Refer to "Forward Looking Statements" following the Index in front of this Form 10-Q. In the discussion that follows, all dollars are in thousands (both tables and text), except per share data. Overview:
US Diagnostics Operating Segment
During our third fiscal quarter, the US experienced an outbreak of novel A (H1N1) influenza virus. Our sales increases in influenza products during the quarter were driven by outbreak preparedness and response plans of our various hospital and laboratory customers.
For the nine-month period, our upper respiratory sales were down 6% compared to the same period of the prior fiscal year. These sales levels were affected by the timing of an annual promotion offered by a third-party manufacturer of certain of these products, which are passed along to our customers. The timing of this promotion led to stocking orders by our customers during the fourth quarter of our fiscal 2008. The timing of sales promotions can vary from year to year, and consequently, we measure our relative sales success for our upper respiratory product family during the primary selling season, which typically runs from July through March, taking into consideration the relative strength of the season. The increased sales activity in the third quarter from the novel A (H1N1) influenza outbreak partially offset the effects of a mild respiratory season and the promotion mentioned above during the first half of fiscal 2009. Additionally, the 2008-09 respiratory season was the first full season in which we were selling our internally developed TRU FLU® and TRU RSV® products. Our TRU FLU and TRU RSV products represented approximately one-quarter of our total influenza and respiratory syncytial virus product sales during the nine months ended June 30, 2009. We expect this percentage to continue to increase in the upcoming stocking season, beginning in the fourth quarter of fiscal 2009, yielding continuing improvements in gross profit margins.
In the US, sales outside of the upper respiratory product family grew 10% in the three-month period and 11% in the nine-month period, compared to the same periods of the prior fiscal year. This growth was led by unit volume growth in our H. pylori, parasitology, and foodborne product families. Increases for our foodborne product family primarily relate to volume growth for our ImmunoCard STAT!® EHEC product, launched in 2007, and the recent growth from the launches of PremierTM CAMPY and ImmunoCard STAT!® CAMPY. The growth rate for our foodborne products category exceeded 50% for the first nine months of fiscal 2009. Considerable confusion has developed in the C. difficile market over the relative benefits of the various test methods available (toxin testing, antigen testing and molecular testing). Several new competitive products, including molecular assays, have recently been introduced into this market, causing competitive pressures for our products. With our strong position in toxin testing and the development of our illumigeneTM molecular C. difficile product, we believe we will continue to see growth in our C. difficile business. Our new molecular test for C. difficile on our illumigene platform is in the final stages of product design. We are currently conducting field studies to refine the assay and the software. We anticipate the initiation of formal clinical studies to begin later this calendar year.
International sales out of the US Diagnostics operating segment declined 23% in the third quarter due primarily to a weaker mycoplasma demand from Japan. For the nine-month period, international sales out of the US Diagnostics operating segment declined 12% primarily due to weaker sales to Japan.

