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; 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 theUnited Kingdom's withdrawal from theEuropean 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 fromPresident 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 ofthe 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 Nasdaq rules regarding the composition of our Board of Directors and certain committees now that we are no longer a "controlled company"; and risks related to the ownership of our ordinary shares, as well as other risks discussed from time to time in our filings with theSecurities 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 endedJanuary 3, 2021 .
Overview
We are a pure-play in vitro diagnostics ("IVD") business driven by our 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
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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 from ongoing sales of high margin consumables. These
consumables contribute more than 90% of our total revenue. We maintain close
connectivity with our customers through our global presence, with approximately
4,700 employees, including approximately 2,200 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 ,
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 in the 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
Impact of the initial public offering
Use of proceeds and impact of debt extinguishment
OnFebruary 1, 2021 , we completed the initial public offering ("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 from us. 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 to us of$1,426.4 million after deducting underwriting discounts and commissions. We used the net proceeds from the IPO (i) to redeem$160 million of our 2025 Notes, plus accrued interest thereon and$11.8 million of redemption premium, (ii) to redeem$270 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 new public company, we will incur 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.
Stock-based compensation expense
In connection with our IPO, in the fiscal year 2021, we may incur a one-time
stock-based compensation expense related to performance-based options held by
members of management that may vest upon the completion of certain liquidity and
realization
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-------------------------------------------------------------------------------- events. 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$0.3 million for the fiscal quarter endedOctober 3, 2021 and$1.6 million for the fiscal nine months endedOctober 3, 2021 . 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 three and nine months endedOctober 3, 2021 , which were recorded in Selling, marketing and administrative expenses in the unaudited consolidated statement of operations.
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.
In February 2020 , we began to see a decrease in the number of tests run in
China . This decline spread to certain other countries in EMEA and ASPAC in early
March 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 ended June 28, 2020 . As a result, during the fiscal
year ended January 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 ended January 3, 2021 , we started to experience a
recovery in the base business of our core revenue, which continued through the
fiscal nine months ended October 3, 2021 . Additionally, 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 fiscal quarter
ended October 3, 2021 , this supplemental revenue from sales of our COVID-19
antibody and antigen tests began to decline and we expect such decline to
continue into the fourth quarter of fiscal year 2021. During the fiscal nine
months ended October 3, 2021 , we also continued to experience higher
distribution costs due to higher shipping rates as a result of the COVID-19
pandemic, and during the fiscal quarter ended October 3, 2021 , began to
experience some supply chain disruptions. 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 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. We permit
limited domestic travel for our employees, which has reduced our travel-related
operating expenses.
On September 9, 2021 , President Biden issued 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 December 18, 2021 . We have been assessing our obligations under the
Executive Order 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.
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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 endedOctober 3, 2021 was$14.7 million compared to net loss of$28.5 million for fiscal quarter endedSeptember 27, 2020 , representing a change of$43.2 million . The change resulting in net income was primarily due to higher net revenue resulting from the growth of our base business, driven by strong instrument placements, especially of our integrated clinical lab systems, as well as a decrease in interest expense as a result of our debt pay down. These impacts were partially offset by an increase in operating expenses and a higher provision for income taxes. During the fiscal nine months endedOctober 3, 2021 , reported net loss of$44.4 million decreased by$126.6 million compared with the fiscal nine months endedSeptember 27, 2020 . The decrease in net loss was primarily due to higher net revenue, a reduction in interest expense as a result of the debt pay down and a decrease in foreign currency losses, partially offset by higher operating expense and provision for income taxes. We also incurred losses on early extinguishment of debt due to our use of proceeds from our IPO to redeem portions of our 2025 Notes, 2028 Notes and Dollar Term Loan Facility.
