SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-14902
Meridian Diagnostics, Inc.
- --------------------------------------------------------------------------------
Incorporated under the laws of Ohio 31-0888197
(I.R.S. Employer Identification No.)
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 at July 30, 1997
- -------------------------- ----------------------------
Common stock, no par value 14,365,189
Page 1
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-
Consolidated Balance Sheets -
June 30, 1997 and September 30, 1996 3-4
Consolidated Statements of Earnings -
Three Months Ended June 30, 1997 and 1996
Nine Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows - Nine Months
Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signature 12
Exhibit 11 Computation of Earnings per Common Share 13
Exhibit 27 Financial Data Schedule 14
Page 2
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
ASSETS
June 30, September 30,
1997 1996
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents $13,653,413 $ 5,648,225
Short-term investments 6,300,805 14,094,299
Accounts receivable,
less allowance of $138,000
and $128,000 for doubtful accounts 10,057,788 9,206,498
Inventories 5,222,854 4,251,531
Prepaid expenses and other 352,734 195,417
Deferred tax assets 464,675 402,125
---------- ----------
Total current assets 36,052,269 33,798,095
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 262,251 277,691
Building improvements 7,170,761 5,864,008
Machinery, equipment and furniture 6,986,764 6,322,071
Construction in progress 183,618 1,061,002
---------- ----------
14,603,394 13,524,772
Less- Accumulated depreciation
and amortization 5,996,381 5,171,388
---------- ----------
Net property, plant and equipment 8,607,013 8,353,384
---------- ----------
OTHER ASSETS:
Long-term receivables and other 264,039 573,710
Deferred royalties 192,323 278,027
Deferred tax assets 191,403 109,503
Deferred debenture offering costs,
net of accumulated
amortization of $102,750 and $1,500 1,225,586 1,260,543
Covenants not to compete, net of
accumulated amortization
of $2,937,821 and $2,381,064 2,582,772 3,139,530
License agreements, net of
accumulated amortization
of $873,153 and $829,987 261,960 305,125
Patents, tradenames, customer lists
and distributorships, net of
accumulated amortization of
$921,776 and $707,474 3,019,674 3,411,534
Other intangible assets, net of
accumulated amortization of
$430,019 and $154,469 2,024,778 2,086,531
Costs in excess of net assets acquired,
net of accumulated amortization
of $393,799 and $310,219 1,351,023 1,434,604
---------- ----------
Total other assets 11,113,558 12,599,107
---------- ----------
Total assets $55,772,840 $54,750,586
=========== ===========
Page 3
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, September 30,
1997 1996
---------- -------------
CURRENT LIABILITIES:
Current portion of capital
lease obligation $ 117,006 $ 139,019
Accounts payable 1,192,181 990,249
Accrued payroll and payroll taxes 688,278 850,722
Other accrued expenses 1,762,220 1,648,175
Income taxes payable 401,607 831,723
---------- ----------
Total current liabilities 4,161,292 4,459,888
---------- ----------
LONG-TERM OBLIGATIONS 20,104,844 20,105,081
---------- ----------
CAPITAL LEASE OBLIGATIONS 584,799 617,619
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
1,000,000 shares
authorized; none issued - -
Common stock, no par value,
50,000,000 shares authorized;
14,365,189 and 14,278,578 shares
issued and outstanding,
respectively, stated at 2,393,852 2,386,153
Additional paid-in capital 20,571,453 20,526,337
Retained earnings 8,404,445 6,809,830
Cumulative foreign currency
translation adjustment (447,845) (154,322)
---------- ----------
Total shareholders' equity 30,921,905 29,567,998
---------- ----------
Total liabilities and shareholders' equity $55,772,840 $54,750,586
=========== ===========
Page 4
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
NET SALES $ 9,082,219 $ 7,559,416 $24,980,724 $20,335,897
COST OF SALES 3,033,863 2,197,321 8,616,232 6,196,415
Gross Profit 6,048,356 5,362,095 16,364,492 14,139,482
OPERATING EXPENSES:
Research and development 391,232 409,036 1,185,470 1,105,675
Selling and marketing 1,912,359 1,564,120 5,512,540 4,378,907
General and administrative 962,810 1,068,388 3,208,824 3,064,568
Total operating expenses 3,266,401 3,041,544 9,906,834 8,549,150
Operating income 2,781,955 2,320,551 6,457,658 5,590,332
OTHER INCOME (EXPENSE):
Licensing and commission fees - 0 - 8,908 7,297 41,846
Investment income 252,329 97,016 763,219 339,648
Interest expense and
