX
TO QUARTERLY REPORT ON FORM 10-Q
Page(s)
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001
Six Months Ended March 31, 2002 and 2001 3
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2002 and 2001 4
Consolidated Balance Sheets
March 31, 2002 and September 30, 2001 5-6
Consolidated Statement of Shareholders' Equity
Six Months Ended March 31, 2002 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
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.
Page 2 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Three Months Six Months
Ended March 31, Ended March 31,
-------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- ---------
NET SALES $ 15,092 $ 13,866 $ 28,647 $ 29,120
COST OF SALES:
Sale of product 6,433 6,954 11,977 12,775
Inventory write-off -- -- -- 4,000
-------- -------- -------- --------
Total cost of sales 6,433 6,954 11,977 16,775
-------- -------- -------- --------
Gross profit 8,659 6,912 16,670 12,345
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 716 892 1,494 1,931
Sales and marketing 2,440 3,205 4,750 6,412
General and administrative 2,677 3,008 5,286 5,995
Asset impairment and
FDA related charges -- 1,019 -- 10,290
European restructuring -- 420 -- 1,264
-------- -------- -------- --------
Total operating expenses 5,833 8,544 11,530 25,892
-------- -------- -------- --------
Operating income (loss) 2,826 (1,632) 5,140 (13,547)
OTHER INCOME (EXPENSE):
Interest income 13 56 20 111
Interest expense (501) (618) (1,042) (1,346)
Other, net (52) (507) 159 (173)
-------- -------- -------- --------
Total other income (expense) (540) (1,069) (863) (1,408)
-------- -------- -------- --------
Earnings (loss) before
income taxes 2,286 (2,701) 4,277 (14,955)
INCOME TAX PROVISION (BENEFIT) 861 (1,085) 1,665 (5,147)
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 1,425 $ (1,616) $ 2,612 $ (9,808)
======== ======== ======== ========
BASIC EARNINGS (LOSS)
PER COMMON SHARE $ 0.10 $ (0.11) $ 0.18 $ (0.67)
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ 0.10 $ (0.11) $ 0.18 $ (0.67)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 14,617 14,598 14,608 14,596
DILUTIVE COMMON STOCK OPTIONS 168 - 148 -
-------- -------- -------- --------
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - DILUTED 14,785 14,598 14,756 14,596
======== ======== ======== ========
ANTI-DILUTIVE SECURITIES:
Common stock options 667 1,009 775 1,009
Shares from convertible
debentures 1,243 1,243 1,243 1,243
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
Six Months Ended March 31, 2002 2001
- -------------------------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 2,612 $ (9,808)
Non cash items:
Depreciation of property, plant and equipment 1,107 1,204
Amortization of intangible assets 716 1,231
Stock based compensation 40 --
Deferred income taxes 781 (3,720)
Asset impairment and other costs
related to FDA matters -- 13,271
European restructuring charges -- 705
Change in current assets excluding
cash and deferred taxes 18 740
Change in current liabilities,
excluding debt obligations (961) (858)
Other (199) 127
-------- --------
Net cash provided by operating activities 4,114 2,892
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment, net (1,752) (820)
Proceeds from sale of short term investments -- 9
-------- --------
Net cash used for investing activities (1,752) (811)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net activity on revolving credit facility 1,165 (133)
Repayment of debt obligations (1,667) (707)
Dividends paid (1,974) (1,824)
Proceeds from exercise of stock options 117 11
-------- --------
Net cash used for financing activities (2,359) (2,653)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (128) 10
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (125) (562)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,673 4,766
======== ========
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,548 $ 4,204
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes paid (received) $ 283 $ (3,342)
Interest 1,155 1,174
Non-cash items:
Capital lease -- 214
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
ASSETS
------
March 31, September 30,
2002 2001
CURRENT ASSETS: --------- -------------
Cash and cash equivalents $ 4,548 $ 4,673
Accounts receivable, less allowance
of $835 and $889 for doubtful accounts 12,182 12,526
Inventories 13,105 12,139
Deferred income taxes 991 1,635
Other current assets 885 1,525
------- -------
Total current assets 31,711 32,498
PROPERTY, PLANT AND EQUIPMENT:
Land 653 658
Buildings and improvements 13,884 13,970
Machinery, equipment and furniture 14,315 13,756
Construction in progress 1,992 872
------- -------
Total property, plant and equipment 30,844 29,256
Less-accumulated depreciation
and amortization 13,511 12,530
