MERIDIAN BIOSCIENCE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Refer to "Note About Forward-Looking Statements" following the Index in front of
this Form 10-K and Item 1A "Risk Factors" on pages 12 through 25 of this Annual
Report.
In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data.
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The purpose of Management's Discussion and Analysis is to provide an understanding of the financial condition, changes in consolidated financial condition and results of operations ofMeridian Bioscience, Inc. ("Meridian", the "Company", "We"). This discussion should be read in conjunction with the Consolidated Financial Statements and notes. It should be noted that the terms revenue and/or revenues are utilized throughout the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to indicate net revenue and/or net revenues. In addition, throughout the MD&A, we refer to certain product tradenames and trademarks, which are protected under applicable intellectual property laws and are our property. Solely for convenience, these tradenames and trademarks are referred to without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent of the law, our rights to these tradenames and trademarks.
Reportable Segments
Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations for infectious disease products inCincinnati, Ohio ;Quebec City, Canada ; and Modi'in,Israel ; and manufacturing operations for blood chemistry products inBillerica, Massachusetts (nearBoston ). These diagnostic test products are sold and distributed in the countries comprisingNorth and Latin America (the "Americas");Europe ,Middle East andAfrica ("EMEA"); and other countries outside of theAmericas and EMEA (rest of the world, or "ROW"). The Life Science segment consists of manufacturing operations inMemphis, Tennessee ;Boca Raton, Florida ;London, England ; andLuckenwalde, Germany , and the sale and distribution of bulk antigens, antibodies, immunoassay blocking reagents, specialized Polymerase Chain Reaction ("PCR") master mixes, isothermal mixes, enzymes, nucleotides, and bioresearch reagents domestically and abroad, including a sales and business development facility, with outsourced distribution capabilities, inBeijing, China to further pursue growing revenue opportunities inAsia .
Recent Developments
Agreement and Plan of Merger
OnJuly 7, 2022 , the Company entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time, the "Merger Agreement") with SD Biosensor, Inc., a corporation with limited liability organized under the laws of theRepublic of Korea ("SDB"),Columbus Holding Company , aDelaware corporation ("Parent"), andMadeira Acquisition Corp. , anOhio corporation and a direct wholly owned subsidiary of Parent ("Merger Sub"). Meridian is informed thatSJL Partners, LLC ("SJL") is currently the sole shareholder of Parent, and SDB together with SJL will be the sole shareholders of Parent as of the closing of the Merger. Pursuant to the Merger Agreement, Merger Sub will merge with and into Meridian (the "Merger"), with Meridian surviving the Merger as a direct wholly owned subsidiary of Parent. At the effective time of the proposed Merger (the "Effective Time"), each share of common stock, no par value per share, of the Company issued and outstanding as of immediately prior to the Effective Time (other than dissenting shares or shares of the Company's common stock held by the Company as treasury stock or owned by SDB, Merger Sub or any subsidiary of the Company or SDB) will be cancelled and cease to exist and automatically convert into the right to receive cash in an amount equal to$34.00 , without interest (the "Merger Consideration"). Consummation of the Merger is subject to customary closing conditions, including, without limitation: (i) the absence of certain legal impediments; and (ii) the condition that no Specified Outcome, as such term is defined in the Merger Agreement, related to the DOJ LeadCare legal matter (which is described in the section entitled "Legal Matter Relating to LeadCare Product Line" of Item 3. "Legal Proceedings") has occurred or is reasonably likely to occur.
On
The Merger Agreement contains certain termination rights for the Company and SDB. In addition to the foregoing termination right, and subject to certain limitations: (i) the Company or SDB may terminate the Merger Agreement if the Merger is not consummated byJanuary 6, 2023 ; and (ii) the Company and SDB may mutually agree to terminate the Merger Agreement.
The foregoing description of the Merger Agreement and the transactions
contemplated thereby does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the full text of the Merger
Agreement, which is attached as an exhibit to our Current Report on Form 8-K
filed with the
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The Company incurred transaction related costs of approximately
Impact of COVID-19 Pandemic
Starting in the latter half of fiscal 2020 and continuing to the date of this
filing, the ongoing COVID-19 pandemic has had both positive and negative effects
on our business.
Our Life Science segment's products were well positioned to respond to in vitro
device ("IVD") manufacturers' increased demand for reagents used in the
manufacture of molecular, rapid antigen and serology tests. Consequently,
through the end of the second quarter of fiscal 2022, our Life Science segment
consistently delivered significantly higher levels of net revenues and operating
income than those achieved prior to the COVID-19 pandemic, with the peak to date
in such levels occurring during the second quarter of fiscal 2022. This revenue
peak has been followed by a significant decrease in such net revenue levels
during the fiscal 2022 third and fourth quarters, reflecting the softening in
demand for COVID-19 related reagents during the second half of our fiscal year.
