QUIDELORTHO CORPORATION The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties. This discussion should be read in conjunction with "A Warning About Forward-Looking Statements" on page 3 and "Risk Factors" under Item 1A of this Annual Report. In addition, our discussion of the financial condition and results of operations ofQuidel Corporation in this Item 7 should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Annual Report. Discussions of year-to-year comparisons between 2018 and 2017 that are not included in this Annual Report can be found in our Annual Report for the year endedDecember 31, 2018 . Overview and Executive Summary We have a leadership position in the development, manufacturing and marketing of rapid diagnostic testing solutions. These diagnostic testing solutions are separated into our four product categories: rapid immunoassays, cardiac immunoassays, specialized diagnostic solutions and molecular diagnostic solutions. We sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies and wellness screening centers. We market our products through a network of distributors and through a direct sales force. The Company operates in one business segment that develops, manufactures and markets our four product categories. For the year endedDecember 31, 2019 , total revenue increased 2% to$534.9 million as compared to the year endedDecember 31, 2018 . On a constant currency basis, 2019 revenue growth was 3%. For the years endedDecember 31, 2019 , 2018 and 2017, sales of our influenza products accounted for 26%, 24%, and 39% respectively, of total revenue. Additionally, a significant portion of our total revenue is from a relatively small number of distributors. Approximately 46%, 44% and 54% of our total revenue for the years endedDecember 31, 2019 , 2018 and 2017, respectively, were related to sales through our three largest distributors. Our primary objective is to increase shareholder value by building a broader-based diagnostic company capable of delivering revenue growth and consistent operating results. Our strategy is to identify potential market segments that provide, or are expected to provide, significant total market opportunities, and in which we can be successful by applying our expertise and know-how to develop differentiated technologies and products. Our diagnostic testing solutions are designed to provide specialized results that serve a broad range of customers, by addressing the market requirements of ease of use, reduced cost, increased test accuracy and reduced time to result. Our current approach is to offer products in the following product categories: • rapid immunoassay tests for use in physician offices, hospital laboratories and emergency departments, retail clinics, eye health settings, pharmacies and other urgent care or alternative site settings; • cardiac immunoassay tests for use in physician offices, hospital laboratories and emergency departments, and other urgent care or alternative site settings;
• specialized diagnostic solutions, including DFA and culture-based tests
for the clinical virology laboratory and other products serving the
bone health, autoimmune and complement research communities; and
• molecular diagnostic tests for use in hospitals, moderately complex
physician offices, laboratories and other settings.
Our current focus to accomplish our primary objective includes the following: • leveraging our current infrastructure to develop and launch new Rapid
Immunoassays and Cardiac Immunoassays such as additional assays for our
Sofia® and Sofia® 2 analyzers and Triage® MeterPro® systems;
• developing a molecular diagnostics franchise that incorporates distinct
testing platforms, including Solana® and Savanna®, that leverages our
molecular assay development competencies; and
• strengthening our position with distribution partners and our end-user
customers to gain more emphasis on our products.
37
--------------------------------------------------------------------------------
Our current initiatives to execute this strategy include the following: • provide products that can compete effectively in the healthcare market
where cost and quality are important;
• focus our research and development efforts on three areas:
• new proprietary product platform development;
• the creation of improved products and new products for existing
markets and unmet clinical needs; and
• pursuit of collaborations with, or acquisitions of, other
companies for new and existing products and markets that advance
our strategy to develop differentiated technologies and products;
• leverage our international infrastructure and enhance our global
footprint to support our international operations and future growth;
• strengthen our market and brand leadership in current markets by
acquiring and/or developing and introducing clinically superior
diagnostic solutions;
• strengthen our direct sales force to enhance relationships with
integrated delivery networks, laboratories and hospitals, with a goal
of driving growth through improved physician and laboratorian
satisfaction;
• leverage our wireless connectivity and data management systems,
including cloud-based tools;
• support payer evaluation of diagnostic tests and establishment of
favorable reimbursement rates;
• provide clinicians with validated studies that encompass the clinical
efficacy and economic efficiency of our diagnostic tests for the
professional market;
• create strong global alliances to support our efforts to achieve
leadership in key markets and expand our presence in emerging markets;
• further refine our manufacturing efficiencies and productivity
improvements to increase profit; and
• focus on innovative products and markets and leverage our core
competency in new product development.
Product development activities are inherently uncertain, and there can be no
assurance that we will be able to obtain regulatory body clearance to market any
of our products, or if we obtain clearances, that we will successfully
commercialize any of our products. In addition, we may terminate our development
efforts with respect to one or more of our products under development at any
time, including before or during clinical trials.