------- -------
Net property, plant and equipment 17,333 16,726
OTHER ASSETS:
Deferred debenture offering costs, net 584 652
Goodwill, net 3,179 2,956
Other intangible assets, net 12,040 12,806
Other assets 296 344
------- -------
Total other assets 16,099 16,758
------- -------
TOTAL ASSETS $65,143 $65,982
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 5 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
March 31, September 30,
2002 2001
--------- -------------
CURRENT LIABILITIES:
Current portion of long-term obligations $ 998 $ 2,132
Borrowings under bank lines of credit 7,050 5,885
Accounts payable 1,990 2,370
Accrued payroll costs 2,876 2,103
Other accrued expenses 2,629 3,878
-------- --------
Total current liabilities 15,543 16,368
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Bank debt and capital lease obligations 3,596 4,349
Convertible subordinated debentures 20,000 20,000
DEFERRED TAX LIABILITIES 2,458 2,321
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares authorized;
none issued -- --
Common stock, no par value,
50,000,000 shares authorized;
14,624,234 and 14,598,970 shares
issued and outstanding,
respectively, stated at 2,535 2,535
Treasury stock, 8,300 shares (32) (32)
Additional paid-in capital 21,119 20,962
Retained earnings 1,530 892
Accumulated other comprehensive loss (1,606) (1,413)
-------- --------
Total shareholders' equity 23,546 22,944
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,143 $ 65,982
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 6 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
(dollars and shares in thousands)
Accumulated
Common Shares Additional Other Total
Shares Held in Common Treasury Paid-in Retained Comprehensive Comprehensive Shareholders'
Issued Treasury Stock Stock Capital Earnings Income (Loss) Income (Loss) Equity
------ -------- ------ -------- ---------- -------- ------------- ------------- ------------
Balance at September 30, 2001 14,599 (8) $2,535 $ (32) $ 20,962 $ 892 $ (1,413) $ -- $ 22,944
Dividends paid -- -- -- -- -- (1,974) -- -- (1,974)
Stock based compensation -- -- -- -- 40 -- -- -- 40
Stock option exercise 25 -- -- -- 117 -- -- -- 117
Comprehensive income:
Net income -- -- -- -- -- 2,612 -- 2,612 2,612
Foreign currency
translation adjustment -- -- -- -- -- -- (193) (193) (193)
---------
Comprehensive income (loss) $ 2,419
=========
------ -- ------ ------ -------- ------- -------- --------
Balance at March 31, 2002 14,624 (8) $2,535 $ (32) $ 21,119 $ 1,530 $ (1,606) $ 23,546
====== == ====== ====== ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7 of 17
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements(Unaudited)
- 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 Meridian 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 the consolidated financial statements and notes thereto included in Meridian’s Annual Report on Form 10-K for the Year Ended September 30, 2001. Certain reclassifications have been made to prior period financial statements to conform with the current year presentation.
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. - 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 income (loss). Revenues and expenses are translated using exchange rates prevailing during the period. Meridian also recognizes foreign currency transaction gains and losses on certain assets and liabilities that are denominated in the Euro currency. These gains and losses are included in other income and expense in the accompanying consolidated statements of operations. - Inventories:
Inventories are comprised of the following (amounts in thousands):
March 31, 2002 September 30, 2001 -------------- ------------------ Raw materials $ 3,521 $ 3,256 Work-in-process 4,669 4,928 Finished goods 4,915 3,955 --------- --------- $ 13,105 $ 12,139 ========= ========= Page 8 of 17 - 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 the manufacture and distribution of bioresearch reagents and 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 three months and six months ended March 31, 2002 and 2001 is as follows (in thousands):MBI MBE ELIM(1) Total ------- ------ -------- ------ Three Months - 2002 Net sales $13,293 $3,039 $(1,240) $15,092 Operating income 2,246 460 120 2,826 Total assets 71,738 10,477 (17,072) 65,143 Three Months - 2001 Net sales 11,793 3,381 (1,308) 13,866 Operating income (loss) (1,672) 139 (99) (1,632) Total assets 80,141 11,064 (21,755) 69,450 Six Months - 2002 Net sales $25,250 $5,834 $(2,437) $28,647 Operating income 4,182 849 109 5,140 Total assets 71,738 10,477 (17,072) 65,143 Six Months - 2001 Net sales 25,586 6,680 (3,146) 29,120 Operating loss (12,651) (531) (365) (13,547) Total assets 80,141 11,064 (21,755) 69,450 (1) Eliminations consist of intersegment transactions.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 goodwill and intangibles of $15,219,000 and $15,250,000 for the quarters ended March 31, 2002 and 2001 respectively. - Recently Issued Accounting Standards:
