Form 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-14902
MERIDIAN BIOSCIENCE, INC.
Incorporated under the laws of Ohio
31-0888197
(I.R.S. Employer Identification No.)
3471 River Hills Drive
Cincinnati, Ohio 45244
(513) 271-3700
Indicate by 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 þ       No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding July 31, 2009
     
Common Stock, no par value   40,521,003
 
 

 

 


 

MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
         
    Page(s)  
PART I FINANCIAL INFORMATION
       
 
       
Item 1. Financial Statements (Unaudited)
       
 
       
    2  
 
       
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    4-5  
 
       
    6  
 
       
    7-14  
 
       
    14-19  
 
       
    19  
 
       
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    20  
 
       
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    21  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. Such statements, whether expressed or implied, are based upon current expectations of the Company and speak only as of the date made. The Company assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following: 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 a number of internally developed products, 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. Recessionary pressures on the economy and the markets in which our customers operate can change expected results, as well as adverse trends in buying patterns from customers. 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. Changes in the relative strength or weakness of the U.S. dollar can also change expected results. One of Meridian’s main growth strategies is the 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. In addition to the factors described in this paragraph, Part I, Item 1A Risk Factors of our Form 10-K contains a list and description of uncertainties, risks and other matters that may affect the Company which are incorporated by reference into this filing.

 

 


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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,  
    2009     2008     2009     2008  
 
                               
NET SALES
  $ 38,240     $ 33,068     $ 105,813     $ 103,164  
 
                               
COST OF SALES
    14,917       11,781       38,172       39,010  
 
                       
Gross profit
    23,323       21,287       67,641       64,154  
 
                       
 
                               
OPERATING EXPENSES:
                               
Research and development
    1,958       1,322       6,361       4,372  
Sales and marketing
    4,509       4,459       13,451       13,697  
General and administrative
    4,325       4,507       12,135       13,155  
 
                       
Total operating expenses
    10,792       10,288       31,947       31,224  
 
                       
 
                               
Operating income
    12,531       10,999       35,694       32,930  
 
                               
OTHER INCOME:
                               
Interest income
    54       297       400       1,148  
Other, net
    129       183       57       156  
 
                       
Total other income
    183       480       457       1,304  
 
                       
 
                               
Earnings before income taxes
    12,714       11,479       36,151       34,234  
 
                               
INCOME TAX PROVISION
    4,212       3,716       12,322       11,716  
 
                       
 
                               
NET EARNINGS
  $ 8,502     $ 7,763     $ 23,829     $ 22,518  
 
                       
 
                               
BASIC EARNINGS PER COMMON SHARE
  $ 0.21     $ 0.19     $ 0.59     $ 0.56  
 
                               
DILUTED EARNINGS PER COMMON SHARE
  $ 0.21     $ 0.19     $ 0.58     $ 0.55  
 
                               
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC
    40,500       40,150       40,372       40,043  
 
                               
DILUTIVE COMMON STOCK OPTIONS
    691       900       749       975  
 
                       
 
                               
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED
    41,191       41,050       41,121       41,018  
 
                       
 
                               
ANTI-DILUTIVE SECURITIES:
                               
Common stock options
    150       100       132       52  
 
                       
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.17     $ 0.14     $ 0.48     $ 0.39  
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

 

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
                 
Nine Months Ended June 30,   2009     2008  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net earnings
  $ 23,829     $ 22,518  
Non-cash items:
               
Depreciation of property, plant and equipment
    2,179       2,142  
Amortization of intangible assets
    1,186       1,206  
Stock based compensation
    828       1,190  
Deferred income taxes
    (536 )     649  
Loss on disposition of fixed assets
    39       52  
Unrealized loss on auction-rate securities and rights, net
    44        
Change in accounts receivable, inventory, and prepaid expenses
    767       (1,073 )
Change in accounts payable, accrued expenses, and income taxes payable
    (3,902 )     (4,274 )
Other
    25       (276 )
 
           
Net cash provided by operating activities
    24,459       22,134  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisitions of property, plant and equipment
    (2,324 )     (2,905 )
Proceeds from sales of property, plant and equipment
    5       12  
Purchases of intangibles and other assets
    (109 )     (1,108 )
Acquisition earnout payments
    (7 )     (157 )
Auction-rate security (purchases) redemption calls
    425       (7,750 )
 
           
Net cash used for investing activities
    (2,010 )     (11,908 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Dividends paid
    (19,383 )     (15,624 )
Proceeds and tax benefits from exercises of stock options
    1,080       2,780  
 
           
Net cash used for financing activities
    (18,303 )     (12,844 )
 
           
 
               
Effect of Exchange Rate Changes on Cash and Equivalents
    (17 )     268  
 
           
 
               
Net Increase (Decrease) in Cash and Equivalents
    4,129       (2,350 )
 
               
Cash and Equivalents at Beginning of Period
    49,297       49,400  
 
           
 
               
Cash and Equivalents at End of Period
  $ 53,426     $ 47,050  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
ASSETS
                 
    June 30,     September 30,  
    2009     2008  
CURRENT ASSETS:
               
Cash and equivalents
  $ 53,426     $ 49,297  
Accounts receivable, less allowances of $250 and $230
    22,329       25,098  
Inventories
    21,756       19,945  
Prepaid expenses and other current assets
    3,291       3,382  
Deferred income taxes
    1,756       1,736  
 
           
 
               
Total current assets
    102,558       99,458  
 
           
 
               
PROPERTY, PLANT AND EQUIPMENT:
               