amortization
of debt expenses (164,572) (71,774) (1,045,729) (307,792)
Other, net (62,788) 161,825 (55,319) 197,532
Total other income(expense) 24,969 195,975 (330,532) 271,234
Earnings before income taxes 2,806,924 2,516,526 6,127,126 5,861,566
INCOME TAXES 1,109,475 1,017,483 2,454,954 2,378,393
Net earnings $1,697,449 $ 1,499,043 $ 3,672,172 $ 3,483,173
PRIMARY WGHTD AVG NUMBER OF
COMMON SHARES OUTSTANDING 14,365,077 14,266,736 14,333,881 14,136,623
PRIMARY EARNINGS PER
COMMON SHARE $ .12 $ .11 $ .26 $ .25
FULLY DILUTED WGHTD AVG NUMBER
OF COMMON SHARES n/a 14,803,167 n/a 14,794,029
FULLY DILUTED EARNINGS PER
COMMON SHARE n/a $ .10 n/a $ .24
Page 5
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $3,672,172 $3,483,173
Noncash items-
Depreciation of property,
plant and equipment 877,394 741,808
Amortization of intangible
assets and deferred royalties 1,364,523 567,347
Deferred income taxes (81,900) (200,152)
Change in current assets excluding
cash and short-term investments (2,042,480) (1,757,997)
Change in current liabilities,
excluding current portion of
long term obligations (276,583) 1,884,004
Long term receivable and payable (130,984) (126,495)
--------- ---------
Net cash provided by operating activities 3,382,142 4,591,688
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment acquired, net (639,369) (1,185,058)
Sale of short-term investments 7,793,494 -
Royalty Advanced - (37,500)
Patents (40,450) -
Product Acquisition:
Royalty Advanced - (200,000)
Inventory & Equipment - (1,030,000)
Covenants not to compete - (1,260,000)
Patents, tradenames, customer
lists & other assets - (3,416,000)
Cost in excess of net assets acquired - (570,527)
Net cash provided by (used for)
investing activities 7,113,675 (7,699,085)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated debentures offering costs (66,293) -
Proceeds from other long-term obligations 6,902 399,032
Repayment of long-term obligations (112,973) (2,742,941)
Dividends paid (2,077,557) (1,730,561)
Proceeds from issuance of common stock, net 52,815 (53,535)
Proceeds from bank line of credit - 6,218,000
--------- ---------
Net cash provided by (used for)
financing activities (2,197,106) 2,089,995
--------- ---------
Effect of exchange rate changes on cash (293,523) 70,858
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,005,188 (946,544)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,648,225 8,918,637
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,653,413 $7,972,093
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Income taxes $ 2,150,296 $1,883,196
Interest 638,833 111,637
Non-cash activities-
Common stock issued from conversion
of subordinated debentures, net of
amortization of deferred debenture
offering cost of $379,847 and net
conversion cost of $77,649 - $7,409,504
Cashless Exercise of stock options - 66,380
Capital lease obligations $ 51,001 -
Page 6
MERIDIAN DIAGNOSTICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation-
The consolidated financial statements included herein have not been
examined 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 disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the requirements of
the Securities and Exchange Commission, although the Company believes
that the disclosures included in these financial statements are adequate
to make the information not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
(2) Inventories-
Inventories are comprised of the following:
June 30, September 30,
1997 1996
----------- -------------
Raw materials $ 1,732,390 $ 1,223,438
Work-in-process 1,088,931 966,437
Finished goods 2,401,533 2,061,656
----------- -----------
$ 5,222,854 $ 4,251,531
=========== ===========
(3) Income Taxes-
The provisions for income taxes were computed at the estimated annualized
effective tax rates utilizing current tax law in effect, after giving
effect to research and experimentation credits.
Page 7
(4) Earnings Per Common Share-
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share" (Statement 128). This statement
requires the presentation of basic EPS and diluted EPS. Basic EPS is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding. Diluted EPS is
computed by adding to the weighted average number of common shares
outstanding the dilutive effect of additional common shares that would
have been outstanding if the dilutive potential common shares had been
issued. Using the methods prescribed in Statement 128, proforma basic and
diluted earnings per share would be as follows:
1997 1996
----------------- ----------------
Qtr. 9 mos. Qtr. 9 mos.