Our Diagnostics segment, on the other hand, has generally been negatively
impacted by health systems' increased focus on COVID-19 testing over traditional
infectious disease testing. The impacts of the COVID-19 pandemic are most
dramatically evident in the 34% year-over-year decline in revenues from
respiratory illness assays in fiscal 2021, following flat year-over-year revenue
levels experienced in fiscal 2020. Reflecting what we believe to be a
continuation of a return to pre-pandemic activity levels, during fiscal 2022,
net revenues from our respiratory illness assays were 51% higher than fiscal
2021, a marked improvement over the aforementioned 34% decline in fiscal 2021.
Despite these recent COVID-19 pandemic related trends, due to the many
uncertainties surrounding the COVID-19 pandemic, we can provide no assurances
with respect to our views of the longevity or severity of the positive or
negative impacts to our consolidated financial condition of the ongoing COVID-19
pandemic.
Employee Safety
While the majority of our employee base has returned to working on-site at our
facilities, we have implemented a hybrid work-from-home program for certain
personnel whose on-site presence has been deemed to be non-essential. We also
continue to utilize enhanced cleaning and sanitizing procedures, and provide
additional personal hygiene supplies at all our sites. We have implemented
policies for employees to adhere to Centers for Disease Control and Prevention
("CDC") guidelines on social distancing, and similar guidelines by authorities
outside the U.S. To date, we have been able to manufacture and distribute
products globally, and all our sites have continued to operate with little, if
any, impact on shipments to customers. As the COVID-19 pandemic continues, along
with continuing governmental restrictions which vary by locale and jurisdiction,
there is an increased risk of employee absenteeism, which could materially
impact our operations at one or more sites. To date, the steps we have taken,
including our work-from-home processes, have not materially impacted the
Company's financial reporting systems, internal controls over financial
reporting or disclosure controls.
Supply Chains
Supply chains supporting our products have generally remained intact, providing
access to sufficient inventory of the key materials needed for manufacturing.
While we have experienced extended lead times for certain select raw materials,
delays and allocations for raw materials have to date been limited and have not
had a material impact on our results of operations. From time to time, we
identify alternative suppliers to address the risk of a current supplier's
inability to deliver materials in volumes sufficient to meet our manufacturing
needs; or we may choose to purchase certain materials in bulk volumes where we
have supply chain scarcity concerns. It remains possible that we may experience
some sort of interruption to our supply chains, and such an interruption could
materially affect our ability to timely manufacture and distribute our products
and unfavorably impact our results of operations.
Since the second half of fiscal 2021, we have experienced input cost inflation,
including materials, labor and transportation costs. Pricing actions and supply
chain productivity initiatives have mitigated and are expected to continue to
mitigate some of these inflationary pressures, but we may not be successful in
fully offsetting these incremental costs, which could have an impact on the
Company's results of operations and cash flows in the future.
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Product Development and Clinical Trials
Our Diagnostics segment's new product development programs are continuing to progress at a slower pace than normal, due in part to the prevalence of certain infectious diseases having been lower than normal during the COVID-19 pandemic. These matters continue to impact our timing for filing applications for product clearances with theU.S. Food and Drug Administration ("FDA"), as well as related timing of FDA clearances of such filings. Additionally, the ongoing COVID-19 pandemic has slowed and could continue to slow down our efforts to expand our product portfolio, impacting the speed with which we are able to bring additional products to market.
Product Demand
Our Life Science segment manufactures, markets and sells a number of molecular
and immunological reagents to IVD customers, including those who are making both
molecular and immunoassay COVID-19 tests. While there have been
quarter-to-quarter fluctuations in demand throughout the COVID-19 pandemic, from
late in the second quarter of fiscal 2020 through the second quarter of fiscal
2022, we generally experienced unprecedented demand for certain of our molecular
reagents (e.g., ribonucleic acid ("RNA") master mixes and nucleotides). While we
expect demand to continue to exceed pre-COVID-19 pandemic levels, the
significant decline in COVID-19 related demand experienced during the third and
fourth quarters of fiscal 2022 is expected to continue into fiscal 2023. These
expectations will certainly be impacted by infection rates and the responses to
such levels of infection varying by country based on their individual COVID-19
case statistics, potential seasonality of infection rates and vaccine programs.
Furthermore, a significant number of our Life Science segment customers now use
our molecular reagents in multiple tests, including non-COVID-19 related tests.
