ORTHO CLINICAL DIAGNOSTICS HOLDINGS PLC The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. Some of the discussion includes forward-looking statements related to future events and our future operating performance that are based on current expectations and are subject to risk and uncertainties. Without limiting the foregoing, the words as "anticipate," "expect," "suggest," "plan," "believe," "intend," "project," "forecast," "estimates," "targets," "projections," "should," "could," "would," "may," "might," "will," and the negative thereof and similar words and expressions are intended to identify forward-looking statements. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including, but not limited to those discussed below and in Part I, Item 1A,"Risk Factors" of this Annual Report on Form 10-K.
Overview
We are a pure-play in vitro diagnostics ("IVD") business pioneering
life-impacting advances in diagnostics for over 80 years, from our earliest work
in blood typing, to our innovation in infectious diseases and our latest
developments in laboratory solutions. We are driven by the credo, "Because Every
Test is A Life." This guiding principle reflects the crucial role diagnostics
play in global health and guides our priorities as an organization. As a leader
in IVD, we impact approximately 800,000 patients every day. We are dedicated to
improving outcomes for these patients and saving lives through providing
innovative and reliable diagnostic testing solutions to the clinical laboratory
and transfusion medicine communities. Our global infrastructure and commercial
reach allow us to serve these markets with significant scale. We have an intense
focus on the customer. We support our customers with high quality diagnostic
instrumentation, a broad test portfolio and market leading service. Our products
deliver consistently fast, accurate and reliable results that allow clinicians
to make better-informed treatment decisions. Our business model generates
significant recurring revenues and strong cash flow streams, primarily from the
ongoing sales of high margin consumables. In fiscal 2021, these recurring
revenues contributed approximately 93% of both our total and core revenue. We
maintain close connectivity with customers through a global presence, with
approximately 4,800 employees, including approximately 2,300 commercial sales,
service and marketing teammates. This global organization allows us to support
our customers across more than 130 countries and territories.
Definitive Agreement in which Quidel Corporation will Acquire Ortho
OnDecember 22, 2021 , Ortho,Coronado Topco, Inc. , aDelaware corporation and a wholly owned subsidiary of the Company ("Coronado Topco"),Laguna Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of Topco ("U.S. Merger Sub"),Orca Holdco, Inc. , aDelaware corporation and a wholly owned subsidiary of Topco ("U.S. Holdco Sub"), Orca Holdco 2, Inc., aDelaware corporation and a wholly owned subsidiary ofU.S. Holdco Sub ("U.S. Holdco Sub 2") and Quidel Corporation, aDelaware corporation ("Quidel") entered into a Business Combination Agreement (the "Business Combination Agreement," and the transactions contemplated thereby, the "Combinations"), pursuant to which, among other things and subject to the terms and conditions contained therein, (i) under a scheme of arrangement underU.K. corporate law, each issued and outstanding share of Ortho will be acquired by a depository nominee (or transferred within the depository nominee) on behalf of Coronado Topco in exchange for (x) 0.1055 shares of common stock of Coronado Topco and (y)$7.14 in cash (the "Ortho Scheme"), and (ii) immediately after the consummation of the Ortho Scheme,U.S. Merger Sub will merge with and into Quidel, pursuant to which each issued and outstanding share of Quidel common stock will be converted into one share of Coronado Topco common stock, with Quidel surviving as a wholly owned subsidiary of Coronado Topco. The boards of directors of both Ortho and Quidel have unanimously approved the terms of the Business Combination Agreement, which is expected to close during the first half of fiscal 2022. Upon completion of the Combinations, which requires shareholder approval, Ortho shareholders are expected to own approximately 38% of Coronado Topco and Quidel stockholders are expected to own approximately 62% of Coronado Topco on a fully diluted basis, based on the respective capitalizations of Ortho and Quidel as of the date the parties entered into the Business Combination Agreement. In the event that the Business Combination Agreement is terminated by Ortho as a result of the occurrence of certain terms and conditions as specified therein, we must pay Quidel a termination fee of approximately$46.9 million , less any expenses reimbursable by Quidel pursuant to the Business Combination Agreement. If the Business Combination Agreement is terminated by Quidel as a result of the occurrence of certain terms and conditions as specified therein, we will receive approximately$207.8 million , less any expenses reimbursable by us pursuant to the Business Combination Agreement.
Refer to Note 1-General and description of the business to our audited consolidated financial statements set forth in "Part IV Item 15. Exhibits, Financial Statements Schedules" of this Annual Report on Form 10-K for additional information on the Combinations.
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--------------------------------------------------------------------------------Key components of results of operations
Net revenue
We operate on a "razor-razor blade" model whereby we offer our customers a selection of automated instruments under long-term contracts along with the assays, reagents and other consumables that are used by these instruments to generate test results. This business model allows us to generate predictable recurring revenue and strong cash flow streams from ongoing sales of high-margin assays, reagents and other consumables and services, sales of which represented approximately 93% of our core revenue during the fiscal year endedJanuary 2, 2022 . We also employ a "closed system" strategy with our instruments, which allows only our assays, reagents and other consumables to be used by our instruments and further strengthens the predictability of our revenue. Finally, our typical customer contract length is approximately five years and we have benefitted from a good customer retention rate in recent years. We manage our business geographically to better align with the market dynamics of the specific geographic region with our reportable segments beingAmericas ,Europe , theMiddle East andAfrica ("EMEA"), andGreater China . We generate revenue primarily in the following lines of business:
Core:
•
Clinical Laboratories-Focused on (i) clinical chemistry, which is the measurement of target chemicals in bodily fluids for the evaluation of health and the clinical management of patients, (ii) immunoassay instruments, which test the measurement of proteins as they act as antigens in the spread of disease, antibodies in the immune response spurred by disease, or markers of proper organ function and health, and (iii) testing to detect and monitor disease progression across a broad spectrum of therapeutic areas, and includes grant revenue related to development of our COVID-19 antibody and antigen tests.
•
Transfusion Medicine-Focused on (i) immunohematology instruments and tests used for blood typing to ensure patient-donor compatibility in blood transfusions and (ii) donor screening instruments and tests used for blood and plasma screening for infectious diseases for customers primarily in theU.S.
Non-core:
•
Other Product Revenue-Includes revenues primarily from contract manufacturing.
•
Collaboration and Other Revenue-Includes collaboration and license agreements pursuant to which we derive collaboration and royalty revenues.
All non-core revenue is recorded in the
Cost of revenue
The primary components of our cost of revenue are purchased materials, the overhead costs related to our manufacturing operations and direct labor associated with the manufacture of our instruments, assays, reagents and other consumables and depreciation of customer leased instruments. Cost of revenue excludes amortization of intangible assets.
Selling, marketing and administrative expenses
The primary components of our Selling, marketing and administrative expenses are employee-related costs in our sales, marketing and administrative and support functions, marketing costs, distribution costs and an allocation of facility and information technology costs and other overhead costs. Employee-related costs include compensation and benefits, including stock-based compensation expense and commissions, employee recruiting and relocation expenses, employee training costs and travel-related costs.
Research and development expense
The primary components of our Research and development expense are costs related to clinical trials and regulatory-related spending, as well as employee-related costs in these functions, and an allocation of facility and information technology costs and other overhead costs.
Amortization of intangible assets
Amortization of intangible assets consists of the amortization of intangible assets primarily related to the acquisition of Ortho from Johnson & Johnson by Carlyle. Other operating expense, net
The primary components of Other operating expense, net, are profit share expense related to our Joint Business and restructuring charges.
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--------------------------------------------------------------------------------Interest expense, net
The primary components of Interest expense, net are interest charges and amortization of deferred financing charges related to our borrowings.
Tax indemnification expense (income), net
The primary components of Tax indemnification expense (income), net are gains and losses related to certain federal, state and foreign tax matters that relate to the period prior to the Acquisition and for which we have indemnification agreements. We are subject to income tax in approximately 35 jurisdictions outside theU.S. Our most significant operations outside theU.S. are located inChina ,France ,Japan and theU.K. For these jurisdictions for which we have significant operations, the statute of limitations varies by jurisdiction, with 2013 being the oldest tax year still open. We are currently under audit in certain jurisdictions for tax years under the responsibility of Johnson & Johnson. Pursuant to the Acquisition Agreement, all tax liabilities related to these tax years will be indemnified by Johnson & Johnson.
