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 unaudited interim consolidated financial
statements and the related notes thereto included elsewhere in this Quarterly
Report on Form 10-Q. 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: the ongoing global coronavirus
("COVID-19") pandemic; risks related to the proposed acquisition of Ortho by
Quidel Corporation, including (i) failure to complete the proposed transaction
on the proposed terms or on the anticipated timeline, or at all, (ii) risks and
uncertainties related to securing the necessary regulatory and shareholder
approvals, the sanction of the High Court of Justice of England and Wales and
satisfaction of other closing conditions to consummate the proposed transaction;
(iii) the occurrence of any event, change or other circumstance that could give
rise to the termination of the definitive transaction agreement relating to the
proposed transaction; (iv) the challenges and costs of closing, integrating,
restructuring and achieving anticipated synergies; (v) the ability to retain key
employees; and (vi) the economic, business, competitive, and/or regulatory
factors affecting the business of the Company and Quidel; increased competition;
manufacturing problems or delays or failure to develop and market new or
enhanced products or services; adverse developments in global market, economic
and political conditions; our ability to obtain additional capital on
commercially reasonable terms may be limited or non-existent; our inability to
implement our strategies for improving growth or to realize the anticipated
benefits of any acquisitions and divestitures, including as a result of
difficulties integrating acquired businesses with, or disposing of divested
businesses from, our current operations; a need to recognize impairment charges
related to goodwill, identified intangible assets and fixed assets; our
inability to achieve some or all of the operational cost improvements and other
benefits that we expect to realize; our ability to operate according to our
business strategy should our collaboration partners fail to fulfill their
obligations; risk that the insurance we will maintain may not fully cover all
potential exposures; product recalls or negative publicity may harm our
reputation or market acceptance of our products; decreases in the number of
surgical procedures performed, and the resulting decrease in blood demand;
fluctuations in our cash flows as a result of our reagent rental model;
terrorist acts, conflicts, wars and natural disasters that may materially
adversely affect our business, financial condition and results of operations;
the outcome of legal proceedings instituted against us and/or others; risks
associated with our non-U.S. operations, including currency translation risks,
the impact of possible new tariffs and compliance with applicable trade
embargoes; the effect of the U.K.'s withdrawal from the European Union ; our
inability to deliver products and services that meet customers' needs and
expectations; failure to maintain a high level of confidence in our products;
significant changes in the healthcare industry and related industries that we
serve, in an effort to reduce costs; reductions in government funding and
reimbursement to our customers; price increases or interruptions in the supply
of raw materials, components for our products, and products and services
provided to us by certain key suppliers and manufacturers; our ability to
recruit and retain the experienced and skilled personnel we need to compete;
work stoppages, union negotiations, labor disputes and other matters associated
with our labor force; consolidation of our customer base and the formation of
group purchasing organizations; unexpected payments to any pension plans
applicable to our employees; our inability to obtain required clearances or
approvals for our products; failure to comply with applicable regulations, which
may result in significant costs or the suspension or withdrawal of previously
obtained clearances or approvals; the inability of government agencies to hire,
retain or deploy personnel or otherwise prevent new or modified products from
being developed, cleared or approved or commercialized in a timely manner;
disruptions resulting from President Biden's invocation of the Defense
Production Act; results of clinical studies, which may be delayed or fail to
demonstrate the safety and effectiveness of our products; costs to comply with
environmental and health and safety requirements, or costs related to liability
for contamination or other potential environmental harm; healthcare fraud and
abuse regulations that could result in liability, require us to change our
business practices and restrict our operations in the future; failure to comply
with the anti-corruption laws of the United States and various international
jurisdictions; failure to comply with anti-terrorism laws and regulations and
applicable trade embargoes; failure to comply with the requirements of federal,
state and international laws pertaining to the privacy and security of health
information; our inability to maintain our data management and information
technology systems; data corruption, cyber-based attacks, security breaches and
privacy violations; our inability to protect and enforce our intellectual
property rights or defend against intellectual property infringement suits
against us by third parties; risks related to changes in income tax laws and
regulations; risks related to our substantial indebtedness; our ability to
generate cash flow to service our substantial debt obligations; difficulties
complying with the rules of the Nasdaq Global Select Market regarding the
composition of our Board of Directors and certain committees now that we are no
longer a "controlled company;" risks related to the ownership of our ordinary
shares; and risks related to the ongoing military action between Russia and
Ukraine ; as well as other risks discussed from time to time in our filings with
the Securities and Exchange Commission , including, without limitation, the risk
factors set forth in Part II, Item 1A,"Risk Factors" of this Quarterly Report on
Form 10-Q, if any, as well as the risk factors set forth in Part I, Item 1A,
"Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended
January 2, 2022 .