Land
    887       892  
Buildings and improvements
    18,882       16,977  
Machinery, equipment and furniture
    27,475       26,458  
Construction in progress
    1,732       3,391  
 
           
Subtotal
    48,976       47,718  
Less: accumulated depreciation and amortization
    29,166       28,043  
 
           
 
               
Net property, plant and equipment
    19,810       19,675  
 
           
 
               
OTHER ASSETS:
               
Goodwill
    9,866       9,861  
Other intangible assets, net
    7,707       8,786  
Restricted cash
    1,000       1,000  
Investments in auction rate securities and rights
    7,281       7,480  
Other long-term assets
    148       171  
 
           
 
               
Total other assets
    26,002       27,298  
 
           
 
               
TOTAL ASSETS
  $ 148,370     $ 146,431  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
    June 30,     September 30,  
    2009     2008  
CURRENT LIABILITIES:
               
Accounts payable
  $ 3,852     $ 4,777  
Accrued employee compensation costs
    3,472       6,777  
Other accrued expenses
    3,675       3,616  
Income taxes payable
    1,205       891  
 
           
 
               
Total current liabilities
    12,204       16,061  
 
           
 
               
DEFERRED INCOME TAXES
    1,158       1,881  
 
               
COMMITMENTS AND CONTINGENCIES
               
 
               
SHAREHOLDERS’ EQUITY:
               
 
               
Preferred stock, no par value, 1,000,000 shares authorized, none issued
           
Common shares, no par value, 71,000,000 shares authorized, 40,520,891 and 40,313,656 shares issued, respectively
           
Additional paid-in capital
    91,098       89,107  
Retained earnings
    43,462       39,016  
Accumulated other comprehensive income
    448       366  
 
           
 
               
Total shareholders’ equity
    135,008       128,489  
 
           
 
               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 148,370     $ 146,431  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
(dollars and shares in thousands)
                                                 
                            Accumulated              
    Common     Additional             Other           Total  
    Shares     Paid-in     Retained     Comprehensive     Comprehensive     Shareholders’  
    Issued     Capital     Earnings     Income (Loss)     Income (Loss)     Equity  
Balance at September 30, 2008
    40,314     $ 89,107     $ 39,016     $ 366             $ 128,489  
Cash dividends paid
                (19,383 )                   (19,383 )
Exercise of stock options
    131       1,170                           1,170  
Issuance of restricted shares
    76                                  
Stock based compensation
          828                           828  
Cost of S-8 registration statement
          (7 )                         (7 )
Comprehensive income:
                                               
Net earnings
                23,829           $ 23,829       23,829  
Hedging activity
                      (3 )     (3 )     (3 )
Transfer of AFS securities to trading classification
                      270       270       270  
Other comprehensive income taxes
                      35       35       35  
Foreign currency translation adjustment
                      (220 )     (220 )     (220 )
 
                                             
Comprehensive income
                                  $ 23,911          
 
                                   
 
                                               
Balance at June 30, 2009
    40,521     $ 91,098     $ 43,462     $ 448             $ 135,008  
 
                                   
The accompanying notes are an integral part of these consolidated financial statements.

 

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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Dollars in Thousands, Except Per Share Amounts
(Unaudited)
1. Basis of Presentation:
The consolidated financial statements included herein have not been audited by an independent registered public accounting firm, 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 (SEC). Meridian believes that the disclosures included in these financial statements are adequate to make the information not misleading.
It is suggested that these consolidated interim financial statements be read in conjunction with the consolidated annual financial statements and notes thereto, included in Meridian’s Annual Report on Form 10-K for the Year Ended September 30, 2008.
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year.
Further, in connection with preparation of the condensed consolidated financial statements, we evaluated subsequent events after the balance sheet date of June 30, 2009 through July 31, 2009.
2. Significant Accounting Policies:
(a) Revenue Recognition -
Revenue is generally recognized from sales when product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at the date of sale for estimated rebates that will be claimed by customers. Management estimates accruals for rebate agreements based on historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Our rebate accruals were $3,871 at June 30, 2009 and $3,259 at September 30, 2008.
Life Science revenue for contract services may come from standalone arrangements for process development and/or optimization work (contract research and development services) or custom manufacturing, or multiple-deliverable arrangements that include process development work followed by larger-scale manufacturing (both contract research and development services and contract manufacturing services). Revenue is recognized based on each of the multiple deliverables in a given arrangement having distinct and separate fair values. Fair values are determined via consistent pricing between standalone arrangements and multiple deliverable arrangements, as well as a competitive bidding process. Contract research and development services may be performed on a “time and materials” basis or “fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and acceptance by the customer. For contract manufacturing services, revenue is generally recognized upon delivery of product and acceptance by the customer. In some cases, customers may request that we store on their behalf, clinical grade biologicals that we produce under contract manufacturing agreements. These cases arise when customers do not have clinical grade storage facilities or do not want to risk contamination during transport. For such cases, revenue may be recognized on a bill-and-hold basis pursuant to the satisfaction of criteria in SEC Staff Accounting Bulletins Nos. 101 and 104 related to bill-and-hold revenue recognition.

