QuidelOrtho Corp 10-K

Item 8. Financial Statements and Supplementary Data Index of Consolidated Financial Statements and Schedule Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 72 Consolidated Balance Sheets 75 Consolidated Statements of Income 76 Consolidated Statements of Comprehensive Income 77 Consolidated Statements of Stockholders’ Equity 78 Consolidated Statements of Cash Flows 79 Notes to Consolidated Financial Statements 80 71 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of QuidelOrtho Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of QuidelOrtho Corporation (the Company) as of January 1, 2023 and January 2, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended January 1, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 1, 2023 and January 2, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 1, 2023, in conformity with US generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 72 Reserve for contractual rebates Description of the Matter As described in Note 1 and Note 7 to the consolidated financial statements, the Company records revenues from product sales net of contractual rebates that are estimated at the time of sale. As of January 1, 2023, the Company recognized an allowance on accounts receivable of $40.0 million in rebates which are dependent on estimated rebate percentages that vary based on end-user sales mix. Auditing the Company’s allowance for contractual rebates is especially challenging because the calculation involves estimating adjustments to revenue based upon a high volume of data including inputs from third-party sources, such as distributor inventory levels and historical distributor sales to end users. In addition, the determination of such adjustments includes estimating rebate percentages which are dependent on estimated end-user sales mix and customer contractual terms, which vary across customers. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of key controls over the Company’s process to calculate the reserves for contractual rebates, including management’s evaluation of third-party data inputs utilized in the reserve calculations, as well as the Company’s data inputs such as accuracy of contractual pricing and reasonableness of estimated end user sales. Our audit procedures also included, among others, the evaluation of the Company’s retrospective analysis of rebates claimed compared to actual payments issued and performance of analytical procedures and sensitivity analyses over the Company’s significant inputs. We also tested the underlying data used in management’s calculations for accuracy and completeness, which included inspection of source data supporting the inventory levels and agreement of contractual rebate amounts to underlying customer contracts. 73 Valuation of intangible assets acquired in connection with the acquisition of Ortho Description of the Matter As described in Note 2 to the consolidated financial statements, on May 27, 2022, Quidel and Ortho consummated the Combinations, with Quidel considered the accounting and legal acquirer for total purchase consideration of approximately $4.3 billion. The transaction was accounted for as a business combination. The Company measured the assets acquired and liabilities assumed at fair value, which resulted in the recognition of approximately $3.2 billion of intangible assets, comprised of customer relationships, developed technology, and trademarks. Auditing the Company’s accounting for its acquisition of Ortho was complex due to the significant estimation uncertainty in determining the fair value of the identified intangible assets. A significant emphasis is placed on the appropriateness of key estimates used by management to determine the fair value of the acquired intangible assets due to sensitivity of the resulting fair values to these underlying assumptions. The Company used an income approach to measure the intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates and customer attrition. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of key controls over the Company's process for determining the fair value of intangible assets acquired. This included controls over management’s development of the above-described assumptions used in the valuation models applied. To test the estimated fair value of the intangible assets, we performed audit procedures that included, among others, evaluating the Company’s use of the income approach and testing the significant assumptions used in the valuation model, as described above. We evaluated the completeness and accuracy of underlying data used in supporting the assumptions and estimates. We evaluated the reasonableness of projected revenue growth used within the valuations against industry trends and other market information. In addition, we involved valuation specialists to assist in assessing the significant assumptions and methodologies used by the Company. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2002. San Diego, California February 23, 2023 74 QUIDELORTHO CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except par value) January 1, 2023 January 2, 2022 ASSETS Current assets: Cash and cash equivalents $ 292.9 $ 802.8 Marketable securities 52.1 25.7 Accounts receivable, net 453.9 378.0 Inventories 524.1 198.8 Prepaid expenses and other current assets 252.1 35.0 Total current assets 1,575.1 1,440.3 Property, plant and equipment, net 1,339.0 349.2 Marketable securities 21.0 37.9 Right-of-use assets 181.0 127.6 Goodwill 2,476.8 337.0 Intangible assets, net 3,123.8 98.7 Deferred tax asset 16.4 20.1 Other assets 122.7 19.6 Total assets $ 8,855.8 $ 2,430.4 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 283.3 $ 101.5 Accrued payroll and related expenses 139.2 40.4 Income tax payable 51.6 66.9 Current portion of borrowings 207.5 0.3 Other current liabilities 325.4 114.4 Total current liabilities 1,007.0 323.5 Operating lease liabilities 186.4 128.6 Long-term borrowings 2,430.8 0.4 Deferred tax liability 213.2 — Other liabilities 83.8 48.5 Total liabilities 3,921.2 501.0 Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, $ 0.001 par value per share; 5.0 shares authorized; none issued or outstanding at January 1, 2023 and January 2, 2022 — — Common stock, $ 0.001 par value per share; 126.2 and 97.5 shares authorized; 66.4 and 41.7 shares issued and outstanding at January 1, 2023 and January 2, 2022, respectively — — Additional paid-in capital 2,804.3 279.8 Accumulated other comprehensive (loss) income ( 67.6 ) 0.4 Retained earnings 2,197.9 1,649.2 Total stockholders’ equity 4,934.6 1,929.4 Total liabilities and stockholders’ equity $ 8,855.8 $ 2,430.4 See accompanying notes. 75 QUIDELORTHO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share data) Fiscal Year Ended 2022 2021 2020 Total revenues $ 3,266.0 $ 1,698.6 $ 1,661.7 Cost of sales, excluding amortization of intangibles 1,330.0 420.3 305.4 Selling, marketing and administrative 621.0 239.6 180.7 Research and development 190.5 95.7 84.3 Amortization of intangible assets 132.5 27.4 27.3 Acquisition and integration costs 136.0 9.6 3.7 Other operating expenses 12.3 — — Operating income 843.7 906.0 1,060.3 Interest expense, net 75.7 5.8 8.5 Loss on extinguishment of debt 24.0 — 10.4 Other expense (income), net 8.1 ( 0.1 ) 1.1 Income before provision for income taxes 735.9 900.3 1,040.3 Provision for income taxes 187.2 196.1 230.0 Net income $ 548.7 $ 704.2 $ 810.3 Basic earnings per share $ 9.66 $ 16.74 $ 19.24 Diluted earnings per share $ 9.56 $ 16.43 $ 18.60 Weighted-average shares outstanding - basic 56.8 42.1 42.1 Weighted-average shares outstanding - diluted 57.4 42.9 43.6 See accompanying notes. 76 QUIDELORTHO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) Fiscal Year Ended 2022 2021 2020 Net income $ 548.7 $ 704.2 $ 810.3 Other comprehensive income (loss) Changes in cumulative translation adjustment, net of tax ( 69.8 ) ( 1.6 ) 2.5 Changes in unrealized losses from investments, net of tax ( 0.4 ) ( 0.1 ) — Changes from pension and other post-employment benefits, net of tax 0.7 — — Changes in unrealized gains (losses) from cash flow hedges, net of tax: Net unrealized gains (losses) on derivative instruments 6.7 0.1 ( 3.0 ) Reclassification of net realized (gains) losses on derivative instruments included in net income ( 5.2 ) 2.4 0.5 Total change in unrealized gains (losses) from cash flow hedges, net of tax 1.5 2.5 ( 2.5 ) Comprehensive income $ 480.7 $ 705.0 $ 810.3 See accompanying notes. 77 QUIDELORTHO CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In millions) Common Stock Shares Par Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders’ equity Balance at December 29, 2019 41.9 $ — $ 425.6 $ ( 0.4 ) $ 134.7 $ 559.9 Issuance of common stock under equity compensation plans 0.5 — 10.4 — — 10.4 Stock-based compensation expense — — 19.0 — — 19.0 Issuance of shares in exchange for Convertible Notes 0.2 — 7.2 — — 7.2 Tax impact from the conversion of Convertible Notes — — 0.1 — — 0.1 Derivative liabilities - Convertible Notes elected to settle in cash — — ( 26.2 ) — — ( 26.2 ) Tax withholdings related to vesting of stock-based awards — ( 4.3 ) ( 4.3 ) Repurchases of common stock ( 0.3 ) — ( 43.7 ) — — ( 43.7 ) Net income — — — — 810.3 810.3 Balance at January 3, 2021 42.3 $ — $ 388.1 $ ( 0.4 ) $ 945.0 $ 1,332.7 Issuance of common stock under equity compensation plans 0.6 — 9.6 — — 9.6 Stock-based compensation expense — — 22.7 — — 22.7 Tax withholdings related to vesting of stock-based awards ( 0.2 ) — ( 37.1 ) — — ( 37.1 ) Repurchases of common stock ( 1.0 ) — ( 103.5 ) — — ( 103.5 ) Other comprehensive income, net of tax — — — 0.8 — 0.8 Net income — — — — 704.2 704.2 Balance at January 2, 2022 41.7 $ — $ 279.8 $ 0.4 $ 1,649.2 $ 1,929.4 Issuance of common stock under equity compensation plans 0.7 — 30.8 — — 30.8 Stock-based compensation expense — — 45.1 — — 45.1 Issuance of shares in connection with the Combinations 25.1 — 2,495.4 — — 2,495.4 Issuance of equity replacement awards in connection with the Combinations — — 36.1 — — 36.1 Tax withholdings related to vesting of stock-based awards ( 0.1 ) — ( 8.6 ) — — ( 8.6 ) Repurchases of common stock ( 1.0 ) — ( 74.3 ) — — ( 74.3 ) Other comprehensive loss, net of tax — — — ( 68.0 ) — ( 68.0 ) Net income — — — — 548.7 548.7 Balance at January 1, 2023 66.4 $ — $ 2,804.3 $ ( 67.6 ) $ 2,197.9 $ 4,934.6 See accompanying notes. 78 QUIDELORTHO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Fiscal Year Ended 2022 2021 2020 OPERATING ACTIVITIES: Net income $ 548.7 $ 704.2 $ 810.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 283.6 52.7 48.8 Stock-based compensation expense 48.4 25.4 21.0 Net change in operating lease right-of-use assets and liabilities 18.4 3.0 0.4 Payment of accreted interest on contingent and deferred consideration ( 10.4 ) ( 8.2 ) — Loss on extinguishment of debt 24.0 — 10.4 Unwind inventory fair value adjustment 60.6 — — Other non-cash, net ( 34.8 ) 31.6 ( 10.0 ) Changes in assets and liabilities: Accounts receivable 150.2 118.9 ( 402.1 ) Inventories ( 116.9 ) ( 85.0 ) ( 54.9 ) Prepaid expenses and other current and non-current assets ( 26.2 ) ( 13.3 ) ( 14.3 ) Accounts payable 23.5 10.4 52.2 Accrued payroll and related expenses 18.2 5.0 16.0 Income taxes payable ( 26.8 ) ( 66.7 ) 137.7 Other current and non-current liabilities ( 75.2 ) 27.9 14.2 Net cash provided by operating activities 885.3 805.9 629.7 INVESTING ACTIVITIES Acquisitions of property, equipment, investments and intangibles ( 140.9 ) ( 292.8 ) ( 64.9 ) Acquisition of businesses, net of cash and restricted cash acquired ( 1,511.4 ) — — Proceeds from government assistance allocated to fixed assets 18.4 36.9 1.6 Purchases of marketable securities ( 63.7 ) ( 67.4 ) — Proceeds from sale of marketable securities 53.4 3.8 — Net cash used for investing activities ( 1,644.2 ) ( 319.5 ) ( 63.3 ) FINANCING ACTIVITIES Proceeds from issuance of common stock 26.4 7.6 9.6 Proceeds from long-term borrowings, net of debt issuance costs 2,734.5 — — Payments on long-term borrowings and extinguishment costs ( 2,388.3 ) ( 0.3 ) ( 0.5 ) Payments of tax withholdings related to vesting of stock-based awards ( 8.6 ) ( 37.1 ) ( 4.3 ) Repurchases of common stock ( 74.3 ) ( 103.5 ) ( 43.7 ) Principal payments of acquisition contingent consideration ( 4.2 ) ( 4.7 ) ( 6.0 ) Principal payments of deferred consideration ( 33.5 ) ( 35.1 ) ( 42.0 ) Payment on Convertible Senior Note and Derivative Liability — — ( 43.4 ) Net cash provided by (used for) financing activities 252.0 ( 173.1 ) ( 130.3 ) Effect of exchange rates on cash ( 2.0 ) ( 0.4 ) 1.0 Net (decrease) increase in cash, cash equivalents and restricted cash ( 508.9 ) 312.9 437.1 Cash, cash equivalents and restricted cash at beginning of period 802.8 489.9 52.8 Cash, cash equivalents and restricted cash at end of period $ 293.9 $ 802.8 $ 489.9 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 95.1 $ — $ 0.5 Cash paid during the period for income taxes $ 264.8 $ 235.6 $ 109.9 Purchase of property, equipment and intangibles by incurring current liabilities $ 40.4 $ 10.5 $ 7.2 Capital expenditures to be reimbursed under a government contract $ — $ — $ 15.9 Transfer of instrument inventories to fixed assets $ 73.7 $ — $ — Reduction of other current liabilities upon issuance of restricted share units $ 4.6 $ 2.0 $ 0.8 Extinguishment of Convertible Notes through issuance of stock $ — $ — $ 7.2 See accompanying notes. 79 QuidelOrtho Corporation Notes to Consolidated Financial Statements Note 1. Basis of Presentation and Summary of Significant Accounting Policies Organization and Business 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. As a result of the Combinations, QuidelOrtho became the successor issuer to Quidel. The results of operations of Ortho have been included in the Company’s Consolidated Financial Statements from the date of acquisition. See Note 2 for further information regarding the Combinations. The Company’s mission is to develop and manufacture intelligent diagnostic solutions that transform the power of diagnostics into a healthier future for everyone. The Company’s expertise in immunoassay and molecular testing, clinical chemistry and transfusion medicine helps clinicians and patients make better informed decisions across the globe. The Company’s global infrastructure and commercial reach support its customers across more than 130 countries and territories with quality diagnostics, a broad test portfolio and market-leading service. The Company operates globally with manufacturing facilities in the U.S. and U.K. and with sales centers, administrative offices and warehouses located throughout the world. Basis of Presentation The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). Accounting Periods The Company follows the concept of a fiscal year that ends on the Sunday nearest to the end of the month of December, and fiscal quarters that end on the Sunday nearest to the end of the months of March, June, and September. For fiscal years 2022, 2021 and 2020, the Company’s fiscal years ended on January 1, 2023, January 2, 2022 and January 3, 2021, respectively. Fiscal years 2022 and 2021 were 52 weeks and fiscal year 2020 was 53 weeks. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and underlying assumptions can impact all elements of the financial statements, including, but not limited to, accounting for deductions from revenues (e.g. rebates, sales allowances, and discounts), receivable and inventory valuations, fixed asset valuations, useful lives, impairment of goodwill and tangible and intangible assets, the fair value of assets acquired and liabilities assumed in a business combination and related purchase price allocation, long-term employee benefit obligations, income taxes, environmental matters, litigation and allocations of costs. Estimates are based on historical experience, complex judgments, facts and circumstances available at the time and various other assumptions that are believed to be reasonable under the circumstances but are inherently uncertain and unpredictable. Actual results could differ from those estimates. Reclassifications Certain prior period amounts were reclassified to conform to the current period presentation, including the separate presentation of Amortization of intangible assets and Interest expense, net, the combination of Selling, marketing and administrative expense, and reclassification of Other current liabilities and Other liabilities, which did not change the reported amounts of Total current liabilities or Total liabilities. Cost of sales, excluding amortization of intangibles for fiscal years 2021 and 2020 excludes $ 7.4 million and $ 7.4 million, respectively, of intangibles amortization expense, formerly included in Cost of sales, which has been reclassified to Amortization of intangible assets. Selling, marketing and administrative expense for fiscal years 2021 and 2020 excludes $ 20.0 million and $ 19.9 million, respectively, of intangibles amortization expense, formerly included in Sales and marketing expense, which has been reclassified to Amortization of intangible assets. The reclassifications did not have an impact on net assets, Operating income, Net income, Basic or Diluted earnings per share, or cash flows. Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers cash equivalents to be highly liquid investments with a maturity at the date of purchase of three months or less. They are carried at cost plus accrued interest, which approximates fair value because of the short-term maturity of these 80 instruments. Cash equivalents include money market funds and debt securities of high quality institutions. Cash balances may exceed government insured limits in certain jurisdictions. Marketable Securities The Company invests excess cash balances in investment-grade corporate debt securities, asset-backed securities and U.S. Treasury securities. The Company seeks to diversify investments and limits the amount of investment concentrations for individual institutions, maturities and investment types. These marketable securities are classified as available-for-sale and, accordingly, such securities are recorded at fair value. Unrealized gains and losses that are deemed temporary are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. If any adjustment to fair value reflects a significant decline in the value of the security, the Company evaluates the extent to which the decline is determined to be other-than-temporary and would mark the security to market through a charge to its Consolidated Statements of Income. Marketable securities are classified as non-current when maturities are one year or more. Accounts Receivable and Allowance for Credit Losses and Concentration of Credit Risk The Company sells its products directly to physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies, wellness screening centers, other POC settings, blood banks and donor centers, as well as to individual, non-professional OTC customers, and other distributors in the U.S. and internationally (see Note 4). The Company periodically assesses the financial strength of these customers and establishes reserves for anticipated losses when necessary, which historically have not been material. The Company establishes a reserve based on historical losses, the age of receivables, customer mix and credit policies, current economic conditions in customers’ country or industry, and expectations associated with reasonable and supportable forecasts, and specific allowances for large or risky accounts. Amounts later determined to be uncollectible are charged or written off against this allowance. T he balance of accounts receivable is net of reserves of $ 89.1 million and $ 52.4 million at January 1, 2023 and January 2, 2022, respectively, of which the reserve related to contract rebates was $ 73.5 million and $ 40.3 million, respectively. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, marketable securities and trade accounts receivable. Credit losses are identified when cash flows received are not expected to be sufficient to recover the amortized cost basis of a security. In the event of a credit loss, only the amount associated with the credit loss is recognized in operating results, with the amount of loss relating to other factors recorded in accumulated other comprehensive income (loss). The Company performs credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral. Credit quality is monitored regularly by reviewing credit history. The Company believes that the concentration of credit risk in its trade accounts receivables is moderated by its credit evaluation process, relatively short collection terms, the high level of credit worthiness of its customers, and letters of credit issued on the Company’s behalf. Potential credit losses are limited to the gross value of accounts receivable. Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. The Company reviews the components of its inventory periodically for excess, obsolete and impaired inventory and records a reduction to the carrying value when identified. Property, Plant and Equipment Property, plant and equipment are recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method as follows: Asset type Useful life Building and building improvements 7 - 47 years Machinery and equipment 3 - 15 years Customer leased instruments 3 - 8 years Computer software 3 - 5 years Amortization of leasehold improvements is computed on the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. When assets are surrendered, retired, sold or otherwise disposed of, their gross carrying values and related accumulated depreciation are removed from the accounts and included in determining gain or loss on such disposals. Maintenance and repairs are expensed as incurred; major replacements and improvements that extend the useful life are capitalized. 81 Goodwill Goodwill represents the excess of purchase price over the fair values of underlying net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level on an annual basis, or whenever events or changes in circumstances occur that indicate that the fair value of a reporting unit is below its carrying amount. Beginning in 2022, the Company changed its annual impairment assessment date from December 31 to the first day of the fourth quarter of the fiscal year. In connection with the Combinations, the manner in which the chief operating decision maker (“CODM”) reviews the Company’s performance and allocates resources changed, resulting in six operating segments: North America, EMEA, China, Latin America, Japan and Asia Pacific. North America, EMEA and China are the Company’s reportable segments; Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” The Company concluded each of these six operating segments is considered a reporting unit for the purpose of allocating goodwill and performing the annual goodwill impairment assessment. Prior to the Combinations, the Company operated as a single reportable segment with one reporting unit. When testing goodwill for impairment, the Company first has an option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that impairment exists. Such qualitative factors may include the following: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity-specific events. In the event the qualitative assessment indicates that an impairment is more likely than not, the Company would be required to perform a quantitative impairment test. Under the quantitative goodwill impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of its reporting units by using forecasts of discounted future cash flows and peer market multiples. If the fair value of a reporting unit is less than its carrying value, impairment will be recognized in the amount by which the carrying value exceeds the fair value. For fiscal year 2022, the Company performed a qualitative goodwill impairment assessment as of the beginning of the fiscal fourth quarter to assess for potential impairment. Based on the qualitative impairment assessment performed by the Company, it was concluded that it is not more likely than not that the fair value of the Company’s reporting units is less than their carrying amounts, and therefore no further impairment testing was necessary. Intangible Assets Intangible assets are recorded at cost and amortized on a straight-line basis over their estimated useful lives, except for indefinite-lived intangibles such as goodwill. Software development costs associated with software to be leased or otherwise marketed are expensed as incurred until technological feasibility has been established. After technological feasibility is established, software development costs are capitalized and amortized on a straight-line basis over the estimated product life. Long-lived Assets The process of evaluating the potential impairment of long-lived assets, such as property, plant and equipment and intangible assets, is subjective and requires judgment. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If these circumstances exist, recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset group to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Convertible Debt The Company accounts for convertible debt instruments that may be settled in cash upon conversion (including combination settlement of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock and/or cash) by separating the liability and equity components of the instruments in a manner that reflects the Company’s nonconvertible debt borrowing rate. The Company determines the carrying amount of the liability component by measuring the fair value of similar debt instruments that do not have the conversion feature. If no similar debt instrument exists, the Company estimates fair value by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. Determining the fair value of the debt component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the debt component, and the associated non-cash interest expense. During fiscal year 2020, the remaining aggregate principal amount of the Company’s Convertible Notes was settled or matured. Revenue Recognition The Company records revenues primarily from product sales. These revenues are recorded net of rebates and other discounts. These rebates and discounts are estimated at the time of sale, and are largely driven by various customer program offerings, 82 including special pricing agreements, promotions and other volume-based incentives. Rebates and discounts are calculated based on historical experience, estimated discounting levels and estimated distributor inventory balances and recorded as a reduction of sales with offsets to accounts receivable and other current liabilities, respectively. Transaction price for a contract represents the amount to which we are entitled in exchange for providing goods and services to the customer. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. Revenue is recognized when control of the products is transferred to the customers in an amount that reflects the consideration the Company expects to receive from the customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract and the contract price, allocating the contract price to the distinct performance obligations in the contract and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. A performance obligation is considered to be satisfied once the control of a product is transferred to the customer or the service is provided to the customer, meaning the customer has the ability to use and obtain the benefit of the goods or service. During fiscal years 2022 and 2021 , the Company generated a portion of its revenue from sales of the QuickVue At-Home OTC COVID-19 tests to retail customers. The Company estimates the transaction price for revenue from sales to retail customers based on historical experience and current trends to evaluate when uncertainties related to right of return provisions are resolved. As of January 1, 2023 and January 2, 2022, due to a lack of history on which to base an estimate of products to be returned from the retailers, the Company established a reserve based on an estimate of total inventory remaining at our retailers which was subject to return. A portion of product sales includes revenues for diagnostic kits, which are utilized on leased instrument systems under the Company’s “reagent rental” program. The reagent rental program provides customers the right to use the instruments at no separate cost to the customer in consideration for a multi-year agreement to purchase annual minimum amounts of consumables (“reagents” or “diagnostic kits”). When an instrument is placed with a customer under a reagent rental agreement, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheets as property, plant and equipment, net. The instrument is depreciated on a straight-line basis over the lesser of the lease term or life of the instrument. Depreciation expense is recorded in cost of sales included in the Consolidated Statements of Income. Instrument and consumables under the reagent rental agreements are deemed two distinct performance obligations. Though the instrument and consumables do not have any use to customers without one another, they are not highly interdependent because they do not significantly affect each other. The Company would be able to fulfill its promise to transfer the instrument even if its customers did not purchase any consumables and the Company would be able to fulfill its promise to provide the consumables even if customers acquired instruments separately. The contract price is allocated between these two performance obligations based on the relative standalone selling prices. The instrument is considered an operating lease and revenue allocated to the instrument was not material for fiscal years 2022, 2021 and 2020. Government Assistance During fiscal year 2020, the Company entered into a contract with the National Institutes of Health (“NIH”), through its newly launched Rapid Acceleration of Diagnostics - Advanced Technology Platforms initiative, to support the Company’s expansion of its manufacturing capacity for its diagnostic assays that test for the SARS-CoV-2 antigen. The contract originally provided for consideration to the Company of up to $ 65.0 million and had a performance period of one year , which began in July 2020. During 2021, the Company entered into several amendments to the contract, which added additional deliverables and milestones, as well as extended the performance period. The contract and amendments included key deliverables and milestones that directly supported the upgrade and addition of new manufacturing lines, as well as the