Other expense (income), net
The primary components of Other expense (income), net are foreign currency related gains and losses, including unrealized gains and losses on intercompany loans denominated in currencies other than the functional currency of the affected subsidiaries, and losses related to the early extinguishment of certain borrowings.
Impact of the initial public offering
Use of proceeds and impact of debt extinguishment
OnFebruary 1, 2021 , we completed the IPO of our ordinary shares at a price of$17.00 per share. We issued and sold 76,000,000 ordinary shares in the IPO and issued and sold an additional 11,400,000 ordinary shares onFebruary 4, 2021 pursuant to the full exercise of the underwriters' option to purchase additional shares. The ordinary shares sold in the IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (the "IPO Registration Statement"), which was declared effective by theSEC onJanuary 29, 2021 . Our ordinary shares are listed on Nasdaq under the symbol "OCDX." The offering, including proceeds from the full exercise of the underwriters' option to purchase additional shares, generated net proceeds of$1,426.4 million after deducting underwriting discounts and commissions. We used the net proceeds from the IPO (i) to redeem$160.0 million of our 2025 Notes, plus accrued interest thereon and$11.8 million of redemption premium, (ii) to redeem$270.0 million of our 2028 Notes, plus accrued interest thereon and$19.6 million of redemption premium, (iii) to repay$892.7 million in aggregate principal amount of borrowings under our Dollar Term Loan Facility, and (iv) for working capital and general corporate purposes.
Incremental public company expenses
As a recently new public company, we have incurred significant expenses on an ongoing basis that we did not incur as a private company, including increased director and officer liability insurance expense, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal and investor and public relations expenses. These costs will generally be included in Selling, marketing and administrative expenses in our audited consolidated statement of operations.
Stock-based compensation expense
OnMay 3, 2021 , the Board of Directors approved the modifications to the vesting of restricted stock and Liquidity Event option awards held by certain current and former members of management in accordance with the 2014 Equity Incentive Plan, which governs these grants. As a result of the modification, we recorded additional stock-based compensation expense of$6.2 million during the fiscal year endedJanuary 2, 2022 . Furthermore, during the fiscal quarter endedApril 4, 2021 , the Board of Directors approved the share pool associated with our long-term equity incentive plan.
Underwritten secondary offering
InSeptember 2021 , we completed an underwritten secondary offering of 25.3 million ordinary shares held by a selling shareholder affiliated with Carlyle, including 3.3 million ordinary shares pursuant to the full exercise of the underwriters' option to purchase additional shares. The ordinary shares sold in the secondary offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1, which was declared effective by theSEC onSeptember 9, 2021 . We did not offer any ordinary shares in this transaction and did not receive any proceeds from the sale of the ordinary shares by the selling shareholder. We incurred costs of$1.1 million in relation to the secondary public offering for the fiscal year endedJanuary 2, 2022 , which were recorded in Selling, marketing and administrative expenses in our audited consolidated statement of operations. 65 --------------------------------------------------------------------------------
Impact of the COVID-19 pandemic
In response to the global COVID-19 pandemic, we mobilized our research and development teams to bring to market COVID-19 antibody and antigen tests. Our COVID-19 antibody tests detect whether a patient has been previously infected by COVID-19 and our COVID-19 antigen test detects whether a patient is currently infected by COVID-19. We have received a combination of EUA from the FDA, authority to affix a CE Mark for sale in the E.U. and various other regulatory approvals globally for our COVID-19 antibody tests. We have also received authority to affix a CE Mark for sale in the E.U. and the FDA accepted our EUA for our COVID-19 antigen test. We sell these tests in various other markets globally and continue to work on gaining further regulatory approvals in other markets. All of our COVID-19 antibody and antigen tests run on our existing instruments. InFebruary 2020 , we began to see a decrease in the number of tests run inChina . This decline spread to certain other countries in EMEA and ASPAC in earlyMarch 2020 and resulted in a worldwide decrease in the number of tests run globally by the end of that month. In many countries, we also experienced a lag between the timing of the decrease in the number of tests run and the decrease in shipments of additional products to our customers, which began to occur during the fiscal quarter endedJune 28, 2020 . As a result, during the fiscal year endedJanuary 3, 2021 , we experienced decreased revenues and incurred idle or underutilized facilities costs, higher freight and higher distribution costs compared to the periods prior to the pandemic. During the fiscal quarter endedJanuary 3, 2021 , we started to experience a recovery in the base business of our core revenue, which continued through the fiscal year endedJanuary 2, 2022 . Additionally, since the fiscal quarter endedJune 28, 2020 , our results of operations were supplemented with revenue from sales of our COVID-19 antibody and antigen tests. However, starting in the fiscal quarter endedJuly 4, 2021 , this supplemental revenue from sales of our COVID-19 antibody and antigen tests began to decline and continued to decline into the fourth quarter of fiscal year 2021. During the fiscal year endedJanuary 2, 2022 , we also continued to experience higher distribution costs due to higher shipping rates as a result of the COVID-19 pandemic, and beginning in the fiscal quarter endedOctober 3, 2021 , we experienced some supply chain disruptions. These supply chain disruptions have resulted in shortages or delays in receipts for certain key components of our instruments and assays. Additionally, we have experienced distribution challenges, which has affected our ability to fulfill customer orders on a timely basis, including instrument placements. These supply chain and distribution challenges have impacted, and we expect will continue to impact, our results of operations and resulted in disruption to our business operations. We are continuously evaluating our supply chain to identify potential gaps and take steps to ensure continuity, including working closely with our primary suppliers of these components and pursuing additional suppliers for certain of these components, in order to maintain supply to our customers. We continue to monitor the potential impact of these issues on our business. We are continually monitoring our business continuity plans. Due to the fact that our products and services are considered to be medically critical, our manufacturing and research and development sites are generally exempt from governmental orders in theU.S. and other countries requiring businesses to cease or reduce operations. For these sites, we have implemented steps to protect our employees. Our office-based work sites in theU.S. are subject to operating restrictions consistent with applicable health guidelines. We permit limited domestic travel for our employees, which has reduced our travel-related operating expenses. OnSeptember 9, 2021 ,President Biden issued the Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors (the "Executive Order"), which directs executive departments and agencies to ensure that contracts covered by the Executive Order require relevant federal contractors and subcontractors to mandate their employees to be fully vaccinated against COVID-19 by certain dates that continue to be extended by the government. The Executive Order has faced several legal challenges and onDecember 7, 2021 , theU.S. District Court for the Southern District of Georgia issued a nationwide injunction blocking enforcement of the federal contractor mandate which was upheld by the Eleventh Circuit onDecember 17, 2021 . We continue to monitor all court developments as well as impacts of requirements as it relates to any applicable contracts. As the global COVID-19 pandemic is an ongoing matter, our future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods. Results of operations The discussion of our results of operations for fiscal year 2019 has been omitted from this Form 10-K but can be found in Item 7. Management's Discussion and Analysis and Results of Operations in our Form 10-K for the fiscal year endedJanuary 3, 2021 filed with theSecurities and Exchange Commission onMarch 18, 2021 . Net loss Net loss for the fiscal year endedJanuary 2, 2022 was$54.3 million compared to Net loss of$211.9 million for the fiscal year endedJanuary 3, 2021 , representing a decrease of$157.6 million . The decrease in Net loss was primarily due to higher Net revenue, primarily driven by growth of our base business, as well as a decrease in interest expense as a result of our debt pay down, and a decrease in other 66 -------------------------------------------------------------------------------- expense, primarily related to unrealized foreign currency losses in the prior year period. These impacts were partially offset by an increase in operating expenses, primarily Selling, marketing and administrative expenses.
Net revenue
Net revenue for the fiscal year endedJanuary 2, 2022 increased by$276.6 million , or 15.7%, compared with the fiscal year endedJanuary 3, 2021 . Net revenue for the fiscal year endedJanuary 2, 2022 included operational net revenue growth of 14.2% and a positive impact of 1.5% from foreign currency fluctuations, which was primarily driven by the weakening of theU.S. Dollar against a variety of currencies, primarily the Chinese Yuan, Euro and British Pound, partially offset by the strengthening of the Japanese Yen and Brazilian Real. The increase in revenues for the fiscal year endedJanuary 2, 2022 , excluding the impact of foreign currency exchange, was mainly driven by our Core lines of business, as we recorded higher revenues across all geographic regions of ourClinical Laboratories and Transfusion Medicine businesses.