 

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Trade accounts receivable are recorded in the accompanying consolidated balance sheet at invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historical write-off experience. The allowance for doubtful accounts and related metrics, such as days’ sales outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed individually for collectibility. Customer invoices are charged off against the allowance when we believe it is probable the invoices will not be paid.
(b) Comprehensive Income -
Comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders. Our comprehensive income or loss is comprised of net earnings, foreign currency translation, changes in the fair value of forward exchange contracts accounted for as cash flow hedges, changes in income taxes, and changes in the fair value of available-for-sale (AFS) debt securities.
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 or loss. Revenues and expenses are translated using exchange rates prevailing during the period. We also recognize 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.
Comprehensive income for the interim periods was as follows:
                                 
    Three Months     Nine Months  
    Ended June 30,     Ended June 30,  
    2009     2008     2009     2008  
Net earnings
  $ 8,502     $ 7,763     $ 23,829     $ 22,518  
Hedging activity
          230       (3 )     (144 )
Transfer of AFS securities to trading classification
                270        
Unrealized loss on investments
                      (233 )
Income taxes
    (214 )     (84 )     35       (235 )
Foreign currency translation adjustment
    758       10       (220 )     1,044  
 
                       
Comprehensive income
  $ 9,046     $ 7,919     $ 23,911     $ 22,950  
 
                       
(c) Income Taxes -
The 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. We prepare estimates of permanent and temporary differences between income for financial reporting purposes and income for tax purposes. These differences are adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates.
Our provision for income taxes also includes a component for uncertain tax positions using a benefit recognition model with a two-step approach: (i) a more-likely-than-not recognition criterion and (ii) a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit is recorded. We recognize accrued interest and penalties related to unrecognized tax benefits as a portion of our income tax provision in the consolidated statements of operations.
(d) Share-based Compensation -
We recognize compensation expense for all share-based awards made to employees, outside directors and consultants, based upon the fair value of the share-based award on the date of the grant.

 

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(e) Cash, Cash Equivalents and Investments -
Our investment portfolio includes the following components:
                                 
    June 30, 2009     September 30, 2008  
    Cash and     Other     Cash and     Other  
    Equivalents     Assets     Equivalents     Assets  
Taxable investments —
                               
Repurchase agreements
  $     $     $ 6,711     $  
Money market funds
    24,026                    
UBS Auction Rate Security Rights
          528              
 
                               
Tax-exempt investments —
                               
Money market funds
    10,300             12,848        
Variable rate demand notes
                23,948        
Student loan auction-rate securities
          6,753             7,480  
 
                               
Cash on hand —
                               
Non-interest bearing —
                               
Unrestricted
    13,007                    
Restricted
          1,000             1,000  
Interest bearing — unrestricted
    6,093             5,790        
 
                       
Total
  $ 53,426     $ 8,281     $ 49,297     $ 8,480  
 
                       
The primary objectives of our investment activities are to preserve capital and provide sufficient liquidity to meet operating requirements and fund strategic initiatives such as acquisitions. We maintain a written investment policy that governs the management of our investments in fixed income securities. This policy, among other things, provides that we may purchase only high credit-quality securities, that have short-term ratings of at least A-1 and P-1 or better, and long-term ratings of at least A-2 and A or better, by Moody’s and Standard & Poor’s, respectively, at the time of purchase.
We consider short-term investments with original maturities of 90 days or less to be cash equivalents, including overnight repurchase agreements, investments in variable rate demand notes that have a seven-day put feature and institutional money market funds. Our investments in repurchase agreements at September 30, 2008 were with a commercial bank pursuant to an overnight sweep/liquidity arrangement with our operating cash accounts. Our investments in variable rate demand notes at September 30, 2008 contained a seven-day put feature.
Our investments in tax-exempt variable rate demand notes, prior to their complete liquidation in October 2008, and student loan auction-rate securities, prior to the settlement agreement with UBS discussed below, were accounted for as available-for-sale. As such, unrealized holding gains and losses were reported as a component of other comprehensive income or loss within shareholders’ equity until realized, except where losses were considered to be other-than-temporary, in which case they would have been recorded to other income and expense, net. As of September 30, 2008, we did not have any losses that were considered other-than-temporary, and accumulated other comprehensive income included $270 of unrealized holding losses related to student loan auction-rate securities.
Our investment portfolio includes student loan auction-rate securities, which are long-term student loan revenue bonds whose interest rates are reset every 35 days via a Dutch auction process. All of our auction-rate securities are backed by pools of student loans originated under the Federal Family Education Loan Program (FFELP). FFELP student loans are guaranteed by State guarantors who have reinsurance agreements with the US Department of Education. All of our student loan auction-rate securities were rated Aaa and AAA by Moody’s and Standard & Poor’s, respectively, at the time of purchase, and have continued to maintain these credit ratings through the present time.

 