This development makes it increasingly difficult to accurately estimate the
portion of molecular reagent sales related specifically to COVID-19. As a
result, we are no longer reporting the portion of Life Science segment net
revenues related to COVID-19. Such net revenues were identified and reported
throughout fiscal 2021 and fiscal 2020, totaling approximately $111,900 and
$71,500 , respectively.
Our Diagnostics segment manufactures, markets and sells a number of molecular,
immunoassay, blood chemistry and urea breath tests for various infectious
diseases and blood-lead levels. Sales volumes for a number of these assays have
been adversely affected by the COVID-19 pandemic over the past two fiscal years,
as such assays are often used in non-critical care settings; however, we have
seen indications of a return to more normal pre-pandemic levels. The COVID-19
pandemic also has depressed instrument orders and placements for our BreathID,
Curian and Revogene platforms. Order activity for our Revogene platform was
affected by the delay in obtaining emergency use authorization ("EUA") for our
SARS-CoV-2 assay, as customers took a "wait and see" approach throughout our
entire EUA application process. We received the EUA on November 9, 2021 , but did
not begin to ship product at that time, as our SARS-CoV-2 assay required
enhancement to detect the Omicron variants of the COVID-19 infection. We
completed validation of these changes during the second quarter of fiscal 2022
and submitted the required information to the FDA. The FDA also requested the
completion of additional clinical studies, which we completed and submitted. On
July 28, 2022 notification was received from the FDA that it has re-authorized
the EUA for the Revogene SARS-CoV-2 assay. As such, we began shipping this
product in October 2022 . Despite the situation encountered with our EUA
application for the SARS-CoV-2 assay, and the delay in shipment due to the
Omicron variant related enhancements, we proceeded with the process of
increasing our capacity to produce these tests, as well as other tests on the
Revogene platform, at our facilities in Quebec and Cincinnati . Specifically, we
have: (i) added a second production line at our Quebec manufacturing facility;
(ii) installed a production line in a leased facility near our corporate
headquarters in Cincinnati ; and (iii) are in the process of installing an
additional production line in the Cincinnati leased facility. With a gross cost
of approximately $17,700 through September 30, 2022 , we expect these expansion
efforts to be completed during calendar 2022 at a total gross cost of
approximately $22,600 , which is expected to be partially offset by the monies
received under the National Institutes of Health Rapid Acceleration of
Diagnostics ("RADx") initiative grant entered into on February 1, 2021 , and as
amended on January 25, 2022 , $2,750 of which had been received and used to
offset the above gross cost as of September 30, 2022 (see Note 14, "National
Institutes of Health Contracts " of the Consolidated Financial Statements for
further discussion).
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Lead Testing Matters
OnSeptember 1, 2021 , the Company's wholly owned subsidiary Magellan announced the expansion of the Class I voluntary recall of its LeadCare test kits for the detection of lead in blood, which it had initiated inMay 2021 after identifying an issue in certain manufactured lots of its LeadCare test kits. As a result of the identified issue, impacted test kit lots could potentially underestimate blood lead levels when processing patient blood samples. Although it was initially believed that the root cause of the issue related to the plastic containers used for the treatment reagent, additional studies have indicated that the root cause related to the third-party-sourced cardboard trays that held the treatment reagent containers. Upon correction of the identified supplier issue, shipment of product resumed during the second quarter of fiscal 2022. The Company continues to work closely with the FDA in its execution of the recall activities, which has included Magellan notifying customers and distributors affected by the recall and providing instructions for the return of impacted test kits. Of the$5,100 estimated and accrued as ofSeptember 30, 2021 to cover the estimated costs of the recall, it was estimated atSeptember 30, 2022 that the remaining costs of the recall exceeded the amount accrued, and as a result, an adjustment was made to the product recall reserve. The effect of this adjustment is reflected in product recall costs (adjustment) within the Consolidated Statement of Operations for the year endedSeptember 30, 2022 , and results in approximately$430 of remaining accrued product recall costs reflected in the Consolidated Balance Sheet as ofSeptember 30, 2022 . Anticipated recall-related costs primarily include temporary labor costs, product replacement and/or refund costs, mailing/shipping costs, attorneys' fees and other miscellaneous costs. As described in Item 3. "Legal Proceedings", onApril 17, 2018 , the Company's wholly owned subsidiary Magellan received a subpoena from theU.S. Department of Justice ("DOJ") regarding its LeadCare product line. The subpoena outlined documents to be produced, and the Company is cooperating with the DOJ in this matter. The Company maintains rigorous policies and procedures to promote compliance with applicable regulatory agencies and requirements and is working with the DOJ to promptly respond to the subpoena, including responding to additional information requests