QuidelOrtho Corp 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations In this Quarterly Report, all references to “we,” “our” and “us” refer to QuidelOrtho Corporation and its subsidiaries. Future Uncertainties and Forward-Looking Statements This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act. These statements are any statement contained herein that is not strictly historical, including, but not limited to, certain statements under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including under “Outlook” and “Liquidity Outlook,” and located elsewhere herein regarding our commercial, integration and other strategic goals, our cost-savings initiatives, industry prospects, our expected results of operations or financial position, and future plans, objectives, strategies, expectations and intentions. Without limiting the foregoing, the words “may,” “will,” “would,” “should,” “might,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “goal,” “project,” “strategy,” “future,” “continue” or similar words, expressions or the negative of such terms or other comparable terminology are intended to identify forward-looking statements. Such statements are based on the beliefs and expectations of our management as of the date of this Quarterly Report and are subject to significant known and unknown risks and uncertainties. Actual results or outcomes may differ significantly from those set forth or implied in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth or implied in the forward-looking statements: fluctuations in demand for our non-respiratory and respiratory products; supply chain, production, logistics, distribution and labor disruptions and challenges; the challenges and costs of integrating, restructuring and achieving anticipated synergies as a result of the Combinations; and other macroeconomic, geopolitical, market, business, competitive and/or regulatory factors affecting our business generally, including those discussed under Part II, Item 1A, “Risk Factors” of this Quarterly Report and Part I, Item 1A, “Risk Factors” of our Annual Report. Investors should not rely on forward-looking statements as predictions of future events because these statements are based on assumptions that may not come true and are speculative by their nature. All forward-looking statements are based on information currently available to us and speak only as of the date of this Quarterly Report. We undertake no obligation to update any of the forward-looking information or time-sensitive information included in this Quarterly Report, whether as a result of new information, future events, changed expectations or otherwise, except as required by law. Information Available on Our Website This Quarterly Report and each of our other periodic and current reports, including any amendments thereto, are available, free of charge, on our website, www.quidelortho.com, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. From time to time, we may use our website as a channel of distribution of material information related to the Company. Financial and other material information regarding the Company is routinely posted on and accessible at https://ir.quidelortho.com/. The information contained on or connected to our website is not deemed to be incorporated by reference into this Quarterly Report or filed with or furnished to the SEC and should not be considered part of this Quarterly Report. Overview Our vision is to advance diagnostics to power a healthier future. With our expertise in immunoassay and molecular testing, clinical chemistry and transfusion medicine, we aim to support clarity for clinicians and patients to help create better health outcomes. Our global infrastructure and commercial reach support our customers across more than 130 countries and territories with quality diagnostics, a broad test portfolio and market-leading service. We operate globally with manufacturing facilities in the U.S. and U.K. and with sales centers, administrative offices and warehouses located throughout the world. We manage our business geographically to better align with the market dynamics of the specific geographic regions in which we operate, with our reportable segments being North America, EMEA and China. Latin America and JPAC (Japan and Asia Pacific) are immaterial operating segments that are not considered reportable segments and are included in “Other.” We generate our revenue in the following business units: Labs, Immunohematology, Donor Screening, Point of Care and Molecular Diagnostics. For the nine months ended September 29, 2024, Total revenues decreased by 8% to $2,075.1 million as compared to the same period in the prior year, primarily driven by variability of our U.S. respiratory products. Currency exchange rates had an unfavorable impact of 100 basis points on our growth rate. Our revenues can be highly concentrated over a small number of products, including certain of our respiratory products. For the nine months ended September 29, 2024 and October 1, 2023, revenues related to our respiratory products accounted for approximately 17% and 24% of our Total revenues, respectively. 