MERIDIAN BIOSCIENCE, INC. Refer to "Forward-Looking Statements" following the Table of Contents in front of this Form 10-Q. In the discussion that follows, all dollar amounts are in thousands (both tables and text), except per share data. The purpose of Management's Discussion and Analysis is to provide an understanding of the financial condition, changes in financial condition and results of operations ofMeridian Bioscience, Inc. ("Meridian", the "Company", "We"). This discussion should be read in conjunction with the Condensed 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 . 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 ;North Brunswick, New Jersey ;London, England ; andLuckenwalde, Germany , and the sale and distribution of bulk antigens, antibodies, immunoassay blocking reagents, various Polymerase Chain Reaction ("PCR") and isothermal amplification master mixes, 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 (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; (ii) the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) approval by the holders of two thirds of the issued and outstanding shares of the Company's common stock entitled to vote on such matter; and (iv) the condition that no adverse outcome, as defined in the Merger Agreement, related to the previously discussed DOJ matter has occurred or is reasonably likely to occur. Page 19
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The Merger Agreement contains certain termination rights for the Company and SDB. The Company will be required to pay SDB a termination fee of approximately$45,960 if we terminate the Merger Agreement under specified circumstances. 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
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 have been 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 the level of such revenues during the fiscal 2022 third quarter,
reflecting the softening in demand for
COVID-19
related reagents during the quarter.
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 the third quarter of fiscal 2022, revenues from
respiratory illness assays were 47% higher than the third quarter of 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 to date. 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.
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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. We are also starting to experience 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 consolidated results of operations and cash flows during 2022 and beyond.
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 quarter of fiscal 2022 is expected
to continue throughout the remainder of fiscal 2022. 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.
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. Having completed the
additional studies and submitting the results to the FDA, 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 expect to begin shipping this product
before the end of our fiscal year ending September 30, 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
$15,400 through June 30, 2022 , we expect these expansion efforts to be completed
during calendar 2022 at a total gross cost of approximately $22,400 , 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 June 30,
2022 (see Note 14,
"National Institutes of Health Contracts "
of the Condensed Consolidated Financial Statements for further discussion).
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Critical Accounting Estimates
As of and for the three and nine months endedJune 30, 2022 , there were no significant changes to our critical accounting estimates, as outlined in our Annual Report on Form 10-K as of and for the year endedSeptember 30, 2021 , filed with theSEC onNovember 23, 2021 .
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 ongoing 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 duringFebruary 2022 . The Company continues to work closely with the FDA in its execution of the recall activities, which include Magellan notifying customers and distributors affected by the recall and providing instructions for the return of impacted test kits. The evaluation of the recall and the related notification process are ongoing. Of the$5,100 estimated and accrued as ofSeptember 30, 2021 to cover the estimated costs of the recall,$2,359 remains accrued and is reflected in the Condensed Consolidated Balance Sheet as ofJune 30, 2022 . Anticipated recall-related costs primarily include product replacement and/or refund costs, mailing/shipping costs, attorneys' fees and other miscellaneous costs. As previously disclosed, 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 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 , the 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 , the 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 ofJune 30, 2022 , in accordance with the applicable accounting guidance, the Company accrued$10,000 as an estimate of the cost to settle the LeadCare legal matter, which is reflected in litigation and select legal costs within the Condensed Consolidated Statements of Operations for the three and nine months endedJune 30, 2022 . The Company cannot predict when the investigation will be resolved or the outcome of the investigation, and the ultimate resolution of the LeadCare legal matter may exceed the amount accrued atJune 30, 2022 and could be material to the Condensed Consolidated Statement of Operations. Approximately$1,812 and$438 of expense for attorneys' fees related to this matter is included in litigation and select legal costs within the Condensed Consolidated Statements of Operations for the three months endedJune 30, 2022 and 2021, respectively, and$2,601 and$2,695 , for the nine months endedJune 30, 2022 and 2021, respectively. Having issued a Warning Letter to Magellan onOctober 23, 2017 related to theBillerica location's manufacturing of LeadCare testing systems for venous blood samples (the "Warning Letter"), onAugust 3, 2021 , the FDA sent Magellan a close-out letter for the Warning Letter. TheFDA's close-out letter notified Magellan that the FDA has completed an evaluation of Magellan's corrective actions in response to theFDA's Warning Letter, and based on theFDA's evaluation, Magellan has addressed the issues identified in the Warning Letter. TheFDA'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. For a more detailed discussion of this matter, see the "Lead Testing Matters" section beginning on page 29 of the Company's fiscal 2021 Annual Report on Form 10-K, filed with theSEC onNovember 23, 2021 . Page 22
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RESULTS OF OPERATIONS
Three Months Ended
A net loss of$7,338 , or$0.16 per diluted share, was generated during the third quarter of fiscal 2022, compared to$11,669 of net earnings, or$0.26 per diluted share, during the third quarter of fiscal 2021. The net loss in the third quarter of fiscal 2022 reflects primarily the overall increase in operating expenses described in the Operating Expenses section below, along with the decline in net revenues and operating income in our Life Science segment, stemming from the 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, therefore making 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$14,500 in the third quarter of fiscal 2021.
