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VIVO > SEC Filings for VIVO > Form 10-K on 29-Nov-2013All Recent SEC Filings

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Form 10-K for MERIDIAN BIOSCIENCE INC


29-Nov-2013

Annual Report


ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Refer to "Forward Looking Statements" following the Index in front of this Form 10-K and Item 1A "Risk Factors" on pages 14 through 22 of this Annual Report.

In the discussion that follows, all amounts are in thousands (both tables and text), except per share data.

Results of Operations:

Fourth Quarter

Net earnings for the fourth quarter of fiscal 2013 increased 7% to $9,150, or $0.22 per diluted share, from net earnings for the fourth quarter of fiscal 2012 of $8,573, or $0.21 per diluted share. This increase reflects the combined effects of both increased sales, consistent gross profit margins and increased operating expenses, along with the negative effect of $441 (pre-tax) of medical device tax that did not exist in fiscal 2012 (see discussion in Medical Device Tax below). Consolidated sales for the fourth quarter of fiscal 2013 were $48,962, an increase of $5,479, or 13%, compared to the fourth quarter of fiscal 2012. Increased sales across all of our diagnostic focus product families (C. difficile, foodborne and H. pylori), as well as in our Life Science segment, contributed to this increase. Included within the fourth quarter 2013 results were sales of our illumigene® molecular platform of products totaling $9,400, representing a 44% increase over the fiscal 2012 fourth quarter.

Sales for the Diagnostics segment for the fourth quarter of fiscal 2013 increased 15% compared to the fourth quarter of fiscal 2012, reflecting growth across all of our focus product families - 9% growth in our C. difficile products, 16% growth in our foodborne products, and 26% growth in our H. pylori products. With growth in both its molecular component and immunoassay component business, sales of our Life Science segment increased by 5% during the fourth quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012.

Fiscal Year

Net earnings for fiscal 2013 increased 14% to $38,032, or $0.91 per diluted share from net earnings for fiscal 2012 of $33,371, or $0.80 per diluted share. This increase reflects the combined effects of both increased sales, increased gross profit margins and increased operating expenses, along with the negative effect of $1,318 (pre-tax) of medical device tax that did not exist in fiscal 2012 (see discussion in Medical Device Tax below). Additionally, fiscal 2012 results included $1,013 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $659 or $0.02 per diluted share - see Non-GAAP Information below).

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Non-GAAP Information

The tables below provide information on net earnings, basic earnings per share and diluted earnings per share, excluding the effect of costs associated with the consolidation of our Saco, Maine operations into our Memphis, Tennessee facility (fiscal 2012 and fiscal 2011) and costs of reorganizing our sales and marketing leadership (fiscal 2011), each of which is a non-GAAP financial measure, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to those who read our financial statements and evaluate our operating results because:

1. These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of non-routine costs related to consolidating the Maine operations (fiscal 2012 and fiscal 2011) and reorganizing our sales and marketing leadership (fiscal 2011); and

2. These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from period to period in presentations to our board of directors, and as a basis for strategic planning and forecasting.

                                                       2013         2012         2011
   Net Earnings-
   U.S. GAAP basis                                   $ 38,032     $ 33,371     $ 26,831
   Facility consolidation costs (1)                        -           659          691
   Sales & marketing leadership reorganization (2)         -            -           872

   Adjusted earnings                                 $ 38,032     $ 34,030     $ 28,394

   Net Earnings per Basic Common Share-
   U.S. GAAP basis                                   $   0.92     $   0.81     $   0.66
   Facility consolidation costs (1)                        -          0.02         0.02
   Sales & marketing leadership reorganization (2)         -            -          0.02

   Adjusted Basic EPS                                $   0.92     $   0.83     $   0.70

   Net Earnings per Diluted Common Share-
   U.S. GAAP basis                                   $   0.91     $   0.80     $   0.65
   Facility consolidation costs (1)                        -          0.02         0.02
   Sales & marketing leadership reorganization (2)         -            -          0.02

   Adjusted Diluted EPS                              $   0.91     $   0.82     $   0.69

(1) These facility consolidation costs are net of income tax effects of $354 and $366 for fiscal 2012 and fiscal 2011, respectively, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

(2) These leadership reorganization costs are net of income tax effects of $368 for fiscal 2011, which were calculated using the effective tax rates of the jurisdictions in which the costs were incurred.

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REVENUE OVERVIEW

Below are analyses of the Company's revenue, provided for each of the following:

• By Reportable Segment & Geographic Region

• By Product Platform/Type

• By Disease Family (Diagnostics only)

Revenue Overview- By Reportable Segment & Geographic Region

Our reportable segments are Diagnostics and Life Science. The Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and Canada ("North America"); Europe, Middle East and Africa ("EMEA"); and other countries outside of North America and EMEA (rest of the world, or "ROW"). The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad, including a sales and business development location in Singapore. The Life Science 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 segment, in the normal course of business, may be affected from quarter to quarter by buying patterns of major distributors, seasonality and strength of certain diseases, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected from quarter to quarter by 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, and foreign currency exchange rates. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated revenues.

