ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Refer to Forward-Looking Statements following the Table of Contents in front of this Form
10-Q.
In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of
Meridians financial condition, changes in financial condition and results of operations. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.
RESULTS OF OPERATIONS
Quarterly Overview
The second quarter of fiscal 2017 was characterized by improvement in the Companys overall results compared to those of the first quarter,
with both our Diagnostics and Life Science reportable segments reflecting revenue increases over both the fiscal 2017 first quarter and the comparable fiscal 2016 second quarter. These improvements reflect the benefits of measures taken since late
in fiscal 2016 to stabilize our Americas core diagnostics business, including making changes to our senior management team and strengthening our relationships with key distribution partners, as well as actions taken to align resources, reduce
expenses and optimize investments in product development. Revenues for the second quarter of fiscal 2017 were 16% higher than the first quarter. Similarly, net earnings for the second quarter of fiscal 2017 were 48% higher than the first quarter.
Three Months Ended March 31, 2017
Net
earnings for the second quarter of fiscal 2017 increased 2% to $9,312, or $0.22 per diluted share, from net earnings for the second quarter of fiscal 2016 of $9,091, or $0.21 per diluted share. Reflected within the fiscal 2016 quarterly results are
transaction costs related to acquisition activity, including the 2016 Magellan acquisition ($1,000, or $0.02 per diluted share, net of tax). Consolidated revenues increased 6% to $54,125 for the second quarter of fiscal 2017 compared to the same
period of the prior year (also 6% on a constant-currency basis).
Revenues for the Diagnostics segment for the second quarter of fiscal 2017 increased 1%
compared to the second quarter of fiscal 2016 (increased 2% on a constant-currency basis), comprised of a 2% decrease in molecular products and a 2% increase in
non-molecular
products, including $3,645 of
Magellan revenues. With a 25% increase in its immunoassay components business and a 4% increase in its molecular components business, revenues of our Life Science segment increased by 18% during the second quarter of fiscal 2017 compared to the
second quarter of fiscal 2016 (increasing 20% on a constant-currency basis).
Six Months Ended March 31, 2017
For the six month period ended March 31, 2017, net earnings decreased 13% to $15,591, or $0.37 per diluted share, compared to net earnings for the
comparable fiscal 2016 period of $17,984, or $0.42 per diluted share. Reflected within the
year-to-date
fiscal 2016 results are transaction costs related to acquisition
activity, including the 2016 Magellan acquisition ($1,233, or $0.03 per diluted share, net of tax). Consolidated revenues increased 3% to $100,934 for the first six months of fiscal 2017 compared to the same period of the prior year (also 3% on a
constant-currency basis).
Revenues for the Diagnostics segment for the first six months of fiscal 2017 decreased 1% compared to the first six months of
fiscal 2016 (also 1% on a constant-currency basis), comprised of a 12% decrease in molecular products and a 2% increase in
non-molecular
products, including $8,844 of Magellan revenues. With a 19% increase in
its immunoassay components business and a 6% increase in its molecular components business, revenues of our Life Science segment increased by 14% during the first six months of fiscal 2017 compared to the first six months of fiscal 2016 (increasing
16% on a constant-currency basis).
Page 14
USE OF
NON-GAAP
MEASURES
We have supplemented our reported GAAP financial information with information on net earnings, basic earnings per share and diluted earnings per share,
excluding the effect of costs associated with acquisition activity, each of which is a
non-GAAP
financial measure, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting
Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:
|
1)
|
These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of
non-routine
costs related to acquisition
activity; and
|
|
2)
|
These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from period to period in presentations to our board of
directors, and as a basis for strategic planning and forecasting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
|
Six Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Earnings -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
$
|
9,312
|
|
|
$
|
9,091
|
|
|
$
|
15,591
|
|
|
$
|
17,984
|
|
Acquisition-related costs (1)
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
9,312
|
|
|
$
|
10,091
|
|
|
$
|
15,591
|
|
|
$
|
19,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings per Basic Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.37
|
|
|
$
|
0.43
|
|
Acquisition-related costs (1)
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Basic EPS
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.37
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings per Diluted Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
$
|
0.22
|
|
|
$
|
0.21
|
|
|
$
|
0.37
|
|
|
$
|
0.42
|
|
Acquisition-related costs (1)
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted EPS (2)
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.37
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Acquisition-related costs are net of income tax effects of $202 and $248 for the three and six month periods, respectively, which were calculated using the effective tax rates of the jurisdictions in which the costs
were incurred.
|
(2)
|
Net Earnings per Diluted Common Share for the three months ended March 31, 2016 does not sum to the total due to rounding.
|
These
non-GAAP
measures may be different from
non-GAAP
measures used by other
companies. In addition, these
non-GAAP
measures are not based on any comprehensive set of accounting rules or principles.