21
--------------------------------------------------------------------------------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 the fiscal quarter ended April 3,
2022 , these recurring revenues contributed approximately 94% 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.
We manage our business geographically to better align with the market dynamics
of the specific geographic region with our reportable segments being Americas ,
Europe , the Middle East and Africa ("EMEA") and Greater 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) tests to detect and monitor disease progression across a broad spectrum of therapeutic areas, including 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 inthe United States .
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
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 year 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. 22 -------------------------------------------------------------------------------- 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. During the fiscal quarter endedApril 3, 2022 , we entered into agreements with certain of our officers related to the vesting of certain outstanding equity awards in connection with the consummation of the Combinations. Additionally, our Compensation Committee approved an amendment to our outstanding equity awards to provide for immediate vesting of unvested options in the event that the option holder's service with Ortho is terminated without cause whether before, on or after the consummation of the Combinations. These agreements are contingent upon the closing of the acquisition of Ortho by Quidel. Accordingly, we have not recorded any impact to our results of operations related to these agreements or the amendment to our outstanding equity awards during the fiscal quarter endedApril 3, 2022 , as the Combinations have not yet been completed.
Costs incurred related to the proposed transaction, including
integration-related activities, were
Impact of 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 Emergency Use
Authorization ("EUA") from the U.S. Food and Drug Administration (the "FDA"),
authority to affix a CE Mark for sale in the European Union 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 European Union 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.
Since the fiscal quarter ended June 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 ended July 4, 2021 and continuing
through the end of fiscal year 2021, this supplemental revenue from sales of our
COVID-19 antibody and antigen tests began to decline. During the fiscal quarter
ended April 3, 2022 , sales related to our COVID-19 antibody and antigen tests
were relatively consistent with the prior quarter, however, they were $16.8
million lower than the sales made in the fiscal quarter ended April 4, 2021 .
During the fiscal quarter ended April 3, 2022 , we also continued to experience
higher distribution costs due to higher shipping rates as a result of the
COVID-19 pandemic and continued to experience 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.
During the fiscal quarter ended April 3, 2022 , pandemic-related lockdowns in
Greater China began to impact our business operations. While the impact of the
recent lockdowns in Greater China was not material to our results of operations
in the fiscal quarter ended April 3, 2022 , we continue to monitor the potential
impact of any further lockdowns in Greater China and the other issues noted
above regarding 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 the U.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 the U.S. are subject to
operating restrictions consistent with applicable health guidelines.
On September 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 on December 7, 2021 , the
U.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 on December 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.
23
--------------------------------------------------------------------------------Results of operations
The following discussion should be read in conjunction with the information contained in the accompanying interim unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Our historical results of operations may not necessarily reflect what will occur in the future.
Net income (loss) Net income for the fiscal quarter endedApril 3, 2022 was$14.8 million compared to net loss of$39.1 million for fiscal quarter endedApril 4, 2021 , representing a change of$53.9 million . The change resulting in net income was primarily due to the$50.3 million extinguishment of debt in the prior year period in connection with the use of our proceeds from our initial public offering ("IPO"), as well as a decrease in interest expense in the current year period as a result of our debt pay down in the prior year period. These impacts were partially offset by lower revenues and increased research and development costs in the current year period.