outfitting of the new distribution center. The Company also provided instruments and assays to NIH. There were no refund provisions under the contract. Consideration from the contract was allocated to each deliverable identified within the contract using a relative fair value allocation method and recognized when there was reasonable assurance the Company would meet the milestones and receive the consideration. Consideration allocated to the delivery of instruments and assays was recognized in accordance with the Company’s existing revenue recognition policy described above. Consideration that related to capital expenditures was recorded as a reduction to the carrying value of such assets and amortized over the useful life of the assets. Consideration allocated to the remainder of the contract was recorded as reductions to the related expense. As of January 2, 2022, the Company had achieved and collected payments for all milestones under the NIH contract. In connection with the Combinations, the Company acquired a previously established agreement between Ortho and the Biomedical Advanced Research and Development Authority (“BARDA”), a division of HHS, which provides funding for Ortho to build manufacturing space and production support equipment to increase COVID-19 assay production capacity, as well as to build a manufacturing facility to produce certain analyzers needed to support COVID-19 testing. Amounts received from BARDA under this grant are recorded as a reduction to the carrying value of the related assets. A portion of the grant is 83 for purposes of reimbursement of certain general and administrative expenses related to the project, which are not capitalized as part of the equipment constructed in connection with the project and are recorded as a reduction to the related expense. The Company received $ 18.4 million during fiscal year 2022, which was recorded as a reduction to the carrying value of the related assets. Research and Development Costs Research and development costs are charged to operations as incurred. Upfront and milestone payments made to third parties in connection with R&D collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties at or subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization. The Company enters into collaborative arrangements to develop and commercialize intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including R&D, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. Product Shipment Costs Product shipment costs are included in Selling, marketing and administrative expense in the accompanying Consolidated Statements of Income. Shipping and handling costs were $ 104.9 million, $ 29.3 million and $ 14.2 million for fiscal years 2022, 2021 and 2020, respectively. Advertising Costs Advertising costs are expensed as incurred and included in Selling, marketing and administrative expense in the accompanying Consolidated Statements of Income. Advertising costs were $ 26.8 million, $ 13.7 million and $ 1.1 million for fiscal years 2022, 2021 and 2020, respectively. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company’s policy is to recognize the interest expense and penalties related to income tax matters as a component of the income tax provision. The Company does not intend to permanently reinvest earnings of foreign subsidiaries at this time. As such, the Company provides for income taxes and foreign withholding taxes, where applicable, on undistributed earnings. Any repatriation of undistributed earnings would be done at little or no tax cost. Fair Value of Financial Instruments The Company uses the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires that the valuation of assets and liabilities subject to fair value measurements be classified and disclosed by the Company in one of the following three categories: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities approximate their fair values due to their short-term nature. 84 Stock-based Compensation Stock-based compensation, comprised of stock options, restricted stock units (“RSUs”) and restricted stock awards to employees and directors, is measured at fair value on the grant date. Compensation expense is recognized over the requisite service period, which is generally the vesting period, and includes an estimate of the awards that will be forfeited, and an estimate of the level of performance the Company will achieve for performance-based awards. Leases Lease liabilities represent the obligation to make lease payments and right-of-use (“ROU”) assets represent the right to use the underlying asset during the lease term. Lease liabilities and ROU assets are recognized at the commencement date of the lease based on the present value of lease payments over the lease term at the commencement date. When the implicit rate is unknown, an incremental borrowing rate based on the information available at the commencement date is used in determining the present value of the lease payments. Options to extend or terminate the lease are included in the determination of the lease term when it is reasonably certain that the Company will exercise such options. For certain classes of assets, the Company accounts for lease and non-lease components as a single lease component. Variable lease payments, including those related to changes in the consumer price index, are recognized in the period in which the obligation for those payments is incurred and are not included in the measurement of the ROU assets or lease liabilities. Short-term leases are excluded from the calculation of the ROU assets and lease liabilities. Operating leases are included in ROU assets, operating lease liabilities and operating lease liabilities non-current in the Consolidated Balance Sheets. Comprehensive Income Comprehensive income includes unrealized gains and losses that are related to cumulative translation adjustments; unrealized gains and losses on marketable securities; changes in unamortized pension and post-employment actuarial gains and losses; and changes in the fair value of derivatives that are designated and qualify as cash flow hedging instruments excluded from the Consolidated Statements of Income. Business Combinations The cost of an acquired business is assigned to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of the estimated fair values at the date of acquisition. The Company assesses fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, using a variety of methods including, but not limited to, an income approach and a market approach, such as the estimation of future cash flows of the acquired business and current selling prices of similar assets. Fair value of the assets acquired and liabilities assumed, including intangible assets, IPR&D, and contingent payments, are measured based on the assumptions and estimations with regards to variable factors such as the amount and timing of future cash flows for the asset or liability being measured, appropriate risk-adjusted discount rates, nonperformance risk, or other factors that market participants would consider. Upon acquisition, the Company determines the estimated economic lives of the acquired intangible assets for amortization purposes, which are based on the underlying expected cash flows of such assets. When applicable, adjustments to inventory are based on the fair market value of inventory and are recognized into income based on the period in which the underlying inventory is sold. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that is not individually identified and separately recognized. Actual results may vary from projected results and assumptions used in the fair value assessments. Defined Benefit Plans and Other Post-Employment Benefits In connection with the Combinations, the Company assumed Ortho’s defined benefit plans in certain countries and a retiree healthcare reimbursement plan for certain U.S. employees. Defined benefit plans specify an amount of pension benefit that an employee will receive on retirement, usually dependent on factors such as age, years of service and compensation. The net obligation with respect to defined benefit plans is calculated separately for each plan by estimating the amount of the future benefits that employees have earned in return for their service in the current and prior periods. These benefits are then discounted to determine the present value of the obligations and are then adjusted for the impact of any unamortized prior service costs. The net obligation is then determined with reference to the fair value of the plan assets (if any). The discount rate used is the yield on bonds that are denominated in the currency in which the benefits will be paid and that have maturity dates approximating the terms of the obligations. The calculations are performed by qualified actuaries using the projected unit credit method. Recent Accounting Pronouncements In October 2021, the Financial Accounting Standards Board issued guidance which was codified in Accounting Standards Update 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts 85 with Customers . Under the new guidance, an acquirer is required to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers . For public business entities, this guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company early adopted the guidance during the first quarter of 2022 with no material impact to the Consolidated Financial Statements. Note 2. Business Combination 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. As a result of the Combinations, QuidelOrtho became the successor issuer to Quidel. The Combinations have been accounted for as a business combination using the acquisition method of accounting in conformity with ASC Topic 805, Business Combinations , with Quidel considered the accounting and the legal acquirer. The Combinations enhance the Company’s revenue profile and expand the Company’s geographic footprint and product diversity. The Combinations were completed for a total consideration of approximately $ 4.3 billion, which included the fair value of equity issued based on the May 26, 2022 closing price of $ 99.60 per share of Quidel common stock. Former Ortho shareholders received $ 7.14 in cash and 0.1055 shares of QuidelOrtho common stock for each Ortho ordinary share. The total purchase consideration was calculated as follows (in millions, except value per share data and Ortho Exchange Ratio): Total Ortho shares subject to exchange 237.487 Ortho Exchange Ratio 0.1055 QuidelOrtho shares issued 25.055 Value per Quidel share as of May 26, 2022 $ 99.60 Fair value of stock consideration $ 2,495.5 Fair value of replacement equity awards (1) 47.9 Cash consideration (2) 1,747.7 Total purchase consideration $ 4,291.1 (1) Represents the fair value of replacement stock options (which include options with time-based, performance-based, and both performance- and market-based vesting conditions), RSUs and restricted stock outstanding as of May 27, 2022 that are attributable to service prior to the Combinations. The terms of the replacement awards are substantially similar to the former Ortho equity awards for which they were exchanged. The portion of the fair value of the replacement equity awards attributable to service after the Combinations is $ 46.6 million and will be recognized as compensation expense based on the vesting terms of the replacement equity awards. (2) Represents cash consideration of $ 7.14 per share paid to Ortho shareholders and holders of vested Ortho stock options on the closing date of the Combinations for 237.5 million outstanding Ortho shares and 7.3 million vested Ortho stock options. The Company funded the cash portion of the purchase price with cash on its balance sheet and a portion of the Term Loan (as defined in Note 8) proceeds from the Financing (as defined in Note 8). See Note 8 for further information regarding the Company’s debt. 86 The components of the preliminary purchase price allocation on the closing date of the Combinations are as follows: (In millions) Amounts Recognized as of Acquisition Date (as previously reported) Measurement Period Adjustments Amounts Recognized as of Acquisition Date (as adjusted) Cash and cash equivalents $ 234.5 $ — $ 234.5 Accounts receivable 240.6 — 240.6 Inventories 386.8 ( 2.4 ) 384.4 Property, plant and equipment 767.5 181.4 948.9 Goodwill 2,291.3 ( 112.9 ) 2,178.4 Intangible assets 3,133.0 35.0 3,168.0 Prepaid expenses and other assets 287.9 ( 16.2 ) 271.7 Total assets 7,341.6 84.9 7,426.5 Accounts payable ( 135.0 ) — ( 135.0 ) Accrued payroll and related expenses ( 80.7 ) ( 0.4 ) ( 81.1 ) Long-term borrowings, including current portion (1) ( 2,268.4 ) — ( 2,268.4 ) Deferred tax liability ( 215.4 ) ( 63.0 ) ( 278.4 ) Other current and non-current liabilities ( 351.0 ) ( 21.5 ) ( 372.5 ) Total liabilities ( 3,050.5 ) ( 84.9 ) ( 3,135.4 ) Total purchase consideration $ 4,291.1 $ — $ 4,291.1 (1) Immediately following the closing of the Combinations, the Company repaid long-term borrowings assumed, which consisted of $ 1,608.4 million aggregate principal amount related to Ortho’s Dollar Term Loan and Euro Term Loan Facilities, $ 240.0 million aggregate principal amount of 7.375 % Senior Notes due 2025 and $ 405.0 million aggregate principal amount of 7.250 % Senior Notes due 2028. The 7.375 % and 7.250 % Senior Notes were fully discharged following the Combinations. The Company recorded a $ 23.5 million loss on extinguishment in connection with the Combinations, representing the difference between the reacquisition value, inclusive of $ 35.9 million of redemption premium, and the net carrying value of the extinguished debt. The fair value estimates for the assets acquired and liabilities assumed were based on preliminary calculations, and the Company’s estimates and assumptions are subject to change for income tax matters. The Company expects to finalize the valuation as soon as practicable, but no later than one year after the closing date of the Combinations. The measurement period adjustments in the six months ended January 1, 2023 primarily resulted from completing valuations of real estate, personal property and intangible assets and revising the valuation of income tax liabilities. The related impact to net earnings that would have been recognized in previous periods if the adjustments were recognized as of the acquisition date is immaterial to the Consolidated Financial Statements. Inventories acquired included raw materials, work in progress and finished goods. Inventories were recorded at their estimated fair values. Inventories were valued at the estimated selling price less the estimated costs to be incurred to complete and sell the inventories, the associated margins on these activities and holding costs. A step-up in the value of inventory of $ 61.7 million was recorded in connection with the Combinations. The step-up value was recorded in Cost of sales, excluding amortization of intangibles in the Consolidated Statements of Income as the inventory was sold to customers, and was fully recognized by the end of fiscal year 2022. In fiscal year 2022, $ 60.6 million of the fair value step-up of inventory was recognized in the Consolidated Statements of Income. Goodwill represents the excess of the total purchase consideration over the estimated fair value of the net assets acquired, and