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
Three Months Ended
June 30, 2017
Net earnings for the third quarter of fiscal 2017 decreased 97% to $240, or $0.01 per diluted share, from net earnings for the
third quarter of fiscal 2016 of $8,754, or $0.21 per diluted share. The fiscal 2017 results include an impairment charge against Magellan goodwill ($6,628 or $0.16 per diluted share). Net earnings for the third quarter of fiscal 2017 also include
increased legal and professional services spending. These expenses totaled approximately $500 after income taxes, or $0.01 per diluted share. Consolidated revenues decreased 1% to $50,140 for the third quarter of fiscal 2017 compared to the same
period of the prior year (flat on a constant-currency basis).
Revenues for the Diagnostics segment for the third quarter of fiscal 2017 decreased 4%
compared to the third quarter of fiscal 2016 (also 4% on a constant-currency basis), comprised of a 20% decrease in molecular products and a 2% increase in
non-molecular
products. With a 7% increase in its
immunoassay components business and a 10% increase in its molecular components business, revenues of our Life Science segment increased by 8% during the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016 (increasing 10% on a
constant-currency basis).
Nine Months Ended June 30, 2017
For the nine month period ended June 30, 2017, net earnings decreased 41% to $15,831, or $0.37 per diluted share, compared to net earnings for the
comparable fiscal 2016 period of $26,738, or $0.63 per diluted share. The
year-to-date
fiscal 2017 results include an impairment charge against Magellan goodwill ($6,628
or $0.16 per diluted share), and
year-to-date
fiscal 2016 results include 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 1% to $151,074 for the first nine months of fiscal 2017 compared to the same period of the prior year (increasing 2% on a constant-currency basis).
Revenues for the Diagnostics segment for the first nine months of fiscal 2017 decreased 2% compared to the first nine months of fiscal 2016 (also 2% on a
constant-currency basis), comprised of a 15% decrease in molecular products and a 2% increase in
non-molecular
products, including an $8,422 increase in Magellan revenues resulting from only three months of
Meridian ownership during the comparable fiscal 2016 period. With a 15% increase in its immunoassay components business and a 7% increase in its molecular components business, revenues of our Life Science segment increased by 12% during the first
nine months of fiscal 2017 compared to the first nine months of fiscal 2016 (increasing 14% on a constant-currency basis).
Page 15
Magellan FDA Activities and Goodwill Impairment Charge
On May 17, 2017, the FDA issued a field safety notice advising customers to discontinue use of Magellans lead testing systems with venous blood
samples. This was followed by product recall notices on May 25
th
and June 5
th
. Magellans lead testing systems are capable of
processing both capillary and venous blood samples. Magellans LeadCare Plus and LeadCare Ultra systems, which account for approximately 10% of Magellans annual revenues, are used predominantly with venous blood samples. Magellans
LeadCare and LeadCare II systems are predominantly used with capillary blood samples. Since issuance of the field safety and recall notices, the FDA has completed a quality system inspection of Magellan and has issued its Form FDA 483 to Magellan.
As a result of one of the observations contained within the Form FDA 483 involving a Medical Device Report, we expect that the FDA will issue a Warning Letter requiring periodic reporting on our remediation progress. Upon evaluation of the Form FDA
483 and potential Warning Letter, we believe we may experience further delays in reinstating venous blood sample testing on our LeadCare products, as well as in obtaining 510(k) clearance for new Magellan products. Additionally, we may also
experience delays in obtaining export certifications for Magellan products during the remediation period.
In light of these factors and their impacts, it
was determined that a potential impairment of goodwill recorded in connection with the acquisition of Magellan had occurred (i.e., a triggering event). With the assistance of an independent valuation firm, Magellans fair value was
calculated via both market (comparable company) and income (discounted cash flows) approaches. Based upon these approaches, it was determined that the carrying value of the Magellan reporting unit did, in fact, exceed its fair value. As a result, an
impairment charge of $6,628, on both a
pre-tax
and
after-tax
basis, has been recorded during the third quarter and is reflected as a separate operating expense line item
within the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017. Given all of the factors considered, we do not anticipate, at this time, any further goodwill impairment charge from the
Magellan acquisition.
