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 June 30, 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 August 8, 2002 |
Page 1 of 23
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page(s)
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001
Nine Months Ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001 4
Consolidated Balance Sheets
June 30, 2002 and September 30, 2001 5-6
Consolidated Statement of Shareholders' Equity
Nine Months Ended June 30, 2002 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-20
PART II.OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
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 23
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Three Months Nine Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET SALES $ 14,898 $ 13,906 $ 43,545 $ 43,026
COST OF SALES:
Sale of product 6,326 5,556 18,303 18,331
Inventory write-off -- -- -- 4,000
-------- -------- -------- --------
Total cost of sales 6,326 5,556 18,303 22,331
-------- -------- -------- --------
Gross profit 8,572 8,350 25,242 20,695
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 653 616 2,147 2,547
Sales and marketing 2,477 2,465 7,227 8,877
General and administrative 2,501 2,796 7,787 8,785
Acquired in-process research
and development -- 800 -- 800
Asset impairment and FDA
related charges -- 936 -- 11,232
European restructuring -- 150 -- 1,414
-------- -------- -------- --------
Total operating expenses 5,631 7,763 17,161 33,655
-------- -------- -------- --------
Operating income (loss) 2,941 587 8,081 (12,960)
OTHER INCOME (EXPENSE):
Interest income 5 28 26 140
Interest expense (495) (654) (1,538) (2,000)
Other, net 30 (238) 189 (412)
-------- -------- -------- --------
Total other income (expense) (460) (864) (1,323) (2,272)
-------- -------- -------- --------
Earnings (loss) before
income taxes 2,481 (277) 6,758 (15,232)
INCOME TAX PROVISION (BENEFIT) 925 361 2,590 (4,786)
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 1,556 $ (638) $ 4,168 $(10,446)
======== ======== ======== ========
BASIC EARNINGS (LOSS)
PER COMMON SHARE $ 0.11 $ (0.04) $ 0.29 $ (0.72)
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ 0.11 $ (0.04) $ 0.28 $ (0.72)
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC 14,631 14,590 14,615 14,590
DILUTIVE COMMON STOCK OPTIONS 187 - 149 -
-------- -------- -------- --------
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - DILUTED 14,818 14,590 14,764 14,590
======== ======== ======== ========
ANTI-DILUTIVE SECURITIES:
Common stock options 558 1,051 746 1,051
Shares from convertible
debentures 1,243 1,243 1,243 1,243
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
Nine Months Ended June 30, 2002 2001
- -------------------------------------------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 4,168 $(10,446)
Non cash items:
Depreciation of property,
plant and equipment 1,680 1,701
Amortization of intangible assets 1,062 1,839
Acquired in-process research
and development -- 800
Stock based compensation 48 --
Deferred income taxes 981 (3,354)
Gain on sale of common stock received
in demutualization (254) --
Asset impairment and other costs
related to FDA matters -- 13,271
European restructuring charges -- 504
Change in current assets excluding
cash and deferred taxes (702) 2,016
Change in current liabilities,
excluding debt obligations 63 (1,346)
Other 251 799
-------- --------
Net cash provided by operating activities 7,297 5,784
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (2,627) (1,369)
Proceeds from sale of investments 254 9
-------- --------
Net cash used for investing activities (2,373) (1,360)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net activity on revolving credit facility (384) (530)
Repayment of debt obligations (1,933) (2,561)
Dividends paid (2,997) (2,774)
Purchase of treasury stock -- (32)
Proceeds from exercise of stock options 135 11
-------- --------
Net cash used for financing activities (5,179) (5,886)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 191 (87)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (64) (1,549)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,673 4,766
======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,609 $ 3,217
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes paid (received) $ 329 $ (4,146)
Interest 1,272 1,607
Non-cash items:
Capital lease -- 214
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 23
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
ASSETS
CURRENT ASSETS: June 30, September 30,