Net revenue
Net revenue for the fiscal quarter endedOctober 3, 2021 increased by$71.4 million , or 15.8%, compared with the fiscal quarter endedSeptember 27, 2020 . Revenues for the fiscal quarter endedOctober 3, 2021 included an operational net revenue increase of 14.3% 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. The increase in revenues for the fiscal quarter endedOctober 3, 2021 , excluding the impact of foreign currency exchange, was mainly driven by our Core lines of business, as we recorded higher revenues in all geographic segments of ourClinical Laboratories and Transfusion Medicine businesses. Net revenue for the fiscal nine months endedOctober 3, 2021 increased by$272.3 million , or 21.8%, compared with the fiscal nine months endedSeptember 27, 2020 . Revenues for the fiscal nine months endedOctober 3, 2021 included an operational net revenue increase of 19.3% and a positive impact of 2.5% 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 Brazilian Real and Japanese Yen. The increase in revenues for the fiscal nine months endedOctober 3, 2021 , excluding the impact of foreign currency exchange, was mainly driven by our Core lines of business, as we recorded higher revenues in certain geographic segments of ourClinical Laboratories business, and in all geographic segments of our Transfusion Medicine business.
The following table shows net revenue by line of business:
Fiscal Quarter Ended Fiscal Nine Months Ended
(Dollars in October 3, September October 3, September
millions) 2021 27, 2020 % Change 2021 27, 2020 % Change
Clinical
Laboratories $ 338.2 $ 302.7 11.7 % $ 1,001.3 $ 819.2 22.2 %
Transfusion
Medicine 170.7 140.6 21.4 % 494.5 414.5 19.3 %
Core Revenue 508.9 443.3 14.8 % 1,495.8 1,233.7 21.2 %
Other Product
Revenue - 3.3 (100.0 %) 5.6 3.7 59.8 %
Collaboration
and Other
Revenue 13.6 4.5 N.M. 20.4 12.2 66.9 %
Non-Core Revenue 13.6 7.8 74.7 % 26.0 15.9 65.3 %
Net Revenue $ 522.5 $ 451.1 15.8 % $ 1,521.8 $ 1,249.6 21.8 %
Core revenue
Clinical Laboratories revenue for the fiscal quarter ended October 3, 2021
increased by $35.5 million , or 11.7% compared with the fiscal quarter ended
September 27, 2020 , net of a decrease in sales of $9.1 million from our COVID-19
antibody and antigen tests. This increase included an operational net revenue
increase of 9.8% and a positive impact of 1.9% from foreign currency
fluctuations. The increase in Clinical Laboratories revenue was primarily due to
higher reagent revenue sales across all regions, driven by strong instrument
placements, especially of our integrated clinical lab systems.
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Clinical Laboratories revenue for the fiscal nine months ended October 3, 2021
increased by $181.9 million , or 22.2%, compared with the fiscal nine months
ended September 27, 2020 , including an increase of $9.9 million from our
COVID-19 antibody and antigen tests, driven by the year-over-year increase in
revenue from COVID-19 antibody and antigen tests in the first half of the year.
This increase included an operational net revenue increase of 19.7% and a
positive impact of 2.5% from foreign currency fluctuations. The increase in
Clinical Laboratories revenue was primarily due to higher reagent revenue,
driven by the recovery of testing volumes, and higher instrument sales in the
Americas , EMEA and Greater China regions.
Transfusion Medicine revenue for the fiscal quarter ended October 3, 2021
increased by $30.1 million , or 21.4%, compared with the fiscal quarter ended
September 27, 2020 . This increase included an operational net revenue increase
of 20.6% and a positive impact of 0.8% from foreign currency fluctuations. The
increase in Transfusion Medicine revenue, excluding the impact of foreign
currency exchange, was primarily driven by strength in both Immunohematology and
Donor Screening, including a new customer in our Donor Screening business in the
United States .
Transfusion Medicine revenue for the fiscal nine months ended October 3, 2021
increased by $80.1 million , or 19.3%, compared with the fiscal nine months ended
September 27, 2020 . This increase included an operational net revenue increase
of 16.8% and a positive impact of 2.5% from foreign currency fluctuations. The
increase in Transfusion Medicine revenue, excluding the impact of foreign
currency exchange, was primarily driven by a new customer in our Donor Screening
business in the United States and higher reagent revenue in all geographical
regions.
Non-core revenue
Other product revenue, related to our contract manufacturing business, decreased
by $3.3 million for the fiscal quarter ended October 3, 2021 compared with the
fiscal quarter ended September 27, 2020 , due to the completion of our
performance obligations related to a contract manufacturing arrangement.