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The Dutch auction process historically provided the necessary liquidity mechanism to either purchase or sell these securities. Beginning in mid-February 2008, liquidity issues in the US credit markets resulted in the failure of auctions across a broad spectrum of tax-exempt securities, including student loan revenue bonds. Auctions for the student loan revenue bonds that we hold have continued to fail through the present time. The consequence of a failed auction is that we do not have access to the principal amount of our investments. Issuers are still required to make interest payments when due in the event of failed auctions. We have not experienced any missed interest payments to date.
Our auction-rate securities were purchased through UBS Financial Services, Inc. During November 2008, we accepted an offer from UBS, AG (UBS) of Auction Rate Security Rights. These rights permit us to require UBS between June 30, 2010 and July 2, 2012 (the exercise period) to purchase our auction-rate securities at par value. In exchange, UBS is granted the right, at their sole discretion, to sell or otherwise dispose of our auction-rate security investments until July 2, 2012 as long as we receive a payment of par value upon the sale or disposition. In addition, the rights permit us to establish a demand revolving credit line in an amount equal to the par value of the securities at a net zero cost. We are still able to sell the auction-rate securities on our own, but in such a circumstance, we would lose the par value support from UBS.
Upon executing the settlement agreement with UBS, we recognized the Auction Rate Security Rights as a stand-alone financial instrument and elected the fair value option. We also transferred the student loan auction-rate securities from the available-for-sale classification, to the trading classification. Upon transfer to the trading classification, $270 in unrealized losses as of September 30, 2008, were transferred from accumulated other comprehensive income to other income and expense. Adjustments to the fair value of student loan auction-rate securities and Auction Rate Security Rights are recorded to other income and expense in each accounting period. As of June 30, 2009, the fair value of the student-loan auction rate securities was $6,753 compared to a par value of $7,325. As of June 30, 2009, the fair value of the Auction Rate Security Rights was $528. The student loan auction-rate securities are included in other long-term assets in the accompanying consolidated balance sheet based on the maturities of the student loan revenue bonds (2029 to 2037). The Auction Rate Security Rights are included in other long-term assets in the accompanying consolidated balance sheet based on the earliest exercise date of June 30, 2010.
(f) New Accounting Pronouncements -
Effective October 1, 2008, we adopted the FASB’s framework for measuring fair value, including a hierarchy that prioritizes the inputs to valuation techniques into three broad levels. This fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. See Note 7.
In October 2008, the FASB issued clarifying guidance related to financial assets when the market is inactive, such as the case with debt securities that were issued via the auction-rate markets. This guidance was effective upon issuance and was taken into consideration in the valuation of our investments in student loan auction-rate securities and the UBS Auction Rate Security Rights.
In connection with the UBS settlement discussed in Note 2(e), we adopted the fair value option which permits an entity to choose to measure certain financial instruments and other items at fair value where such financial instruments and other items are not currently required to be measured at fair value. For financial instruments and other items where the fair value option is elected, unrealized gains and losses are reported in earnings at each subsequent reporting date.
In April 2009, the FASB amended the other-than-temporary impairment guidance in US GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than temporary impairments on debt and equity securities in the financial statements. As discussed above, we have elected the fair value option for our auction-rate securities. Thus, this amendment had no effect on our statements of operations or financial position.
Also, in April 2009, the FASB amended its standards to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements. We have provided the additional disclosures required.

 

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In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, to provide guidance for assessing whether an impairment of a debt security is other than temporary. SAB 111 maintains the SEC staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. This bulletin had no effect on our statements of operations or financial position.
In May 2009, the FASB issued general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued. More specifically, the standards set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. These standards provide largely the same guidance on subsequent events that previously existed only in auditing literature. We have provided the additional disclosures required.
(g) Reclassifications -
Certain reclassifications have been made to the prior period financial statements to conform to the current fiscal period presentation.
3. Inventories:
Inventories are comprised of the following:
                 
    June 30,     September 30,  
    2009     2008  
Raw materials
  $ 5,559     $ 5,238  
Work-in-process
    4,929       4,867  
Finished goods
    11,268       9,840  
 
           
 
  $ 21,756     $ 19,945  
 
           
4. Major Customers and Segment Information:
Meridian was formed in 1976 and functions as a fully integrated research, development, manufacturing, marketing and sales organization with primary emphasis in the field of life science. Our principal businesses are (i) the development, manufacture and distribution of diagnostic test kits primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic manufacturers and (iii) the contract manufacture of proteins and other biologicals under clinical cGMP conditions for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in North America, South America and the Pacific Rim. The European Diagnostics operating segment consists of the sale and distribution of diagnostic test kits in Europe, Scandinavia, Africa, and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically and abroad. The Life Science operating segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
Two customers accounted for 55% and 48% of the US Diagnostics operating segment third-party sales during the three months ended June 30, 2009 and 2008, respectively, and 56% and 53% during the nine months ended June 30, 2009 and 2008, respectively. Two customers accounted for 32% and 20% of the Life Science operating segment third-party sales during the three months ended June 30, 2009 and 2008, respectively, and 30% and 34% during the nine months ended June 30, 2009 and 2008, respectively.

 

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Segment information for the interim periods is as follows:
                                         
    US     European     Life              
    Diagnostics     Diagnostics     Science     Eliminations(1)     Total  
Three Months — June 30, 2009
                                       
Net sales —
                                       
Third-party
  $ 24,765     $ 7,018     $ 6,457     $     $ 38,240  
Inter-segment
    2,880             232       (3,112 )      
Operating income
    10,218       1,390       1,035       (112 )     12,531  
Total assets (June 30, 2009)
    125,475       17,522       53,491       (48,118 )     148,370  
 
                                       
Three Months — June 30, 2008
                                       
Net sales —
                                       
Third-party
  $ 19,406     $ 8,016     $ 5,646     $     $ 33,068  
Inter-segment
    3,355             162       (3,517 )      
Operating income
    8,890       1,720       774       (385 )     10,999  
Total assets (September 30, 2008)
    126,808       15,955       49,619       (45,951 )     146,431  
 
                                       
Nine Months — June 30, 2009
                                       
Net sales —
                                       
Third-party
  $ 69,711     $ 19,288     $ 16,814     $     $ 105,813  
Inter-segment
    7,856       6       512       (8,374 )      
Operating income
    28,893       3,495       3,257       49       35,694  
 
                                       
Nine Months — June 30, 2008
                                       
Net sales —
                                       
Third-party
  $ 64,878     $ 21,709     $ 16,577     $     $ 103,164  
Inter-segment
    8,926       2       440       (9,368 )      
Operating income
    26,669       4,470       2,117       (326 )     32,930  
 