Net revenue
Net revenue for the fiscal quarter endedApril 3, 2022 decreased by$6.8 million , or 1.3%, compared with the fiscal quarter endedApril 4, 2021 . Revenues for the fiscal quarter endedApril 3, 2022 included an operational net revenue increase of 0.1%, more than offset by the negative impact of 1.4% from foreign currency fluctuations, which was primarily driven by the strengthening of theU.S. Dollar against a variety of currencies. The operational net increase in Core revenues for the fiscal quarter endedApril 3, 2022 was 4.2%, excluding the negative impact of 1.5% from foreign currency fluctuations and the decrease in sales of COVID-19 antibody and antigen tests of$16.8 million , and was primarily driven by increased revenues in our Transfusion Medicine business.
The following table shows net revenue by line of business:
Fiscal Quarter Ended
(Dollars in millions) April 3, 2022 April 4, 2021 % Change
Clinical Laboratories $ 321.3 $ 338.0 (4.9 )%
Transfusion Medicine 173.6 161.4 7.6 %
Core Revenue 495.0 499.3 (0.9 )%
Other Product Revenue 0.4 4.3 (90.3 )%
Collaboration and Other Revenue 4.7 3.2 48.5 %
Non-Core Revenue 5.1 7.5 (31.7 )%
Net Revenue $ 500.1 $ 506.8 (1.3 )%
Core revenue
Clinical Laboratories revenue for the fiscal quarter ended April 3, 2022
decreased by $16.7 million , or 4.9% compared with the fiscal quarter ended April
4, 2021 , including an operational net revenue decrease of 4.1% and a negative
impact of 0.8% from foreign currency fluctuations. The decrease in Clinical
Laboratories revenue was primarily due to lower revenues related to the sales of
our COVID-19 antibody and antigen tests. We recorded revenue of $12.2 million
related to our COVID-19 antibody and antigen tests in the fiscal quarter ended
April 3, 2022 , compared with $29.0 million in the fiscal quarter ended April 4,
2021 .
Transfusion Medicine revenue for the fiscal quarter ended April 3, 2022
increased by $12.3 million , or 7.6%, compared with the fiscal quarter ended
April 4, 2021 , including an operational net revenue increase of 10.5%, partially
offset by a negative impact of 2.9% from foreign currency fluctuations. The
increase in Transfusion Medicine revenue, excluding the impact of foreign
currency exchange, was primarily driven by increased reagent and instrument
revenues related to our Immunohematology business, mainly in the Americas and
EMEA, and to a lesser extent, increased revenue related to our Donor Screening
business in the United States .
Non-core revenue
Other product revenue, related to our contract manufacturing business, decreased by$3.9 million for the fiscal quarter endedApril 3, 2022 compared with the fiscal quarter endedApril 4, 2021 , due to the completion of our performance obligations related to a contract manufacturing arrangement in the prior year.
Collaboration and other revenue for the fiscal quarter ended
24
--------------------------------------------------------------------------------Cost of revenue, excluding amortization of intangible assets
Fiscal Quarter Ended
% of Net % of Net
(Dollars in millions) April 3, 2022 Revenue April 4, 2021 Revenue
Cost of revenue, excluding
amortization of
intangible assets $ 249.5 49.9 % $ 248.2 49.0 %
The increase in Cost of revenue, excluding amortization of intangible assets for
the fiscal quarter ended April 3, 2022 compared with the fiscal quarter ended
April 4, 2021 was primarily due to higher freight costs and the decrease in
sales of COVID-19 antibody and antigen tests with favorable margin.
Operating expenses
The following table provides a summary of certain operating expenses:
Fiscal Quarter Ended
% of Net % of Net
(Dollars in millions) April 3, 2022 Revenue April 4, 2021 Revenue
Selling, marketing and
administrative expenses $ 129.5 25.9 % $ 131.5 25.9 %
Research and development
expense 32.2 6.4 % 28.9 5.7 %
Amortization of intangible
assets 33.2 6.6 % 33.4 6.6 %
Other operating expense,
net 8.6 1.7 % 7.4 1.5 %
Selling, marketing and administrative expenses
Selling, marketing and administrative expenses were
Research and development expense
Research and development expense was$32.2 million for the fiscal quarter endedApril 3, 2022 , or 6.4% of net revenue, as compared with$28.9 million for the fiscal quarter endedApril 4, 2021 , or 5.7% of net revenue, an increase of$3.3 million . The increase was primarily due to higher employee-related costs and increased investments in certain research and development projects.
