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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
____________________________________________________________________________
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
or | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-41409
____________________________________________________________________________
QUIDELORTHO CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________________________________ | | | | | | | | |
Delaware | | 87-4496285 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
9975 Summers Ridge Road, San Diego, California | | 92121 |
(Address of principal executive offices) | | (zip code) |
(858) 552-1100
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 Par Value | QDEL | The Nasdaq Stock Market |
____________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
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Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 24, 2024, 67,235,394 shares of the registrant’s common stock were outstanding.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
QUIDELORTHO CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except par value) | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 107.0 | | | $ | 118.9 | |
Marketable securities | — | | | 48.4 | |
Accounts receivable, net | 269.5 | | | 303.3 | |
Inventories | 602.0 | | | 577.8 | |
Prepaid expenses and other current assets | 310.0 | | | 262.1 | |
Assets held for sale | 52.8 | | | — | |
Total current assets | 1,341.3 | | | 1,310.5 | |
Property, plant and equipment, net | 1,326.7 | | | 1,443.8 | |
Marketable securities | — | | | 7.4 | |
Right-of-use assets | 177.2 | | | 169.6 | |
Goodwill | 732.5 | | | 2,492.0 | |
Intangible assets, net | 2,836.0 | | | 2,934.3 | |
Deferred tax asset | 24.7 | | | 25.9 | |
Other assets | 250.8 | | | 179.6 | |
Total assets | $ | 6,689.2 | | | $ | 8,563.1 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 237.4 | | | $ | 294.8 | |
Accrued payroll and related expenses | 86.0 | | | 84.8 | |
Income tax payable | 3.5 | | | 11.1 | |
Current portion of borrowings | 356.4 | | | 139.8 | |
Other current liabilities | 249.1 | | | 303.3 | |
Total current liabilities | 932.4 | | | 833.8 | |
Operating lease liabilities | 177.7 | | | 172.8 | |
Long-term borrowings | 2,207.2 | | | 2,274.8 | |
Deferred tax liability | 127.9 | | | 192.2 | |
Other liabilities | 70.5 | | | 83.6 | |
Total liabilities | 3,515.7 | | | 3,557.2 | |
Commitments and contingencies (Note 11) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.001 par value per share; 5.0 shares authorized; none issued or outstanding at June 30, 2024 and December 31, 2023 | — | | | — | |
Common stock, $0.001 par value per share; 126.2 shares authorized; 67.1 and 66.7 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | 0.1 | | | 0.1 | |
Additional paid-in capital | 2,863.9 | | | 2,848.0 | |
Accumulated other comprehensive loss | (24.6) | | | (30.0) | |
Retained earnings | 334.1 | | | 2,187.8 | |
Total stockholders’ equity | 3,173.5 | | | 5,005.9 | |
Total liabilities and stockholders’ equity | $ | 6,689.2 | | | $ | 8,563.1 | |
See accompanying notes.
QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
Total revenues | $ | 637.0 | | | $ | 665.1 | | | $ | 1,348.0 | | | $ | 1,511.2 | |
Cost of sales, excluding amortization of intangibles | 361.0 | | | 368.6 | | | 739.9 | | | 766.1 | |
Selling, marketing and administrative | 188.2 | | | 179.1 | | | 392.9 | | | 381.5 | |
Research and development | 56.3 | | | 62.4 | | | 115.5 | | | 124.2 | |
Amortization of intangible assets | 51.9 | | | 51.4 | | | 103.6 | | | 102.2 | |
Integration related costs | 30.9 | | | 24.2 | | | 53.5 | | | 53.9 | |
Goodwill impairment charge | — | | | — | | | 1,743.9 | | | — | |
Asset impairment charge | 56.9 | | | 0.5 | | | 56.9 | | | 1.0 | |
Other operating expenses | 9.3 | | | 5.8 | | | 17.3 | | | 9.6 | |
Operating (loss) income | (117.5) | | | (26.9) | | | (1,875.5) | | | 72.7 | |
Interest expense, net | 41.0 | | | 36.5 | | | 80.0 | | | 73.2 | |
| | | | | | | |
Other expense, net | 4.4 | | | 1.0 | | | 6.3 | | | 3.9 | |
Loss before income taxes | (162.9) | | | (64.4) | | | (1,961.8) | | | (4.4) | |
Benefit from income taxes | (15.2) | | | (11.2) | | | (108.1) | | | — | |
Net loss | $ | (147.7) | | | $ | (53.2) | | | $ | (1,853.7) | | | $ | (4.4) | |
Basic loss per share | $ | (2.20) | | | $ | (0.80) | | | $ | (27.67) | | | $ | (0.07) | |
Diluted loss per share | $ | (2.20) | | | $ | (0.80) | | | $ | (27.67) | | | $ | (0.07) | |
Weighted-average shares outstanding - basic | 67.1 | | | 66.8 | | | 67.0 | | | 66.7 | |
Weighted-average shares outstanding - diluted | 67.1 | | | 66.8 | | | 67.0 | | | 66.7 | |
See accompanying notes.
QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
Net loss | $ | (147.7) | | | $ | (53.2) | | | $ | (1,853.7) | | | $ | (4.4) | |
Other comprehensive (loss) income | | | | | | | |
Changes in cumulative translation adjustment, net of tax | (5.3) | | | 7.4 | | | (26.1) | | | 38.1 | |
Changes in unrealized (losses) gains from investments, net of tax | — | | | (0.1) | | | — | | | 0.1 | |
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Changes in unrealized gains from cash flow hedges, net of tax: | | | | | | | |
Net unrealized gains on derivative instruments | 13.1 | | | 40.0 | | | 43.6 | | | 23.1 | |
Reclassification of net realized gains on derivative instruments included in net income | (6.2) | | | (4.3) | | | (12.1) | | | (10.0) | |
Total change in unrealized gains from cash flow hedges, net of tax | 6.9 | | | 35.7 | | | 31.5 | | | 13.1 | |
Comprehensive (loss) income | $ | (146.1) | | | $ | (10.2) | | | $ | (1,848.3) | | | $ | 46.9 | |
See accompanying notes.
QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | Additional paid-in capital | | Accumulated other comprehensive (loss) income | | Retained earnings | | Total stockholders’ equity |
| Shares | | Par | | | | | | | | |
Balance at December 31, 2023 | 66.7 | | | $ | 0.1 | | | | | | | $ | 2,848.0 | | | $ | (30.0) | | | $ | 2,187.8 | | | $ | 5,005.9 | |
Issuance of common stock under equity compensation plans | 0.2 | | | — | | | | | | | 0.8 | | | — | | | — | | | 0.8 | |
Stock-based compensation expense | — | | | — | | | | | | | 9.0 | | | — | | | — | | | 9.0 | |
Tax withholdings related to vesting of stock-based awards | (0.1) | | | — | | | | | | | (5.8) | | | — | | | — | | | (5.8) | |
Other comprehensive income, net of tax | — | | | — | | | | | | | — | | | 3.8 | | | — | | | 3.8 | |
Net loss | — | | | — | | | | | | | — | | | — | | | (1,706.0) | | | (1,706.0) | |
Balance at March 31, 2024 | 66.8 | | | 0.1 | | | | | | | 2,852.0 | | | (26.2) | | | 481.8 | | | 3,307.7 | |
Issuance of common stock under equity compensation plans | 0.4 | | | — | | | | | | | 4.1 | | | — | | | — | | | 4.1 | |
Stock-based compensation expense | — | | | — | | | | | | | 10.3 | | | — | | | — | | | 10.3 | |
Tax withholdings related to vesting of stock-based awards | (0.1) | | | — | | | | | | | (2.5) | | | — | | | — | | | (2.5) | |
Other comprehensive income, net of tax | — | | | — | | | | | | | — | | | 1.6 | | | — | | | 1.6 | |
Net loss | — | | | — | | | | | | | — | | | — | | | (147.7) | | | (147.7) | |
Balance at June 30, 2024 | 67.1 | | | $ | 0.1 | | | | | | | $ | 2,863.9 | | | $ | (24.6) | | | $ | 334.1 | | | $ | 3,173.5 | |
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| Common Stock | | Additional paid-in capital | | Accumulated other comprehensive (loss) income | | Retained earnings | | Total stockholders’ equity | | | | |
| Shares | | Par | | | | | | | | |
Balance at January 1, 2023 | 66.4 | | | $ | — | | | $ | 2,804.3 | | | $ | (67.6) | | | $ | 2,197.9 | | | $ | 4,934.6 | | | | | |
Issuance of common stock under equity compensation plans | 0.3 | | | 0.1 | | | 3.8 | | | — | | | — | | | 3.9 | | | | | |
Stock-based compensation expense | — | | | — | | | 10.4 | | | — | | | — | | | 10.4 | | | | | |
Tax withholdings related to vesting of stock-based awards | (0.1) | | | — | | | (9.5) | | | — | | | — | | | (9.5) | | | | | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 8.3 | | | — | | | 8.3 | | | | | |
Net income | — | | | — | | | — | | | — | | | 48.8 | | | 48.8 | | | | | |
Balance at April 2, 2023 | 66.6 | | | 0.1 | | | 2,809.0 | | | (59.3) | | | 2,246.7 | | | 4,996.5 | | | | | |
Issuance of common stock under equity compensation plans | 0.2 | | | — | | | 5.5 | | | — | | | — | | | 5.5 | | | | | |
Stock-based compensation expense | — | | | — | | | 13.7 | | | — | | | — | | | 13.7 | | | | | |
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Tax withholdings related to vesting of stock-based awards | — | | | — | | | (3.0) | | | — | | | — | | | (3.0) | | | | | |
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Other comprehensive income, net of tax | — | | | — | | | — | | | 43.0 | | | — | | | 43.0 | | | | | |
Net loss | — | | | — | | | — | | | — | | | (53.2) | | | (53.2) | | | | | |
Balance at July 2, 2023 | 66.8 | | | $ | 0.1 | | | $ | 2,825.2 | | | $ | (16.3) | | | $ | 2,193.5 | | | $ | 5,002.5 | | | | | |
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See accompanying notes.
QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
| | | | | | | | | | | |
| Six Months Ended |
| June 30, 2024 | | July 2, 2023 |
OPERATING ACTIVITIES | | | |
Net loss | $ | (1,853.7) | | | $ | (4.4) | |
Adjustments to reconcile net loss to net cash (used for) provided by operating activities: | | | |
Depreciation and amortization | 231.0 | | | 228.7 | |
Goodwill impairment charge | 1,743.9 | | | — | |
Asset impairment charge | 56.9 | | | 1.0 | |
Stock-based compensation expense | 20.2 | | | 25.2 | |
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Net change in operating lease right-of-use assets and liabilities | 0.1 | | | 0.2 | |
Change in deferred tax assets and liabilities | (73.6) | | | 0.6 | |
Payment of accreted interest on deferred consideration | — | | | (9.7) | |
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Other non-cash, net | (7.4) | | | (2.3) | |
Changes in assets and liabilities: | | | |
Accounts receivable | 24.2 | | | 214.5 | |
Inventories | (95.2) | | | (86.0) | |
Prepaid expenses and other current and non-current assets | (11.7) | | | (37.8) | |
Accounts payable | (23.9) | | | (35.0) | |
Accrued payroll and related expenses | 2.6 | | | (57.0) | |
Income taxes payable | (58.2) | | | (46.3) | |
Other current and non-current liabilities | (53.8) | | | (33.4) | |
Net cash (used for) provided by operating activities | (98.6) | | | 158.3 | |
INVESTING ACTIVITIES | | | |
Acquisitions of property, plant, equipment, investments and intangibles | (101.4) | | | (117.3) | |
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Proceeds from government assistance allocated to fixed assets | — | | | 2.8 | |
Purchases of marketable securities | (7.2) | | | (50.6) | |
Proceeds from sale of marketable securities | 63.1 | | | 53.9 | |
Other payments | (10.0) | | | — | |
Net cash used for investing activities | (55.5) | | | (111.2) | |
FINANCING ACTIVITIES | | | |
Proceeds from issuance of common stock | 4.6 | | | 7.3 | |
Short-term borrowings, net | (1.6) | | | — | |
Revolving credit facility, net | 253.0 | | | — | |
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Payments on long-term borrowings | (103.7) | | | (123.8) | |
Payments of tax withholdings related to vesting of stock-based awards | (8.3) | | | (12.5) | |
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Principal payments of deferred consideration | — | | | (30.3) | |
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Net cash provided by (used for) financing activities | 144.0 | | | (159.3) | |
Effect of exchange rates on cash | (1.9) | | | (2.1) | |
Net decrease in cash, cash equivalents and restricted cash | (12.0) | | | (114.3) | |
Cash, cash equivalents and restricted cash at beginning of period | 119.5 | | | 293.9 | |
Cash, cash equivalents and restricted cash at end of period | $ | 107.5 | | | $ | 179.6 | |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
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Purchase of property, equipment and intangibles by incurring current liabilities | $ | 9.6 | | | $ | 18.6 | |
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Transfer of instrument inventories to fixed assets | $ | 69.2 | | | $ | 67.3 | |
Reduction of accrued payroll and related expenses upon issuance of restricted share units | $ | 0.3 | | | $ | 1.9 | |
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See accompanying notes.
