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 statements 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,” “could,” “would,” “should,” “might,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “goal,” “project,” “strategy,” “future,” “continue,” “aim,” “strive,” “seek” 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 arising from the effects of announced or future or amended tariffs, trade policies and global trade relations, as well as 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 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, Transfusion Medicine (Immunohematology and Donor Screening product categories), Point of Care and Molecular Diagnostics. We also generate non-core revenue, including through our contract manufacturing business and certain business collaborations, which accounted for $33.4 million and $31.0 million for the three months ended March 30, 2025 and March 31, 2024, respectively. For the three months ended March 30, 2025, Total revenues decreased by 3% to $692.8 million as compared to the same period in the prior year. This decrease was primarily driven by variability of our U.S. respiratory products, mainly due to a decrease in COVID-19 revenues, partially offset by an increase in flu revenues. Currency exchange rates had an unfavorable impact of 150 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 three months ended March 30, 2025 and March 31, 2024, revenues related to our respiratory 19 products accounted for 17% and 19% of our Total revenues, respectively. The respiratory product revenue included $23.4 million and $50.2 million revenue related to COVID-19 for the three months ended March 30, 2025 and March 31, 2024, respectively. 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. Recent Macroeconomic Trends and Challenges In recent months, the United States has announced tariffs on imports from most countries, including significant tariffs on imports from U.K., Canada, Mexico and China, leading to increasing trade and political tensions. In response to tariffs, other countries have implemented retaliatory tariffs on U.S. goods. These actions and the related rising political tensions could negatively impact global macroeconomic conditions and the stability of global financial markets, which could have a material adverse effect on our business, financial condition and results of operations, including through increased supply chain costs. There is substantial uncertainty about the duration of existing tariffs or pauses in tariffs, tariff levels and whether additional tariffs or other retaliatory actions may be imposed, modified or suspended. We continue to closely monitor these events as they unfold and assess their potential impact on our operations to inform our response strategy. 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. 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. 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. 20 Results of Operations Revenues The following table compares Total revenues by business unit for the three months ended March 30, 2025 and March 31, 2024: Three Months Ended (Dollars in millions) March 30, 2025 March 31, 2024 % Change Labs $ 373.1 $ 356.9 5 % Immunohematology (1) 128.5 127.0 1 % Donor Screening (1) 12.8 33.3 (62) % Point of Care 170.8 186.6 (8) % Molecular Diagnostics 7.6 7.2 6 % Total revenues $ 692.8 $ 711.0 (3) % (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 March 30, 2025, Total revenues decreased to $692.8 million from $711.0 million for the same period in the prior year. Labs revenue increased 5% compared to the prior year period, primarily due to growth in reagents, consumables and services, partially offset by a decline in instrument revenue. Immunohematology revenue increased 1% compared to the prior year period, primarily due to reagent growth. Donor Screening revenue decreased 62% 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 $15.8 million, or 37% in sales of QuickVue SARS Antigen assays. Molecular Diagnostics revenue increased 6% compared to the prior year period, driven by higher Savanna revenue. Currency exchange rates had an unfavorable impact of 150 basis points on our growth rate for the three months ended March 30, 2025. Cost of Sales, Excluding Amortization of Intangible Assets Cost of sales, excluding amortization of intangible assets, decreased to $349.5 million, or 50.4% of Total revenues, for the three months ended March 30, 2025, compared to $378.9 million, or 53.3% of Total revenues, for the three months ended March 31, 2024. The decrease in cost of sales, excluding amortization of intangible assets, was driven primarily by procurement-related cost-savings initiatives actioned in 2024. Operating Expenses The following table summarizes operating expenses for the three months ended March 30, 2025 and March 31, 2024: Three Months Ended (Dollars in millions) March 30, 2025 % of Total Revenues March 31, 2024 % of Total Revenues Selling, marketing and administrative $ 187.0 27.0 % $ 204.7 28.8 % Research and development 53.2 7.7 % 59.2 8.3 % Amortization of intangible assets 48.0 6.9 % 51.7 7.3 % Integration related costs 16.1 2.3 % 22.6 3.2 % Goodwill impairment charge — N/M 1,743.9 N/M Other operating expenses 6.4 0.9 % 8.0 1.1 % * N/M - Not meaningful Selling, Marketing and Administrative Expenses Selling, marketing and administrative expenses for the three months ended March 30, 2025 decreased by $17.7 million, or 8.6%, to $187.0 million from $204.7 million for the same period in the prior year, primarily due to compensation costs related to cost-savings initiatives actioned in 2024. 