that have followed receipt of the subpoena inApril 2018 . The Company has executed tolling agreements to extend the statute of limitations. In March andApril 2021 , DOJ issued two subpoenas, both to former employees of Magellan, calling for witnesses to testify before a federal grand jury related to this matter. In September andOctober 2021 , DOJ issued additional subpoenas to individuals seeking testimony and documents in connection with its ongoing investigation. It is the Company's understanding that multiple witnesses have testified before the federal grand jury and the DOJ's investigation is ongoing. Discussions continue with the DOJ to explore resolution of the matter. As ofSeptember 30, 2022 , in accordance with applicable accounting guidance, the Company believes a loss is probable in the DOJ LeadCare legal matter and has accrued$10,000 as an estimate of the cost to resolve the DOJ LeadCare legal matter, which is reflected in litigation and select legal costs within the Consolidated Statement of Operations for the year endedSeptember 30, 2022 . The Company cannot predict when the investigation will be resolved or the outcome of the investigation, and the ultimate resolution of the DOJ LeadCare legal matter may exceed the amount accrued atSeptember 30, 2022 and could be material to the Company. Expense for attorneys' fees related to this matter totaling$3,510 ,$2,803 and$2,035 is included within the Consolidated Statements of Operations for the years endedSeptember 30, 2022 , 2021 and 2020, respectively. Magellan submitted 510(k) applications inDecember 2018 , seeking to reinstate venous blood sample-types for its LeadCare II, LeadCare Plus and LeadCare Ultra testing systems. In the second fiscal quarter of 2019, the FDA informed Magellan that each of these 510(k) applications had been put on Additional Information hold. OnJuly 15, 2019 , we provided responses to theFDA's requests for Additional Information. These 510(k) applications have since expired and are no longer under FDA review. Further, while Magellan's LeadCare testing systems remain cleared for marketing by the FDA and permitted for use with capillary blood samples, the FDA advised that it has commissioned a third-party study of the Company's LeadCare testing systems using both venous and capillary blood samples. According to the FDA, the results of the field study will be used in conjunction with other information to determine whether further action by the FDA or theCDC is necessary to protect the public health. The Company intends to fully cooperate with the FDA orCDC on any follow-up based on the third-party study. - 32 -
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DuringOctober 2019 , the FDA performed a follow-up inspection of Magellan's manufacturing facility. The FDA issued five Form FDA 483 observations. OnMarch 18, 2020 , we participated in a regulatory meeting with the FDA at theFDA's request to further discuss the Form FDA 483 observations and our remediation efforts. Since the inspection, we have submitted a number of written responses to the FDA regarding the five Form FDA 483 observations issued in theOctober 2019 inspection, and have worked diligently to execute a remediation plan. DuringOctober 2020 , the FDA issued Establishment Inspection Reports which closed out the inspections fromJune 2017 andOctober 2019 under 21 C.F.R.20.64(d)(3). DuringJune 2021 , the FDA performed an inspection of Magellan's manufacturing facility. As a result of this inspection, the FDA issued one Form 483 observation. OnAugust 3, 2021 , FDA sent Magellan a close-out letter for the Warning Letter that FDA issued to Magellan onOctober 23, 2017 .FDA's close-out letter notified Magellan that FDA has completed an evaluation of Magellan's corrective actions in response toFDA's Warning Letter, and based onFDA's evaluation, Magellan has addressed the issues identified in the Warning Letter.FDA's close-out letter also stated that future FDA inspections of Magellan and regulatory activities will further assess the adequacy and sustainability of Magellan's corrections.
Results of Operations
Fourth Quarter
Net earnings for the fourth quarter of fiscal 2022 decreased 14% to$5,705 , or$0.13 per diluted share, from net earnings for the fourth quarter of fiscal 2021 of$6,657 , or$0.15 per diluted share. The level of net earnings in the fourth quarter of fiscal 2022 results primarily from the decline in net revenues and operating income in our Life Science segment, stemming from the continued softening in demand for COVID-19 related reagents during the quarter. As it relates to our Life Science segment net revenues, a significant number of our Life Science segment customers now use our molecular reagents in multiple tests, including non-COVID-19 related tests. This development makes it increasingly difficult to accurately estimate the portion of molecular reagent sales related specifically to COVID-19. As a result, we are no longer reporting the portion of Life Science segment net revenues related to COVID-19. Such net revenues were identified and reported throughout fiscal 2021 and totaled approximately$23,300 in the fourth quarter of fiscal 2021. By contrast, the fourth quarter of fiscal 2021 was adversely affected by approximately$5,600 , or$0.10 per diluted share, of LeadCare product recall expenses and a$4,596 , or$0.08 per diluted share, upward adjustment to the fair value of acquisition consideration related to the acquisition of the business ofGenePOC, Inc. ("GenePOC") (i.e., incremental expense), offsetting the impact of higher net revenues and resulting gross profit.
