In the discussion that follows, all dollars and shares are in thousands (both tables and text), except per share data.
ITEM 1.
BUSINESS
Overview
Meridian is a fully-integrated life science company with principal businesses in (i) the development, manufacture, sale and distribution of
diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory, and parasitic infectious diseases, and elevated blood lead levels; and (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents,
nucleotides, competent cells, and bioresearch reagents used by researchers and other diagnostic manufacturers. The Company was incorporated in Ohio in 1976. Our principal corporate offices are located near Cincinnati, Ohio, USA.
During March 2016, we acquired all of the outstanding common stock of Magellan Biosciences, Inc., and its wholly-owned subsidiary Magellan Diagnostics, Inc.
(collectively, Magellan), which is now reported as part of our Diagnostics operating segment. Headquartered near Boston, Massachusetts, Magellan is a leading manufacturer of products cleared by the Food & Drug Administration
(FDA) for the
point-of-care
testing of capillary blood to diagnose lead poisoning in children and adults. Further details of the Magellan acquisition are set
forth in Note 2 of the accompanying Consolidated Financial Statements.
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Our website is
www.meridianbioscience.com
. We make available our Annual Reports on Form
10-K,
Quarterly Reports on Form
10-Q,
Current Reports on Form
8-K
and any amendments thereto, free of charge through this website, as
soon as reasonably practicable after such material has been electronically filed with or furnished to the Securities and Exchange Commission (SEC). These reports may also be read and copied at the SECs public reference room at 100
F Street, N.E., Washington, DC 20549, phone number
1-800-732-0330.
The SEC maintains an internet site containing these filings
and other information regarding Meridian at
www.sec.gov
. The information on our website is not and should not be considered part of this Annual Report on Form
10-K.
Reportable Segments
Our reportable segments are
Diagnostics and Life Science, both of which are headquartered in Cincinnati, Ohio. Detailed information related to the reportable segments can be found in the following locations within this Annual Report on Form
10-K:
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Type of Segment Information
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Location within Annual Report on Form 10-K
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Physical locations and activities
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Item 2. Properties
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Revenue by geographic region
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Item 7. Managements Discussion and Analysis of Financial Condition & Results of Operations (hereafter MD&A)
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Financial information
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Note 8 of Consolidated Financial Statements
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Diagnostics Segment
Overview of Products and Markets
Our primary
source of revenues is clinical diagnostic products, with our Diagnostics segment providing 71% of consolidated net revenues for fiscal 2017. Third-party revenues for this segment were approximately $144,000, $145,000 and $146,000 for fiscal 2017,
2016 and 2015, respectively. As of September 30, 2017, our Diagnostics segment had approximately 420 employees in seven countries.
Our clinical
diagnostic products provide accuracy, simplicity and speed; enable early diagnosis and treatment of common, acute medical conditions; and provide for better patient outcomes at reduced costs. We target diagnostics for disease states that
(i) are conditions where rapid diagnosis impacts patient outcomes; (ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; and/or (iv) have difficult sample handling
requirements (e.g., stool). This approach has allowed us to establish significant market share in our target disease states.
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Our clinical diagnostic products span a broad menu of testing platforms and technologies, and also include
transport media that store and preserve specimen samples from patient collection to laboratory testing. Our testing platforms include:
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Isothermal DNA Amplification (
illumi
gene
brand)
high sensitivity, molecular platform that is suitable for virtually any moderately-complex laboratory, whether centralized or
decentralized; provides flexibility to process from 1 to 10 tests per run in generally under one hour; and requires no batching of samples.
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Rapid Immunoassay (TRU, Immuno
Card
and Immuno
Card
STAT! brands)
single-use
immunoassays that have fast turnaround times
(generally under 20 minutes); and can reduce expensive send-outs for hospitals and outpatient clinics.
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Enzyme-linked
Immunoassay (PREMIER brand)
batch immunoassay platform that can process up to 96 tests per run; is highly accurate and economical; and is adaptable to
automation.
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Anodic Stripping Voltammetry (LeadCare brand)
electrical chemical sensor platform for quantitative determination of lead levels in blood.
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Our clinical diagnostic products are used principally in the detection of infectious diseases caused by various bacteria, viruses, parasites and pathogens,
including most notably the following general areas:
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C. difficile
causative agent for antibiotic-associated diarrhea from a hospital-acquired infection
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Foodborne
Enterohemorrhagic
E. coli
(EHEC) and
Campylobacter jejuni
(Campy)
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H. pylori
stomach ulcers
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Respiratory
Group A
Streptococcus
(strep throat),
M. pneumoniae
(Mycoplasma) and
Bordetella pertussis
(whooping cough), among tests for other diseases
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Womens Health
& Sexually Transmitted Diseases (STD)
Group B
Streptococcus
,
Chlamydia trachomatis
,
Neisseria gonorrhea
, Herpes Simplex Virus
Type 1 & Type 2
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Our clinical diagnostics products also include Magellans LeadCare brand of tests for quantitative determination
of blood lead levels.
Our product portfolio includes over 140 diagnostic tests and transport media, and is marketed to acute care hospitals, reference
laboratories, outpatient clinics and physician office laboratories in over 70 countries around the world.