This impairment charge does not impact our cash flow, our dividend or our bank covenants. Our outlook for Magellans LeadCare
II testing volume continues to be healthy. In the 60+ days since the FDA released its Safety Notification (which pertained to venous blood lead testing performed on the systems produced by Magellan), 176 new LeadCare II systems utilizing capillary
blood samples have been placed in physician offices and clinics. For the nine months ended June 30, 2017, LeadCare II placements have increased 11% over the prior year comparable period. These placements and ongoing placements of LeadCare II
point-of-care
systems and related capillary blood testing are expected to drive revenue growth in 2018 and beyond.
The matters connected with the FDA Safety Notification occurred at Magellan prior to Meridians acquisition of Magellan. Meridian is committed to working
diligently to strengthen Magellans quality system and to address the observations noted in the Form FDA 483 with the highest sense of urgency. However, we can provide no assurance that our remediation efforts will be successful to a degree
acceptable by the FDA within our contemplated time frame. It should be noted that the FDA has stated that all LeadCare blood lead testing systems can be used with capillary blood samples, the predominant sample type used by physicians testing at the
point-of-care.
We believe
point-of-care
lead testing is critical to addressing elevated
lead levels among children and adults across the globe, as testing at the
point-of-care
improves compliance and facilitates patient education and intervention.
Beyond the impact of the impairment charge, we believe the impact on revenue related to the FDAs Safety Notification was approximately $200 during the
quarter. This represents the impact of reduced venous blood sample testing sales from the May 17
th
Safety Notice through June 30, 2017. Costs associated with the matter were less than $100,
resulting in a total impact of less than $0.01 on diluted earnings per share for the quarter.
Page 16
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 the impairment charge against Magellan goodwill and 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 impacts of the goodwill impairment charge and
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.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Earnings -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
$
|
240
|
|
|
$
|
8,754
|
|
|
$
|
15,831
|
|
|
$
|
26,738
|
|
Goodwill impairment charge
|
|
|
6,628
|
|
|
|
|
|
|
|
6,628
|
|
|
|
|
|
Acquisition-related costs (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
6,868
|
|
|
$
|
8,754
|
|
|
$
|
22,459
|
|
|
$
|
27,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings per Basic Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
$
|
0.01
|
|
|
$
|
0.21
|
|
|
$
|
0.38
|
|
|
$
|
0.64
|
|
Goodwill impairment charge
|
|
|
0.16
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
Acquisition-related costs (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Basic EPS (2)
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
|
$
|
0.53
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings per Diluted Common Share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GAAP basis
|
|
$
|
0.01
|
|
|
$
|
0.21
|
|
|
$
|
0.37
|
|
|
$
|
0.63
|
|
Goodwill impairment charge
|
|
|
0.16
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
Acquisition-related costs (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted EPS (3)
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
|
$
|
0.53
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These acquisition-related costs are net of income tax effects of $248, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.
|
(2)
|
Net Earnings per Basic Common Share for the three and nine months ended June 30, 2017 do not sum due to rounding.
|
(3)
|
Net Earnings per Diluted Common Share for the three months ended June 30, 2017 does not sum due to rounding.