The following table shows total Net revenue by line of business:
Fiscal Year Ended
(Dollars in millions) January 2, 2022 January 3, 2021 % Change
Clinical Laboratories $ 1,350.4 $ 1,154.2 17.0 %
Transfusion Medicine 664.3 580.6 14.4 %
Core Revenue 2,014.7 1,734.8 16.1 %
Other Product Revenue 6.2 8.5 (26.9 )%
Collaboration and Other Revenue 21.9 22.9 (4.4 )%
Non-Core Revenue 28.1 31.4 (9.8 )%
Net Revenue $ 2,042.8 $ 1,766.2 15.7 %
Core revenue
Clinical Laboratories revenue for the fiscal year ended January 2, 2022
increased by $196.2 million , or 17.0%, compared with the fiscal year ended
January 3, 2021 , net of a decrease of $6.6 million from our COVID-19 antibody
and antigen tests resulting from the deceleration of COVID-19 related testing
year-over-year, primarily in the second half of the year. The increase included
an operational net revenue growth of 15.4% and a positive impact of 1.6% from
foreign currency fluctuations. The increase in Clinical Laboratories revenue was
primarily due to higher reagent revenue, driven by the recovery of testing
volumes in our base business and the growth of our installed base. The growth in
the base business includes increases in revenues related to our chemistry slides
and our wells, primarily our cardiac-related assays. Additionally, we recorded
higher consumables and instrument sales across most regions, most notably in the
Americas , and primarily related to our integrated clinical lab systems.
Transfusion Medicine revenue for the fiscal year ended January 2, 2022 increased
by $83.7 million , or 14.4%, compared with the fiscal year ended January 3, 2021 .
This increase included operational net revenue growth of 13.1% and a positive
impact of 1.3% from foreign currency fluctuations. The increase in Transfusion
Medicine revenue, excluding the impact of foreign currency exchange, was
primarily driven by strength in Donor Screening, including a new customer in our
Donor Screening business in the U.S. , as well as an increase in Immunohematology
assays.
Non-core revenue
Other product revenue, related to our contract manufacturing business, decreased
by $2.3 million for the fiscal year ended January 2, 2022 compared with the
fiscal year ended January 3, 2021 , due to the timing of satisfying certain
performance obligations related to a contract manufacturing arrangement in the
current fiscal period.
Collaboration and other revenue for the fiscal year ended January 2, 2022
decreased by $1.0 million compared with the fiscal year ended January 3, 2021 .
The decrease was primarily due to lower revenues related to our HCV/HIV license
agreements, partially offset by an $8.5 million award from an arbitration
proceeding related to one of our collaboration agreements recorded during the
current year period.
Cost of revenue
Fiscal Year Ended
% of Net % of Net
(Dollars in millions) January 2, 2022 Revenue January 3, 2021 Revenue
Cost of revenue $ 1,006.8 49.3 % $ 908.2 51.4 %
The increase in Cost of revenue was primarily driven by the increase in revenues
during the current year period. The decrease in Cost of revenue as a percentage
of net revenue for the fiscal year ended January 2, 2022 compared with the
fiscal year ended January 3, 2021
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was primarily due to lower manufacturing costs and lower underutilized facility
costs, as well as the impact of the previously mentioned award from an
arbitration proceeding related to one of our collaboration agreements, partially
offset by higher freight costs and unfavorable product mix.
Operating expenses
The following table provides a summary of certain operating expenses:
Fiscal Year Ended
January 2, % of Net January 3, % of Net
(Dollars in millions) 2022 Revenue 2021 Revenue
Selling, marketing and administrative
expenses $ 555.0 27.2 % $ 489.6 27.7 %
Research and development expense 126.2 6.2 % 112.9 6.4 %
Amortization of intangible assets 133.4 6.5 % 131.9 7.5 %
Other operating expense, net 47.5 2.3 % 35.3 2.0 %
Selling, marketing and administrative expenses
Selling, marketing and administrative expenses were$555.0 million for the fiscal year endedJanuary 2, 2022 , or 27.2% of net revenue, as compared with$489.6 million for the fiscal year endedJanuary 3, 2021 , or 27.7% of net revenue, an increase of$65.4 million . The increase in Selling, marketing and administrative expenses was primarily due to higher employee-related costs, including stock-based compensation, and increased distribution costs due to higher shipment volumes and higher shipping rates as a result of the ongoing global COVID-19 pandemic.
Research and development expense
Research and development expense was$126.2 million for the fiscal year endedJanuary 2, 2022 , or 6.2% of net revenue, as compared with$112.9 million for the fiscal year endedJanuary 3, 2021 , or 6.4% of net revenue, an increase of$13.3 million . The increase was primarily due to an increased investment in costs to develop new assays, as well as an increase in employee-related costs, partially offset by the$7.5 million up-front payment made to Quotient in the prior year period.
Amortization of intangible assets
Amortization of intangible assets was$133.4 million for the fiscal year endedJanuary 2, 2022 as compared with$131.9 million for the fiscal year endedJanuary 3, 2021 . There were no significant changes in the composition of our intangible assets in the fiscal year endedJanuary 2, 2022 compared to the fiscal year endedJanuary 3, 2021 .
Other operating expense, net
Other operating expense, net, was$47.5 million , or 2.3% of net revenue, for the fiscal year endedJanuary 2, 2022 , as compared with$35.3 million , or 2.0% of net revenue, for the fiscal year endedJanuary 3, 2021 , an increase of$12.2 million . The increase was primarily due to costs incurred of$7.0 million related to the acquisition of Ortho by Quidel and, to a lesser extent, higher profit share expense in the current year due to lower manufacturing costs related to our Joint Business.
Non-operating items
Interest expense, net
Interest expense, net was$146.0 million for the fiscal year endedJanuary 2, 2022 , compared with$198.2 million for the fiscal year endedJanuary 3, 2021 . The decrease of$52.2 million was primarily related to lower borrowings due to the use of the net proceeds from the IPO to (i) redeem$160.0 million of our 2025 Notes, (ii) redeem$270.0 million of our 2028 Notes, and (iii) repay$892.7 million in aggregate principal amount of borrowings under our Dollar Term Loan Facility.
Tax indemnification expense, net
Tax indemnification expense was$0.8 million for the fiscal year endedJanuary 2, 2022 , and was primarily related to the release of certain pre-acquisitionU.S. state tax reserves. Tax indemnification expense was$31.2 million for the fiscal year endedJanuary 3, 2021 , and was primarily related to the release of certain tax reserves upon the settlement of certainU.S. federal and state tax matters, with an offsetting benefit recorded to income tax expense. 68 --------------------------------------------------------------------------------
Other expense, net
Other expense, net was$53.1 million for the fiscal year endedJanuary 2, 2022 and was comprised primarily of loss on early extinguishment of debt of$50.3 million , which was related to the use of proceeds from the IPO to redeem portions of our outstanding 2025 Notes, 2028 Notes and Dollar Term Loan Facility. Other expense, net was$84.2 million for the fiscal year endedJanuary 3, 2021 and primarily related to$69.5 million of foreign currency losses, of which$68.2 million was unrealized, and loss on early extinguishment of the 2022 Notes of$12.6 million . The unrealized foreign currency losses are mainly related to intercompany loans denominated in currencies other than the functional currency of the affected subsidiaries.
Provision for (benefit from) income taxes
During the fiscal year endedJanuary 2, 2022 , we incurred a loss before provision for income taxes of$26.0 million and recognized a provision for income taxes of$28.3 million , resulting in a negative effective tax rate of 109.0%. The effective tax rate differs from theU.S. federal statutory rate primarily due to (i) a net cost of$44.7 million for the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances, (ii) a net benefit of$23.8 million related to non-U.S. earnings being taxed at rates that are different than theU.S. statutory rate, and (iii) a net cost of$11.8 million for the tax expense associated with the remeasurement of deferred tax assets and liabilities due to the enactment of new tax rates, primarily in the U.K. During the fiscal year endedJanuary 3, 2021 , we incurred a loss before benefit from income taxes of$225.3 million and recognized a benefit from income taxes of$13.4 million resulting in an effective tax rate of 5.9%. The effective tax rate for each period differs from theU.S. federal statutory rate primarily due to (i) a net cost of$63.8 million for the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of a valuation allowance, (ii) a net benefit of$37.3 million related to a decrease in our pre-Acquisition reserves for uncertain tax positions due to the settlement of certain tax matters, (iii) partially offset by a net cost of$5.7 million related to an increase in certain post-Acquisition non-U.S. reserves for uncertain tax positions and (iv) a net benefit of$23.1 million for non-U.S. earnings being taxed at rates that are different than theU.S. statutory rate.