25 Planned Wind-Down of U.S. Donor Screening Portfolio In February 2024, we initiated a wind-down plan to transition out of the U.S. donor screening portfolio. Specifically, we plan to wind-down only the ORTHO VERSEIA® Integrated Processor platform and microplate assays, which are only sold in the U.S., and have a lower growth and margin profile. This wind-down will not affect any donor screening portfolio outside of the U.S. While our goal is to wind-down this U.S. donor screening portfolio, we will continue to support our existing customers and honor our contractual commitments. The winding down of the U.S. donor screening portfolio, as compared to the prior year periods, contributed to the decline in revenue with a margin lower than our overall margin. Refer to Item 1, “Financial Statements—Note 3. Revenue” for more information. The wind-down of our U.S. donor screening portfolio is expected to be substantially complete by the end of 2025. Outlook Our financial performance and results of operations will depend on future developments and other factors that are highly uncertain, continuously evolving and unpredictable, including the occurrence, spread, severity, duration and emergence of new variants of respiratory diseases, including flu, strep, RSV and COVID-19, as well as ongoing supply, production and logistics challenges. We expect overall demand for our non-respiratory and respiratory products to continue to fluctuate and pricing pressures on certain products to persist as a result of a number of factors, including increased supply, emergence and spread of new variants, and the seasonal demands of the respiratory season, which are typically more prevalent during the fall and winter. Because our business environment is highly competitive, our long-term growth and profitability will depend in part on our ability to retain and grow our current customers and attract new customers through developing and delivering new and improved products and services that meet our customers’ needs and expectations, including with respect to product performance, product offerings, cost, automation and other work-flow efficiencies. As a result, we expect to continue to maintain our emphasis on R&D investments for longer term growth, including for our next generation platforms and assays, as well as additional assays to be launched on our current platforms. In addition, we expect to continue to evaluate strategic opportunities to (i) expand our product lines and services, production capabilities, technologies and geographic footprint and address other business challenges and opportunities, and (ii) rationalize and consolidate facilities with the goal to improve our long-term results. While we expect the revenues and financial results from our non-respiratory and respiratory products to be affected by the highly competitive environment and our respiratory products to be affected by the seasonal demands of the respiratory season, we intend to continue our focus on prudently managing our business and delivering improved financial results, while at the same time striving to introduce new products and services into the market. Seasonality Revenues from our respiratory products are subject to, and significantly affected by, the seasonal demands of the cold, flu and RSV seasons, which are typically more prevalent during the fall and winter. Historically, revenues from our influenza products have varied from year to year based, in large part, on the severity, length and timing of the onset of the cold, flu and RSV seasons. In addition, the SARS-CoV-2 virus may have similar seasonal demands and impacts on our revenues in the future. Results of Operations Revenues The following table compares Total revenues by business unit for the three and nine months ended September 29, 2024 and October 1, 2023: Three Months Ended Nine Months Ended (Dollars in millions) September 29, 2024 October 1, 2023 % Change September 29, 2024 October 1, 2023 % Change Labs $ 355.9 $ 341.4 4 % $ 1,067.0 $ 1,073.5 (1) % Immunohematology (1) 132.0 128.9 2 % 385.9 380.1 2 % Donor Screening (1) 28.0 35.0 (20) % 95.7 103.0 (7) % Point of Care 205.6 233.1 (12) % 509.3 675.4 (25) % Molecular Diagnostics 5.6 5.6 — % 17.2 23.2 (26) % Total revenues $ 727.1 $ 744.0 (2) % $ 2,075.1 $ 2,255.2 (8) % 26 (1) For presentation purposes, as a result of the wind-down of the U.S. donor screening portfolio, the previously reported Transfusion Medicine business unit is shown in its two product categories: Immunohematology and Donor Screening. Prior periods have been revised to align with the current period presentation. For the three months ended September 29, 2024, Total revenues decreased to $727.1 million from $744.0 million for the same period in the prior year. Labs revenue increased 4% compared to the prior year period, primarily due to growth in recurring revenue, which includes reagents, consumables and services in our Labs revenue, partially offset by a decline in instrument revenue. Excluding foreign currency impact, Labs revenue increased 5% compared to the prior year period. Immunohematology revenue increased 2% compared to the prior year period, primarily