QuidelOrtho Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of QuidelOrtho Corporation and its subsidiaries (the “Company” or “QuidelOrtho”) have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Refer to the Summary of Abbreviated Terms at the end of this Quarterly Report for definitions of terms used throughout the document.
The information at June 30, 2024, and for the three and six months ended June 30, 2024 and July 2, 2023, is unaudited. For further information, refer to the Company’s Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2023 included in QuidelOrtho’s Annual Report. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year.
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 2024 and 2023, the Company’s fiscal year will end or has ended on December 29, 2024 and December 31, 2023, respectively. For 2024 and 2023, the Company’s second quarter ended on June 30, 2024 and July 2, 2023, respectively. The three and six months ended June 30, 2024 and July 2, 2023 each included 13 and 26 weeks, respectively.
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. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior periods amounts to conform to the current period presentation. Such amounts include a reclassification of $0.5 million and $1.0 million recognized in the three and six months ended July 2, 2023, respectively, related to impairment of long-lived assets from (i) Cost of sales, excluding amortization of intangibles (excludes $0.1 million for both the three and six months ended July 2, 2023), and (ii) Research and development (excludes $0.4 million and $0.9 million for the three and six months ended July 2, 2023, respectively), to Asset impairment charge.
The reclassifications did not have an impact on the Company’s previously reported Consolidated Balance Sheets, Consolidated Statements of Comprehensive (Loss) Income, Consolidated Statements of Stockholders’ Equity or Consolidated Statements of Cash Flows.
Recent Accounting Pronouncements
There have been no accounting pronouncements issued or adopted during the six months ended June 30, 2024 that are expected to have a material impact on the Company’s Consolidated Financial Statements.
Note 2. Computation of Earnings Per Share
The following table presents the calculation of the weighted-average shares used in computing basic and diluted EPS in the respective periods:
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| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
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Basic weighted-average shares of common stock outstanding | 67.1 | | | 66.8 | | | 67.0 | | | 66.7 | |
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Dilutive potential shares issuable from stock options and RSUs(1) | — | | | — | | | — | | | — | |
Diluted weighted-average shares of common stock outstanding | 67.1 | | | 66.8 | | | 67.0 | | | 66.7 | |
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(1) In the three and six months ended June 30, 2024 and July 2, 2023, all potential shares of common stock issuable for stock options and RSUs were excluded from the dilutive calculations above because the effect of including them would have been anti-dilutive. The dilutive
effect of potential shares of common stock issuable for stock options and RSUs on the weighted-average number of shares of common stock outstanding would have been as follows:
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| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
Basic weighted-average shares of common stock outstanding | 67.1 | | | 66.8 | | | 67.0 | | | 66.7 | |
Dilutive potential shares issuable from stock options and RSUs | 0.2 | | | 0.4 | | | 0.3 | | | 0.5 | |
Diluted weighted-average shares of common stock outstanding | 67.3 | | | 67.2 | | | 67.3 | | | 67.2 | |
Stock options and RSUs where the combined exercise price and unrecognized stock-based compensation was greater than the average market price for the Company’s common stock were not included in the computations of diluted weighted-average shares because the effect would have been anti-dilutive under the treasury stock method. These stock options and RSUs represented 2.1 million shares of common stock for both the three and six months ended June 30, 2024, and 1.2 million and 1.1 million shares of common stock for the three and six months ended July 2, 2023, respectively.
Note 3. 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 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 June 30, 2024 and December 31, 2023 was $44.1 million and $46.2 million, respectively.
The contract asset balance consisted of the following components:
•a customer supply agreement under which the difference between the timing of invoicing and revenue recognition resulted in a contract asset of $1.9 million as of December 31, 2023. There was no contract asset remaining as of June 30, 2024;
•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 $44.1 million and $41.8 million as of June 30, 2024 and December 31, 2023, respectively; and
•one of the Company’s contract manufacturing agreements that recognizes revenue as the products are manufactured resulted in a contract asset of $2.5 million as of December 31, 2023. There was no contract asset remaining as of June 30, 2024.
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 the three and six months ended June 30, 2024 and July 2, 2023.
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 $40.1 million and $36.8 million as of June 30, 2024 and December 31, 2023, respectively, and was included in Other current liabilities in the Consolidated Balance Sheets. 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 $15.9 million and $13.9 million as of June 30, 2024 and December 31, 2023, respectively, and was included in Other liabilities in the Consolidated Balance Sheets. The amount of deferred revenue as of December 31, 2023 that was recorded in Total revenues during the three and six months ended June 30, 2024 was $9.2 million and $27.0 million, respectively.
