OraSure Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited consolidated results. Amounts below are in millions of U.S. dollars unless stated otherwise. OraSure operates its diagnostic products business (OSUR) and molecular sample-collection business (DNAG).
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $43.6 | $40.2 | $85.6 | $72.7 |
| Gross margin | 59% | 63% | 59% | 63% |
| Operating income | $5.6 | $6.9 | $5.1 | $22.8 |
| Net income | $4.1 | $5.4 | $2.0 | $17.9 |
| Diluted EPS | $0.07 | $0.09 | $0.03 | $0.30 |
| Operating cash flow | Not stated separately | Not stated separately | $13.9 | $21.7 |
- Q2 revenue grew 9%; product revenue declined 1% to $38.8 million, while other revenue rose to $4.8 million from $1.0 million. First-half revenue increased 18%, including 9% growth in product revenue.
- DNAG drove product growth: first-half segment revenue rose 33% to $35.6 million, while OSUR segment revenue declined 5% to $41.6 million. In Q2, DNAG operating income was $8.5 million; OSUR reported an operating loss of $2.9 million.
- Other revenue included $3.7 million of Ancestry-related royalties, $3.5 million of BARDA funding and $1.3 million of Gates Foundation cost reimbursement in the first half. The Gates agreement also contributed $2.7 million in product revenue.
- Gross margin fell four percentage points in both comparison periods, reflecting a greater mix of lower-margin sales; higher other revenue, which has a 100% gross margin, partially offset the effect.
- First-half operating income was affected by $8.6 million of executive transition costs. The prior-year period included a $12.5 million litigation-settlement gain. First-half 2018 stock-based compensation was $11.3 million.
Liquidity, cash flow and debt
- At June 30, cash, cash equivalents and restricted cash totaled $71.1 million; available-for-sale investments totaled $110.1 million. Combined liquidity was $181.2 million, versus $176.6 million at December 31, 2017. Working capital was $181.1 million.
- First-half operating cash flow was $13.9 million, down from $21.7 million. Accounts receivable collections provided cash, while accrued expenses and other liabilities decreased $11.6 million, largely due to Canadian tax payments and payment of 2017 incentive bonuses.
- Investing activities used $12.5 million, including $4.5 million of capital expenditures; financing activities used $2.0 million, primarily reflecting shares retired for restricted-stock tax withholding.
- No borrowings were outstanding under the $10 million revolving credit facility. The facility matures September 30, 2019; the company reported covenant compliance. Management said available liquidity and borrowing capacity should fund current operating and capital needs for the foreseeable future.
- $53.2 million, or 29% of combined cash and investments, was held by the Canadian subsidiary; repatriation above certain levels could have adverse tax consequences.
Outlook, risks and unusual items
- The filing provides no formal financial guidance or quantified forecast. Management noted that interim results are not necessarily indicative of full-year results.
- Management cited growth in molecular-collection products and international OraQuick HIV self-test sales, partly offset by weakness in HCV tests, domestic professional HIV tests and cryosurgical products.
- Risks highlighted include customer concentration in genomics, reliance on sole-source suppliers and third-party manufacturing, competitive pressure, changes in government or grant funding, regulatory and product-development uncertainty, and foreign-currency exposure. One customer represented 18% of Q2 revenue and 18% of receivables at June 30.
- The company reported ordinary-course litigation with no expected material adverse effect, no material change in previously disclosed risk factors, and effective disclosure controls. A 10% unfavorable Canadian-dollar movement was estimated to reduce first-half comprehensive income by $9.0 million.
- Revenue-standard adoption reduced opening accumulated deficit by $75,000; management said the impact on reported revenue and operating income was immaterial.
Important facts for investors to verify
- Whether DNAG’s customer demand and commercial-genomics growth are sustainable, given customer concentration and the loss of certain customers.
- Whether international OraQuick HIV growth can offset continued HCV, domestic professional HIV and cryosurgical weakness.
- How much reported revenue and profitability depend on royalties, BARDA funding and Gates Foundation support, and the timing or continuation of those arrangements.
- Whether gross-margin pressure, executive transition costs and elevated stock-based compensation moderate in subsequent periods.
- Cash conversion, Canadian cash-repatriation implications, and continued compliance with the revolving credit facility.