|
Page 17
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 June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
Diagnostics -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
30,810
|
|
|
$
|
31,885
|
|
|
|
(3
|
)%
|
|
$
|
90,221
|
|
|
$
|
93,864
|
|
|
|
(4
|
)%
|
EMEA
|
|
|
4,232
|
|
|
|
4,826
|
|
|
|
(12
|
)%
|
|
|
14,907
|
|
|
|
14,357
|
|
|
|
4
|
%
|
ROW
|
|
|
907
|
|
|
|
812
|
|
|
|
12
|
%
|
|
|
2,401
|
|
|
|
1,957
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diagnostics
|
|
|
35,949
|
|
|
|
37,523
|
|
|
|
(4
|
)%
|
|
|
107,529
|
|
|
|
110,178
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Science -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
5,550
|
|
|
|
4,790
|
|
|
|
16
|
%
|
|
|
16,681
|
|
|
|
16,249
|
|
|
|
3
|
%
|
EMEA
|
|
|
4,633
|
|
|
|
5,977
|
|
|
|
(22
|
)%
|
|
|
16,253
|
|
|
|
15,127
|
|
|
|
7
|
%
|
ROW
|
|
|
4,008
|
|
|
|
2,375
|
|
|
|
69
|
%
|
|
|
10,611
|
|
|
|
7,530
|
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Science
|
|
|
14,191
|
|
|
|
13,142
|
|
|
|
8
|
%
|
|
|
43,545
|
|
|
|
38,906
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
50,140
|
|
|
$
|
50,665
|
|
|
|
(1
|
)%
|
|
$
|
151,074
|
|
|
$
|
149,084
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostics
|
|
|
72
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
71
|
%
|
|
|
74
|
%
|
|
|
|
|
Life Science
|
|
|
28
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
29
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ex-Americas
|
|
|
27
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
29
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Page 18
Revenues for each product platform/type, as well as its relative percentage of segment revenues, are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
|
2017
|
|
|
2016
|
|
|
Inc (Dec)
|
|
Diagnostics -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
|
|
$
|
8,006
|
|
|
$
|
10,063
|
|
|
|
(20
|
)%
|
|
$
|
25,194
|
|
|
$
|
29,564
|
|
|
|
(15
|
)%
|
Non-molecular
|
|
|
27,943
|
|
|
|
27,460
|
|
|
|
2
|
%
|
|
|
82,335
|
|
|
|
80,614
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diagnostics
|
|
$
|
35,949
|
|
|
$
|
37,523
|
|
|
|
(4
|
)%
|
|
$
|
107,529
|
|
|
$
|
110,178
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Science -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular components
|
|
$
|
5,541
|
|
|
$
|
5,037
|
|
|
|
10
|
%
|
|
$
|
15,996
|
|
|
$
|
14,902
|
|
|
|
7
|
%
|
Immunoassay components
|
|
|
8,650
|
|
|
|
8,105
|
|
|
|
7
|
%
|
|
|
27,549
|
|
|
|
24,004
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Science
|
|
$
|
14,191
|
|
|
$
|
13,142
|
|
|
|
8
|
%
|
|
$
|
43,545
|
|
|
$
|
38,906
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Diagnostics revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
|
|
|
22
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
23
|
%
|
|
|
27
|
%
|
|
|
|
|
Non-molecular
|
|
|
78
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
77
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diagnostics
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Life Science revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular components
|
|
|
39
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
37
|
%
|
|
|
38
|
%
|
|
|
|
|
Immunoassay components
|
|
|
61
|
%
|
|
|
62
|
%
|
|
|
|
|
|
|
63
|
%
|
|
|
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 20% to $8,006 for the third quarter of fiscal 2017 (also
20% on a constant-currency basis), and decreased 15% to $25,194 for the nine month
year-to-date
period (also 15% 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 1,600 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 over 500 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.
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 120 accounts in the EMEA region for use primarily 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 third quarter of fiscal 2017 we experienced 9% growth in all molecular testing
categories, other than the hyper-competitive
C. difficile
arena and 7% growth during the nine month
year-to-date
period. While this market is competitive, with
molecular companies such as Cepheid and Becton Dickinson, and
Page 19
others such as Quidel, Great Basin, Luminex 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 third quarter of fiscal
2017 and on a nine month
year-to-date
basis. On a quarterly basis, these results reflect a decrease in Magellan revenue and overall increases in our
H. pylori
and foodborne product lines. The
year-to-date
increase reflects the current fiscal year including a full nine months of Magellan 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 $4,330 and $13,174 during the third quarter of fiscal 2017 and the nine month
year-to-date
period, respectively. Compared to the three-month and
nine-month periods ended June 30, 2016, of which the six months ended March 31, 2016 were prior to Meridians ownership of Magellan, these revenues decreased 9% and increased 6%, respectively. The decline in Magellans revenues
for the third quarter reflected the combined effects of lower revenue from venous blood testing during the quarter, resulting from
FDA-related
activities, and favorable acquisition-related matters in the
previous year. Also, having been affected by distributor and international order patterns earlier in this fiscal year, Magellan has executed distribution agreements with distributors in China and Kenya that are expected to contribute revenues during
fiscal 2018.