Joint Business with Grifols
The Company has an ongoing 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 Joint Business agreement. The Company’s portion of the pre-tax net profit shared under the Joint Business was $8.9 million and $17.0 million during the three and six months ended June 30, 2024, respectively, and $6.1 million and $29.7 million during the three and six months ended July 2, 2023, respectively. These amounts included the Company’s portion of the pre-tax net profit of $6.5 million and $11.5 million during the three and six months ended June 30, 2024, respectively, and $5.5 million and $6.7 million during the three and six months ended July 2, 2023, respectively, 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 Loss. The Company’s portion of the pre-tax net profit also included revenue from collaboration and royalty agreements of $2.4 million and $5.5 million during the three and six months ended June 30, 2024, respectively, and $0.6 million and $23.0 million during the three and six months ended July 2, 2023, respectively, which is presented on a net basis within Total revenues.
Disaggregation of Revenue
The following table summarizes Total revenues by business unit:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
Labs | $ | 354.2 | | | $ | 361.4 | | | $ | 711.1 | | | $ | 732.1 | |
Transfusion Medicine | 161.3 | | | 163.3 | | | 321.6 | | | 319.2 | |
Point of Care | 117.1 | | | 134.2 | | | 303.7 | | | 442.3 | |
Molecular Diagnostics | 4.4 | | | 6.2 | | | 11.6 | | | 17.6 | |
Total revenues | $ | 637.0 | | | $ | 665.1 | | | $ | 1,348.0 | | | $ | 1,511.2 | |
Concentration of Revenue and Credit Risk
For the six months ended June 30, 2024, one customer represented 11% of Total revenues. For the six months ended July 2, 2023, no customers individually accounted for more than 10% of Total revenues.
As of June 30, 2024, no customers had a balance due in excess of 10% of Accounts receivable, net. As of December 31, 2023, customers with a balance due in excess of 10% of Accounts receivable, net totaled $63.5 million. Revenue related to the Company’s respiratory products accounted for 9% and 14% of Total revenues for the three and six months ended June 30, 2024, respectively, and 13% and 23% for the three and six months ended July 2, 2023, respectively.
Note 4. Segment and Geographic Information
The Company operates in three geographically-based reportable segments: North America, EMEA and China.
Effective January 1, 2024, Japan and Asia Pacific operating segments were combined into one operating segment: JPAC. The CODM reviews the Company’s performance and allocates resources based on five operating segments: North America, EMEA, China, Latin America and JPAC. North America, EMEA and China are the Company’s reportable segments; Latin America and JPAC are immaterial operating segments that are not considered reportable segments and are included in “Other.”
Total revenues by reportable segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
North America | $ | 350.1 | | | $ | 378.8 | | | $ | 784.0 | | | $ | 961.6 | |
EMEA | 81.1 | | | 80.6 | | | 165.9 | | | 161.9 | |
China | 81.6 | | | 81.3 | | | 157.7 | | | 151.9 | |
Other | 124.2 | | | 124.4 | | | 240.4 | | | 235.8 | |
Total revenues | $ | 637.0 | | | $ | 665.1 | | | $ | 1,348.0 | | | $ | 1,511.2 | |
The following table sets forth Adjusted EBITDA by segment and the reconciliations to Loss before income taxes for the three and six months ended June 30, 2024 and July 2, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
North America | $ | 173.9 | | | $ | 176.3 | | | $ | 392.7 | | | $ | 454.7 | |
EMEA | 11.4 | | | 5.3 | | | 24.2 | | | 12.5 | |
China | 35.8 | | | 30.2 | | | 60.5 | | | 58.7 | |
Other | 34.1 | | | 36.3 | | | 66.1 | | | 58.1 | |
Total segment Adjusted EBITDA | 255.2 | | | 248.1 | | | 543.5 | | | 584.0 | |
Corporate (1) | (165.3) | | | (134.8) | | | (321.6) | | | (225.4) | |
Interest expense, net | (41.0) | | | (36.5) | | | (80.0) | | | (73.2) | |
Depreciation and amortization | (116.1) | | | (114.5) | | | (231.0) | | | (228.7) | |
Integration related costs | (30.9) | | | (24.2) | | | (53.5) | | | (53.9) | |
Goodwill impairment charge | — | | | — | | | (1,743.9) | | | — | |
Asset impairment charge | (56.9) | | | (0.5) | | | (56.9) | | | (1.0) | |
Credit Agreement amendment fees | (4.0) | | | — | | | (4.0) | | | — | |
Amortization of deferred cloud computing implementation costs | (3.0) | | | (1.5) | | | (5.9) | | | (3.1) | |
EU medical device regulation transition costs (2) | (0.5) | | | (0.7) | | | (1.1) | | | (1.5) | |
Employee compensation charges | — | | | — | | | (5.6) | | | — | |
Tax indemnification income | — | | | 0.4 | | | — | | | 0.1 | |
Gain (loss) on investments | 0.7 | | | (0.2) | | | — | | | (0.2) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other adjustments | (1.1) | | | — | | | (1.8) | | | (1.5) | |
Loss before income taxes | $ | (162.9) | | | $ | (64.4) | | | $ | (1,961.8) | | | $ | (4.4) | |
(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 the Company’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.
Note 5. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC 270, Interim Reporting, and ASC 740, Accounting for Income Taxes. At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.
For the three months ended June 30, 2024, the Company recognized an income tax benefit of $15.2 million in relation to loss before income taxes of $162.9 million, resulting in an effective benefit tax rate of 9.3%. For the three months ended July 2, 2023, the Company recognized an income tax benefit of $11.2 million in relation to loss before income taxes of $64.4 million, resulting in an effective benefit tax rate of 17.4%. For the three months ended June 30, 2024, the effective tax rate differed from the U.S. federal statutory rate primarily due to Subpart F income and the Base Erosion and Anti-Abuse Tax liability. For the three months ended July 2, 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to non-U.S. earnings being taxed at rates that were different than the U.S. statutory rate, operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances, R&D credits and foreign tax credits, partially offset by foreign exchange losses and the Global Intangible Low-Tax Income.