Amortization of intangible assets
Amortization of intangible assets was$33.2 million for the fiscal quarter endedApril 3, 2022 as compared with$33.4 million for the fiscal quarter endedApril 4, 2021 . There were no significant changes in the composition of our intangible assets in the fiscal quarter endedApril 3, 2022 compared to the fiscal quarter endedApril 4, 2021 . Other operating expense, net Other operating expense, net was$8.6 million , or 1.7% of net revenue, for the fiscal quarter endedApril 3, 2022 , as compared with$7.4 million , or 1.5% of net revenue, for the fiscal quarter endedApril 4, 2021 , an increase of$1.2 million . The increase in Other operating expense, net was primarily due to$5.7 million of acquisition and integration-related costs in the current year period related to the proposed acquisition by Quidel, partially offset by a decrease in profit share expense in the current year period related to our Joint Business. Non-operating items Interest expense, net Interest expense, net was$32.5 million for the fiscal quarter endedApril 3, 2022 , as compared with$43.4 million for the fiscal quarter endedApril 4, 2021 . The decrease of$10.9 million was primarily related to lower borrowings due to the use of the net proceeds from our IPO in the prior year period to (i) redeem$160 million of our 2025 Notes, (ii) redeem$270 million of our 2028 Notes, and (iii) repay$892.7 million in aggregate principal amount of borrowings under our Dollar Term Loan Facility. 25 --------------------------------------------------------------------------------
Tax indemnification income, net
Tax indemnification income was$0.2 million in each of the fiscal quarters endedApril 3, 2022 andApril 4, 2021 and was primarily related to interest on our indemnification receivables related to certain tax matters included in our pre-acquisition audit reserves.
Other (income) expense, net
Other income, net was$3.5 million for the fiscal quarter endedApril 3, 2022 , comprised primarily of$1.7 million of net foreign currency gains and fair value gains of$1.9 million from interest rate caps. Other expense, net was$50.0 million for the fiscal quarter endedApril 4, 2021 and was comprised primarily of loss on early extinguishment of debt of$50.3 million , related to the use of proceeds from the IPO to redeem portions of our outstanding 2025 Notes, 2028 Notes and Dollar Term Loan Facility. This was partially offset by$0.9 million of net foreign currency gains, of which$22.9 million of realized gains were partially offset by$22.0 million of unrealized losses, primarily related to the unwinding of our cross currency swaps.
Provision for income taxes
During the fiscal quarter endedApril 3, 2022 , we reported income before provision for income taxes of$18.3 million and recognized a provision for income taxes of$3.5 million , resulting in an effective tax rate of 19.1%. The effective tax rate for the fiscal quarter endedApril 3, 2022 differs from theU.S. federal statutory rate primarily due to (i) a net cost of$2.5 million for the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and (ii) a net benefit of$2.5 million related to non-U.S. earnings being taxed at rates that are different than theU.S. statutory rate. During the fiscal quarter endedApril 4, 2021 , we incurred a loss before provision for income taxes of$35.8 million and recognized an provision for income taxes of$3.3 million , resulting in a negative effective tax rate of 9.2%. The effective tax rate for the fiscal quarter endedApril 4, 2021 differs from theU.S. federal statutory rate primarily due to (i) a net cost of$14.8 million for the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and (ii) a net benefit of$4.9 million due to the 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 Income (Loss) to Adjusted EBITDA
We believe that our financial statements and the other financial data included
in this Quarterly Report on Form 10-Q 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 income (loss) before interest expense, net,
provision for 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 income (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
Quarterly Report on Form 10-Q. 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 indenture governing the 2025 Notes and the indenture governing
the 2028 Notes for purposes of covenant calculation.