Outlook
We anticipate continued revenue growth over the next year with a positive impact
on gross margin and earnings. We expect continued and significant investment in
research and development activities as we develop our next generation
immunoassay and molecular platforms. We will continue our focus on prudently
managing our business and delivering solid financial results, while at the same
time striving to continue to introduce new products to the market and
maintaining our emphasis on research and development investments for longer term
growth. Finally, we will continue to evaluate opportunities to acquire new
product lines, technologies and companies.
38
--------------------------------------------------------------------------------
Results of Operations
Comparison of years ended December 31, 2019 and 2018
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31 .
Fiscal years 2019 and 2018 were both 52 weeks.
Total Revenues
The following table compares total revenues for the years ended December 31,
2019 and 2018 (in thousands, except percentages):
For the year ended December 31, Increase (decrease)
2019 2018 $ %
Rapid Immunoassay $ 191,736 $ 183,160 $ 8,576 5 %
Cardiac Immunoassay 266,505 266,524 (19 ) 0 %
Specialized Diagnostic Solutions 54,933 53,243 1,690 3 %
Molecular Diagnostic Solutions 21,716 19,358 2,358 12 %
Total revenues $ 534,890 $ 522,285 $ 12,605 2 %
For the year ended December 31, 2019 , total revenues increased 2% to $534.9
million . On a constant currency basis, 2019 revenue growth was 3%. The increase
in total revenues was driven primarily by increases in Rapid Immunoassay
revenues due to growth in respiratory products, bolstered by a strong start to
the respiratory season in the last quarter of 2019. Molecular products were up
12% over prior year driven by continued revenue growth on the Solana platform.
Growth otherwise experienced in the Cardiac Immunoassay products in constant
currency was fully offset by an unfavorable impact from foreign currency
fluctuations. Excluding such impact, Cardiac Immunoassay grew 2%. See further
discussion in Item 7A of this Annual Report for additional information related
to our calculation and use of constant currency and constant currency revenue
growth.
Gross Profit
Gross profit increased by 2% over prior year, to $320.8 million , or 60% of
revenue for the year ended December 31, 2019 , compared to $315.7 million , or 60%
of revenue for the year ended December 31, 2018 . The higher gross profit was
mainly driven by increased influenza sales in the current year, partially offset
by unfavorable fluctuations in foreign currency. Gross margin was flat compared
to the prior year as the impact of a favorable product mix was offset by lower
factory overhead absorption during the current year as well as unfavorable
fluctuations in foreign currency.
Operating Expenses
The following table compares operating expenses for the years ended December 31,
2019 and 2018 (in thousands, except percentages):
For the year ended December 31,
2019 2018
As a % of As a % of Increase (decrease)
Operating total Operating total
expenses revenues expenses revenues $ %
Research and development $ 52,553 10 % $ 51,649 10 % $ 904 2 %
Sales and marketing $ 111,114 21 % $ 108,987 21 % $ 2,127 2 %
General and administrative $ 52,755 10 % $ 44,951 9 % $ 7,804 17 %
Acquisition and integration costs $ 11,667 2 % $ 14,197 3 % $ (2,530 ) (18 )%
Research and Development Expense
Research and development expense for the year ended December 31, 2019 increased
from $51.6 million to $52.6 million due primarily to higher spend on projects
related to Sofia and Savanna platforms. Such increases were partially offset by
lower spending on projects related to Cardiovascular and Solana platforms, as
they were largely completed in 2018.
39
--------------------------------------------------------------------------------
Research and development expenses include direct external costs such as fees
paid to third-party contractors and consultants and internal direct and indirect
costs such as compensation and other expenses for research and development
personnel, supplies and materials, clinical trials and studies, facility costs
and depreciation.
Due to the risks inherent in the product development process and given the
early-stage of development of certain projects, we are unable to estimate with
meaningful certainty the costs we will incur in the continued development of our
product candidates for commercialization. We expect our research and development
costs to be substantial as we move other product candidates into preclinical and
clinical trials and advance our existing product candidates into later stages of
development.
Sales and Marketing Expense
Sales and marketing expense for the year ended December 31, 2019 increased from
$109.0 million to $111.1 million primarily due to higher employee-related costs,
product promotion costs and higher freight costs partially offset by lower
transition service fees as we have completed the globalization of our commercial
team.
General and Administrative Expense
General and administrative expense for the year ended December 31, 2019
increased from $45.0 million to $52.8 million primarily due to increased
facility and Information Technology costs required to support the new global
infrastructure. The increase was partially offset by lower transition service
fees.
Acquisition and Integration Costs
Acquisition and integration costs for the year ended December 31, 2019 decreased
from $14.2 million last year to $11.7 million this year primarily, as more of
the global operations became fully integrated into the business. Such decrease
was partially offset by $2.8 million incurred in the current year related to the
evaluation of new business development opportunities.