For the six months ended June 30, 2024, the Company recognized an income tax benefit of $108.1 million in relation to loss before income taxes of $1,961.8 million, resulting in an effective tax rate of 5.5%. For the six months ended July 2, 2023, the recognized amount of income tax benefit was not material in relation to loss before income taxes of $4.4 million, resulting in an effective benefit tax rate of 0.7%. For the six months ended June 30, 2024, the effective tax rate differed from the U.S. federal statutory rate primarily due to goodwill impairment charges that are nondeductible for tax purposes. For the six months ended July 2, 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 the Global Intangible Low-Tax Income, partially offset by 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.
The balance of unrecognized tax benefits at June 30, 2024, not including interest and penalties, was $29.3 million, of which $22.0 million could affect the effective income tax rate in future periods, if recognized. The Company also recognizes interest and penalties related to unrecognized tax benefits in tax expense. At June 30, 2024, the Company had approximately $4.1 million of interest and penalties accrued related to unrecognized tax benefits. The Company estimates that within the next 12 months, its uncertain tax positions, excluding interest, should decrease by $11.7 million.
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 laws applied to the facts of each matter.
Indemnification Assets
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 are required to be indemnified by Johnson & Johnson. The indemnification receivable from Johnson & Johnson totaled $3.0 million as of June 30, 2024 and December 31, 2023, and is included as a component of Prepaid expenses and other current assets on the Consolidated Balance Sheet.
Note 6. Balance Sheet Account Details
Cash, Cash Equivalents and Restricted Cash
| | | | | | | | | | | |
(In millions) | June 30, 2024 | | December 31, 2023 |
Cash and cash equivalents | $ | 107.0 | | | $ | 118.9 | |
Restricted cash included in Other assets | 0.5 | | | 0.6 | |
Cash, cash equivalents and restricted cash | $ | 107.5 | | | $ | 119.5 | |
Marketable Securities
The Company had no marketable securities outstanding as of June 30, 2024. The following table is a summary of marketable securities as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 |
(In millions) | | | | | | | | | Amortized Cost | | | | Gross Unrealized Losses | | Fair Value |
Corporate bonds | | | | | | | | | $ | 38.1 | | | | | $ | (0.1) | | | $ | 38.0 | |
| | | | | | | | | | | | | | | |
Corporate asset-backed securities | | | | | | | | | 8.9 | | | | | — | | | 8.9 | |
| | | | | | | | | | | | | | | |
Agency bonds | | | | | | | | | 1.5 | | | | | — | | | 1.5 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total marketable securities, current | | | | | | | | | 48.5 | | | | | (0.1) | | | 48.4 | |
Corporate bonds, non-current | | | | | | | | | 4.5 | | | | | — | | | 4.5 | |
Corporate asset-backed securities, non-current | | | | | | | | | 0.9 | | | | | — | | | 0.9 | |
| | | | | | | | | | | | | | | |
Sovereign government bonds, non-current | | | | | | | | | 2.0 | | | | | — | | | 2.0 | |
Total marketable securities | | | | | | | | | $ | 55.9 | | | | | $ | (0.1) | | | $ | 55.8 | |
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) | June 30, 2024 | | December 31, 2023 |
Accounts receivable | $ | 347.2 | | | $ | 395.1 | |
Allowance for contract rebates and discounts | (63.9) | | | (77.2) | |
Allowance for doubtful accounts | (13.8) | | | (14.6) | |
Total accounts receivable, net | $ | 269.5 | | | $ | 303.3 | |
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following:
| | | | | | | | | | | |
(In millions) | June 30, 2024 | | December 31, 2023 |
Raw materials | $ | 222.3 | | | $ | 212.7 | |
Work-in-process (materials, labor and overhead) | 99.3 | | | 92.3 | |
Finished goods (materials, labor and overhead) | 319.0 | | | 318.1 | |
Total inventories | $ | 640.6 | | | $ | 623.1 | |
| | | |
Inventories | $ | 602.0 | | | $ | 577.8 | |
Other assets (1) | 38.6 | | | 45.3 | |
Total inventories | $ | 640.6 | | | $ | 623.1 | |
(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 consisted of the following:
| | | | | | | | | | | |
(In millions) | June 30, 2024 | | December 31, 2023 |
Income taxes and other tax receivables | $ | 156.4 | | | $ | 104.7 | |
Prepaid expenses | 68.3 | | | 67.0 | |
Contract assets | 44.1 | | | 46.2 | |
Other receivables | 27.3 | | | 34.2 | |
Derivatives | 11.0 | | | 6.9 | |
Other | 2.9 | | | 3.1 | |
Total prepaid expenses and other current assets | $ | 310.0 | | | $ | 262.1 | |
Other Current Liabilities
Other current liabilities consisted of the following:
| | | | | | | | | | | |
(In millions) | June 30, 2024 | | December 31, 2023 |
Accrued commissions, rebates and returns | $ | 67.1 | | | $ | 63.8 | |
Deferred revenue | 40.1 | | | 36.8 | |
Operating lease liabilities | 29.5 | | | 26.7 | |
Accrued other taxes payable | 21.6 | | | 17.9 | |
Derivatives | 4.7 | | | 12.1 | |
Accrued interest | 1.4 | | | 30.3 | |
| | | |
| | | |
Other | 84.7 | | | 115.7 | |
Total other current liabilities | $ | 249.1 | | | $ | 303.3 | |
Note 7. Assets Held for Sale
The following criteria are considered before concluding assets are classified as held for sale: 1) management’s commitment to a plan to sell, 2) availability for immediate sale in its present condition, 3) initiation of an active program to identify a buyer, 4) probability of a completed sale within one year, 5) actively marketed for sale at a reasonable price in relation to its current fair value, and 6) likelihood of significant changes to the plan will be made or that the plan will be withdrawn. If all of the criteria are met as of the balance sheet date, the net assets are presented separately in the balance sheet as held for sale at the lower of its carrying amount or fair value less costs to sell and is no longer depreciated or amortized while classified as held for sale. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale.