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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. As of September 30, 2017, our
illumi
gene
Malaria test has been placed
in nearly 150 accounts in the EMEA region (i.e., Europe, Middle East and Africa) for use as a screening test for travelers returning to Europe from endemic areas in Africa. Our efforts to develop market channels in the endemic areas of Africa
continue, as we work to convince policy-makers of the advantages of a more accurate molecular test to assist in efforts to eradicate malaria.
We believe
that our
illumi
gene
system has been well-accepted in our global markets. We now have nearly 1,650 customer account placements. Of these account placements, approximately 1,375 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 nearly 600 accounts that are regularly purchasing, evaluating and/or
validating two or more assays.
Our current research and development pipeline for immunoassay products includes a new instrument that utilizes fluorescent
chemistry and has colorimetric capabilities. This new platform is being branded under the Curian name. During the first half of fiscal 2018, we expect to submit a 510(k) to the FDA for one or more of our existing rapid
immunoassay tests using the colorimetric capabilities of the Curian instrument. During the second half of fiscal 2018, we expect to submit a 510(k) to the FDA for our first fluorescent assay, a combination
C.difficile
common antigen
(GDH) and toxin (A/B) test. Looking forward into fiscal 2019 and 2020, we expect to develop additional rapid immunoassay tests using the Curian fluorescent chemistry.
Market Trends
The global market for infectious
disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. More importantly, within this market, there is a continuing shift from
conventional testing, which requires highly trained personnel and lengthy turnaround times for test results, to more technologically advanced testing, which can be performed by less highly trained personnel and completed in minutes or hours.
The increasing global pressures to contain total health care costs have accelerated the increased use of diagnostic testing. With rapid and accurate diagnoses
of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and lower overall treatment cost. Integrated Delivery Networks (IDNs) and Accountable Care Organizations
(ACOs) in our U.S. market have the goal of increasing the efficiency of health care delivery, reducing spending and improving clinical outcomes. We believe our product portfolio positions us competitively with IDNs, ACOs and health care
systems that are transitioning from
fee-for-service
compensation models, to value based reimbursement. Our
C. difficile
, Group B
Streptococcus
, Group A
Streptococcus
and
H. pylori
products are all examples of how a highly accurate diagnostic test on the front end can mitigate or reduce down-stream costs for antibiotic use, symptom-relieving drugs and hospital stays.
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We also continue to see aggregation of buying power in our U.S. market via multi-hospital group purchasing
organizations and IDNs, consolidation among reference laboratories, hospital laboratories being operated by large reference laboratories, and acquisition of physician practices by hospitals, health systems, and
for-profit
specialty health care companies. We utilize multi-year supply agreements to secure our business where we deem appropriate.
Cost containment pressures have also affected health care systems outside the U.S., particularly in Europe, where the health care systems are generally
government-run.
The level of government budget deficits can have an adverse effect on the amount of government health care spend.
Sales, Marketing and Distribution
Our Diagnostics
segments sales and distribution network consists of the following for each of the broad geographic regions we serve:
United
States
In the U.S., our sales and distribution network consists of a direct sales force complemented by independent distributors. The
use of independent distributors allows our products to reach any size health care facility and also provides our customers the option to purchase our products directly from Meridian or through an authorized distributor. Two independent distributors
accounted for 10% or more of consolidated revenues in fiscal 2017, 2016 and 2015: Cardinal Healthcare Corporation and Thermo Fisher Scientific. Our revenues from Cardinal were approximately $23,000, $20,000 and $29,000 during fiscal 2017, 2016 and
2015, respectively. Our revenues from Thermo Fisher were approximately $18,000, $20,000 and $25,000 during fiscal 2017, 2016 and 2015, respectively.
EMEA
In EMEA, our sales
and distribution network consists of direct sales forces in Belgium, France, Holland and Italy, and independent distributors in other European countries, Africa and the Middle East. We have implemented a direct sales presence in Germany and the U.K.
for our
illumi
gene
products, and utilize independent distributors for our immunoassay products. We maintain a distribution center near Milan, Italy.
ROW
With the exception
of Australia, where we utilize a direct sales force, we utilize independent distributors throughout the rest of the world (ROW).
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Competition
Our major competitors in molecular diagnostics are Cepheid and Becton Dickinson, who have systems with multiple-assay menus. We also face competition in
molecular diagnostics, but to a lesser degree, from companies such as Alere and Quidel, who have a limited commercial menu and tend to compete strictly on price. We believe that our molecular platform offers a number of competitive features:
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Molecular assay sensitivity that is comparable to higher costing PCR;
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Low capital investment with no instrument service cost;
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Small footprint that is portable and does not consume much laboratory space; and
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Product menu that fits with initiatives to improve clinical and economic outcomes.
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Our major competitors in
rapid immunoassay diagnostics are primarily Alere and Quidel. Over the last two years, companies such as BioMerieux have captured market share in our foodborne category via multi-plex panel tests. However, over the last several months, payors have
raised concerns over reimbursement levels relative to clinical utility. For blood lead testing, we believe we have the only
FDA-cleared,
CLIA-waived
point-of-care
test available commercially. Other blood lead testing systems in use, marketed by our competitors, include Graphite Furnace Atomic Absorption Spectroscopy, which requires a highly-skilled
technician and larger laboratory space to operate, in addition to not being portable or suitable for
point-of-care
use. We believe that with the breadth and depth of our
product portfolio, we are well positioned for the clinical laboratory.
