Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Quarterly Report on Form 10-Q (“Quarterly Report”), all references to “the Company,” “we,” “our” and “us” refer to QuidelOrtho Corporation and its subsidiaries.
Future Uncertainties and Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For this purpose, any statements contained herein that are not statements of historical fact, including without limitation certain statements under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A, “Risk Factors” and located elsewhere herein regarding industry prospects and our expected results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “will,” “should,” “might,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “goal,” “project,” “strategy,” “future,” and similar words are intended to identify forward-looking statements. Our business is subject to a number of risks, including those discussed under Part II, Item 1A, “Risk Factors” of this Quarterly Report, that could cause actual results to differ materially from those indicated or expressed by the forward-looking statements made herein and such statements presented elsewhere by management from time to time. Such forward-looking statements represent management’s current expectations and are inherently uncertain. Investors are warned that actual results may differ from management’s expectations. Except as required by law, we assume no, and hereby disclaim any, obligation to update any forward-looking statements.
The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto beginning on page 3 of this Quarterly Report and the “Risk Factors” in Part II, Item IA of this Quarterly Report.
Information Available on Our Website
From time to time, we may use our website as a channel of distribution of material information related to the Company. Financial and other material information regarding the Company is routinely posted on and accessible at https://ir.quidelortho.com/. The information contained on or connected to our website is not deemed to be incorporated by reference into this Quarterly Report or filed with the Securities and Exchange Commission (the “SEC”).
Overview
Our mission is to develop and manufacture accurate and affordable diagnostic testing technologies across the continuum of healthcare testing needs to create better patient outcomes. Our expertise in clinical chemistry, immunoassay and molecular testing helps clinicians and patients make better informed decisions across the globe. Our global infrastructure and commercial reach support our customers across more than 130 countries and territories with quality diagnostics, a broad test portfolio and market leading service.
Beginning in the second quarter of 2022, in connection with the Combinations and in order to manage our business to better align with the market dynamics of the specific geographic regions in which we operate, we changed the manner in which we review our performance and allocate resources. As a result, we changed from one reportable segment to the following three geographically-based reportable segments: North America, EMEA and China. Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” We generate our revenue primarily in the following business units: Labs, Transfusion Medicine, Point-of-Care and Molecular Diagnostics.
We currently sell our products directly to end users through a direct sales force and through a network of distributors, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies, wellness screening centers, blood banks and donor centers, as well as for individual, non-professional, over-the-counter (“OTC”) use. We reached significant new markets as we introduced our QuickVue ® At-Home OTC COVID-19 test for at-home consumer use, school testing, health departments and many other locations.
For the six months ended July 3, 2022, Total revenues increased 193% to $1,615.7 million as compared to the same period in the prior year, and currency exchange rate s had a minimal impact on growth rate. Our revenues can be highly concentrated over a small number of products. For the six months ended July 3, 2022 and July 4, 2021, sales of our COVID-19 products accounted for approximatel y 70% a n d 64% o f our Total revenues , respectively. For the six months ended July 3, 2022 and July 4, 2021, sales of our influenza products accounted for 8% and 3% of our Total revenues , respectively. Approximately 54% and 29% of our Total revenues for the six months ended July 3, 2022 and July 4, 2021, respectively, were related to sales to our three largest customers.
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Recent Developments
On May 27, 2022, pursuant to the BCA, Quidel and Ortho consummated the Combinations and each of Quidel and Ortho became a wholly owned subsidiary of QuidelOrtho. For additional information about the Combinations, see Note 1 to the unaudited Consolidated Financial Statements under the section “Organization and Business” and Note 2 to the unaudited Consolidated Financial Statements.
The Combinations were completed for total consideration of approximately $4.3 billion (which is based on the May 26, 2022 closing price of $99.60 per share of Quidel common stock), including $1.7 billion of cash, funded through cash on our balance sheet and incremental borrowings. The Combinations have been accounted for as a business combination using the acquisition method of accounting in conformity with ASC Topic 805, Business Combinations .
Commencing from the closing date of the Combinations, our financial statements include the assets, liabilities, operating results and cash flows of Ortho. The revenues related to Ortho are included in the Labs and Transfusion Medicine business units and the results of operations are included within each of our segments, as described in Note 5 to the unaudited Consolidated Financial Statements. For further information related to the Combinations, see Note 2 to the unaudited Consolidated Financial Statements.
Impact of COVID-19 Pandemic
The healthcare challenge and other impacts surrounding the SARS-CoV-2 virus that emerged in late 2019 and the ensuing global pandemic have presented significant business uncertainty and had a dramatic impact on businesses globally, including ours. The severity and duration of the pandemic and economic repercussions of the virus remain uncertain and will ultimately depend on many factors, including the speed of global dissemination, effectiveness of the vaccination and containment efforts throughout the world, the duration and spread of the virus, including variants or new outbreaks, as well as potential seasonality. We continue to evaluate the extent to which COVID-19 may impact our business and operations and adjust risk mitigation planning and business continuity activities as needed.