Other product revenue, related to our contract manufacturing business, increased
by $2.1 million for the fiscal nine months ended October 3, 2021 compared with
the fiscal nine months ended September 27, 2020 , 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 quarter ended October 3, 2021
increased by $9.1 million compared with the fiscal quarter ended September 27,
2020 . The increase was primarily due to an $8.5 million award from an
arbitration proceeding related to one of our collaboration agreements.
Collaboration and other revenue for the fiscal nine months ended October 3, 2021
increased by $8.2 million , or 66.9%, compared with the fiscal nine months ended
September 27, 2020 . The increase was primarily due to an $8.5 million award from
an arbitration proceeding related to one of our collaboration agreements.
Cost of revenue, excluding amortization of intangible assets, and Gross profit
Fiscal Quarter Ended Fiscal Nine Months Ended
October 3, % of Net September %of Net October 3, % of Total September % of Total (Dollars in millions) 2021 Revenue 27, 2020 Revenue 2021 Revenue 27, 2020 Revenue Cost of revenue, excluding amortization of intangible assets$ 252.4 48.3 %$ 234.1 51.9 %$ 748.7 49.2 %$ 650.2 52.0 % Gross profit 270.1 51.7 % 217.0 48.1 % 773.1 50.8 % 599.4 48.0 % The decrease in Cost of revenue, excluding amortization of intangible assets, and increase in Gross profit as a percentage of net revenue for the fiscal quarter endedOctober 3, 2021 compared with the fiscal quarter endedSeptember 27, 2020 was primarily due to lower manufacturing costs and lower underutilized facility costs and inventory reserves, 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 the decrease in sales of COVID-19 antibody and antigen tests with favorable margin. The decrease in Cost of revenue, excluding amortization of intangible assets, and increase in Gross profit as a percentage of net revenue for the fiscal nine months endedOctober 3, 2021 compared with the fiscal nine months endedSeptember 27, 2020 was primarily due to favorable product mix, including sales of COVID-19 antibody and antigen tests, 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. 31 --------------------------------------------------------------------------------
Operating expenses
The following table provides a summary of certain operating expenses:
Fiscal Quarter Ended Fiscal Nine Months Ended
October 3, % of Net September % of Net October 3, % of Total September % of Total
(Dollars in millions) 2021 Revenue 27, 2020 Revenue 2021 Revenue 27, 2020 Revenue
Selling, marketing
and
administrative
expenses $ 140.9 27.0 % $ 121.0 26.8 % $ 411.0 27.0 % $ 347.9 27.8 %
Research and
development expense 32.1 6.1 % 32.7 7.2 % 91.3 6.0 % 82.1 6.6 %
Amortization of
intangible
assets 33.3 6.4 % 33.1 7.3 % 100.3 6.6 % 98.7 7.9 %
Other operating
expense, net 9.8 1.9 % 9.5 2.1 % 27.7 1.8 % 22.8 1.8 %
Selling, marketing and administrative expenses
Selling, marketing and administrative expenses were$140.9 million for the fiscal quarter endedOctober 3, 2021 , or 27.0% of net revenue, as compared with$121.0 million for the fiscal quarter endedSeptember 27, 2020 , or 26.8% of net revenue, an increase of$19.9 million . The increase in Selling, marketing and administrative expenses was primarily due to higher employee-related costs, including stock-based compensation. Selling, marketing and administrative expenses were$411.0 million for the fiscal nine months endedOctober 3, 2021 , or 27.0% of net revenue, as compared with$347.9 million for the fiscal nine months endedSeptember 27, 2020 , or 27.8% of net revenue, an increase of$63.1 million . The increase in Selling, marketing and administrative expenses was primarily due to higher employee-related costs, including stock-based compensation, increased distribution costs due to higher shipment volumes and higher shipping rates as a result of the ongoing global COVID-19 pandemic, partially offset by decreased travel-related costs for our employees due to global travel restrictions.