Consolidated net revenues for the third quarter of fiscal 2022 totaled
Net revenues from the Diagnostics segment for the third quarter of fiscal 2022 increased 36% compared to the third quarter of fiscal 2021, comprised primarily of an increase in sales of non-molecular assay products including the addition of sales of the BreathTek product, which was acquiredJuly 31, 2021 . The third quarter of fiscal 2022 represents the fifth consecutive quarter our Diagnostics segment has shown positive revenue growth versus the same quarter in the prior fiscal year. Our Diagnostics segment generated$3,278 of operating income for the third quarter of fiscal 2022, compared to$2,717 of operating income in the third quarter of fiscal 2021, reflecting the increase in net revenues and gross profit margins being offset by the increase in operating expenses described in the respective sections below. With a 62% decrease in net revenues from molecular reagent products and a 48% increase in net revenues from immunological reagent products, net revenues for our Life Science segment decreased 22% during the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. Our Life Science segment generated$9,088 of operating income for the third quarter of fiscal 2022, a decrease of$6,990 from the third 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.
Nine Months Ended
Net earnings for the nine months endedJune 30, 2022 decreased 43% to$36,754 , or$0.83 per diluted share, from net earnings for the comparable fiscal 2021 period of$64,750 , or$1.47 per diluted share. The level of net earnings in the first nine months of 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$88,500 in the first nine months of fiscal 2021.
Consolidated net revenues increased 11% to
Diagnostics segment net revenues increased 25%, comprised of a 5% increase in sales of molecular assay products and a 28% increase in sales of non-molecular assay products including the addition of sales of the BreathTek product, which was acquiredJuly 31, 2021 . Our Diagnostics segment generated$3,104 of operating income for the first nine months of fiscal 2022, compared to$4,400 of operating income in the first nine months of fiscal 2021, reflecting the increase in net revenues being offset by the decrease in gross profit margins and increase in operating expenses described in the respective sections below. Page 23
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With a 24% decrease in net revenues from molecular reagent products and a 61% increase in net revenues from immunological reagent products, including COVID-19 related products, net revenues for our Life Science segment increased 2% during the first nine months of fiscal 2022 compared to the same period of the prior year. Our Life Science segment generated$75,976 of operating income for the first nine months of fiscal 2022, a decrease of$15,856 from the first nine months of fiscal 2021, primarily due to the increase in net revenues being offset by the decrease in 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, provided for each of the following:
- By Reportable Segment &Geographic Region - By Product Platform/Type
Revenue Overview- By Reportable Segment &
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 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 quarter to quarter by buying patterns of major IVD manufacturing customers, severity of disease outbreaks (specifically the ongoing COVID-19 pandemic), and foreign currency exchange rates.