Other Expense, Net
The following table compares Other expense, net, for the years ended
December 31, 2019 and 2018 (in thousands, except percentages):
For the year ended December 31, Increase (decrease)
2019 2018 $ %
Interest and other expense, net $ 14,790 $ 24,283 $ (9,493 ) (39 )%
Loss on extinguishment of debt 748 8,262 (7,514 ) (91 )%
Total other expense, net $ 15,538 $ 32,545 $ (17,007 ) (52 )%
Interest and other expense, net decreased from $24.3 million to $14.8 million .
Interest and other expense, net primarily relates to accretion of interest on
the deferred consideration, coupon and accretion of interest related to our
Convertible Senior Notes and interest and amortization of deferred financing
costs associated with our Credit Agreement. The decrease in interest expense of
$9.5 million over the prior year was primarily due to lower debt balances under
the Company's Convertible Senior Notes, lower interest incurred under the
Revolving Credit Facility, and lower accretion of interest as deferred
consideration liability outstanding declined.
Loss on extinguishment of debt of $0.7 million for the twelve months ended
December 31, 2019 relates to the extinguishment of $45.4 million in aggregate
principal of the Convertible Senior Notes in exchange for the Company's common
stock during the period. Loss on extinguishment of debt of $8.3 million for the
year ended December 31, 2018 relates to the $161.8 million early payment on the
Term Loan, the extinguishment of $108.8 million in aggregate principal of the
Convertible Senior Notes in exchange for the Company's common stock during the
period and the write-off of certain previously capitalized costs relating to the
Term Loan due to the modification of the Credit Agreement.
Income Taxes
We recognized an income tax provision of $4.3 million , resulting in an effective
tax rate of 5.5% for the year ended December 31, 2019 . The primary factors
contributing to a rate lower than the statutory rate in 2019 are the excess tax
benefits from stock-based compensation and the generation of research credits.
We recognized an income tax benefit of $10.8 million for the year ended
December 31, 2018 . The primary factors that contributed to the income tax
benefit in 2018 were the reversal
40
--------------------------------------------------------------------------------
of a significant portion of the Company's deferred tax valuation allowance, the
excess tax benefits from stock-based compensation and the generation of research
credits.
Liquidity and Capital Resources
As of December 31, 2019 and 2018, our principal sources of liquidity consisted
of the following (in thousands):
December 31,
2019 2018
Cash, cash equivalents, and restricted cash$ 52,775 $
43,695
Amount available to borrow under the Revolving Credit Facility
$ 175,000 $
121,812
Working capital including cash, cash equivalents, and restricted cash$ 96,336 $ 33,662 Adjusted working capital (1)$ 108,997 $ 88,041 (1) Adjusted working capital excludes the current portion of the Convertible Senior Notes as ofDecember 31, 2019 and 2018 of$12.7 million and$54.4 million , respectively, as such notes may be settled at the Company's option in cash or a combination of cash and shares of common stock. As ofDecember 31, 2019 , we had$52.8 million in cash and cash equivalents, a$9.1 million increase from the prior year. Our cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash from operations, progress in research and development projects and integration activities, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. In addition, we intend to continue to evaluate candidates for new product lines, company or technology acquisitions or technology licensing. If we decide to proceed with any such transactions, we may need to incur additional debt or issue additional equity, to successfully complete the transactions. Our primary source of liquidity, other than our holdings of cash and cash equivalents, has been cash flows from operations and financing. Cash generated from operations provides us with the financial flexibility we need to meet normal operating, investing and financing needs. We anticipate that our current cash and cash equivalents, together with cash provided by operating activities will be sufficient to fund our near-term capital and operating needs for at least the next 12 months. Normal operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to: • support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources; • interest on and repayments of our Convertible Senior Notes, deferred consideration, contingent consideration and lease obligations;
• the continued advancement of research and development efforts;
• acquisitions of equipment and other fixed assets for use in our current
and future manufacturing and research and development facilities; and
• potential strategic acquisitions and investments.
The Amended and Restated Credit Agreement provides us with a Revolving Credit Facility of$175.0 million and there are no balances outstanding as ofDecember 31, 2019 . The Revolving Credit Facility matures onAugust 31, 2023 . Our Convertible Senior Notes due in 2020 have a coupon rate of 3.25% and are convertible as ofDecember 31, 2019 . The principal balance outstanding as ofDecember 31, 2019 was$13.1 million . During the year endedDecember 31, 2019 ,$45.4 million in principal was settled for 1.5 million shares of our common stock. See Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report under the heading "Convertible Senior Notes". As ofDecember 31, 2019 , we have$16.5 million in fair value of contingent consideration and$151.4 million of deferred consideration associated with acquisitions to be settled in future periods.
On
41
--------------------------------------------------------------------------------
We expect our revenue and operating expenses will significantly impact our cash
management decisions. Our future capital requirements and the adequacy of our
available funds to service our long-term debt and to fund working capital
expenditures and business development efforts will depend on many factors,
including:
• our ability to realize revenue growth from our new technologies and
create innovative products in our markets;
• our outstanding debt and covenant restrictions;
• our ability to leverage our operating expenses to realize operating
profits as we grow revenue;
• competing technological and market developments; and
• the need to enter into collaborations with other companies or acquire
other companies or technologies to enhance or complement our product
and service offerings.