2002 2001
-------- -------------
Cash and cash equivalents $ 4,609 $ 4,673
Accounts receivable, less allowance of
$964 and $889 for doubtful accounts 12,711 12,526
Inventories 12,950 12,139
Deferred income taxes 398 1,635
Other current assets 1,231 1,525
------- -------
Total current assets 31,899 32,498
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 667 658
Buildings and improvements 13,979 13,970
Machinery, equipment and furniture 14,924 13,756
Construction in progress 2,298 872
------- -------
Total property, plant and equipment 31,868 29,256
Less-accumulated depreciation
and amortization 14,148 12,530
------- -------
Net property, plant and equipment 17,720 16,726
------- -------
OTHER ASSETS:
Deferred debenture offering costs, net 550 652
Goodwill 3,180 2,956
Other intangible assets, net 11,727 12,806
Other assets 290 344
------- -------
Total other assets 15,747 16,758
------- -------
TOTAL ASSETS $65,366 $65,982
======= =======
The accompanying notes are an integral part of these consolidated balance sheets
Page 5 of 23
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: June 30, September 30,
2002 2001
-------- -------------
Current portion of long-term obligations $ 957 $ 2,132
Borrowings under bank lines of credit 5,501 5,885
Accounts payable 2,187 2,370
Accrued payroll costs 2,237 2,103
Other accrued expenses 3,421 3,878
Income taxes payables 673 --
-------- --------
Total current liabilities 14,976 16,368
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Bank debt and capital lease obligations 3,886 4,349
Convertible subordinated debentures 20,000 20,000
DEFERRED TAX LIABILITIES 2,065 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;
14,632,765 and 14,598,970
shares issued and outstanding 2,535 2,535
Treasury stock, 8,300 shares (32) (32)
Additional paid-in capital 21,145 20,962
Retained earnings 2,063 892
Accumulated other comprehensive loss (1,272) (1,413)
-------- --------
Total shareholders' equity 24,439 22,944
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 65,366 $ 65,982
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 6 of 23
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 - - - - - (2,997) - - (2,997)
Stock based compensation - - - - 48 - - - 48
Stock option exercise 34 - - - 135 - - - 135
Comprehensive income:
Net income - - - - - 4,168 - 4,168 4,168
Foreign currency
translation adjustment - - - - - - 141 141 141
-------
Comprehensive income (loss) $ 4,309
=======
------ ------ ------ ------- ------- ------ ---------- --------
Balance at June 30, 2002 14,633 (8) $2,535 $(32) $21,145 $2,063 $(1,272) $24,439
------ ------ ------ ------- ------- ------ ---------- --------
The accompanying notes are an integral part of these consoited financial statements.
Page 7 of 23
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. 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. |
2. 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. |
3. Inventories:
| Inventories are comprised of the following (amounts in thousands): |
June 30, 2002 September 30, 2001
------------- ------------------
Raw materials $ 3,536 $ 3,256
Work-in-process 4,213 4,928
Finished goods 5,201 3,955
--------- --------
$ 12,950 $ 12,139
========= ========
Page 8 of 23
4. Segment Information:
Meridian operates in two geographic segments: Meridian Bioscience, Inc. (MBI) and Meridian Bioscience Europe (MBE). MBI operations consist of manufacturing operations in Cincinnati, Memphis (Viral Antigens subsidiary) and Saco, Maine (BIODESIGN subsidiary) 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. |
------- -------- --------- --------
MBI MBE ELIM(1) Total
------- -------- --------- --------
Three Months - 2002
Net sales $13,295 $ 3,129 $(1,526) $14,898
Operating income 2,799 293 (151) 2,941
Total assets 72,520 11,551 (18,705) 65,366
Three Months - 2001
Net sales $11,772 $ 3,187 $(1,053) $13,906
Operating income (loss) (235) 531 291 587
Total assets 73,302 10,113 (17,278) 66,137
Nine Months - 2002
Net sales $38,545 $8,963 $(3,963) $43,545
Operating income 6,981 1,142 (42) 8,081
Total assets 72,520 11,551 (18,705) 65,366
Nine Months - 2001
Net sales $37,358 $ 9,867 $(4,199) $43,026
Operating loss (12,886) - (74) (12,960)
Total assets 73,302 10,113 (17,278) 66,137
-----------------------
(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 $14,907,000 and $15,496,000 for the quarters ended June 30, 2002 and 2001 respectively. |
5. Intangible Assets and Adoption of SFAS No. 142:
Effective October 1, 2001, Meridian adopted SFAS No. 142, Goodwill and other Intangible Assets. SFAS No. 142 addresses accounting and reporting for acquired goodwill and other intangible assets. Among other things, SFAS No. 142 provides that goodwill and other intangible assets with indefinite lines are no longer subject to amortization over their useful lives, but rather, are now subject to an annual impairment review (or more frequently if impairment indicators arise) by applying a fair-value based test. Meridian has no intangible assets with indefinite lives other than goodwill. Meridian completed the transition analysis required by SFAS No. 142 during the first quarter, and there were no impairments. Pursuant to the provisions of SFAS No. 142, the intangible asset representing the workforce acquired in the Gull acquisition was reclassified to goodwill. The net book value of the acquired workforce at the time of transfer was $118,000. The following table reconciles reported net income (loss) to amounts adjusted to add back goodwill and workforce amortization (in thousands, except per share amounts). |
Page 9 of 23
Three Months Nine Months
Ended June 30, Ended June 30,
--------------- -------------------
2002 2001 2002 2001
------- ------- -------- ----------
Reported net income (loss) $1,556 $ (638) $4,168 $(10,446)
Add back: Goodwill amortization -- 37 -- 124
Workforce amortization -- 8 -- 32
Adjusted net income (loss) $1,556 $ (593) $4,168 $(10,290)
Reported basic earnings (loss) per share $ 0.11 $(0.04) $ 0.29 $ (0.72)
Goodwill and workforce amortization -- -- -- 0.01
Adjusted basic earnings (loss) per share $ 0.11 $(0.04) $ 0.29 $ (0.71)
Reported diluted earnings (loss) per share $ 0.11 $(0.04) $ 0.28 $ (0.72)
Goodwill and workforce amortization -- -- -- 0.01
Adjusted diluted earnings (loss) per share $ 0.11 $(0.04) $ 0.28 $ (0.71)
A summary of Meridian' acquired intangle assets subject to amortization, as of June 30, 2002 is as follows (in thousands). |
Gross Carrying Accumulated
Value Amortization
-------------- -------------
Covenants not to compete $ 800 $ (673)
Core products 3,199 (1,051)
Manufacturing technologies 5,747 (2,242)
Trademarks, licenses and patents 1,787 (971)
Customer lists and supply agreements 7,362 (2,231)
---------- -------------
$ 18,895 $ (7,168)
---------- -------------
The actual aggregate amortization expense for these intangible assets for the nine-month period ended June 30, 2002, was $961,000. The estimated aggregate amortization expense for these intangible assets for each of the five succeeding fiscal years is as follows: fiscal 2003 - $1,242,000, fiscal 2004 - $1,176,000, fiscal 2005 - $1,090,000, fiscal 2006 - $1,086,000 and fiscal 2007 - $1,086,000. |
6. Recently Issued Accounting Standards:
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-lived Assets. SFAS No. 144 establishes a single model for accounting for impairment or disposal of long-lived assets, including the disposal of a segment of a business. Long-lived assets, excluding goodwill and identifiable intangibles with indefinite lives, are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their carrying value. Whether an event or circumstance triggers an impairment is determined by comparing an estimate of the assets’ future cash flows to its carrying value. If an impairment has occurred it is measured by a fair-value based test. SFAS No. 144 requires companies to separately report discontinued operations and extends the reporting to a component of an entity that either has been disposed of (by sale, abandonment or distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of carrying value or fair value, less costs to sell. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Meridian has not yet determined the impact, if any, of adopting SFAS No. 144. |
Page 10 of 23
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities in situations that do not involve a business combination. SFAS No. 146 requires liabilities associated with exit and disposal activities to be expensed as incurred, rather than recognized at the date an entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. |
7. 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. |
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. |
Page 11 of 23
In accordance with the FDA’s directive in the Warning Letter, in September 2001, 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. As anticipated by Meridian, on August 12, 2002, the FDA commenced an on-site follow-up inspection. |
8. 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 ($1,414,000 in the first nine 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. |