During the third quarter of fiscal 2017, revenues from our
H. pylori
products increased 5% (6% on a constant-currency basis) to
$8,486. These revenues decreased 7% to $23,367 during the first nine months of fiscal 2017 (6% 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 have low single-digit growth during the balance of fiscal 2017.
This growth expectation reflects customers working through this inventory and replenishing product, and the Company 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
combining the ability to diagnose
H. pylori
and identify resistance is a strong competitive advantage.
The patents for our
H. pylori
products, owned by us, 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 coming months, as we currently market the only
FDA-cleared
tests to detect
H. pylori
antigen in stool samples in the U.S. market. 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.
During the third quarter of fiscal 2017, revenues from our other immunoassay products
(including
C. difficile
, foodborne and respiratory) increased 1% (2% on a constant-currency basis) to $14,617. These revenues decreased 11% to $44,154 during the first nine months of fiscal 2017 (10% on a constant-currency basis). These
results primarily reflect the effects of continued increased competition and distributor order patterns.
Page 20
Life Science Products
During the third quarter of fiscal 2017, revenues from our Life Science segment increased 8%, with revenues from molecular component sales increasing 10% from
the comparable fiscal 2016 quarter and revenues from immunoassay component sales increasing 7%. For the first nine months of fiscal 2017, revenues from our Life Science segment increased 12%, with revenues from molecular component sales increasing
7% from the
year-to-date
fiscal 2016 period and revenues from immunoassay component sales increasing 15%. Our molecular component business growth was negatively
impacted by the movement in currency exchange rates since the fiscal 2016 periods, with revenues increasing 15% and 13% on a constant-currency basis over the third quarter and first nine months of fiscal 2016, respectively. Our Life Science segment
continued to benefit from increased sales into China, with such sales totaling approximately $2,000 during the third quarter of fiscal 2017 (approximately $300 in the molecular components business and $1,700 in the immunoassay components business)
and approximately $4,000 during the
year-to-date
period (approximately $700 in the molecular components business and $3,300 in the immunoassay components business);
representing an approximate 65% increase over the fiscal 2016
year-to-date
period. New products also contributed to growth, including EPIK miRNA Select,
JetSeq, and SensiFast
Lyo-Ready.
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 June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Gross Profit
|
|
$
|
31,197
|
|
|
$
|
32,909
|
|
|
|
(5
|
)%
|
|
$
|
94,178
|
|
|
$
|
98,064
|
|
|
|
(4
|
)%
|
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 in the
year-to-date
period; (ii) customer mix; (iii) operating
segment mix; and (iv) decreased production levels in certain of our production facilities designed to reduce inventory levels.