Effective October 1, 2001, Meridian adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). Among other things, SFAS No 142 provides that, upon adoption, goodwill and other intangible assets with indefinite lives will no longer be subject to amortization over their useful lives. Rather, goodwill will be subject to at least an annual review (or more frequently if impairment indicators arise) for impairment by applying a fair-value-based test. Meridian has recognized goodwill for several past acquisition transactions. Meridian has no intangible assets with indefinite lives other than goodwill. Meridian has completed transition impairment analyses of both goodwill and specifically identified intangible assets. There were no impairments to these assets. The following table reconciles reported net income (loss) to amounts adjusted to add back goodwill and workforce amortization.Page 9 of 17
Three Months Six Months Ended March 31, Ended March 31, ----------------- ----------------- 2002 2001 2002 2001 ------- ------- ------- ------- Reported net income (loss) $ 1,425 $(1,616) $ 2,612 $(9,808) Add back: Goodwill amortization -- 37 -- 96 Workforce amortization -- 8 -- 16 ------- ------- ------- ------- Adjusted net income (loss) $ 1,425 $(1,571) $ 2,612 $(9,696) ------- ------- ------- ------- Reported basic earnings (loss) per share $ 0.10 $ (0.11) $ 0.18 $ (0.67) Goodwill and workforce amortization -- -- -- 0.01 ------- ------- ------- ------- Adjusted basic earnings (loss) per share $ 0.10 $ (0.11) $ 0.18 $ (0.66) ------- ------- ------- ------- Reported diluted earnings (loss) per share $ 0.10 $ (0.11) $ 0.18 $ (0.67) Goodwill and workforce amortization -- -- -- 0.01 ------- ------- ------- ------- Adjusted diluted earnings (loss) per share $ 0.10 $ (0.11) $ 0.18 $ (0.66) ------- ------- ------- -------- FDA Matters:
During January 2001, the FDA completed a follow-up inspection of Meridian’s compliance with the Quality Systems Regulations that govern 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 June 2001, Meridian received a Warning Letter from the FDA which summarized and reiterated certain of the observations made by the FDA during their follow-up inspection completed in January 2001. Meridian responded to the Warning Letter on July 20, 2001.
In January 2001, Meridian submitted a comprehensive plan to the FDA outlining specific steps it committed to undertake to improve its quality systems. To concentrate and focus resources on QSR compliance, Meridian discontinued the manufacture and distribution of approximately 30 products. The fiscal 2001 costs of implementing the plan included costs for outside consultants with experience in the quality system regulations, validation and computer software and equipment. During fiscal 2001, Meridian incurred plan implementation costs in the amount of $2,322,000, primarily related to consulting fees. On an on-going basis, Meridian has considered the effects of incremental costs of compliance with QSR in its cost structure. Meridian believes that such incremental costs of compliance with QSR will be offset by cost reductions and efficiencies related to the restructuring of Cincinnati manufacturing operations, and consequently, gross profit margins for the diagnostics business are expected to approach 1999 - 2000 levels. Meridian continues to engage in activities designed to reduce costs, improve operations and replace products that were discontinued.
As a result of the decision to discontinue the manufacturing and distribution of approximately 30 products, Meridian could not recover the cost of certain assets, and consequently, recorded the following pre-tax charges during the first quarter of fiscal 2001 (in thousands):Page 10 of 17
Product inventory write-off $ 4,000 Product recall costs 700 Write-off of sales-type lease receivables 336 Impaired instrumentation equipment 666 Impaired intangible assets 7,569 ------- $13,271 =======Impaired intangible assets included 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. During the fourth quarter of fiscal 2001, product recall activities were completed for a total cost of approximately $181,000, which reduced this aggregate pre-tax charge to $12,752,000.
In accordance with the FDA’s directive in the Warning Letter, Meridian engaged an outside independent auditor to evaluate Meridian’s progress in implementing its corrective plan. Based on an extensive review of documents and an on-site visit, the auditors substantiated Meridian’s progress in addressing the issues raised in the FDA inspection and Warning Letter.