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Revenues for each of our segments and the geographic regions therein are shown below.

                                                                    2013 vs.         2012 vs.
                                                                      2012             2011
                        2013           2012           2011         Inc (Dec)        Inc (Dec)
 Diagnostics-
 North America        $ 116,509      $ 101,391      $  90,387              15 %             12 %
 EMEA                    21,378         22,267         24,059              (4 )%            (7 )%
 ROW                      6,742          6,522          5,987               3 %              9 %

 Total Diagnostics      144,629        130,180        120,433              11 %              8 %

 Life Science-
 North America           17,688         17,917         15,797              (1 )%            13 %
 EMEA                    18,721         18,050         16,133               4 %             12 %
 ROW                      7,648          6,565          6,473              16 %              1 %

 Total Life Science      44,057         42,532         38,403               4 %             11 %

 Consolidated         $ 188,686      $ 172,712      $ 158,836               9 %              9 %

 % of total sales-
 Diagnostics                 77 %           75 %           76 %
 Life Science                23 %           25 %           24 %

 Total                      100 %          100 %          100 %

 Ex-North America            29 %           31 %           33 %

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Revenue Overview- By Product Platform/Type

The revenues generated by each of our reportable segments result primarily from the sale of the following segment-specific categories of products:

Diagnostics

1) Molecular tests that operate on our illumigene platform

2) Immunoassay tests

Life Science

1) Molecular components

2) Immunoassay components

Revenue for each product platform/type, as well as its relative percentage of segment revenue, is shown below.

                                                                                      2013 vs.          2012 vs.
                                                                                        2012              2011
                                       2013            2012            2011          Inc (Dec)          Inc (Dec)
Diagnostics-
Molecular                            $  33,597       $  23,248       $   9,042               45 %              157 %
Immunoassay                            111,032         106,932         111,391                4 %               (4 )%

Total Diagnostics                    $ 144,629       $ 130,180       $ 120,433               11 %                8 %

Life Science-
Molecular components                 $  18,777       $  17,078       $  14,869               10 %               15 %
Immunoassay components                  25,280          25,454          23,534               (1 )%               8 %

Total Life Science                   $  44,057       $  42,532       $  38,403                4 %               11 %

% of Diagnostics sales-
Molecular                                   23 %            18 %             8 %
Immunoassay                                 77 %            82 %            92 %

Total Diagnostics                          100 %           100 %           100 %

% of Life Science sales-
Molecular components                        43 %            40 %            39 %
Immunoassay components                      57 %            60 %            61 %

Total Life Science                         100 %           100 %           100 %

Following is a discussion of the revenues generated by each of these product platforms/types:

Diagnostics Products

illumigene Molecular Platform Products

We have approximately 1,200 customer account placements. Of these account placements, approximately 1,000 accounts have completed evaluations and validations and are regularly purchasing product, with the balance of our account placements being in some stage of product evaluation and/or validation. Of our account placements, we have over 190 accounts that are regularly purchasing, evaluating and/or validating two or more assays.

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We continue to invest in new product development for our molecular testing platform, illumigene. This platform now has four commercialized tests, with three additional tests expected to be available for sale in fiscal 2014:

1. illumigene® C. difficile - commercialized in August 2010

2. illumigene® Group B Streptococcus (Group B Strep or GBS) - commercialized in December 2011

3. illumigene® Group A Streptococcus (Group A Strep) - commercialized in September 2012

4. illumigene® Mycoplasma (M. pneumonia; walking pneumonia) - commercialized in June 2013

5. illumigene® Bordetella pertussis (whooping cough) - expected first half fiscal 2014

6. illumigene® Chlamydia trachomatis - expected second half fiscal 2014

7. illumigene® Neisseria gonorrhea - expected second half fiscal 2014

Additional illumigene tests in early-stage research or development include Herpes Simplex Virus I & II, enteric parasites such as Giardia, foodborne pathogens such as E. coli, and bloodborne pathogens such as malaria.

We believe that the diagnostic testing market is continuing to move away from culture and immunoassay testing to molecular testing for diseases where there is a favorable cost/benefit position for the total cost of healthcare. While this market is competitive, with molecular companies such as Cepheid and Becton Dickinson and new entrants such as Quidel, Great Basin, Nanosphere, and others, we believe we are well positioned to capitalize on the migration to molecular testing. Our simple, easy-to-use, illumigene platform, with its expanding menu, requires no expensive equipment purchase and little to no maintenance cost. These features, along with its small footprint and the performance of the illumigene assays, make illumigene an attractive molecular platform to any size hospital.