     
(1)  
Eliminations consist of intersegment transactions.
Transactions between operating segments are accounted for at established intercompany prices for internal and management purposes with all intercompany amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science operating segments include goodwill of $1,382 and $8,485, respectively, at June 30, 2009, and $1,382 and $8,479, respectively, at September 30, 2008.
5. Intangible Assets:
A summary of our acquired intangible assets subject to amortization, as of June 30, 2009 and September 30, 2008 is as follows:
                                         
    Wtd              
    Avg     June 30, 2009     September 30, 2008  
    Amort     Gross             Gross        
    Period     Carrying     Accumulated     Carrying     Accumulated  
    (Yrs)     Value     Amortization     Value     Amortization  
 
                                       
Core products and cell lines
    15     $ 4,698     $ 2,819     $ 4,698     $ 2,602  
Manufacturing technologies
    14       6,057       4,697       6,057       4,440  
Trademarks, licenses and patents
    8       2,772       1,937       2,663       1,843  
Customer lists and supply agreements
    13       11,037       7,404       11,039       6,786  
 
                               
 
                                       
 
          $ 24,564     $ 16,857     $ 24,457     $ 15,671  
 
                               

 

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The actual aggregate amortization expense for these intangible assets for the three months ended June 30, 2009 and 2008 was $387 and $343, respectively. The actual aggregate amortization expense for these intangible assets for the nine months ended June 30, 2009 and 2008 was $1,186 and $1,206, respectively.
6. Hedging Transactions:
Prior to February 1, 2009, we managed exchange rate risk related to forecasted intercompany sales denominated in the Euro currency through the use of forward exchange contracts and designated such forward contracts as cash flow hedges. As such, the effective portion of the gain or loss on the derivative instrument was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. As of June 30, 2009, we had no such contracts outstanding.
During January 2009, 500 notional amount of these contracts were settled in accordance with their original maturities. The realized gain on these contracts was $32. Also during January 2009, we accelerated the settlement of the remaining 2,700 notional amount of forward exchange contracts that were originally scheduled to mature between February 27, 2009 and December 31, 2009. These transactions resulted in a gain of approximately $140 that was recorded in the second quarter of fiscal 2009. We unwound these forward exchange contracts after completing a strategic review of our foreign currency exposures. This strategic review revealed that we have natural currency hedges in place for consolidated gross profit and operating income via certain Meridian-branded diagnostic test kits that we purchase in Euros from suppliers in Spain and Germany.
7. Fair Value Measurements:
We adopted the fair value measurement as prescribed by the FASB on October 1, 2008 to value our financial assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date for assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs, developed using the Company’s estimates and assumptions, which reflect those that the market participants would use. Such inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Determining where an asset or liability falls within the hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in the assessment of fair value.
Financial assets and liabilities carried at fair value at June 30, 2009 are classified in the table below in one of the three categories described above:
                                 
    Level 1     Level 2     Level 3     Total  
Student loan auction-rate securities
  $     $     $ 6,753     $ 6,753  
UBS Auction Rate Security Rights
                528       528  
 
                       
Total
  $     $     $ 7,281     $ 7,281  
 
                       

 

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The failed auction status and lack of liquidity for our student loan auction-rate securities and the non-transferability of our UBS Auction Rate Security Rights requires the use of a valuation methodology that relies exclusively on Level 3 inputs including market, tax status, credit quality, duration, recent market observations and overall capital market liquidity. The valuation of our student loan auction-rate securities and UBS Auction Rate Security Rights is subject to uncertainties that are difficult to predict. Factors that may impact the valuations include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity.
ITEM 2.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Refer to “Forward Looking Statements” following the Index in front of this Form 10-Q. In the discussion that follows, all dollars are in thousands (both tables and text), except per share data.
Overview:
US Diagnostics Operating Segment
During our third fiscal quarter, the US experienced an outbreak of novel A (H1N1) influenza virus. Our sales increases in influenza products during the quarter were driven by outbreak preparedness and response plans of our various hospital and laboratory customers.
For the nine-month period, our upper respiratory sales were down 6% compared to the same period of the prior fiscal year. These sales levels were affected by the timing of an annual promotion offered by a third-party manufacturer of certain of these products, which are passed along to our customers. The timing of this promotion led to stocking orders by our customers during the fourth quarter of our fiscal 2008. The timing of sales promotions can vary from year to year, and consequently, we measure our relative sales success for our upper respiratory product family during the primary selling season, which typically runs from July through March, taking into consideration the relative strength of the season. The increased sales activity in the third quarter from the novel A (H1N1) influenza outbreak partially offset the effects of a mild respiratory season and the promotion mentioned above during the first half of fiscal 2009.
Additionally, the 2008-09 respiratory season was the first full season in which we were selling our internally developed TRU FLU® and TRU RSV® products. Our TRU FLU and TRU RSV products represented approximately one-quarter of our total influenza and respiratory syncytial virus product sales during the nine months ended June 30, 2009. We expect this percentage to continue to increase in the upcoming stocking season, beginning in the fourth quarter of fiscal 2009, yielding continuing improvements in gross profit margins.
In the US, sales outside of the upper respiratory product family grew 10% in the three-month period and 11% in the nine-month period, compared to the same periods of the prior fiscal year. This growth was led by unit volume growth in our H. pylori, parasitology, and foodborne product families. Increases for our foodborne product family primarily relate to volume growth for our ImmunoCard STAT!® EHEC product, launched in 2007, and the recent growth from the launches of PremierTM CAMPY and ImmunoCard STAT!® CAMPY. The growth rate for our foodborne products category exceeded 50% for the first nine months of fiscal 2009. Considerable confusion has developed in the C. difficile market over the relative benefits of the various test methods available (toxin testing, antigen testing and molecular testing). Several new competitive products, including molecular assays, have recently been introduced into this market, causing competitive pressures for our products. With our strong position in toxin testing and the development of our illumigeneTM molecular C. difficile product, we believe we will continue to see growth in our C. difficile business. Our new molecular test for C. difficile on our illumigene platform is in the final stages of product design. We are currently conducting field studies to refine the assay and the software. We anticipate the initiation of formal clinical studies to begin later this calendar year.
International sales out of the US Diagnostics operating segment declined 23% in the third quarter due primarily to a weaker mycoplasma demand from Japan. For the nine-month period, international sales out of the US Diagnostics operating segment declined 12% primarily due to weaker sales to Japan.