SARS-CoV-2 Diagnostic Products
As a leader in Point-of-Care diagnostics and with established expertise in respiratory infectious disease products, we were and remain well-positioned to respond to the COVID-19 pandemic. We have and continue to work closely with national and local governments, agencies, and industry partners to develop, manufacture and supply critical diagnostic products to support testing initiatives to help curb the spread of the SARS-CoV-2 virus. In particular, we developed molecular and antigen products to diagnose the SARS-CoV-2 virus. We also committed significant resources toward the expansion of our production capacity to manufacture and supply these products. We have experienced significant volatility in demand for these products since their launch, with periods of significant demand and periods where we experienced dramatic decreases in demand. At the same time, we also have observed fluctuating demand for certain of our other diagnostic products. Demand has fluctuated in line with a range of factors, including the prevalence of the SARS-CoV-2 virus and its variants, the supply of COVID-19 tests generally, the purchasing activity of government entities, and the dissemination and effectiveness of vaccinations. The extent to which COVID-19 will continue to impact demand for our products depends on these and future developments, which are highly uncertain and very difficult to predict, including new information that may emerge concerning the severity of COVID-19, regulatory changes in any of the markets in which we serve, the impact of new SARS-CoV-2 variants and actions to contain and treat their impact.
Operations and Employee Safety
While many governments implemented lockdown and shelter-in-place orders, requiring non-essential businesses to shut down operations, our business was deemed “essential” and we continued to operate, manufacture and distribute products to customers. Accordingly, we have implemented steps to protect our employees. Our office-based work sites in the U.S. are subject to operating restrictions consistent with applicable health guidelines.
We have been able to maintain our operations without significant interruption and have been able to develop and quickly scale manufacturing capacity for new products related to the COVID-19 pandemic. However, during the first quarter of 2022, pandemic-related lockdowns in China impacted our business operations. The lockdowns continued through most of the second quarter of 2022, continuing to impact portions of our operations in China prior to the easing of restrictions in May 2022 and the return to more normalized activity levels by the end of June 2022. While the impact of the lockdowns in China was not material to our results of operations in the fiscal quarter ended July 3, 2022, we continue to monitor the potential impact of any further lockdowns in China or other regions and the other issues noted above regarding our business.
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Supply Chains
As a result of the COVID-19 pandemic, and other economic and geopolitical conditions, we have seen shortages and delays in receiving certain raw materials and other components for our products and experienced logistics and distribution challenges, as well as challenges in labor availability, all of which have affected our ability to fulfill customer orders on a timely basis, including instrument placements. Supply chain, production, logistics and distribution challenges, including shortages of components, cost inflation, shipping delays and other logistics challenges, labor availability constraints and labor costs, have impacted, and we expect will continue for some period of time to impact, our results of operations. Some of our products are derived from source biologic materials, which are available from a limited number of sources. In response, we have increased safety stock of certain critical components as well as certain finished goods. In addition, we are continuously evaluating our supply chain for potential gaps and to take other steps intended to help address continuity, such as identifying additional sources for key raw materials.
We continue to monitor these developments, as well as other international developments, including the Russia-Ukraine conflict and localization efforts, and the impact of such factors on our business. We cannot currently predict the frequency, duration or scope of these supply, production, logistics, distribution and labor disruptions and challenges. However, we continue to proactively work with our suppliers, manufacturers, distributors, industry partners and government agencies to address these challenges and continue to meet the needs of our customers. Despite our mitigation efforts, such interruptions and challenges could materially affect our ability to timely manufacture and distribute our products and unfavorably impact our results of operations depending on the nature and duration of such challenges.
Outlook
Our financial performance and results of operations will depend on future developments and other factors that are highly uncertain, continuously evolving and unpredictable, including the duration, severity and continuation of outbreaks and surges of COVID-19, actions to contain the spread of the virus such as vaccination efforts globally, and the ongoing supply, production and logistics challenges.
While demand for COVID-19 testing continued to be strong in the early part of 2022, it fluctuated dramatically, and as a result of a number of factors, including increased supply, effectiveness of global containment efforts and other mitigation efforts, for the remainder of the year, we expect demand and pricing for our COVID-19 testing to be less than that seen in the early part of the year. However, in light of our experience to date with the virus and the emergence and impact of new variants, we believe some level of ongoing COVID-19 testing will be required for some period of time, even as communities return to more normal practices. We would expect any such normalized demand to continue to experience fluctuations, which may be significant. With respect to our core products, excluding COVID-19 tests and influenza tests, we anticipate revenue growth for the remainder of 2022. We expect demand for our influenza tests to continue to fluctuate based on a number of factors, including the severity of the flu season.
Because our business environment is highly competitive, our long-term growth and profitability will depend in part on our ability to retain and grow our current customers and attract new customers through developing and delivering new and improved products and services that meet our customers’ needs and expectations, including product performance, product offerings, cost, automation and other work flow efficiency. As a result, we expect to continue to maintain our emphasis on R&D investments for longer term growth, including for our next generation platforms and assays, as well as additional assays to be launched on our current platforms. In addition, we expect to continue to evaluate strategic opportunities to expand our product lines and services, production capabilities, technologies and geographic footprint and address other business challenges and opportunities.
While the revenues and financial results from our COVID-19 products are uncertain, we intend to continue our focus on prudently managing our business and delivering improved financial results, while at the same time striving to introduce new products and services into the market.