Research and Development
Our Diagnostics segments research and development organization for infectious disease products is located at our corporate headquarters in Newtown, Ohio,
a suburb of Cincinnati, and has expertise in biochemistry, immunology, mycology, bacteriology, virology, parasitology, and molecular biology. Our Magellan business has a dedicated research and development team in Billerica, Massachusetts. Research
and development expenses for the Diagnostics segment for fiscal 2017, 2016 and 2015 were approximately $13,000, $11,000 and $10,000, respectively. Our research and development activities are focused on new product and new technology development, new
applications for our existing technologies, and improvements to existing products. Research and development efforts may occur
in-house
or with collaborative partners. We believe that new product development is
a key source for sustaining revenue growth. The products within our
illumi
gene
molecular platform,
H. pylori
product family and blood lead testing family were developed solely
in-house,
or substantially so. See Operating Expenses section within MD&A on page 39.
Manufacturing
Our immunoassay and molecular assay
products require the production of highly specialized reagents, primers and enzymes. We produce substantially all of our own immunoassay requirements. Primers for our
illumi
gene
molecular assay products are purchased from
outside vendors. Our blood lead testing products require the production of electrical chemical sensors, which we manufacture using critical raw materials purchased from outside vendors. We believe that we have sufficient manufacturing and sourcing
capacity for anticipated growth over the next several years.
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Intellectual Property, Patents and Licenses
We own or license U.S. and foreign patents, most of which are for selected products manufactured by our Diagnostics segment. These patents are used in our
manufacturing processes for selected products (method patents) or may relate to the design of the test device technology format (design patents). In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our
production and manufacturing technologies and processes. Our employees are required to sign confidentiality and
non-disclosure
agreements designed to protect our proprietary products.
The patents for our
illumi
gene
products, which represented 17%, 20% and 21% of consolidated revenues for fiscal 2017, 2016 and 2015,
respectively, are licensed from a third party, Eiken Chemical Co., Ltd., under a
non-exclusive
license agreement and expire between 2020 and 2022. These patents were issued in the U.S., European Community and
other countries. The term of our license agreement runs until the last patent expires in 2022, at which point we will be free to practice the patents without any restriction or royalty obligation.
The patents for our
H. pylori
products, owned by us and which represented 14%, 15% and 14% of consolidated revenues for fiscal 2017, 2016 and 2015,
respectively, 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 in the near future, 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
, including drug resistance. 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.
Government Regulation
Our diagnostic products are regulated by the FDA as devices pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). Under the
FDCA, medical devices are classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly approved by the FDA, but, instead, are cleared for marketing. Class III devices generally
must receive
pre-market
approval from the FDA as to safety and effectiveness. Our diagnostics manufacturing facilities in Cincinnati and Billerica are subject to periodic inspection by the FDA. See
page 30 within MD&A for discussion regarding the FDAs inspection of our Billerica facility.
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Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA
pursuant to the 510(k) clearance process or is exempt from such requirements. We believe that most, but not all, products under development will be classified as Class I or II medical devices and, in the case of most of our Class I and all
Class II devices, will be eligible for 510(k) clearance; however, we can make no assurances in this regard.
Sales of our diagnostic products in
foreign countries are subject to foreign government regulation, which is similar to that of the FDA.
Our Cincinnati manufacturing facility is certified
to ISO 13485:2012, and our Magellan facility in Billerica, Massachusetts is certified to ISO 13485:2003.
Medical Device Tax
As more fully discussed in the accompanying MD&A, the Company was subject to the medical device tax established as part of the U.S. health care reform
legislation through December 31, 2015. Upon expiration of the taxs
two-year
moratorium, which is currently scheduled for December 31, 2017, the Company would become subject to the tax once
again. We are unable to predict any future legislative changes or developments related to this moratorium or excise tax.
Seasonal Factors and
Sporadic Outbreaks
Our principal business is the sale of a broad range of clinical diagnostic test kits for common gastrointestinal, viral, upper
respiratory and parasitic infectious diseases, and elevated blood lead levels. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses or pandemics such as the H1N1
influenza outbreak during fiscal 2009. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can
make no assurance that revenues will not be impacted period over period by such factors.
Life Science Segment
Overview of Products and Markets
Our Life Science
segment focuses on the development, manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers,
agri-bio
companies and other diagnostic manufacturing companies. Third-party revenues for this segment were approximately $57,000, $51,000 and $49,000 for fiscal 2017, 2016 and 2015, respectively. As of September 30, 2017, our Life Science segment had
approximately 220 employees in seven countries.
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Most of the revenues for our Life Science segment currently come from the manufacture, sale and distribution of
bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturing companies focused on the development of immunoassay and molecular assay tests. Approximately
72% of Life Science revenues are generated from the industrial market, defined as diagnostic manufacturers and the agriculture industry. This continues to be an increasing focus of our Bioline molecular components business, which historically
focused on the academic/research market that comprises the remaining 28% of Life Science revenues. We utilize direct sales teams in key countries such as the U.S., the U.K., Germany, France, Australia and Singapore. We have added distribution
capabilities to our Singapore sales and business development office to increase our presence and our revenue opportunities in Asia for both molecular and immunoassay components. Additionally, in order to further pursue revenue opportunities in Asia,
and China in particular, during fiscal 2017 we established a wholly foreign owned enterprise (WFOE) location in Beijing, China, after having operated a representative office there since fiscal 2015. The WFOE employs a business
development staff and imports product for sales to customers in China. We utilize a network of distributors in other major countries. During fiscal 2017, 17% of third-party revenues for this segment were from two diagnostic manufacturing customers.