 

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We also monitor sales trends for our products that are sold through distributor channels. Our two primary distributors provide us with sales data for our products that are sold by them to end-users. Sales to end customers, excluding upper respiratory products, by our two primary distributors grew 15% and 18% during the three and nine-month periods ended June 30, 2009, respectively. These growth rates indicate to us that end-user demand for our products remains healthy.
European Diagnostics Operating Segment
Organic sales, which exclude the effects of foreign currency, declined 2% for the third quarter, consistent with the last two quarters. The effects of general economic conditions and increased competition in these product families were somewhat offset by sales related to new products launched during fiscal 2008, which included TRU FLU, TRU RSV, TRU EBV-G®, and TRU EBV-M®. We also saw benefits from increased TRU FLU sales due to the Swine Flu outbreak. We expect our illumigene C. difficile product to address competitive pressures in this product family. While we expect organic sales for the European Diagnostics operating segment to be largely flat for the balance of fiscal 2009, we believe that an increased distributor focus and upcoming product launches will position this segment for growth in fiscal 2010.
Life Science Operating Segment
Sales for our Life Science operating segment during the third quarter of fiscal 2009 increased 14%. This increase reflects buying patterns from our two largest diagnostic manufacturing customers, who accounted for 32% of the Life Science Operating segment’s sales in the third quarter of fiscal 2009 compared to 20% in the third quarter of fiscal 2008. We expect sales for this operating segment to be up slightly for fiscal 2009 and healthy single-digit growth in 2010. Due to manufacturing efficiency improvements at our Memphis, Tennessee facility, we expect to see year-over-year improvements in operating income contributions in fiscal 2009 compared to the prior fiscal year.
All Segments
We have generated a consolidated gross profit margin of 64% for the first nine months of fiscal 2009. This level of gross profit margin reflects favorable efficiencies from automation in our US Diagnostics manufacturing plant, changing product mix in favor of higher margin manufactured products over lower margin third-party influenza and RSV products within the upper respiratory product family, and improved operating performance and utilization of our Life Science manufacturing facility in Memphis, Tennessee. Although foreign currency exchange rates had a negative effect on sales of our European Diagnostics operating segment, they had no significant effect on consolidated gross profit or consolidated operating income due to natural hedges. Our US Diagnostics operating segment markets and sells certain Meridian-branded diagnostic test kits that are sourced from European suppliers in Spain and Germany. These kits are purchased in Euros, which provides a natural hedge to gross profit and operating income on a consolidated basis.
The recessionary state of the economy has continued during our third fiscal quarter, and is affecting not only the US, but also countries around the world. If current economic conditions worsen or remain in the current state for an extended period of time, our sales levels could be adversely affected by customer buying patterns in their efforts to conserve cash and manage inventory levels. On a longer-term basis, in a recessed economic state, our sales levels could be adversely impacted by the number of diagnostic tests performed in the healthcare system, if, for example, there were declines in physician office visits and/or hospital admissions. Our product portfolios, for both diagnostics and life science, deal with acute patient symptoms and infectious diseases. To date, we have not seen any significant reduced end-user demand for our major products.
Despite recent gains in the major stock market indices during our third fiscal quarter, overall stock market valuations remain significantly lower than twelve months ago, which may raise questions around the potential impairment of goodwill and other long-lived assets. Our annual goodwill impairment review takes place as of June 30th each year and is in process for the current fiscal year. There have been no past impairments from these annual reviews and none are expected for the current period. As of July 31, 2009, our stock price was $22.02 per share, compared to our book value per share of $3.67 as of June 30, 2009. Due to this relationship, stock price trading at 6.0x book value, and our operating results, we believe there have been no triggering events for the evaluation of impairment of our goodwill and other long-lived assets.

 

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From a cash flow perspective, we expect cash flows from operations to be sufficient to fund working capital requirements, capital expenditure requirements and dividends over the next 12 months.
Operating Segments:
Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in North America, South America and the Pacific Rim. The European Diagnostics operating segment consists of the sale and distribution of diagnostic test kits in Europe, Scandinavia, Africa, and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically and abroad. The Life Science operating segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
Revenues for the Diagnostics operating segments, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and strength of certain diseases and foreign currency exchange rates. Revenues for the Life Science operating segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of arrangements for contract services work, which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated sales from quarter to quarter.
Results of Operations:
Net sales
                                                 
    Three Months Ended June 30     Nine Months Ended June 30  
                    Inc                     Inc  
    2009     2008     (Dec)     2009     2008     (Dec)  
US Diagnostics
  $ 24,765     $ 19,406       28 %   $ 69,711     $ 64,878       7 %
European Diagnostics
    7,018       8,016       (12 )%     19,288       21,709       (11 )%
Life Science
    6,457       5,646       14 %     16,814       16,577       1 %
 
                                   
Consolidated
  $ 38,240     $ 33,068       16 %   $ 105,813     $ 103,164       3 %
 