See the "Revenue Disaggregation" section of Note 4, "Revenue Recognition" of the Condensed 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 growth in net revenues of 36% and 25% during the third quarter and first nine months of fiscal 2022, respectively, compared to the same periods of fiscal 2021, primarily results from the combined net effects of the following:
• Volume growth in the gastrointestinal and
non-molecular
products benefitting from sales of the BreathTek product, acquired on
July 31, 2021 (approximately$5,500 and$16,600 of net revenues from BreathTek in the third quarter and first nine months of fiscal 2022, respectively);
• Volume growth in sales of respiratory illness products, comprised of
tests for Group A Strep, Mycoplasma pneumonia, Influenza, Pertussis and
SARS-CoV-2,
among others, reflecting an increase in the testing for these illnesses
compared to the quarterly and
year-to-date
fiscal 2021 periods (total increases in respiratory illness products
compared to the prior year periods of 47% and 75% in the third quarter
and first nine months of fiscal 2022, respectively); and
• Fluctuations in the volumes of sales of blood chemistry products,
reflecting the ongoing LeadCare product recall, which commenced in May
2021 , and the resumption of product shipments in February 2022 ($2,177
increase in quarterly net revenues compared to the third quarter of
fiscal 2021, and a $3,244 decrease in fiscal
year-to-date
net revenues compared to the first nine months of fiscal 2021).
Life Science Segment Products
During the third quarter and first nine months of fiscal 2022, net revenues for
our Life Science segment decreased 22% and increased 2%, respectively, compared
to the fiscal 2021 periods. While the level of net revenues during the third
quarter of fiscal 2022 reflects the significant decline in demand for
COVID-19
related reagents during the quarter, such level of quarterly net revenues
significantly outpaced the
pre-pandemic
level of net revenues generated in the third quarter of fiscal 2019; increasing
66% in total, 41% for molecular reagents and 79% for immunological reagents.
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Significant Customers
Revenue concentrations related to certain customers within our Diagnostics and Life Science segments are set forth in Note 15, "Reportable Segment and Major Customers Information" of the Condensed Consolidated Financial Statements.
Gross Profit
Three Months Ended June 30, Nine Months Ended June 30,
2022 2021 Change 2022 2021 Change
Gross profit $ 36,728 $ 37,111 (1 )% $ 154,364 $ 156,431 (1 )%
Gross profit margin 54 % 58 % -4 points 58 % 65 % -7 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 the third
quarter and first nine months of fiscal 2022, sales of molecular reagent
products represented approximately 11% and 30%, respectively, of consolidated
net revenues, compared to approximately 32% and 43% during the comparable
periods of fiscal 2021, respectively.
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 our Cincinnati and Quebec Revogene manufacturing facilities.
Operating Expenses - Segment Detail and Corporate
Three Months Ended June 30,
Research & Selling & General & Total Operating
Development Marketing Administrative Other Expenses
Fiscal 2021:
Diagnostics $ 5,463 $ 4,966 $ 5,933 $ (3,263 ) $ 13,099
Life Science 620 1,243 3,315 - 5,178
Corporate - - 2,716 438 3,154
Total Expenses (2021 Quarter)
11,964$ (2,825 ) $ 21,431 Fiscal 2022: Diagnostics$ 5,228 $ 6,353 $ 7,130 $ - $ 18,711 Life Science 815 1,825 2,935 39 5,614 Corporate - - 3,084 16,000 19,084
Total Expenses (2022 Quarter)
13,149$ 16,039 $ 43,409 Page 25
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Nine Months Ended June 30,
Research & Selling & General & Total Operating
Development Marketing Administrative Other Expenses
Fiscal 2021:
Diagnostics $ 16,011 $ 15,914 $ 17,790 $ (5,205 ) $ 44,510
Life Science 1,788 3,856 9,978 - 15,622
Corporate - - 9,059 2,695 11,754
Total Expenses (2021
Year-to-Date) $ 17,799 $ 19,770 $ 36,827 $ (2,510 ) $ 71,886
Fiscal 2022:
Diagnostics $ 15,856 $ 18,040 $ 21,750 $ - $ 55,646
Life Science 2,072 5,393 11,996 107 19,568
Corporate - - 12,618 16,789 29,407
Total Expenses (2022
Year-to-Date) $ 17,928 $ 23,433 $ 46,364 $ 16,896 $ 104,621
Compared to the prior year periods, operating expenses increased $21,978 to
$43,409 in the third quarter of fiscal 2022 and increased $32,735 to $104,621 in
the first nine months of fiscal 2022. Major components of these increases were
as follows:
• 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 year in connection with the
COVID-19
pandemic;
• Increased General & Administrative costs, primarily reflecting thecombined effects of: (i) increased purchase accounting amortization
expense; (ii) additional investment in incentive compensation tied to the
Company's financial performance; (iii) the timing of certain outside
services costs; and (iv) increased commercial insurance costs for
Directors & Officers and Property & Casualty coverages;
• A
Diagnostics segment resulting from adjustments to the fair value of
acquisition consideration in the third quarter and first nine months of
fiscal 2021, respectively;
• An $11,374 and $9,906 year-over-year increase in litigation and select
legal costs in the third quarter and first nine months of fiscal 2022,
respectively, reflected within Corporate and primarily related to thepreviously discussed LeadCare legal matter (see "Lead Testing Matters"
above); and
• A $3,927 and $3,995 year-over-year increase in acquisition andtransaction related costs in the third quarter and first nine months of
fiscal 2022, respectively, primarily within Corporate and related to the
previously discussed pending acquisition (see "
Agreement and Plan of Merger"
above).