We also monitor sales trends for our products that are sold through distributor channels. Our two primary distributors provide us with sales data for our products that are sold by them to end-users. Sales to end customers, excluding upper respiratory products, by our two primary distributors grew 15% and 18% during the three and nine-month periods ended June 30, 2009, respectively. These growth rates indicate to us that end-user demand for our products remains healthy.
European Diagnostics Operating Segment
Organic sales, which exclude the effects of foreign currency, declined 2% for the third quarter, consistent with the last two quarters. The effects of general economic conditions and increased competition in these product families were somewhat offset by sales related to new products launched during fiscal 2008, which included TRU FLU, TRU RSV, TRU EBV-G®, and TRU EBV-M®. We also saw benefits from increased TRU FLU sales due to the Swine Flu outbreak. We expect our illumigene C. difficile product to address competitive pressures in this product family. While we expect organic sales for the European Diagnostics operating segment to be largely flat for the balance of fiscal 2009, we believe that an increased distributor focus and upcoming product launches will position this segment for growth in fiscal 2010.
Life Science Operating Segment
Sales for our Life Science operating segment during the third quarter of fiscal 2009 increased 14%. This increase reflects buying patterns from our two largest diagnostic manufacturing customers, who accounted for 32% of the Life Science Operating segment's sales in the third quarter of fiscal 2009 compared to 20% in the third quarter of fiscal 2008. We expect sales for this operating segment to be up slightly for fiscal 2009 and healthy single-digit growth in 2010. Due to manufacturing efficiency improvements at our Memphis, Tennessee facility, we expect to see year-over-year improvements in operating income contributions in fiscal 2009 compared to the prior fiscal year. All Segments
We have generated a consolidated gross profit margin of 64% for the first nine months of fiscal 2009. This level of gross profit margin reflects favorable efficiencies from automation in our US Diagnostics manufacturing plant, changing product mix in favor of higher margin manufactured products over lower margin third-party influenza and RSV products within the upper respiratory product family, and improved operating performance and utilization of our Life Science manufacturing facility in Memphis, Tennessee. Although foreign currency exchange rates had a negative effect on sales of our European Diagnostics operating segment, they had no significant effect on consolidated gross profit or consolidated operating income due to natural hedges. Our US Diagnostics operating segment markets and sells certain Meridian-branded diagnostic test kits that are sourced from European suppliers in Spain and Germany. These kits are purchased in Euros, which provides a natural hedge to gross profit and operating income on a consolidated basis.
The recessionary state of the economy has continued during our third fiscal quarter, and is affecting not only the US, but also countries around the world. If current economic conditions worsen or remain in the current state for an extended period of time, our sales levels could be adversely affected by customer buying patterns in their efforts to conserve cash and manage inventory levels. On a longer-term basis, in a recessed economic state, our sales levels could be adversely impacted by the number of diagnostic tests performed in the healthcare system, if, for example, there were declines in physician office visits and/or hospital admissions. Our product portfolios, for both diagnostics and life science, deal with acute patient symptoms and infectious diseases. To date, we have not seen any significant reduced end-user demand for our major products.
Despite recent gains in the major stock market indices during our third fiscal quarter, overall stock market valuations remain significantly lower than twelve months ago, which may raise questions around the potential impairment of goodwill and other long-lived assets. Our annual goodwill impairment review takes place as of June 30th each year and is in process for the current fiscal year. There have been no past impairments from these annual reviews and none are expected for the current period. As of July 31, 2009, our stock price was $22.02 per share, compared to our book value per share of $3.67 as of June 30, 2009. Due to this relationship, stock price trading at 6.0x book value, and our operating results, we believe there have been no triggering events for the evaluation of impairment of our goodwill and other long-lived assets.

From a cash flow perspective, we expect cash flows from operations to be sufficient to fund working capital requirements, capital expenditure requirements and dividends over the next 12 months. Operating Segments:
Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in North America, South America and the Pacific Rim. The European Diagnostics operating segment consists of the sale and distribution of diagnostic test kits in Europe, Scandinavia, Africa, and the Middle East. The Life Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically and abroad. The Life Science operating segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines.
Revenues for the Diagnostics operating segments, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and strength of certain diseases and foreign currency exchange rates. Revenues for the Life Science operating segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of arrangements for contract services work, which may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated sales from quarter to quarter.
Results of Operations:
Net sales

                                 Three Months Ended June 30                     Nine Months Ended June 30
                                                            Inc                                           Inc
                             2009             2008         (Dec)            2009           2008          (Dec)
US Diagnostics            $    24,765       $ 19,406            28 %     $   69,711      $  64,878             7 %
European Diagnostics            7,018          8,016           (12 )%        19,288         21,709           (11 )%
Life Science                    6,457          5,646            14 %         16,814         16,577             1 %

Consolidated              $    38,240       $ 33,068            16 %     $  105,813      $ 103,164             3 %


International -
US Diagnostics export     $     1,524       $  1,978           (23 )%    $    4,220      $   4,786           (12 )%
Life Science export             2,635          2,427             9 %          7,122          6,868             4 %
European Diagnostics            7,018          8,016           (12 )%        19,288         21,709           (11 )%

Total                     $    11,177       $ 12,421           (10 )%    $   30,630      $  33,363            (8 )%

% of total sales                   29 %           38 %                           29 %           32 %

As more fully discussed above, overall sales for our US Diagnostics operating segment increased for both the three and nine-month interim periods in fiscal 2009. This increase for the quarter was primarily attributable to increased upper respiratory sales related to the Swine Flu outbreak and volume increases in H. pylori and foodborne products. Upper respiratory product growth accounted for approximately two-thirds of the 28% growth rate in sales for the US Diagnostics operating segment for the three-month period. The increase for the nine-month period was driven by volume increases in C. difficile, H. pylori and foodborne products. These increases were somewhat offset by a weak normal upper respiratory season, combined with a shift in timing of an annual promotion offered by one of our suppliers. Volume increases for foodborne products were driven by sales of ImmunoCard STAT! EHEC for toxigenic E. coli and new product launches for Campylobacter. Two national distributors accounted for 55% and 48% of total sales for the US Diagnostics operating segment for the third quarters of fiscal 2009 and 2008, respectively, and 56% and 53% of total sales for the US Diagnostics operating segment for the first nine months of fiscal 2009 and 2008, respectively.