------- ------- ----------------
Pro forma Basic EPS $ .12 $ .26 $ .11 $ .25
===== ===== ===== ====
Pro forma Diluted EPS $ .12 $ .25 $ .10 $ .24
===== ===== ===== ====
(5) Translation of Foreign Currency
Assets and liabilities of foreign operations are translated using
quarter end exchange rates, and revenues and expenses are translated
using exchange rates prevailing during the year with gains or losses
resulting from translation included in a separate component of
shareholders' equity. Gains and losses resulting from transactions in
foreign currencies were immaterial.
(6) Reclassifications-
Certain reclassifications have been made to the September 30, 1996
financial statements to conform to the June 30, 1997 presentation.
(7) Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 (Statement 121) on "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of."
Statement 121 is required to be applied prospectively for assets to be
held and used. Statement 121 also establishes accounting standards for
long-lived assets that are to be disposed. The initial application of
Statement 121 to assets held for disposal is required to be reported as
the cumulative effect of a change in accounting principle. The Company
is required to adopt Statement 121 in 1997 and, based on current
circumstances, the effect of the adoption will not have a material
effect on its financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (Statement 123) "Accounting for Stock Based
Compensation" establishing financial accounting and reporting standards
for stock-based employee compensation plans. Statement 123 encourages
the use of the fair value based method to measure compensation cost for
stock-based employee compensation plans; however, it also continues to
allow the intrinsic value based method of accounting as prescribed by
APB Opinion No. 25, which is currently used by the Company. If the
intrinsic value based method continues to be used, Statement 123
requires pro forma disclosures of net income and earnings per share, as
if the fair value based method of accounting had been applied. The fair
value based method requires that compensation cost be measured at the
grant date based upon the value of the award and recognized over the
service period, which is normally the vesting period. The Company
adopted Statement 123 in fiscal 1997 and will make the required footnote
disclosures only. Therefore, the adoption of this Statement will not
have a material effect on the Company's financial position or results of
operations.
Page 8
Item 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations
Results of Operations
Consolidated net sales increased $1,523,000, or 20%, to $9,082,000 for the third
fiscal quarter and increased $4,645,000, or 23%, to $24,981,000 for the nine
months ended June 30, 1997. These increases for the quarter were primarily from
continued strong unit volume growth (+27%) offset in part by lower pricing (down
5%) and the currency effect of the stronger dollar versus the lira (down 2%).
The rates of change in volume, price and currency for the nine months
approximate the quarter. Sales of Premier EHEC and Premier 0157, for detection
of toxin producing strains of E. coli, into the Japanese market were a
significant contributor to the volume increase for the quarter as were sales of
the Cambridge products acquired June 24, 1996.
On a product line basis, Premier and ImmunoCard continue to be the principal
growth lines, mainly in those products used for the detection of E. coli, C.
difficile, H. pylori and rotavirus. Para-Pak, FiltraCheck and the mononucleosis
lines were down in total about $250,000, or 10%, for the quarter partially
offsetting the above gains. The Cambridge product line of enteric products
contributed about $750,000 of sales in the third quarter, almost half of the
total growth over the prior year quarter.
Gross profit increased 13% for the quarter and 16% for the nine month period
compared to sales increases of 20% and 23% respectively, resulting in a decline
as a percentage of sales from 70.9% to 66.6% for the quarter and from 69.5% to
65.5% for the nine months. The reduction in the gross profit rate continues to
be primarily attributable to the higher costs of the enteric products acquired
from Cambridge in June 1996 under a one-year inventory purchase agreement at a
cost expected to be higher than the Company's cost of manufacturing when the
acquired product line is fully integrated into the Company's manufacturing
facilities in Cincinnati.
As of June 30, 1997, these products have been largely assimilated into the
Company's manufacturing facilities, however, the previously anticipated
improvement in the gross profit rate for the fourth fiscal quarter will not be
fully realized due to the earlier reported delay in the German registration of
the former Cambridge products under the Meridian label. This delay has resulted
in an extension of the sell-out period of the acquired inventory until the first
quarter of fiscal 1998.
Other factors negatively impacting the gross profit rate were increases in scrap
and replacement costs, royalties and depreciation/insurance expenses related to
the expanded, refurbished manufacturing facilities.
It should also be noted that despite the above increases in costs, gross profit
improved a full percentage point over the second quarter. This improvement stems
from the higher volumes and favorable product mix.