Immunoassay Products

Sales of our Diagnostic segment's immunoassay products increased 4% in fiscal 2013, following a 4% decrease in fiscal 2012. The current year increase results primarily from the revenue growth of our H. pylori and foodborne products, as described below.

Life Science Products

During fiscal 2013, sales of our Life Science segment increased 4%, with sales of our molecular component business increasing 10% over fiscal 2012 and sales of our immunoassay component business decreasing 1%. Life Science segment sales increased 11% in fiscal 2012, reflecting increases in both our molecular and immunoassay component businesses of 15% and 8%, respectively. Our molecular component business continues to benefit from new product launches and advancements - most notably SensiFAST™ and MyTaq™ PCR components - while our bulk immunoassay component business is focusing on improving its operating efficiency and developing revenue opportunities in Asia.

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Diagnostic Revenue Overview- By Disease Family

Sales from our focus families (C. difficile, foodborne and H. pylori) comprised 62%, 62% and 59% of our Diagnostics segment's revenue during fiscal 2013, 2012 and 2011, respectively. Following is a discussion of the revenues generated by each product family:

C. difficile Products

During fiscal 2013 our C. difficile product family sales totaled $39,000, representing growth of 8%. This followed growth of 21% in fiscal 2012. This overall product family growth is largely driven by the growth of our illumigene C. difficile product, which now represents over 70% of total C. difficile revenues. While the C. difficile market continues to be highly competitive, we are the only company that can offer a full range of high performing, FDA cleared, C. difficile testing formats, including toxin, GDH and molecular tests.

Foodborne Products

With fiscal 2013 sales totaling $24,000, we continue to see demand increases for foodborne products, all of which are immunoassay products, as laboratories realize the benefits of increased sensitivity and faster turnaround time with our tests for Enterohemorrhagic E. coli (EHEC) and Campylobacter, compared to traditional culture methods. Sales increases for these products were 15% and 13% during fiscal 2013 and fiscal 2012, respectively. While historically the primary competition for our foodborne products has been laboratory culture methods, during 2012 one of our competitors, Alere, cleared through the FDA a shiga toxin test that competes with our EHEC test. Despite this new competition, our revenue growth rate improved in fiscal 2013. We believe that our products have two principal advantages versus culture methods: (i) test accuracy; and
(ii) improved work flow, resulting in a significantly shortened time to test result (20 minutes vs. 24-48 hours for culture).

H. pylori Products

During fiscal 2013, sales of H. pylori products, all of which are immunoassay products, grew 11% to $26,000, which followed 7% growth during fiscal 2012. This increase continues to reflect the benefits of our partnerships with managed care companies in promoting the health and economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving physician behavior away from serology-based testing toward direct antigen testing. A significant amount of the H. pyloriproduct sales are to reference labs, whose buying patterns may not be consistent period to period.

Respiratory Products

Total respiratory sales for our Diagnostics segment increased 17% to $17,000 during fiscal 2013, following a 3% decrease in the sales of such products in fiscal 2012. Contributing to the current year increase were increased sales of influenza products, reflecting the strength of this year's influenza season, compared to last year's; and growth in our illumigene Group A Strep product, which as previously noted, received FDA approval in September 2012.

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Foreign Currency

During fiscal 2013, currency exchange rates had a negligible impact on revenue; $150 favorable within the Diagnostics segment and $150 unfavorable in the Life Science segment. This compares to currency exchange having an approximate $1,700 unfavorable impact on revenue in fiscal 2012; $1,450 within the Diagnostics segment and $250 in the Life Science segment.

Significant Customers

Two U.S. distributors accounted for 42%, 41% and 40% of our Diagnostics segment's total sales for fiscal 2013, 2012 and 2011, respectively. These sales represented 32%, 31% and 30% of consolidated sales for fiscal 2013, 2012 and 2011, respectively.

Within our Life Science segment, two diagnostic manufacturing customers accounted for 17%, 19% and 15% of the segment's total sales for fiscal 2013, 2012 and 2011, respectively. These sales represented 4%, 5% and 4% of our consolidated sales for fiscal 2013, 2012 and 2011, respectively.

Medical Device Tax

On January 1, 2013, the medical device tax established as part of the U.S. healthcare reform legislation became effective, and as a result, the Company made its first required tax deposit near the end of January 2013. During fiscal 2013, the Company recorded approximately $1,300 of medical device tax expense, which is reflected as a component of cost of sales in the accompanying Consolidated Statements of Operations.