Non-GAAP
measures have limitations, in that
they do not reflect all amounts associated with our results as determined in accordance with U.S. GAAP. Therefore, these measures should only be used to evaluate our results in conjunction with corresponding GAAP measures.
Page 15
REVENUE OVERVIEW
Below are analyses of the Companys revenue, provided for each of the following:
|
|
|
By Reportable Segment & Geographic Region
|
|
|
|
By Product Platform/Type
|
Revenue Overview By Reportable Segment & Geographic Region
Our reportable segments are Diagnostics and Life Science, with products sold and distributed in the countries comprising North and Latin America
(the Americas); Europe, Middle East and Africa (EMEA); and other countries outside of the Americas and EMEA (rest of the world, or ROW). A full description of our segments is set forth in Note 8 of the
accompanying Condensed Consolidated Financial Statements.
Revenues for the Diagnostics segment, 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 segment, in the normal course of business, may be affected from quarter to
quarter by buying patterns of major customers, and foreign currency exchange rates. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated revenues due to these factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
Diagnostics -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
31,842
|
|
|
$
|
31,864
|
|
|
|
|
%
|
|
$
|
59,411
|
|
|
$
|
61,979
|
|
|
|
(4
|
)%
|
EMEA
|
|
|
5,013
|
|
|
|
4,882
|
|
|
|
3
|
%
|
|
|
10,675
|
|
|
|
9,531
|
|
|
|
12
|
%
|
ROW
|
|
|
917
|
|
|
|
608
|
|
|
|
51
|
%
|
|
|
1,494
|
|
|
|
1,145
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diagnostics
|
|
|
37,772
|
|
|
|
37,354
|
|
|
|
1
|
%
|
|
|
71,580
|
|
|
|
72,655
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Science -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
5,732
|
|
|
|
6,356
|
|
|
|
(10
|
)%
|
|
|
11,131
|
|
|
|
11,459
|
|
|
|
(3
|
)%
|
EMEA
|
|
|
6,722
|
|
|
|
4,614
|
|
|
|
46
|
%
|
|
|
11,620
|
|
|
|
9,150
|
|
|
|
27
|
%
|
ROW
|
|
|
3,899
|
|
|
|
2,935
|
|
|
|
33
|
%
|
|
|
6,603
|
|
|
|
5,155
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Science
|
|
|
16,353
|
|
|
|
13,905
|
|
|
|
18
|
%
|
|
|
29,354
|
|
|
|
25,764
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
54,125
|
|
|
$
|
51,259
|
|
|
|
6
|
%
|
|
$
|
100,934
|
|
|
$
|
98,419
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostics
|
|
|
70
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
71
|
%
|
|
|
74
|
%
|
|
|
|
|
Life Science
|
|
|
30
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
29
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ex-Americas
|
|
|
31
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
30
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 16
Revenue Overview By Product Platform/Type
The revenues generated by each of our reportable segments result primarily from the sale of the following segment-specific categories of products:
Diagnostics
|
1)
|
Molecular tests that operate on our
illumi
gene
platform
|
|
2)
|
Non-molecular
tests on multiple technology platforms (including our Magellan diagnostics blood lead test)
|
Life Science
|
2)
|
Immunoassay components
|
Revenues for each product platform/type, as well as its relative percentage of segment
revenues, are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
Diagnostics -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
|
|
$
|
9,477
|
|
|
$
|
9,665
|
|
|
|
(2
|
)%
|
|
$
|
17,188
|
|
|
$
|
19,501
|
|
|
|
(12
|
)%
|
Non-molecular
|
|
|
28,295
|
|
|
|
27,689
|
|
|
|
2
|
%
|
|
|
54,392
|
|
|
|
53,154
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diagnostics
|
|
$
|
37,772
|
|
|
$
|
37,354
|
|
|
|
1
|
%
|
|
$
|
71,580
|
|
|
$
|
72,655
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Science -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular components
|
|
$
|
5,339
|
|
|
$
|
5,116
|
|
|
|
4
|
%
|
|
$
|
10,455
|
|
|
$
|
9,865
|
|
|
|
6
|
%
|
Immunoassay components
|
|
|
11,014
|
|
|
|
8,789
|
|
|
|
25
|
%
|
|
|
18,899
|
|
|
|
15,899
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Science
|
|
$
|
16,353
|
|
|
$
|
13,905
|
|
|
|
18
|
%
|
|
$
|
29,354
|
|
|
$
|
25,764
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Diagnostics revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
|
|
|
25
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
24
|
%
|
|
|
27
|
%
|
|
|
|
|
Non-molecular
|
|
|
75