For the European Diagnostics operating segment, the sales decrease includes currency translation losses in the approximate amount of $900 and $2,100 for the three and nine-month periods ending June 30, 2009, respectively. Organic sales, which exclude the effects of currency translation, declined 2% for the third quarter and 1% for the nine-month period ended June 30, 2009. Sales for fiscal 2009 were adversely affected by competition in C. difficile products and price competition for H. pylori in Italy. These decreases were partially offset by increased revenues for new products released during fiscal 2008.
For the Life Science operating segment, the fluctuations in sales reflect buying patterns and inventory management of certain of our major diagnostic manufacturing customers. Sales to our two largest diagnostic manufacturing customers accounted for 32% and 20% of total sales for the Life Science operating segment for the third quarters of fiscal 2009 and 2008, respectively, and 30% and 34% of total sales for the Life Science operating segment for the first nine months of fiscal 2009 and fiscal 2008, respectively. We believe that this inventory management may continue, but to a lesser degree, throughout the balance of fiscal 2009.

Gross Profit

                            Three Months Ended June 30                Nine Months Ended June 30
                                                      Inc                                       Inc
                          2009            2008       (Dec)         2009            2008        (Dec)

 Gross Profit          $    23,323      $ 21,287        +10 %   $    67,641      $ 64,154          +5 %

 Gross Profit Margin            61 %          64 %       -3 %            64 %          62 %        +2 %

Gross profit margins for the third quarter of fiscal 2009, as well as the nine-month period, include the effects of continued operating efficiencies, automation, and changing product mix in favor of higher margin manufactured products over lower margin third party influenza and RSV products within the upper respiratory product family. Gross profit margins for the third quarter of fiscal 2009 include a much higher mix of third-party influenza products, which are generally at a lower margin than our other core product families. Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, proficiency panels, contract research and development and contract manufacturing services. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit margin to fluctuate by several points.

Operating Expenses

                                                                  Three Months Ended June 30                                              Nine Months Ended June 30
                                                                                                        Total                                                                   Total
                                               Research &        Sales &          General &           Operating       Research &        Sales &           General &           Operating
                                              Development       Marketing       Administrative        Expenses       Development       Marketing        Administrative        Expenses
2008 Expenses                                 $      1,322     $     4,459     $          4,507      $    10,288     $      4,372     $    13,697      $         13,155      $    31,224
% of Sales                                               4 %            13 %                 14 %             31 %              4 %            13 %                  13 %             30 %

Fiscal 2009 Increases (Decreases):
US Diagnostics                                         475             310                 (163 )            622            2,014             322                  (923 )          1,413
European Diagnostics                                     -            (198 )                 37             (161 )              -            (329 )                  21             (308 )
Life Science                                           161             (62 )                (56 )             43              (25 )          (239 )                (118 )           (382 )


2009 Expenses                                 $      1,958     $     4,509     $          4,325      $    10,792     $      6,361     $    13,451      $         12,135      $    31,947

% of Sales                                               5 %            12 %                 11 %             28 %              6 %            13 %                  11 %             30 %

% Increase (Decrease)                                   48 %             1 %                 (4 )%             5 %             45 %            (2 )%                 (8 )%             2 %