Cash Flow Summary
Year ended December 31 ,
(in thousands) 2019 2018
Net cash provided by operating activities$ 134,485 $
136,345
Net cash (used for) provided by investing activities (27,229 ) 114,955 Net cash used for financing activities
(98,282 ) (244,058 )
Effect of exchange rate changes on cash 106 367
Net increase in cash and cash equivalents$ 9,080 $
7,609
Cash provided by operating activities of$134.5 million during the twelve months endedDecember 31, 2019 reflects net income of$72.9 million and net non-cash items of$76.8 million primarily associated with depreciation, amortization, stock-based compensation and accretion of interest on deferred consideration. Partially offsetting these cash inflows was a net working capital use of cash of$21.2 million . Cash provided by operating activities of$136.3 million during the year endedDecember 31, 2018 reflects net income of$74.2 million and net non-cash items of$64.5 million , primarily related to depreciation, amortization of intangible assets, changes in deferred tax assets and liabilities, stock-based compensation, accretion of interest on deferred consideration related to the acquired BNP Business, and loss on extinguishment of debt related to Term Loan and Convertible Senior Notes. Partially offsetting these cash inflows was a net working capital use of cash of$7.1 million . Our investing activities used$27.2 million during the twelve months endedDecember 31, 2019 primarily for facility improvements, to acquire production equipment and to purchaseSofia , Solana and Triage instruments available for lease and manufacturing equipment. Our investing activities provided$115.0 million during the year endedDecember 31, 2018 primarily from the sale of theSummers Ridge property for$146.6 million . In addition, we used$31.7 million to acquire production equipment, building improvements andSofia , Solana and Triage instruments available for sale or lease. We are currently planning approximately$28.5 million in capital expenditures over the next 12 months. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, to implement facility improvements, to acquire instruments to be leased to customers and to purchase or develop information technology. We plan to fund these capital expenditures with the cash on our balance sheet. We have$15.1 million in firm purchase commitments with respect to planned inventory purchases as ofDecember 31, 2019 . Cash used by financing activities was$98.3 million during the twelve months endedDecember 31, 2019 primarily related to the payments of Revolving Credit Facility of$53.2 million , deferred consideration of$44.0 million , repurchases of common stock of$10.7 million , and acquisition contingent consideration of$4.0 million , partially offset by proceeds from issuance of stock of$14.8 million from stock option exercises. Cash used by financing activities was$244.1 million during the year endedDecember 31, 2018 primarily related to payments on the Term Loan of$161.8 million , payments on the Revolving Credit Facility of$40.0 million , payments on deferred consideration of$46.0 million , repurchases of common stock of$4.3 million , payments of$2.0 million of transaction costs related to the exchange of Convertible Senior Notes for common stock and payments of acquisition contingent consideration of$6.3 million , partially offset by proceeds from issuance of stock of$17.0 million from stock option exercises. 42
-------------------------------------------------------------------------------- Off-Balance Sheet Arrangements AtDecember 31, 2019 and 2018, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. Contractual Obligations As ofDecember 31, 2019 , our future contractual obligations were as follows (in thousands): Payment due by period Less than 1-3 3-5 More than Total 1 year Years Years 5 years Convertible Senior Notes (1)$ 13,558 $ 13,558 $ - $ - $ - Deferred consideration (2) 166,000 42,000 84,000 40,000 - Finance lease obligation (3) 8,314 1,264 2,554 2,399 2,097
Operating lease obligations (4) 130,455 10,603 20,648
18,904 80,300
Non-cancelable purchase
commitment (5) 15,079 13,464 453 327 835
Total contractual obligations $ 333,406 $ 80,889 $ 107,655 $ 61,630 $ 83,232
(1) Includes the principal amount of our Convertible Senior Notes due in
December 2020 , as well as interest payments to be made semi-annually.
(2) Reflects the deferred consideration payments related to the acquisition of
the BNP Business.
(3) Reflects our finance lease obligation primarily on the approximately 78,000
square-foot
with options to extend for three additional 5-year periods. Finance lease
obligations include payments through
(4) Reflects future minimum lease obligations on facilities and equipment under
operating leases in place as of
to one additional building that is not included in the operating lease
obligations.
(5) Reflects our $15.1 million of non-cancelable commitments for planned
inventory purchases under contractual arrangements.
We have entered into various licensing agreements, which largely require
payments based on specified product sales as well as the achievement of specific
milestones. Royalty and license expenses under these various royalty and
licensing agreements collectively totaled $1.1 million , $0.4 million and $0.6
million for the years ended December 31, 2019 , 2018 and 2017, respectively.