Consolidated net revenues for the fourth quarter of fiscal 2022 totaled
Net revenues from the Diagnostics segment for the fourth quarter of fiscal 2022 increased 14% to$39,187 , compared to the fourth quarter of fiscal 2021, comprised of a 22% increase in non-molecular assay products, partially offset by a 27% decrease in molecular assay products. Non-molecular assay product sales include the addition of sales of the BreathTek product, which was acquiredJuly 31, 2021 . The fourth quarter of fiscal 2022 represents the sixth consecutive quarter our Diagnostics segment has shown positive revenue growth versus the same quarter in the prior fiscal year. Our Diagnostics segment generated a$122 operating loss for the fourth quarter of fiscal 2022, compared to an operating loss of$11,680 in the fourth quarter of fiscal 2021, largely due to the fiscal 2021 fourth quarter including$5,600 of LeadCare product recall expenses and$4,596 upward adjustment to the fair value of acquisition consideration related to the acquisition of the business of GenePOC (i.e., incremental expense) (see Note 3, "Fair Value Measurements" of the Consolidated Financial Statements). With a 53% decrease in net revenues from molecular reagents products and an 8% decrease in net revenues from immunological reagents products, net revenues for our Life Science segment decreased 37% to$26,488 during the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021. Our Life Science segment generated$10,064 of operating income, or a margin of 38%, for the fourth quarter of fiscal 2022, a decrease of$13,118 from$23,182 , or a margin of 55%, achieved in the fourth quarter of fiscal 2021, primarily due to the decrease in net revenues and associated gross profit margins, resulting in large part from the immunological reagent products representing a higher percentage of net revenues, as described in the respective sections below. - 33 -
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Fiscal Year
Net earnings for fiscal 2022 decreased 41% to$42,459 , or$0.96 per diluted share, from net earnings for fiscal 2021 of$71,407 , or$1.62 per diluted share. The level of net earnings in fiscal 2022 reflects primarily: (i) the overall increase in operating expenses described in the Operating Expenses section below; and (ii) the decrease in gross profit margins resulting from immunological reagent products representing a higher percentage of both Life Science segment and total consolidated net revenues in the fiscal 2022 period, compared to higher margin molecular reagent products in the fiscal 2021 period. As previously noted, we are no longer reporting the portion of Life Science segment net revenues related to COVID-19, noting that such net revenues totaled approximately$111,900 in fiscal 2021.
Consolidated net revenues for fiscal 2022 totaled
Diagnostics segment net revenues increased 22% to$155,903 in fiscal 2022, comprised of a 27% increase in non-molecular assay products including the addition of sales of the BreathTek product, which was acquiredJuly 31, 2021 , partially offset by a 5% decrease in molecular assay products. Our Diagnostics segment generated operating income of$2,982 in fiscal 2022, compared to an operating loss of$7,280 in fiscal 2021. This year over year improvement in operating income resulted primarily from the combined effects of: (i) the Diagnostics segment's increase in net revenues; and (ii) fiscal 2021 including$5,600 of LeadCare product recall expenses. These factors contributing to the improvement in operating margin were partially offset by the effect of lower gross profit margins and increase in operating expenses described in the respective sections below. With a 30% decrease in net revenues from molecular reagents products and a 43% increase in net revenues from immunological reagents products, including COVID-19 related products, net revenues for our Life Science segment decreased 7% to$177,115 during fiscal 2022 compared to fiscal 2021. Our Life Science segment generated$86,040 of operating income in fiscal 2022, a decrease of$28,974 from fiscal 2021, primarily due to the decrease in net revenues and gross profit margins, resulting from the aforementioned mix of products sold, and the increase in operating expenses, as described in the respective sections below. REVENUE OVERVIEW
Below are analyses of the Company's net revenues, by reportable segment, provided for each of the following:
- By
- By Product Platform/Type
Revenue Overview - By Reportable Segment &
Revenues for the Diagnostics segment, in the normal course of business, may be affected from year to year by buying patterns of major distributors and reference laboratories, seasonality and severity of seasonal diseases and outbreaks (including the ongoing COVID-19 pandemic), and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from year to year by buying patterns of major IVD manufacturing customers, severity of disease outbreaks (specifically the ongoing COVID-19 pandemic), and foreign currency exchange rates.
See Note 2, "Revenue Recognition" of the Consolidated Financial Statements for detailed revenue disaggregation information.
