QuidelOrtho Corporation (QDEL) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 3, 2022. Results are unaudited. Quidel and Ortho completed their combination on May 27, 2022; consolidated results include Ortho only from that date, so reported year-over-year comparisons are not like-for-like.
Business context
QuidelOrtho develops and sells diagnostic testing products across Labs, Transfusion Medicine, Point-of-Care and Molecular Diagnostics. The combination expanded its product range and geographic reach; the company now reports North America, EMEA and China as reportable segments. COVID-19 products remained a major revenue driver.
Key financial metrics
| Metric | Three months ended July 3, 2022 | Six months ended July 3, 2022 |
|---|---|---|
| Revenue | $613.4 million, up 247% year over year | $1,615.7 million, up 193% |
| Operating income | $79.7 million | $700.4 million |
| Net income | $19.3 million; diluted EPS $0.36 | $499.2 million; diluted EPS $10.47 |
| Operating cash flow | Not provided separately for the quarter | $725.6 million, versus $407.5 million |
| Capital spending and acquisitions | Not provided separately for the quarter | Investing cash outflow of $1,555.1 million, including $1,511.4 million for acquisitions, net of acquired cash |
Cost of sales, excluding intangible amortization, was 45.0% of revenue in the quarter versus 38.8% a year earlier, implying a 55.0% gross margin on that basis versus 61.2%. For the six-month periods, the corresponding cost ratios were 33.2% and 25.4%, implying margins of 66.8% and 74.6%. Higher product mix, acquisition-related sales and supply-chain costs affected comparisons.
At July 3, 2022, cash and cash equivalents were $379.0 million and marketable securities totaled $67.7 million. Working capital was $659.1 million. Borrowings totaled $2,741.1 million, including a $2,750.0 million term loan before deferred financing costs; $716.8 million remained available under the revolving facility after letters of credit. The company reported compliance with debt financial covenants.
Material changes versus comparable periods
- Reported growth primarily reflects the May 27 combination as well as COVID-19 test sales. Ortho contributed $213.7 million of revenue and a $40.1 million net loss from closing through July 3.
- On a pro forma basis assuming the combination occurred at the start of each comparative period, second-quarter revenue was $898.5 million versus $669.1 million, and net income was $22.3 million versus a $13.0 million net loss. Six-month pro forma revenue was $2,400.9 million versus $1,551.2 million; net income was $500.8 million versus $116.7 million. These figures are illustrative, not forecasts.
- Point-of-Care revenue was $367.1 million for the quarter and $1,310.1 million for six months, driven mainly by QuickVue SARS antigen tests. Molecular Diagnostics revenue declined 40% for the quarter and 30% for six months, mainly due to lower Lyra SARS antigen pricing and demand.
- Acquisition and integration costs were $80.2 million in the quarter and $83.2 million for six months. Second-quarter results also included a $24.0 million debt-extinguishment loss. Both items weighed on reported earnings.
- COVID-19 products accounted for 70% of six-month revenue, versus 64% in the prior-year period. The three largest customers accounted for 54% of six-month revenue, versus 29%.
- Cash and cash equivalents declined by $423.8 million from January 2, 2022, reflecting the combination and related financing and investment activity. Six-month operating cash flow benefited from $232.3 million in accounts-receivable collections.
Outlook, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance. It expected COVID-19 testing demand and pricing for the remainder of 2022 to be below early-2022 levels, with continuing but potentially fluctuating demand. It anticipated revenue growth in core products excluding COVID-19 and influenza tests.
- Management cited continuing supply-chain, logistics, inflation and labor constraints, which had affected and were expected to continue affecting results. China lockdowns disrupted operations through much of the second quarter but were not material to quarterly results; activity had largely normalized by the end of June.
- Management said available cash, operating cash flows and borrowing capacity should fund near-term needs for at least 12 months. Key uses include debt service, R&D, capital expenditures, integration and possible strategic investments.
- Variable-rate debt creates interest-rate exposure. The company had a $1.0 billion interest-rate cap and a $1.0 billion interest-rate swap in place through December 2023; the swap fixes a portion of the rate at 1.58%.
- Acquisition accounting remains preliminary. The company recorded $2,291.3 million of acquired goodwill and $3,133.0 million of acquired intangible assets; fair-value estimates may change during the measurement period. A $64.1 million acquired-inventory step-up is expected to be recognized in cost of sales as inventory is sold, with $11.2 million recognized in the quarter.
- Other risks include reliance on COVID-19 testing and large customers, potential loss or change of FDA emergency-use authorizations, integration and synergy execution, regulatory and product-liability exposure, foreign-exchange movements and substantial secured debt. The company reported disclosure controls effective at quarter-end while integration of Ortho’s financial controls was ongoing.
Investor facts to verify
- How much of subsequent revenue, margins and cash generation is attributable to recurring core products versus COVID-19 testing and acquisition effects.
- Progress on integration, realized synergies and the final purchase-price allocation, including acquired intangible-asset valuations and inventory step-up runoff.
- Debt repayment plans, variable-rate exposure, covenant headroom and the effect of interest-rate changes on cash flow.
- Whether supply constraints, inflation, customer concentration or COVID-19 demand changes materially affect future orders and margins.
- Subsequent filings for updates to forward guidance, regulatory authorizations, litigation or other contingencies; this filing does not quantify a specific expected loss for legal matters.