Use of Non-GAAP Financial Measures
Reconciliation of Net Loss to Adjusted EBITDA
We believe that our financial statements and the other financial data included
in this Annual Report on Form 10-K have been prepared in a manner that complies,
in all material respects, with GAAP, and are consistent with current practice,
with the exception of the inclusion of financial measures that differ from
measures calculated in accordance with GAAP, including Adjusted EBITDA. Adjusted
EBITDA consists of net loss before interest expense, net, provision for (benefit
from) income taxes and depreciation and amortization and eliminates (i) certain
non-operating income or expense, and (ii) impacts of certain noncash, unusual or
other items that are included in net loss that we do not consider indicative of
our ongoing operating performance.
We use these financial measures in the analysis of our financial and operating
performance because they assist in the evaluation of underlying trends in our
business. Additionally, Adjusted EBITDA is the basis we use for assessing the
profitability of our geographic-based reportable segments and is also utilized
as a basis for calculating certain management incentive compensation programs.
In the case of Adjusted EBITDA, we believe that making such adjustments provides
management and investors meaningful information to understand our operating
performance and ability to analyze financial and business trends on a
period-to-period basis. We believe that the presentation of these financial
measures enhances an investor's understanding of our financial performance. We
use certain of these financial measures for business planning purposes and
measuring our performance relative to that of our competitors.
Other companies in our industry may calculate Adjusted EBITDA differently than
we do. As a result, these financial measures have limitations as analytical and
comparative tools and you should not consider these items in isolation, or as a
substitute for analysis of our results as reported under GAAP. Adjusted EBITDA
should not be considered as measures of discretionary cash available to us to
invest in the growth of our business. In calculating these financial measures,
we make certain adjustments that are based on assumptions and estimates that may
prove to have been inaccurate. In addition, in evaluating these financial
measures, you should be aware that in the future we may incur expenses similar
to those eliminated in the presentation of these metrics included in this Annual
Report on Form 10-K. Our presentation of Adjusted EBITDA should not be construed
as an inference that our future results will be unaffected by unusual or
non-recurring items or changes in our customer base. Additionally, our
presentation of Adjusted EBITDA may differ from that included in the Credit
Agreement, the 2025 Notes Indenture and the 2028 Notes Indenture for purposes of
covenant calculation.
Adjusted EBITDA has important limitations as an analytical tool and you should
not consider it in isolation or as substitutes for analysis of our results as
reported under GAAP. Some of these limitations include the fact that Adjusted
EBITDA:
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does not reflect the significant interest expense on our debt, including the Senior Secured Credit Facilities, the 2025 Notes and the 2028 Notes;
•
eliminates the impact of income taxes on our results of operations; and
•
does not reflect any cash requirements for any future replacements of assets being depreciated and amortized, although the assets being depreciated and amortized will often have to be replaced in the future.
We compensate for these limitations by relying primarily on our GAAP results and using these financial measures only as a supplement to our GAAP results.
The following tables reconcile Net loss to Adjusted EBITDA for the periods
presented:
Fiscal Year Ended
(Dollars in millions) January 2, 2022 January 3, 2021
Net loss $ (54.3 ) $ (211.9 )
Interest expense, net 146.0 198.2
Provision for (benefit from) income taxes 28.3 (13.4 )
Depreciation and amortization 328.1 325.9
Stock-based compensation (a) 22.2 8.6
Restructuring and severance-related costs (b) 8.2 11.7
Loss on extinguishment of debt 50.3
12.6
Arbitration award (c) (7.4 ) - Quidel acquisition-related costs (d) 7.0 - Tax indemnification expense, net (e) 0.8
31.2
Costs related to Ortho's initial public and secondary offerings (f) 5.4 7.8 EU medical device regulation transition costs (g) 4.0 4.3 Unrealized foreign currency exchange losses (h) - 63.0 Other adjustments (i) 9.5 10.5 Adjusted EBITDA $ 548.1 $ 448.5 (a) Represents expenses related to awards granted under our 2014 Equity Incentive Plan. (b) Represents restructuring and severance costs related to several discrete initiatives intended to strengthen operational performance and to support building our commercial capabilities. (c) Represents an award from an arbitration proceeding related to one of our collaboration agreements of$8.5 million , partially offset by related legal fees of$1.1 million . (d) Represents acquiree-related transaction costs related to the Business Combination Agreement with Quidel. (e) Represents the reversal of the impact of tax indemnification income with Johnson & Johnson, primarily related to certain state tax matters, for which we recorded a tax reserve and indemnification. These state tax matters primarily include the taxability of the sale of our assets on the Acquisition date from Johnson & Johnson. (f) Represents costs incurred in connection with our IPO and underwritten secondary offering. (g) European Medical Device Regulation costs represent incremental consulting costs and R&D manufacturing site costs for our previously registered products under the In Vitro Diagnostic Regulation ("IVDR") to align existing, on-market products, with the revised expectations under the IVDR. IVDR is a replacement of the existing European In Vitro Diagnostics Directive regulatory framework, and manufacturers of currently marketed medical devices are required to comply with EU IVDR beginning inMay 2022 . (h) Represents noncash unrealized gains and losses resulting from the remeasurement of transactions denominated in foreign currencies primarily related to intercompany loans. Beginning in fiscal year 2021, we initiated programs to mitigate the impact of foreign currencies related to intercompany loans in our results, and such noncash net unrealized gains were approximately$33.0 million for the fiscal year endedJanuary 2, 2022 . We intend for these programs to mitigate the impact of foreign currency exchange rate fluctuations related to intercompany loans in current and future periods. Therefore, effectiveJanuary 4, 2021 , we no longer exclude non-cash unrealized gains and losses from Adjusted EBITDA. (i) Represents miscellaneous other adjustments related to unusual items impacting our results, including Principal Shareholder management fees of$3.0 million in each of the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 ; noncash derivative mark-to-market losses of$0.4 million and$1.5 million during the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 , respectively; costs related to our executive leadership reorganization, initiated in fiscal year 2019, of$1.0 million and$3.5 million during the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 , respectively; and other individually immaterial adjustments. 70 --------------------------------------------------------------------------------
Segment Results
The key indicators that we monitor are as follows:
•
Net revenue - This measure is discussed in the section entitled "Key components of results of operations."
•
Adjusted EBITDA - Adjusted EBITDA by reportable segment is used by our
management to measure and evaluate the internal operating performance of our
segments. It is also the basis for calculating certain management incentive
compensation programs. We believe that this measurement is useful to investors
as a way to analyze the underlying trends in our core business, including at the
segment level, consistently across the periods presented and also to evaluate
performance under management incentive compensation programs.
Fiscal Year Ended
%
(Dollars in millions) January 2, 2022 January 3, 2021 Change
Segment net revenue
Americas (1) $ 1,228.9 $ 1,067.3 15.1 %
EMEA 276.3 240.6 14.8 %
Greater China 274.4 229.6 19.5 %
Other 263.2 228.7 15.1 %
Net revenue $ 2,042.8 $ 1,766.2 15.7 %
(1)
Fiscal Year Ended
%
(Dollars in millions) January 2, 2022 January 3, 2021 Change
Segment Adjusted EBITDA
Americas $ 516.6 $ 463.1 11.6 %
EMEA 63.9 41.9 52.4 %
Greater China 129.2 108.0 19.7 %
Other 79.9 65.9 21.3 %
Corporate (241.5 ) (230.4 ) 4.9 %
Total Adjusted EBITDA $ 548.1 $ 448.5 22.2 %
Americas
Net revenue was $1,228.9 million for the fiscal year ended January 2, 2022
compared to net revenue of $1,067.3 million for the fiscal year ended January 3,
2021 , including a decrease in sales of $10.0 million from our COVID-19 antibody
and antigen tests. The increase of $161.6 million , or 15.1%, which included
operational net revenue growth of 14.8% and a positive impact of 0.4% from
foreign currency fluctuations, was primarily due to higher reagent and
instrument revenues in our Clinical Laboratories business, a new customer in our
Donor Screening business in the United States , grant revenue related to
development of our COVID-19 antibody and antigen tests and an $8.5 million award
from an arbitration proceeding related to one of our collaboration agreements.