26
--------------------------------------------------------------------------------
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:
•
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 income (loss) to Adjusted EBITDA for the
periods presented:
Fiscal Quarter Ended
(Dollars in millions) April 3, 2022 April 4, 2021
Net income (loss) $ 14.8 $ (39.1 )
Depreciation and amortization 79.4 82.7
Interest expense, net 32.5 43.4
Provision for income taxes 3.5 3.3
Stock-based compensation (a) 2.5 3.5
Restructuring and severance-related costs (b) 1.0 1.3
Loss on extinguishment of debt - 50.3
Quidel acquisition-related costs (c) 5.7 -
Tax indemnification income, net (0.2 ) (0.2 )
Costs related to Ortho's initial public offering (d) - 3.8
EU medical device regulation costs (e) 0.7 0.9
Other adjustments (f) (0.4 ) 2.5
Adjusted EBITDA $ 139.5 $ 152.4
(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 acquiree-related transaction and integration costs related to the
Business Combination Agreement with Quidel.
(d) Represents costs incurred in connection with our IPO.
(e) 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 in May 2022 .
(f) Represents miscellaneous other adjustments related to unusual items
impacting our results, including management fees to our principal shareholder of
$0.8 million in each of the fiscal quarters ended April 3, 2022 and April 4,
2021 ; noncash derivative mark-to-market gains of $1.9 million and losses of $0.6
million during the fiscal quarter ended April 3, 2022 and April 4, 2021 ,
respectively; costs related to our executive leadership reorganization,
initiated in fiscal year 2019, of $0.5 million and $0.4 million during the
fiscal quarter ended April 3, 2022 and April 4, 2021 , respectively; and other
individually immaterial adjustments.
Segment Results
The key indicators that we monitor are as follows:
•
Net revenue - This measure is discussed in the section entitled "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
27
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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 Quarter Ended
(Dollars in millions) April 3, 2022 April 4, 2021 % Change
Segment net revenue
Americas (1) $ 315.4 $ 321.4 (1.9 )%
EMEA 68.7 68.5 0.3 %
Greater China 54.5 55.0 (0.8 )%
Other 61.4 61.9 (0.8 )%
Net revenue $ 500.1 $ 506.8 (1.3 )%
(1)
Net revenue was$315.4 million for the fiscal quarter endedApril 3, 2022 compared to net revenue of$321.4 million for the fiscal quarter endedApril 4, 2021 , including a decrease in revenue of$13.7 million from our COVID-19 antibody and antigen test sales. The decrease of$6.0 million , or 1.9%, which was minimally impacted by the impact of foreign currency exchange rates, was also driven by lower reagent revenue in ourClinical Laboratories business, primarily related to the decrease in revenues related to sales of our COVID-19 tests. Excluding the impact of the$13.7 million decrease in our COVID-19 antibody and antigen test sales, net revenues increased$7.7 million , or 2.5%, primarily driven by increased reagent revenues in our Immunohematology business inthe United States andLatin America and our Donor Screening business inthe United States .
Adjusted EBITDA was
EMEA
Net revenue was$68.7 million for the fiscal quarter endedApril 3, 2022 compared to net revenue of$68.5 million for the fiscal quarter endedApril 4, 2021 , including a decrease in revenue of$2.9 million from our COVID-19 antibody and antigen test sales. The increase of$0.2 million , or 0.3%, which included operational net revenue growth of 6.7%, partially offset by a negative impact of 6.4% from foreign currency fluctuations, was primarily due to higher reagent and instrument revenue in our Immunohematology business. Adjusted EBITDA was$19.7 million for the fiscal quarter endedApril 3, 2022 compared to Adjusted EBITDA of$17.5 million for the fiscal quarter endedApril 4, 2021 . The increase of$2.2 million , or 12.7%, was primarily due to increased revenues and favorable cost of revenues, excluding amortization of intangible assets.Greater China Net revenue was$54.5 million for the fiscal quarter endedApril 3, 2022 compared to net revenue of$55.0 million for the fiscal quarter endedApril 4, 2021 . The decrease of$0.4 million , or 0.8%, which included operational net revenue decline of 2.9%, partially offset by a positive impact of 2.1% from foreign currency fluctuations, was primarily due to lower instrument revenue in ourClinical Laboratories business, primarily due to supply chain constraints, and to a lesser extent the impact of the recent COVID-19 related lockdowns. These decreases partially offset by increased reagent revenues in ourClinical Laboratories business. Adjusted EBITDA was$24.7 million for the fiscal quarter endedApril 3, 2022 compared to Adjusted EBITDA of$25.2 million for the fiscal quarter endedApril 4, 2021 . The decrease of$0.5 million , or 2.0%, was primarily due to lower revenues.