Following is a discussion of the net revenues generated by these product platforms/types and/or disease states:
Diagnostics Segment Products
The Diagnostics segment's overall 22% growth in net revenues during fiscal 2022 primarily results from the combined effects of the following:
• Volume growth in the gastrointestinal product family, including the
benefit of a full year of net revenues from sales of the BreathTek
product, acquired in late
product revenue of 27% in fiscal 2022, including approximately
net revenues from BreathTek);
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• Volume growth in sales of respiratory illness products, comprised of
tests for Group A Strep, Mycoplasma pneumonia, Influenza, and Pertussis,
among others, reflecting an increase in the testing for these illnesses
compared to fiscal 2021 in the midst of the COVID-19 pandemic (total
increase in respiratory illness products of 51% in fiscal 2022);
• Volume declines from sales of blood chemistry products due to the ongoing
LeadCare product recall, which commenced in
product resuming in the second quarter of fiscal 2022 (approximately
and
• Ongoing pricing pressure on our H. pylori stool antigen tests, which
contributed approximately $2,200 of unfavorable price variance from
customers in the U.S. Life Science Segment Products
During fiscal 2022, net revenues for the Life Science segment decreased 7% from fiscal 2021. While the level of net revenues during fiscal 2022 reflects the significant decline in demand for COVID-19 related reagents during the last half of fiscal year 2022, such level of net revenues significantly outpaced the net revenues generated in fiscal 2020 (partial pandemic) and fiscal 2019 (pre-pandemic) as follows:
Fiscal 2020
Increased 34% in total; 17% for molecular reagents and 58% for immunological reagents
Fiscal 2019
Increased 175% in total; 295% for molecular reagents and 108% for immunological reagents
Foreign Currency Fluctuations in foreign currency exchange rates in fiscal 2022 compared to fiscal 2021 had an approximate$5,200 unfavorable impact on fiscal 2022 consolidated net revenues;$1,700 within the Diagnostics segment and$3,500 within the Life Science segment. This compares to year-to-year currency exchange rates having an approximate$9,200 favorable impact on consolidated net revenues in fiscal 2021;$1,300 within the Diagnostics segment and$7,900 within the Life Science segment. Significant Customers Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 15, "Reportable Segments and Major Concentration Data" of the Consolidated Financial Statements. Gross Profit: 2022 vs. 2021 2022 2021 Inc (Dec) Gross Profit$ 188,356 $ 201,148 (6 )% Gross Profit Margin 57 % 63 % -6 points Overall gross profit margins during fiscal 2022 have been unfavorably impacted by a decline in net revenues from our Life Science segment's molecular reagent products, which are some of our highest margin products. During fiscal 2022, approximately 28% of consolidated net revenues related to sales of molecular reagent products, compared to approximately 41% during fiscal 2021, which included the peak of the COVID-19 pandemic. Additionally, overall gross profit margins in fiscal 2022 have been unfavorably impacted in our Diagnostics segment by the previously discussed LeadCare product recall (see "Lead Testing Matters" above) and production capacity ramp-up costs at ourCincinnati and Quebec Revogene manufacturing facilities. - 35 -
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Operating Expenses-Segment Detail and Corporate
Research & Selling & General & Total Operating
Development Marketing Administrative Other (1) Expenses
Fiscal 2021:
Diagnostics $ 21,406 $ 21,430 $ 24,055 $ 5,079 $ 71,970
Life Science 2,505 5,350 13,501 - 21,356
Corporate - - 11,985 2,803 14,788
Total 2021 Expenses $ 23,911 $ 26,780 $ 49,541 $ 7,882 $ 108,114
Fiscal 2022:
Diagnostics $ 21,424 $ 24,268 $ 28,563 $ 759 $ 75,014
Life Science 2,911 7,005 14,176 152 24,244
Corporate - - 14,409 20,298 34,707
Total 2022 Expenses $ 24,335 $ 31,273 $ 57,148 $ 21,209 $ 133,965
(1) Product recall expenses are included within the Diagnostics segment's fiscal
2021 other expenses, while the Diagnostics segment's fiscal 2022 other
expenses include an adjustment to the accrual for such product recall costs.
Operating expenses in fiscal 2022 increased
• Increased Selling & Marketing costs in both the Diagnostics and Life
Science segments, primarily reflecting the effects of filling certainopen positions and the easing of certain travel and meeting restrictions
imposed during the prior years in connection with the COVID-19 pandemic;
• Increased General & Administrative costs, primarily reflecting thecombined effects of: (i) increased purchase accounting amortization
expense; and (ii) additional investment in incentive compensation tied to
the Company's financial performance;
• A
within Corporate and related to the previously discussed pending merger
(see "Agreement and Plan of Merger" above); and
• A
Corporate and primarily related to the previously discussed LeadCare
legal matter (see "Lead Testing Matters" above).
Offsetting these increases was a$5,946 total net decrease in product recall costs within our Diagnostics segment, primarily related to the LeadCare product recall initiated in fiscal 2021.