Total operating expenses increased $225,000, or 7%, for the third fiscal quarter
and $1,358,000 or 16%, for the nine months ended June 30, 1997, compared to the
prior year. Total operating expenses were 36.0% of net sales for the quarter,
down 4.3 percentage points from the prior year, and were 39.7% of net sales for
the nine months, down 2.4 percentage points.
Page 9
Research and development expenses for the third fiscal quarter were down
$18,000, or 4%, compared to the prior year quarter reflecting stepped-up cost
control efforts during the third quarter. For the nine months, expenses were up
$80,000, or 7%, attributable to laboratory supplies, professional fees
associated with new product development applications and temporary labor
required to supplement regular staff in new product development.
Selling and marketing expenses increased 22% for the quarter and 26% for the
nine months compared to the comparable prior year periods, primarily from U.S.
sales personnel added during fiscal 1996 to provide improved geographic coverage
and penetration of national accounts, higher national sales meeting expenses and
amortization of certain Cambridge acquisition costs. European selling and
marketing expenses were up approximately 3% for the quarter and down about 5%
for the nine months excluding the effect of currency.
General and administrative expenses decreased 10% for the third fiscal quarter
and increased about 5% for the nine months. The lower expenses for the quarter
reflect in part the accelerated cost controls mentioned above, reductions in
European expenses largely from the stronger dollar versus the lira, plus
revisions to the amortization of certain intangible costs related to prior
product line acquisitions. These revisions are offset in part in higher royalty
expense in cost of goods sold, and do not have a material impact on operating
income. The increases in the nine months are principally related to higher
personnel costs in the U.S., amortization of expenses associated with the
Cambridge acquisition, and outside professional fees for several special
projects. European expenses were relatively flat largely from currency impact in
the third quarter.
Operating income, as a result of the above, increased $461,000, or 20%, and
remained constant as a percentage of sales at 31% for the third fiscal quarter.
For the nine months, operating income increased $867,000, or 16%, but declined
about one-and-one half points as a percentage of sales.
Other income decreased by $171,000 and $602,000 respectively for the three and
nine month periods ended June 30, 1997 because of the interest expense
associated with the 7% Convertible Subordinated Debentures due 2006. In
addition, the third fiscal quarter of last year included an extraordinary gain
from payment of a fully reserved note related to the 1994 Ortho acquisition of
infectious disease products. Increases in interest income reflect the higher
amount of invested cash (from the debentures) during the periods. The cumulative
foreign currency translation adjustment changed by $39,000 during the quarter as
a result of the U.S. dollar strengthening against the lira.
The Company's effective tax rate declined almost one percentage point for the
quarter and one-half point for the nine months period compared to the prior year
as a result of a higher proportion of income being generated in the U.S.
compared to the Company's European subsidiary.
Net earnings increased 13% for the third fiscal quarter to $1,697,000 from
$1,499,000 and increased 5% to $3,672,000 compared to $3,483,000 for nine months
ended June 30, 1996. The corresponding primary earnings per share for the
comparable periods were $0.12 and $0.11 for the quarters respectively, and $0.26
and $0.25 for the nine month periods.
Page 10
Liquidity and Capital Resources
Net cash flow provided by operating activities was $3,382,000 for the nine month
period ended June 30, 1997, down $1,210,000 from last year. This reduction stems
from changes in current liabilities notably lower accounts payable and accrued
expenses plus the timing of income tax payments.
Net cash provided by investing activities increased $14,813,000 principally from
the sale of short term investments with maturities greater than 90 days which
have been reinvested into maturities of less than 90 days and reflected in Cash
and Cash Equivalents plus the effect of the acquisition of Cambridge Biotech in
June 1996 which used about $6,500,000. Net cash used for financing activities
decreased $4,287,000, the major items being higher dividend payments, including
the year-end special cash dividend of $0.025 per share, and the repayment of
long term obligations in fiscal 1996 which was more than offset by the proceeds
from a bank line of credit in June 1996.
Page 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-
Exhibit No. Description Page(s)
----------- ----------- -------
11 Computation of earnings per common share 13
27 Financial Data Schedule 14-16
(b) Reports on Form 8-K - None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
MERIDIAN DIAGNOSTICS, INC.
Date: July 30, 1997 /S/ GERARD BLAIN
---------------------------------
GERARD BLAIN, Vice President,
Chief Financial Officer
(Principal Financial Officer)
Page 12