Research and development expense
Research and development expense was$32.1 million for the fiscal quarter endedOctober 3, 2021 , or 6.1% of net revenue, as compared with$32.7 million for the fiscal quarter endedSeptember 27, 2020 , or 7.2% of net revenue, a decrease of$0.6 million . The decrease was primarily due to the$7.5 million up-front payment made to Quotient Limited ("Quotient") upon the signing of a binding letter agreement in the prior year period, partially offset by increased investment in costs to develop new assays, as well as an increase in employee-related costs. Research and development expense was$91.3 million for the fiscal nine months endedOctober 3, 2021 , or 6.0% of net revenue, as compared with$82.1 million for the fiscal nine months endedSeptember 27, 2020 , or 6.6% of net revenue, an increase of$9.2 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$33.3 million for the fiscal quarter endedOctober 3, 2021 as compared with$33.1 million for the fiscal quarter endedSeptember 27, 2020 . There were no significant changes in the composition of our intangible assets in the fiscal quarter endedOctober 3, 2021 compared to the fiscal quarter endedSeptember 27, 2020 . Amortization of intangible assets was$100.3 million for the fiscal nine months endedOctober 3, 2021 as compared with$98.7 million for the fiscal nine months endedSeptember 27, 2020 . There were no significant changes in the composition of our intangible assets in the fiscal nine months endedOctober 3, 2021 compared to the fiscal nine months endedSeptember 27, 2020 .
Other operating expense, net
Other operating expense, net was$9.8 million , or 1.9% of net revenue, for the fiscal quarter endedOctober 3, 2021 , as compared with$9.5 million , or 2.1% of net revenue, for the fiscal quarter endedSeptember 27, 2020 , an increase of$0.3 million . There were no significant changes in the balance of Other operating expense, net in the fiscal quarter endedOctober 3, 2021 compared to the fiscal quarter endedSeptember 27, 2020 . Other operating expense, net was$27.7 million , or 1.8% of net revenue, for the fiscal nine months endedOctober 3, 2021 , as compared with$22.8 million , or 1.8% of net revenue, for the fiscal nine months endedSeptember 27, 2020 , an increase of$4.9 million . 32
-------------------------------------------------------------------------------- The increase was primarily due to higher profit share expense in the current year due to lower manufacturing costs related to our Joint Business, partially offset by the timing of government subsidies earned.
Non-operating items
Interest expense, net
Interest expense, net was$36.1 million for the fiscal quarter endedOctober 3, 2021 , as compared with$48.9 million for the fiscal quarter endedSeptember 27, 2020 . The decrease of$12.8 million was primarily related to lower borrowings due to the use of the net proceeds from the IPO 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. Interest expense, net was$112.5 million for the fiscal nine months endedOctober 3, 2021 , as compared with$148.6 million for the fiscal nine months endedSeptember 27, 2020 . The decrease of$36.1 million was primarily related to lower borrowings due to our use of net proceeds from the IPO for debt repayment, as detailed above.
Tax indemnification (income) expense, net
Tax indemnification income was$0.2 million and$0.6 million for the fiscal quarter and nine months endedOctober 3, 2021 , respectively. This primarily related to interest on our indemnification receivables related to certain tax matters included in our pre-acquisition audit reserves. Tax indemnification expense was$16.5 million and$11.6 million for the fiscal quarter and nine months endedSeptember 27, 2020 , respectively. This primarily related to the release of certain tax reserves upon the settlement of certain state tax matters, with an offsetting benefit recorded to income tax expense.
Other (income) expense, net
Other income, net was$2.6 million for the fiscal quarter endedOctober 3, 2021 comprised primarily of$0.7 million of net foreign currency gains, and fair value gains of$1.5 million in interest rate caps. Other expense, net was$50.8 million for the fiscal nine months endedOctober 3, 2021 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 income, net was$5.9 million for the fiscal quarter endedSeptember 27, 2020 and was comprised primarily of$5.4 million of net foreign currency gains, of which$3.9 million was unrealized, mainly related to intercompany loans denominated in currencies other than the functional currency of the affected subsidiaries, and fair value gains of$0.5 million from interest rate caps. Other expense, net was$61.1 million for the fiscal nine months endedSeptember 27, 2020 and was comprised primarily of$49.4 million of net foreign currency losses, of which$51.1 million was unrealized, mainly related to intercompany loans denominated in currencies other than the functional currency of the affected subsidiaries, and loss on early extinguishment of the 2022 Notes of$12.6 million .