due to reagent growth. Donor Screening revenue decreased 20% compared to the prior year period, primarily due to the wind-down of the U.S. donor screening business. Point of Care revenue decreased 12% compared to the prior year period, primarily due to lower sales of Sofia SARS Antigen assays, partially offset by an increase in demand for QuickVue SARS Antigen assays. Currency exchange rates did not significantly impact our growth rate for the three months ended September 29, 2024. For the nine months ended September 29, 2024, Total revenues decreased to $2,075.1 million from $2,255.2 million for the same period in the prior year. Labs revenue decreased 1% compared to the prior year period, primarily due to a $19.2 million settlement award from a third party related to one of our collaboration agreements in the prior year period, partially offset by growth in recurring revenue. Immunohematology revenue increased 2% compared to the prior year period, primarily due to reagent growth. Donor Screening revenue decreased 7% compared to the prior year period, primarily due to the wind-down of the U.S. donor screening business. The Point of Care business unit contributed to revenue decline, driven by a decrease of $178.9 million in sales of QuickVue SARS Antigen assays, primarily due to a COVID-19 government award in the prior year period, partially offset by an increase of $11.8 million in sales of Sofia SARS Antigen assays. Molecular Diagnostics sales decreased by $6.0 million, driven primarily by lower demand. Currency exchange rates had an unfavorable impact of approximately 100 basis points on our growth rate for the nine months ended September 29, 2024. Cost of Sales, Excluding Amortization of Intangible Assets Cost of sales, excluding amortization of intangible assets, increased to $374.8 million, or 51.5% of Total revenues, for the three months ended September 29, 2024, compared to $374.6 million, or 50.3% of Total revenues, for the three months ended October 1, 2023. Cost of sales, excluding amortization of intangible assets, was impacted by a shift in product mix. Cost of sales, excluding amortization of intangible assets, decreased to $1,114.7 million, or 53.7% of Total revenues, for the nine months ended September 29, 2024, compared to $1,140.7 million, or 50.6% of Total revenues, for the nine months ended October 1, 2023. The decrease in cost of sales, excluding amortization of intangible assets, was driven primarily by a prior year period COVID-19 government award, along with the corresponding inventory release of $39 million, partially offset by an increase in sales of Sofia SARS Antigen assays. Operating Expenses The following table summarizes operating expenses for the three and nine months ended September 29, 2024 and October 1, 2023: Three Months Ended Nine Months Ended (Dollars in millions) September 29, 2024 % of Total Revenues October 1, 2023 % of Total Revenues September 29, 2024 % of Total Revenues October 1, 2023 % of Total Revenues Selling, marketing and administrative $ 186.4 25.6 % $ 194.1 26.1 % $ 579.3 27.9 % $ 575.6 25.5 % Research and development 55.9 7.7 % 61.5 8.3 % 171.4 8.3 % 185.7 8.2 % Amortization of intangible assets 51.9 7.1 % 51.4 6.9 % 155.5 7.5 % 153.6 6.8 % Integration related costs 36.8 5.1 % 26.5 3.6 % 90.3 4.4 % 80.4 3.6 % Goodwill impairment charge — N/M — N/M 1,743.9 N/M — N/M Asset impairment charge — N/M 2.2 N/M 56.9 N/M 3.2 N/M Other operating expenses 6.3 0.9 % 7.4 1.0 % 23.6 1.1 % 17.0 0.8 % * N/M - Not meaningful Selling, Marketing and Administrative Expenses Selling, marketing and administrative expenses for the three months ended September 29, 2024 decreased by $7.7 million, or 4.0%, to $186.4 million from $194.1 million for the same period in the prior year, primarily due to lower employee compensation costs. 27 Selling, marketing and administrative expenses for the nine months ended September 29, 2024 increased by $3.7 million, or 0.6%, to $579.3 million from $575.6 million for the same period in the prior year, primarily due to higher employee compensation costs. Research and Development Expense Research and development expense for the three months ended September 29, 2024 decreased by $5.6 million, or 9.1%, to $55.9 million from $61.5 million for the same period in the prior year, primarily due to lower outside services and employee compensation costs. Research and development expense for the nine months ended September 29, 2024 decreased by $14.3 million, or 7.7%, to $171.4 million from $185.7 million for the same period in the prior year, primarily due to lower employee compensation costs and outside services. Amortization of Intangible Assets Amortization of intangible assets was $51.9 million and $155.5 million for the three and nine months ended September 29, 2024, respectively, and $51.4 million and $153.6 million for the three and nine months ended October 1, 2023, respectively. Integration Related Costs Integration related costs were $36.8 million and $90.3 million for the three and nine months ended September 29, 2024, respectively, and $26.5 million and $80.4 million for the three and nine months ended October 1, 