9. Biotrin Acquisition
On May 23, 2002, Meridian announced it had executed a letter of intent to acquire all of the capital stock of Biotrin Holdings, plc, headquartered in Dublin, Ireland. The proposed purchase price includes a base amount of euro 13,000,000, future earnout opportunities of up to euro 3,600,000, contingent upon the Parvovirus products achieving defined sales levels, and cash on-hand. Biotrin shareholders may elect to receive euro 2,170,000 at closing in lieu of the contingent earnout opportunity. Meridian will finance the acquisition through an expansion of its credit facilities. |
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Sales
Net sales increased $992,000 or 7%, to $14,898,000 for the third quarter of fiscal 2002 compared to the third 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 12 of 23
International sales were $4,368,000, or 29% of total sales, for the third quarter of fiscal 2002, compared to $4,591,000, or 33% of total sales for the third quarter of fiscal 2001. Domestic exports were $1,239,000 for the third quarter of fiscal 2002, compared to $1,404,000 for the third quarter of fiscal 2001. The remaining international sales were generated by MBE, Meridian’s European distribution businesses.
Gross Profit
Gross profit increased $222,000 or 3%, to $8,572,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. Gross profit margins decreased from 60% for the third quarter of fiscal 2001, to 58% for the third quarter of fiscal 2002. Gross profit for the third quarter of fiscal 2002 includes the negative effects of certain scrap in Cincinnati operations for short-dated products and components, somewhat offset by favorable sales mix in other business units.
Meridian’s overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, antigens and proficiency tests. On a quarterly basis, product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.
Operating Expenses
Operating expenses declined $2,132,000, to $5,631,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. Operating expenses for the third quarter of fiscal 2001 included costs of $936,000, $150,000 and $800,000 related to FDA matters, European restructuring and acquired in-process research and development, respectively. Excluding these charges, operating expenses for the third quarter of fiscal 2002 declined $246,000 or 4%. This decline is primarily attributable to tightly controlled spending and no longer amortizing goodwill due to the adoption of SFAS No. 142 in the first quarter.
Research and development expenses increased $37,000 or 6%, to $653,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001, and as a percentage of sales, was 4% for both the third quarter of fiscal 2002 and the third quarter of fiscal 2001.
Sales and marketing expenses increased $12,000 to $2,477,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001, and as a percentage of sales, declined from 18% for the third quarter of fiscal 2001 to 17% for the third quarter of fiscal 2002.
General and administrative expenses declined $295,000 or 11%, to $2,501,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001, and as a percentage of sales, declined from 20% for the third quarter of fiscal 2001 to 17% for the third quarter of fiscal 2002. This decline is primarily attributable to spending controls and no longer amortizing goodwill due to the adoption of SFAS No. 142.
Operating Income
Excluding the effects of costs for FDA matters, European restructuring and acquired in-process research and development during the third quarter of fiscal 2001, operating income increased $468,000 to $2,941,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. This increase is attributable to higher sales levels and operating expense reductions, all discussed above.
Other Income and Expense
Interest expense declined $159,000 or 24%, to $495,000 for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001. This decrease is primarily attributable to the favorable effects of a lower interest rate environment.
Page 13 of 23
Other expense, net for the third quarters of fiscal 2002 and 2001 included net currency gains (losses) of $57,000 and ($201,000), respectively, a substantial portion related to intercompany transactions that are denominated in foreign currencies. This change is attributable to the level of Euro/US dollar exchange rates during each period as well as strategies that were implemented in the latter part of fiscal 2001 to reduce currency exposure on these types of transactions.