Provision for (benefit from) income taxes
During the fiscal quarter endedOctober 3, 2021 , we reported income before provision for income taxes of$20.7 million and recognized a provision for income taxes of$6.0 million , resulting in an effective tax rate of 29.1%. During the fiscal nine months endedOctober 3, 2021 , we incurred a loss before provision from income taxes of$20.0 million and recognized a provision for income taxes of$24.4 million , resulting in a negative effective tax rate of 122.2%. The effective tax rate for the fiscal nine months endedOctober 3, 2021 differs from theU.S. federal statutory rate primarily due to (i) a net cost of$27.5 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$10.9 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$10.6 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 theUnited Kingdom . During the fiscal quarter endedSeptember 27, 2020 , we incurred a loss before provision for income taxes of$38.8 million and recognized an income tax benefit of$10.3 million , resulting in an effective tax rate of 26.5%. During the fiscal nine months endedSeptember 27, 2020 , we incurred a loss before provision for income taxes of$173.4 million and recognized an income tax benefit of$2.4 million , resulting in an effective tax rate of 1.4%. The effective tax rate for the fiscal nine months endedSeptember 27, 2020 differs from theU.S. federal statutory rate primarily due to (i) a net cost of$39 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$12 million related to the increase in the Company's interest expense on prior year reserves for uncertain tax positions, and (iii) a net cost of$9.7 million due to the non-U.S. earnings being taxed at rates that are different than theU.S. statutory rate. 33 --------------------------------------------------------------------------------
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. Adjusted EBITDA consists of net income (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 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 for the 2025 Notes and the indenture for the 2028 Notes 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: ? 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.
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--------------------------------------------------------------------------------The following tables reconcile Net income (loss) to Adjusted EBITDA for the periods presented:
Fiscal Quarter Ended Fiscal Nine Months Ended
October 3, September 27, October 3, September 27,
(Dollars in millions) 2021 2020 2021 2020
Net income (loss) $ 14.7 $ (28.5 ) $ (44.4 ) $ (171.0 )
Interest expense, net 36.1 48.9 112.5 148.6
Provision for (benefit from) income
taxes 6.0 (10.3 ) 24.4 (2.4 )
Depreciation and amortization 80.8 79.9 246.6 239.6
Stock-based compensation (a) 5.0 2.4 19.5 6.2
Restructuring and severance-related
costs (b) 1.7 4.7 4.7 9.3
Loss on extinguishment of debt - - 50.3 12.6
Arbitration award (c) (7.4 ) - (7.4 ) -
Tax indemnification (income)
expense, net (0.2 ) 16.5 (0.6 ) 11.6
Unrealized foreign currency
exchanges (gains) losses, net (d) - (6.3 ) - 46.0
Quotient upfront payment (e) - 7.5 - 7.5
Other adjustments (f) 2.9 4.7 14.5 14.4
Adjusted EBITDA $ 139.6 $ 119.5 $ 420.1 $ 322.4
(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 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 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 $4.3 million
and $38.0 million for the fiscal quarter and nine months ended October 3, 2021 ,
respectively. 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, effective January 4, 2021 , we no longer exclude
non-cash unrealized gains and losses from Adjusted EBITDA.
(e)
Represents an initial, non-refundable upfront payment made to Quotient, one of
our partners and suppliers. See Note 9 to our unaudited consolidated financial
statements for further discussion of the Quotient relationship.
(f)
Represents miscellaneous other adjustments related to unusual items impacting
our results, including the elimination of management fees and noncash derivative
mark-to-market (gains) losses. See information below:
Fiscal Quarter Ended Fiscal Nine Months Ended
October 3, September 27, October 3, September 27,
(Dollars in millions) 2021 2020 2021 2020
EU medical device regulation
transition costs $ 1.1 $ 1.0 $ 2.9 $ 3.3
Principal shareholder management fee 0.8 0.8 2.3 2.3
Derivative mark-to-market (gain)
loss (0.9 ) (0.5 ) 0.6 (0.7 )
Other 2.0 3.4 8.7 9.5
Total other adjustments $ 2.9 $ 4.7 $ 14.5 $ 14.4
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 in our core business, including at the
segment level, consistently across the periods presented and also to evaluate
performance under management incentive compensation programs.