Contingent upon the successful restructuring of operations and the acceptance of the plan by the FDA, Meridian expects cash flows from operations to be sufficient to fund working capital needs, debt service and dividends during fiscal 2002. Meridian is communicating with the FDA on a periodic basis to advise it on the progress of the plan implementation. At present, it is uncertain whether Meridian’s actions will be sufficient so that no further remedial action or enforcement action by the FDA will occur.- 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. During the second quarter of fiscal 2001, Meridian completed the transfer of the German business to an independent distributor. Total costs for the European restructuring plan were $2,310,000, ($800,000 recognized in the fourth quarter of fiscal 2000 and $1,510,000 recognized in fiscal 2001 ($1,264,000 in the first six months). Restructuring costs included severance, future lease costs and asset writedowns for accounts receivable, fixed assets and certain intangible assets. The restructuring plan is complete and Meridian does not expect to incur additional restructuring costs. - FDA Matters:
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net Sales
Net sales increased $1,226,000 or 9%, to $15,092,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. This increase was primarily attributable to the on going rebuilding of sales after the discontinuation of manufacturing and distribution of approximately 30 products during the second quarter of fiscal 2001, and increased contributions from the Viral Antigens business.
Page 11 of 17
International sales were $4,310,000, or 29% of total sales, for the second quarter of fiscal 2002, compared to $4,543,000, or 33% of total sales for the second quarter of fiscal 2001. Domestic exports were $1,271,000 for the second quarter of fiscal 2002, compared to $1,162,000 for the second quarter of fiscal 2001. The remaining international sales were generated by MBE, Meridian’s European distribution businesses. MBE’s sales reflect the move to a distribution arrangement in Germany effective January 1, 2001, rather than utilization of a direct sales force, as well as depressed market conditions in Germany.
Gross Profit
Gross profit increased $1,747,000 or 25%, to $8,659,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. Gross profit margins increased from 50% for the second quarter of fiscal 2001, to 57% for the second quarter of fiscal 2002. Gross profit for the second quarter of fiscal 2001 includes the negative effects of certain inefficiencies related to products manufactured in Cincinnati, because during this time period, resources were concentrated on execution of the plan submitted to the FDA (see Note 6 to the consolidated financial statements contained herein).
Meridian’s overall operations in the US and Europe consist of several component business units, each with varying gross profit margins in the normal course of business. On a quarterly basis, sales mix shifts can cause the consolidated gross profit margin to fluctuate by one or two points. An example of this occurred during fiscal 2002 to date. Gross profit margin for the first quarter of fiscal 2002 was 59% compared to 57% for the second quarter of fiscal 2002. The decline for the second quarter was primarily due to sales mix variations within the US business units.
Operating Expenses
Operating expenses declined $2,711,000, to $5,833,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. Operating expenses for the second quarter of fiscal 2001 included costs of $1,019,000 and $420,000 related to FDA matters and European restructuring, respectively. Excluding these charges, operating expenses for the second quarter of fiscal 2002 declined $1,272,000 or 18%. This decline is primarily attributable to general cost-cutting measures implemented across all Meridian business units and tightly controlled spending.
Research and development expenses declined $176,000 or 20%, to $716,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001, and as a percentage of sales, declined from 6% for the second quarter of fiscal 2001 to 5% for the second quarter of fiscal 2002. This decline is primarily attributable to lower outside contract research and clinical trial costs based on timing of projects, as well as the favorable effects of spending controls.
Sales and marketing expenses declined $765,000 or 24%, to $2,440,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001, and as a percentage of sales, declined from 23% for the second quarter of fiscal 2001 to 16% for the second quarter of fiscal 2002. This decline is primarily attributable to certain spending controls and cost-cutting measures, including reduced spending on advertising, promotional materials, travel and conventions, and lower headcount in Cincinnati. In addition, freight costs to ship product to customers from the Cincinnati manufacturing facility has been reduced as a result of better management of this element of operations.
General and administrative expenses declined $331,000 or 11%, to $2,677,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001, and as a percentage of sales, declined from 22% for the second quarter of fiscal 2001 to 18% for the second quarter of fiscal 2002. This decline is primarily attributable to lower headcount in Cincinnati operations, other spending controls and cost-cutting measures and no longer amortizing goodwill due to the adoption of SFAS No. 142.
