QuidelOrtho Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended April 2, 2023 (13 weeks), compared with the three months ended April 3, 2022. Results are unaudited. The May 2022 Quidel-Ortho combination means the prior-year period does not include the acquired Ortho business and is not directly comparable.
Business context and financial performance
QuidelOrtho develops and sells diagnostic products across Labs, Transfusion Medicine, Point of Care and Molecular Diagnostics. Its geographic segments are North America, EMEA and China, with other regions reported together.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $846.1 million | $1,002.3 million |
| Operating income | $99.6 million | $620.7 million |
| Net income | $48.8 million | $479.9 million |
| Diluted EPS | $0.73 | $11.31 |
| Operating cash flow | $188.9 million | $500.9 million |
| Capital expenditures and intangible purchases | $66.0 million | $22.5 million |
Revenue fell 16% year over year. Cost of sales was 47.0% of revenue, versus 26.0%; operating margin was approximately 11.8%, versus 61.9%, and net margin approximately 5.8%, versus 47.9%. The substantial declines reflect lower COVID-related sales and the different business mix, alongside acquisition-related expenses, amortization and higher interest costs.
- Revenue by business unit: Labs $370.7 million; Transfusion Medicine $155.9 million; Point of Care $308.1 million; Molecular Diagnostics $11.4 million. Labs and Transfusion Medicine revenue largely reflect the acquired Ortho business.
- COVID-19 products accounted for 26% of revenue, versus 83% a year earlier. Respiratory products overall represented approximately 31%, versus 93%.
- Cash and cash equivalents were $353.9 million; marketable securities totaled $76.6 million. The company reported working capital of $591.1 million and $787.0 million available under its revolving credit facility.
- Total borrowings were $2.587 billion, including $2.595 billion principal on the term loan before financing costs. Cash and marketable securities were $430.5 million. The $2.750 billion term loan and $800 million revolver mature May 27, 2027. The company reported compliance with financial covenants.
- Operating cash flow included a $187.2 million benefit from accounts receivable collections; inventory increased cash use by $37.3 million, and prepaid and other assets by $55.1 million.
Changes versus the prior comparable period
- Point of Care revenue decreased 67%, primarily from lower QuickVue SARS Antigen and Sofia assay sales; Molecular Diagnostics revenue decreased 75%, primarily from lower Lyra SARS Antigen demand.
- Acquired Labs and Transfusion Medicine businesses added substantial revenue. North America revenue fell 39%, despite $283.6 million attributed to the combination, as lower COVID-related demand more than offset the contribution.
- Selling, marketing and administrative expense rose to $202.4 million from $84.8 million; R&D rose to $62.3 million from $26.4 million; intangible amortization rose to $50.8 million from $7.1 million; and acquisition and integration costs rose to $29.7 million from $3.0 million.
- Net interest expense increased to $36.7 million from $1.0 million, primarily due to acquisition-related term-loan debt.
- Cash from operations declined to $188.9 million from $500.9 million, while cash used for investing and financing was $68.9 million and $59.6 million, respectively. Cash, cash equivalents and restricted cash increased $61.0 million during the quarter.
Outlook, risks and notable items
- Management expects revenue growth in core products excluding respiratory products for the remainder of 2023. It expects COVID testing demand to fluctuate and pricing pressure to persist; no quantified revenue or earnings guidance is provided.
- Management expects current cash, operating cash flow and revolver availability to fund near-term operating and capital needs for at least 12 months. Planned uses include debt service, R&D, manufacturing capacity, Ortho integration and commercial investment.
- Supply-chain constraints, raw-material and labor costs, logistics disruptions, foreign-exchange movements, interest rates, respiratory-disease demand, competition and successful integration of Ortho could affect results. Respiratory sales are seasonal, and quarterly results may not indicate full-year performance.
- Q1 included a $20.7 million third-party settlement award in Labs revenue. The balance sheet included approximately $41 million of related settlement receivable, of which approximately $20 million was payable to a collaboration partner. Inventory obsolescence reserves decreased by approximately $39 million during the quarter following changes in estimates.
- The company paid a final $40 million installment for the BNP assay business after quarter-end. It also disclosed a future warehouse lease expected to commence in the second half of 2023, with approximately $36 million of total payments over five years.
- Legal proceedings include product-liability, commercial, intellectual-property, regulatory and other matters. Management said current matters in aggregate are not expected to have a material adverse effect, but noted that resolution or higher accruals could materially affect results or cash flows.
- Disclosure controls were deemed effective; integration of the acquired business’s internal controls remained in progress. The filing reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- Whether core-product growth offsets continued declines and pricing pressure in COVID and other respiratory products.
- How reported performance develops as post-combination comparisons become more comparable, including integration costs and expected synergies.
- Whether the $39 million inventory-reserve estimate change and settlement-related amounts are one-time items, and their effects on reported earnings and cash conversion.
- Debt repayment capacity, variable-rate exposure, hedge effectiveness and continued compliance with credit covenants.
- Execution of supply-chain, manufacturing-capacity, R&D and instrument-placement plans, and any significant developments in litigation or tax matters.