Fulgent Genetics, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing reports the quarter and six months ended June 30, 2022. Fulgent provides COVID-19, molecular diagnostic and genetic testing services. Results include Inform Diagnostics from its April 26 acquisition, expanding the business into pathology testing.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $125.3 million | $153.6 million | $445.6 million | $513.0 million |
| Gross profit / margin | $65.3 million / 52.1% | $117.8 million / 76.7% | $307.8 million / 69.1% | $403.1 million / 78.6% |
| Operating income | $12.8 million | $98.9 million | $214.7 million | $365.8 million |
| Net income attributable to Fulgent | $11.5 million | $79.8 million | $165.5 million | $280.5 million |
| Diluted earnings per share | $0.37 | $2.59 | $5.30 | $9.10 |
| Operating cash flow | Not separately stated | Not separately stated | $199.5 million | $309.3 million |
- Revenue fell 18% in Q2 and 13% for the first half year over year. Management attributed the decline primarily to fewer COVID-19 tests. Billable tests fell 14% in Q2 and 15% for the first half.
- Q2 operating margin was 10.2%, versus 64.4% a year earlier; first-half operating margin was 48.2%, versus 71.3%. Higher cost per test and operating expenses weighed on profitability. Cost per billable test was $45 in Q2 and $30 for the first half, compared with $23 and $21, respectively, in 2021.
- Cash, cash equivalents and marketable securities totaled $931.0 million at June 30, 2022. Current assets were $675.2 million and current liabilities $127.5 million.
- Six-month cash flow: $199.5 million provided by operations, $213.0 million used in investing and $12.1 million used in financing. Cash and equivalents ended at $138.8 million, down from $164.9 million at year-end 2021.
- Debt and borrowings included a $15.0 million margin loan secured by marketable securities, $5.3 million of notes due December 2022, and a $3.8 million building installment obligation due in 2030. The margin lender may issue a call at any time; its interest rate is variable.
Material changes and notable items
- Institutional-customer revenue declined to $61.2 million in Q2 from $103.6 million; insurance revenue increased to $63.8 million from $49.5 million. HRSA COVID-19 Uninsured Program revenue was zero in Q2 2022, compared with $37.1 million in Q2 2021; the program stopped accepting claims on March 22, 2022.
- General and administrative expense rose to $30.2 million in Q2 from $8.3 million, including increased credit-loss provisions, acquisition costs and personnel expense. The six-month credit-loss provision was $18.7 million, versus $3.3 million in 2021; the receivables allowance was $30.3 million at June 30.
- Inform Diagnostics was acquired for approximately $170 million, with $137.8 million of net cash consideration reported in investing cash flow. Since acquisition, it contributed $23.7 million of revenue and a $7.1 million operating loss. The purchase accounting included $71.6 million of goodwill and $56.6 million of intangible assets.
- The company recorded $2.9 million of restructuring costs for acquired-entity employee terminations; the plan was expected to be completed by September 2022.
- Unrealized losses on available-for-sale securities reduced other comprehensive income by $20.2 million for the first half. The redeemable preferred-stock investment was valued at $12.0 million, reflecting an $8.0 million unrealized loss; the filing says the loss was not recognized in earnings.
- A $250 million share-repurchase program was authorized in March. Fulgent repurchased 215,000 shares for $10.6 million in Q2, leaving approximately $239.4 million available.
Outlook, risks and management commentary
- Management said existing cash, short-term marketable securities and expected operating cash flow should cover anticipated needs for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Management emphasized uncertainty in COVID-19 testing demand, including effects from variants, vaccination, and customer preferences. Results and cash flow may also fluctuate with test volumes and mix, pricing, billing and collections, and government-program funding.
- The company received a Department of Justice Civil Investigative Demand concerning allegations involving medically unnecessary testing, billing and remuneration. It also disclosed an SEC subpoena, received June 29, 2022, requesting information about certain Exchange Act reports from 2018 through Q1 2020. Fulgent said it was cooperating and did not presently expect a material adverse impact, but stated outcomes and timing are uncertain and could be more adverse than expected.
- Customer concentration remains notable: two customers represented 15% and 12% of Q2 revenue; one customer represented 23% of first-half revenue. Management reported disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether COVID-19 testing declines are offset by durable growth in genetic and pathology testing, and how the end of HRSA claims affects revenue and collections.
- Inform Diagnostics’ subsequent revenue, operating performance, integration costs and realization of expected acquisition benefits.
- Receivables collectability and allowance adequacy, given the increased credit-loss provision and allowance balance.
- Developments, potential costs and outcomes of the DOJ and SEC investigations, notwithstanding management’s current assessment.
- Marketable-securities valuation and liquidity, including the margin loan collateral and the lender’s right to issue a margin call.