Adjusted EBITDA was $516.6 million for the fiscal year ended January 2, 2022
compared to Adjusted EBITDA of $463.1 million for the fiscal year ended January
3, 2021 . The increase of $53.5 million , or 11.6%, was primarily due to higher
revenues, partially offset by increased employee-related costs.
EMEA
Net revenue was$276.3 million for the fiscal year endedJanuary 2, 2022 compared to net revenue of$240.6 million for the fiscal year endedJanuary 3, 2021 , including incremental sales of$4.6 million from our COVID-19 antibody and antigen tests. The increase of$35.7 million , or 14.8%, which included operational net revenue growth of 11.5% and a positive impact of 3.4% from foreign currency fluctuations, was primarily due to higher reagent revenue and, to a lesser extent, instrument sales in ourClinical Laboratories business, and higher reagent revenue in our Immunohematology business. Adjusted EBITDA was$63.9 million for the fiscal year endedJanuary 2, 2022 compared to Adjusted EBITDA of$41.9 million for the fiscal year endedJanuary 3, 2021 . The increase of$22.0 million , or 52.4%, was primarily due to higher revenues, partially offset by increased employee-related costs. 71 --------------------------------------------------------------------------------
Net revenue was$274.4 million for the fiscal year endedJanuary 2, 2022 compared to net revenue of$229.6 million for the fiscal year endedJanuary 3, 2021 . The increase of$44.8 million , or 19.5%, which included operational net revenue growth of 12.3% and a positive impact of 7.2% from foreign currency fluctuations, was primarily due to higher reagent revenue in both ourClinical Laboratories and Immunohematology businesses, partially offset by lower instrument sales in ourClinical Laboratories business. Adjusted EBITDA was$129.2 million for the fiscal year endedJanuary 2, 2022 compared to Adjusted EBITDA of$108.0 million for the fiscal year endedJanuary 3, 2021 . The increase of$21.2 million , or 19.7%, was primarily due to higher revenues, partially offset by increased employee-related costs and government subsidies received in the prior year period.
Other
Net revenue was$263.2 million for the fiscal year endedJanuary 2, 2022 compared to net revenue of$228.7 million for the fiscal year endedJanuary 3, 2021 . The increase of$34.5 million , or 15.1%, which included operational net revenue growth of 16.2% and a negative impact of 1.1% from foreign currency fluctuations, was primarily due to higher reagent revenue in ourClinical Laboratories and Transfusion Medicine businesses. Adjusted EBITDA was$79.9 million for the fiscal year endedJanuary 2, 2022 compared to Adjusted EBITDA of$65.9 million for the fiscal year endedJanuary 3, 2021 . The increase of$14.0 million , or 21.3%, was primarily due to higher revenues, partially offset by increased employee-related and distribution costs.
Liquidity and capital resources
As ofJanuary 2, 2022 andJanuary 3, 2021 , we had$309.7 million and$132.8 million of Cash and cash equivalents, respectively. As ofJanuary 2, 2022 andJanuary 3, 2021 ,$157.5 million and$108.8 million , respectively, of these Cash and cash equivalents were maintained in non-U.S. jurisdictions, primarily held in foreign currencies. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs. Notwithstanding the foregoing, until the Quidel Effective Time (as defined in the Business Combination Agreement) or termination of the Business Combination Agreement in accordance with its terms, subject to certain specified exceptions, we are subject to a variety of restrictions as specified under the Business Combination Agreement. Unless Quidel approves in writing (which approval will not be unreasonably withheld, conditioned or delayed, subject to certain exceptions), we may not, among other things, engage in another merger, restructuring or reorganization; incur indebtedness for borrowed money or issued debt securities, except for borrowing in amounts not to exceed$25 million in the aggregate (including pursuant to drawdowns of credit facilities outstanding on the date of the Business Combination Agreement) (excluding with respect to financing required in order to consummate the Combinations); or lease, license, transfer, exchange or swap, mortgage, pledge, abandon, allow to lapse or otherwise dispose of any of our assets, except for dispositions individually or in the aggregate that have a fair market value of less than$25 million , transactions between us and any of our subsidiaries, or in the ordinary course of business. Historical cash flows The following table presents a summary of our net cash inflows (outflows) for the periods shown Fiscal Year Ended (Dollars in millions) January 2, 2022 January 3, 2021 Net cash provided by operating activities $ 286.6 $ 46.1 Net cash used in investing activities (43.6 ) (45.4 ) Net cash (used in) provided by financing activities (74.7 ) 55.8
Fiscal year ended
Net cash flows provided by operating activities
Net cash provided by operating activities was$286.6 million for the fiscal year endedJanuary 2, 2022 . Factors resulting in Cash provided by operating activities included strong collections on Accounts receivable, as well as the impact of our new receivables purchase agreement, cash inflows from earnings before interest, taxes, depreciation and amortization expense, and increase Accounts payable and accrued expenses. These increases were partially offset by the payment of interest on borrowings of$132.1 million and increased investments in inventories of$139.5 million , which includes$106.3 million of instrument inventories that were transferred from Inventories to Property, plant and equipment, net, related to customer leased instruments. 72 --------------------------------------------------------------------------------
Net cash flows used in investing activities
Net cash used in investing activities was$43.6 million for the fiscal year endedJanuary 2, 2022 . The primary factor resulting in Cash used in investing activities was Purchases of property, plant and equipment during the fiscal year endedJanuary 2, 2022 of$58.4 million , partially offset by proceeds of$15.2 million related to the net settlement of our terminated cross currency swaps.
Net cash flows used in financing activities
Net cash used in financing activities was$74.7 million for the fiscal year endedJanuary 2, 2022 . During the fiscal year endedJanuary 2, 2022 , payments on long-term borrowings of$1,423.0 million and payments on short-term borrowings, net of$82.0 million , including the repayment of the outstanding balance of our Financing Program, were partially offset by net proceeds from our initial public offering of$1,426.4 million .
Fiscal year ended
Net cash flows provided by operating activities
Net cash provided by operating activities was$46.1 million for the fiscal year endedJanuary 3, 2021 . Factors resulting in cash provided by operating activities included cash inflows from earnings before interest, taxes, depreciation and amortization expense and other noncash items and lower Accounts receivable of$33.3 million , partially offset by interest paid on borrowings of$191.8 million , net investment in Inventories of$152.0 million , which includes$132.3 million of instrument inventories that were transferred from Inventories to Property, plant and equipment, net. Net cash provided by operating activities for fiscal year 2020 decreased$96.9 million compared to fiscal year 2019 primarily due to the impact of the global pandemic.
Net cash flows used in investing activities
Purchases of property, plant and equipment during the fiscal year endedJanuary 3, 2021 were$44.1 million . As ofJanuary 3, 2021 andDecember 29, 2019 , Accounts payable and Accrued liabilities included amounts related to purchases of Property, plant and equipment and capitalized internal-use software costs, which totaled$11.4 million and$14.1 million , respectively. In addition to the capital expenditures of$44.1 million , we made noncash transfers of$132.3 million of instrument inventories from Inventories to Property, plant and equipment, net, further increasing our investment in property, plant and equipment.
Net cash flows provided by financing activities
During the fiscal year endedJanuary 3, 2021 , net proceeds from the issuance of the 2025 Notes, 2028 Notes and Euro Term Loan Facility of$1,421.0 million were offset by payments on the 2022 Notes of$1,363.5 million . Net payments on short-term borrowings were$3.5 million .