2023, respectively. The increase in costs compared to the prior year periods was primarily due to consulting costs and employee compensation related charges. Goodwill Impairment Charge During the nine months ended September 29, 2024, we identified a triggering event requiring an interim goodwill impairment assessment for our reporting units. As a result, we recognized a non-cash goodwill impairment charge of $1.7 billion for the North America reporting unit. Refer to Item 1, “Financial Statements—Note 8. Goodwill and Intangible Assets, Net” for more information. Asset Impairment Charge During the nine months ended September 29, 2024, we recognized an impairment charge of $56.9 million related to the long-lived assets classified as assets held for sale. Refer to Item 1, “Financial Statements—Note 7. Assets Held for Sale” for more information. Asset impairment charges were $2.2 million and $3.2 million for the three and nine months ended October 1, 2023, respectively. Other Operating Expenses Other operating expenses were $6.3 million and $23.6 million for the three and nine months ended September 29, 2024, respectively, and $7.4 million and $17.0 million for the three and nine months ended October 1, 2023, respectively. Other operating expenses were primarily related to the profit share expense for our Joint Business with Grifols. Non-operating Expenses Interest Expense, Net Interest expense, net was $42.9 million and $122.9 million for the three and nine months ended September 29, 2024, respectively, and $37.7 million and $110.9 million for the three and nine months ended October 1, 2023, respectively. Refer to Item 1, “Financial Statements—Note 9. Borrowings” for more information. Other Expense, Net Other expense, net was $0.9 million and $7.2 million for the three and nine months ended September 29, 2024, respectively, and $4.1 million and $8.0 million for the three and nine months ended October 1, 2023, respectively. The decreases from prior year periods were primarily related to net foreign currency losses offset by the Credit Agreement amendment fees. Refer to Item 1, “Financial Statements—Note 9. Borrowings” for more information. 28 Income Taxes For the three months ended September 29, 2024, we recognized an income tax benefit of $8.9 million in relation to loss before income taxes of $28.8 million, resulting in an effective tax rate of 30.9%. For the three months ended October 1, 2023, we recognized an income tax benefit of $2.8 million in relation to loss before income taxes of $15.5 million, resulting in an effective tax rate of 18.1%. For the three months ended September 29, 2024, the effective tax rate differed from the U.S. federal statutory rate primarily due to the utilization of net operating losses previously not benefited due to valuation allowances. For the three months ended October 1, 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to net operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and Global Intangible Low-Tax Income, partially offset by non-U.S. earnings being taxed at rates that were different than the U.S. statutory rate, R&D credits, foreign tax credits and foreign exchange losses. For the nine months ended September 29, 2024, we recognized an income tax benefit of $117.0 million in relation to loss before income taxes of $1,990.6 million, resulting in an effective tax rate of 5.9%. For the nine months ended October 1, 2023, we recognized an income tax benefit of $2.8 million in relation to loss before income taxes of $19.9 million, resulting in an effective tax rate of 14.1%. For the nine months ended September 29, 2024, the effective tax rate differed from the U.S. federal statutory rate primarily due to goodwill impairment charges that were nondeductible for tax purposes. For the nine months ended October 1, 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to net operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and Global Intangible Low-Tax Income, partially offset by non-U.S. earnings being taxed at rates that were different than the U.S. statutory rate, R&D credits, foreign tax credits and foreign exchange losses. Segment Results We operate under three geographically-based reportable segments: North America, EMEA and China. Our operations in Latin America and JPAC (Japan and Asia Pacific) are immaterial operating segments that are not considered reportable segments and are included in “Other.” The key indicators that we monitor are as follows: • Total revenues — This measure is discussed in the section entitled “Results of Operations.” • Adjusted EBITDA — Adjusted EBITDA by reportable segment is used by our management to measure and evaluate the internal operating performance of our reportable segments. It is also the basis for calculating certain management incentive compensation programs. We believe that this measurement is useful to investors as a way to analyze the underlying trends in our core business, including at the segment level, consistently across the periods presented and to evaluate performance under management incentive compensation programs. Adjusted EBITDA consists of Net loss before Interest expense, net, Benefit