Gross Profit:



                                                                     2013 vs.        2012 vs.
                                                                       2012            2011
                          2013           2012           2011        Inc (Dec)       Inc (Dec)
  Gross Profit          $ 121,044      $ 109,048      $ 98,411              11 %            11 %
  Gross Profit Margin          64 %           63 %          62 %      +1 point        +1 point

The improvement in our overall gross profit margins from 2011 to 2013 reflects the combined effects of (i) mix of sales from the Company's segments;
(ii) continued operating efficiencies in our Cincinnati, Ohio diagnostic manufacturing facility; (iii) lower overall cost structure from the consolidation of our Life Science immunoassay component manufacturing facilities; and (iv) mix of products sold.

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, PCR/qPCR reagents, nucleotides, competent cells, proficiency panels, and 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.

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Operating Expenses:



                                                                                                                     Total
                                       Research &          Selling &           General &                           Operating
                                       Development         Marketing        Administrative         Other           Expenses
2011 Expenses                         $       9,822       $    21,885       $        24,883       $  1,788        $    58,378

% of Sales                                        6 %              14 %                  16 %            1 %               37 %
Fiscal 2012 Increases (Decreases):
Diagnostics                                     644            (1,080 )               3,113         (1,240 )            1,437
Life Science                                   (191 )           1,287                (1,624 )          465                (63 )

2012 Expenses                         $      10,275       $    22,092       $        26,372       $  1,013        $    59,752

% of Sales                                        6 %              13 %                  15 %            1 %               35 %
% Increase (Decrease)                             5 %               1 %                   6 %          (43 %)               2 %
Fiscal 2013 Increases (Decreases):
Diagnostics                                     324               572                 3,006             -               3,902
Life Science                                    188              (240 )               1,141         (1,013 )               76

2013 Expenses                         $      10,787       $    22,424       $        30,519       $     -         $    63,730

% of Sales                                        6 %              12 %                  16 %            0 %               34 %
% Increase (Decrease)                             5 %               2 %                  16 %         (100 %)               7 %

Overall, total operating expenses increased during both fiscal 2013 and fiscal 2012 relative to the immediately preceding fiscal year, but decreased as a percentage of consolidated sales. The fiscal 2013 increase results in large part from the combined effects of our (i) ongoing efforts to control spending in each of our segments while investing the necessary resources in our strategic areas of growth, including increased investment in Research & Development for our molecular platform products; (ii) increased sales personnel costs in Europe in connection with filling open positions and upgrading talent; (iii) increased incentive compensation compared to fiscal 2012 based upon improved operating results; and (iv) costs incurred in connection with the consolidation of our Saco, Maine operations into our Memphis, Tennessee location during fiscal 2012 of approximately $1,013. We expect to have higher levels of Research & Development spending during fiscal 2014 related to clinical trials for our illumigene Chlamydia trachomatis and Neisseria gonorrhea products.

During fiscal 2012, the increase in operating expenses resulted in large part from the combined effects of our (i) fiscal 2012 efforts to control spending in each of our segments while investing the necessary resources in our strategic areas of growth; (ii) beginning to realize cost savings during 2012 from the consolidation of our Life Science immunoassay component manufacturing operations into one facility in Tennessee; (iii) incurring costs in connection with the Maine-Tennessee facility consolidation of approximately $1,013 during fiscal 2012, and approximately $1,057 during fiscal 2011 ($548 of an Operating Expense nature); and (iv) incurring during the second quarter of fiscal 2011 approximately $1,240 of costs in connection with the reorganization of our European and Global Sales and Marketing Leadership.

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Operating expenses for the Diagnostics segment increased $3,902 for fiscal 2013 compared to fiscal 2012, and increased $1,437 for fiscal 2012 compared to fiscal 2011. These overall increases result largely from the combined effects of the following:

Fiscal 2013

General & Administrative

Improved corporate-wide operating profits, resulting in increased bonus expense of approximately $3,100, along with an approximate $500 increase in stock-based compensation during fiscal 2013.

Fiscal 2012

Research & Development

Overall increase in spending on new product development activities, related primarily to our illumigene test for Group A Streptococcus, including an approximate $350 increase in personnel-related costs.

Selling & Marketing

Field sales force realignment activities during the year resulting in decreased sales commission expenses of approximately $1,050.

General & Administrative

Improved corporate-wide operating profits, resulting in increased bonus, profit sharing and deferred compensation expenses of approximately $2,800, partially offset by an approximate $650 decrease in stock-based compensation during fiscal 2012.

Operating expenses for the Life Science segment increased $76 for fiscal 2013 compared to fiscal 2012, and decreased $63 for fiscal 2012 compared to fiscal 2011. The 2013 activity reflects in large part the combined effects of increased bonus expenses, investments in Bioline infrastructure and the lack of Maine-Tennessee facility consolidation costs, which existed in fiscal 2012. The decrease in 2012 primarily results from realizing cost savings from the Maine-Tennessee facility consolidation and an increased investment in Bioline Group sales resources.

The amount of stock-based compensation expense reported for fiscal 2013, 2012 . . .

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