                                   
 
                                               
International —
                                               
US Diagnostics export
  $ 1,524     $ 1,978       (23 )%   $ 4,220     $ 4,786       (12 )%
Life Science export
    2,635       2,427       9 %     7,122       6,868       4 %
European Diagnostics
    7,018       8,016       (12 )%     19,288       21,709       (11 )%
 
                                   
Total
  $ 11,177     $ 12,421       (10 )%   $ 30,630     $ 33,363       (8 )%
 
                                   
% of total sales
    29 %     38 %             29 %     32 %        
As more fully discussed above, overall sales for our US Diagnostics operating segment increased for both the three and nine-month interim periods in fiscal 2009. This increase for the quarter was primarily attributable to increased upper respiratory sales related to the Swine Flu outbreak and volume increases in H. pylori and foodborne products. Upper respiratory product growth accounted for approximately two-thirds of the 28% growth rate in sales for the US Diagnostics operating segment for the three-month period. The increase for the nine-month period was driven by volume increases in C. difficile, H. pylori and foodborne products. These increases were somewhat offset by a weak normal upper respiratory season, combined with a shift in timing of an annual promotion offered by one of our suppliers. Volume increases for foodborne products were driven by sales of ImmunoCard STAT! EHEC for toxigenic E. coli and new product launches for Campylobacter. Two national distributors accounted for 55% and 48% of total sales for the US Diagnostics operating segment for the third quarters of fiscal 2009 and 2008, respectively, and 56% and 53% of total sales for the US Diagnostics operating segment for the first nine months of fiscal 2009 and 2008, respectively.

 

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For the European Diagnostics operating segment, the sales decrease includes currency translation losses in the approximate amount of $900 and $2,100 for the three and nine-month periods ending June 30, 2009, respectively. Organic sales, which exclude the effects of currency translation, declined 2% for the third quarter and 1% for the nine-month period ended June 30, 2009. Sales for fiscal 2009 were adversely affected by competition in C. difficile products and price competition for H. pylori in Italy. These decreases were partially offset by increased revenues for new products released during fiscal 2008.
For the Life Science operating segment, the fluctuations in sales reflect buying patterns and inventory management of certain of our major diagnostic manufacturing customers. Sales to our two largest diagnostic manufacturing customers accounted for 32% and 20% of total sales for the Life Science operating segment for the third quarters of fiscal 2009 and 2008, respectively, and 30% and 34% of total sales for the Life Science operating segment for the first nine months of fiscal 2009 and fiscal 2008, respectively. We believe that this inventory management may continue, but to a lesser degree, throughout the balance of fiscal 2009.
Gross Profit
                                                 
    Three Months Ended June 30     Nine Months Ended June 30  
                    Inc                     Inc  
    2009     2008     (Dec)     2009     2008     (Dec)  
 
                                               
Gross Profit
  $ 23,323     $ 21,287       +10 %   $ 67,641     $ 64,154       +5 %
 
                                               
Gross Profit Margin
    61 %     64 %     -3 %     64 %     62 %     +2 %
Gross profit margins for the third quarter of fiscal 2009, as well as the nine-month period, include the effects of continued operating efficiencies, automation, and changing product mix in favor of higher margin manufactured products over lower margin third party influenza and RSV products within the upper respiratory product family. Gross profit margins for the third quarter of fiscal 2009 include a much higher mix of third-party influenza products, which are generally at a lower margin than our other core product families.
Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, proficiency panels, contract research and development and contract manufacturing services. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.
Operating Expenses
                                                                 
    Three Months Ended June 30     Nine Months Ended June 30  
                            Total                             Total  
    Research &     Sales &     General &     Operating     Research &     Sales &     General &     Operating  
    Development     Marketing     Administrative     Expenses     Development     Marketing     Administrative     Expenses  
2008 Expenses
  $ 1,322     $ 4,459     $ 4,507     $ 10,288     $ 4,372     $ 13,697     $ 13,155     $ 31,224  
% of Sales
    4 %     13 %     14 %     31 %     4 %     13 %     13 %     30 %
 
                                                               
Fiscal 2009 Increases (Decreases):
                                                               
US Diagnostics
    475       310       (163 )     622       2,014       322       (923 )     1,413  
European Diagnostics
          (198 )     37       (161 )           (329 )     21       (308 )
Life Science
    161       (62 )     (56 )     43       (25 )     (239 )     (118 )     (382 )
 
                                               
 
2009 Expenses
  $ 1,958     $ 4,509     $ 4,325     $ 10,792     $ 6,361     $ 13,451     $ 12,135     $ 31,947  
 
                                               
% of Sales
    5 %     12 %     11 %     28 %     6 %     13 %     11 %     30 %
 
                                                               
% Increase (Decrease)
    48 %     1 %     (4 )%     5 %     45 %     (2 )%     (8 )%     2 %

 