Products such as antibodies, antigens and reagents are marketed primarily to diagnostic manufacturing customers as a source of raw materials for their
immunoassay products, or as an outsourced step in their manufacturing processes. For example, we supply a number of major diagnostic manufacturers with proteins used to detect hepatitis A virus and rubella virus. These products are typically sold in
bulk quantities, and may also be custom-designed for a particular manufacturers requirements. Sales efforts are focused on multi-year supply arrangements in order to provide stability in volumes and pricing. We believe this benefits both us
and our customers.
Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed to academic/research and industrial
customers. These products are used in measuring DNA and RNA in clinical and agricultural applications. These reagents improve the purity, yield and speed of PCR reactions. Products such as MyTaq and SensiFAST are examples of this type of PCR/qPCR
reagent.
Market Trends
As certain global
markets become increasingly accessible to us, most notably the Asia-Pacific region, geographic expansion continues to be a significant strategy for our Life Science segment, along with further penetration into industrial markets with our molecular
component products.
Competition
The market
for bulk biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service and reputation. We face competitors, many of which have greater financial, research and development, sales and
marketing, and manufacturing resources, and where sole-source supply arrangements do not exist. Customers also may choose to manufacture their biomedical reagents
in-house
rather than purchase from outside
vendors such as Meridian.
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The academic/research market is highly fragmented. Individual purchases are typically of small quantities. The
breadth of product offerings, quality, price and service, including
on-line
capabilities and technical resources, are important factors to building customer loyalty and repeat purchases.
Research and Development
Research and development
expenses for our Life Science segment for each of fiscal 2017, 2016 and 2015 were approximately $3,000. The primary focus of this research and development organization is development of new molecular reagent products. See Operating
Expenses section within MD&A on page 39.
Manufacturing and Government Regulation
Our Life Science U.S. facilities are ISO 9001:2008 certified and our Bioline facilities in the U.K. and Germany are ISO 13485:2012 certified. Additionally,
where appropriate, our Life Science facilities comply with Regulation EC 1069:2009.
Acquisitions
Acquisitions have played an important role in the growth of our businesses. Our acquisition objectives include, among other things: (i) enhancing product
offerings; (ii) improving product distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide assurance
that we will consummate additional acquisitions in the future, nor can we provide assurance that any acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenue and
earnings growth in the future.
As previously noted in the Overview section, during March 2016, we acquired all of the outstanding common stock of
Magellan. Details of the Magellan acquisition are set forth in Note 2 of the accompanying Consolidated Financial Statements.
International Markets
International markets are an important source of revenues and future growth opportunities for both of our segments. For both segments combined,
revenues from customers located outside of the Americas approximated $59,000 or 29% of consolidated fiscal 2017 revenues, $52,000 or 26% of consolidated fiscal 2016 revenues, and $49,000 or 25% of consolidated fiscal 2015 revenues. We expect to
continue to look to international markets as a source of revenue growth in the future.
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Fluctuations in foreign currency exchange rates since fiscal 2016 had an approximate $1,200 unfavorable impact on
fiscal 2017 revenues; $400 within the Diagnostics segment and $800 within the Life Science segment. This compares to
year-to-year
currency exchange rates having an
approximate $1,700 unfavorable impact on revenues in fiscal 2016; $700 within the Diagnostics segment and $1,000 within the Life Science segment. Due to natural hedge relationships with expenses, both cost of sales and operating expenses, the
overall impact of exchange rate fluctuations on operating income was not significant during fiscal 2017, 2016 or 2015.
Environmental
We are in compliance with applicable portions of the federal and state hazardous waste regulations and have never been a party to any environmental proceeding.
ITEM 1A.
RISK FACTORS
In addition to the other
information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause our actual results to vary
materially from recent results or from anticipated future results. The risks described below are not the only risks facing our company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also
may materially adversely affect our business, financial condition and/or operating results.
Risks Affecting Growth and Profitability of our Business
We may be unable to develop new products and services or acquire products and services on favorable terms.
The medical diagnostic and life science industries are characterized by ongoing technological developments and changing customer requirements. As such, our
results of operations and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products and services, or new products and
services that incorporate technological advances, meet customer requirements and/or respond to products developed by our competition. We cannot provide any assurance that we will be successful in developing or acquiring such rights to products and
services on a timely basis, or that such products and services will adequately address the changing needs of the marketplace, either of which could adversely affect our results of operations.
In addition, we must regularly allocate considerable resources to research and development of new products, services and technologies. The research and
development process generally takes a significant amount of time from research to product launch. This process is conducted in various stages. During each stage, there is a risk that we will not achieve our goals on a timely basis, or at all, and we
may have to abandon a product in which we have invested substantial resources.
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We may be unable to successfully integrate operations or to achieve expected cost savings from acquisitions
we make.
One of our growth strategies is the acquisition of companies and/or products. Although additional acquisitions of companies and products
may enhance the opportunity to increase net earnings over time, such acquisitions could result in greater administrative burdens, increased exposure to the uncertainties inherent in marketing new products, financial risks of additional operating
costs, and risk of asset impairments if future revenues and cash flows are deficient. The principal benefits expected to result from any acquisitions we make will not be achieved fully unless we are able to successfully integrate the operations of
the acquired entities with our operations and realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses into our existing businesses. We cannot provide assurance that we will be able to identify and
complete additional acquisitions on terms we consider favorable or that, if completed, will be successfully integrated into our operations. Furthermore, we cannot predict the outcome of goodwill impairment testing and the impact of goodwill
impairments on the Companys earnings and financial results.