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
76
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diagnostics
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Life Science revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular components
|
|
|
33
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
36
|
%
|
|
|
38
|
%
|
|
|
|
|
Immunoassay components
|
|
|
67
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
64
|
%
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Science
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a discussion of the revenues generated by each of these product platforms/types:
Diagnostics Products
Molecular Products
Revenues for our
illumi
gene
molecular platform of products decreased 2% to $9,477 for the second quarter of fiscal 2017 (also
2% on a constant-currency basis), and decreased 12% to $17,188 for the six month
year-to-date
period (also 12% on a constant-currency basis). This decrease reflects the
ongoing increased competition within the molecular-based testing market, most notably within the market for
C. difficile
testing.
We have nearly
1,550 customer account placements. Of these account placements, over 1,300 accounts have completed evaluations and validations and are regularly purchasing product, with the balance of our account placements being in some stage of product evaluation
and/or validation. Of our account placements, we have approximately 475 accounts that are regularly purchasing, evaluating and/or validating two or more assays. Increasing the number of customers utilizing two or more assays is a key objective, as
we believe broader menu utilization lessens the risk of displacement by competitors.
Page 17
We continue to invest in new product development for our molecular testing platform, and this platform now has
nine commercialized tests spanning hospital acquired infections, womens health, respiratory, sexually transmitted diseases, and tropical diseases. Our
illumi
gene
Malaria test has been placed in nearly 100 accounts in the
EMEA region for use as a screening test for travelers returning to Europe from endemic areas in Africa. We have initiated efforts to develop market channels in the endemic areas of Africa, and early results are encouraging.
We believe that the diagnostic testing market, particularly in the U.S., is continuing to selectively move away from culture and immunoassay testing to
molecular testing for diseases where there is a favorable cost/benefit position for the total cost of health care. During the second quarter of fiscal 2017 we experienced 5% growth in all testing categories, other than the hyper-competitive
C. difficile
arena and 6% growth during the six month
year-to-date
period. While this market is competitive, with molecular companies such as Cepheid and
Becton Dickinson, and others such as Quidel, Great Basin, Nanosphere and Alere, we believe we are well-positioned. Our simple,
easy-to-use,
illumi
gene
platform, with its expanding menu, requires no expensive equipment purchase and little to no maintenance cost. We believe these features, along with its small footprint and the performance of the
illumi
gene
assays, make
illumi
gene
an attractive molecular platform for any size hospital or physician office laboratory that runs moderately-complex tests. We continue to invest in the development of
additional assays for this platform.
Non-molecular
Products
Revenues from our Diagnostics segments
non-molecular
products increased 2% in both the second quarter of fiscal
2017 and on a six month
year-to-date
basis. These results reflect the addition of Magellans revenue, largely offset by decreased revenues in our
H. pylori
and other immunoassay product lines.
Revenues from Magellans sales of products to test for elevated levels of lead in blood totaled $3,645 and
$8,844 during the second quarter of fiscal 2017 and the six month
year-to-date
period, respectively. Compared to the three-month and
six-month
periods ended March 31, 2016, which were prior to Meridians ownership of Magellan, these revenues were approximately flat and up approximately 17%, respectively. Magellans revenues
for the second quarter of fiscal 2017 were adversely affected by distributor and international order patterns. Also, during the second quarter, Magellan executed distribution agreements with distributors in China and Kenya that are expected to
contribute revenues during the second half of fiscal 2017.