We exclude liabilities pertaining to uncertain tax positions from our table of
contractual obligations as we cannot make a reliable estimate of the period of
cash settlement with the respective taxing authorities, nor the amount of the
final cash settlement. As of December 31, 2019 , we had approximately $7.5
million of liabilities associated with uncertain tax positions. See Note 4 in
the Consolidated Financial Statements included in this Annual Report for further
discussion of uncertain tax positions. The table also excludes $16.5 million in
potential contingent consideration payments primarily related to the acquisition
of the BNP Business and achievement of certain revenue targets under other
acquisition agreements. We have not included amounts in the table because we
cannot make a reasonably reliable estimate regarding the probability of the
annual payments for the BNP Business. See Note 10 in the Consolidated Financial
Statements included in this Annual Report for further discussion of our
contingent consideration.
Recent Accounting Standards
For summary of recent accounting pronouncements applicable to our consolidated
financial statements see "Company Operations and Summary of Significant
Accounting Policies" in Note 1 to our Consolidated Financial Statements in Part
II, Item 8, which is incorporated herein by reference.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation
43
--------------------------------------------------------------------------------
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to revenue recognition,
goodwill and intangibles, business combinations and income taxes. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Reserve for Contractual Rebates and Discounts
The Company records revenues primarily from product sales. These revenues are
recorded net of rebates and other discounts that are estimated at the time of
sale, and are largely driven by various customer program offerings, including
special pricing agreements, promotions and other volume-based incentives.
Rebates and discounts are calculated based upon historical experience, estimated
discounting levels and estimated distributor inventory balances and recorded as
a reduction of sales with offsets to trade accounts receivable and other current
liabilities, respectively.
Goodwill and Intangible Assets
The useful lives of intangible assets with definite lives are based on the
expected number of years the asset will generate revenue or otherwise be used by
us and the related amortization is based on the straight-line method. Goodwill ,
which has an indefinite life, is not amortized but instead is tested at least
annually for impairment, or more frequently when events or changes in
circumstances indicate that the asset might be impaired. Examples of such events
or circumstances include:
• the asset's ability to continue to generate income from operations and
positive cash flow in future periods;
• any volatility or significant decline in our stock price and market
capitalization compared to our net book value;
• loss of legal ownership or title to an asset;
• significant changes in our strategic business objectives and utilization of
our assets; and
• the impact of significant negative industry or economic trends.
If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase. For goodwill, the entity has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The quantitative impairment test compares the fair value of a reporting unit with the carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is recorded. We completed our annual evaluation for impairment of goodwill as ofDecember 31, 2019 and determined that no impairment existed. Business Combinations The cost of an acquired business is assigned to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of the estimated fair values at the date of acquisition. We assess fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, using a variety of methods including, but not limited to, an income approach and a market approach such as the estimation of future cash flows of an acquired business and current selling prices of similar assets. Fair value of the assets acquired and liabilities assumed, including intangible assets, in-process research and development (IPR&D), and contingent payments, are measured based on the assumptions and estimations with regards to the variable factors such as the amount and timing of future cash flows for the asset or liability being measured, appropriate risk-adjusted discount rates, nonperformance risk, or other factors that market participants would consider. Upon acquisition, we determine the estimated economic lives of the acquired intangible assets for amortization purposes, which are based on the underlying expected cash flows of such assets. When applicable, adjustments to inventory are based on the fair market value of inventory and amortized into income based on the period in which the underlying inventory is sold.Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that is not individually identified and separately recognized. Actual results may vary from projected results and assumptions used in the fair value assessments. 44 -------------------------------------------------------------------------------- Income Taxes Significant judgment is required in determining our provision for income taxes, current tax assets and liabilities, deferred tax assets and liabilities, and our future taxable income, both as a whole and in various tax jurisdictions, for purposes of assessing our ability to realize future benefit from our deferred tax assets. A valuation allowance may be established to reduce our deferred tax assets to the amount that is considered more likely than not to be realized through the generation of future taxable income and other tax planning opportunities. As ofDecember 31, 2019 , the Company has a valuation allowance of$2.4 million which represents the portion of the Company's deferred tax assets that management believes is not more likely than not to be realized. We will continue to assess the need for a valuation allowance on our deferred tax assets by evaluating both positive and negative evidence that may exist. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained during an audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe that we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcome of examinations by tax authorities in determining the adequacy of our provision for income taxes. See Note 4 in the Consolidated Financial Statements included in this Annual Report for more information on income taxes. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are not subject to interest rate risk on our Convertible Senior Notes as the Notes have a fixed rate of 3.25%. For fixed rate debt, changes in interest rates will generally affect the fair value of the debt instrument, but not our earnings or cash flows. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to changes in interest rates. Our current investment policy with respect to our cash and cash equivalents focuses on maintaining acceptable levels of interest rate risk and liquidity. Although we continually evaluate our placement of investments, as ofDecember 31, 2019 , our cash and cash equivalents were placed in the Company's highly liquid operating accounts. Foreign Currency Exchange Risk We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location's functional currency. For the year endedDecember 31, 2019 , total revenues increased 2% to$534.9 million , of which approximately$113.8 million in revenue was denominated in currencies other than theU.S. dollar. On a constant currency basis, revenue growth during the year endedDecember 31, 2019 was 3%. We believe constant currency and constant currency growth rate enhance the comparison of our financial performance from period-to-period, and to that of our competitors. Constant currency revenue excludes the impact from foreign currency fluctuations, which was an unfavorable$4.8 million for the year endedDecember 31, 2019 , and is calculated by translating current period revenues using prior period exchange rates, net of any hedging effect recognized in the current period. Constant currency revenue growth (expressed as a percentage) is calculated by determining the change in current period constant currency revenues over prior period revenues. The major currencies to which our revenues are exposed are the Euro and the Chinese Yuan. A 100-basis point move in the average exchange rates (assuming a simultaneous and immediate 100 basis point change for the relevant period) would have resulted in an increase or decrease in our reported revenue for the year endedDecember 31, 2019 as follows (in thousands): Currency Year ended December 31, 2019 Chinese Renminbi $615 Euro $ 381 Effective fiscal year 2019, the Company has initiated a foreign currency management policy which permits the use of derivative instruments, such as forward contracts, to reduce volatility in our results of operations resulting from foreign exchange rate fluctuations. We do not enter into foreign currency derivative instruments for trading purposes or to engage in 45 --------------------------------------------------------------------------------
speculative activity. See further discussion in Note 12 to the Notes to the Consolidated Financial Statements for additional information related to such forward contracts.
46
--------------------------------------------------------------------------------Item 8. Financial Statements and Supplementary Data
Index of Consolidated Financial Statements and Schedule
Report of Independent Registered Public Accounting Firm 48
Consolidated Balance Sheets as of December 31, 2019 and 2018 50
Consolidated Statements of Operations for the years ended
51
Consolidated Statements of Comprehensive Income (Loss) for the years
ended
52
Consolidated Statements of Stockholders' Equity for the years ended
53
Consolidated Statements of Cash Flows for the years ended
54
Notes to Consolidated Financial Statements 56
Schedule II Consolidated Valuation and Qualifying Accounts 77
47
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Quidel Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quidel
Corporation (the "Company") as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows, for each of the three years in the period
ended December 31, 2019 and the related notes and schedule listed in the Index
at Item 15(a)(2) (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
December 31, 2019 and 2018, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2019 , in conformity
with US generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States ) (PCAOB), the Company's internal
control over financial reporting as of December 31, 2019 , based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework), and our
report dated February 13, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for leases in 2019 due to the adoption of
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the
related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures include examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our
audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the
current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on
the critical audit matter or on the accounts or disclosures to which it relates.
48
--------------------------------------------------------------------------------
Reserve for contractual rebates and discounts
Description of As described in Note 1 to the consolidated financial statements, the Matter the Company records revenues from product sales net of
contractual rebates and other discounts that are estimated at the
time of sale. As of December 31, 2019 , the Companyrecognized an
allowance on accounts receivable of $15.7 million in rebates and
an accrued liability of $7.4 million in promotion and other
volume-based customer incentives.
Auditing the Company's allowance for contractual rebates and
other discounts is especially challenging because the calculation
involves estimating adjustments to revenue based upon a high
volume of data including inputs from third-party sources, such as
distributor inventory levels and historical distributor sales to
end users. In addition, the determination of such adjustments
includes estimating rebate percentages which are dependent on
estimated end-user sales mix and customer contractual terms,
including volume discount tiers, which vary across customers.
How We We obtained an understanding, evaluated the design and tested the
Addressed the operating effectiveness of key controls over the Company's
Matter in Our process to calculate the reserves for contractual rebates and
Audit discounts, including their evaluation of third-party data inputs
utilized in the reserve and accrual calculations, as well as the
accuracy of the Company's data inputs such as contractual pricing
and estimated end user sales. Our audit procedures also included
the evaluation of significant inputs through the evaluation of
the Company's retrospective analysis of rebates claimed and
volume discounts estimated compared to actual payments issued,
evaluation of estimates based on historical experience, and
performance of analytical procedures and sensitivity analyses
over the Company's significant inputs. We also tested the
underlying data used in management's calculations for accuracy
and completeness, which included inspection of source data
supporting the inventory levels, rebate claims paidsubsequent to
period end, and volume discounts settled during the period.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2002.
