Business context and reporting period
OraSure Technologies, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2018. Its OSUR segment sells diagnostic tests and cryosurgical products; its DNAG segment sells molecular specimen-collection systems, including Oragene. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
- Third quarter: Revenue was $45.9 million, up 8% year over year. Net income was $8.1 million versus $5.8 million; diluted EPS was $0.13 versus $0.09. Operating income was $10.9 million versus $7.3 million.
- First nine months: Revenue was $131.5 million, up 14%. Net income fell to $10.1 million from $23.6 million; diluted EPS was $0.16 versus $0.39. Operating income was $15.9 million versus $30.1 million.
- Revenue mix and segments: Nine-month product revenue rose 8% to $120.6 million, led by DNAG product revenue growth; OSUR segment revenue declined 6% to $65.6 million while DNAG rose 35% to $65.9 million. Other revenue increased to $10.9 million from $3.3 million, including $4.8 million of Ancestry-related royalties, $4.5 million of BARDA funding and $1.5 million of Gates Foundation cost reimbursements.
- Margins: Consolidated gross margin was 62% in Q3 versus 58% a year earlier; for the nine months it was 60% versus 61%. Q3 benefited from lower Oragene manufacturing costs, lower royalty expense and higher-margin other revenue. Year-to-date margin was pressured by a greater mix of lower-margin sales.
- Cash flow: Operating cash flow for the first nine months was $24.8 million, compared with $30.4 million. Investing activities used $17.5 million, including $5.9 million of capital expenditures; financing activities used $1.5 million.
- Liquidity and debt: Cash, cash equivalents and available-for-sale securities totaled $192.1 million at September 30, 2018, versus $176.6 million at year-end 2017. Working capital was $186.5 million. No borrowings were outstanding under the $10 million revolving facility; the company was covenant-compliant. The facility matures September 30, 2019.
Material changes and unusual items
Nine-month 2018 results included $8.6 million of executive transition costs, primarily noncash stock-award modifications and costs related to leadership changes. The 2017 comparison included a $12.5 million litigation-settlement gain, which did not recur. These items materially affect the year-over-year comparison. The company adopted the new revenue recognition standard in January 2018; the $75,000 opening accumulated-deficit adjustment had an immaterial effect on reported revenue and operating income.
DNAG growth was driven largely by higher demand from a large consumer-genetics customer; microbiome sales also grew. OSUR faced lower HCV sales after a foreign-government supply contract was not renewed and a multinational customer switched to a competitor, as well as weaker domestic professional HIV sales and cryosurgical competition.
Outlook, risks and contingencies
No specific financial forecast or quantitative guidance is provided. Management said cash, investments and available borrowing capacity should fund operating and capital needs for the foreseeable future. The Ebola BARDA grant was extended through December 31, 2019; its total potential funding is up to $10.4 million. The Zika BARDA contract provides for up to $16.6 million over six years, subject to options and activities.
- Customer concentration is significant: one customer represented 39% of Q3 revenue and 27% of nine-month revenue, and 18% of receivables at quarter-end.
- The company relies on sole-source suppliers for some components and on two third-party manufacturers for DNAG products; supply disruption could affect costs and deliveries.
- About 30% of cash, cash equivalents and available-for-sale securities was held by the Canadian subsidiary; repatriation above certain levels could have adverse tax consequences. A 10% unfavorable Canadian-dollar exchange-rate change would have reduced nine-month comprehensive income by $10.1 million.
- Other stated risks include competitive and regulatory pressures, government funding and contract dependence, product acceptance, and the ability to sustain profitability. Management said routine legal proceedings were not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- How durable the large customer’s demand is, and how revenue concentration and customer ordering patterns may affect future results.
- Whether DNAG growth and improved Q3 margins can continue, and whether weaker OSUR product trends stabilize.
- The expected persistence of settlement-related royalties and BARDA/Gates funding, including any contract or grant conditions.
- The full-year effect of executive transition costs and stock-based compensation, and the comparability of results against 2017’s settlement gain.
- Liquidity, investment-portfolio valuation, Canadian cash repatriation considerations, and the status of the revolving facility before its September 2019 maturity.