21 Research and Development Expense Research and development expense for the three months ended March 30, 2025 decreased by $6.0 million, or 10.1%, to $53.2 million from $59.2 million for the same period in the prior year, primarily due to compensation costs related to cost-savings initiatives actioned in 2024. Amortization of Intangible Assets Amortization of intangible assets was $48.0 million and $51.7 million for the three months ended March 30, 2025 and March 31, 2024, respectively. Integration Related Costs Integration related costs were $16.1 million and $22.6 million for the three months ended March 30, 2025 and March 31, 2024, respectively. The decrease in costs compared to the prior year period was primarily due to lower consulting costs and compensation related charges. Goodwill Impairment Charge We recognized a non-cash goodwill impairment charge of $1.7 billion for the three months ended March 31, 2024. Other Operating Expenses Other operating expenses were $6.4 million and $8.0 million for the three months ended March 30, 2025 and March 31, 2024, respectively. Other operating expenses were primarily related to the profit share expense for our Joint Business. Non-operating Expenses Interest Expense, Net Interest expense, net was $40.0 million and $39.0 million for the three months ended March 30, 2025 and March 31, 2024, respectively. Refer to Item 1, “Financial Statements—Note 7. Borrowings” for more information. Other Expense, Net Other expense, net was $1.4 million and $1.9 million for the three months ended March 30, 2025 and March 31, 2024, respectively. Income Taxes For the three months ended March 30, 2025, we recognized a provision for income taxes of $3.9 million in relation to loss before income taxes of $8.8 million, resulting in a negative effective tax rate of 44.3%. For the three months ended March 31, 2024, we recognized an income tax benefit of $92.9 million in relation to loss before income taxes of $1,798.9 million, resulting in an effective tax rate of 5.2%. For the three months ended March 30, 2025, the effective tax rate differed from the U.S. federal statutory rate primarily due to the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances. For the three months ended March 31, 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. Segment Results We operate under three geographically-based reportable segments: North America, EMEA and China. Our operations in Latin America and JPAC are immaterial operating segments that are not considered reportable segments and are included in “Other.” In the fourth quarter of 2024, we revised the internal allocation of certain global costs primarily between the North America segment and Corporate to better align costs that impact us as a whole. Prior periods have been revised to align with the current period presentation. 22 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, Provision for (benefit from) income taxes and depreciation and amortization and eliminates (i) certain non-operating income or expense items, and (ii) impacts of certain 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 (Dollars in millions) March 30, 2025 March 31, 2024 % Change Total revenues $ 406.7 $ 433.9 (6) % Adjusted EBITDA $ 234.3 $ 236.6 (1) % Total revenues were $406.7 million for the three months ended March 30, 2025, compared to $433.9 million for the three months ended March 31, 2024. The decrease was primarily driven by the wind-down of the U.S. donor screening business and a decrease in sales of QuickVue SARS Antigen assays, partially offset by an increase in Labs revenues. Adjusted EBITDA was $234.3 million for the three months ended March 30, 2025, compared to $236.6 million for the three months ended March 31, 2024. The decrease was primarily driven by decreases in revenue due to the wind-down of the U.S. donor screening business and sales of QuickVue SARS Antigen assays, partially offset by an increase in Labs revenues and lower operating expenses due to cost-savings initiatives. EMEA Total revenues and Adjusted EBITDA for EMEA were as follows: Three Months Ended (Dollars in millions) March 30, 2025 March 31, 2024 % Change Total revenues $ 88.9 $ 84.8 5 % Adjusted EBITDA $ 16.5 $ 11.6 42 % Total revenues were $88.9 million for the three months ended March 30, 2025, compared to $84.8 million for the three months ended March 31, 2024, primarily driven by increases in revenues across most of our business units. Adjusted EBITDA was $16.5 million for the three months ended March 30, 2025, compared to $11.6 million for the three months ended March 31, 2024, primarily driven by lower operating expenses due to cost-savings initiatives and increases in revenues. China Total revenues and Adjusted EBITDA for China were as follows: Three Months Ended (Dollars in millions) March 30, 2025 March 31, 2024 % Change Total revenues $ 75.0 $ 76.1 (1) % Adjusted EBITDA $ 29.3 $ 26.1 12 % Total revenues were $75.0 million for the three months ended March 30, 2025, compared to $76.1 million for the three months ended March 31, 2024, driven by a decrease in Point of Care revenues, partially offset by an increases in Labs and Donor Screening revenues. 