Debt capitalization
The following table details our debt outstanding as of
(Dollars in millions) January 2, 2022 January 3,
2021
Senior Secured Credit Facilities Dollar Term Loan Facility $ 1,292.8 $2,185.5 Euro Term Loan Facility 335.8 408.9 Revolving Credit Facility - - 2028 Notes 405.0 675.0 2025 Notes 240.0 400.0 Accounts Receivable Financing -
75.0
Sale and Leaseback Financing -
20.5
Finance lease obligation 0.7
1.0
Other short-term borrowings -
0.9
Other long-term borrowings 2.6
3.9
Unamortized deferred financing costs (21.4 ) (40.9 )
Unamortized original issue discount (5.3 ) (11.3 )
Total borrowings 2,250.2 3,718.5
Less: Current portion (63.4 ) (160.0 )
Long-term borrowings $ 2,186.7 $ 3,558.5
73-------------------------------------------------------------------------------- As ofJanuary 2, 2022 andJanuary 3, 2021 , there were no outstanding borrowings under the Revolving Credit Facility. As ofJanuary 2, 2022 andJanuary 3, 2021 , letters of credit issued under the Revolving Credit Facility totaled$46.3 million and$37.5 million , respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was$453.7 million and$312.5 million as ofJanuary 2, 2022 andJanuary 3, 2021 , respectively. Our debt agreements contain various covenants that may restrict our ability to borrow on available credit facilities and future financing arrangements or require us to remain below a specific credit coverage threshold. We believe that we are and will continue to be in compliance with these covenants. OnFebruary 5, 2021 , we entered into a fifth amendment of our Credit Agreement (as amended, the "Credit Agreement") governing our Senior Secured Credit Facilities, which increased the Revolving Credit Facility contained in the credit agreement by$150.0 million to an aggregate amount of$500.0 million and extended the maturity date toFebruary 5, 2026 , provided that such date may be accelerated subject to certain circumstances as set forth in the fifth amendment. To the extent that the aggregate principal amount of the Dollar Term Loan Facility and Euro Term Loan Facility (and any Refinancing Indebtedness (as defined in the Credit Agreement) with respect thereto that matures on or prior toJune 30, 2025 ) outstanding as ofMarch 31, 2025 exceeds$500.0 million then the maturity date with respect to the Revolving Credit Facility shall beMarch 31, 2025 . OnDecember 24, 2021 , we entered into a sixth amendment to the Senior Secured Credit Facilities to account for the cessation of LIBOR for Sterling, Euros and Japanese Yen and the alternative replacement rates with respect to such currencies, as applicable. All other terms of the Senior Secured Credit Facilities remain substantially the same except as otherwise amended by the fifth and sixth amendments. OnFebruary 5, 2021 andFebruary 9, 2021 , we used a portion of the proceeds from our IPO to repay$706.6 million and$186.1 million , respectively, of borrowings under the Dollar Term Loan Facility. In aggregate, we repaid$892.7 million of borrowings under the Dollar Term Loan Facility. As ofJanuary 2, 2022 andJanuary 3, 2021 , the remaining balance of deferred financing costs related to the Dollar Term Loan Facility was$8.1 million and$17.3 million , respectively. As ofJanuary 2, 2022 andJanuary 3, 2021 , the remaining balance of deferred financing costs related to the Euro Term Loan Facility was$3.6 million and$4.6 million , respectively. As ofJanuary 2, 2022 andJanuary 3, 2021 , the remaining unamortized balance related to the Revolving Credit Facility was$2.7 million and$3.4 million , respectively. The effective interest rate of the Term Loan as ofJanuary 2, 2022 is 5.74%. OnJanuary 27, 2020 , we issued$675.0 million aggregate principal amount of 7.250% Senior Notes due 2028, on which interest is payable semi-annually in arrears onFebruary 1 andAugust 1 of each year. The 2028 Notes will mature onFebruary 1, 2028 . The 2028 Notes and the guarantees thereof are our senior unsecured obligations and the 2028 Notes and the guarantees rank equally in right of payment with all of the Lux Co-Issuer's andU.S. Co-Issuer's (together, the "Issuers") and guarantors' existing and future senior debt, including the 2025 Notes. The 2028 Notes and the guarantees thereof are effectively subordinated to any of the Issuers' and guarantors' existing and future secured debt, including the Senior Secured Credit Facilities, to the extent of the value of the assets securing such debt. In addition, the 2028 Notes and the guarantees thereof rank senior in right of payment to all of the Issuers' and guarantors' future subordinated debt and will be structurally subordinated to the liabilities of our non-guarantor subsidiaries. We incurred deferred financing costs of$12.9 million related to the 2028 Notes, which were capitalized as deferred financing costs and are being amortized using the effective interest method as a component of interest expense over the life of the 2028 Notes. OnFebruary 5, 2021 , we used a portion of the proceeds from our IPO to redeem$270.0 million aggregate principal amount of the 2028 Notes, plus accrued interest thereon and$19.6 million of redemption premium. The redemption resulted in an extinguishment loss recognized of$24.3 million during the fiscal year endedJanuary 2, 2022 , which consisted of$4.7 million of unamortized deferred issuance costs and$19.6 million of redemption premium. Concurrent with the issuance of the 2028 Notes, we entered into a$350.0 million U.S. dollar equivalent swap to Japanese Yen-denominated interest at a weighted average rate of 5.56%, for a five-year term. We terminated the cross currency swaps onApril 1, 2021 and received$12.8 million of cash from net settlement in the fiscal year endedJanuary 2, 2022 . OnJune 11, 2020 , we issued$400.0 million aggregate principal amount of 7.375% Senior Notes due 2025 on which interest is payable semi-annually in arrears onJune 1 andDecember 1 of each year. The 2025 Notes will mature onJune 1, 2025 . The 2025 Notes and the guarantees thereof are our unsecured obligations and the 2025 Notes and the guarantees thereof rank equally in right of payment with all of the Issuers' and guarantors' existing and future senior debt, including the 2028 Notes. The 2025 Notes and the guarantees thereof are effectively subordinated to any of the Issuers' and guarantors' existing and future secured debt, including the Senior Secured Credit Facilities, to the extent of the value of the assets securing such debt. In addition, the 2025 Notes and the guarantees thereof rank senior in right of payment to all of the Issuers' and guarantors' future subordinated debt and will be structurally subordinated to the liabilities of the Issuers' non-guarantor subsidiaries. We incurred deferred financing costs of$7.5 million related to the 2025 Notes, which were capitalized as deferred financing costs and are being amortized using the effective interest method as a component of interest expense over the life of the 2025 Notes. OnFebruary 5, 2021 , we used a portion of the proceeds from our IPO to redeem$160.0 million aggregate principal amount of the 2025 Notes, plus accrued interest thereon and$11.8 million of redemption premium. The redemption resulted in an extinguishment loss recognized of$14.5 million for the fiscal year endedJanuary 2, 2022 , which consisted of$2.7 million of unamortized deferred issuance costs and$11.8 million of redemption premium. 74 -------------------------------------------------------------------------------- InSeptember 2016 , we entered into an accounts receivable financing program (the "Financing Program") with a financial institution. The Financing Program, which was fully paid off inJune 2021 in connection with entry into the RPA (as defined below), was set to mature onJanuary 24, 2022 and was secured by receivables from ourU.S. business that are sold or contributed to a wholly-owned, consolidated, bankruptcy remote subsidiary. The bankruptcy remote subsidiary's sole business consists of the purchase or receipt of the receivables and subsequent granting of a security interest to the financial institution under the program, and its assets were available first to satisfy obligations and were not available to pay creditors of our other legal entities. Under the Financing Program, we could borrow up to the lower of$75.0 million or 85% of the accounts receivable borrowing base. Interest on outstanding borrowings under the Financing Program was charged based on a per annum rate equal to the London Inter-bank Offered Rate (the "LIBOR Rate") (with a floor of zero percent and as defined in the agreement) plus the LIBOR Rate margin (2.25 percentage points) if the related loan was a LIBOR Rate loan. Otherwise, the per annum rate was equal to a Base Rate (as defined in the Financing Program agreement) plus the base rate margin (1.25 percentage points). Interest was due and payable, in arrears, on the first day of each month. The Financing Program was also subject to termination under standard events of default as defined. OnJune 11, 2021 ,Ortho-Clinical Diagnostics FinanceCo I, LLC ("Ortho FinanceCo I"), a wholly owned receivables financing subsidiary of us, entered into a receivables purchase agreement (the "RPA") withWells Fargo, N.A. , as administrative agent (the "Agent"), and certain purchasers. Under the RPA, Ortho FinanceCo I may sell receivables in amounts up to a$75.0 million limit, subject to certain conditions, including that, at any date of determination, the aggregate capital paid to Ortho FinanceCo I does not exceed a "capital coverage amount," equal to an adjusted net receivables pool balance minus a required reserve. Ortho FinanceCo I has guaranteed the prompt payment of the sold receivables, and to secure the prompt payment and performance of such guaranteed obligations, Ortho FinanceCo I has granted a security interest to the Agent, for the benefit of the purchasers, in all assets of Ortho FinanceCo I. We, in our capacity as master servicer under the RPA, are responsible for administering and collecting the receivables and have made customary representations, warranties, covenants and indemnities. We have also provided a performance guarantee for the benefit of Ortho FinanceCo I to cause the due and punctual performance by us of our obligations as master servicer. The proceeds of the RPA were used, in part, to pay off the outstanding balance of the Financing Program. We or our affiliates, including investment funds affiliated with Carlyle, at any time and from time to time, may purchase Senior Notes or our other indebtedness. Any such purchases may be made through the open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine. Such purchases could result in a change to the allocation between the Issuers of the indebtedness represented by the Senior Notes and could have important tax consequences for holders of the Senior Notes.