Income Taxes
The effective rate for income taxes is a provision of 37% for the third quarter of fiscal 2002, reflecting the effects of certain favorable book-to-tax return adjustments related to non-U.S. sales activities. The tax provision for the third quarter of fiscal 2001 reflects the negative effects of there being no tax basis in the acquired in-process research and development charge.
Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001
Net Sales
Net sales increased $519,000 or 1%, to $43,545,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001. This increase was primarily attributable to increased contributions from the Viral Antigens business largely offset by the discontinuation of manufacturing and distribution of approximately 30 products during the second quarter of fiscal 2001.
International sales were $13,479,000 or 31% of total sales, for the first nine months of fiscal 2002, compared to $14,140,000, or 33% of total sales for the first nine months of fiscal 2001. Domestic exports were $4,516,000 for the first nine months of fiscal 2002, compared to $4,273,000 for the first nine 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 $4,547,000 or 22%, to $25,242,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001. Gross profit margins increased from 48% for the first nine months of fiscal 2001, to 58% for the first nine months of fiscal 2002. Gross profit for the first nine 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 7 to the consolidated financial statements contained herein). Excluding the effects of the inventory impairment charge, gross profit margin for the first nine months of fiscal 2001 was 57%.
Meridian’s overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, antigens and proficiency tests. On a quarterly basis, product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.
Operating Expenses
Operating expenses declined $16,494,000, to $17,161,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001. Operating expenses for the first nine months of fiscal 2001 included costs of $11,232,000, $1,414,000, and $800,000 related to FDA matters, European restructuring and acquired in-process research and development, respectively. Excluding these charges, operating expenses for the first nine months of fiscal 2002 declined $3,048,000 or 15%. 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.
Page 14 of 23
Research and development expenses declined $400,000 or 16%, to $2,147,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001, and as a percentage of sales, declined from 6% for the first nine months of fiscal 2001 to 5% for the first nine 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 $1,650,000 or 19%, to $7,227,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001, and as a percentage of sales, declined from 21% for the first nine months of fiscal 2001 to 17% for the first nine 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 $998,000 or 11%, to $7,787,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001, and as a percentage of sales, declined from 20% for the first nine months of fiscal 2001 to 18% for the first nine 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, European restructuring and acquired in-process research and development during the first nine months of fiscal 2001, operating income increased $3,595,000 to $8,081,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001. This increase is attributable to increased sales, improved gross profit margins and operating expense reductions, all discussed above.
Other Income and Expense
Interest expense declined $462,000 or 23%, to $1,538,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001. This decrease is primarily attributable to the favorable effects of a lower interest rate environment.
Other expense, net for the first nine 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 nine months of fiscal 2002 and 2001 included net currency losses of $47,000 and $352,000, respectively, a substantial portion related to intercompany transactions that are denominated in foreign currencies. The decrease in currency losses is attributable to the level of Euro/U.S. dollar exchange rates during each period as well as strategies that were implemented in the latter part of fiscal 2001 to reduce currency exposure on these types of transactions.
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Income Taxes
The effective rate for income taxes is a provision of 38% for the first nine months of fiscal 2002, compared to a credit of 31% for the first nine months of fiscal 2001. The effective rate for the first nine months of fiscal 2002 includes the favorable effects of reversing valuation allowance provisions in Belgium established prior to the restructuring of European operations as net operating loss carryforwards in this jurisdiction are being utilized and certain favorable book-to-tax return adjustments related to non-US sales activities. The effective rate for the first nine months of fiscal 2001 includes the unfavorable effects of the goodwill portion of the impairment charges related to FDA matters, a substantial portion of the European restructuring charge and the acquired in-process research and development charge, which could not be utilized for tax purposes.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
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 $1,513,000 or 26%, to $7,297,000 for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001. This increase is primarily attributable to earning levels and changes in deferred taxes, and also reflects cash used to return finished goods inventories to targeted levels. Although the first nine months of fiscal 2001 reflected a significant loss caused by asset impairment related to FDA matters, European restructuring and acquired in-process research and development, a substantial portion of these charges were non-cash in nature.