Results of Operations
Revenues
In connection with the Combinations, we reorganized our former product categories into four business units. Revenues from our former Specialized Diagnostic Solutions product category have been included in a new Labs business unit described below. Our former Rapid Immunoassay and Cardiometabolic Immunoassay product categories now represent our Point-of-Care business unit. The Molecular Diagnostics business unit represents the former Molecular Diagnostic Solutions product category. In addition, we added a Transfusion Medicine business unit.
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Following the Combinations, we generate product revenue in the following business units:
• Labs—Focused on (i) clinical chemistry laboratory instruments and tests, which measure target chemicals in bodily fluids for the evaluation of health and the clinical management of patients, (ii) immunoassay laboratory instruments and tests, which measure proteins as they act as antigens in the spread of disease, antibodies in the immune response spurred by disease, or markers of proper organ function and health, (iii) testing to detect and monitor disease progression across a broad spectrum of therapeutic areas, (iv) other product revenues primarily from contract manufacturing, (v) specialized diagnostic solutions and (vi) collaboration and license agreements pursuant to which we derive collaboration and royalty revenues.
• Transfusion Medicine—Focused on (i) immunohematology instruments and tests used for blood typing to help ensure patient-donor compatibility in blood transfusions and (ii) donor screening instruments and tests used for blood and plasma screening for infectious diseases for customers primarily in the U.S.
• Point-of-Care—Focused on tests to provide rapid results across a broad continuum of point-of-care settings, including tests for professional healthcare providers and tests that can be taken at home. Includes (i) tests for a range of benchtop analyzers and (ii) tests that can be visually read.
• Molecular Diagnostics—Includes (i) PCR thermocyclers with reduced process time and ready-to-use reagent configurations and (ii) analyzer and amplification systems with the ability to run multiple assays at one time.
The following table compares Total revenues by business unit for the three and six months ended July 3, 2022 and July 4, 2021:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021 % Change July 3, 2022 July 4, 2021 % Change
Labs $ 157.4 $ 10.4 1,413 % $ 170.7 $ 21.3 701 %
Transfusion Medicine 68.2 — N/A 68.2 — N/A
Point-of-Care 367.1 131.8 179 % 1,310.1 435.9 201 %
Molecular Diagnostics 20.7 34.4 (40) % 66.7 94.7 (30) %
Total revenues $ 613.4 $ 176.6 247 % $ 1,615.7 $ 551.9 193 %
For the three months ended July 3, 2022, Total revenues increased to $613.4 million from $176.6 million for the same period in the prior year. The increases in Labs and Transfusion Medicine were primarily related to new revenues from the Combinations. The Point-of-Care business line was the largest contributor to revenue growth, driven primarily by demand for the QuickVue SARS Antigen assays. Molecular Diagnostics sales decreased by $13.7 million, driven by decreased pricing and demand for the Lyra ® SARS Antigen assay, partially offset by increased demand for the Solana ® SARS Antigen assay. Currency exchange rate had an unfavorable impact of 450 basis points on the growth rate for the quarter ended July 3, 2022.
For the six months ended July 3, 2022, Total revenues increased to $1,615.7 million from $551.9 million for the same period in the prior year. The increases in Labs and Transfusion Medicine were primarily related to new revenues from the Combinations. The Point-of-Care business line was the largest contributor to revenue growth, driven primarily by an increase of $894.2 million in sales of QuickVue SARS Antigen assays, partially offset by lower BNP sales due to the transition of the BNP Business to Beckman Coulter, Inc. (“Beckman”). Molecular Diagnostics sales decreased by $28.0 million, driven primarily by decreased pricing for the Lyra SARS Antigen assay. Currency exchange rate had an unfavorable impact of 180 basis points on the growth rate for the six months ended July 3, 2022.
Cost of Sales, Excluding Amortization of Intangible Assets
Cost of sales, excluding amortization of intangible assets, increased to $275.9 million, or 45.0% of Total revenues, for the three months ended July 3, 2022, compared to $68.6 million, or 38.8% of revenue, for the three months ended July 4, 2021. The increase in cost of sales, excluding amortization of intangible assets, was driven primarily by a large increase in sales of QuickVue SARS Antigen assays and new product sales in Labs and Transfusion Medicine.
Cost of sales, excluding amortization of intangible assets, increased to $536.2 million, or 33.2% of Total revenues, for the six months ended July 3, 2022, compared to $140.2 million, or 25.4% of revenue, for the six months ended July 4, 2021. The increase in cost of sales, excluding amortization of intangible assets, was driven primarily by a large increase in sales of QuickVue SARS Antigen assays in 2022, as well as new product sales in Labs and Transfusion Medicine. There were also increases in supply chain and other indirect manufacturing costs, which were only partially offset by increased absorption driven by higher production volumes.
