Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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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
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o |
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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.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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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 issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding July 31, 2009 |
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Common Stock, no par value
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40,521,003 |
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
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: Meridians 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
Meridians 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 Meridians 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 Meridians 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.
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
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Three Months |
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Nine Months |
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Ended June 30, |
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Ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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NET SALES |
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$ |
38,240 |
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$ |
33,068 |
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$ |
105,813 |
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$ |
103,164 |
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COST OF SALES |
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14,917 |
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11,781 |
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38,172 |
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39,010 |
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Gross profit |
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23,323 |
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21,287 |
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67,641 |
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64,154 |
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OPERATING EXPENSES: |
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Research and development |
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1,958 |
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1,322 |
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6,361 |
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4,372 |
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Sales and marketing |
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4,509 |
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4,459 |
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13,451 |
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13,697 |
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General and administrative |
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4,325 |
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4,507 |
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12,135 |
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13,155 |
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Total operating expenses |
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10,792 |
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10,288 |
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31,947 |
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31,224 |
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Operating income |
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12,531 |
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10,999 |
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35,694 |
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32,930 |
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OTHER INCOME: |
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Interest income |
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54 |
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297 |
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400 |
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1,148 |
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Other, net |
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129 |
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183 |
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57 |
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156 |
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Total other income |
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183 |
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480 |
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457 |
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1,304 |
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Earnings before income taxes |
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12,714 |
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11,479 |
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36,151 |
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34,234 |
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INCOME TAX PROVISION |
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4,212 |
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3,716 |
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12,322 |
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11,716 |
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NET EARNINGS |
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$ |
8,502 |
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$ |
7,763 |
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$ |
23,829 |
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$ |
22,518 |
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BASIC EARNINGS PER COMMON SHARE |
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$ |
0.21 |
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$ |
0.19 |
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$ |
0.59 |
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$ |
0.56 |
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DILUTED EARNINGS PER COMMON SHARE |
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$ |
0.21 |
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$ |
0.19 |
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$ |
0.58 |
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$ |
0.55 |
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AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING BASIC |
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40,500 |
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40,150 |
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40,372 |
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40,043 |
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DILUTIVE COMMON STOCK OPTIONS |
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691 |
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900 |
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749 |
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975 |
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AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DILUTED |
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41,191 |
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41,050 |
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41,121 |
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41,018 |
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ANTI-DILUTIVE SECURITIES: |
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Common stock options |
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150 |
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100 |
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132 |
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52 |
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DIVIDENDS DECLARED PER COMMON SHARE |
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$ |
0.17 |
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$ |
0.14 |
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$ |
0.48 |
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$ |
0.39 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
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MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
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Nine Months Ended June 30, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net earnings |
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$ |
23,829 |
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$ |
22,518 |
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Non-cash items: |
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Depreciation of property, plant and equipment |
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2,179 |
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2,142 |
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Amortization of intangible assets |
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1,186 |
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1,206 |
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Stock based compensation |
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828 |
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1,190 |
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Deferred income taxes |
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(536 |
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649 |
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Loss on disposition of fixed assets |
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39 |
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52 |
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Unrealized loss on auction-rate securities and rights, net |
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44 |
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Change in accounts receivable, inventory, and prepaid expenses |
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767 |
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(1,073 |
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Change in accounts payable, accrued expenses, and income taxes
payable |
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(3,902 |
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(4,274 |
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Other |
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25 |
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(276 |
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Net cash provided by operating activities |
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24,459 |
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22,134 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisitions of property, plant and equipment |
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(2,324 |
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(2,905 |
