QuidelOrtho (US:QDEL)2023-08-08 22:11PART I—FINANCIAL INFORMATION Item 1. Financial Statements The company's financials reflect a business shift post-Ortho combination, with declining respiratory sales causing a net loss and reduced operating cash flow Consolidated Balance Sheets Total assets and liabilities decreased slightly, while stockholders' equity saw a minor increase as of July 2, 2023 Consolidated Balance Sheet Highlights (in millions) | Account | July 2, 2023 | January 1, 2023 | | :--- | :--- | :--- | | Total Assets | $8,550.3 | $8,855.8 | | Cash and cash equivalents | $178.6 | $292.9 | | Accounts receivable, net | $246.7 | $453.9 | | Goodwill | $2,470.9 | $2,476.8 | | Total Liabilities | $3,547.8 | $3,921.2 | | Long-term borrowings | $2,308.5 | $2,430.8 | | Total Stockholders' Equity | $5,002.5 | $4,934.6 | Consolidated Statements of (Loss) Income The company shifted from net income to a net loss in Q2 and H1 2023 due to lower COVID-19 product sales and higher operating expenses Key Income Statement Data (in millions, except per share data) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $665.1 | $613.4 | $1,511.2 | $1,615.7 | | Operating (loss) income | $(26.9) | $79.7 | $72.7 | $700.4 | | Net (loss) income | $(53.2) | $19.3 | $(4.4) | $499.2 | | Diluted (loss) EPS | $(0.80) | $0.36 | $(0.07) | $10.47 | Consolidated Statements of Cash Flows Net cash from operations decreased significantly, while investing and financing activities resulted in a net cash reduction for the period Six-Month Cash Flow Summary (in millions) | Activity | Six Months Ended July 2, 2023 | Six Months Ended July 3, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $158.3 | $725.6 | | Net cash used for investing activities | $(111.2) | $(1,555.1) | | Net cash (used for) provided by financing activities | $(159.3) | $409.7 | | Net decrease in cash | $(114.3) | $(422.2) | Notes to Consolidated Financial Statements Notes detail the Ortho business combination, revenue disaggregation, debt structure, and the use of derivative hedging instruments - The business combination with Ortho was consummated on May 27, 2022, for a total consideration of approximately $4.3 billion, with goodwill adjusted downward by $23.9 million in H1 2023272829 Revenue by Business Unit (in millions) | Business Unit | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Labs | $361.4 | $157.4 | $732.1 | $170.7 | | Transfusion Medicine | $163.3 | $68.2 | $319.2 | $68.2 | | Point of Care | $134.2 | $367.1 | $442.3 | $1,310.1 | | Molecular Diagnostics | $6.2 | $20.7 | $17.6 | $66.7 | - The company's long-term borrowings primarily consist of a $2.75 billion senior secured term loan facility, with an outstanding balance of approximately $2.52 billion as of July 2, 202361 - The company utilizes interest rate swaps and foreign currency forward contracts to hedge against market risks, with total notional amounts of over $1.8 billion and $865.0 million, respectively8184177 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impact of the Ortho combination, highlighting a revenue mix shift and decreased profitability from lower COVID-19 sales Overview and Outlook The business combination transformed the revenue profile, with respiratory products declining significantly while the company navigates supply chain issues - Revenues from respiratory products fell to approximately 23% of total revenues in H1 2023, down from 78% in the prior year, due to declining COVID-19 product sales100 - The company is experiencing ongoing supply chain challenges, including raw material shortages, logistics issues, and rising labor costs102 - For the remainder of 2023, the company expects fluctuating respiratory product demand but anticipates revenue growth in its core, non-respiratory products106107 Results of Operations H1 2023 revenues decreased 6% as a sharp drop in Point of Care sales offset growth from the Ortho combination, compressing gross margins Six Months Ended July 2, 2023 vs. July 3, 2022 (in millions) | Line Item | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,511.2 | $1,615.7 | (6)% | | Cost of sales | $766.2 | $536.2 | 43% | | Gross Margin % | 49.3% | 66.8% | N/A | | Selling, marketing and administrative | $381.5 | $203.2 | 88% | | Research and development | $125.1 | $60.6 | 106% | | Operating income | $72.7 | $700.4 | (90)% | - The decrease in Point of Care revenue for the first six months was driven by a $698.1 million decline in QuickVue SARS Antigen assays and a $169.7 million decline in Sofia assays110 Segment Results North America revenue declined due to lower COVID-19 sales, while international segments grew substantially from the Ortho business combination Six-Month Revenue by Segment (in millions) | Segment | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | North America | $961.6 | $1,399.7 | (31)% | | EMEA | $161.9 | $57.3 | 183% | | China | $151.9 | $82.3 | 85% | | Other | $235.8 | $76.4 | 209% | Six-Month Adjusted EBITDA by Segment (in millions) | Segment | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | North America | $454.7 | $952.6 | (52)% | | EMEA | $12.5 | $16.2 | (23)% | | China | $58.7 | $39.2 | 50% | | Other | $58.1 | $34.3 | 69% | Liquidity and Capital Resources The company maintains sufficient liquidity through cash and its credit facility despite a significant decrease in operating cash flow Liquidity Position (in millions) | Item | July 2, 2023 | January 1, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $178.6 | $292.9 | | Total cash, cash equivalents and marketable securities | $248.4 | $366.0 | | Amount available under Revolving Credit Facility | $787.1 | $786.9 | - The company was in compliance with all financial covenants under its Credit Agreement as of July 2, 2023147 - The company is increasingly using a reagent rental model, transferring $67.3 million of instrument inventories to Property, Plant, and Equipment in H1 2023160161 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency risks, which it manages using derivative hedging instruments - The company has significant interest rate risk from its variable rate debt; a 0.125% rate change would impact annual interest expense by approximately $4.1 million before hedges168 - To manage interest rate risk, the company has entered into interest rate swap agreements with a total notional value expected to increase to $1.8 billion in December 2023171 - With 45% of Q2 2023 revenue from outside the U.S., the company uses foreign currency forward contracts with a notional amount of $865.0 million to manage FX risk173177 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period, July 2, 2023180 - No changes occurred in the company's internal control over financial reporting during the second fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls181 PART II—OTHER INFORMATION Item 1. Legal Proceedings Current legal actions are not expected to have a material adverse effect on the company's financial condition or operations - Management believes that current legal actions, in aggregate, are not expected to have a material adverse effect on the company's financial condition or results of operations71183 Item 1A. Risk Factors No material changes to the company's risk factors have occurred since its last Annual Report on Form 10-K - No material changes in risk factors were reported since the company's 2022 Annual Report on Form 10-K184 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased shares to satisfy employee tax obligations, with $225.7 million remaining under its authorized repurchase program - The company repurchased 35,005 shares during the quarter, which were surrendered by employees to satisfy tax withholding obligations on vested stock awards186 - A stock repurchase program authorized on August 17, 2022, allows for up to $300.0 million in repurchases, with approximately $225.7 million remaining available as of July 2, 2023186187 Item 6. Exhibits This section lists filed exhibits, including corporate governance documents and required CEO/CFO Sarbanes-Oxley certifications - The exhibits include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002192