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Operating Expenses
The following table summarizes operating expenses for the three and six months ended July 3, 2022 and July 4, 2021:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 % of
total revenues July 4, 2021 % of
total revenues July 3, 2022 % of
total revenues July 4, 2021 % of
total revenues
Selling, marketing and
administrative $ 118.4 19.3 % $ 54.2 30.7 % $ 203.2 12.6 % $ 102.9 18.6 %
Research and development 34.2 5.6 % 22.6 12.8 % 60.6 3.8 % 45.9 8.3 %
Amortization of intangible
assets 21.0 3.4 % 6.8 3.9 % 28.1 1.7 % 13.6 2.5 %
Acquisition and integration
costs 80.2 13.1 % 1.1 0.6 % 83.2 5.1 % 1.8 0.3 %
Other operating expense, net 4.0 0.7 % — — % 4.0 0.2 % — — %
Selling, Marketing and Administrative Expenses
Selling, marketing and administrative expenses for the three months ended July 3, 2022 increased by $64.2 million, or 118.5%, to $118.4 million from $54.2 million for the same period in the prior year, primarily due to the Combinations which contributed $45.8 million in increased expense, as well as increased freight expense.
Selling, marketing and administrative expenses for the six months ended July 3, 2022 increased by $100.3 million, or 97.5%, to $203.2 million from $102.9 million for the same period in the prior year, driven primarily by the Combinations which contributed $45.8 million in increased expense, higher freight expense due to higher sales volume and expedited shipping, and higher product promotional spend associated with the launch of the QuickVue At-Home OTC COVID-19 test.
Research and Development Expense
Research and development expense for the three months ended July 3, 2022 increased by $11.6 million, or 51.3%, to $34.2 million from $22.6 million for the same period in the prior year, primarily due to the Combinations which contributed $13.4 million in increased expense.
Research and development expense for the six months ended July 3, 2022 increased by $14.7 million, or 32.0%, to $60.6 million from $45.9 million for the same period in the prior year, primarily due to the Combinations which contributed $13.4 million in increased expense, as well as higher compensation costs driven by increased headcount to support the growth of the business.
Research and development expense includes direct external costs such as fees paid to third-party contractors and consultants, and internal direct and indirect costs such as compensation and other expenses for R&D personnel, supplies and materials, clinical trials and studies, facility costs and depreciation.
Amortization of Intangible Assets
Amortization of intangible assets for the three months ended July 3, 2022 and July 4, 2021 was $21.0 million and $6.8 million, respectively. Amortization of intangible assets for the six months ended July 3, 2022 and July 4, 2021 was $28.1 million and $13.6 million, respectively. The increases in amortization expense in the three and six months ended July 3, 2022 compared to the prior year periods were primarily due to the Combinations.
Acquisition and Integration Costs
Acquisition and integration costs were $80.2 million and $1.1 million for the three months ended July 3, 2022 and July 4, 2021, respectively. Acquisition and integration costs were $83.2 million and $1.8 million for the six months ended July 3, 2022 and July 4, 2021, respectively. The increases in the three and six months ended July 3, 2022 compared to the prior year periods were attributable to the Combinations.
Other Operating Expense, Net
Other operating expense, net was $ 4.0 million for each of the three and six months ended July 3, 2022. Other operating expense, net was related to the profit share expense for our Joint Business with Grifols, which we acquired in connection with the Combinations.
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Non-Operating Expenses
The following table summarizes non-operating expenses, net, for the three and six months ended July 3, 2022 and July 4, 2021:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021 % Change July 3, 2022 July 4, 2021 % Change
Interest expense, net $ 10.3 $ 1.4 635.7 % $ 11.3 $ 3.4 232.4 %
Loss on extinguishment of debt 24.0 — N/A 24.0 — N/A
Other expense, net 2.5 0.2 1150.0 % 1.6 0.6 166.7 %
Interest Expense, Net
Interest expense, net, was $ 10.3 million and $ 1.4 million for the three months ended July 3, 2022 and July 4, 2021, respectively. Interest expense, net was $ 11.3 million and $ 3.4 million for the six months ended July 3, 2022 and July 4, 2021, respectively. The increases in interest expense, net in the three and six months ended July 3, 2022 compared to the prior year periods were primarily related to the new Term Loan under the Credit Agreement entered into in connection with the Combinations.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $ 24.0 million for each of the three and six months ended July 3, 2022, and was related to the extinguishment of the senior notes and former term loans and revolving credit facility of Ortho in connection with the Combinations.
Other Expense, Net
Other expense, net was $ 2.5 million and $ 0.2 million for the three months ended July 3, 2022 and July 4, 2021, respectively. Other expense, net was $ 1.6 million and $ 0.6 million for the six months ended July 3, 2022 and July 4, 2021, respectively. The increases in Other expense, net in the three and six months ended July 3, 2022 compared to the prior year periods were primarily related to net foreign currency losses.
Income Taxes
For the three months ended July 3, 2022 and July 4, 2021, we recognized income tax provisions of $23.6 million in relation to income before taxes of $42.9 million and $2.6 million in relation to income before taxes of $21.7 million, respectively, resulting in effective tax rates of 55% and 12%, respectively. The higher tax expense for the three months ended July 3, 2022 compared to the same period in the prior year is primarily a result of a proportionate increase in pre-tax profits, as well as increases in non-deductible executive compensation, Global Intangible Low-Tax Income (“GILTI”) and acquisition-related costs.