During the second quarter of fiscal 2017, revenues from our
H. pylori
products
decreased 7% (6% on a constant-currency basis) to $7,725. These revenues decreased 13% to $14,881 during the first six months of fiscal 2017 (12% on a constant-currency basis). In fiscal 2016, we employed
bulk-buy
sales programs (also referred to as
stock-and-block
programs) intended to increase major customer inventory
levels as a defense against potential competitors upon the expiration of our patent, as further described below. Although certain participating customers are continuing to consume the inventory purchased as part of these programs, we expect our
H. pylori
revenue to return to flat to low single-digit growth during the second half of fiscal 2017. This growth expectation reflects customers working through this inventory and replenishing product, and our realizing volume growth from the
ongoing conversion of serology testing to our antigen tests. We continue to believe there are ongoing benefits to be realized from our partnerships with managed care companies in promoting: (i) the health and economic benefits of a test and
treat strategy; (ii) changes in policies that discourage the use of traditional serology methods and promote the utilization of active infection testing methods; and (iii) physician behavior of movement away from serology-based testing and
toward direct antigen testing. A significant amount of the
H. pylori
product revenues are sales to reference labs, whose buying patterns may not be consistent from period to period. We recently introduced capabilities to identify resistance
to Clarithromycin, the antibiotic commonly used to treat
H. pylori
. We believe that partnering the ability to diagnose
H. pylori
and identify resistance is a strong competitive advantage.
The patents for our
H. pylori
products are owned by us and expired in May 2016 in the U.S. and in May 2017 in countries outside the U.S. We expect
competition with respect to our
H. pylori
products to increase over the next 12 months, as we currently market the only
FDA-cleared
tests to detect
H. pylori
antigen in stool samples. Such
competition may have an adverse impact on our selling prices for these products, or our ability to retain business at prices acceptable to us, and consequently, adversely affect our future results of operations and liquidity, including revenues and
gross profit. In order to defend against competition, our product development pipeline includes multiple new product initiatives for the detection of
H. pylori
. We are unable to provide assurances that we will be successful with any
competition defense strategy or that any competition defense strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.
Page 18
During the second quarter of fiscal 2017, revenues from our other immunoassay products (including
C.
difficile
, foodborne and respiratory) decreased 14% (also 14% on a constant-currency basis) to $15,922. These revenues decreased 16% to $29,537 during the first six months of fiscal 2017 (also 16% on a constant-currency basis). These decreases
result primarily from the effects of continued increased competition and distributor order patterns.
Life Science Products
During the second quarter of fiscal 2017, revenues from our Life Science segment increased 18%, with revenues from molecular component sales increasing 4% from
the comparable fiscal 2016 quarter and revenues from immunoassay component sales increasing 25%. For the first six months of fiscal 2017, revenues from our Life Science segment increased 14%, with revenues from molecular component sales increasing
6% from the
year-to-date
fiscal 2016 period and revenues from immunoassay component sales increasing 19%. Our molecular component business growth was negatively
impacted by the movement in currency exchange rates since the fiscal 2016 periods, with revenues increasing 10% and 12% on a constant-currency basis over the second quarter and first six months of fiscal 2016, respectively. Our Life Science segment
continued to benefit from increased sales into China, with such sales totaling approximately $1,300 during the second quarter of fiscal 2017 (approximately $200 in the molecular components business and $1,100 in the immunoassay components business)
and approximately $2,000 during the
year-to-date
period (approximately $400 in the molecular components business and $1,600 in the immunoassay components business) New
products also contributed to growth, including EPIK miRNA Select, JetSeq, SensiFast
Lyo-Ready,
and MIC Personal qPCR Cycler and accessories.
Significant Customers
Revenue concentrations
related to certain customers within our Diagnostics and Life Science segments are set forth in Note 8 of the accompanying Condensed Consolidated Financial Statements.
Medical Device Tax
During the first three months
of fiscal 2016, the Company recorded approximately $500 of medical device tax expense, which is reflected as a component of cost of sales in the accompanying Condensed Consolidated Statements of Operations. During December 2015, the Consolidations
Appropriations Act of 2016 imposed a
two-year
moratorium on this excise tax effective January 1, 2016. We are unable to predict any future legislative changes or developments related to this moratorium or
excise tax.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Gross Profit
|
|
$
|
33,531
|
|
|
$
|
33,572
|
|
|
|
|
%
|
|
$
|
62,981
|
|
|
$
|
65,155
|
|
|
|
(3
|
)%
|
Gross Profit Margin
|
|
|
62
|
%
|
|
|
65
|
%
|
|
|
-3 points
|
|
|
|
62
|
%
|
|
|
66
|
%
|
|
|
-4 points
|
|
The gross profit decreases experienced in fiscal 2017 primarily result from the combined effects of (i) mix of products
sold, particularly decreased contribution from our higher margin
H. pylori
products; (ii) customer mix; (iii) operating segment mix; and (iv) decreased production levels in certain of our production facilities.