is primarily attributable to synergies which are expected to expand the Company’s revenue profile and product diversity, as well as Ortho’s assembled workforce. Goodwill is not deductible for tax purposes. The preliminary assignment of goodwill by reportable segment as of the closing date of the Combinations is as follows (in millions): North America $ 1,211.5 EMEA 370.0 China 121.6 Other 475.3 $ 2,178.4 87 The following table sets forth the amounts assigned to the identifiable intangible assets acquired (in millions, except years): Intangible Asset Amortization Period Fair Value of Assets Acquired Customer relationships 20 years $ 1,907.0 Developed technology 15 years 888.0 Trademarks 15 years 373.0 $ 3,168.0 The fair value of customer relationships was estimated using the Multi-Period Excess Earnings Method, which is a form of the income approach. Significant assumptions include: (i) the estimated annual net cash flows, which are a function of expected earnings attributable to the asset, contributory asset charges and the applicable tax rate, and (ii) the discount rate. The fair value of developed technology and trademarks was estimated using the Relief from Royalty Method, which is another form of the income approach. Significant assumptions include: (i) the estimated annual net cash flows, which are a function of expected earnings attributable to the asset, the probability of use of the asset, the royalty rate and the applicable tax rate, and (ii) the discount rate. Intangible assets are amortized on a straight-line basis over the amortization periods noted above, which reflects the estimated useful life of the underlying assets. For fiscal year 2022, the Company incurred $ 46.9 million of transaction costs related to the Combinations, which primarily consisted of financial advisory, legal, accounting and valuation-related expenses. These expenses were recorded in Acquisition and integration costs in the Consolidated Statements of Income. The following supplemental pro forma financial information shows the combined results of operations of the Company as if the Combinations had occurred on January 4, 2021, the beginning of the periods presented: Fiscal Year Ended (In millions) (unaudited) 2022 2021 Pro forma total revenues $ 4,051.2 $ 3,741.4 Pro forma net income 589.3 613.2 This supplemental pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the Combinations been completed at the beginning of fiscal year 2021. In addition, the supplemental pro forma financial information is not a projection of the Company’s future results of operations, nor does it reflect the expected realization of any synergies or cost savings associated with the Combinations. The supplemental pro forma financial information includes adjustments for: • incremental intangible assets amortization expense to be incurred of $ 19.6 million and $ 45.5 million for fiscal years 2022 and 2021, respectively, based on the preliminary fair values of the identifiable intangible assets acquired; • incremental cost of sales related to the fair value step-up of inventory which is reflected by an adjustment to decrease expense by $ 60.6 million for fiscal year 2022 and an adjustment to increase expense by $ 61.7 million for fiscal year 2021; • decreases in interest expense of $ 11.2 million and $ 34.9 million for fiscal years 2022 and 2021, respectively, associated with the issuance of debt to finance the Combinations and to repay Ortho’s then-outstanding indebtedness, including the net impact of the removal of the amortization of the discount on Ortho’s indebtedness and the change in amortization of deferred financing fees; • the removal of $ 50.3 million of loss on extinguishment of debt from Ortho’s financial results for fiscal year 2022 and the reclassification of $ 24.0 million of loss on extinguishment of debt incurred during fiscal year 2022 to fiscal year 2021; • the reclassification of $ 12.8 million of expense related to the accelerated vesting of certain stock awards of Ortho’s former chief executive officer from fiscal year 2022 to fiscal year 2021; and • tax impacts related to the above adjustments. From the closing date of the Combinations through January 1, 2023, the acquired results of operations of Ortho contributed total revenues of $ 1,165.2 million and net loss of $ 126.2 million to the Company’s consolidated results, which included amortization of acquired intangible assets of $ 104.7 million and recognition in Cost of sales, excluding amortization of intangibles of the fair value step-up of inventory of $ 60.6 million. 88 Note 3. Computation of Earnings Per Share Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted EPS is computed based on the sum of the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares of common stock consist of shares issuable from stock options, unvested RSUs and restricted stock. Potentially dilutive shares of common stock from outstanding stock options and unvested RSUs are determined using the average share price for each period under the treasury stock method. Potentially dilutive common shares from the Convertible Notes are determined using the if-converted method. Under the provisions of the if-converted method, the Convertible Notes are assumed to be converted and the resulting common shares are included in the denominator of the EPS calculation and the interest expense, net of tax, recorded in connection with the Convertible Notes is added back to net income. The Convertible Notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the notes. The Convertible Notes became convertible on March 31, 2018 and matured on December 15, 2020. The following table reconciles net income and the weighted-average shares used in computing basic and diluted EPS in the respective periods: Fiscal Year Ended (In millions) 2022 2021 2020 Numerator: Net income used for basic earnings per share $ 548.7 $ 704.2 $ 810.3 Interest expense on Convertible Notes, net of tax — — 0.4 Net income used for diluted earnings per share, if-converted method $ 548.7 $ 704.2 $ 810.7 Denominator: Basic weighted-average shares of common stock outstanding 56.8 42.1 42.1 Dilutive potential shares issuable from Convertible Notes — — 0.3 Dilutive potential shares issuable from stock options and unvested RSUs 0.6 0.8 1.2 Diluted weighted-average shares of common stock outstanding 57.4 42.9 43.6 Potentially dilutive shares excluded from calculation due to anti-dilutive effect 1.5 0.2 — Potentially dilutive shares excluded from the calculation above represent stock options when the combined exercise price and unrecognized stock-based compensation are greater than the average market price for the Company’s common stock because their effect is anti-dilutive. Note 4. Revenue Contract Balances Timing of revenue recognition may differ from timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing a customer (a “contract asset”). Contract assets are included within Prepaid expenses and other current assets or Other assets in the Company’s Consolidated Balance Sheets and are transferred to accounts receivable when the right to payment becomes unconditional. The balance of contract assets recorded in the Company’s Consolidated Balance Sheets as of January 1, 2023 was $ 49.6 million and was included in Prepaid expenses and other current assets. The contract asset balance as of January 1, 2023 consisted of the following components, all of which related to agreements acquired by the Company in connection with the Combinations; therefore, no balance existed at January 2, 2022: • a customer supply agreement under which the difference between the timing of invoicing and revenue recognition resulted in a contract asset of $ 6.8 million; • contractual arrangements with certain customers under which the Company invoices the customers based on reportable results generated by its reagents; however, control of the goods transfers to the customers upon shipment or delivery of the products, as determined under the terms of the contract. Using the expected value method, the Company estimates the number of reagents that will generate a reportable result. The Company records the revenue upon shipment and an associated contract asset, and relieves the contract asset upon completion of the invoicing. The balance of the contract asset related to these arrangements was $ 38.5 million as of January 1, 2023 and was recorded in Prepaid expenses and other current assets; and 89 • one of the Company’s contract manufacturing agreements that recognizes revenue as the products are manufactured. The balance of the contract asset related to this arrangement was $ 4.3 million as of January 1, 2023. The Company reviews contract assets for expected credit losses resulting from the collectability of customer accounts. Expected losses are established based on historical losses, customer mix and credit policies, current economic conditions in customers’ country or industry, and expectations associated with reasonable and supportable forecasts. No credit losses related to contract assets were recognized during fiscal year 2022. The Company recognizes a contract liability when a customer pays an invoice prior to the Company transferring control of the goods or services (“contract liabilities”). The Company’s contract liabilities consist of deferred revenue primarily related to customer service contracts. The Company classifies deferred revenue as current or non-current based on the timing of the transfer of control or performance of the service. The balance of the Company’s current deferred revenue was $ 76.4 million as of January 1, 2023, and $ 1.9 million as of January 2, 2022. The Company has one arrangement with a customer where the revenue is expected to be recognized beyond one year. The balance of the deferred revenue included in long-term liabilities was $ 9.4 million as of January 1, 2023 and was included in Other liabilities in the Consolidated Balance Sheets. There was no deferred revenue included in long-term liabilities as of January 2, 2022. Joint Business with Grifols In connection with the Combinations, the Company acquired the Joint Business between Ortho and Grifols, under which Ortho and Grifols agreed to pursue a collaboration relating to Ortho’s Hepatitis and HIV diagnostics business. The governance of the Joint Business is shared through a supervisory board made up of equal representation by Ortho and Grifols, which is responsible for all significant decisions relating to the Joint Business that are not exclusively assigned to either Ortho or Grifols, as defined in the Grifols Agreement. The Company’s portion of the pre-tax net profit shared under the Joint Business was $ 18.6 million during fiscal year 2022. This included the Company’s portion of the pre-tax net profit of $ 11.1 million during fiscal year 2022 on sales transactions with third parties where the Company is the principal. The Company recognized revenues, cost of sales, excluding amortization of intangibles, and operating expenses, on a gross basis on these sales transactions in their respective lines in the Consolidated Statements of Income. The Company’s portion of the pre-tax net profit also included revenue of $ 7.5 million from collaboration and royalty agreements during fiscal year 2022, which is presented on a net basis within Total revenues. Disaggregation of Revenue Following the Combinations, the Company reorganized its former product categories into four business units. Revenues from the Company’s former Specialized Diagnostic Solutions product category have been included in a new Labs business unit. The Company’s former Rapid Immunoassay and Cardiometabolic Immunoassay product categories now represent its Point of Care business unit. The Molecular Diagnostics business unit represents the former Molecular Diagnostic Solutions product category. In addition, the Company added a Transfusion Medicine business unit. The following table summarizes Total revenues by business unit: Fiscal Year Ended (In millions) 2022 2021 2020 Labs $ 820.2 $ 44.8 $ 50.9 Transfusion Medicine 393.8 — — Point of Care 1,955.3 1,453.3 1,387.8 Molecular Diagnostics 96.7 200.5 223.0 Total revenues $ 3,266.0 $ 1,698.6 $ 1,661.7 90 Concentration of Revenue and Credit Risk The Company had sales to individual customers in excess of 10% of Total revenues as follows: Fiscal Year Ended 2022 2021 2020 Customer: A 20 % 1 % — % B 11 % 24 % 29 % C 8 % 9 % 16 % D 5 % 9 % 13 % E 3 % 7 % 10 % 47 % 50 % 68 % As of January 1, 2023 and January 2, 2022, customers with balances due in excess of 10% of Accounts receivable, net totaled $ 161.9 million and $ 267.3 million, respectively. For fiscal years 2022, 2021 and 2020, sales of COVID-19 products accounted for 44 %, 75 % and 70 % of Total revenues, respectively. For fiscal years 2022, 2021 and 2020, sales of influenza products accounted for 11 %, 4 % and 8 % of Total revenues, respectively. Note 5. Segment and Geographic Information In connection with the Combinations, the manner in which the CODM reviews the Company’s performance and allocates resources changed, resulting in three geographically-based reportable segments: North America; EMEA; and China. Although all three segments are engaged in the marketing, distribution and sale of diagnostic instruments and assays for hospitals, retailers, distributors, laboratories and/or blood and plasma centers worldwide, each region is managed separately to better align with the market dynamics of the specific geographic region. Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” Previously, the Company operated as a single reportable segment. Prior periods have been revised to align with the current period presentation. Total revenues by reportable segment are as follows: Fiscal Year Ended (In millions) 2022 2021 2020 North America $ 2,536.5 $ 1,500.2 $ 1,460.7 EMEA 206.8 69.6 92.9 China 220.0 58.0 62.4 Other 302.7 70.8 45.7 Total revenues $ 3,266.0 $ 1,698.6 $ 1,661.7 Beginning in the second quarter of 2022, in connection with the Combinations, the basis by which the Company measures segment profit or loss changed to Adjusted EBITDA in order to manage the Company’s business to better align with the market dynamics of the specific geographic regions in which the Company operates. In the fourth quarter of 2022, the Company revised the internal allocation of certain global costs primarily between the North America segment and Corporate to better align costs that impact the Company as a whole. Prior periods have been revised to align with the current period presentation. 