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Proceeds from sales of property, plant and equipment |
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5 |
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12 |
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Purchases of intangibles and other assets |
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(109 |
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(1,108 |
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Acquisition earnout payments |
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(7 |
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(157 |
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Auction-rate security (purchases) redemption calls |
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425 |
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(7,750 |
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Net cash used for investing activities |
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(2,010 |
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(11,908 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Dividends paid |
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(19,383 |
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(15,624 |
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Proceeds and tax benefits from exercises of stock options |
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1,080 |
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2,780 |
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Net cash used for financing activities |
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(18,303 |
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(12,844 |
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Effect of Exchange Rate Changes on Cash and Equivalents |
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(17 |
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268 |
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Net Increase (Decrease) in Cash and Equivalents |
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4,129 |
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(2,350 |
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Cash and Equivalents at Beginning of Period |
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49,297 |
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49,400 |
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Cash and Equivalents at End of Period |
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$ |
53,426 |
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$ |
47,050 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
ASSETS
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June 30, |
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September 30, |
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2009 |
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2008 |
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CURRENT ASSETS: |
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Cash and equivalents |
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$ |
53,426 |
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$ |
49,297 |
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Accounts receivable, less allowances of $250 and $230 |
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22,329 |
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25,098 |
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Inventories |
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21,756 |
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19,945 |
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Prepaid expenses and other current assets |
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3,291 |
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3,382 |
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Deferred income taxes |
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1,756 |
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1,736 |
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Total current assets |
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102,558 |
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99,458 |
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PROPERTY, PLANT AND EQUIPMENT: |
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Land |
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887 |
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892 |
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Buildings and improvements |
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18,882 |
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16,977 |
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Machinery, equipment and furniture |
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27,475 |
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26,458 |
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Construction in progress |
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1,732 |
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3,391 |
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Subtotal |
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48,976 |
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|
47,718 |
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Less: accumulated depreciation and amortization |
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29,166 |
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28,043 |
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Net property, plant and equipment |
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19,810 |
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19,675 |
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OTHER ASSETS: |
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Goodwill |
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9,866 |
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|
9,861 |
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Other intangible assets, net |
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7,707 |
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|
8,786 |
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Restricted cash |
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1,000 |
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|
1,000 |
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Investments in auction rate securities and rights |
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|
7,281 |
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|
7,480 |
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Other long-term assets |
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|
148 |
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|
171 |
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Total other assets |
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26,002 |
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|
27,298 |
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TOTAL ASSETS |
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$ |
148,370 |
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$ |
146,431 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
MERIDIAN BIOSCIENCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS EQUITY
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June 30, |
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September 30, |
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2009 |
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2008 |
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CURRENT LIABILITIES: |
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Accounts payable |
|
$ |
3,852 |
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$ |
4,777 |
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Accrued employee compensation costs |
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3,472 |
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|
6,777 |
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Other accrued expenses |
|
|
3,675 |
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|
3,616 |
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Income taxes payable |
|
|
1,205 |
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|
891 |
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Total current liabilities |
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12,204 |
|
|
|
16,061 |
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DEFERRED INCOME TAXES |
|
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1,158 |
|
|
|
1,881 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY: |
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Preferred stock, no par value, 1,000,000 shares
authorized, none issued |
|
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Common shares, no par value, 71,000,000 shares authorized,
40,520,891 and 40,313,656 shares issued, respectively |
|
|
|
|
|
|
|
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Additional paid-in capital |
|
|
91,098 |
|
|
|
89,107 |
|
Retained earnings |
|
|
43,462 |
|
|
|
39,016 |
|
Accumulated other comprehensive income |
|
|
448 |
|
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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.
5
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.
6
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 Meridians 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.
7
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 years 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.
8
(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 Moodys and
Standard & Poors, 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 Moodys and
Standard & Poors, respectively, at the time of purchase, and have continued to maintain
these credit ratings through the present time.
9
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 FASBs 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.
10
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 staffs 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.
11
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
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 Companys 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
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. |
|
MANAGEMENTS 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.
14
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 segments 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.
15
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.
16
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 |
% |
17
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 policys 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.
18
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 Companys exposure to market risk since September 30,
2008.
19
|
|
|
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
There have been no material changes from risk factors as previously disclosed in the Registrants
Form 10-K in response to Item 1A of Part I of Form 10-K.
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
20
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 |
|
21
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 |
22