Restructuring activities
We have previously undertaken several initiatives intended to strengthen operational performance and to support building our capabilities to enable us to win in the marketplace. These activities to improve operational performance are primarily cost reduction and productivity improvement initiatives in procurement, manufacturing, supply chain and logistics. During the fiscal year endedJanuary 3, 2016 , we announced that we will outsource its equipment manufacturing operations inRochester, New York and refurbishment operations in Neckargemund,Germany to a third-party contract manufacturing company. These initiatives were substantially completed during the fiscal year endedDecember 29, 2019 , with total cumulative charges incurred of$75.4 million . We made cash payments of$6.5 million during the fiscal year endedJanuary 3, 2021 , and made cumulative cash payments of$71.1 million as ofJanuary 2, 2022 .
During the fiscal year ended
For additional information on our restructuring activities, see Note 12-Restructuring costs to our audited consolidated financial statements set forth in "Part IV Item 15. Exhibits, Financial Statements Schedules" of this Annual Report on Form 10-K.
Outlook
Short-term liquidity outlook
We expect that our cash and cash equivalents, cash flows from operations and
amounts available under the Revolving Credit Facility will be sufficient to meet
debt service requirements, working capital requirements, and capital
expenditures for the next 12 months from the issuance of these audited
consolidated financial statements. Our ability to make scheduled payments of
principal or interest on, or to refinance, our indebtedness or to fund working
capital requirements, capital expenditures and other current obligations will
depend
75
--------------------------------------------------------------------------------
on our ability to generate cash from operations. Such cash generation is subject
to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
We are focused on expanding the number of instruments placed in the field and
solidifying long-term contractual relationships with customers. In order to
achieve this goal, in certain jurisdictions where it is permitted, we have
leveraged a reagent rental model that has been recognized as more attractive to
certain customers. In this model, we lease, rather than sell, instruments to our
customers. Over the term of the contract, the purchase price of the instrument
is embedded in the price of the assays and reagents. Going forward, we intend to
increase the number of reagent rental placements in developed markets, a
strategy that we believe is beneficial to our commercial goals because it lowers
our customers' upfront capital costs and therefore allows purchasing decisions
to be made at the lab manager level. For these same reasons, the reagent rental
model also benefits our commercial strategy in emerging markets. We believe that
the shift in our sales strategy will grow our installed base, thereby increasing
sales of higher-margin assays, reagents and other consumables over the life of
the customer contracts and enhancing our recurring revenue and cash flows.
During the fiscal year ended January 2, 2022 , we transferred $106.3 million of
instrument inventories from Inventories to Property, plant and equipment,
further increasing our investment in property, plant and equipment. We currently
estimate that we will transfer additional instrument inventories of
approximately $135 million during fiscal year 2022.
We expect to make contributions of $1.9 million to our defined benefit plans in
fiscal 2022. The amount of any contributions is dependent on the future economic
environment and investment returns, and we are unable to reasonably estimate
pension contributions beyond fiscal 2022. See Note 14-Long-term employee
benefits to our audited consolidated financial statements set forth in "Part IV
Item 15. Exhibits, Financial Statements Schedules" of this Annual Report on Form
10-K for further discussion of our defined benefit plans.
As of January 2, 2022 , we had approximately $232.4 million of purchase
obligations, which includes agreements to purchase goods or services that is
enforceable and legally binding, and that specifies all significant terms,
including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum
or variable price provisions and (iii) the approximate timing of the
transaction. We expect the majority of the payments related to these purchase
obligations to be made during fiscal year 2022.
We entered into a consulting services agreement with an affiliate of Carlyle,
which was amended on October 15, 2020 . The agreement terminates upon the earlier
of (i) the second anniversary of our IPO and (ii) the date that Carlyle
collectively and beneficially owns, directly or indirectly, less than ten
percent (10%) of our outstanding voting securities. For a description of the
agreement and our obligations, see Note 20-Related party transactions to our
audited consolidated financial statements set forth in "Part IV Item 15.
Exhibits, Financial Statements Schedules" of this Annual Report on Form 10-K.
As of January 2, 2022 , the total undiscounted future payments we expect to make
in connection with our operating lease agreements was $30.7 million .
Approximately $13.7 million of these payments are expected to be made in fiscal
year 2022. See Note 10-Leases to our audited consolidated financial statements
set forth in "Part IV Item 15. Exhibits, Financial Statements Schedules" of this
Annual Report on Form 10-K for further discussion.
Based on our forecasts, we believe that cash flow from operations, available
cash on hand and available borrowing capacity under our Revolving Credit
Facility will be sufficient to fund continuing operations for the next 12 months
from the issuance of these audited consolidated financial statements. Our debt
agreements contain various covenants that may restrict our ability to borrow on
available credit facilities and future financing arrangements and require us to
remain below a specific credit coverage threshold. Our credit agreement has a
financial covenant (ratio of Net First Lien Secured Debt to Adjusted EBITDA not
to exceed 5.5-to-1, subject to a 50 basis point step-down on September 30, 2022 )
that is tested when borrowings and letters of credit issued under the Revolving
Credit Facility exceed 30% of the committed amount at any period end reporting
date. As of January 2, 2022 , we had no outstanding borrowings under our
Revolving Credit Facility. Due to the current economic and business uncertainty
resulting from the ongoing COVID-19 pandemic, from time to time we may borrow
from our Revolving Credit Facility, if needed, during fiscal year 2022. We
believe that we will continue to comply with the financial covenant for the next
12 months. In the event we do not comply with the financial covenant of the
Revolving Credit Facility, the lenders will have the right to call on all of the
borrowings under the Revolving Credit Facility. If the lenders on the Revolving
Credit Facility terminate their commitments and accelerate the loans, this would
become a cross default to other material indebtedness. We believe that we will
continue to be in compliance with these covenants. However, should it become
necessary, we may seek to raise additional capital within the next 12 months
through borrowings on credit facilities, other financing activities and/or the
private sale of equity securities.
Long-term liquidity outlook
UK Holdco is a holding company with no business operations or assets other than the capital stock of its direct and indirect subsidiaries and intercompany loan receivables. Consequently,UK Holdco is dependent on loans, dividends, interest and other payments from its subsidiaries to make principal and interest payments on our indebtedness, meet working capital requirements and make capital expenditures. As presently structured, its operating subsidiaries are the sole source of cash for such payments and there is no assurance that the cash for those interest payments will be available. We believe our organizational structure will allow the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs. In the future, the Issuers and borrowers under 76 -------------------------------------------------------------------------------- our Senior Secured Credit Facilities may also need to refinance all or a portion of the borrowings under the Senior Notes and the Senior Secured Credit Facilities on or prior to maturity. If refinancing is necessary, there can be no assurance that we will be able to secure such financing on acceptable terms, or at all. We have milestone payment obligations to partners and suppliers which are contingent on regulatory approval. Future launch-related milestone payments of up to$60.0 million may be owed to Quotient for MosaiQ; however, the future timing of when such payments would be made, if ever, is unclear at this time. See Note 13-Collaborations and other relationships to our audited consolidated financial statements for further discussion of the Quotient relationship. As ofJanuary 2, 2022 , we had approximately$27.9 million of uncertain tax positions, not including interest and penalties. Due to the high degree of uncertainty regarding future timing of cash flows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities. See Note 16-Income taxes to our audited consolidated financial statements for further discussion of our tax obligations. Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control as well as the factors described in Part 1, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.