For the six months ended July 3, 2022 and July 4, 2021, we recognized income tax provisions of $164.3 million in relation to income before taxes of $663.5 million and $46.3 million in relation to income before taxes of $243.5 million, respectively, resulting in effective tax rates of 25% and 19%, respectively. The higher tax expense for the six months ended July 3, 2022 compared to the same period in the prior year is primarily a result of a proportionate increase in pre-tax profits, as well as increases in non-deductible executive compensation, GILTI and acquisition-related costs.
Indemnification Assets
On January 16, 2014, Ortho entered into a stock and asset purchase agreement of (i) certain assets and liabilities, and (ii) all of the equity interests and substantially all of the assets and liabilities of certain entities, which, together with their subsidiaries, comprised the Ortho business from Johnson & Johnson. The agreement generally provided that Johnson & Johnson retained all income tax liabilities accrued as of the date of the acquisition, including reserves for unrecognized tax benefits. The indemnification receivable from Johnson & Johnson totaled $17.2 million as of July 3, 2022 and is included as a component of Prepaid expenses and other current assets and Other assets on the unaudited Consolidated Balance Sheet. We recorded $0.1 million of interest and penalties during the fiscal quarter ended July 3, 2022.
Segment Results
In the quarter ended July 3, 2022, following the completion of the Combinations, we changed the manner in which we evaluate performance and allocate resources. As a result, we began to operate under three geographically-based reportable segments: North America, EMEA and China. Our operations in Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” Prior periods have been revised to align with the current period presentation.
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The key indicators that we monitor are as follows:
• Total revenues — This measure is discussed in the section entitled “Results of Operations.”
• Adjusted EBITDA — Adjusted EBITDA by reportable segment is used by our management to measure and evaluate the internal operating performance of our segments. It is also the basis for calculating certain management incentive compensation programs. We believe that this measurement is useful to investors as a way to analyze the underlying trends in our core business, including at the segment level, consistently across the periods presented and to evaluate performance under management incentive compensation programs. Adjusted EBITDA consists of Net income before Interest expense, net, Provision for (benefit from) income taxes and depreciation and amortization and eliminates (i) certain non-operating income or expense items, and (ii) impacts of certain noncash, unusual or other items that are included in net income that we do not consider indicative of our ongoing operating performance. For a reconciliation of Segment Adjusted EBITDA to Income before provision for income taxes, see Note 5 to the unaudited Consolidated Financial Statements.
North America
Total revenues and Adjusted EBITDA for North America were as follows:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021 % Change July 3, 2022 July 4, 2021 % Change
Total revenues $ 438.2 $ 122.0 259 % $ 1,399.7 $ 435.4 221 %
Adjusted EBITDA $ 285.0 $ 94.4 202 % $ 1,029.9 $ 374.8 175 %
Total revenues were $ 438.2 million for the three months ended July 3, 2022, compared to Total revenues of $ 122.0 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $105.4 million to Total revenues. Excluding the impact of the Combinations, the increase of $210.8 million was driven primarily by demand for the QuickVue SARS Antigen assays, partially offset by a decrease in revenues related to our Lyra SARS Antigen assay.
Total revenues were $ 1,399.7 million for the six months ended July 3, 2022, compared to Total revenues of $ 435.4 million for the six months ended July 4, 2021. During the six months ended July 3, 2022 , the impact of the Combinations contributed $105.4 million to Total revenues. Excluding the impact of the Combinations, the increase of $858.9 million was driven primarily by demand for the QuickVue SARS Antigen assays, partially offset by a decrease in revenues for the Lyra SARS Antigen assay.
Adjusted EBITDA was $ 285.0 million for the three months ended July 3, 2022, compared to Adjusted EBITDA of $ 94.4 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $44.4 million to Adjusted EBITDA. Excluding the impact of the Combinations, the increase of $146.2 million was driven primarily by increased revenues, partially offset by increased distribution and selling costs.
Adjusted EBITDA was $ 1,029.9 million for the six months ended July 3, 2022, compared to Adjusted EBITDA of $ 374.8 million for the six months ended July 4, 2021 . During the six months ended July 3, 2022 , the impact of the Combinations contributed $44.4 million to Adjusted EBITDA. Excluding the impact of the Combinations, the increase of $610.7 million was driven primarily by increased revenues, partially offset by increased distribution and selling costs.
EMEA
Total revenues and Adjusted EBITDA for EMEA were as follows:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021 % Change July 3, 2022 July 4, 2021 % Change
Total revenues $ 42.1 $ 17.9 135 % $ 57.3 $ 39.0 47 %
Adjusted EBITDA $ 12.8 $ 7.3 75 % $ 16.3 $ 18.3 (11) %
Total revenues were $ 42.1 million for the three months ended July 3, 2022, compared to Total revenues of $ 17.9 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $25.4 million to Total revenues. Excluding the impact of the Combinations, Total revenues decreased by $1.2 million, primarily due to lower Point-of-Care revenues, driven primarily by lower BNP sales due to the transition of the BNP Business to Beckman.
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Total revenues were $ 57.3 million for the six months ended July 3, 2022, compared to Total revenues of $ 39.0 million for the six months ended July 4, 2021. During the six months ended July 3, 2022 , the impact of the Combinations contributed $25.4 million to Total revenues. Excluding the impact of the Combinations, Total revenues decreased by $7.1 million, primarily due to lower Point-of-Care revenues, driven by lower BNP sales due to the transition of the BNP Business to Beckman.