91 The following table sets forth Adjusted EBITDA by segment and the reconciliations to Income before provision for income taxes for fiscal years 2022, 2021 and 2020: Fiscal Year Ended (In millions) 2022 2021 2020 North America $ 1,614.6 $ 1,028.5 $ 1,205.2 EMEA 31.7 28.1 55.5 China 104.1 24.1 30.5 Other 92.7 43.0 28.0 Total segment Adjusted EBITDA 1,843.1 1,123.7 1,319.2 Corporate (1) ( 512.1 ) ( 152.9 ) ( 203.9 ) Depreciation and amortization ( 283.6 ) ( 52.7 ) ( 48.8 ) Acquisition and integration costs ( 136.0 ) ( 9.6 ) ( 3.7 ) Interest expense, net ( 75.7 ) ( 5.8 ) ( 8.5 ) Unwind inventory fair value adjustment ( 60.6 ) — — Loss on extinguishment of debt ( 24.0 ) — ( 10.4 ) (Loss) gain on investments ( 5.8 ) 1.5 — Amortization of deferred cloud computing implementation costs ( 5.4 ) ( 3.7 ) ( 1.1 ) Employee compensation charges and other costs ( 3.7 ) — — Impairment of long-lived assets ( 2.8 ) — — EU medical device regulation transition costs (2) ( 1.5 ) — — Tax indemnification expense ( 0.3 ) — — Change in fair value of acquisition contingencies ( 0.1 ) ( 0.2 ) ( 1.4 ) Derivative mark-to-market gain (loss) 4.4 — ( 1.1 ) Income before provision for income taxes $ 735.9 $ 900.3 $ 1,040.3 (1) Primarily consists of costs related to executive and staff functions, including certain finance, human resources, manufacturing and IT functions, which benefit the Company as a whole. These costs are primarily related to the general management of these functions on a corporate level and the design and development of programs, policies and procedures that are then implemented in the individual segments, with each segment bearing its own cost of implementation. The Company’s corporate function also includes debt and stock-based compensation associated with all employee stock-based awards. (2) Represents incremental consulting costs and R&D manufacturing site costs to align compliance of Ortho’s existing, on-market products that were previously registered under the European In Vitro Diagnostics Directive regulatory framework with the requirements under the EU’s In Vitro Diagnostic Regulation, which generally apply from May 2022 onwards. The CODM does not review capital expenditures, total depreciation and amortization or assets by segment, and therefore this information has been excluded as it does not comprise part of management’s key performance metrics. The following presents long-lived assets (excluding intangible assets) and total net revenue by geographic territory: Long-lived Assets as of Total Revenues for Fiscal Year (In millions) January 1, 2023 January 2, 2022 2022 2021 2020 Domestic $ 983.0 $ 347.1 $ 2,451.7 $ 1,415.5 $ 1,452.4 Foreign 356.0 2.1 814.3 283.1 209.3 Total $ 1,339.0 $ 349.2 $ 3,266.0 $ 1,698.6 $ 1,661.7 92 Note 6. Income Taxes Significant components of the provision for income taxes were as follows: Fiscal Year Ended (In millions) 2022 2021 2020 Current: Federal $ 162.2 $ 148.8 $ 198.5 State 48.8 42.4 34.6 Foreign 17.6 2.3 1.1 Total current provision 228.6 193.5 234.2 Deferred: Federal ( 31.9 ) 7.2 ( 2.9 ) State ( 9.3 ) ( 2.6 ) ( 1.0 ) Foreign ( 0.2 ) ( 2.0 ) ( 0.3 ) Total deferred provision (benefit) ( 41.4 ) 2.6 ( 4.2 ) Provision for income taxes $ 187.2 $ 196.1 $ 230.0 The Company’s income before income taxes was subject to taxes in the following jurisdictions for the following periods: Fiscal Year Ended (In millions) 2022 2021 2020 United States $ 672.1 $ 891.2 $ 1,035.7 Foreign 63.8 9.1 4.6 Income before income taxes $ 735.9 $ 900.3 $ 1,040.3 Significant components of the Company’s deferred tax assets and deferred tax liabilities as of January 1, 2023 and January 2, 2022 are shown below: (In millions) January 1, 2023 January 2, 2022 Deferred tax assets: Lease liability $ 51.4 $ 32.7 Intangible assets — 2.2 Allowance for returns and discounts 45.9 28.3 Inventory reserve 34.1 6.4 Stock-based compensation 14.6 9.2 Tax loss and credit carryforwards 565.3 10.8 Research & development expenses 50.7 — Employee related obligations 19.9 5.5 Other, net 16.1 0.8 Total deferred tax assets 798.0 95.9 Valuation allowance for deferred tax assets ( 251.3 ) ( 2.3 ) Total deferred tax assets, net of valuation allowance 546.7 93.6 Deferred tax liabilities: Right-of-use assets ( 43.8 ) ( 30.1 ) Intangible assets ( 590.2 ) ( 0.9 ) Property, plant and equipment ( 109.5 ) ( 42.5 ) Total deferred tax liabilities ( 743.5 ) ( 73.5 ) Net deferred tax assets (liabilities) $ ( 196.8 ) $ 20.1 Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. For the fiscal years ended January 1, 2023, January 2, 2022 and January 3, 2021, the Company has demonstrated positive cumulative pre-tax book income. Such objective positive evidence allowed the 93 Company to consider other subjective evidence, such as the Company’s projections for future profitability, to determine the realizability of its deferred tax assets. The valuation allowance of $ 251.3 million as of January 1, 2023 represents the portion of the deferred tax asset that management could not conclude was more likely than not to be realized. The Company’s valuation allowance relates primarily to the realization of recorded tax benefits on tax loss carryforwards from operations in Luxembourg and certain U.S. state jurisdictions. The amount of the deferred tax assets considered realizable could be adjusted in the future based on changes in available positive and negative evidence. As of January 1, 2023, the Company had U.S. federal net operating loss (“NOL”) carryforwards of $ 879.8 million, of which $ 473.0 million are subject to expiration through 2037 and $ 406.8 million are not subject to expiration. In addition, the Company has state NOLs of approximately $ 530.1 million, which will expire in years 2023 through 2042. As of January 1, 2023, the Company had U.S. federal research credit carryforwards of $ 14.2 million and federal foreign tax credits of $ 3.4 million, which will begin to expire in 2034 and 2028, respectively. In addition, the Company had state research credits of $ 5.9 million, of which none expire, and state business credit carryforwards of $ 25.6 million, which will begin to expire in 2029. As of January 1, 2023, the Company had $ 543.8 million of NOL carryforwards in certain non-U.S. jurisdictions, net of uncertain tax positions. Of these, $ 339.1 million have no expiration and the remaining $ 204.7 million will expire in years through 2042. Pursuant to Internal Revenue Code Sections 382 and 383, the Company’s use of its NOL and tax credit carryforwards may be limited as a result of cumulative changes in ownership of more than 50 % over a three-year period. As a result of an ownership change that occurred in the second quarter of fiscal year 2022, the Company may be limited in its ability to utilize its NOL carryforwards and certain other attributes, starting the ownership change date. The reconciliation of income tax computed at the federal statutory rate to the provision for income taxes from continuing operations was as follows: Fiscal Year Ended (In millions) 2022 2021 2020 Tax expense at statutory tax rate $ 154.5 $ 189.1 $ 218.5 State tax expense, net of federal tax 29.3 30.1 30.3 Foreign income taxed at rates other than the applicable U.S. rate ( 27.5 ) — — Permanent differences 12.0 1.8 3.8 Federal and state research credits—current year ( 7.3 ) ( 7.7 ) ( 5.0 ) Stock-based compensation 1.5 ( 9.2 ) ( 13.9 ) Change in valuation allowance 26.2 ( 0.1 ) ( 0.1 ) Foreign Derived Intangible Income Deduction (FDII) ( 10.2 ) ( 8.4 ) ( 8.6 ) Other 8.7 0.5 5.0 Provision for income taxes $ 187.2 $ 196.1 $ 230.0 The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 % likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes. The following table summarizes the activity related to the Company’s unrecognized tax benefits: Fiscal Year Ended (In millions) 2022 2021 2020 Beginning balance $ 17.7 $ 22.6 $ 17.2 Increases due to current year acquisitions 27.8 — — Increases (decreases) related to prior year tax positions ( 0.6 ) 0.5 ( 2.3 ) Increases related to current year tax positions 1.8 0.9 7.7 Decreases from voluntary disclosure agreements — ( 6.3 ) — Decreases due to settlements ( 6.7 ) — — Ending balance $ 40.0 $ 17.7 $ 22.6 94 As of January 1, 2023, January 2, 2022 and January 3, 2021, the Company had unrecognized tax benefits of $ 40.0 million, $ 17.7 million, and $ 22.6 million, respectively, of which $ 28.3 million, $ 11.3 million and $ 15.0 million, respectively, would reduce the Company’s annual effective tax rate, if recognized. The Company estimates that within the next 12 months, its uncertain tax positions, excluding interest, will decrease by $ 2.4 million. The uncertain tax positions relate to an on-going multi-state tax commission audit that is expected to be settled within the next 12 months. The Company’s policy is to recognize the interest expense and penalties related to income tax matters as a component of the income tax expense. The Company had accrued interest and penalties associated with uncertain tax positions of $ 8.3 million as of January 1, 2023 and $ 1.2 million as of January 2, 2022. Interest expense, net of accrued interest (reversed) for fiscal years 2022, 2021 and 2020 was approximately $ 0.3 million, $ 0.7 million and $ 0.1 million, respectively. The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized credits, the Company’s federal tax years from 2012 and onwards are subject to examination by the U.S. authorities. The Company’s state and foreign tax years for 2001 and onwards are subject to examination by applicable tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. Ortho is currently under audit in certain jurisdictions for tax years under the responsibility of Johnson & Johnson. Pursuant to the stock and asset purchase agreement entered into by Ortho and Johnson & Johnson in January 2014, Johnson & Johnson retained all income tax liabilities accrued as of the date of acquisition, including reserves for unrecognized tax benefits. Accordingly, all tax liabilities related to these tax years will be indemnified by Johnson & Johnson. As of January 1, 2023, the indemnification receivable from Johnson & Johnson totaled $ 16.8 million and is included as a component of Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheet. The following table summarizes the changes to the valuation allowance for balances for fiscal years 2022, 2021 and 2020: Beginning Balance Additions Due to Current Year Acquisitions Additions (Deductions) Charged to Provision for (Benefit From) Income Taxes Currency Translation/Other Ending Balance Deferred tax valuation allowance Fiscal year ended January 1, 2023 $ 2.3 223.5 26.2 ( 0.7 ) $ 251.3 Fiscal year ended January 2, 2022 $ 2.3 — — — $ 2.3 Fiscal year ended January 3, 2021 $ 2.4 — ( 0.1 ) — $ 2.3 Note 7. Balance Sheet Account Details Cash, Cash Equivalents and Restricted Cash (In millions) January 1, 2023 January 2, 2022 Cash and cash equivalents $ 292.9 $ 802.8 Restricted cash included in Other assets 1.0 — Cash, cash equivalents and restricted cash $ 293.9 $ 802.8 95 Marketable Securities The following table is a summary of marketable securities: January 1, 2023 January 2, 2022 (In millions) Amortized Cost Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Losses Fair Value Corporate bonds 40.5 $ ( 0.5 ) $ 40.0 $ 22.3 $ — $ 22.3 Corporate asset-backed securities 6.7 — 6.7 3.4 — 3.4 U.S. government securities 2.0 — 2.0 — — — Agency bonds 1.0 — 1.0 — — — Sovereign government bonds 1.9 — 1.9 — — — Foreign and other 0.5 — 0.5 — — — Total marketable securities, current 52.6 ( 0.5 ) 52.1 25.7 — 25.7 Corporate bonds, non-current 13.3 ( 0.1 ) 13.2 26.8 ( 0.1 ) 26.7 Corporate asset-backed securities, non-current 7.9 ( 0.1 ) 7.8 11.2 — 11.2 Total marketable securities $ 73.8 $ ( 0.7 ) $ 73.1 $ 63.7 $ ( 0.1 ) $ 63.6 Accounts Receivable, Net Accounts receivables primarily consist of trade accounts receivables with maturities of one year or less and are presented net of reserves: (In millions) January 1, 2023 January 2, 2022 Accounts receivable $ 543.0 $ 430.4 Allowance for contract rebates and discounts ( 77.1 ) ( 50.7 ) Allowance for doubtful accounts ( 12.0 ) ( 1.7 ) Total accounts receivable, net $ 453.9 $ 378.0 The allowance for contractual rebates involves estimating adjustments to revenue based on a high volume of data, including inputs from third-party sources. In addition, the determination of such adjustments includes estimating rebate percentages which are dependent on estimated end-user sales mix and customer contractual terms, which vary across customers, the related balance of which was $ 40.0 million and $ 40.3 million at January 1, 2023 and January 2, 2022, respectively, and was included in the allowance for contract rebates and discounts. The following table summarizes changes to the accounts receivable allowance balances for fiscal years 2022, 2021 and 2020: Balance at Beginning of Period Additions Charged to Expense or as Reductions to Revenue (1) Deductions (2) Balance at end of period (In millions) Fiscal year ended January 1, 2023 $ 52.4 $ 407.6 $ ( 370.9 ) $ 89.1 Fiscal year ended January 2, 2022 $ 103.4 $ 456.2 $ ( 507.2 ) $ 52.4 Fiscal year ended January 3, 2021 $ 15.9 $ 277.0 $ ( 189.5 ) $ 103.4 (1) Includes opening balance of $ 31.4 million related to the Combinations during fiscal year 2022. Primarily represents charges for contract rebate allowances recorded as reductions to revenue. Additions to allowance for doubtful accounts are recorded to selling, marketing and administrative expense. (2) The deductions represent actual charges against the accrual described above. 96 Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following: (In millions) January 1, 2023 January 2, 2022 Raw materials $ 185.2 $ 103.2 Work-in-process (materials, labor and overhead) 82.7 36.1 Finished goods (materials, labor and overhead) 295.1 59.5 Total inventories $ 563.0 $ 198.8 Inventories $ 524.1 $ 198.8 Other assets (1) 38.9 — Total inventories $ 563.0 $ 198.8 (1) Other assets includes inventory expected to remain on hand beyond one year. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following: (In millions) January 1, 2023 January 2, 2022 Prepaid expenses $ 96.7 $ 14.6 Contract assets 49.6 — Other receivables 44.3 15.8 Income taxes and other tax receivables 38.6 — Derivatives 22.0 0.1 Other 0.9 4.5 Total prepaid expenses and other current assets $ 252.1 $ 35.0 Property, Plant and Equipment, Net The following is a summary of property, plant and equipment: (In millions) January 1, 2023 January 2, 2022 Equipment, furniture and fixtures $ 515.1 $ 159.0 Building and improvements 364.7 146.8 Customer leased instruments 434.5 68.1 Land 34.5 10.2 Construction in progress 268.4 105.2 Total property, plant and equipment, gross 1,617.2 489.3 Less: accumulated depreciation and amortization ( 278.2 ) ( 140.1 ) Total property, plant and equipment, net $ 1,339.0 $ 349.2 Construction in progress reflects amounts incurred for construction or improvements of property, plant, or equipment that have not been made in service. In addition, construction in progress includes certain instruments that have not been placed at a customer under a lease agreement that will be reclassified to leased instruments once placed at a customer site. The total expense for depreciation of fixed assets and amortization of leasehold improvements was $ 151.1 million, $ 24.3 million and $ 20.8 million for fiscal years 2022, 2021 and 2020, respectively. 