Research and development expenses for the US Diagnostics operating segment increased for the third quarter and the nine-month period primarily due to development costs for our molecular C. difficile product, for which product design is in its final stages. Expenses related to clinical trials also contributed to increases for the nine-month period. Research and development expenses for the Life Science operating segment increased for the third quarter primarily due to increased incentive compensation related to improved performance for this operating segment, increased research and development resource allocations between new product development and contract research and development performed for customers under contracts, and increased supplies. Sales and marketing expenses for the US Diagnostics operating segment for the three and nine-month periods increased primarily due to increased salaries and benefits related to planned headcount additions. Among other personnel, we have added a new product manager responsible for molecular products as we prepare for new product launch activities around our molecular C. difficile product and the illumigeneTM brand. The three-month period also saw increased sales bonus expense related to sales levels. These increases were partially offset by decreased corporate incentive bonus related to earnings levels in fiscal 2009 and reduced samples expense related to fiscal 2008 product launches for the nine-month period. Sales and marketing expenses for the European Diagnostics operating segment decreased primarily due to currency fluctuations for both the quarter and the nine-month period.
General and administrative expenses for all operating segments for the third quarter and nine-month period have decreased due to no corporate incentive bonus accruals for fiscal 2009. Stock-based compensation expense has also decreased due to not achieving performance targets for certain stock options issued during the first quarter of fiscal 2008.
Operating Income
Operating income increased 14% to $12,531 for the third quarter of fiscal 2009 and 8% to $35,694 for the first nine months of fiscal 2009, as a result of the factors discussed above.
Other Income and Expense
Other income and expense primarily consists of interest income on our investment portfolio and fair value adjustments on our auction-rate securities and related Auction Rate Security Rights. Interest income has decreased substantially throughout fiscal 2009 to date, primarily due to lower interest yields in the current interest rate environment. We expect interest yields to remain low for the foreseeable future for institutional money market funds, which comprise a majority of our investment portfolio. See Note 2(e) to the consolidated financial statements herein for discussion of our investment portfolio, including fair value adjustments on our auction-rate securities and Auction Rate Security Rights.
Income Taxes
The effective rate for income taxes was 33% for the third quarter of fiscal 2009 compared to 32% for the same period of the prior fiscal year. The effective rate for income taxes was 34% for the nine-month periods ended June 30, 2009 and June 30, 2008. For the fiscal year ending September 30, 2009, Meridian expects the effective tax rate to be in the range of 34% to 35%. Liquidity and Capital Resources:
Comparative Cash Flow Analysis
Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, consideration of acquisition plans, and consideration of common share dividends. We have historically maintained a credit facility to support working capital requirements and to respond quickly to acquisition opportunities. This credit facility has been supplemented by the proceeds from a September 2005 common share offering, which during the first three quarters of fiscal 2009, were invested in a non-interest bearing bank deposit account, institutional money-market mutual funds, and tax-exempt auction-rate securities.
We have an investment policy that guides the holdings of our investment portfolio. Our objectives in managing the investment portfolio are to
(i) preserve capital, (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) capture a market rate of return commensurate with market conditions and our 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. See Note 2(e) to the consolidated financial statements included herein for discussion of our investments in tax-exempt auction-rate securities.

We do not expect current conditions in the financial markets or overall economic conditions to have a significant impact on our liquidity needs or financial condition. For fiscal 2009, we expect our consolidated sales to be in the range of $140,000 to $144,000, and our diluted earnings per share to be in the range of $0.77 to $0.81. We intend to continue to fund our working capital requirements, capital expenditure requirements and dividends from current cash flows from operating activities. We also have additional sources of liquidity through our investment portfolio and $30,000 bank credit facility, if needed. To date, we have not experienced any significant deterioration in the aging of our customer accounts receivable nor in our vendors' ability to supply raw materials and services and extend normal credit terms. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tight for an extended period of time, and such conditions impact the collectability of our customer accounts receivable, impact credit terms with our vendors or disrupt the supply of raw materials and services.
Net cash provided by operating activities increased 11% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. This increase was driven by growth in net earnings and improved collections on receivables.
Net cash used for investing activities decreased 83% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. This decrease primarily relates to changes in our investment portfolio during the prior year, including purchases of auction-rate securities. See Note 2(e).
Net cash used for financing activities increased 43% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008, primarily due to increased dividends paid per share. Our dividend rate for fiscal 2009 increased 21% over the fiscal 2008 rate. This increase was partially offset by reduced share issuances related to stock option exercises in response to general market conditions during fiscal 2009.
Net cash flows from operating activities are anticipated to be adequate to fund working capital requirements, capital expenditures and dividends during fiscal 2009.
Capital Resources
We have a $30,000 credit facility with a commercial bank which expires on September 15, 2012. As of July 31, 2009, there were no borrowings outstanding on this facility and we had 100% borrowing capacity available to us. We have had no borrowings outstanding under this facility during the first nine months of fiscal 2009, or during the full year of fiscal 2008.
Our capital expenditures are estimated to be approximately $3,000 for fiscal 2009 and may be funded with operating cash flows, availability under the $30,000 credit facility, or cash equivalents on-hand. Capital expenditures relate to manufacturing and other equipment of a normal and recurring nature, as well as completion of our facility expansion in Saco, Maine and clinical cGMP expansion in Memphis, Tennessee.
We do not utilize any special-purpose financing vehicles or have any undisclosed off balance sheet arrangements.