Operating Income
Operating income decreased 42% in fiscal 2022, following a 52% increase in fiscal 2021, as a result of the factors discussed above.
Other Expense
Other expense, net primarily includes: (i) interest costs on the Company's long-term borrowings and contingent grant obligations due to theIsrael Innovation Authority ; (ii) grant income under the RADx initiative (fiscal 2021; see Note 14, "National Institutes of Health Contracts " of the Consolidated Financial Statements); (iii) a$935 gain on the termination of interest rate swap contracts (fiscal 2022); and (iv) net currency gains and losses. Interest costs related to the revolving credit facility with a commercial bank were$1,057 and$1,420 in fiscal 2022 and 2021, respectively. The varying levels of interest costs on the revolving credit facility reflect the following approximate levels of average debt outstanding, as detailed in Note 10, "Bank Credit Arrangements" of the Consolidated Financial Statements: (i) fiscal 2022 -$39,233 ; and (ii) fiscal 2021 -$56,505 . - 36 -
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Income Taxes
The effective rate for income taxes was 22% and 21% for fiscal 2022 and 2021, respectively. The increase in effective tax rates primarily results from the anticipated non-deductibility of the previously discussed DOJ LeadCare legal matter (see "Lead Testing Matters" above), partially offset by various tax effects associated with the Company's currently unremitted earnings of international subsidiaries.
Impact of Inflation
To the extent feasible, we have consistently followed the practice of reviewing our prices to consider the impacts of inflation on salaries and fringe benefits for employees, the cost of purchased materials and services, and transportation costs. Inflation and changing prices did not have a material adverse impact on our gross margin, net revenues or operating income in fiscal 2022 or fiscal 2021.
Liquidity and Capital Resources:
Liquidity
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets and debt service. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities. We have an investment policy that guides the holdings of our investment portfolio, which presently consists of bank savings accounts and institutional money market 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 policy's investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective. We intend to continue to fund our working capital requirements from current cash flows from operating activities and cash on hand, and such sources are anticipated to be adequate to fund working capital requirements, capital expenditures and debt service during the next twelve months. However, if needed, we also have an additional source of liquidity through the amount remaining available on our$200,000 bank revolving credit facility, which totaled$175,000 as ofSeptember 30, 2022 . The Company also maintains a shelf registration statement on file with theSEC . Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets tightens for an extended period, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors, or disrupt the supply of raw materials and services. As ofSeptember 30, 2022 , our cash and cash equivalents balance was$81,453 , an increase of$31,682 compared toSeptember 30, 2021 . This net increase primarily results from the combined net effects of: (i) generating$82,361 of cash flow from operations, an increase of 23% over fiscal 2021; (ii) using cash to pay down$35,000 on the revolving credit facility; (iii) using cash to acquire property, plant and equipment ($7,365 net of RADx grant monies received); and (iv) acquiringEUPROTEIN, Inc. ($3,750 ) (see Note 4, "Business Combinations" of the Consolidated Financial Statements). In addition, the net balance of cash and cash equivalents was reduced by approximately$5,300 as ofSeptember 30, 2022 , as a result of the movement in foreign currency exchange rates, specifically the British pound and Euro, sinceSeptember 30, 2021 . Considering these factors, our balance of cash and cash equivalents on hand exceeded our total debt (defined as bank debt, government grant obligations and obligations related to acquisitions) by approximately$49,700 atSeptember 30, 2022 . Capital Resources As described in Note 10, "Bank Credit Arrangements" of the Consolidated Financial Statements, the Company maintains a$200,000 credit facility, which is secured by substantially all ourU.S. assets and includes certain restrictive financial covenants. As ofSeptember 30, 2022 , the Company was in compliance with all covenants. The Company also maintains a shelf registration statement on file with theSEC . - 37 -
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Our capital expenditures totaled$8,615 for fiscal 2022,$1,250 of which was offset by receipts under the RADx grant initiative (see Note 14, "National Institutes of Health Contracts " of the Consolidated Financial Statements), and which largely related to expanding manufacturing capacity. During fiscal 2023, our capital expenditures are estimated to total approximately$10,000 , comprised of approximately$6,500 and$3,500 in the Diagnostics and Life Science segments, respectively. Such expenditures may be funded with cash and cash equivalents on hand, operating cash flows, and/or availability under the$200,000 revolving credit facility discussed above.