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Fiscal Quarter Ended Fiscal Nine Months Ended
(Dollars in October 3, September 27, October 3, September 27, %
millions) 2021 2020 % Change 2021 2020 Change
Segment net
revenue
Americas $ 306.5 $ 264.2 16.0 % $ 924.2 $ 755.8 22.3 %
EMEA 67.2 58.6 14.6 % 203.5 168.2 20.9 %
Greater China 85.6 72.7 17.8 % 199.1 162.3 22.6 %
Other 63.2 55.6 13.7 % 195.1 163.2 19.6 %
Net revenue $ 522.5 $ 451.1 15.8 % $ 1,521.8 $ 1,249.6 21.8 %
Fiscal Quarter Ended Fiscal Nine Months Ended
(Dollars in October 3, September 27, October 3, September 27, %
millions) 2021 2020 % Change 2021 2020 Change
Segment
Adjusted
EBITDA
Americas $ 125.0 $ 116.8 7.1 % $ 394.2 $ 329.9 19.5 %
EMEA 17.2 10.7 60.0 % 47.7 31.4 52.0 %
Greater China 42.2 41.1 2.7 % 91.7 78.9 16.1 %
Other 19.0 16.7 13.5 % 61.4 49.9 23.0 %
Corporate (63.8 ) (65.9 ) (3.3 )% (174.8 ) (167.8 ) 4.2 %
Adjusted
EBITDA $ 139.6 $ 119.5 16.9 % $ 420.1 $ 322.4 30.4 %
Americas
Net revenue was $306.5 million for the fiscal quarter ended October 3, 2021
compared to net revenue of $264.2 million for the fiscal quarter ended September
27, 2020 , including a decrease in sales of $6.8 million from our COVID-19
antibody and antigen tests. The increase of $42.3 million , or 16.0%, which
included operational net revenue growth of 15.3% and a positive impact of 0.7%
from foreign currency fluctuations, was primarily due to higher reagent revenue
in our Clinical Laboratories business, driven by the strong instrument
placements, especially of our integrated clinical lab systems, a new customer in
our Donor Screening business in the United States and an $8.5 million award from
an arbitration proceeding related to one of our collaboration agreements.
Net revenue was $924.2 million for the fiscal nine months ended October 3, 2021
compared to net revenue of $755.8 million for the fiscal nine months ended
September 27, 2020 , including incremental sales of $3.9 million from our
COVID-19 antibody and antigen tests. The increase of $168.4 million , or 22.3%,
which included operational net revenue growth of 21.7% and a positive impact of
0.6% from foreign currency fluctuations, was primarily due to higher reagent
revenue in our Clinical Laboratories business, higher instrument sales 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 $125.0 million for the fiscal quarter ended October 3, 2021
compared to Adjusted EBITDA of $116.8 million for the fiscal quarter ended
September 27, 2020 . The increase of $8.2 million , or 7.1%, was primarily due to
higher revenues, partially offset by higher operating costs.
Adjusted EBITDA was $394.2 million for the fiscal nine months ended October 3,
2021 compared to Adjusted EBITDA of $329.9 million for the fiscal nine months
ended September 27, 2020 . The increase of $64.3 million , or 19.5%, was primarily
due to higher revenues.
EMEA
Net revenue was $67.2 million for the fiscal quarter ended October 3, 2021
compared to net revenue of $58.6 million for the fiscal quarter ended September
27, 2020 , including a decrease in sales of $0.3 million from our COVID-19
antibody and antigen tests. The increase of $8.5 million , or 14.6%, which
included operational net revenue growth of 13.1% and a positive impact of 1.4%
from foreign currency fluctuations, was primarily due to higher reagent revenue
in our Clinical Laboratories business driven by the continued recovery of
testing volumes.
Net revenue was $203.5 million for the fiscal nine months ended October 3, 2021
compared to net revenue of $168.2 million for the fiscal nine months ended
September 27, 2020 , including incremental sales of $6.0 million from our
COVID-19 antibody and antigen tests. The increase of $35.2 million , or 20.9%,
which included operational net revenue growth of 14.8% and a positive impact of
6.1% from foreign currency fluctuations, was primarily due to higher reagent
revenue in our Clinical Laboratories business, higher instrument sales in our
Clinical Laboratories business and higher reagent revenue in our
Immunohematology business.
36
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Adjusted EBITDA was $17.2 million for the fiscal quarter ended October 3, 2021
compared to Adjusted EBITDA of $10.7 million for the fiscal quarter ended
September 27, 2020 . The increase of $6.4 million , or 60.0%, was primarily due to
higher revenues.