Revenues for our Diagnostics segment may be impacted by our reliance upon two key
distributors in North America, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions.
Key Distributors
Our Diagnostics segments revenues from sales through two U.S. distributors were 29% and 27%, respectively, of the Diagnostics segments total
revenues, or 21% and 20%, respectively, of our consolidated revenues, for fiscal 2017 and fiscal 2016. These parties distribute our products and other laboratory products to
end-user
customers. The loss of
either of these distributors could negatively impact our revenues and results of operations unless suitable alternatives were timely found or lost sales to one distributor were absorbed by another distributor. Finding a suitable alternative on
satisfactory terms may pose challenges in our industrys competitive environment. As an alternative, we could expand our efforts to distribute and market our products directly. This alternative, however, would require substantial investment in
additional sales, marketing and logistics resources, including hiring additional sales and customer service personnel, which would significantly increase our future selling, general and administrative expenses.
In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, potentially leading to uneven concentration levels on a
quarterly basis.
Seasonal Factors and Sporadic Outbreaks
Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious
diseases, and elevated blood lead levels. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses or pandemics such as H1N1 influenza. While we believe that the
breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be negatively impacted
period over period by such factors.
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Changing Diagnostic Market Conditions
Changes in the U.S. health care delivery system have resulted in consolidation among reference laboratories, hospital laboratories being operated by large
reference laboratories, and the formation of multi-hospital alliances, reducing the number of institutional customers for diagnostic test products. Consolidation in the U.S. health care industry has also led to the creation of group purchasing
organizations (GPOs) and integrated delivery networks (IDNs) that aggregate buying power for hospital groups and put pressure on our selling prices. Due to such consolidation, we may not be able to enter into and/or sustain
contractual or other marketing or distribution arrangements on a satisfactory commercial basis with institutional customers, GPOs and IDNs, which could adversely affect our results of operations.
We could be adversely affected by health care reform legislation.
Third-party payers for medical products and services, including state, federal and foreign governments, are increasingly concerned about escalating health
care costs and can indirectly affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement they will provide for diagnostic testing services. Following years of increasing pressure, during 2010
the U.S. government enacted comprehensive health care reform with the enactment of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, which makes changes that are expected to significantly
impact the pharmaceutical and medical device industries. The Protecting Access to Medicare Act of 2014 will require applicable laboratories to report all private payor reimbursement rates and the volumes for each test they perform. Although a final
rule has yet to be published, the statute requires that Medicare establish reimbursement rates based on the weighted median of private insurance reimbursement rates effective January 1, 2017. The new Medicare rates would be subject to a maximum
reduction of 10% a year for the initial three year period and a maximum of 15% a year for the subsequent three year period. There is no limit on the amount of potential rate increases. As a result, some of our customers in the United States may
experience lower Medicare reimbursement rates for our products, which may adversely affect our business, financial condition and results of operations. Although to date, we have not seen any significant effect on the reimbursement rates for our
products, if reimbursement amounts for diagnostic testing services are decreased in the future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for such services and consequently, could place constraints on
the levels of overall pricing, which could have a material effect on our revenues and/or results of operations.
In addition, as more fully discussed in
the accompanying MD&A, the Company was subject to a 2.3% medical device tax established as part of the U.S. health care reform legislation through December 31, 2015. Upon expiration of the taxs
two-year
moratorium, which is currently scheduled for December 31, 2017, the Company would become subject to the tax once again. We are unable to predict any future legislative changes or developments
related to this moratorium or excise tax.
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Additional state and federal health care reform measures may be adopted in the future, any of which could have a
material adverse effect on our ability to successfully commercialize our products and on our industry in general. For example, the United States government has in the past considered, is currently considering and may in the future consider, health
care policies and proposals intended to curb rising health care costs, including those that could significantly affect both private and public reimbursement for health care services. Further, state and local governments, as well as a number of
foreign governments, are also considering or have adopted similar types of policies. Future significant changes in the health care system in the United States or elsewhere, and current uncertainty about whether and how changes may be implemented,
could have a negative impact on the demand for our products. We are unable to predict whether health care policies, including policies stemming from legislation or regulations affecting our business, may be proposed or enacted in the future, what
effect such policies would have on our business, or the effect that ongoing uncertainty about these matters will have on the purchasing decisions of our customers.
Efforts to reduce the U.S. federal deficit could adversely affect our results of operations.
As part of the Budget Control Act passed in August 2011 to extend the federal debt limit and reduce government spending, $1.2 trillion in automatic spending
cuts (known as sequestration) were implemented in 2013. The sequestration requires a 2% cut in Medicare payments for all services, including our diagnostic tests, which, due to subsequent legislative amendments to the statute, will remain in effect
through 2024 unless Congressional action is otherwise taken. Government research funding has also been reduced as a result of the sequestration. On January 2, 2013, the American Taxpayer Relief Act of 2012 also was signed into law, which, among
other things, further reduces Medicare payments to providers such as hospitals, imaging centers and cancer treatment centers, and increases the statute of limitations period for the government to recover overpayments to providers from three to five
years.