Other
Net revenue was$61.4 million for the fiscal quarter endedApril 3, 2022 compared to net revenue of$61.9 million for the fiscal quarter endedApril 4, 2021 . The decrease of$0.5 million , or 0.8%, which included operational net revenue growth of 6.0%, more than offset by the negative impact of 6.8% from foreign currency fluctuations, was primarily due to higher reagent and instrument revenues in ourClinical Laboratories business in ourAsia Pacific region. Adjusted EBITDA was$17.0 million for the fiscal quarter endedApril 3, 2022 compared to Adjusted EBITDA of$19.4 million for the fiscal quarter endedApril 4, 2021 . The decrease of$2.4 million , or 12.4%, was primarily due to unfavorable foreign currency fluctuations. 28 --------------------------------------------------------------------------------
Liquidity and capital resources
As ofApril 3, 2022 andJanuary 2, 2022 , we had$281.1 million and$309.7 million of Cash and cash equivalents, respectively. As ofApril 3, 2022 andJanuary 2, 2022 ,$224.7 million and$157.5 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$25.0 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$25.0 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 Quarter Ended (Dollars in millions) April 3, 2022 April 4, 2021
Net cash used in operating activities $ (4.0 ) $
(9.9 ) Net cash used in investing activities (27.2 ) (10.7 ) Net cash provided by financing activities 2.1 41.1
Fiscal quarter ended
Net cash flows used in operating activities
Net cash used in operating activities was$4.0 million for the fiscal quarter endedApril 3, 2022 . Factors resulting in Cash used in operating activities included settlement of accrued liabilities, payment of$29.2 million of interest on borrowings, and an increase in our investment in inventories, which includes$21.9 million of instrument inventories that were transferred from Inventories to Property, plant and equipment, net. These activities were partially offset by strong collections on Accounts receivable, and cash inflows from earnings before interest, taxes, depreciation and amortization expense.
Net cash flows used in investing activities
Net cash used in investing activities was
Net cash flows provided by financing activities
Net cash provided by financing activities was$2.1 million for the fiscal quarter endedApril 3, 2022 . During the fiscal quarter endedApril 3, 2022 , we received proceeds from the exercise of stock options of$3.4 million , which was partially offset by$1.3 million of payments on long-term borrowings.
Fiscal quarter ended
Net cash flows used in operating activities
Net cash used in operating activities was$9.9 million for the fiscal quarter endedApril 4, 2021 . Factors resulting in cash used in operating activities included payment of interest on borrowings of$53.8 million , settlement of accounts payable and an increased investment in inventories of$41.7 million , which includes$25.6 million of instrument inventories that were transferred from Inventories to Property, plant and equipment, net, related to customer leased instruments as well as an increase in accounts receivable of$10.3 29 --------------------------------------------------------------------------------
million. These cash outflows were offset by cash inflows from earnings before interest, taxes, depreciation and amortization expense and other non-cash items.