Adjusted EBITDA was $47.7 million for the fiscal nine months ended October 3,
2021 compared to Adjusted EBITDA of $31.4 million for the fiscal nine months
ended September 27, 2020 . The increase of $16.3 million , or 52.0%, was primarily
due to higher revenues.
Greater China
Net revenue was $85.6 million for the fiscal quarter ended October 3, 2021
compared to net revenue of $72.7 million for the fiscal quarter ended September
27, 2020 . The increase of $12.9 million , or 17.8%, which included operational
net revenue growth of 10.3% and a positive impact of 7.4% from foreign currency
fluctuations, was primarily due to higher reagent revenue in our Clinical
Laboratories business and higher instrument sales in our Immunohematology
business.
Net revenue was $199.1 million for the fiscal nine months ended October 3, 2021
compared to net revenue of $162.3 million for the fiscal nine months ended
September 27, 2020 . The increase of $36.7 million , or 22.6%, which included
operational net revenue growth of 13.9% and a positive impact of 8.7% from
foreign currency fluctuations, was primarily due to higher reagent revenue and
instrument sales in our Clinical Laboratories business and higher reagent
revenue in our Immunohematology business.
Adjusted EBITDA was $42.2 million for the fiscal quarter ended October 3, 2021
compared to Adjusted EBITDA of $41.1 million for the fiscal quarter ended
September 27, 2020 . The increase of $1.1 million , or 2.7%, was primarily due to
higher revenues, partially offset by a government subsidy received in the prior
year.
Adjusted EBITDA was $91.7 million for the fiscal nine months ended October 3,
2021 compared to Adjusted EBITDA of $78.9 million for the fiscal nine months
ended September 27, 2020 . The increase of $12.7 million , or 16.1%, was primarily
due to higher revenues.
Other
Net revenue was $63.2 million for the fiscal quarter ended October 3, 2021
compared to net revenue of $55.6 million for the fiscal quarter ended September
27, 2020 . The increase of $7.6 million , or 13.7%, which included operational net
revenue growth of 15.7% and a negative impact of 2.0% from foreign currency
fluctuations, was primarily due to higher reagent revenue in our Clinical
Laboratories business.
Net revenue was $195.1 million for the fiscal nine months ended October 3, 2021
compared to net revenue of $163.2 million for the fiscal nine months ended
September 27, 2020 . The increase of $31.9 million , or 19.6%, which included
operational net revenue growth of 18.6% and a positive impact of 1.0% from
foreign currency fluctuations, was primarily due to higher reagent revenue in
our Clinical Laboratories business.
Adjusted EBITDA was $19.0 million for the fiscal quarter ended October 3, 2021
compared to Adjusted EBITDA of $16.7 million for the fiscal quarter ended
September 27, 2020 . The increase of $2.3 million , or 13.5%, was primarily due to
higher revenues.
Adjusted EBITDA was $61.4 million for the fiscal nine months ended October 3,
2021 compared to Adjusted EBITDA of $49.9 million for the fiscal nine months
ended September 27, 2020 . The increase of $11.5 million , or 23.0%, was primarily
due to higher revenues.
Liquidity and capital resources
As ofOctober 3, 2021 andJanuary 3, 2021 , we had$255.9 million and$132.8 million of Cash and cash equivalents, respectively. As ofOctober 3, 2021 andJanuary 3, 2021 ,$186.2 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. 37 --------------------------------------------------------------------------------
Historical cash flows
The following table presents a summary of our net cash inflows (outflows) for
the periods shown:
Fiscal Nine Months Ended
(Dollars in millions) October 3, 2021 September 27, 2020
Net cash provided by (used in) operating activities $ 188.2 $ (48.6 )
Net cash used in investing activities (11.7 ) (27.5 )
Net cash (used in) provided by financing activities (61.9 ) 71.3
Fiscal nine months ended
Net cash flows provided by operating activities
Net cash provided by operating activities was$188.2 million for the fiscal nine months endedOctober 3, 2021 . 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, and cash inflows from earnings before interest, taxes, depreciation and amortization expense. These increases were partially offset by the payment of interest on borrowings of$109.2 million , settlement of Accrued liabilities and increased investments in inventories of$117.3 million , which includes$82.6 million of instrument inventories that were transferred from Inventories to Property, plant and equipment, net, related to customer leased instruments.