Such reductions in government health care spending or research funding could result in reduced demand for our products or additional pricing
pressure. Further, there is ongoing uncertainty regarding the federal budget and federal spending levels, including the possible impacts of a failure to increase the debt ceiling. Any U.S. government default on its debt could have broad
macroeconomic effects that could, among other things, raise our borrowing costs. Any future shutdown of the federal government or failure to enact annual appropriations could also have a material adverse impact on our business.
Revenues for our Life Science segment may be impacted by customer concentrations and buying patterns.
Our Life Science segments revenues from sales of purified antigens and reagents to two diagnostic manufacturing customers were 17% and 18% of the Life
Science segments total revenues for fiscal 2017 and fiscal 2016, respectively; and 5% of our consolidated revenues for each of fiscal 2017 and fiscal 2016. Our Life Science segment has five other significant customers who purchase antigens,
antibodies and reagents, which together comprised 10% and 7% of the segments total revenues for fiscal 2017 and fiscal 2016, respectively. Any significant alteration of buying patterns from these customers could adversely affect our period
over period revenues and results of operations.
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Intense competition could adversely affect our profitability.
The markets for our products and services are characterized by substantial competition and rapid change. Hundreds of companies around the world supply
diagnostic tests and immunoassay and molecular reagents. These companies range from multinational health care entities, for which diagnostics is one line of business, to small
start-up
companies. Many of our
competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. We cannot provide assurance that our products and services will be able to compete successfully with the products and services of our
competitors.
We expect to face increased competition resulting from expiration of our H. pylori patents.
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 in the near future, as we currently market the only
FDA-cleared
tests to detect
H. pylori
antigen in stool samples in the U.S.
market. At present, we are aware of two companies that have commenced clinical trials of
H. pylori
products in the U.S., one of which is DiaSorin Inc. (see Item 3. Legal Proceedings). 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 mitigate any
loss in revenues, among other things, we are researching and experimenting with new products and attempting to secure significant customers under long-term contracts. We are unable to provide assurances that we will be successful with any mitigation
strategy or that any mitigation strategy will prevent an adverse effect on our future results of operations and liquidity, including revenues and gross profit.
See Item 3. Legal Proceedings for a discussion of the status of certain litigation related to our intellectual property.
We depend on international revenues, and our financial results may be adversely impacted by foreign currency, regulatory or other developments affecting
international markets.
We sell products and services into approximately 70 countries. Approximately 29% and 26% of our net revenues for fiscal
2017 and 2016, respectively, were attributable to markets outside of the Americas. For fiscal 2017, approximately 15% of our consolidated revenues were transacted in currencies other than the U.S. dollar. We are subject to the risks associated with
fluctuations in the exchange rates for the Australian dollar, British pound, Chinese yuan, Euro and Singapore dollar to the U.S. dollar. We are also subject to other risks associated with international operations, including longer customer payment
cycles, tariff regulations, requirements for export licenses, instability of foreign governments, and governmental requirements with respect to the importation and distribution of medical devices and immunodiagnostic and molecular biology reagents,
all of which may vary by country.
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Risks Affecting our Manufacturing Operations
We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations.
Medical device diagnostics is a highly regulated industry. We cannot provide assurance that we will be able to obtain necessary governmental clearances or
approvals, or timely clearances or approvals, to market future products in the United States and other countries. Costs and difficulties in complying with laws and regulations administered by the U.S. Food and Drug Administration, the U.S.
Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the Centers for Disease Control or other regulators can result in unanticipated expenses and delays, and interruptions to the sale of new and existing
products.
Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs of approvals difficult to predict. The
failure to comply with these regulations can result in delays in obtaining authorization to sell products, seizure or recall of products, suspension or revocation of authority to manufacture or sell products, and other civil or criminal sanctions.
If we or our third-party vendors fail to comply with FDA regulations relating to the manufacturing of our products or any component part, we may be
subject to fines, injunctions and penalties, and our ability to commercially distribute and sell our products may be negatively impacted.
Our
diagnostics manufacturing facilities, and the manufacturing facilities of any of our third-party diagnostic component manufacturers or critical suppliers, are required to comply with the FDAs Quality System Regulation (QSR) which
sets forth minimum standards for the procedures, execution and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of the products we sell. The FDA may evaluate our
compliance with the QSR, among other ways, through periodic announced or unannounced inspections which could disrupt our operations and interrupt our manufacturing. If in conducting an inspection of our manufacturing facilities, or the
manufacturing facilities of any of our third-party component manufacturers or critical suppliers, an FDA investigator observes conditions or practices believed to violate the QSR, the investigator may document their observations on a Form FDA 483
that is issued at the conclusion of the inspection. A manufacturer that receives an FDA 483 may respond in writing and explain any corrective actions taken in response to the inspectional observations. The FDA will typically review the
facilitys written response and may
re-inspect
to determine the facilitys compliance with the QSR and other applicable regulatory requirements. Failure to take adequate and timely corrective actions
to remedy objectionable conditions listed on an FDA 483 could result in the FDA taking administrative or enforcement actions. Among these may be the FDAs issuance of a Warning Letter to a manufacturer, which informs it that the FDA considers
the observed violations to be of regulatory significance that, if not corrected, could result in further enforcement action.