from income taxes and depreciation and amortization and eliminates (i) certain non-operating income or expense items, and (ii) impacts of certain non-cash, unusual or other items that are included in Net loss and that we do not consider indicative of our ongoing operating performance. Refer to Item 1, “Financial Statements—Note 4. Segment and Geographic Information” for a reconciliation of Adjusted EBITDA by reportable segment to Loss before income taxes. North America Total revenues and Adjusted EBITDA for North America were as follows: Three Months Ended Nine Months Ended (Dollars in millions) September 29, 2024 October 1, 2023 % Change September 29, 2024 October 1, 2023 % Change Total revenues $ 436.2 $ 465.2 (6) % $ 1,220.2 $ 1,426.8 (14) % Adjusted EBITDA $ 233.0 $ 253.4 (8) % $ 625.7 $ 708.1 (12) % Total revenues were $436.2 million for the three months ended September 29, 2024, compared to $465.2 million for the three months ended October 1, 2023. The decrease was primarily driven by lower revenues for Sofia SARS Antigen assays and the wind-down of the U.S. donor screening business, partially offset by higher demand for QuickVue SARS Antigen assays. Total revenues were $1,220.2 million for the nine months ended September 29, 2024, compared to $1,426.8 million for the nine months ended October 1, 2023. The decrease was primarily driven by a COVID-19 government award in the prior year period and the wind-down of the U.S. donor screening business, partially offset by an increase in revenues for Sofia SARS Antigen assays. Adjusted EBITDA was $233.0 million for the three months ended September 29, 2024, compared to $253.4 million for the three months ended October 1, 2023. The decrease was primarily driven by lower revenues for Sofia SARS Antigen assays and 29 the wind-down of the U.S. donor screening business, partially offset by a decrease in employee compensation costs, lower other operating expenses and higher demand for QuickVue SARS Antigen assays. Adjusted EBITDA was $625.7 million for the nine months ended September 29, 2024, compared to $708.1 million for the nine months ended October 1, 2023. The decrease was primarily driven by a COVID-19 government award in the prior year period, along with the corresponding inventory release of $39 million, partially offset by a decrease in employee compensation costs, lower other operating expenses and an increase in revenues for Sofia SARS Antigen assays. EMEA Total revenues and Adjusted EBITDA for EMEA were as follows: Three Months Ended Nine Months Ended (Dollars in millions) September 29, 2024 October 1, 2023 % Change September 29, 2024 October 1, 2023 % Change Total revenues $ 84.0 $ 74.5 13 % $ 249.9 $ 236.4 6 % Adjusted EBITDA $ 6.7 $ 10.2 (34) % $ 30.9 $ 22.7 36 % Total revenues were $84.0 million for the three months ended September 29, 2024, compared to $74.5 million for the three months ended October 1, 2023, primarily driven by an increase in Labs and Immunohematology revenues. Total revenues were $249.9 million for the nine months ended September 29, 2024, compared to $236.4 million for the nine months ended October 1, 2023, primarily driven by an increase in Labs and Immunohematology revenues. Adjusted EBITDA was $6.7 million for the three months ended September 29, 2024, compared to $10.2 million for the three months ended October 1, 2023. The decrease was primarily driven by (i) product mix and (ii) foreign exchange net losses resulting from re-measurement and settlement transactions, including loans transacted in non-functional currencies. These decreases were partially offset by (i) an increase in Labs and Immunohematology revenues and (ii) net gains realized on foreign currency forward contracts. Adjusted EBITDA was $30.9 million for the nine months ended September 29, 2024, compared to $22.7 million for the nine months ended October 1, 2023, primarily driven by an increase in Labs and Immunohematology revenues and product mix. China Total revenues and Adjusted EBITDA for China were as follows: Three Months Ended Nine Months Ended (Dollars in millions) September 29, 2024 October 1, 2023 % Change September 29, 2024 October 1, 2023 % Change Total revenues $ 80.4 $ 81.1 (1) % $ 238.1 $ 233.0 2 % Adjusted EBITDA $ 36.9 $ 37.3 (1) % $ 97.4 $ 96.0 1 % Total revenues were $80.4 million for the three months ended September 29, 2024, which decreased slightly compared to $81.1 million for the three months ended October 1, 2023, driven by an increase of 6% in Labs revenues, offset by decreases in other business units revenues. Total revenues were $238.1 million for the nine months ended September 29, 2024, compared to $233.0 million for the nine months ended October 1, 2023, driven by an increase of 7% in Labs revenues, offset by decreases in other business units revenues. Adjusted EBITDA was $36.9 million for the three months ended September 29, 2024, compared to $37.3 million for the three months ended October 1, 2023. The decrease was primarily driven by a decrease in other business units revenues, partially offset by higher Labs revenues. Adjusted EBITDA was $97.4 million for the nine months ended September 29, 