Page 12 of 17
Operating Income
Excluding the effects of costs for FDA matters and European restructuring during the second quarter of fiscal 2001, operating income increased $3,019,000 to $2,826,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. This increase is attributable to higher sales levels, improved gross profit margins and operating expense reductions, all discussed above.
Other Income and Expense
Interest expense declined $117,000 or 19%, to $501,000 for the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001. This decrease is primarily attributable to the favorable effects of a lower interest rate environment and lower overall debt levels.
Other expense, net for the second quarters of fiscal 2002 and 2001 included net currency losses of $65,000 and $477,000, respectively, a substantial portion related to intercompany transactions that are denominated in foreign currencies. This decrease is attributable to the level of Euro exchange rates during each period as well as strategies that have been implemented to reduce currency exposure on these types of transactions.
Income Taxes
The effective rate for income taxes is a provision of 38% for the second quarter of fiscal 2002, compared to a credit of 40% for the second quarter of fiscal 2001. The effective rate for the second quarter of fiscal 2002 includes the favorable effects of reversing valuation allowance provisions in Belgium as net operating loss carryforwards in this jurisdiction are being utilized.
Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001
Net Sales
Net sales decreased $473,000 or 2%, to $28,647,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001. This decrease was primarily attributable to the discontinuation of manufacturing and distribution of approximately 30 products during the second quarter of fiscal 2001.
International sales were $8,256,000, or 29% of total sales, for the first six months of fiscal 2002, compared to $8,699,000, or 30% of total sales for the first six months of fiscal 2001. Domestic exports were $2,422,000 for the first six months of fiscal 2002, compared to $2,019,000 for the first six months of fiscal 2001. The remaining international sales were generated by MBE, Meridian’s European distribution businesses. MBE’s sales reflect the move to a distribution arrangement in Germany effective January 1, 2001, rather than utilization of a direct sales force, as well as depressed market conditions in Germany.
Gross Profit
Gross profit increased $4,325,000 or 35%, to $16,670,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001. Gross profit margins increased from 42% for the first six months of fiscal 2001, to 58% for the first six months of fiscal 2002. Gross profit for the first six months of fiscal 2001 includes the negative effects of an inventory impairment charge in the amount of $4,000,000 related to FDA matters, as well as certain inefficiencies related to products manufactured in Cincinnati, because during the second quarter of fiscal 2001, resources were concentrated on execution of the plan submitted to the FDA (see Note 6 to the consolidated financial statements contained herein). Excluding the effects of the inventory impairment charge, gross profit margin for the first six months of fiscal 2001 was 56%.
Page 13 of 17
Meridian’s overall operations in the US and Europe consist of several component business units, each with varying gross profit margins in the normal course of business. On a quarterly basis, each business unit’s sales contribution may vary such that consolidated gross profit margin could vary by one or two points.
Operating Expenses
Operating expenses declined $14,362,000, to $11,530,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001. Operating expenses for the first six months of fiscal 2001 included costs of $10,290,000 and $1,264,000 related to FDA matters and European restructuring, respectively. Excluding these charges, operating expenses for the first six months of fiscal 2002 declined $2,808,000 or 20%. This decline is primarily attributable to closure of the German distribution operation during the first quarter of fiscal 2001, general cost-cutting measures implemented across all Meridian business units and tightly controlled spending.
Research and development expenses declined $437,000 or 23%, to $1,494,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001, and as a percentage of sales, declined from 7% for the first six months of fiscal 2001 to 5% for the first six months of fiscal 2002. This decline is primarily attributable to lower outside contract research and clinical trial costs based on timing of projects, as well as the favorable effects of spending controls.
Sales and marketing expenses declined $1,662,000 or 26%, to $4,750,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001, and as a percentage of sales, declined from 22% for the first six months of fiscal 2001 to 17% for the first six months of fiscal 2002. This decline is primarily attributable to closure of the German distribution operation during the first quarter of fiscal 2001, as well as certain spending controls and cost-cutting measures, including reduced spending on advertising, promotional materials, travel and conventions, and lower headcount in Cincinnati. In addition, freight costs to ship product to customers from the Cincinnati manufacturing facility has been reduced as a result of better management of this element of operations.
General and administrative expenses declined $709,000 or 12%, to $5,286,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001, and as a percentage of sales, declined from 21% for the first six months of fiscal 2001 to 18% for the first six months of fiscal 2002. This decline is primarily attributable to lower headcount in Cincinnati operations, other spending controls and cost-cutting measures and no longer amortizing goodwill due to the adoption of SFAS No. 142.