Net cash used for investing activities was $2,373,000 for the first nine months of fiscal 2002, compared to $1,360,000 for the first nine 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 calendar 2002. Net cash used in investing activities for the first nine months of fiscal 2002 also includes proceeds of $254,000 related to the sale of common stock received in the demutualization of two insurance companies during the first quarter.
Net cash used for financing activities was $5,179,000 for the first nine months of fiscal 2002, compared to $5,886,000 for the first nine months of fiscal 2001. Activity on the revolving credit facility during the first nine months of fiscal 2002 includes approximately $1,000,000 related 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 and fiscal 2003.
Capital Resources
The following table presents Meridian’s financing obligations as of June 30, 2002 (amounts in thousands):
Payments Due for 12-Month Periods Beginning July 1
---------------------------------------------------
2002-03 2003-04 2004-05 2005-06 2006-07 Total
------- ------- ------- ------- ------- ------
Bank term debt $735 $702 $678 $678 $1,432 $4,225
Capital lease obligations 222 177 95 87 37 618
Subordinated debentures - - - - 20,000 20,000
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Meridian has a $25,000,000 credit facility with a commercial bank that 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 August 8, 2002, borrowings of $4,027,000 were outstanding on the line of credit portion of this facility, and the availability was $15,973,000.
The Viral Antigens acquisition, completed in fiscal 2000, provides for additional purchase consideration up to a maximum remaining amount of $7,300,000, contingent upon Viral Antigen’s future earnings through September 30, 2006. Earnout consideration is payable each year, following the period earned. Earnout payments, if any, may require financing under the line of credit or other bank credit facility.
On May 23, 2002, Meridian announced it had executed a letter of intent to acquire all of the capital stock of Biotrin Holdings plc, headquartered in Dublin, Ireland. The proposed purchase price includes a base amount of euro 13,000,000, future earnout opportunities of up to euro 3,600,000, contingent upon the Parvovirus products achieving defined sales levels, and cash on-hand. Biotrin shareholders may elect to receive euro 2,170,000 at closing in lieu of the contingent earnout opportunity. Meridian will finance the acquisition through an expansion of the above credit facility.
Commitments
Contract Research and Development Costs
Meridian has entered into product development agreements with various parties. These agreements require Meridian to make future payments to fund product development activities and, in some cases, to obtain licenses to market and sell related products. Meridian expects that payments under these agreements will amount to as much as $1,650,000 in fiscal 2003, including license fees.
Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products (1% to 8%). Meridian expects that payments under these agreements will amount to as much as $700,000 in fiscal 2003.
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.
Market Risk Exposure
Refer to Meridian’s Annual Report on Form 10-K for the year ended September 30, 2001 for discussion.
FDA Matters
For complete discussion of FDA matters, see Note 7 to consolidated financial statements contained herein.
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 and 2003. 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 have been sufficient so that no further remedial action or enforcement action by the FDA will occur.
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Critical Accounting Policies
The consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States. Such accounting principles requires management to make judgments about estimates and assumptions that affect the reported amount of assets, liabilities, revenues, expenses and related disclosures. Management believes that the following accounting policies are critical to understanding the accompanying consolidated financial statements because the application of such polices requires the use of significant estimates and assumptions and the carrying values of related assets and liabilities are material.
Revenue Recognition
Meridian’s revenues are derived primarily from product sales. Revenue is recognized when product is shipped and title has passed to the buyer. Revenue is reduced for estimated rebates and cash discounts that will be claimed by customers at the date of sale. Rebate agreements are in place with certain independent national distributors and are designed to reimburse such distributors for their cost in handling Meridian’s products. Management estimates reserves for rebate agreements and cash discounts based on historical statistics, current trends and other factors. Changes to these reserves are recorded in the period that they become known.