San Diego, California
February 13, 2020
49
--------------------------------------------------------------------------------
QUIDEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31,
2019 2018
ASSETS
Current assets:
Cash and cash equivalents $ 52,775 $ 43,695
Accounts receivable, net 94,496 58,677
Inventories 58,086 67,379
Prepaid expenses and other current assets 16,870 23,646
Total current assets 222,227
193,397
Property, plant and equipment, net 79,762 73,901 Right-of-use assets 92,119 - Goodwill 337,018 337,021 Intangible assets, net 148,112 175,029 Deferred tax asset 24,502 22,192 Other non-current assets 7,127 4,831 Total assets$ 910,867 $ 806,371 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable$ 26,701 $
25,171
Accrued payroll and related expenses 17,286
19,210
Operating lease liabilities 6,412 - Contingent consideration 5,969 3,983 Deferred consideration 42,000 44,000 Convertible Senior Notes 12,661 54,379 Other current liabilities 14,862 12,992 Total current liabilities 125,891 159,735 Operating lease liabilities - non-current 93,227
-
Revolving Credit Facility - non-current -
53,188
Deferred consideration - non-current 109,382
143,158
Contingent consideration - non-current 10,566
15,129
Other non-current liabilities 11,981
9,577
Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock,$.001 par value per share; 5,000 shares authorized; none issued or outstanding atDecember 31, 2019 and 2018 -
-
Common stock,
42 39
Additional paid-in capital 425,557
363,921
Accumulated other comprehensive loss (463 ) (139 ) Retained earnings 134,684 61,763 Total stockholders' equity 559,820 425,584 Total liabilities and stockholders' equity$ 910,867 $ 806,371 See accompanying notes. 50
--------------------------------------------------------------------------------
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
2019 2018 2017
Total revenues $ 534,890 $ 522,285 $ 277,743
Cost of sales 214,085 206,572 121,601
Gross profit 320,805 315,713 156,142
Research and development 52,553 51,649 33,644
Sales and marketing 111,114 108,987 67,248
General and administrative 52,755 44,951 29,192
Acquisition and integration costs 11,667 14,197 16,506
Total operating expenses 228,089 219,784 146,590
Operating income 92,716 95,929 9,552
Other expense, net
Interest and other expense, net (14,790 ) (24,283 ) (17,588 )
Loss on extinguishment of debt (748 ) (8,262 ) -
Total other expense, net (15,538 ) (32,545 ) (17,588 ) Income (loss) before income taxes 77,178 63,384 (8,036 ) Provision (benefit) for income taxes 4,257 (10,799 )
129
Net income (loss)$ 72,921 $ 74,183 $ (8,165 ) Basic earnings (loss) per share$ 1.78 $ 1.95 $ (0.24 ) Diluted earnings (loss) per share$ 1.73 $ 1.86 $ (0.24 ) Shares used in basic per share calculation 40,860 37,995 33,734 Shares used in diluted per share calculation 43,111 42,554 33,734 See accompanying notes. 51
--------------------------------------------------------------------------------
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year ended December 31,
2019 2018 2017
Net income (loss) $ 72,921 $ 74,183 $ (8,165 )
Other comprehensive income (loss)
Changes in cumulative translation
adjustment, net of tax (322 ) (139 ) 53
Changes in unrealized gains (losses) from cash flow hedges: Net unrealized gains on derivative instruments 716 - - Reclassification of net realized gains on derivative instruments included in net income (718 ) - - Total change in unrealized losses realized from cash flow hedges, net of tax (2 ) - - Comprehensive income (loss)$ 72,597 $ 74,044 $ (8,112 ) See accompanying notes. 52
--------------------------------------------------------------------------------
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
Retained
Additional Accumulated earnings Total
paid-in other (accumulated stockholders'
Shares Par capital comprehensive loss deficit) equity
Balance at
(53 ) $ (4,255 ) $ 200,630
Issuance of common stock
under equity compensation
plans 1,669 2 26,077 - - 26,079
Stock-based compensation
expense - - 9,048 - - 9,048
Repurchases of common stock (26 ) - (541 ) - - (541 )
Changes in cumulative
translation adjustment, net
of tax - - - 53 - 53
Net loss - - - - (8,165 ) (8,165 )
Balance at December 31, 2017 34,540 35 239,489 - (12,420 ) 227,104
Issuance of common stock
under equity compensation
plans 1,237 - 17,047 - - 17,047
Stock-based compensation
expense - - 10,078 - - 10,078
Issuance of shares in
exchange for Convertible
Senior Notes 3,699 4 200,215 - - 200,219
Tax impact from the
conversion of Convertible
Senior Notes - - 2,162 - - 2,162
Reduction for equity
component of Convertible
Senior Notes exchanged - - (100,726 ) - - (100,726 )Repurchases of common stock (90 ) - (4,344 )
- - (4,344 )
Changes in cumulative
translation adjustment, net
of tax - - - (139 ) - (139 )
Net income - - - - 74,183 74,183
Balance at December 31, 2018 39,386 39 363,921 (139 ) 61,763 425,584
Issuance of common stock
under equity compensation
plans 1,152 2 16,797 - - 16,799
Stock-based compensation
expense - - 12,088 - - 12,088
Issuance of shares in
exchange for Convertible
Senior Notes 1,497 1 86,427 - - 86,428
Tax impact from the
conversion of Convertible
Senior Notes - - 568 - - 568
Reduction for equity
component of Convertible
Senior Notes exchanged - - (43,516 ) - - (43,516 )Repurchases of common stock (167 ) - (10,728 )
- - (10,728 )
Other comprehensive loss,
net of tax - - - (324 ) - (324 )
Net income - - - - 72,921 72,921
Balance at
(463 ) $ 134,684 $ 559,820
See accompanying notes.