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FDA enforcement actions, which include seizure, injunction and criminal prosecution, could result in total or
partial suspension of a facilitys production and/or distribution, product recalls, fines, suspension of the FDAs review of product applications, and/or the FDAs issuance of adverse publicity. Thus, an adverse inspection could force
a shutdown of our manufacturing operations or a recall of our products. Adverse inspections could also delay FDA approval of our products and could have an adverse effect on our production, sales and profitability.
We and any of our third-party vendors may also encounter other problems during manufacturing including failure to follow specific protocols and procedures,
equipment malfunction, and environmental factors, any of which could delay or impede our ability to meet demand. The manufacture of our product also subjects us to risks that could harm our business, including problems relating to our facilities and
errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in shipment of our products. Any interruption or delay in the manufacture of the product or any of its components could impair our
ability to meet the demand of our customers and cause them to cancel orders or switch to competitive products, which could, therefore, have a material adverse effect on our business, financial condition and results of operations.
On June 29, 2017, the FDA, in connection with its recent Safety Notification related to Magellans lead testing systems for venous blood samples,
issued its Form FDA 483 to Magellan. This was followed by the FDA issuing a Warning Letter related to the matter on October 23, 2017. While we remain committed to strengthening Magellans quality system and ensuring that all aspects of the
system are in full compliance, we can provide no assurance that our remediation efforts will be successful to a degree acceptable by the FDA. See a more detailed discussion of this matter within MD&A on page 30.
Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities would adversely affect our
business and operating results.
Products and services manufactured at facilities we own or lease comprised a majority of our revenues. Our global
supply of these products and services is dependent on the uninterrupted and efficient operation of these facilities. In addition, we currently rely on a small number of third-party manufacturers to produce certain of our diagnostic products and
product components. The operations of our facilities or these third-party manufacturing facilities could be adversely affected by power failures, or natural or other disasters, such as earthquakes, floods, tornadoes or terrorist threats. Although we
carry insurance to protect against certain business interruptions at our facilities, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Any
significant interruption in the Companys or a third-party suppliers manufacturing capabilities could materially and adversely affect our operating results.
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We depend on sole-source suppliers for certain critical raw materials, components and finished products. A
supply interruption could adversely affect our business.
Raw Materials and Components
Our diagnostic products are made from a wide variety of raw materials that are biological or chemical in nature, and that generally are available from multiple
sources of supply. We sole-source certain raw materials and components, which make it time consuming and costly to switch raw materials and components in
FDA-cleared
products. If certain suppliers fail to
supply required raw materials or components, we will need to secure other sources which may require us to conduct additional development and testing and obtain regulatory approval. These activities require significant time and resources, and there
is no assurance that new sources will be secured or regulatory approvals, if necessary, will be obtained.
We utilize third-party manufacturers for our
instrumentation. One third party manufactures our proprietary
illumi
pro-10
Incubator/Reader (instrument), a component of our
illumi
gene
molecular system, and a
separate third party manufactures our proprietary LeadCare instruments. These instruments are manufactured exclusively for Meridian according to our specifications. While other manufacturers for these types of instruments are available, we source
solely from one manufacturer to limit the costs involved in clearing the system for marketing in the United States. If these third-party manufacturers fail to supply us with instruments, we will need to secure another manufacturer, and it may take
as long as 12 months to transfer instrument manufacturing. An interruption in the manufacturing of these instruments could have a material adverse effect on our operating results.
Additionally, one third party manufactures a certain reagent for use with our
illumi
gene
assays. While alternative suppliers exist, we
elect to utilize this third party exclusively in order to maintain consistency in our materials, which is critical in complying with FDA regulatory requirements. An interruption in the manufacturing of these reagents could have a material adverse
effect on our operating results.
Finished Products
We outsource the manufacturing for certain finished diagnostic products to third parties. A disruption in the supply of these finished products could have a
material adverse effect on our business until we find another supplier or bring manufacturing
in-house.
Four products manufactured exclusively for us by two separate and independent companies accounted for 11%, 12% and 15% of consolidated revenues in fiscal
2017, 2016 and 2015, respectively. Meridian owns all rights and title to the FDA 510(k) clearances for these products.
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Activities undertaken by Meridian to reduce the risk of these sole-supplier arrangements include maintaining
adequate inventory levels, supplier qualification procedures, supplier audits, site visits and frequent communication. Additionally, we have identified potential alternate suppliers.
Risks Related to Intellectual Property and Product Liability
We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize.
In developing and manufacturing our products, we employ a variety of proprietary and patented technologies. In addition, we have licensed, and expect to
continue to license, various complementary technologies and methods from academic institutions and public and private companies. We cannot provide assurance that the technologies that we own or license provide protection from competitive threats or
from challenges to our intellectual property. In addition, we cannot provide assurances that we will be successful in obtaining and retaining licenses or proprietary or patented technologies in the future.
See Item 3. Legal Proceedings for a discussion of the status of certain litigation related to our intellectual property.
Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our products.
Litigation over intellectual property rights is prevalent in the diagnostic industry. As the market for diagnostics continues to grow and the number of
participants in the market increases, we may increasingly be subject to patent infringement claims. It is possible that a third party may claim infringement against us. If found to infringe, we may attempt to obtain a license to such intellectual
property; however, we may be unable to do so on favorable terms, or at all. Additionally, if our products are found to infringe on third-party intellectual property, we may be required to pay damages for past infringement and lose the ability to
sell certain products, causing our revenues to decrease. Any substantial loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our reputation in the industry could have a material adverse
effect on our business.
