OraSure Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
OraSure operates two segments: OSUR, which sells diagnostic and cryosurgical products, and DNAG, which sells molecular collection systems and provides genomics and microbiome services. On January 4, 2019, the company acquired CoreBiome and Novosanis; their results are included in DNAG from that date.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $38.8 | $43.6 | $68.9 | $85.6 |
| Gross profit | $25.0 | $25.9 | $43.1 | $50.4 |
| Gross margin | 64% | 59% | 63% | 59% |
| Operating income | $5.3 | $5.6 | $1.5 | $5.1 |
| Net income | $4.4 | $4.1 | $1.1 | $2.0 |
| Diluted EPS | $0.07 | $0.07 | $0.02 | $0.03 |
- Six-month operating cash flow was $4.7 million, compared with $13.9 million a year earlier. Cash and cash equivalents declined to $72.6 million from $88.4 million at year-end 2018.
- Cash, cash equivalents and available-for-sale securities totaled $186.6 million at June 30, versus $201.3 million at December 31, 2018; working capital was $179.3 million, down from $191.3 million.
- Six-month investing cash outflow was $18.4 million, including $13.2 million for acquisitions and $5.5 million for capital expenditures. Financing cash outflow was $4.4 million, including $3.7 million of share withholding-related repurchases and $0.7 million repayment of acquired loans.
- The company reported no borrowings outstanding when it terminated its bank credit agreement in March. At June 30, lease liabilities totaled $5.4 million: $4.0 million operating and $1.4 million finance.
Material changes versus the prior period
- First-half revenue fell 19%; product revenue declined 15%, and other revenue fell 60%. Management cited lower genomics and OraQuick HIV sales and reduced research funding and cost reimbursements.
- First-half genomics revenue decreased 31%, primarily because a large consumer genomics customer changed promotions and purchasing patterns. Microbiome revenue increased 71%, aided by CoreBiome and higher sales; cryosurgical revenue rose 18%.
- Q2 revenue declined 11%. Lower OraQuick HIV, genomics and international HCV sales were partly offset by stronger cryosurgical, microbiome and domestic HCV sales.
- Gross margin improved, attributed to product mix and lower royalty expense, partly offset by lower other revenue and lower margins at CoreBiome and Novosanis. First-half operating income nevertheless decreased $3.6 million.
- 2019 first-half results included a $1.5 million non-cash charge for the increased fair value of acquisition-related contingent consideration and $0.6 million of acquisition costs. Management estimated their combined impact reduced EPS by about $0.03. The 2018 comparison included $8.6 million of executive transition costs that did not recur.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said current cash and investments should fund current and foreseeable operating and capital needs.
- The acquisitions may generate up to $32.4 million of additional contingent consideration over three years, based on specified performance and development milestones. The recorded fair value was $5.9 million at June 30 and is remeasured using estimates and assumptions.
- Management identified continued weakness in the consumer ancestry genomics market and the largest customer’s changed purchasing patterns as risks to revenue; it expects the market trend to continue to affect results. Expansion in international markets is an opportunity but is not assured.
- Other risks include competition and pricing pressure in HIV testing, customer order timing, dependence on sole-source suppliers and third-party manufacturers, regulatory and product-development uncertainties, and acquisition integration and execution.
- BARDA-funded Zika work was substantially completed in early 2019; Ebola development spending was lower as the project approached completion. Reduced Gates Foundation reimbursements and other research funding contributed to lower other revenue.
- About $81.6 million, or 44%, of cash, cash equivalents and available-for-sale securities was held by the Canadian subsidiary; repatriating amounts above certain levels could have adverse tax consequences. The company also disclosed foreign-currency exposure, including a modeled $11.1 million reduction in first-half comprehensive income from a 10% unfavorable currency move.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Important facts for investors to verify
- Whether genomics demand, particularly from the large consumer customer, stabilizes or continues to decline.
- Whether growth in microbiome, HCV and cryosurgical products can offset weakness in HIV and genomics revenue and lower funding-related revenue.
- CoreBiome and Novosanis integration, their margins and operating contribution, and progress against contingent-consideration milestones.
- Operating cash generation, working-capital trends, the use and location of liquid assets, and any tax implications of repatriating Canadian funds.
- Potential exposure from sole-source suppliers, regulatory matters, and the company’s stated currency sensitivity.