Fulgent Genetics, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Fulgent provides COVID-19 testing, molecular diagnostics and genetic testing services.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $320.3 million | $359.4 million | Down 11% |
| Gross profit / margin | $242.5 million / 75.7% | $285.4 million / 79.4% | Margin down 3.7 percentage points |
| Operating income | $201.9 million | $266.9 million | Down 24% |
| Net income attributable to Fulgent | $154.0 million | $200.7 million | Down 23% |
| Diluted earnings per share | $4.93 | $6.52 | Down 24% |
| Cash from operating activities | $188.4 million | $233.2 million | Down $44.8 million |
Fulgent delivered 3.224 million billable tests, down 15%. Average revenue per test rose to $99 from $95, while cost per test increased to $24 from $20. Management attributed lower revenue primarily to fewer COVID-19 tests. Insurance revenue was $210.7 million, including $106.7 million for claims under the HRSA COVID-19 Uninsured Program; institutional revenue was $109.5 million. One customer accounted for 27% of revenue, versus 25% a year earlier.
Financial position and liquidity
- Cash and cash equivalents were $353.1 million; marketable securities totaled $725.2 million. Combined, these were approximately $1.078 billion at March 31, 2022, versus $936 million at year-end 2021.
- Total assets were $1.466 billion and stockholders’ equity was $1.313 billion. Current assets of $765.3 million compared with current liabilities of $141.7 million.
- Debt included a $15.0 million margin borrowing secured by investment securities, $6.1 million of current notes payable, and approximately $3.4 million of noncurrent installment-sale notes. The custodian may issue a margin call at any time.
- Operating cash flow included a $51.4 million increase in income tax payable, partly offset by a $32.9 million increase in receivables. Investing cash flow was nearly neutral; financing cash flow was a $0.9 million outflow.
- Available-for-sale securities had $17.8 million of gross unrealized losses at quarter-end, reflected primarily in other comprehensive loss; the filing reported no credit losses on these securities.
Changes, outlook and risks
- Higher operating expenses weighed on earnings: general and administrative expense rose 222% to $25.8 million, primarily due to a $10.5 million increase in provision for credit losses, higher personnel costs, and acquisition-related and corporate legal fees. The allowance for credit losses was $22.1 million, up from $11.2 million at year-end.
- Management said it expected existing cash, short-term securities and operating cash flow to meet anticipated requirements for at least 12 months. No specific revenue or earnings guidance was provided.
- Management cited uncertainty in COVID-19 testing demand, viral variants, government actions and possible effects on core genetic-test volumes. The HRSA program stopped accepting claims on March 22, 2022.
- The company received a Department of Justice Civil Investigative Demand concerning allegations involving medically unnecessary testing, billing and remuneration under anti-kickback and Stark laws. Fulgent said it was cooperating and did not then expect a material adverse impact, but could not predict the outcome or ultimate impact.
- In April, after quarter-end, Fulgent completed its acquisition of Inform Diagnostics for approximately $170 million, subject to closing adjustments. The acquisition expands its pathology offerings. Separately, Jian Xie was appointed President on May 3, retaining his COO role; he is the CEO’s brother.
- Q1 depreciation included an additional $866,000 after the company shortened the estimated useful lives of certain COVID-19 testing assets to end in 2022.
Important facts for investors to verify
- How quickly COVID-19 testing demand and HRSA-related collections change, and the resulting effect on revenue, margins and cash flow.
- Receivables collectability, the elevated credit-loss provision and the concentration of revenue in one customer.
- The DOJ investigation’s scope, resolution timeline and any financial or operational consequences.
- Inform Diagnostics’ final purchase accounting, integration costs and contribution to results, as well as funding and cash needs after the acquisition.
- Exposure to investment-security valuation changes and the collateral and margin-call terms on the $15.0 million borrowing.