Page 21
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
Research &
Development
|
|
|
Selling &
Marketing
|
|
|
General &
Administrative
|
|
|
Goodwill
Impairment Charge
and Acquisition-
Related Costs
|
|
|
Total Operating
Expenses
|
|
2016 Expenses
|
|
$
|
3,546
|
|
|
$
|
8,085
|
|
|
$
|
7,537
|
|
|
$
|
|
|
|
$
|
19,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
7
|
%
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
|
%
|
|
|
38
|
%
|
Fiscal 2017 Increases (Decreases):
|
|
Diagnostics
|
|
|
304
|
|
|
|
(252
|
)
|
|
|
686
|
|
|
|
6,628
|
|
|
|
7,366
|
|
Life Science
|
|
|
56
|
|
|
|
52
|
|
|
|
251
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Expenses
|
|
$
|
3,906
|
|
|
$
|
7,885
|
|
|
$
|
8,474
|
|
|
$
|
6,628
|
|
|
$
|
26,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
8
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
13
|
%
|
|
|
54
|
%
|
% Increase (Decrease)
|
|
|
10
|
%
|
|
|
(2
|
)%
|
|
|
12
|
%
|
|
|
NMF
|
|
|
|
40
|
%
|
|
|
|
|
Nine Months Ended June 30, 2017
|
|
|
|
Research &
Development
|
|
|
Selling &
Marketing
|
|
|
General &
Administrative
|
|
|
Goodwill
Impairment Charge
and Acquisition-
Related Costs
|
|
|
Total Operating
Expenses
|
|
2016 Expenses
|
|
$
|
10,056
|
|
|
$
|
21,738
|
|
|
$
|
22,306
|
|
|
$
|
1,481
|
|
|
$
|
55,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
7
|
%
|
|
|
15
|
%
|
|
|
15
|
%
|
|
|
1
|
%
|
|
|
37
|
%
|
Fiscal 2017 Increases (Decreases):
|
|
Diagnostics
|
|
|
1,229
|
|
|
|
1,344
|
|
|
|
2,313
|
|
|
|
5,147
|
|
|
|
10,033
|
|
Life Science
|
|
|
(67
|
)
|
|
|
329
|
|
|
|
(273
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Expenses
|
|
$
|
11,218
|
|
|
$
|
23,411
|
|
|
$
|
24,346
|
|
|
$
|
6,628
|
|
|
$
|
65,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenues
|
|
|
7
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
4
|
%
|
|
|
43
|
%
|
% Increase
|
|
|
12
|
%
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
348
|
%
|
|
|
18
|
%
|
Total operating expenses increased during both the third quarter and first nine months of fiscal 2017 compared to the
corresponding fiscal 2016 periods, relating primarily to overall increases in spending in our Diagnostics operating segment, as detailed below.
Quarterly Increase
The quarterly increase in Diagnostics
operating expenses result primarily from the combined effects of the following:
|
|
|
Recording of Magellan goodwill impairment charge;
|
|
|
|
Increased legal and professional services spending; and
|
|
|
|
Increased research and development spending by our core diagnostics business.
|
Page 22
Year-to-Date
Increase
The
year-to-date
increase in Diagnostics operating expenses result primarily
from the combined effects of the following:
|
|
|
Recording of Magellan goodwill impairment charge;
|
|
|
|
Addition of incremental Magellan operating expenses, due to six additional months of Meridian ownership in the current fiscal year period compared to the prior year period;
|
|
|
|
Increased legal and professional services spending; and
|
|
|
|
Acquisition-related expenses included within the fiscal 2016
year-to-date
period.
|
Operating Income
Operating income decreased 69%
to $4,304 for the third quarter of fiscal 2017, and decreased 33% to $28,575 for the first nine months of fiscal 2017, as a result of the factors discussed above, including most notably the Magellan goodwill impairment charge.
Income Taxes
The effective rate for income taxes
was 94% and 43% for the fiscal 2017 third quarter and nine month
year-to-date
periods, respectively. These rates are higher than the 35% and 36% in the comparable fiscal
2016 periods due primarily to the
non-deductibility
of the Magellan goodwill impairment charge. Excluding the effects of the Magellan goodwill impairment charge, the effective tax rate was 35% for the fiscal
2017 third quarter and nine month year-to-date periods. For the fiscal year ending September 30, 2017, we expect the normalized effective tax rate (i.e., excluding the Magellan goodwill impairment charge) to approximate
35%-36%.
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 each of the second and third quarters, 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
Page 23
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 $32,491 for the first nine months of fiscal 2017, a 25% increase from the $26,004 provided during the first
nine 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 nine months of fiscal 2017, reflecting the payment of discretionary bonuses related to fiscal 2016 and the timing of regularly scheduled payroll payments. 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. Of this amount, a payment of approximately $650 is expected to be made to the sellers during the fourth quarter of fiscal 2017. The remaining amount is
expected to be paid in 2018 upon filing of our U.S. tax returns.
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 July 31, 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 nine months of fiscal 2017 or during the full year of fiscal 2016.
Our capital expenditures are estimated to range between approximately $4,000
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.
Page 24