2024, compared to $96.0 million for the nine months ended October 1, 2023. The increase was primarily driven by higher Labs revenues, partially offset by a decrease in other business units revenues and the impact from changes in product mix. 30 Other Total revenues and Adjusted EBITDA for Other were as follows: Three Months Ended Nine Months Ended (Dollars in millions) September 29, 2024 October 1, 2023 % Change September 29, 2024 October 1, 2023 % Change Total revenues $ 126.5 $ 123.2 3 % $ 366.9 $ 359.0 2 % Adjusted EBITDA $ 31.7 $ 31.2 2 % $ 97.8 $ 89.3 10 % Total revenues were $126.5 million for the three months ended September 29, 2024, which increased slightly compared to $123.2 million for the three months ended October 1, 2023, primarily due to an increase in Labs revenues, partially offset by a decrease in Point of Care revenues. Total revenues were $366.9 million for the nine months ended September 29, 2024, compared to $359.0 million for the nine months ended October 1, 2023, primarily driven by an increase in Labs revenues, partially offset by a decrease in Point of Care revenues. Adjusted EBITDA was $31.7 million for the three months ended September 29, 2024, which increased slightly compared to $31.2 million for the three months ended October 1, 2023. The increase was primarily driven by an increase in Labs revenues, partially offset by a decrease in Point of Care revenues and product mix. Adjusted EBITDA was $97.8 million for the nine months ended September 29, 2024, compared to $89.3 million for the nine months ended October 1, 2023, primarily driven by an increase in Labs revenues, partially offset by a decrease in Point of Care revenues and product mix. Liquidity and Capital Resources As of September 29, 2024 and December 31, 2023, our principal sources of liquidity consisted of the following: (Dollars in millions) September 29, 2024 December 31, 2023 Cash and cash equivalents $ 143.7 $ 118.9 Marketable securities, current — 48.4 Marketable securities, non-current — 7.4 Total cash, cash equivalents and marketable securities $ 143.7 $ 174.7 Amount available to borrow under the Revolving Credit Facility $ 557.0 $ 787.1 Working capital including cash and cash equivalents and marketable securities, current $ 385.3 $ 476.7 As of September 29, 2024, we had $143.7 million in Cash and cash equivalents, a $24.8 million increase from December 31, 2023. Our cash requirements fluctuate as a result of numerous factors, including cash generated from operations, progress in R&D, capital expansion projects and acquisition and business development activities. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs. Debt Capitalization Our Credit Agreement consists of a $2,750.0 million Term Loan and an $800.0 million Revolving Credit Facility. Availability under the Revolving Credit Facility, after deducting letters of credit of $13.0 million and $230.0 million borrowings outstanding, was $557.0 million as of September 29, 2024. On April 25, 2024, we entered into the Amendment, by and among us, the lenders party thereto, and Bank of America, N.A., as administrative agent, which amended the Credit Agreement. The Amendment sets a maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) for the applicable measurement period as of the last day of each fiscal quarter of (a) 4.50 to 1.00 on or prior to June 30, 2023, (b) 4.00 to 1.00 after June 30, 2023 and on or prior to June 30, 2024, (c) 4.25 to 1.00 after June 30, 2024 and on or prior to December 31, 2024, (d) 4.00 to 1.00 after December 31, 2024 and on or prior to June 30, 2025 and (e) 3.75 to 1.00 each fiscal quarter after June 30, 2025. The Credit Agreement contains a minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 to 1.00 as of the end of any fiscal quarter for the most recently completed four fiscal quarters. We were in compliance with the financial covenants as of September 29, 2024. 31 Capital Expenditures Capital expenditures, including investments, were $147.9 million for the nine months ended September 29, 2024. We continue to make capital expenditures in connection with the expansion of our manufacturing capabilities and other facility-related activities. Cash Flow Summary Nine Months Ended (In millions) September 29, 2024 October 1, 2023 Net cash provided by operating activities $ 19.3 $ 199.8 Net cash used for investing activities (112.0) (132.5) Net cash provided by (used for) financing activities 117.7 (208.0) Effect of exchange rates on cash (0.5) (3.3) Net increase (decrease) in cash, cash equivalents and restricted cash $ 24.5 $ (144.0) Nine Months Ended September 29, 2024 Cash provided by operating activities was $19.3 million for the nine months ended September 29, 2024, and reflected a net loss of $1,873.6 million and non-cash adjustments of $2,099.8 million, primarily associated with a goodwill impairment charge and change in deferred tax assets and liabilities as well as depreciation and amortization, asset impairment charge and stock-based compensation expense. Cash provided by operating activities was also driven by $110.9 million cash outflows for inventories. Cash used for investing activities was $112.0 