Net cash flows used in investing activities
Net cash used in investing activities was$10.7 million for the fiscal quarter endedApril 4, 2021 . Purchases of property, plant and equipment during the fiscal quarter endedApril 4, 2021 were$13.4 million . In addition, we made noncash transfers of$25.6 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 quarter endedApril 4, 2021 , net proceeds from our IPO of$1,421.4 million were partially offset by payments of long-term borrowings of$1,375.9 million . Debt capitalization The following table details our debt outstanding as ofApril 3, 2022 andJanuary 2, 2022 : (Dollars in millions) April 3, 2022 January 2, 2022 Senior Secured Credit Facilities Dollar Term Loan Facility$ 1,292.8 $1,292.8 Euro Term Loan Facility 324.8 335.8 Revolving Credit Facility - - 2028 Notes 405.0 405.0 2025 Notes 240.0 240.0 Finance lease obligation 0.8 0.7 Other long-term borrowings 2.2 2.6 Unamortized deferred financing costs (20.2 ) (21.4 ) Unamortized original issue discount (4.9 ) (5.3 ) Total borrowings 2,240.4 2,250.2 Less: Current portion (63.2 ) (63.4 ) Long-term borrowings$ 2,177.1 $ 2,186.7 As ofApril 3, 2022 andJanuary 2, 2022 , there were no outstanding borrowings under the Revolving Credit Facility. As ofApril 3, 2022 andJanuary 2, 2022 , letters of credit issued under the Revolving Credit Facility totaled$43.7 million and$46.3 million , respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was$456.3 million and$453.7 million as ofApril 3, 2022 andJanuary 2, 2022 , 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. As ofApril 3, 2022 andJanuary 2, 2022 , the remaining balance of deferred financing costs related to the Dollar Term Loan Facility was$7.5 million and$8.1 million , respectively. As ofApril 3, 2022 andJanuary 2, 2022 , the remaining balance of deferred financing costs related to the Euro Term Loan Facility was$3.4 million and$3.6 million , respectively. As ofApril 3, 2022 andJanuary 2, 2022 , the remaining unamortized balance related to the Revolving Credit Facility was$2.2 million and$2.7 million , respectively. The effective interest rate of the Dollar Term Loan Facility and Euro Term Loan Facility as ofApril 3, 2022 is 5.76% and 3.88%, respectively. OnJanuary 27, 2020 , we issued$675.0 million aggregate principal amount of 7.250% Senior Notes due 2028 ("2028 Notes"), 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 ofOrtho-Clinical Diagnostics S.A.'s andOrtho-Clinical Diagnostics, Inc.'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 30 -------------------------------------------------------------------------------- extinguishment loss recognized of$24.3 million for the fiscal quarter endedApril 4, 2021 , which consisted of$4.7 million of unamortized deferred issuance costs and$19.6 million of the 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 subsequent toApril 4, 2021 . OnJune 11, 2020 , we issued$400.0 million aggregate principal amount of 7.375% Senior Notes due 2025 ("2025 Notes") 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 during the quarter endedApril 4, 2021 , which consisted of$2.7 million of unamortized deferred issuance costs and$11.8 million of the redemption premium. We or our affiliates, including investment funds affiliated with Carlyle, at any time and from time to time, may purchase the 2025 Notes, the 2028 Notes or other indebtedness of the Company. 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 2025 Notes and the 2028 Notes and could have important tax consequences for holders of the 2025 Notes and the 2028 Notes. Liquidity 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 unaudited 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 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 quarter endedApril 3, 2022 , we transferred$21.9 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$125 million during the remainder of fiscal year 2022. 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 unaudited 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 onSeptember 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 ofApril 3, 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 31 -------------------------------------------------------------------------------- pandemic, from time to time we may borrow from our Revolving Credit Facility, if needed, for the remainder of 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
We are a holding company with no business operations or assets other than cash, the capital stock of our direct and indirect subsidiaries, miscellaneous administrative costs and intercompany loan receivables. Consequently, we are 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, our 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 our Senior Secured Credit Facilities may also need to refinance all or a portion of the borrowings under the 2025 Notes, the 2028 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. 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" and "Forward-looking statements" in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 .
Recent accounting pronouncements
Information regarding new accounting pronouncements is included in Note 3-Recent accounting pronouncements to the unaudited consolidated financial statements.
Critical accounting estimates and summary of significant accounting policies
Significant accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations and that require the use of complex and subjective estimates based upon past experience and management's judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. The policies applied preparing our interim unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q are those that management believes are the most dependent on estimates and assumptions. There have been no changes to our critical accounting estimates and significant accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 .
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