Inventories
Meridian’s inventories are carried at the lower of cost or market. Cost is determined on a first-in, first-out basis, except for inventories in the Viral Antigens business for which cost is determined on a last-in, first-out basis. Meridian establishes reserves against cost for excess and obsolete materials, finished goods whose shelf life may expire before sale to customers, and other identified inventory matters. Management estimates reserves based on assumptions about future demand and market conditions. If actual market conditions are less favorable than such estimates, additional inventory writedowns would be required and this would negatively affect gross profit margin and overall results of operations. Changes to inventory reserves are recorded in the period that they become known.
Intangibles Assets
Meridian's intangible assets include identifiable intangibles and goodwill. Identifiable intangibles include customer lists, supply agreements, manufacturing technologies, patents, licenses, trade names and non-compete agreements. All of Meridian's identifiable intangibles have finite lives.
During the first quarter of fiscal 2002, Meridian adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives are no longer amortized over their useful lives, but rather, are now subject to an annual impairment review (or more frequently if impairment indicators arise) by applying a fair-value based test. Meridian completed the transition analyses required by SFAS No. 142 during the first quarter, and there were no impairments.
Identifiable intangibles with finite lives are subject to impairment testing as prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. Pursuant to the provisions of SFAS No. 144, identifiable intangibles with finite lives are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their current carrying value. Whether an event or circumstance triggers an impairment is determined by comparing an estimate of the asset’s undiscounted future cash flows to its carrying value. If impairment has occurred, it is measured by a fair-value based test.
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Meridian’s ability to recover its intangible assets, both identifiable intangibles and goodwill, is dependent upon the future cash flows of the related acquired businesses and assets. The application of SFAS Nos. 142 and 144 requires management to make judgments and assumptions regarding future cash flows, including sales levels, gross profit margins, operating expense levels, working capital levels and capital expenditures. With respect to identifiable intangibles, management also makes judgments and assumptions regarding useful lives.
Management considers the following factors in evaluating events and circumstances for possible impairment: (i) significant under-performance relative to historical or projected operating results, (ii) negative industry trends, (iii) sales levels of specific groups of products (related to specific identifiable intangibles), (iv) changes in overall business strategies and (v) other factors.
If actual cash flows are less favorable than projections, this could trigger impairment of intangible assets. If impairment were to occur, this would negatively affect overall results of operations.
Income Taxes
Pursuant to SFAS No. 109, Accounting for Income Taxes, Meridian's provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between income for financial reporting and income for tax purposes.
Meridian’s deferred tax assets include net operating loss carryforwards in both US and foreign jurisdictions. The realization of tax benefits related to net operating loss carryforwards is dependent upon the generation of future taxable income in the applicable jurisdictions. Management assesses the level deferred tax asset valuation allowance by taking into consideration historical and future projected operating results, as well as tax planning strategies. The amount of net deferred tax asset considered realizable could be reduced in future years if estimates of future taxable income during the carryforward period are reduced.
Undistributed earnings in Meridian’s foreign subsidiaries are considered by management to be permanently re-invested in such subsidiaries. Consequently, US deferred tax liabilities on such earnings have not been recorded. Management believes that such US taxes would be largely offset by foreign tax credits for taxes paid in applicable foreign jurisdictions.
Accounting Pronouncements
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-lived Assets. SFAS No. 144 establishes a single model for accounting for impairment or disposal of long-lived assets, including the disposal of a segment of a business. Long-lived assets, excluding goodwill and identifiable intangibles with indefinite lives, are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their carrying value. Whether an event or circumstance triggers an impairment is determined by comparing an estimate of the assets’ future cash flows to its carrying value. If an impairment has occurred it is measured by a fair-value based test. SFAS No. 144 requires companies to separately report discontinued operations and extends the reporting to a component of an entity that either has been disposed of (by sale, abandonment or distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of carrying value or fair value, less costs to sell. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Meridian has not yet determined the impact, if any, of adopting SFAS No. 144.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities in situations that do not involve a business combination. SFAS No. 146 requires liabilities associated with exit and disposal activities to be expensed as incurred, rather than recognized at the date an entity commits to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.
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PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits: |
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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: August 14, 2002 | /s/ Melissa Lueke |
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