97 Goodwill and Intangible Assets Changes in goodwill were as follows: (In millions) North America EMEA China Other Total Balance at January 2, 2022 $ 337.0 Impact of reportable segment revisions $ 336.9 $ 0.1 $ — $ — 337.0 Goodwill acquired 1,211.5 370.0 121.6 475.3 2,178.4 Foreign currency translation ( 0.7 ) ( 11.5 ) ( 3.5 ) ( 22.9 ) ( 38.6 ) Balance at January 1, 2023 $ 1,547.7 $ 358.6 $ 118.1 $ 452.4 $ 2,476.8 Intangible assets consisted of the following: January 1, 2023 January 2, 2022 Description Weighted-average useful life (years) Gross assets Accumulated amortization Net Gross assets Accumulated amortization Net Purchased technology 14.3 $ 997.6 $ ( 120.0 ) $ 877.6 $ 112.7 $ ( 78.2 ) $ 34.5 Customer relationships 19.2 2,023.5 ( 148.9 ) 1,874.6 122.7 ( 77.3 ) 45.4 License agreements 6.4 3.8 ( 3.7 ) 0.1 6.6 ( 5.7 ) 0.9 Patent and trademark costs 14.7 400.5 ( 32.8 ) 367.7 28.7 ( 15.7 ) 13.0 Software development costs 4.7 11.5 ( 7.7 ) 3.8 11.7 ( 6.8 ) 4.9 Total intangible assets $ 3,436.9 $ ( 313.1 ) $ 3,123.8 $ 282.4 $ ( 183.7 ) $ 98.7 Amortization expense related to the capitalized software costs was $ 0.9 million, $ 1.0 million and $ 0.9 million for fiscal years 2022, 2021 and 2020, respectively. Amortization expense (including capitalized software costs) was $ 132.5 million, $ 27.4 million and $ 27.3 million for fiscal years 2022, 2021 and 2020, respectively. The expected future annual amortization expense of the Company’s finite-lived intangible assets held as of January 1, 2023 is as follows: (In millions) 2023 $ 205.4 2024 201.7 2025 188.2 2026 187.1 2027 184.7 Other Current Liabilities Other current liabilities consist of the following: (In millions) January 1, 2023 January 2, 2022 Accrued commissions and rebates $ 55.1 $ 15.9 Deferred consideration 39.3 41.9 Deferred revenue 76.4 1.9 Operating lease liabilities 24.4 10.0 Accrued other taxes payable 9.3 10.2 Derivatives 19.7 0.3 Contingent consideration 0.1 6.0 Payables under transition services agreements — 10.9 Other 101.1 17.3 Total other current liabilities $ 325.4 $ 114.4 98 Note 8. Long-term Borrowings The components of borrowings were as follows: (In millions) January 1, 2023 January 2, 2022 Term Loan $ 2,646.9 $ — Revolving Credit Facility — — Financing lease obligation 0.8 0.7 Other long-term borrowings 1.2 — Unamortized deferred financing costs ( 10.6 ) — Total borrowings 2,638.3 0.7 Less: current portion ( 207.5 ) ( 0.3 ) Long-term borrowings $ 2,430.8 $ 0.4 On May 27, 2022, the Company entered into a credit agreement (the “Credit Agreement”) by and among the Company, as borrower, Bank of America, N.A., as administrative agent and swing line lender (“Bank of America”), and the other lenders and L/C issuers party thereto (together with Bank of America, the “Lenders”). Pursuant to the Credit Agreement and in connection with the consummation of the Combinations, the Lenders provided the Company with a $ 2,750.0 million senior secured term loan facility (the “Term Loan”) and a $ 750.0 million revolving credit facility (the “Revolving Credit Facility” and with the Term Loan, the “Financing”). 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 certain material domestic subsidiaries of the Company (the “Guarantors”) and is secured by liens on substantially all of the assets of the Company and the Guarantors, 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). As of January 1, 2023, letters of credit issued under the Revolving Credit Facility totaled $ 13.1 million, which reduced the available amount under the Revolving Credit Facility to $ 786.9 million. In connection with the Credit Agreement, the Company incurred $ 15.4 million of debt issuance costs, of which $ 11.9 million was related to the Term Loan and $ 3.5 million was related to the Revolving Credit Facility. Debt issuance costs related to the issuance of the Term Loan were recorded as a reduction of the principal amount of the borrowings and are amortized using the effective interest method as a component of Interest expense, net over the life of the Term Loan. Debt issuance costs related to the Revolving Credit Facility were recorded as Other assets and are amortized on a straight-line basis over the term of the Revolving Credit Facility. The Term Loan is subject to quarterly amortization of the principal amount on the last business day of each fiscal quarter of the Company (commencing on September 30, 2022). The required quarterly payments are 1.875 % of the aggregate initial principal amount of the Term Loan through the fiscal second quarter of 2024, and 1.250 % thereafter. The final remaining principal installment is due on the maturity date. The Term Loan and the Revolving Credit Facility will mature on May 27, 2027. The Company must prepay loans outstanding under the Credit Agreement in an amount equal to the Net Cash Proceeds (as defined in the Credit Agreement) 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. 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 first four fiscal quarters ending after the closing date of the Credit Agreement (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. The Company was in compliance with the financial covenants as of January 1, 2023. 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 to repay substantially all of Ortho’s then-outstanding indebtedness. See Note 2 for more information regarding 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. 99 The following table provides the detailed amounts within Interest expense, net for fiscal years 2022, 2021 and 2020. Fiscal Year Ended (In millions) 2022 2021 2020 Term Loan $ 73.0 $ — $ — Revolving Credit Facility 1.5 0.3 0.3 Amortization of deferred financing costs 2.1 0.4 0.4 Derivative instruments and other 0.4 5.4 7.9 Interest income ( 1.3 ) ( 0.3 ) ( 0.1 ) Interest expense, net $ 75.7 $ 5.8 $ 8.5 The following table provides a schedule of required future repayments of all borrowings outstanding as of January 1, 2023. (In millions) 2023 $ 207.5 2024 172.7 2025 137.5 2026 137.5 2027 1,993.7 Total $ 2,648.9 Note 9. Leases The Company leases administrative, R&D, sales and marketing and manufacturing facilities and certain equipment under various non-cancelable lease agreements. Facility leases generally provide for periodic rent increases, and may contain clauses for rent escalation, renewal options or early termination. Operating lease cost for fiscal years 2022, 2021 and 2020 was $ 26.4 million, $ 15.4 million and $ 11.2 million, respectively. Variable lease cost for fiscal years 2022, 2021 and 2020 was $ 5.6 million, $ 2.7 million and $ 1.8 million, respectively. Finance leases are immaterial to the Company’s Consolidated Financial Statements. The supplemental cash flow information related to operating leases during the respective periods was as follows: Fiscal Year Ended (In millions) 2022 2021 2020 Cash paid for amounts included in the measurement of operating lease liabilities $ 25.2 $ 12.3 $ 10.8 ROU assets obtained in exchange for new lease liabilities $ 29.9 $ 37.3 $ 15.3 100 The Company leases its facilities and certain equipment. Commitments for minimum rentals under non-cancelable operating leases at the end of 2022 were as follows: (In millions) 2023 $ 32.7 2024 29.1 2025 26.4 2026 24.1 2027 21.3 Thereafter 122.9 Total lease payments 256.5 Less: imputed interest ( 45.7 ) Total 210.8 Less: current portion ( 24.4 ) Non-current portion $ 186.4 Weighted average remaining lease term 9.7 years Weighted average discount rate 4 % Summers Ridge Lease — The Company leases four buildings that are located on the Summers Ridge property in San Diego, California with an initial term through January 2033 with options to extend the lease for two additional five-year terms upon satisfaction of certain conditions, which have not been included in the determination of the lease term. The must-take provisions related to the fourth building became effective in November 2022 upon expiration of the previous tenant’s lease. As a result, the Company recorded a ROU asset and a corresponding lease liability of approximately $ 20.6 million in November 2022. Note 10. Stockholders' Equity Preferred Stock The Company’s Charter authorizes the issuance of up to 5.0 million shares of preferred stock. The Board is authorized to fix the number of shares of any series of preferred stock and to determine the designation of such shares. No shares of preferred stock were outstanding for fiscal years 2022, 2021 or 2020. Equity Incentive Plan In connection with the Combinations, the Company assumed Quidel’s 2018 Equity Incentive Plan, as amended and restated (the “Quidel Equity Plan”), including all form of award agreements and grants of awards issued thereunder, and shares of Quidel’s common stock (“Quidel Shares”) subject to the plan were replaced by an equivalent number of shares of QuidelOrtho’s common stock. In connection with the assumption of the Quidel Equity Plan, the Quidel Equity Plan was renamed the “QuidelOrtho Corporation Amended and Restated 2018 Equity Incentive Plan” (the “2018 Plan”) and all references to the “Company” in the Quidel Equity Plan were changed to QuidelOrtho. Also in connection with the Combinations, the Company assumed all obligations of Quidel pursuant to each stock option to purchase a Quidel Share and pursuant to each right to acquire or vest in a Quidel Share that was outstanding immediately prior to the closing of the Combinations, and all agreements relating to such equity awards. The Company grants stock options, time-based RSUs and performance-based RSUs (“PSUs”) to employees and non-employee directors under the 2018 Plan. Quidel previously granted stock options under its 2016 Equity Incentive Plan (the “2016 Plan”), Amended and Restated 2010 Equity Incentive Plan (the “2010 Plan”) and Amended and Restated 2001 Equity Incentive Plan (the “2001 Plan”). The 2016 Plan, 2010 Plan and 2001 Plan were terminated at the time of adoption of the Quidel Equity Plan, but the terminated plans continue to govern outstanding options granted thereunder. The Company has stock options, RSUs and PSUs outstanding, which were issued under these equity incentive plans to certain employees and non-employee directors. Stock options granted under these plans have terms ranging up to ten years , have exercise prices ranging from $ 15.40 to $ 254.00 per share, and generally vest over four years . As of January 1, 2023, approximately 2.3 million shares of common stock remained available for grant and 4.1 million shares of common stock were reserved for future issuance under the 2018 Plan. 101 RSUs The Company grants both RSUs and PSUs to certain officers and directors. Until the restrictions lapse, ownership of the shares underlying the affected RSUs or PSUs is conditional upon continuous employment with the Company and/or achievement of certain performance goals. For fiscal years 2022, 2021 and 2020, the Company granted approximately 0.7 million, 0.1 million and 0.2 million shares of common stock, respectively, of RSUs to certain officers and directors, which either have a time-based, four-year vesting provision or performance-based vesting provision. During fiscal years 2022, 2021 and 2020, RSUs were granted to certain members of the Board in lieu of cash compensation as a part of the Company’s non-employee director’s deferred compensation program. The compensation expense associated with these RSU grants was $ 0.6 million, $ 0.6 million and $ 0.5 million for fiscal years 2022, 2021 and 2020, respectively. Employee Deferred Bonus Compensation Program For fiscal years 2022, 2021 and 2020, certain employees of the Company were eligible to participate in the Company’s deferred bonus compensation program with respect to any payments received under the Company’s cash incentive plan. Participating employees could elect to receive 50 % or 100 % of the value of their cash bonus in the form of fully vested RSUs, plus a premium as additional RSUs, issued under the 2018 Plan. The premium RSUs are subject to a one-year vesting requirement from the date of issuance. The additional premium is determined based on the length of the deferral period selected by the participating employee as follows: (i) if one year from the date of grant, a premium of 10 % on the amount deferred, (ii) if two years from the date of grant, a premium of 20 % on the amount deferred, or (iii) if four years from the date of grant, a premium of 30 % on the amount deferred. Employee Stock Purchase Plan In connection with the Combinations, the Company assumed Quidel’s 1983 Employee Stock Purchase Plan, as amended and restated (the “Quidel ESPP”), and the Quidel Shares subject to the Quidel ESPP were replaced by an equivalent number of shares of QuidelOrtho’s common stock. In connection with the assumption of the Quidel ESPP, the Quidel ESPP was renamed the “QuidelOrtho Corporation Amended and Restated 1983 Employee Stock Purchase Plan” (the ESPP) and all references to the “Company” in the Quidel ESPP were changed to QuidelOrtho. Under the ESPP, full-time employees were allowed to purchase common stock through payroll deductions (which could not exceed 10 % of the employee’s compensation) at the lower of 85 % of fair market value at the beginning or end of each six-month purchase period. As of January 1, 2023, 736,630 shares of common stock remained available for future issuance. Stock Repurchase Program On December 18, 2018, Quidel announced a stock repurchase program to repurchase up to $ 50.0 million of its common stock, which was authorized by Quidel’s board of directors (the “Quidel Board”) on December 12, 2018. On August 28, 2020, the Board authorized an increase of an additional $ 150.0 million to Quidel’s existing stock repurchase program authorization, which was announced on September 1, 2020. The Board also extended the stock repurchase program through August 28, 2022. In connection with the consummation of the Combinations, Quidel’s stock repurchase program was terminated. On August 17, 2022, the Board authorized a stock repurchase program, allowing the Company to repurchase up to $ 300.0 million of its common stock through August 17, 2024 (the “Stock Repurchase Program”). During fiscal year 2022, 953,468 shares of outstanding common stock were repurchased under the Stock Repurchase Program. As of January 1, 2023, the Company had approximately $ 225.7 million available under the Stock Repurchase Program. During fiscal years 2021 and 2020, 957,239 and 257,329 shares of outstanding common stock were repurchased under Quidel’s stock repurchase program. Note 11. Stock-based Compensation Stock-based compensation expense was as follows: Fiscal Year Ended (In millions) 2022 2021 2020 Cost of sales $ 2.9 $ 2.7 $ 2.0 Research and development 4.9 4.4 3.4 Selling, marketing and administrative 27.4 18.3 15.6 Acquisition and integration costs 30.4 — — Total stock-based compensation expense $ 65.6 $ 25.4 $ 21.0 102 The table above includes $ 17.2 million of compensation expense related to liability-classified awards for fiscal year 2022, which has been or is expected to be settled in cash. These awards represent the $ 7.14 per share cash settled portion of the replacement awards issued in connection with the Combinations. For fiscal years 2022, 2021 and 2020, the Company recorded $ 3.7 million, $ 3.0 million and $ 2.2 million in stock-based compensation expense, respectively, associated with the deferred bonus compensation program, described in Note 10. During fiscal years 2022, 2021 and 2020, $ 3.3 million, $ 2.8 million and $ 2.1 million, respectively, were initially recorded as a component of accrued payroll and related expenses associated with the deferred bonus compensation program. Stock Options A summary of the status of stock option activity for fiscal year 2022 is as follows: (In thousands, except price data) Shares Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Outstanding at January 2, 2022 722 $ 62.71 Granted 187 100.45 Stock options assumed in the Combinations 1,229 96.10 Exercised ( 383 ) 55.15 Forfeited ( 99 ) 115.95 