If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may have to
limit or cease sales of our products.
The testing, manufacturing and marketing of medical diagnostic products involves an inherent risk of
product liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease sales of our products. We currently carry product liability insurance at a
level we believe is commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. In certain customer contracts, we indemnify third parties for certain product liability claims related to our
products. These indemnification obligations may cause us to pay significant sums of money for claims that are covered by these indemnifications. In addition, a defect in the design or manufacture of our products could have a material adverse effect
on our reputation in the industry and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material adverse effect on our profitability, and the damage to our
reputation in the industry could have a material adverse effect on our business.
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Other Risks Affecting Our Business
Our business could be negatively affected if we are unable to attract, hire and retain key personnel.
Our future success depends on our continued ability to attract, hire and retain highly qualified personnel, including our executive officers and scientific,
technical, sales and marketing employees, and their ability to manage growth successfully. If such key employees were to leave and we were unable to obtain adequate replacements, our operating results could be adversely affected.
Our bank credit agreements impose restrictions with respect to our operations.
Our bank credit agreements contain a number of financial covenants that require us to meet certain financial ratios and tests. If we fail to comply with the
obligations in the credit agreements, we would be in default under the credit agreements. If an event of default is not cured or waived, it could result in acceleration of any indebtedness under our credit agreements, which could have a material
adverse effect on our business. At September 30, 2017, we have approximately $55,000 outstanding on a five-year term loan entered into in connection with the Magellan acquisition and no borrowings are outstanding under our $30,000 bank
revolving credit facility.
We face risks related to global economic conditions.
We currently generate significant operating cash flows, which combined with access to the credit markets, provides us with discretionary funding capacity for
research and development and other strategic activities. However, as an enterprise with global operations and markets, our operations and financial performance are in part dependent upon global economic conditions, and we could be negatively
impacted by a global, regional or national economic crisis, including sovereign risk in the event of deterioration in the credit worthiness of or a default by local governments. We are particularly susceptible to the economic conditions in countries
where government-sponsored health care systems are the primary payers for health care, including those countries within the European Union that are reducing their public expenditures in an effort to achieve cost savings. The uncertainty in global
economic conditions poses a risk to the overall economy that could impact demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. As
such, if global economic conditions deteriorate significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, supplier or customer disruptions resulting
from tighter credit markets, and/or temporary interruptions in our ability to conduct
day-to-day
transactions through our financial intermediaries involving the payment
to or collection of funds from our customers, vendors and suppliers. While
to-date
such factors have not had a significant negative impact on our results or operations, we continue to monitor and plan for the
potential impact of these global economic factors.
- 24 -
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.
Breaches of our information technology systems could have a material adverse effect on our operations.
We rely on information technology systems to process, transmit and store electronic information in our
day-to-day
operations. The secure processing, maintenance and transmission of this information is critical to our operations. Like many multinational corporations, our information technology systems may be
subjected to computer viruses or other malicious codes, unauthorized access attempts, and cyber- or phishing-attacks. We also store certain information with third parties that could be subject to these types of attacks. Any such breach could
compromise our networks, and the information stored therein could be accessed, publicly disclosed, lost or stolen. Such attacks could result in our intellectual property and other confidential information being lost or stolen, disruption of our
operations, and other negative consequences, such as increased costs for security measures or remediation costs, and diversion of management attention. Any such access, disclosure or other loss of information could result in legal claims or
proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption of our operations, damage to our reputation and/or cause a loss of confidence in our products and services, all of which could
adversely affect our business revenues and competitive position. While we will continue to implement additional protective measures to reduce the risk of and detect cyber incidents, cyber-attacks are becoming more sophisticated and frequent, and the
techniques used in such attacks change rapidly. There can be no assurances that our protective measures will prevent attacks that could have a significant impact on our business.
- 25 -
Natural disasters, war and other events could adversely affect our future revenues and operating income.
Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by the United States
and other governments or by our customers or suppliers in response to such events, could cause significant economic disruption and political and social instability in the United States and in areas outside of the United States in which we operate.
These events could result in decreased demand for our products, adversely affect our manufacturing and distribution capabilities, or increase the costs for, or cause interruptions in, the supply of materials from our suppliers.
Risks Related to Our Common Stock
We have identified a material weakness in our internal control over financial reporting that, if not properly corrected, could
materially adversely affect our operations and result in material misstatements in our financial statements.
As described in Item 9A.
Controls and Procedures, we have concluded that our internal control over financial reporting was ineffective as of September 30, 2017 because a material weakness existed in our internal control over financial reporting. If we are unable to
remediate our material weakness in a timely manner, we may be unable to provide holders of our securities with required financial information in a timely and reliable manner and we may incorrectly report financial information. Either of these events
could have a material adverse effect on our operations, investor, supplier and customer confidence in our reported financial information and/or the trading price of our common stock.
Additional stock issuance authorizations.
Our
board of directors has the authority to issue up to 1,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions, including voting rights, of such shares without any future vote or action by the
shareholders. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a change in control of our company. Ohio corporation law contains provisions that may discourage takeover bids for our company
that have not been negotiated with the board of directors. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, sales of substantial amounts of shares in the public
market could adversely affect the market price of our common stock and our ability to raise additional capital at a price favorable to us.
ITEM 1B.