Operating Income (Loss)
An operating loss of $6,681 was generated in the third quarter of fiscal 2022,
compared to $15,680 of operating income during the third quarter of fiscal 2021.
During the first nine months of fiscal 2022, operating income totaled $49,743 , a
41% decrease from the comparable fiscal 2021 period. These operating income
(loss) levels result from the factors discussed above.
Income Taxes
The effective rate for income taxes was approximately (11%) and 26% for the three and nine months endedJune 30, 2022 , respectively, and 24% and 22% for the three and nine months endedJune 30, 2021 , respectively. The negative effective rate for the three months endedJune 30, 2022 and the increase in effective rates for the nine months endedJune 30, 2022 , relate primarily to the anticipated non-deductibility of the previously discussed LeadCare legal matter (see "Lead Testing Matters" above). Page 26
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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, revenues or operating income in the third quarter or first nine months of 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 mutual funds. Our objectives in managing the investment portfolio are to: (i) preserve capital; (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions; and (iii) capture a market rate of return commensurate with market conditions and our 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 ofJune 30, 2022 . 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 ofJune 30, 2022 , our cash and cash equivalents balance was$83,487 , an increase of$33,716 compared toSeptember 30, 2021 . This net increase primarily results from the combined effects of: (i) generating$80,374 of cash flow from operations, an increase of 53% over the first nine months of fiscal 2021; (ii) using cash to pay down$35,000 on the revolving credit facility; and (iii) using cash to acquire property, plant and equipment ($5,138 net of RADx grant monies received) and the assets ofEUPROTEIN, Inc. ($3,750 ) (see Note 6, "Business Combinations" of the Condensed Consolidated Financial Statements). In addition, the net balance of cash and cash equivalents decreased approximately$3,900 during the nine months endedJune 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
Capital Resources As described in Note 12, "Bank Credit Arrangements" of the Condensed Consolidated Financial Statements, the Company maintains a$200,000 revolving credit facility, which is secured by substantially all of ourU.S. assets and includes certain restrictive financial covenants. The Company also maintains a shelf registration statement on file with theSEC . During fiscal 2022, our capital expenditures are estimated to total approximately$15,300 , comprised of approximately$12,900 and$2,400 in the Diagnostics and Life Science segments, respectively. Included within the Diagnostics segment capital expenditures estimate is approximately$7,000 related to completion of the manufacturing capacity scale-up and automation initiatives for Revogene assay production. 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. In addition, a portion of the Diagnostics segment expansion may be funded by the remaining amounts to be received under the previously noted RADx grant entered into onFebruary 1, 2021 , and as amended onJanuary 25, 2022 (see Note 14, "National Institutes of Health Contracts " of the Condensed Consolidated Financial Statements for further discussion). Page 27
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License Agreements
The Company has entered into various license agreements that require payment of royalties based on a specified percentage of sales of related products. During the third quarter and first nine months of fiscal 2022, royalty expense totaled approximately$400 and$2,100 , respectively, with the Diagnostics/Life Science segment split of such revenues equating to approximately 40/60 and 70/30 in the third quarter and first nine months of fiscal 2022, respectively. This compares to a total of approximately$1,500 and$4,700 of royalty expense in the third quarter and first nine months of fiscal 2021, respectively, with approximately 20% and 80% of such expense relating to our Diagnostics and Life Science segments, respectively, during both periods. The Company expects that royalty expense under these agreements will amount to approximately$2,600 in fiscal 2022, a decrease from$5,200 in fiscal 2021, largely due to raw material sourcing activities. 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 5, "Fair Value Measurements" of the Condensed 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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