23 Adjusted EBITDA was $29.3 million for the three months ended March 30, 2025, compared to $26.1 million for the three months ended March 31, 2024. The increase was primarily driven by the impact from changes in product mix and higher Labs revenues. Other Total revenues and Adjusted EBITDA for Other were as follows: Three Months Ended (Dollars in millions) March 30, 2025 March 31, 2024 % Change Total revenues $ 122.2 $ 116.2 5 % Adjusted EBITDA $ 29.6 $ 31.5 (6) % Total revenues were $122.2 million for the three months ended March 30, 2025, compared to $116.2 million for the three months ended March 31, 2024, primarily driven by an increase in Labs revenues. Adjusted EBITDA was $29.6 million for the three months ended March 30, 2025, compared to $31.5 million for the three months ended March 31, 2024, primarily driven by higher operating expenses and the impact from changes in product mix. Liquidity and Capital Resources As of March 30, 2025 and December 29, 2024, our principal sources of liquidity consisted of the following: (In millions) March 30, 2025 December 29, 2024 Cash and cash equivalents $ 127.1 $ 98.3 Amount available to borrow under the Revolving Credit Facility $ 537.3 $ 589.0 Working capital including cash and cash equivalents $ 211.0 $ 220.1 As of March 30, 2025, we had $127.1 million in Cash and cash equivalents, a $28.8 million increase from December 29, 2024. 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 $12.7 million and $250.0 million borrowings outstanding, was $537.3 million as of March 30, 2025. On April 25, 2024, we entered into Amendment No. 2 to the Credit Agreement, by and among us, the lenders party thereto, and Bank of America, N.A., as administrative agent. 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 March 30, 2025. Capital Expenditures Capital expenditures, including investments, were $56.2 million for the three months ended March 30, 2025. We continue to make capital expenditures in connection with the expansion of our manufacturing capabilities and other facility-related activities. 24 Cash Flow Summary Three Months Ended (In millions) March 30, 2025 March 31, 2024 Net cash provided by (used for) operating activities $ 65.6 $ (0.7) Net cash used for investing activities (56.2) (20.2) Net cash provided by (used for) financing activities 17.6 (18.5) Effect of exchange rates on cash 1.7 (1.1) Net increase (decrease) in cash, cash equivalents and restricted cash $ 28.7 $ (40.5) Three Months Ended March 30, 2025 Cash provided by operating activities was $65.6 million for the three months ended March 30, 2025 and reflected a net loss of $12.7 million and non-cash adjustments of $123.7 million, primarily associated with depreciation and amortization and stock-based compensation expense, partially offset by $53.1 million in cash outflows for inventories. Cash used for investing activities of $56.2 million for the three months ended March 30, 2025 was related to purchases of property, plant, equipment, investments and intangibles. Cash provided by financing activities was $17.6 million for the three months ended March 30, 2025 and was primarily related to net proceeds from the Revolving Credit Facility of $52.0 million, partially offset by payments on long-term borrowings of $36.0 million. Three Months Ended March 31, 2024 Cash used for operating activities was $0.7 million for the three months ended March 31, 2024 and reflected a net loss of $1,706.0 million and non-cash adjustments of $1,791.6 million, primarily associated with a goodwill impairment charge and change in deferred tax assets and liabilities as well as depreciation and amortization and stock-based compensation expense. We benefited from collections on accounts receivables, which contributed cash inflows of $26.4 million, offset by other changes in working capital, including $37.7 million cash outflows for inventories. Cash used for investing activities was $20.2 million for the three months ended March 31, 2024 and was primarily related to $66.1 million in purchases of property, plant, equipment, investments and intangibles. We also sold $63.1 million of marketable securities. Cash used for financing activities was $18.5 million for the three months ended March 31, 2024 and was primarily related to payments on long-term borrowings of $51.9 million and net proceeds from the Revolving Credit Facility of $40.0 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; • 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. 25 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, where permitted by law. 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. 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 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 with revenue growth; • 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. Recent Accounting Pronouncements There have been no accounting pronouncements issued or adopted during the three months ended March 30, 2025 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. 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. There have been no significant changes to our critical accounting policies and estimates during the three months ended March 30, 2025. 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.