Adjusted EBITDA was $ 12.8 million for the three months ended July 3, 2022, compared to Adjusted EBITDA of $ 7.3 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $8.0 million to Adjusted EBITDA. Excluding the impact of the Combinations, Adjusted EBITDA decreased $2.5 million, driven primarily by lower revenues and higher selling costs.
Adjusted EBITDA was $ 16.3 million for the six months ended July 3, 2022, compared to Adjusted EBITDA of $ 18.3 million for the six months ended July 4, 2021 . During the six months ended July 3, 2022, the impact of the Combinations contributed $8.0 million to Adjusted EBITDA. Excluding the impact of the Combinations, Adjusted EBITDA decreased $10.0 million, driven primarily by lower revenues.
China
Total revenues and Adjusted EBITDA for China were as follows:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021 % Change July 3, 2022 July 4, 2021 % Change
Total revenues $ 73.6 $ 17.8 313 % $ 82.3 $ 31.3 163 %
Adjusted EBITDA $ 35.4 $ 9.3 281 % $ 38.7 $ 15.4 151 %
Total revenues were $ 73.6 million for the three months ended July 3, 2022, compared to Total revenues of $ 17.8 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $38.7 million to Total revenues. Excluding the impact of the Combinations, the increase of $17.1 million was primarily due to increased Point-of-Care revenues, partially offset by lower BNP sales due to the transition of the BNP Business to Beckman.
Total revenues were $ 82.3 million for the six months ended July 3, 2022, compared to Total revenues of $ 31.3 million for the six months ended July 4, 2021. During the six months ended July 3, 2022 , the impact of the Combinations contributed $38.7 million to Total revenues. Excluding the impact of the Combinations, the increase of $12.3 million was primarily due to increased Point-of-Care revenues, partially offset by lower BNP sales due to the transition of the BNP Business to Beckman.
Adjusted EBITDA was $ 35.4 million for the three months ended July 3, 2022, compared to Adjusted EBITDA of $ 9.3 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $22.1 million to Adjusted EBITDA. Excluding the impact of the Combinations, the increase of $4.0 million was driven primarily by increased revenues.
Adjusted EBITDA was $ 38.7 million for the six months ended July 3, 2022, compared to Adjusted EBITDA of $ 15.4 million for the six months ended July 4, 2021 . During the six months ended July 3, 2022, the impact of the Combinations contributed $22.1 million to Adjusted EBITDA. Excluding the impact of the Combinations, the increase of $1.2 million was driven primarily by increased revenues.
Other
Total revenues and Adjusted EBITDA for Other, which includes our Latin America, Japan and Asia Pacific operating segments, were as follows:
Three Months Ended Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021 % Change July 3, 2022 July 4, 2021 % Change
Total revenues $ 59.5 $ 18.9 215 % $ 76.4 $ 46.2 65 %
Adjusted EBITDA $ 24.5 $ 7.9 210 % $ 34.1 $ 28.1 21 %
Total revenues were $ 59.5 million for the three months ended July 3, 2022, compared to Total revenues of $ 18.9 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the impact of the Combinations contributed $44.2 million to Total revenues. Excluding the impact of the Combinations, Total revenues decreased $3.6 million, primarily due to lower Point-of-Care revenues.
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Total revenues were $ 76.4 million for the six months ended July 3, 2022, compared to Total revenues of $ 46.2 million for the six months ended July 4, 2021. During the six months ended July 3, 2022 , the impact of the Combinations contributed $44.2 million to Total revenues. Excluding the impact of the Combinations, Total revenues decreased $14.0 million, primarily due to lower Point-of-Care revenues.
Adjusted EBITDA was $ 24.5 million for the three months ended July 3, 2022, compared to Adjusted EBITDA of $ 7.9 million for the three months ended July 4, 2021. During the three months ended July 3, 2022, the Combinations were the primary driver of the increase, which contributed $15.1 million to Adjusted EBITDA.
Adjusted EBITDA was $ 34.1 million for the six months ended July 3, 2022, compared to Adjusted EBITDA of $ 28.1 million for the six months ended July 4, 2021 . During the six months ended July 3, 2022, the impact of the Combinations contributed $15.1 million to Adjusted EBITDA. Excluding the impact of the Combinations, Adjusted EBITDA decreased $9.1 million, driven primarily by lower revenues.
Liquidity and Capital Resources
As of July 3, 2022 and January 2, 2022, the principal sources of liquidity consisted of the following:
(dollars in millions) July 3,
2022 January 2,
2022
Cash and cash equivalents $ 379.0 $ 802.8
Marketable securities, current 52.5 25.7
Marketable securities, non-current 15.2 37.9
Total cash, cash equivalents and marketable securities $ 446.7 $ 866.4
Amount available to borrow under the Revolving Credit Facility $ 716.8 $ 175.0
Working capital including cash and cash equivalents and marketable securities, current $ 659.1 $ 1,116.8
As of July 3, 2022, we had $379.0 million in Cash and cash equivalents, a $423.8 million decrease from January 2, 2022. Our cash requirements fluctuate as a result of numerous factors, such as cash generated from operations, progress in R&D, capital expansion projects and acquisition and business development activities. On May 27, 2022, we completed the Combinations for total consideration of $4,291.1 million (which is based on the May 26, 2022 closing price of $99.60 per share of Quidel common stock), including $1,511.4 million of cash, net of cash and restricted cash acquired, funded through cash on our balance sheet and incremental borrowings. The incremental borrowings, described below, were also used to repay substantially all of Ortho’s then-outstanding indebtedness. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.