million for the nine months ended September 29, 2024, and was primarily related to $147.9 million in purchases of property, plant, equipment, investments and intangibles. We also sold $63.1 million of marketable securities. Cash provided by financing activities was $117.7 million for the nine months ended September 29, 2024, and was primarily related to net proceeds from the Revolving Credit Facility of $230.0 million, partially offset by payments on long-term borrowings of $107.0 million. Nine Months Ended October 1, 2023 Cash provided by operating activities was $199.8 million for the nine months ended October 1, 2023, and reflected a net loss of $17.1 million and non-cash adjustments of $366.6 million, primarily associated with depreciation and amortization, stock-based compensation expense and accretion of interest on deferred consideration. We benefited from collections on accounts receivables of $124.1 million, primarily due to a COVID-19 government award, offset by other changes in working capital, including $146.0 million cash outflows for inventories. Cash used for investing activities was $132.5 million for the nine months ended October 1, 2023, and was primarily related to $160.7 million in purchases of property, plant, equipment, investments and intangibles. We also purchased $50.6 million and sold $68.3 million of marketable securities. Cash used for financing activities was $208.0 million for the nine months ended October 1, 2023, and was primarily related to payments on long-term borrowings of $175.7 million, payments for deferred consideration of $30.3 million and payments of tax withholdings related to vesting of stock-based awards of $13.0 million. Liquidity Outlook Short-term Liquidity Outlook Our primary source of liquidity, other than our holdings of Cash and cash equivalents, has been cash flows from operations. Cash generated from operations provides us with the financial flexibility we need to meet normal operating, investing and financing needs. We anticipate that our current Cash and cash equivalents, together with cash provided by operating activities and amounts available under our Revolving Credit Facility, will be sufficient to fund our near-term capital and operating needs for at least the next 12 months. Normal operating needs include the planned costs to operate our business, including amounts required to fund working capital, R&D and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to: • interest on and repayments of our long-term borrowings and lease obligations; 32 • acquisitions of property, equipment and other fixed assets in support of our manufacturing facility expansions; • the continued advancement of R&D efforts; • our integration of the Ortho business arising from the Combinations; • support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources; and • potential strategic acquisitions and investments. Due to the risks inherent in the product development process, we are unable to estimate with meaningful certainty the costs we will incur in the continued development of our product candidates for commercialization. Our R&D costs may be substantial as we move product candidates into preclinical and clinical trials and advance our existing product candidates into later stages of development. The primary purposes of our capital expenditures are to invest in manufacturing capacity expansion, acquire certain of our instruments, acquire scientific equipment, purchase or develop IT and implement facility improvements. We plan to fund the capital expenditures with the cash on our balance sheet. We are focused on expanding the number of instruments placed in the field and solidifying long-term contractual relationships with customers. In order to achieve this goal, in certain jurisdictions where it is permitted, we have leveraged a reagent rental model that has been recognized as more attractive to certain customers. In this model, we lease, rather than sell, instruments to our customers. Over the term of the contract, the purchase price of the instrument is embedded in the price of the assays and reagents. Going forward, we intend to increase the number of reagent rental placements in developed markets, a strategy that we believe is beneficial to our commercial goals because it lowers our customers’ upfront capital costs and therefore allows purchasing decisions to be made at the lab manager level. For these same reasons, the reagent rental model also benefits our commercial strategy in emerging markets. We believe that the shift in our sales strategy will grow our installed base, thereby increasing sales of higher-margin assays, reagents and other consumables over the life of the customer contracts and enhancing our recurring revenue and cash flows. During the nine months ended September 29, 2024, we transferred $99.4 million of instrument inventories from Inventories to Property, plant and equipment, net, further increasing our investment in property, plant and equipment. Long-term Liquidity Outlook Our future capital requirements and the adequacy of our available funds to service any long-term debt outstanding and to fund working capital