As part of the Company’s cost-savings initiatives, the Company has been evaluating its real estate footprint with the goal to relocate and consolidate its operations to improve long-term results. As a result, the Company has decided to (i) sell the McKellar, San Diego, CA facility and (ii) sell the Raritan, NJ, facility with the intent to subsequently lease back the right to use the property. In the second quarter of 2024, the properties met the requirements for reclassification from property, plant and equipment, net to assets held for sale when it became probable that the properties would be sold within one year. The carrying value of the assets was reduced to its estimated relative fair value less costs to sell resulting in an impairment charge of $56.9 million that was included in Asset impairment charge.
Note 8. Goodwill and Intangible Assets, Net
Changes in goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | North America | | EMEA | | China | | Other | | Total |
Balance at December 31, 2023 | $ | 1,743.9 | | | $ | 582.4 | | | $ | 85.7 | | | $ | 80.0 | | | $ | 2,492.0 | |
Impairment charge | (1,743.9) | | | — | | | — | | | — | | | (1,743.9) | |
| | | | | | | | | |
Foreign currency translation | — | | | (7.6) | | | (1.5) | | | (6.5) | | | (15.6) | |
Balance at June 30, 2024 | $ | — | | | $ | 574.8 | | | $ | 84.2 | | | $ | 73.5 | | | $ | 732.5 | |
The Company tests goodwill for impairment on an annual basis on the first day of the fourth quarter and monitors throughout the year for impairment triggering events that indicate that the carrying value of one or more of its reporting units exceeds its fair value.
During the first quarter of 2024, the Company concluded that (i) the sustained decline in the Company’s stock price and market capitalization occurred during the first quarter of 2024, (ii) the faster than expected decline in COVID-19 and flu markets, and (iii) the recent delay in the timing of expected commercialization for Savanna were triggering events requiring an interim goodwill impairment assessment for all reporting units.
Based on the Company’s interim goodwill impairment assessment, the Company concluded that the North America reporting unit’s carrying value exceeded its estimated fair value. As a result, the Company 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 was primarily driven by revised short-term and mid-term forecasts for revenue and EBITDA expectations in North America.
The estimated fair values of the 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, the Company 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 the Company’s 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.
The Company believes 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.
The Company also reviews long-lived assets, including intangible assets, for impairment when events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Given the indications of possible impairment that occurred during the first quarter of 2024, the Company tested its North America long-lived asset group for recoverability and impairment as of March 31, 2024. Recoverability of long-lived assets 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. The undiscounted cash flows for the North America long-lived asset group were above the carrying value and the Company determined that the long-lived asset group was recoverable, and no impairment existed as of June 30, 2024.
Note 9. Borrowings
The components of borrowings were as follows:
| | | | | | | | | | | |
(In millions) | June 30, 2024 | | December 31, 2023 |
Term Loan | $ | 2,317.1 | | | $ | 2,420.2 | |
Revolving Credit Facility | 253.0 | | | — | |
Financing lease obligation | 0.1 | | | 0.4 | |
Other short-term borrowings | — | | | 1.6 | |
Other long-term borrowings | 0.2 | | | 0.4 | |
Unamortized deferred financing costs | (6.8) | | | (8.0) | |
Total borrowings | 2,563.6 | | | 2,414.6 | |
Less: current portion | (356.4) | | | (139.8) | |
Long-term borrowings | $ | 2,207.2 | | | $ | 2,274.8 | |
The Credit Agreement, dated May 27, 2022, by and among the Company, as borrower, Bank of America, N.A., as administrative agent and swing line lender, and the other lenders and L/C issuers party thereto 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 $253.0 million borrowings outstanding, was $534.0 million as of June 30, 2024. During the six months ended June 30, 2024, the Company made $103.1 million in payments on the Term Loan.
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.
On April 25, 2024, the Company entered into Amendment No. 2 (the “Amendment”), by and among the Company, the lenders party thereto, and Bank of America, N.A., as administrative agent, which amends 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. The Company was in compliance with the financial covenants as of June 30, 2024.
The following table provides the detailed amounts within Interest expense, net for the three and six months ended June 30, 2024 and July 2, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
Term Loan | $ | 44.4 | | | $ | 44.2 | | | $ | 88.9 | | | $ | 85.1 | |
Revolving Credit Facility | 3.4 | | | 0.5 | | | 5.2 | | | 1.0 | |
Amortization of deferred financing costs | 0.8 | | | 0.8 | | | 1.6 | | | 1.6 | |
Derivative instruments and other | (7.1) | | | (7.2) | | | (14.3) | | | (11.7) | |
Interest income | (0.5) | | | (1.8) | | | (1.4) | | | (2.8) | |
Interest expense, net | $ | 41.0 | | | $ | 36.5 | | | $ | 80.0 | | | $ | 73.2 | |
Note 10. Stock-based Compensation
Stock-based compensation expense was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions) | June 30, 2024 | | July 2, 2023 | | June 30, 2024 | | July 2, 2023 |
Cost of sales, excluding amortization of intangibles | $ | 1.5 | | | $ | 1.1 | | | $ | 2.7 | | | $ | 2.1 | |
Selling, marketing and administrative | 6.7 | | | 10.0 | | | 11.8 | | | 17.2 | |
Research and development | 0.9 | | | 1.3 | | | 1.9 | | | 2.6 | |
Integration related costs | 2.1 | | | 4.6 | | | 3.9 | | | 9.1 | |
Total stock-based compensation expense | $ | 11.2 | | | $ | 17.0 | | | $ | 20.3 | | | $ | 31.0 | |
The table above includes compensation expense related to liability-classified awards of $2.8 million and $5.8 million for the three and six months ended July 2, 2023, respectively, which has been or is expected to be settled in cash. Amounts related to the three and six months ended June 30, 2024 were not material.
Note 11. Commitments and Contingencies
On April 12, 2024, a purported stockholder of the Company filed a putative class action complaint under the federal securities laws against the Company and three of its current and former executives. The complaint, which is captioned Bristol County Retirement System v. QuidelOrtho Corporation, et al., Case No. 1:24-cv-02804-MKV (S.D.N.Y.) (the “Bristol County Complaint”), asserts claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to statements regarding sales of the Company’s COVID-19 diagnostic tests and the 510(k) submission for its Savanna RVP4 assay. The Bristol County Complaint seeks a judgment determining that the lawsuit can be maintained as a class action and awarding the plaintiff and putative class damages, pre- and post-judgment interest, attorneys’ and experts’ fees, and costs.