Contractual Obligations:
Among the Company's contractual obligations as of
(i) operating leases (Note 9, "Leasing Arrangements")
(ii) the revolving credit facility (Note 10, "Bank Credit Arrangements")
(iii) uncertain income tax positions (Note 11, "Income Taxes")
(iv) contingent government grant obligations (Note 13, "Contingent
Obligations and Non-Current Liabilities")
The Company's additional contractual obligations and their related due dates
were as follows as of
Less than 1 More than
Total Year 1-3 Years 4-5 Years 5 Years
Purchase obligations (1) $ 41,291 $ 40,182 $ 1,104 $ 5 $ -
Acquisition price holdback (2) 1,500 1,000 500 - -
Total $ 42,791 $ 41,182 $ 1,604 $ 5 $ -
(1) Purchase obligations relate primarily to outstanding purchase orders for
machinery and equipment, inventory, including instruments, service items, and
research and development activities. These contractual commitments are not in
excess of expected production requirements over the next twelve months.
(2) Pursuant to the purchase agreements related to the
Meridian's remaining consideration to be paid is comprised solely of purchase
price holdbacks totaling
Other Commitments and Off-Balance Sheet Arrangements:
License Agreements
Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products, with such percentages generally ranging from approximately 3% to 10%. During fiscal 2022, royalty expense totaled approximately$2,300 , with 40% and 60% of such expense relating to our Diagnostics and Life Science segments, respectively. This compares to a total of approximately$5,200 of royalty expense in fiscal 2021, with 25% and 75% relating to our Diagnostics and Life Science segments, respectively. Meridian expects that payments under these agreements will amount to approximately$700 in fiscal 2023, with the decrease from fiscal 2022 largely resulting from the last of the licensed patents applicable to the Alethia product line having expired during fiscal 2022.
Off-Balance Sheet Arrangements
We utilize foreign currency exchange forward contracts to limit exposure to
volatility in foreign currency gains and losses related to financial assets
denominated in other than the holding subsidiary's functional currency. These
contracts are generally settled within a 30-day time frame and are not formally
designated or accounted for as accounting hedges. We also utilize interest rate
swap agreements to limit exposure to volatility in the LIBOR interest rate in
connection with the revolving credit facility. The interest rate swap agreements
are designated and accounted for as accounting hedges (see Note 3, "Fair Value
Measurements" of the Consolidated Financial Statements). Aside from these
instruments, we do not utilize special-purpose financing vehicles or have any
material undisclosed off-balance sheet arrangements.
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Table of Contents Market Risk Exposure: Foreign Currency Risk We have market risk exposure related to foreign currency transactions from our operations outside theU.S. , as well as certain suppliers to our domestic businesses located outside theU.S. The foreign currencies where we have market risk exposure are the Australian dollar, British pound, Canadian dollar, Chinese yuan, Euro, and New Israeli shekel. Assessing foreign currency exposures is a component of our overall ongoing risk management process, with such currency risks managed as we deem appropriate.
Concentration of Customers/Products Risk
Our Diagnostics segment's net revenues from sales to three customers were 29% and 33% of the Diagnostics segment's total net revenues for fiscal 2022 and 2021, respectively, or 13% of consolidated net revenues in each fiscal year. Additionally, our three major Diagnostics segment product families - gastrointestinal, respiratory illnesses and blood chemistry - accounted for 82% and 80% of our Diagnostics segment's net revenues during fiscal 2022 and 2021, respectively, or 39% and 32% of each year's consolidated net revenues. Our Life Science segment's net revenues from sales to three diagnostics manufacturing customers were 31% and 20% of the Life Science segment's total net revenues for fiscal 2022 and 2021, respectively, or 17% and 12% of consolidated net revenues in each fiscal year.
Critical Accounting Policies:
The Consolidated Financial Statements included in this Form 10-K have been prepared in accordance withU.S. generally accepted accounting principles. Such accounting principles require management to make judgments about estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Listed below are the accounting policies management believes to be critical to understanding the Consolidated Financial Statements, along with reference to location of the policy discussion within the Consolidated Financial Statements. The listed policies are considered critical due to the fact that application of such polices requires the use of significant estimates and assumptions, and the carrying values of related assets and liabilities are material. Location Within Consolidated Accounting Policy Financial Statements Examples of Key Estimate Assumptions DOJ LeadCare Legal Note 5 Estimate of loss contingency Matter Revenue Recognition Note 1(i) Distributor price adjustments and fee accruals Income Taxes Note 1(l) and Note 11 Uncertain positions and state apportionment factors
Recent Accounting Pronouncements:
A description of accounting pronouncements recently adopted by the Company, as
well as accounting pronouncements issued but not yet adopted by the Company, are
set forth in Note 1(s), "Summary of Significant Accounting Policies- Recent
Accounting Pronouncements" of the Consolidated Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Capital Resources and Market Risk Exposure above within Item 7, beginning on page 37.
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http://fasb.org/us-gaap/2022#OtherAssetsNoncurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent
ITEM 8.
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