Net cash flows used in investing activities
Net cash used in investing activities was$11.7 million for the fiscal nine months endedOctober 3, 2021 . The primary factor resulting in Cash used in investing activities was Purchases of property, plant and equipment during the fiscal nine months endedOctober 3, 2021 of$27.2 million , 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
Fiscal nine months ended
Net cash flows used in operating activities
Net cash used in operating activities was$48.6 million for the fiscal nine months endedSeptember 27, 2020 . Factors resulting in cash used in operating activities included payment of interest on borrowings of$155.5 million , settlement of accounts payable and an increased investment in inventories of$126.9 million , which includes$91.5 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 other current and non-current assets of$27.6 million . These cash outflows were offset by cash inflows from earnings before interest, taxes, depreciation and amortization expense and other noncash items, as well as net collections of accounts receivable of$34.5 million .
Net cash flows used in investing activities
Net cash used in investing activities was
38
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transfers of
Net cash flows provided by financing activities
During the fiscal nine months endedSeptember 27, 2020 , 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$1,347.7 million . Net payments on short-term borrowings were$2.2 million .
Debt capitalization
The following table details our debt outstanding as ofOctober 3, 2021 andJanuary 3, 2021 : (Dollars in millions) October 3, 2021 January 3, 2021 Senior Secured Credit Facilities Dollar Term Loan Facility $ 1,292.8 $2,185.5 Euro Term Loan Facility 357.2 408.9 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 0.8
1.0
Other short-term borrowings 0.8
0.9
Other long-term borrowings 2.9
3.9
Unamortized deferred financing costs (22.6 ) (40.9 ) Unamortized original issue discount (5.6 ) (11.3 ) Total borrowings 2,271.3 3,718.5 Less: Current portion (64.4 ) (160.0 ) Long-term borrowings $ 2,206.9 $ 3,558.5 As ofOctober 3, 2021 andJanuary 3, 2021 , there were no outstanding borrowings under the Revolving Credit Facility. As ofOctober 3, 2021 andJanuary 3, 2021 , letters of credit issued under the Revolving Credit Facility totaled$45.0 million and$37.5 million , respectively, which reduced the availability under the Revolving Credit Facility. Availability under the Revolving Credit Facility was$455.0 million and$312.5 million as ofOctober 3, 2021 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 . All other terms of the Senior Secured Credit Facilities will remain substantially the same except as otherwise amended by the fifth amendment. As ofOctober 3, 2021 andJanuary 3, 2021 , the remaining balance of deferred financing costs related to the Dollar Term Loan Facility was$8.6 million and$17.3 million , respectively. As ofOctober 3, 2021 andJanuary 3, 2021 , the remaining balance of deferred financing costs related to the Euro Term Loan Facility was$3.8 million and$4.6 million , respectively. As ofOctober 3, 2021 andJanuary 3, 2021 , the remaining unamortized balance related to the Revolving Credit Facility was$3.1 million and$3.4 million , respectively. The effective interest rate of the Dollar Term Loan Facility and Euro Term Loan Facility as ofOctober 3, 2021 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, 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' 39 -------------------------------------------------------------------------------- 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 for the fiscal nine months endedOctober 3, 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 in the fiscal nine months endedOctober 3, 2021 . 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 nine months endedOctober 3, 2021 , which consisted of$2.7 million of unamortized deferred issuance costs and$11.8 million of the redemption premium. 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 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 Senior Notes and could have important tax consequences for holders of the Senior Notes. 40 --------------------------------------------------------------------------------
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 nine months endedOctober 3, 2021 , we transferred$82.6 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$40 million during the remainder of fiscal year 2021. 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 ofOctober 3, 2021 , 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, for the remainder of fiscal year 2021. 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 cash, the capital stock of our direct and indirect subsidiaries, miscellaneous administrative costs 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 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. 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 "Special note regarding forward-looking statements" in our Annual Report on Form 10-K for the fiscal year endedJanuary 3, 2021 . 41 --------------------------------------------------------------------------------
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 3, 2021 .
Off-balance sheet arrangements
We do not have any significant off-balance sheet arrangements.
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