On April 25, 2024, and June 21, 2024, two purported stockholders of the Company filed separate stockholder derivative complaints, purportedly on behalf of the Company, against the current and certain former members of the Company’s Board of Directors and three of its current and former executives. The complaints, which are captioned Matthew Whitfield v. Kenneth F. Buechler, Ph.D., et al., Case No. 1:24-cv-03176-MKV (S.D.N.Y.) (the “Whitfield Complaint”), and Steven Pinkney v. Douglas Bryant, et al., Case No. 1:24-cv-4753-MKV (S.D.N.Y.) (the “Pinkney Complaint”), assert claims for violations of Sections 10(b), 14(a), and 20(a) of the Exchange Act and Rules 10b-5 and 14a-9 promulgated thereunder, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets related to statements regarding sales of the Company’s COVID-19 diagnostic tests and the 510(k) submission for its Savanna RVP4 assay. The Whitfield and Pinkney Complaints seek judgments awarding compensatory and punitive damages against the individual defendants, directing an accounting by the individual defendants, directing the Company and the individual defendants to take actions to improve the Company’s governance and procedures, and awarding the costs and disbursements of the action, including attorneys’ fees, accountants’ and experts’ fees, costs, and expenses.
The Company disputes the allegations of wrongdoing and intends to defend itself vigorously in these matters. Nevertheless, the outcomes of these lawsuits are uncertain and cannot be predicted with any certainty. Accordingly, at this time, the Company is not able to estimate a possible loss or range of loss that may result from these lawsuits or to determine whether such loss, if any, would have a material adverse effect on its business, financial condition, results of operations or liquidity.
From time to time, the Company is involved in other litigation and 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.
Management believes that all such current legal actions, in the aggregate, are not expected to 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.
Note 12. 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Marketable securities | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 55.8 | | | $ | — | | | $ | 55.8 | |
Derivative assets | — | | | 42.2 | | | — | | | 42.2 | | | — | | | 6.9 | | | — | | | 6.9 | |
Total assets measured at fair value | $ | — | | | $ | 42.2 | | | $ | — | | | $ | 42.2 | | | $ | — | | | $ | 62.7 | | | $ | — | | | $ | 62.7 | |
Liabilities: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Derivative liabilities | $ | — | | | $ | 5.6 | | | $ | — | | | $ | 5.6 | | | $ | — | | | $ | 27.5 | | | $ | — | | | $ | 27.5 | |
| | | | | | | | | | | | | | | |
Contingent consideration | — | | | — | | | — | | | — | | | — | | | — | | | 0.1 | | | 0.1 | |
| | | | | | | | | | | | | | | |
Total liabilities measured at fair value | $ | — | | | $ | 5.6 | | | $ | — | | | $ | 5.6 | | | $ | — | | | $ | 27.5 | | | $ | 0.1 | | | $ | 27.6 | |
There were no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy during the six months ended June 30, 2024 and fiscal year 2023.
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.
Financial Instruments Not Measured at Fair Value
The estimated fair value of the Company’s borrowings under the Term Loan was $2,296.8 million at June 30, 2024, compared to the carrying amount, excluding debt issuance costs, of $2,317.1 million. The estimated fair value of the Company’s borrowings under the Term Loan was $2,396.0 million at December 31, 2023, compared to the carrying amount, excluding debt issuance costs, of $2,420.2 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.
Note 13. 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. Refer to “—Note 9. Borrowings” for additional information on the currently outstanding components of the Revolving Credit Facility and Term Loan. The Company entered into interest rate 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 its interest rate swaps 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 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 $20.4 million as of June 30, 2024 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 June 30, 2024, all of which were interest rate swaps:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Notional Amount (In millions) | | Description | | Hedge Designation | | Effective Date | | Expiration Date |
| | | | | | | | |
$ | 550.0 | | | Pay 3.765% fixed, receive floating rate (1-month USD-SOFR) | | Designated cash flow hedge | | December 30, 2022 | | May 27, 2027 |
$ | 200.0 | | | Pay 3.7725% fixed, receive floating rate (1-month USD-SOFR) | | Designated cash flow hedge | | December 30, 2022 | | May 27, 2027 |
$ | 300.0 | | | Pay 3.7675% fixed, receive floating rate (1-month USD-SOFR) | | Designated cash flow hedge | | December 30, 2022 | | May 27, 2027 |
$ | 400.0 | | | Pay 3.7575% fixed, receive floating rate (1-month USD-SOFR) | | Designated cash flow hedge | | December 30, 2022 | | May 27, 2027 |
$ | 350.0 | | | Pay 3.7725% fixed, receive floating rate (1-month USD-SOFR) | | Designated cash flow hedge | | December 30, 2022 | | May 27, 2027 |
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, Colombian Peso, Czech Koruna, Danish Krone, Euro, Indian Rupee, Japanese Yen, Mexican Peso, Philippine Peso, South Korean Won, Swiss Franc and 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 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. Pre-tax unrealized gains of $0.7 million as of June 30, 2024 is expected to be reclassified from OCI 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, net.