expenditures and business development efforts will depend on many factors, including: • our ability to successfully integrate the Ortho business and realize cross-selling revenue synergies; • our ability to realize revenue growth from our new technologies and create innovative products in our markets; • outstanding debt and covenant restrictions; • our ability to leverage our operating expenses to realize operating profits as we grow revenue; • competing technological and market developments; and • our entry into strategic collaborations with other companies or acquisitions of other companies or technologies to enhance or complement our product and service offerings. On March 1, 2024, our lease for warehouse space in the U.S. commenced. Information regarding the lease is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Recent Accounting Pronouncements There have been no accounting pronouncements issued or adopted during the nine months ended September 29, 2024 that are expected to have a material impact on the Company’s financial statements. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our critical accounting estimates are those that significantly affect our financial condition and results of operations and require the most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain. Because of this uncertainty, actual results may vary from these estimates. 33 A comprehensive discussion of our critical accounting estimates is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. Other than the following, there have been no significant changes to our critical accounting policies and estimates during the nine months ended September 29, 2024: Goodwill Impairment We test goodwill for impairment on an annual basis on the first day of the fourth quarter and monitor throughout the year for impairment triggering events that indicate that the carrying value of one or more of our reporting units exceeds its fair value. During the first quarter of 2024, we concluded that (i) the sustained decline in our stock price and market capitalization that occurred during the first quarter of 2024, (ii) the faster than expected decline in COVID-19 and flu markets, and (iii) the delay in the timing of expected commercialization for Savanna were triggering events requiring an interim goodwill impairment assessment for all reporting units. Based on our interim goodwill impairment assessment in the first quarter of 2024, we concluded that the North America reporting unit’s carrying value exceeded its estimated fair value. As a result, we recorded a non-cash goodwill impairment charge of $1.7 billion in the first quarter of 2024 for the North America reporting unit, which represented a full impairment of the goodwill allocated to the North America reporting unit. The decline in the estimated fair value of the North America reporting unit and the resulting impairment were primarily driven by revised short-term and mid-term forecasts for revenue and EBITDA expectations in North America. The estimated fair values of our EMEA, Latin America and JPAC reporting units as of the interim testing date exceeded their respective carrying values. The excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) ranged from approximately 30% to 150%. Due to the significant excess of fair value over carrying value of these reporting units, they are less sensitive to changes in forecast assumptions. To evaluate the sensitivity of the fair value calculations used in the interim goodwill impairment test for the EMEA, Latin America and JPAC reporting units, we applied a hypothetical 5% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values. Based on this hypothetical 5% decrease, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of our reporting units ranged from approximately 25% to 140%. The quantitative goodwill impairment assessment for all reporting units consisted of a fair value calculation that combines an income approach, using a discounted cash flow method, and a market approach, using the guideline public company method. The quantitative goodwill impairment assessment requires the application of a number of significant assumptions, including estimates of future revenue growth rates, EBITDA margins, discount rates and market multiples. The projected future revenue growth rates and EBITDA margins, and the resulting projected cash flows are based on historical experience and internal annual operating plans reviewed by management, extrapolated over the forecast period. Discount rates are determined using a weighted average cost of capital adjusted for risk factors specific to the reporting units. Market multiples are based on the guideline public company method using comparable publicly traded company multiples of revenue and EBITDA for a group of benchmark companies. We believe the assumptions that were used in the quantitative goodwill impairment assessment are reasonable and consistent with assumptions that would be used by other marketplace participants. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in our exposure to market risk from that described in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report.