Page 19
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Research &
Development
|
|
|
Selling &
Marketing
|
|
|
General &
Administrative
|
|
|
Acquisition-
Related Costs
|
|
|
Total Operating
Expenses
|
|
2016 Expenses
|
|
$
|
3,129
|
|
|
$
|
7,210
|
|
|
$
|
6,875
|
|
|
$
|
1,202
|
|
|
$
|
18,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
6
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
2
|
%
|
|
|
36
|
%
|
Fiscal 2017 Increases (Decreases):
|
|
Diagnostics
|
|
|
865
|
|
|
|
654
|
|
|
|
842
|
|
|
|
(1,202
|
)
|
|
|
1,159
|
|
Life Science
|
|
|
(87
|
)
|
|
|
148
|
|
|
|
(291
|
)
|
|
|
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Expenses
|
|
$
|
3,907
|
|
|
$
|
8,012
|
|
|
$
|
7,426
|
|
|
$
|
|
|
|
$
|
19,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
7
|
%
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
|
%
|
|
|
36
|
%
|
% Increase (Decrease)
|
|
|
25
|
%
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
(100
|
)%
|
|
|
5
|
%
|
|
|
|
|
Six Months Ended March 31, 2017
|
|
|
|
Research &
Development
|
|
|
Selling &
Marketing
|
|
|
General &
Administrative
|
|
|
Acquisition-
Related Costs
|
|
|
Total Operating
Expenses
|
|
2016 Expenses
|
|
$
|
6,510
|
|
|
$
|
13,653
|
|
|
$
|
14,769
|
|
|
$
|
1,481
|
|
|
$
|
36,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
7
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
2
|
%
|
|
|
37
|
%
|
Fiscal 2017 Increases (Decreases):
|
|
Diagnostics
|
|
|
925
|
|
|
|
1,596
|
|
|
|
1,627
|
|
|
|
(1,481
|
)
|
|
|
2,667
|
|
Life Science
|
|
|
(123
|
)
|
|
|
277
|
|
|
|
(524
|
)
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Expenses
|
|
$
|
7,312
|
|
|
$
|
15,526
|
|
|
$
|
15,872
|
|
|
$
|
|
|
|
$
|
38,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
7
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
|
%
|
|
|
38
|
%
|
% Increase (Decrease)
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
7
|
%
|
|
|
(100
|
)%
|
|
|
6
|
%
|
Total operating expenses increased during both the second quarter and first six months of fiscal 2017 compared to the
corresponding fiscal 2016 periods. These levels of operating expenses result primarily from the combined effects of (i) the addition of Magellans operating expenses totaling $2,700 and $5,500 for the quarterly and
year-to-date
periods, respectively; (ii) decreased selling, marketing, general and administrative operating expenses in our core diagnostics business, including the
effect of revising vacation accrual policies; and (iii) the acquisition-related expenses included within the fiscal 2016 periods. Although research and development expenses of our core diagnostics business were flat on a
six-month
basis, we expect a modest increase in such spending as we move a number of new products through development.
Operating Income
Operating income decreased 6% to
$14,186 for the second quarter of fiscal 2017, and decreased 16% to $24,271 for the first six months of fiscal 2017, as a result of the factors discussed above.
Income Taxes
The effective rate for income taxes
was 34% and 35% for the fiscal 2017 second quarter and six month
year-to-date
periods, respectively. These rates are lower than the 39% and 37% in the comparable fiscal
2016 periods due to the
non-deductibility
of certain expenses incurred in connection with fiscal 2016 acquisition activities. For the fiscal year ending September 30, 2017, we expect the effective tax
rate to approximate
35%-36%.
Page 20
Liquidity and Capital Resources
Comparative Cash Flow Analysis
Our cash flow and
financing requirements are determined by analyses of operating and capital spending budgets, debt service, consideration of acquisition plans, and consideration of common share dividends. We have historically maintained a credit facility to augment
working capital requirements and to respond quickly to acquisition opportunities.
