OraSure Technologies, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports quarterly results; Q4 ended December 31, 2018. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
OraSure develops and sells rapid diagnostic tests, oral-fluid collection products, cryosurgical devices, and molecular sample collection systems. Its two segments are OSUR (diagnostics and related products) and DNAG (molecular collection systems, principally Oragene kits). The filing was signed February 28, 2019.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $181.7 million | $167.1 million |
| Gross profit / gross margin | $113.6 million / 63% | $99.0 million / 59% |
| Operating income | $28.4 million | $40.2 million |
| Net income | $20.4 million | $30.9 million |
| Diluted earnings per share | $0.33 | $0.51 |
| Cash provided by operating activities | $39.1 million | $28.2 million |
| Cash, cash equivalents, restricted cash and available-for-sale securities at year-end | $201.3 million | $176.6 million |
| Working capital at year-end | $191.3 million | $189.7 million |
Revenue increased 9%, while operating income and net income declined. FY2018 operating income included $9.6 million of executive transition costs and $1.2 million of acquisition costs. FY2017 included a $12.5 million litigation-settlement gain. Gross margin improved, aided by product mix, lower Oragene manufacturing costs, royalty income, and lower scrap and spoilage costs. FY2018 income tax expense was $11.3 million.
At December 31, 2018, the company had no borrowings under its $10 million revolving credit facility, which matured September 30, 2019; it reported compliance with covenants. Management said available cash, investments, and borrowing capacity were expected to cover operating and capital needs for the foreseeable future. About $72.5 million of cash and investments was held by the Canadian subsidiary, and repatriation above certain levels could have tax consequences.
Q4 2018: Revenue was $50.2 million, operating income $12.5 million, and net income $10.3 million, or diluted EPS of $0.16. Q4 2017 revenue was $52.0 million, operating income $10.2 million, and net income $7.3 million.
Material changes versus the prior comparable period
- DNAG product revenue rose 15% to $86.5 million; including $9.7 million of royalty income, DNAG segment revenue was $96.1 million. Growth reflected demand from a large consumer-genetics customer and increased microbiome sales.
- OSUR segment revenue fell 7% to $85.6 million. Infectious-disease testing sales declined 9%, while cryosurgical sales fell 12% and risk-assessment sales fell 5%.
- OraQuick HIV revenue increased 18% to $41.5 million, driven by international growth, partly offset by an 18% decline in domestic HIV sales. OraQuick HCV revenue decreased 51% to $12.4 million, principally after a foreign-government program contract was not renewed.
- International revenue was $44.9 million, or 25% of total revenue, versus $45.6 million, or 27%, in 2017. One customer represented approximately 24% of FY2018 consolidated revenue.
- Cash and investments increased by $24.7 million. Operating cash flow rose to $39.1 million; investing activities used $17.4 million, and financing activities used $1.9 million.
Outlook, management commentary, risks and unusual items
- Early in 2019, the largest commercial genomics customer indicated it would change purchasing and promotional patterns, likely reducing purchases. Management said the impact could be significant in Q1 2019 but expected growth in other genomics accounts to moderate the effect over the year. No numerical FY2019 guidance was provided.
- In January 2019, OraSure acquired CoreBiome, a microbiome lab-services provider, and Novosanis, a urine-sample collection device company. The initial aggregate purchase price was approximately $12.0 million, funded with cash; additional payments may depend on future performance.
- The Zika test development contract with BARDA was reduced because of development difficulties and uncertain demand and was expected to be essentially completed in Q1 2019. OraQuick Ebola had no sales in 2018; future demand depends on outbreaks, funding, and regulatory developments.
- Key risks include customer concentration and changing order patterns; dependence on public-health funding; competition and pricing pressure; regulatory approvals and compliance; reliance on sole-source suppliers and contract manufacturers; acquisition integration; and foreign currency, trade, and market risks.
- Management and KPMG reported effective internal control over financial reporting at year-end; KPMG issued an unqualified opinion on the financial statements. Ordinary-course legal matters were not expected by management to materially affect financial position or results.
Most important facts for investors to verify
- Subsequent quarterly filings and customer disclosures for the largest genomics customer’s reduced purchases, and whether other accounts offset the decline.
- Whether the HCV sales decline and the loss of the foreign-government contract persist, and the trajectory of domestic HIV testing sales.
- The sustainability and composition of FY2018 earnings, particularly the $9.7 million royalty, government funding, and unusual transition and acquisition costs.
- Integration progress, contingent consideration, and financial contribution from the CoreBiome and Novosanis acquisitions.
- Liquidity availability and any refinancing or replacement of the revolver that matured in September 2019; also monitor cash held in Canada and related repatriation implications.