Operating Income
Excluding the effects of costs for FDA matters and European restructuring during the first six months of fiscal 2001, and despite the 2% decline in sales, operating income increased $3,133,000 to $5,140,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001. This increase is attributable to improved gross profit margins and operating expense reductions, all discussed above.
Other Income and Expense
Interest expense declined $304,000 or 23%, to $1,042,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001. This decrease is primarily attributable to the favorable effects of a lower interest rate environment and lower overall debt levels.
Page 14 of 17
Other expense, net for the first six months of fiscal 2002 included a net gain of $254,000 related to the sale of shares of common stock received in the demutualization of two insurance companies during the first quarter of fiscal 2002. Other expense, net for the first six months of fiscal 2002 and 2001 included net currency losses of $104,000 and $151,000, respectively, a substantial portion related to intercompany transactions that are denominated in foreign currencies. This decrease is attributable to the level of Euro exchange rates during each period as well as strategies that have been implemented to reduce currency exposure on these types of transactions.
Income Taxes
The effective rate for income taxes is a provision of 39% for the first six months of fiscal 2002, compared to a credit of 34% for the first six months of fiscal 2001. The effective rate for the first six months of fiscal 2002 includes the favorable effects of reversing valuation allowance provisions in Belgium as net operating loss carryforwards in this jurisdiction are being utilized. The effective rate for the first six months of fiscal 2001 includes the unfavorable effects of the goodwill portion of the impairment charges related to FDA matters and a substantial portion of the European restructuring charge, which could not be utilized for tax purposes.
Liquidity and Capital Resources
Meridian’s operating cash flow and financing requirements are determined by analyses of operating and capital spending budgets and consideration of acquisition plans. Meridian has historically maintained significant levels of cash and line of credit availability to respond to acquisition opportunities quickly.
Net cash provided by operating activities increased $1,222,000 or 42%, to $4,114,000 for the first six months of fiscal 2002 compared to the first six months of fiscal 2001. This increase is primarily attributable to earning levels and changes in deferred taxes. Although the first six months of fiscal 2001 reflected a significant loss caused by asset impairment related to FDA matters and European restructuring, a substantial portion of theses charges were non-cash in nature.
Net cash used for investing activities was $1,752,000 for the first six months of fiscal 2002, compared to $811,000 for the first six months of fiscal 2001, and primarily related to capital expenditures during both periods. The increase during fiscal 2002 reflects the continued expansion of Viral Antigens protein development facilities that are expected to be operational in the summer of 2002.
Net cash used for financing activities was $2,359,000 for the first six months of fiscal 2002, compared to $2,653,000 for the first six months of fiscal 2001. Net borrowings on the revolving credit facility during the first six months of fiscal 2002 were primarily attributable to repayment of the mortgage loan for the Viral Antigens facilities that matured in January 2002.
Contingent upon the FDA’s acceptance of Meridian’s comprehensive plan to improve its quality systems, net cash flows from operating activities are anticipated to fund working capital requirements, debt service and dividends during the remainder of fiscal 2002. Earnout payments, if any, under the Viral Antigens purchase agreement may require financing under the line of credit or other bank credit facility. Meridian has a $25,000,000 credit facility with a commercial bank. This facility includes $5,000,000 of term debt and capital lease capacity and a $20,000,000 line of credit that expires in September 2004. As of May 1, 2002, borrowings of $5,057,000 were outstanding on the line of credit portion of this facility, and the availability was $14,943,000.
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Euro Conversion
Effective January 1, 2002, the Euro was introduced as the official single currency for the 11 participating countries in the European Monetary Union. Meridian’s systems have been updated to process Euro transactions and no significant problems have been experienced to date. The future impact, if any, of the Euro on Meridian’s competitive position is unknown.
PART II. OTHER INFORMATION
Item 5. Other Information
Meridian’s Annual Meeting of Shareholders was held on January 22, 2002. Each of the following matters was voted upon and approved by Meridian’s shareholders as indicated below:
(1) | Election of the following six directors: |
(2) | Ratification of appointment of Arthur Andersen LLP as Meridian’s independent public accountants for fiscal year 2002, 13,338,422 votes for, 168,020 votes against and 29,129 abstentions. Meridian and its Audit Committee are currently evaluating new independent public accounts. |
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) 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.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Date: May 6, 2002 | /s/ Melissa Lueke |
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