Following the release of results for the fiscal 2017 first quarter, the
Board of Directors announced that the fiscal 2017 indicated cash dividend rate had been reduced to $0.50 per share (down from $0.80 per share, and representing approximately 75% of the revised fiscal 2017 earnings per diluted share guidance), and a
first quarter cash dividend of $0.125 per share was declared. This action, as well as the declaration of a $0.125 per share cash dividend for the second quarter, serves to bring the annual dividend rate more in line with our long-standing policy of
establishing a cash dividend payout ratio of between 75% and 85% of diluted earnings per share. This reduction in the annual indicated dividend rate is intended to enable the Company to fund its ongoing global expansion and new product development
efforts.
We have an investment policy that guides the holdings of our investment portfolio, which presently consists of overnight repurchase agreements,
bank savings accounts and institutional money market mutual funds. 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.
Following its June 23, 2016 vote to leave the European Union (commonly referred
to as Brexit), on March 29, 2017, the United Kingdom invoked Article 50 of the Lisbon Treaty; thus formally commencing the process of exiting the European Union. While the impact of Brexit remains uncertain, the resulting
immediate changes in foreign currency exchange rates have had a limited overall impact due to natural hedging. However, any predicted deterioration in the United Kingdom and European economic outlook may have an adverse effect on revenue growth, but
the extent of such effect cannot yet be quantified. In the longer term, it is possible that we will be directly impacted in a number of key areas including the hiring and retention of qualified staff, regulatory affairs, manufacturing and logistics.
We are closely monitoring the Brexit developments in order to determine, quantify and proactively address changes as they become clear. Despite the Brexit developments, we do not expect macroeconomic conditions to have a significant impact on our
liquidity needs, financial condition or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements and dividends from current cash flows from operating activities and cash
on hand. If needed, we also have an additional source of liquidity through our $30,000 bank revolving credit facility. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets
tightens for an extended period of time, and such conditions impact the collectibility of our customer accounts receivable or impact credit terms with our vendors, or disrupt the supply of raw materials and services.
Net cash provided by operating activities totaled $25,132 for the first six months of fiscal 2017, a 36% increase from the $18,461 provided during the first
six months of fiscal 2016. While reflecting the timing of payments from customers and to suppliers and taxing authorities, this increase also results in large part from the net effects of (i) decreased inventory levels during the
year-to-date
fiscal 2017 period, compared to increased levels during the
year-to-date
fiscal
2016 period; and (ii) decreased accrued employee compensation costs during the first six months of fiscal 2017, reflecting the payment of discretionary bonuses related to fiscal 2016. Net cash flows from operating activities and cash on hand
are anticipated to be adequate to fund working capital requirements, capital expenditures and dividends at the previously-noted reduced rate during the next 12 months.
As described in Notes 3 and 7 of the accompanying Condensed Consolidated Financial Statements, on March 24, 2016, the Company acquired all of the
outstanding common stock of Magellan for $67,874, utilizing the proceeds from a $60,000 five-year term loan and cash and equivalents on hand. An amount of the acquisition consideration totaling $2,383 remains payable to the sellers, pending the
realization of tax benefits for certain net operating loss carryforwards in future tax returns.
Page 21
Capital Resources
As described in Notes 3 and 7 of the accompanying Condensed Consolidated Financial Statements, in connection with the acquisition of Magellan, the Company
entered into a $60,000 five-year term loan with a commercial bank. The term loan requires quarterly principal and interest payments, with interest at a variable rate tied to LIBOR, and a balloon principal payment due March 31, 2021. As also
described in Note 7, exposure to the volatility of the term loans variable interest rate is limited by an interest rate swap agreement with the commercial bank. In addition, we have a $30,000 revolving credit facility with a commercial bank
that expires March 31, 2021. As of April 30, 2017, 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 revolving credit facility during
the first six months of fiscal 2017 or during the full year of fiscal 2016.
Our capital expenditures are estimated to range between approximately $3,000
to $5,000 for fiscal 2017, with the actual amount dependent upon actual operating results and the phasing of certain projects. Such expenditures may be funded with cash and equivalents on hand, operating cash flows, and/or availability under the
$30,000 revolving credit facility discussed above.
We do not utilize any special-purpose financing vehicles or have any undisclosed
off-balance
sheet arrangements.