Debt Capitalization
On May 27, 2022, we entered into the Credit Agreement by and among us, as borrower, Bank of America, as administrative agent and swing line lender, and the other Lenders party thereto. Pursuant to the Credit Agreement and in connection with the consummation of the Combinations, the Lenders provided us with a $2,750.0 million Term Loan and a $750.0 million Revolving Credit Facility. Effective August 4, 2022, pursuant to the Increase Joinder No. 1 to the Credit Agreement, the Revolving Credit Facility increased by $50.0 million to $800.0 million. The Financing is guaranteed by the Guarantors and is secured by liens on substantially all of our and the Guarantors’ assets, excluding real property and certain other types of excluded assets. Loans under the Credit Agreement will bear interest at a rate per annum equal to the Term SOFR or Base Rate plus the Applicable Rate (each as defined in the Credit Agreement). On the closing date of the Credit Agreement, we borrowed the entire amount of the Term Loan, and the effective interest rate as of July 3, 2022 was 2.97%. Letters of credit issued under the Revolving Credit Facility totaled $33.2 million, which reduced the available amount under the Revolving Credit Facility to $716.8 million.
The Term Loan is subject to quarterly amortization of the principal amount on the last business day of each of our fiscal quarters (commencing on September 30, 2022) in such amounts as are set forth in the Credit Agreement. The Term Loan and the Revolving Credit Facility will mature on May 27, 2027. We must prepay loans outstanding under the Credit Agreement in an amount equal to the Net Cash Proceeds from (i) certain property dispositions and (ii) the receipt of certain other amounts not in the ordinary course of business, such as certain insurance proceeds and condemnation awards, in each case, if not reinvested within a specified time period as contemplated in the Credit Agreement.
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The Credit Agreement contains affirmative and negative covenants that are customary for credit agreements of this nature. The negative covenants include, among other things, limitations on asset sales, mergers, indebtedness, liens, investments and transactions with affiliates. The Credit Agreement contains two financial covenants: (i) a maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) as of the last day of each fiscal quarter of (a) 4.50 to 1.00 for the Initial Measurement Period, (b) 4.00 to 1.00 for the first four fiscal quarters ending after the Initial Measurement Period and (c) 3.50 to 1.00 for each fiscal quarter thereafter; and (ii) a minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00 as of the end of any fiscal quarter for the most recently completed four fiscal quarters. We were in compliance with the financial covenants as of July 3, 2022.
The Credit Agreement was entered into in connection with the Combinations in order to fund a portion of the cash portion of the purchase price as well as repay substantially all of Ortho’s then-outstanding indebtedness. See Note 2 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for further discussion of the Combinations. In connection with the closing of the Combinations, Quidel terminated its previous $175.0 million revolving credit facility and related credit agreement on May 27, 2022, which did not have an outstanding balance.
In connection with the acquisition of the BNP Business, we had an annual installment payment of $48.0 million payable in 2022 and have an annual installment payment of $40.0 million payable in 2023. As of July 3, 2022, the remaining payment was recorded at fair value as contingent consideration of $0.1 million and deferred consideration of $38.1 million.
Cash Flow Summary
Six Months Ended
(dollars in millions) July 3, 2022 July 4, 2021
Net cash provided by operating activities: $ 725.6 $ 407.5
Net cash used for investing activities: (1,555.1) (130.3)
Net cash provided by (used for) financing activities: 409.7 (174.0)
Effect of exchange rates on cash (2.4) 0.1
Net (decrease) increase in cash, cash equivalents and restricted cash $ (422.2) $ 103.3
Six Months Ended July 3, 2022
Cash provided by operating activities of $725.6 million for the six months ended July 3, 2022 reflects net income of $499.2 million and non-cash adjustments of $123.3 million, primarily associated with depreciation and amortization, stock-based compensation expense, net change in operating lease right-of-use assets and liabilities, accretion of interest on deferred consideration, and loss on extinguishment of debt. In addition, we benefited from collections on accounts receivables, which contributed $232.3 million to Cash provided by operating activities.
Our investing activities used $1,555.1 million of cash during the six months ended July 3, 2022, primarily related to the Combinations. We purchased $48.7 million of property, equipment, investments and intangibles, and we also purchased $33.6 million and sold $28.2 million of available-for-sale securities during the six months ended July 3, 2022. Refer to Note 2 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for further discussion of the Combinations.
Cash provided by financing activities was $409.7 million for the six months ended July 3, 2022, primarily related to proceeds from long-term borrowings, net of debt issuance costs of $2,734.8 million, payments on long-term borrowings of $2,284.4 million and payments of $37.6 for contingent and deferred consideration.