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Research and development expenses for the US Diagnostics operating segment increased for the third quarter and the nine-month period primarily due to development costs for our molecular C. difficile product, for which product design is in its final stages. Expenses related to clinical trials also contributed to increases for the nine-month period. Research and development expenses for the Life Science operating segment increased for the third quarter primarily due to increased incentive compensation related to improved performance for this operating segment, increased research and development resource allocations between new product development and contract research and development performed for customers under contracts, and increased supplies.
Sales and marketing expenses for the US Diagnostics operating segment for the three and nine-month periods increased primarily due to increased salaries and benefits related to planned headcount additions. Among other personnel, we have added a new product manager responsible for molecular products as we prepare for new product launch activities around our molecular C. difficile product and the illumigeneTM brand. The three-month period also saw increased sales bonus expense related to sales levels. These increases were partially offset by decreased corporate incentive bonus related to earnings levels in fiscal 2009 and reduced samples expense related to fiscal 2008 product launches for the nine-month period. Sales and marketing expenses for the European Diagnostics operating segment decreased primarily due to currency fluctuations for both the quarter and the nine-month period.
General and administrative expenses for all operating segments for the third quarter and nine-month period have decreased due to no corporate incentive bonus accruals for fiscal 2009. Stock-based compensation expense has also decreased due to not achieving performance targets for certain stock options issued during the first quarter of fiscal 2008.
Operating Income
Operating income increased 14% to $12,531 for the third quarter of fiscal 2009 and 8% to $35,694 for the first nine months of fiscal 2009, as a result of the factors discussed above.
Other Income and Expense
Other income and expense primarily consists of interest income on our investment portfolio and fair value adjustments on our auction-rate securities and related Auction Rate Security Rights. Interest income has decreased substantially throughout fiscal 2009 to date, primarily due to lower interest yields in the current interest rate environment. We expect interest yields to remain low for the foreseeable future for institutional money market funds, which comprise a majority of our investment portfolio. See Note 2(e) to the consolidated financial statements herein for discussion of our investment portfolio, including fair value adjustments on our auction-rate securities and Auction Rate Security Rights.
Income Taxes
The effective rate for income taxes was 33% for the third quarter of fiscal 2009 compared to 32% for the same period of the prior fiscal year. The effective rate for income taxes was 34% for the nine-month periods ended June 30, 2009 and June 30, 2008. For the fiscal year ending September 30, 2009, Meridian expects the effective tax rate to be in the range of 34% to 35%.
Liquidity and Capital Resources:
Comparative Cash Flow Analysis
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, consideration of acquisition plans, and consideration of common share dividends. We have historically maintained a credit facility to support working capital requirements and to respond quickly to acquisition opportunities. This credit facility has been supplemented by the proceeds from a September 2005 common share offering, which during the first three quarters of fiscal 2009, were invested in a non-interest bearing bank deposit account, institutional money-market mutual funds, and tax-exempt auction-rate securities.
We have an investment policy that guides the holdings of our investment portfolio. Our objectives in managing the investment portfolio are to (i) preserve capital, (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) capture a market rate of return commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective. See Note 2(e) to the consolidated financial statements included herein for discussion of our investments in tax-exempt auction-rate securities.

 

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We do not expect current conditions in the financial markets or overall economic conditions to have a significant impact on our liquidity needs or financial condition. For fiscal 2009, we expect our consolidated sales to be in the range of $140,000 to $144,000, and our diluted earnings per share to be in the range of $0.77 to $0.81. We intend to continue to fund our working capital requirements, capital expenditure requirements and dividends from current cash flows from operating activities. We also have additional sources of liquidity through our investment portfolio and $30,000 bank credit facility, if needed. To date, we have not experienced any significant deterioration in the aging of our customer accounts receivable nor in our vendors’ ability to supply raw materials and services and extend normal credit terms. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tight for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors or disrupt the supply of raw materials and services.
Net cash provided by operating activities increased 11% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. This increase was driven by growth in net earnings and improved collections on receivables.
Net cash used for investing activities decreased 83% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. This decrease primarily relates to changes in our investment portfolio during the prior year, including purchases of auction-rate securities. See Note 2(e).
Net cash used for financing activities increased 43% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008, primarily due to increased dividends paid per share. Our dividend rate for fiscal 2009 increased 21% over the fiscal 2008 rate. This increase was partially offset by reduced share issuances related to stock option exercises in response to general market conditions during fiscal 2009.
Net cash flows from operating activities are anticipated to be adequate to fund working capital requirements, capital expenditures and dividends during fiscal 2009.
Capital Resources
We have a $30,000 credit facility with a commercial bank which expires on September 15, 2012. As of July 31, 2009, there were no borrowings outstanding on this facility and we had 100% borrowing capacity available to us. We have had no borrowings outstanding under this facility during the first nine months of fiscal 2009, or during the full year of fiscal 2008.
Our capital expenditures are estimated to be approximately $3,000 for fiscal 2009 and may be funded with operating cash flows, availability under the $30,000 credit facility, or cash equivalents on-hand. Capital expenditures relate to manufacturing and other equipment of a normal and recurring nature, as well as completion of our facility expansion in Saco, Maine and clinical cGMP expansion in Memphis, Tennessee.
We do not utilize any special-purpose financing vehicles or have any undisclosed off balance sheet arrangements.
ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company’s exposure to market risk since September 30, 2008.

 

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ITEM 4.  
CONTROLS AND PROCEDURES
As of June 30, 2009, an evaluation was completed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2009. There have been no changes in our internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the third fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, or in other factors that could materially affect internal control subsequent to June 30, 2009.
PART II. OTHER INFORMATION
ITEM 1A.  
RISK FACTORS
There have been no material changes from risk factors as previously disclosed in the Registrant’s Form 10-K in response to Item 1A of Part I of Form 10-K.
ITEM 6.  
EXHIBITS
31.1 — Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
31.2 — Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
32 — Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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Signature:
   
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there-unto duly authorized.
         
Date: August 7, 2009   MERIDIAN BIOSCIENCE, INC.
 
 
  /s/ Melissa Lueke    
  Melissa Lueke   
  Vice President and Chief Financial Officer   

 

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Exhibit Index
         
Exhibit No.   Description
  31.1    
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
       
 
  31.2    
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
       
 
  32    
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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