The following table provides details of the currency hedging instruments outstanding as of June 30, 2024:
| | | | | | | | | | | | | | |
Description | | Notional Amount (In millions) | | Hedge Designation |
Foreign currency forward contracts | | $ | 217.0 | | | Cash Flow Hedge |
Foreign currency forward contracts | | $ | 710.4 | | | Non-designated |
The following table summarizes pre-tax gains and losses from designated derivative and non-derivative instruments within AOCI for the three and six months ended June 30, 2024 and July 2, 2023:
| | | | | | | | | | | | | | | | | |
| 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 |
Three Months Ended June 30, 2024 | | | | | |
Foreign currency forward contracts (sales) | $ | (3.2) | | | Total revenues | | $ | 0.7 | |
Foreign currency forward contracts (purchases) | $ | — | | | Cost of sales, excluding amortization of intangibles | | $ | 0.1 | |
Interest rate derivatives | $ | (10.8) | | | Interest expense, net | | $ | (7.0) | |
| | | | | |
Six Months Ended June 30, 2024 | | | | | |
Foreign currency forward contracts (sales) | $ | (6.0) | | | Total revenues | | $ | 2.1 | |
Foreign currency forward contracts (purchases) | $ | 0.8 | | | Cost of sales, excluding amortization of intangibles | | $ | — | |
Interest rate derivatives | $ | (45.8) | | | Interest expense, net | | $ | (14.2) | |
| | | | | |
Three Months Ended July 2, 2023 | | | | | |
Foreign currency forward contracts (sales) | $ | (0.4) | | | Total revenues | | $ | 1.8 | |
Foreign currency forward contracts (purchases) | $ | (2.1) | | | Cost of sales, excluding amortization of intangibles | | $ | 1.3 | |
Interest rate derivatives | $ | (47.0) | | | Interest expense, net | | $ | (7.4) | |
| | | | | |
Six Months Ended July 2, 2023 | | | | | |
Foreign currency forward contracts (sales) | $ | 1.7 | | | Total revenues | | $ | 0.9 | |
Foreign currency forward contracts (purchases) | $ | (2.1) | | | Cost of sales, excluding amortization of intangibles | | $ | 1.7 | |
Interest rate derivatives | $ | (26.1) | | | Interest expense, net | | $ | (12.6) | |
The Company also uses forward exchange contracts to hedge a portion of its net investment in foreign operations against movements in exchange rates. The forward exchange contracts are designated as hedges of the net investment in foreign operations. The unrealized gains or losses on these contracts are recorded in foreign currency translation adjustments within OCI, and remain in AOCI until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument.
The effect of the Company’s net investment hedges on OCI and the Consolidated Statements of Loss are shown below:
| | | | | | | | | | | |
| Net Investment Hedging Relationships |
(In millions) | Amount of Pre-tax (Gain) Loss Recognized in OCI | | Amount of Pre-tax (Gain) Loss Recognized in Other Expense (Income), Net for Amounts Excluded from Effectiveness Testing |
Three Months Ended June 30, 2024 | | | |
| | | |
Foreign exchange contracts | $ | (7.3) | | | $ | (2.9) | |
| | | |
Six Months Ended June 30, 2024 | | | |
| | | |
Foreign exchange contracts | $ | (18.3) | | | $ | (4.9) | |
Fair value gains on foreign currency forward contracts, as determined using Level 2 inputs, that do not qualify for hedge accounting treatment are recorded in Other expense, net and were $5.7 million for both the three and six months ended June 30,
2024. Fair value gains that do not qualify for hedge accounting treatment were $3.2 million and $0.5 million for the three and six months ended July 2, 2023, respectively.
The following table summarizes the fair value of designated and non-designated hedging instruments recognized within the Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023:
| | | | | | | | | | | |
(In millions) | June 30, 2024 | | December 31, 2023 |
Designated cash flow hedges | | | |
Interest rate derivatives: | | | |
Prepaid expenses and other current assets | $ | 0.2 | | | $ | 0.2 | |
Other assets | 24.6 | | | — | |
Other liabilities | — | | | 6.9 | |
Foreign currency forward contracts: | | | |
Prepaid expenses and other current assets | 4.7 | | | 3.2 | |
Other assets | 6.6 | | | — | |
Other current liabilities | 3.6 | | | 9.4 | |
Other liabilities | 0.9 | | | 8.5 |
| | | |
Non-designated hedging instruments | | | |
| | | |
| | | |
Foreign currency forward contracts: | | | |
Prepaid expenses and other current assets | 6.1 | | | 3.5 | |
Other current liabilities | 1.1 | | | 2.7 | |
Note 14. Accumulated Other Comprehensive Loss
The following table summarizes the changes in AOCI by component:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2024 |
(In millions) | Pension and Other Post- Employment Benefits | | Cash Flow Hedges | | Available-for-Sale Investments | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
Balance at March 31, 2024 | $ | (1.3) | | | $ | 14.8 | | | $ | — | | | $ | (39.7) | | | $ | (26.2) | |
Current period deferrals (1) | — | | | 13.1 | | | — | | | (2.4) | | | 10.7 | |
Amounts reclassified to Net loss | — | | | (6.2) | | | — | | | (2.9) | | | (9.1) | |
Net change | — | | | 6.9 | | | — | | | (5.3) | | | 1.6 | |
Balance at June 30, 2024 | $ | (1.3) | | | $ | 21.7 | | | $ | — | | | $ | (45.0) | | | $ | (24.6) | |
| | | | | | | | | |
| Six Months Ended June 30, 2024 |
(In millions) | Pension and Other Post- Employment Benefits | | Cash Flow Hedges | | Available-for-Sale Investments | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
Balance at December 31, 2023 | $ | (1.3) | | | $ | (9.8) | | | $ | — | | | $ | (18.9) | | | $ | (30.0) | |
Current period deferrals (1) | — | | | 43.6 | | | — | | | (21.2) | | | 22.4 | |
Amounts reclassified to Net loss | — | | | (12.1) | | | — | | | (4.9) | | | (17.0) | |
Net change | — | | | 31.5 | | | — | | | (26.1) | | | 5.4 | |
Balance at June 30, 2024 | $ | (1.3) | | | $ | 21.7 | | | $ | — | | | $ | (45.0) | | | $ | (24.6) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 2, 2023 |
(In millions) | Pension and Other Post- Employment Benefits | | Cash Flow Hedges | | Available-for-Sale Investments | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
Balance at April 2, 2023 | $ | 0.7 | | | $ | (21.1) | | | $ | (0.3) | | | $ | (38.6) | | | $ | (59.3) | |
Current period deferrals (2) | — | | | 40.0 | | | (0.1) | | | 7.4 | | | 47.3 | |
Amounts reclassified to Net loss | — | | | (4.3) | | | — | | | — | | | (4.3) | |
Net change | — | | | 35.7 | | | (0.1) | | | 7.4 | | | 43.0 | |
Balance at July 2, 2023 | |