Outstanding at January 1, 2023 1,656 $ 90.34 5.53 $ 28,140 Vested and expected to vest at January 1, 2023 1,600 $ 89.23 5.45 $ 28,122 Exercisable at January 1, 2023 1,195 $ 80.53 4.61 $ 26,774 Compensation expense related to stock options granted is recognized ratably over the service vesting period for the entire option award. The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants, including grants related to options assumed in the Combinations presented separately: Assumed on Fiscal Year Ended May 27, 2022 (1) January 1, 2023 January 2, 2022 January 3, 2021 Risk-free interest rate 2.28 % 1.96 % 0.48 % 1.18 % Expected option life (in years) 1.78 4.80 4.99 5.12 Volatility rate 64 % 57 % 54 % 41 % Dividend rate 0 % 0 % 0 % 0 % Weighted-average grant date fair value $ 40.57 $ 50.62 $ 106.55 $ 36.84 (1) The replacement stock options granted to Ortho option holders on the closing date of the Combinations were issued consistent with the vesting conditions of the replaced award. The fair value on the closing date of the Combinations attributed to post-combination service, adjusted for estimated forfeitures, is recognized as expensed on a straight-line basis over the remaining vesting period. The computation of the expected option life is based on a weighted-average calculation combining the average life of options that have already been exercised and post-vest cancellations with the estimated life of the remaining vested and unexercised options. The expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the US Treasury yield curve over the expected term of the option. The Company has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company’s estimated forfeiture rate is based on its historical experience and future expectations. The Company’s determination of fair value is affected by the Company’s stock price, as well as a number of assumptions that require judgment. The total intrinsic value was $ 13.7 million, $ 9.9 million and $ 51.8 million for options exercised during fiscal years 2022, 2021, and 2020, respectively. As of January 1, 2023, total unrecognized compensation expense related to stock options was approximately $ 27.2 million and the related weighted-average period over which it is expected to be recognized is approximately 3.4 years. The maximum contractual term of the Company’s stock options is ten years . 103 RSUs A summary of the status of RSU activity for fiscal year 2022 is as follows: (In thousands, except price data) Shares Weighted-Average Grant Date Fair Value Non-vested at January 2, 2022 587 $ 95.81 Granted 720 97.31 Stock awards assumed in the Combinations 49 99.60 Vested ( 248 ) 86.61 Forfeited ( 76 ) 100.70 Non-vested at January 1, 2023 1,032 $ 98.89 The total amount of unrecognized compensation expense related to non-vested RSUs as of January 1, 2023 was approximately $ 62.7 million, which is expected to be recognized over a weighted-average period of approximately 2.1 years. The fair value of RSUs is determined based on the closing market price of the Company’s common stock on the grant date. The weighted-average fair value of RSUs granted during the fiscal years ended January 2, 2022 and January 3, 2021 was $ 188.06 and $ 101.20 , respectively. Note 12. Commitments and Contingencies Purchase Obligations The Company had $ 247.8 million of purchase obligations as of January 1, 2023, the majority of which is expected to be purchased in the next year. These purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum or variable price provisions and (iii) the approximate timing of the transaction, as well as amounts for planned inventory purchases under contractual arrangements. Litigation and Other Legal Proceedings From time to time, the Company is involved in litigation and other legal proceedings, including matters related to product liability claims, commercial disputes and intellectual property claims, as well as regulatory, employment, and other claims related to its business. The Company accrues for legal claims when, and to the extent that, amounts associated with the claims become probable and are reasonably estimable. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from these matters are inherently difficult to predict. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For those matters as to which the Company is not able to estimate a possible loss or range of loss, the Company is not able to determine whether the loss will have a material adverse effect on its business, financial condition, results of operations or liquidity. No accrual has been recorded as of January 1, 2023 and January 2, 2022 related to such matters as they are not probable and/or reasonably estimable. Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. However, the resolution of, or increase in any accruals for, one or more matters may have a material adverse effect on the Company’s results of operations and cash flows. Licensing Arrangements The Company has entered into various licensing and royalty agreements, which largely require payments by the Company based on specified product sales, as well as the achievement of specified milestones. The Company had royalty and license expenses relating to those agreements of approximately $ 1.1 million, $ 2.0 million and $ 2.4 million for fiscal years 2022, 2021 and 2020, respectively. 104 Note 13. Fair Value Measurements The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods: January 1, 2023 January 2, 2022 (In millions) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Cash equivalents $ 0.6 $ 2.1 $ — $ 2.7 $ 204.7 $ 6.6 $ — $ 211.3 Marketable securities 2.0 71.1 — 73.1 — 63.6 — 63.6 Derivative assets — 22.0 — 22.0 — 0.1 — 0.1 Total assets measured at fair value $ 2.6 $ 95.2 $ — $ 97.8 $ 204.7 $ 70.3 $ — $ 275.0 Liabilities: Derivative liabilities $ — $ 21.8 $ — $ 21.8 $ — $ 0.3 $ — $ 0.3 Contingent consideration — — 0.1 0.1 — — 6.1 6.1 Deferred consideration — 39.3 — 39.3 — 78.4 — 78.4 Total liabilities measured at fair value $ — $ 61.1 $ 0.1 $ 61.2 $ — $ 78.7 $ 6.1 $ 84.8 There were no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy during fiscal years 2022 and 2021. Cash equivalents consist of funds held in money market accounts that are valued using quoted prices in active markets for identical instruments and highly liquid corporate debt securities with maturities within three months from purchase. Marketable securities consist of investment-grade corporate and government debt securities, corporate asset-backed securities and commercial paper. Derivative financial instruments are based on observable inputs that are corroborated by market data. Observable inputs include broker quotes, daily market foreign currency rates and forward pricing curves . In connection with the acquisition of the BNP Business from Alere Inc., the Company will pay annual installments of up to $ 48.0 million each year through April 2023. The fair value of the payments treated as deferred consideration i s calculated based on the net present value of cash payments using an estimated borrowing rate based on a quoted price for a similar liability. The fair value of the payments treated as contingent consideration is calculated using a discounted probability weighted valuation model. Discount rates used in such calculations are significant assumptions that are not observed in the market and, therefore, the resulting fair value represents a Level 3 measurement. Changes in estimated fair value of contingent consideration liabilities from January 3, 2021 through January 1, 2023 were as follows: (In millions) Contingent Consideration Liabilities (Level 3 Measurement) Balance at January 3, 2021 $ 11.9 Cash payments ( 6.0 ) Change in estimated fair value, recorded in selling, marketing and administrative expenses 0.2 Balance at January 2, 2022 $ 6.1 Cash payments ( 6.0 ) Balance at January 1, 2023 $ 0.1 Financial Instruments Not Measured at Fair Value The estimated fair value of the Company’s borrowings under the Term Loan was $ 2,630.3 million at January 1, 2023, compared to the carrying amount, excluding debt issuance costs, of $ 2,646.9 million. The estimate of fair value is generally based on the quoted market prices for similar issuances of long-term debt with the same maturities, which is classified as a Level 2 input. 105 Note 14. Derivative Instruments and Hedging Activities The Company selectively uses derivative and non-derivative instruments to manage market risk associated with changes in interest rates and foreign currency exchange rates. The use of derivatives is intended for hedging purposes only, and the Company does not enter into derivative transactions for speculative purposes. Credit risk represents the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract. The Company generally enters into master netting arrangements that reduce credit risk by permitting net settlement of transactions with the same counterparty. The Company does not have any derivative instruments with credit-risk related contingent features that would require it to post collateral. Interest Rate Hedging Instruments The Company’s interest rate risk relates primarily to interest rate exposures on variable rate debt, including the Revolving Credit Facility and Term Loan. See Note 8 for additional information on the currently outstanding components of the Revolving Credit Facility and Term Loan. The Company entered into interest rate cap and swap agreements to hedge the related risk of the variability to the Company’s cash flows due to the rates specified for these credit facilities. The Company designates certain interest rate derivative instruments as cash flow hedges, including the outstanding interest rate swaps. The Company records gains and losses due to changes in fair value of the derivatives within Other comprehensive income (loss) (“OCI”) and reclassifies these amounts to Interest expense, net in the same period or periods for which the underlying hedged transaction affects earnings. In the event the Company determines the hedged transaction is no longer probable to occur or concludes the hedge relationship is no longer effective, the hedge is prospectively de-designated. Pre-tax unrealized gains of $ 25.1 million are expected to be reclassified from OCI to earnings in the next 12 months. The following table summarizes the Company’s interest rate derivative agreements as of January 1, 2023, all of which were interest rate swaps: Notional Amount (In millions) (1) Description Hedge Designation Effective Date Expiration Date $ 500.0 Pay 1.58 % fixed, receive floating rate (1-month USD-SOFR) Designated cash flow hedge May 29, 2022 December 31, 2023 397.2 Pay 3.765 % fixed, receive floating rate (1-month USD-SOFR) Designated cash flow hedge December 30, 2022 May 27, 2027 144.4 Pay 3.7725 % fixed, receive floating rate (1-month USD-SOFR) Designated cash flow hedge December 30, 2022 May 27, 2027 216.7 Pay 3.7675 % fixed, receive floating rate (1-month USD-SOFR) Designated cash flow hedge December 30, 2022 May 27, 2027 288.9 Pay 3.7575 % fixed, receive floating rate (1-month USD-SOFR) Designated cash flow hedge December 30, 2022 May 27, 2027 252.8 Pay 3.7725 % fixed, receive floating rate (1-month USD-SOFR) Designated cash flow hedge December 30, 2022 May 27, 2027 (1) The notional value of interest rate swap contracts with an effective date of December 30, 2022, is expected to increase to $ 1.8 billion on December 29, 2023. During the fourth quarter of 2022, the Company terminated its non-designated $ 1.0 billion notional value 3.428 % interest rate cap. As a result of this termination in fiscal year 2022, the Company recognized an immaterial gain within Other expense (income), net and received $ 3.3 million of cash proceeds, presented within operating activities in the Consolidated Statements of Cash Flows. Currency Hedging Instruments The Company has currency risk exposures relating primarily to foreign currency denominated monetary assets and liabilities and forecasted foreign currency denominated intercompany and third-party transactions. The Company uses foreign currency forward contracts and may use option contracts and cross currency swaps to manage its currency risk exposures. The Company’s foreign currency forward contracts are denominated primarily in Australian Dollar, Brazilian Real, British Pound, Canadian Dollar, Chilean Peso, Chinese Yuan/Renminbi, Euro, Indian Rupee, Japanese Yen, Mexican Peso, Swiss Franc and the Thai Baht. The Company designates certain foreign currency forward contracts as cash flow hedges. The Company records gains and losses due to changes in fair value of the derivatives within OCI and reclassifies these amounts to Total revenues and Cost of 106 sales, excluding amortization of intangibles in the same period or periods for which the underlying hedged transaction affects earnings. In the event the Company determines the hedged transaction is no longer probable to occur or concludes the hedge relationship is no longer effective, the hedge is prospectively de-designated. The pre-tax unrealized loss of $ 7.9 million within OCI as of January 1, 2023 is expected to be reclassified to earnings in the next 12 months. The Company also enters into foreign currency forward contracts that are not part of designated hedging relationships and which are intended to mitigate exchange rate risk of monetary assets and liabilities and related forecasted transactions. The Company records these non-designated derivatives at mark-to-market with gains and losses recognized in earnings within Other expense (income), net. The following table provides details of the currency hedging instruments outstanding as of January 1, 2023: Description Notional Amount (In millions) Hedge Designation Foreign currency forward contracts $ 441.6 Cash Flow Hedge Foreign currency forward contracts 581.7 Non-designated The following table summarizes pre-tax gains and losses from designated derivative and non-derivative instruments within accumulated other comprehensive (loss) income (“AOCI”) for fiscal year 2022: Designated Hedging Instruments (In millions) Amount of Loss (Gain) Recognized in OCI on Hedges Location of Amounts Reclassified From AOCI Into Income Amount of Loss (Gain) Reclassified From AOCI Into Income Foreign currency forward contracts (sales) $ 1.3 Total revenues $ ( 2.9 ) Foreign currency forward contracts (purchases) 3.5 Cost of sales, excluding amortization of intangibles ( 0.6 ) Interest rate derivatives ( 11.4 ) Interest expense, net ( 1.7 ) Gains and losses from designated derivative and non-derivative instruments within AOCI for fiscal years 2021 and 2020 were not material. The following table summarizes the fair value of designated and non-designated hedging instruments recognized within the Consolidated Balance Sheets as of January 1, 2023 and January 2, 2022: (In millions) January 1, 2023 January 2, 2022 Designated cash flow hedges Interest rate derivatives: Prepaid expenses and other current assets $ 15.9 $ — Other liabilities 2.1 — Foreign currency forward contracts: Prepaid expenses and other current assets 4.6 0.1 Other current liabilities 14.3 0.2 Non-designated hedging instruments Foreign currency forward contracts: Prepaid expenses and other current assets 1.5 — Other current liabilities 5.4 0.1 Note 15. Long-term Employee Benefits Defined Benefit Plans and Other Post-employment Benefits In connection with the Combinations, the Company assumed certain defined benefit plan obligations and acquired related plan assets for employees of non-U.S. subsidiaries. 