Recent accounting pronouncements
Information regarding new accounting pronouncements is included in Note 3-Summary of significant accounting policies to the audited consolidated financial statements set forth in "Part IV Item 15. Exhibits, Financial Statements Schedules" of this Annual Report on Form 10-K.
Critical accounting estimates and summary of significant accounting policies
The preparation of the audited consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of some assets and liabilities and, in some instances, the reported amounts of revenues and expenses during the applicable reporting period. Actual results could differ from these estimates. Management believes the accounting estimates discussed below represent those accounting estimates requiring the exercise of judgment where a different set of judgments could result in the greatest changes to our reported results.
Revenue recognition
Revenue is recognized when obligations under the terms of a contract with a
customer are satisfied; this occurs with the transfer of control of our goods or
services. We consider revenue to be earned when all of the following criteria
are met: we have a contract with a customer that creates enforceable rights and
obligations; promised products or services are identified; the transaction
price, or consideration we expect to receive for transferring the goods or
providing services, is determinable; and we have transferred control of the
promised items to the customer. A promise in a contract to transfer a distinct
good or service to the customer is identified as a performance obligation. A
contract's transaction price is allocated to each performance obligation and
recognized as revenue when, or as, the performance obligation is satisfied.
Product revenue includes sales of consumable supplies and test kits for
equipment, sales and leases of instruments, as well as services related thereto.
Revenue from sales of consumable supplies and test kits is generally recognized
upon shipment or delivery based on the contractual shipping terms of the
respective customer contract. Revenue from instrument sales is generally
recognized upon installation and customer acceptance. Service revenue on
equipment and instrument maintenance contracts is recognized over the life of
the service arrangement or as services are performed.
A portion of our revenue relates to equipment lease transactions with our
customers. We evaluate these leases to determine proper classification, which
involves specific determinations and judgment. Revenue earned from operating
leases is generally recognized on a straight-line basis over the lease term,
which is normally five to seven years. Revenue earned from sales-type leases is
recognized at the beginning of the lease, as well as a lease receivable and
unearned interest associated with the lease.
If the contract contains a single performance obligation, the entire transaction
price is allocated to the single performance obligation. We may also enter into
transactions that involve multiple performance obligations, such as the sale of
products and related services. In accounting for these transactions, we allocate
the consideration to the deliverables by use of the relative standalone selling
price method.
A portion of our product revenue includes revenue earned under reagent rental
programs which provide customers the right to use instruments at no separate
cost to the customer in consideration for a multi-year agreement to purchase
reagents, assays and consumables. We allocate a portion of the revenue from the
future consumable sale to the instrument based on the customers' minimum volume
commitment and recognize revenue at the time of the future sale of reagents,
assays and consumables. The cost of the instrument is
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capitalized within property and equipment, and is charged to cost of product
revenue on a straight-line basis over the term of the minimum purchase
agreement. Revenue earned from operating leases is recognized over the lease
term, which is normally five to seven years. Revenue earned under sales-type
leases is recognized at the beginning of the lease, as well as a lease
receivable and unearned interest associated with the lease. Revenue is
recognized when control has transferred for the reagents, assays and
consumables. Costs related to product sales are recognized at time of delivery.
We recognize product revenues at the net sales price, which includes estimates
of variable consideration related to rebates and volume discounts. Rights of
return are generally not included in our arrangements with customers. Our
estimates of rebates and discounts are determined using the expected value
method and take into consideration historical experience, contractual and
statutory requirements, and other relevant information such as forecasted
activity. These reserves reflect our best estimate of the amount of
consideration to which it is entitled. The amount of variable consideration
included in the net sales price is limited to the amount that is probable not to
result in a significant future reversal of cumulative revenue under the
contract.
We enter into collaboration arrangements that generate collaboration revenue and
royalty revenue from license agreements. Revenue from collaborations is
presented "gross" where we are deemed the principal in the arrangement and "net"
where we are deemed the agent in the arrangement.
Inventories
Inventories are stated at the lower of cost and net realizable value on a first-in, first-out method. Elements of cost include raw materials, direct labor and manufacturing overhead.
We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory and based upon these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and the net realizable value. Historically, such write-downs have not been significant. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our earnings.
Customer leased instruments
Determining the economic life of our leased instruments requires significant accounting estimates and judgment. These estimates are based on our historical experience and existing contractual terms. Our estimate of the economic life of our instruments is ten years. We depreciate these assets over the lesser of the useful economic life and the length of the contract, which typically ranges between five and eight years. We believe these lives represent the periods during which the instruments are expected to be usable, with normal repairs and maintenance, for the purposes for which they are intended. We regularly evaluate the economic life of existing and new products for purposes of this determination.
Goodwill represents costs in excess of fair values assigned to underlying net assets of acquired companies. We evaluate goodwill for impairment on an annual basis in our fiscal fourth quarter, unless conditions exist that would require a more frequent evaluation. When testing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we will perform a quantitative impairment test, otherwise no further analysis is required. We may also elect not to perform the qualitative assessment and, instead, proceed directly to performing the quantitative impairment test, under which the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. The ultimate outcome of the goodwill impairment assessment for a reporting unit should be the same whether we choose to perform the qualitative assessment or proceed directly to the quantitative impairment test. If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then we would record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (limited to the amount of goodwill). We estimate the fair value of our reporting units by using forecasts of discounted future cash flows and peer market multiples. The inputs utilized in these analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value Measurement. 78 -------------------------------------------------------------------------------- The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to our future cash flows, which includes assumed revenue growth rates, long term growth rates and discount rates. Although we base cash flow forecasts on significant assumptions, including assumed revenue growth rates, long term growth rates and discount rates, that are consistent with plans and estimates we use to manage our Company, there is significant judgment in determining the cash flows. We also consider revenue and earnings trading multiples of the peer companies that have similar financial characteristics to the reporting units. Due to the inherent uncertainty in forecasting cash flows and earnings, actual future results may vary significantly from the forecasts. Based on the degree of uncertainty, we cannot quantify the potential effect of the change in estimate on our results of operations and financial position.
Impairment of long-lived assets
The process of evaluating the potential impairment of other long-lived assets, such as our property, plant and equipment and definite-lived intangible assets, such as technology, tradenames and customer relationships, is subjective and requires judgment. We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. This impairment test may be triggered by a decrease in the market price of a long-lived asset, an adverse change in the extent or manner in which the asset is being used, or a forecast of continuing losses associated with the use of the asset. If the fair value is less than the asset's carrying amount, we recognize a loss for the difference. The fair value methodology used is an estimate of fair market value and is based on the discounted future cash flows of the asset or quoted market prices of similar assets. Based on these assumptions and estimates, we determine whether we need an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value.
Income taxes
The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Deferred tax assets are also recognized for operating losses and tax credit carryforwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date. We do not intend to permanently reinvest earnings of foreign subsidiaries at this time. As such, we provide for income taxes and foreign withholding taxes, where applicable, on undistributed earnings. Any repatriation of undistributed earnings would be done at little or no tax cost. The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. A liability for uncertain tax positions is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than "more likely than not." Interest and penalties accrued related to unrecognized tax benefits are included in the provision for taxes on income.
Stock-based compensation
Stock-based compensation, comprised ofUK Holdco stock options and restricted shares, is measured at fair value on the grant date or date of modification, as applicable. Determining the amount of stock-based compensation expense to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of stock options. Our valuation model requires us to make estimates of the following assumptions: Fair value of our ordinary shares-Prior to our initial public offering inJanuary 2021 , the valuation of our ordinary shares was determined in accordance with the guidelines outlined in theAmerican Institute of Certified Public Accountants , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. We considered numerous objective and subjective factors to determine our best estimate of the fair value of our ordinary shares, including but not limited to, the following factors:
•
the fact that we were a private company with illiquid securities;
•
historical operating results;
•
discounted future cash flows, based on projected operating results;
•
financial information of comparable public companies; and
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the risk involved in the investment, as related to earnings stability, capital structure, competition and market potential.
Expected volatility-We are responsible for estimating volatility and have considered a number of factors, including third-party estimates and comparable companies, when estimating volatility.
Expected term-We estimate the remaining expected life of options as the mid-point between the expected time to vest and the maturity of the options.
Risk-free interest rate-The yield interpolated from
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