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Six Months Ended July 4, 2021
Cash provided by operating activities of $407.5 million for the six months ended July 4, 2021 reflects net income of $197.2 million and non-cash adjustments of $35.7 million, primarily associated with depreciation and amortization, stock-based compensation and the payment of accretion of interest on deferred consideration. In addition, we realized a net working capital increase of $174.6 million driven by a decrease in accounts receivable, partially offset by a decrease in income taxes payable and an increase in product inventory.
Our investing activities used $130.3 million of cash during the six months ended July 4, 2021, primarily related to investments in manufacturing equipment, building improvements, Sofia ® , Solana and Triage ® instruments available for lease and scientific equipment, partially offset by government proceeds received to fund such investments.
Cash used for financing activities was $174.0 million for the six months ended July 4, 2021, primarily related to repurchases of common stock of $103.4 million, payments of tax withholdings for vesting of stock-based awards of $35.4 million, and payment of deferred and contingent consideration of $39.8 million, partially offset by proceeds of $4.9 million from the issuance of common stock under our Amended and Restated 1983 Employee Stock Purchase Plan (“ESPP”) and pursuant to stock option exercises.
Liquidity Outlook
Short-term Liquidity Outlook
Our primary source of liquidity, other than our holdings of Cash and cash equivalents, has been cash flows from operations. Cash generated from operations provides us with the financial flexibility we need to meet normal operating, investing and financing needs. We anticipate that our current Cash and cash equivalents, together with cash provided by operating activities and incremental borrowings will be sufficient to fund our near-term capital and operating needs for at least the next 12 months.
Normal operating needs include the planned costs to operate our business, including amounts required to fund working capital, R&D and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to:
• interest on and repayments of our long-term borrowings, deferred consideration, contingent consideration and lease obligations;
• acquisitions of equipment and other fixed assets in support of our manufacturing facility expansion;
• the continued advancement of R&D efforts;
• our integration of the Ortho business arising from the Combinations;
• support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources; and
• potential strategic acquisitions and investments.
The primary purposes for our capital expenditures are to invest in manufacturing capacity expansion, acquire Savanna ® , Sofia, Solana and Triage instruments, acquire scientific equipment, purchase or develop IT and implement facility improvements. We plan to fund the capital expenditures with the cash on our balance sheet.
We are focused on expanding the number of instruments placed in the field and solidifying long-term contractual relationships with customers. In order to achieve this goal, in certain jurisdictions where it is permitted, we have leveraged a reagent rental model that has been recognized as more attractive to certain customers. In this model, we lease, rather than sell, instruments to our customers. Over the term of the contract, the purchase price of the instrument is embedded in the price of the assays and reagents. Going forward, we intend to increase the number of reagent rental placements in developed markets, a strategy that we believe is beneficial to our commercial goals because it lowers our customers’ upfront capital costs and therefore allows purchasing decisions to be made at the lab manager level. For these same reasons, the reagent rental model also benefits our commercial strategy in emerging markets. We believe that the shift in our sales strategy will grow our installed base, thereby increasing sales of higher-margin assays, reagents and other consumables over the life of the customer contracts and enhancing our recurring revenue and cash flows. During the six months ended July 3, 2022, we transferred $12.1 million of instrument inventories from Inventories to Property, plant and equipment, net, further increasing our investment in property, plant and equipment.
Long-term Liquidity Outlook
Our future capital requirements and the adequacy of our available funds to service any long-term debt outstanding and to fund working capital expenditures and business development efforts will depend on many factors, including:
• our ability to successfully integrate the recently acquired Ortho business and realize cross-selling revenue synergies;
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• our ability to realize revenue growth from our new technologies and create innovative products in our markets;
• outstanding debt and covenant restrictions;
• our ability to leverage our operating expenses to realize operating profits as we grow revenue;
• competing technological and market developments; and
• our entry into strategic collaborations with other companies or acquisitions of other companies or technologies to enhance or complement our product and service offerings.
Seasonality
Sales of our respiratory products are subject to, and significantly affected by, the seasonal demands of the cold and flu seasons, prevalent during the fall and winter. H istorically, sales of our influenza products have varied from year to year based, in large part, on the severity, length and timing of the onset of the cold and flu season. The impact of sales of our COVID-19 products combined with a very mild flu season diminished the seasonal effects in the first six months of 2022.
Recent Accounting Pronouncements
Information about recently adopted and proposed accounting pronouncements is included in Note 1 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report under the heading “Recent Accounting Pronouncements” and is incorporated herein by reference.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our unaudited Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to reserves for contractual rebates, goodwill and intangible assets and income taxes. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
A comprehensive discussion of our critical accounting estimates is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Quidel’s 2021 Annual Report on Form 10-K. There were no material changes to our critical accounting estimates during the six months ended July 3, 2022, except as noted below.
Accounting for Business Combinations
Determining the fair value of assets acquired and liabilities assumed in a business combination is considered a critical accounting estimate because the fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions as well as valuations that utilize customary valuation procedures and techniques. Changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on our financial position, liquidity or results of operations.
Inventories
Inventories are stated at the lower of cost and net realizable value on a first-in, first-out method. Elements of cost include raw materials, direct labor and manufacturing overhead.
We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory and based upon these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and the net realizable value. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our earnings.
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