107 In addition to these defined benefit plans, the Company also assumed one non-U.S. post-employment benefit plan and a replacement retiree health care reimbursement plan for certain U.S employees. The U.S. plan is funded on a pay-as-you-go basis and is not accepting new participants. Obligation and Funded Status The measurement date used to determine the defined benefit and other post-employment benefits obligations was January 1, 2023. The following tables set forth the changes to the projected benefit obligations (“PBO”) and plan assets: Fiscal Year Ended (In millions) January 1, 2023 Defined Benefit Plans Change in benefit obligation: Projected benefit obligation at beginning of year $ — Service cost 1.2 Interest cost 0.4 Benefits paid ( 0.3 ) Actuarial gain ( 0.6 ) Assumed obligation from the Combinations 33.3 Settlements ( 0.2 ) Foreign currency exchange rate changes 0.1 Projected benefit obligation at end of year $ 33.9 Change in plan assets: Fair value of plan assets at beginning of year $ — Actual return on plan assets ( 0.5 ) Employer contributions 1.6 Benefits paid ( 0.3 ) Transfers in from the Combinations 20.1 Settlements ( 0.2 ) Foreign currency exchange rate changes ( 0.1 ) Fair value of plan assets at end of year $ 20.6 Funded status at end of year $ ( 13.3 ) Amounts recognized on the consolidated balance sheets: Other assets $ 0.4 Other current liabilities ( 0.3 ) Other liabilities ( 13.4 ) Net amount recognized $ ( 13.3 ) 108 Fiscal Year Ended (In millions) January 1, 2023 Other Post-employment Benefits Change in benefit obligation: Projected benefit obligation at beginning of year $ 18.9 Service cost 0.3 Interest cost 0.4 Benefits paid ( 0.7 ) Actuarial gain ( 0.7 ) Assumed obligation from the Combinations 0.4 Projected benefit obligation at end of year $ 18.6 Amounts recognized on the consolidated balance sheets: Other current liabilities $ ( 3.5 ) Other liabilities ( 15.1 ) Net amount recognized $ ( 18.6 ) PBO is the actuarial present value of benefits attributable to employee service rendered to date and reflects the effects of estimated future pay increases. The accumulated benefit obligation (“ABO”) is the actuarial present value of benefits attributable to employee service to date, but does not include the effects of estimated future pay increases. The following table reflects the ABO for all defined benefit plans as of January 1, 2023. Further, the table reflects the aggregate PBO, ABO and fair value of plan assets for pension plans with PBO in excess of plan assets and for pension plans with ABO in excess of plan assets. (In millions) January 1, 2023 ABO $ 27.1 Plans with PBO in excess of plan assets PBO $ 18.3 Fair value of plan assets 5.1 Plans with ABO in excess of plan assets PBO $ 17.0 ABO 14.3 Fair value of plan assets 3.8 The pretax amounts that are not yet reflected in the net periodic benefit cost and are included in AOCI as of January 1, 2023 include the following: Fiscal Year Ended (In millions) 2022 Defined Benefit Plans Accumulated net actuarial gains (losses) $ ( 0.2 ) Other Post-employment Benefits Accumulated net actuarial gains (losses) $ 0.7 These accumulated net actuarial gains (losses) for defined benefit plans and other post-employment benefits primarily relate to differences between the actual net periodic expense and the expected net periodic expense from differences in significant assumptions, including primarily return on plan assets and discount rates used in these estimates. 109 Components of Net Periodic Benefit Cost Net periodic benefit cost for the Company’s defined benefit plans was $ 1.4 million for the fiscal year ended January 1, 2023 and was primarily related to service cost. Changes in plan assets and benefit obligations recognized in other comprehensive income was not material for fiscal year 2022. Net periodic benefit cost for the Company’s other post-employment benefit plans was $ 0.7 million for the fiscal year ended January 1, 2023 and was primarily related to interest cost. Changes in benefit obligations recognized in other comprehensive income was not material for fiscal year 2022. The components of net periodic benefit cost other than the service cost component are recorded in Other expense (income), net in the Consolidated Statements of Income. Assumptions and Sensitivities In connection with the preliminary purchase price allocation for the Combinations, the Company recorded assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following assumptions were used to measure the fair value of the benefit obligations and associated plan assets: May 27, 2022 January 1, 2023 Defined Benefit Plans Weighted average discount rate 2.2 % 3.1 % Weighted average rate of compensation increases 2.6 % 3.0 % Other Post-employment Benefit Plans Weighted average discount rate 4.0 % 5.5 % The critical assumptions used in determining the net periodic benefit cost for fiscal year 2022 are as follows: Defined Benefit Plans Weighted average discount rate 2.2 % Weighted average expected rate of compensation increases 2.6 % Weighted average expected return on plan assets 2.5 % Other Post-employment Benefit Plans Weighted average discount rate 4.0 % The discount rates used reflect the expected future cash flow based on plan provisions, participant data and the currencies in which the expected future cash flows will occur. For the majority of defined benefit obligations, the Company utilizes prevailing long-term high quality corporate bond indices applicable to the respective country at the measurement date. In countries where established corporate bond markets do not exist, the Company utilizes other index movement and duration analysis to determine discount rates. The long-term rate of return on plan assets assumptions reflect economic assumptions applicable to each country and assumptions related to the preliminary assessments regarding the type of investments to be held by the respective plans. The discount rate is determined as of each measurement date, based on a review of yield rates associated with long-term, high-quality corporate bonds. The calculation separately discounts benefit payments using the spot rates from a long-term, high-quality corporate bond yield curve. The long-term rate of return on plan assets assumption represents the expected average rate of earnings on the funds invested to provide for the benefits included in the benefit obligations and is determined based on a number of factors, including historical market index returns, the anticipated long-term allocation of the plans, historical plan return data, plan expenses and the potential to outperform market index returns. 110 A significant factor in estimating future per capita cost of covered healthcare benefits for retirees is the healthcare cost trend rate assumption. The health care cost trend rate assumptions for other post-retirement benefit plans are as follows: January 1, 2023 Health care cost trend rate assumed for next year - Pre-65 6.44 % Health care cost trend rate assumed for next year - Post-65 6.10 % Rate to which the cost trend rate is assumed to decline 4.00 % Year that the trend rate reaches the ultimate trend rate 2047 Anticipated Contributions to Defined Benefit Plans For funded plans, our policy is to fund amounts for defined benefit plans sufficient to meet minimum requirements set forth in applicable benefit and local tax laws. Based on the same assumptions used to measure the defined benefit obligations at January 1, 2023, the Company expects to contribute $ 2.0 million to defined benefit plans in fiscal year 2023. Estimated Future Benefit Payments The following table reflects the total benefit payments expected to be made for defined benefit plans and other long-term post-employment benefits: (In millions) Defined Benefit Plans Other Post-employment Benefit Plans Fiscal Year 2023 $ 1.7 $ 3.5 Fiscal Year 2024 3.5 4.0 Fiscal Year 2025 2.1 3.3 Fiscal Year 2026 2.2 2.2 Fiscal Year 2027 2.3 1.9 Fiscal Years 2028-2032 12.6 5.5 Plan Assets The tables below present the fair value of the defined benefit pension plans by level within the fair value hierarchy, as described in Note 1, at January 1, 2023. Fair Value Measurements at January 1, 2023 (In millions) Total Level 1 Level 2 Level 3 U.S. equity securities $ 2.2 $ 2.2 $ — $ — Japan equity securities 3.7 3.7 — — Other international equity securities 1.6 1.6 — — U.S. government bonds 0.2 0.2 — — Japan government bonds 0.5 0.5 — — Other international government bonds 1.6 1.6 — — Cash and cash equivalents 4.7 4.7 — — Insurance contracts 6.1 — — 6.1 Total $ 20.6 $ 14.5 $ — $ 6.1 The Company has funded defined benefit plans in Japan, Belgium and Switzerland. The Japanese plan asset consists primarily of Japan equity and government bond securities, U.S. equity and government bond securities, other international equity and debt securities and cash and cash equivalents. The plan assets are invested in assets with quoted prices in active markets and therefore are classified as Level 1 assets. The Company’s investment strategy is to maintain a target rate of return that is higher than that required to maintain sound pension plan management into the future. In order to achieve its investment targets, the Company has established an asset composition ratio which was formulated from a long-term perspective, taking into account the maturity of the pension plan and other factors. The Company considers expected returns and risks of returns, as well as the correlation between the returns of each investment asset, the diversification of its investments, and other factors related to risk management in order to maximize returns in accordance with its targeted asset mix to achieve its investment targets. The target 111 allocation rates of the Japanese plan is 44 % for debt securities, 55 % for equity securities and 2 % for other assets. The Belgium and Switzerland plan assets consist solely of insurance contracts that are pledged on behalf of employees with benefits in certain countries and are classified as Level 3 assets. The table below presents a roll-forward of activity for the Level 3 assets for fiscal year 2022: (In millions) Level 3 Assets Balance at January 2, 2022 $ — Transfers in 5.5 Net purchases and settlements 0.6 Balance at January 1, 2023 $ 6.1 Defined Contribution Plans The Company offers defined contribution plans to eligible employees primarily in the U.S., whereby employees contribute a portion of their compensation. Company matching and other Company contributions are also provided to the plans. Once Company matching contributions have been paid, the Company has no further payment obligations. The Company’s contributions for its employees totaled approximately $ 15.1 million, $ 3.8 million and $ 3.1 million for fiscal years ended 2022, 2021 and 2020, respectively, which are recognized as expense as incurred in the Consolidated Statements of Income. The increase in Company contributions for fiscal year 2022 was due to defined contribution plans assumed in connection with the Combinations. Note 16. Related Party Transactions Quotient Limited As a result of the consummation of the Combinations, the Company acquired Ortho’s Letter Agreement (the “Letter Agreement”), entered into in September 2020, with Quotient Limited (“Quotient”), in which Ortho partnered with Quotient to commercialize, when approved, the next generation product in immunohematology, a transfusion diagnostic patient immunohematology microarray intended for use with Quotient’s MosaiQ instruments (the “IH3 Microarray”) that enables a high level of multiplexing and addresses the ultra-high throughput market. Under the Letter Agreement, Ortho will have the right to distribute, market and sell the IH3 Microarrays in the European Economic Area, the U.K. and Switzerland (collectively, the “European Territory”) and the U.S., solely for use in testing the immunohematological profile of the blood of medical patients in the course of their care or treatment. Quotient retains the right to distribute, market and sell the IH3 Microarrays for use in blood donor testing worldwide and in the patient testing market outside of the European Territory and the U.S. Ortho’s rights with respect to the IH3 Microarray are exclusive so long as Ortho satisfies its obligation to meet annual minimum purchase volume requirements in each territory. Under the Letter Agreement, Ortho also has the non-exclusive right to sell and distribute MosaiQ instruments in the U.S. and the European Territory for use in testing the immunohematological profile of blood of medical patients in the course of their care or treatment. Under the Letter Agreement, Ortho is also required to purchase the IH3 Microarrays, and the instruments, controls and reagents required for their use, only from Quotient at specified prices. Ortho is also required to make milestone payments to Quotient as specified milestones and benchmarks are achieved. Ortho will be obligated to pay up to $ 60 million in milestone payments to Quotient upon its achievement of certain regulatory milestones and the achievement by Ortho of commercial sales benchmarks related to MosaiQ , including a milestone payment of up to $ 25 million upon the achievement by Ortho of certain cumulative gross revenue hurdl es. The Company did not make such payments during fiscal year 2022. Due to the Company’s equity method investment held in Quotient, the Company concluded that Quotient is a related party of the Company. On January 10, 2023, Quotient filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Proceeding”). The Company is evaluating the impact of the Bankruptcy Proceeding and the related changes in Quotient’s business strategy on the Letter Agreement. Under a separate supply agreement between Ortho and Alba Biosciences, a wholly owned subsidiary of Quotient, which was also acquired by the Company as a result of the consummation of the Combinations, the Company purchased inventories from Alba Biosciences amounting to $ 15.4 million during fiscal year 2022. As of January 1, 2023, Accounts payable included amounts related to purchases from Alba Biosciences of $ 3.7 million. Quotient has stated that none of its subsidiaries intend to file voluntary petitions for relief under the Bankruptcy Code, and that each of its subsidiaries expects to continue to operate its respective business in the ordinary course unaffected by the Bankruptcy Proceeding. The Company will continue to monitor the situation. 112 Note 17. Accumulated Other Comprehensive Income (Loss) The balance of AOCI, net of tax, was as follows for fiscal year 2022: (In millions) Pension and Other Post- employment Benefits Cash Flow Hedges Available-for-Sale Investments Unrealized Foreign Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss) Beginning balance $ — $ — $ ( 0.1 ) $ 0.5 $ 0.4 Current period deferrals 0.7 6.7 ( 0.4 ) ( 69.8 ) ( 62.8 ) Amounts reclassified to net income — ( 5.2 ) — — ( 5.2 ) Net change 0.7 1.5 ( 0.4 ) ( 69.8 ) ( 68.0 ) Ending balance $ 0.7 $ 1.5 $ ( 0.5 ) $ ( 69.3 ) $ ( 67.6 ) Amounts related to fiscal years 2021 and 2020 were not material. 113 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.