53
--------------------------------------------------------------------------------
QUIDEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31,
2019 2018 2017
OPERATING ACTIVITIES
Net income (loss) $ 72,921 $ 74,183 $ (8,165 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and other 51,791 46,266 30,762
Stock-based compensation expense 13,252 11,709
9,061
Impairment loss 1,481 - - Amortization of debt discount and deferred issuance costs 1,582 3,952
6,022
Change in fair value of acquisition contingencies 1,467 1,114 (81 ) Accretion of interest on deferred consideration 8,224 10,000
2,608
Amortization of inventory step-up to fair value - 3,650
10,950
Change in deferred tax assets and liabilities (1,742 ) (20,458 ) 365 Loss on extinguishment of debt 748 8,262 - Changes in assets and liabilities: Accounts receivable (36,059 ) 8,236 (42,052 ) Inventories 9,143 (3,974 ) 362 Prepaid expenses and other current and non-current assets 4,314 (12,681 ) (9,113 ) Accounts payable 2,434 (331 ) 12,956 Accrued payroll and related expenses (1,037 ) 1,674
7,130
Other current and non-current liabilities 5,966 4,743
6,904
Net cash provided by operating activities 134,485 136,345
27,709
INVESTING ACTIVITIES Acquisitions of property, equipment (27,229 ) (31,689 ) (17,510 ) Acquisition of other businesses, net of cash acquired - - (14,451 ) Acquisition of Triage and BNP Businesses - - (399,798 ) Proceeds from sale of Summers Ridge Property - 146,644 - Net cash (used for) provided by investing activities (27,229 ) 114,955 (431,759 ) FINANCING ACTIVITIES Proceeds from issuance of Term Loan - -
245,000
Proceeds from issuance of Revolving Credit Facility - -
10,000
Proceeds from issuance of common stock 14,782 17,047
25,426
Payments of debt issuance costs - (513 ) (8,682 ) Payments on finance lease obligation (371 ) (130 ) (98 ) Payments on Revolving Credit Facility (53,188 ) (40,000 ) - Repurchases of common stock (10,728 ) (4,344 ) (541 ) Payments on acquisition contingent consideration (4,044 ) (6,303 ) (497 ) Payments of deferred consideration (44,000 ) (46,000 ) - Payments of Term Loan - (161,813 ) - Transaction costs related to debt exchange (733 ) (2,002 ) - Net cash (used for) provided by financing activities (98,282 ) (244,058 ) 270,608 Effect of exchange rate changes on cash 106 367 20 Net increase (decrease) in cash and cash equivalents 9,080 7,609 (133,422 ) Cash and cash equivalents, beginning of period 43,695 36,086
169,508
Cash and cash equivalents, at end of period
$ 36,086 54
--------------------------------------------------------------------------------
Year ended December 31,
2019 2018 2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 2,295 $ 7,929 $ 9,137
Cash paid during the period for income taxes $ 2,189 $ 6,923 $ 1,274
NON-CASH INVESTING ACTIVITIES
Purchase of property, equipment and
intangibles by incurring current liabilities $ 1,040 $ 1,785 $ 1,446
NON-CASH FINANCING ACTIVITIES
Reduction of other current liabilities upon
issuance of restricted share units $ 2,018 $ - $ 903
Deferred consideration for acquisition of
BNP Business $ - $ - $ 220,550
Extinguishment of Convertible Senior Notes
through issuance of stock $ 86,428 $ 200,219 $ -
Principal amount of Term Loan exchanged for
Revolving Credit Facility $ - $ 83,187 $ -
See accompanying notes.
55
--------------------------------------------------------------------------------
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Company Operations and Summary of Significant Accounting Policies
Quidel Corporation (the "Company") commenced operations in 1979. The Company
operates in one business segment, which develops, manufactures and markets rapid
diagnostic testing solutions. These diagnostic tests can be categorized in the
following product categories: Rapid Immunoassay, Cardiac Immunoassay,
Specialized Diagnostic Solutions and Molecular Diagnostic Solutions. The Company
sells its products directly to end users and distributors, in each case, for
professional use in physician offices, hospitals, clinical laboratories,
reference laboratories, leading universities, retail clinics and wellness
screening centers. The Company markets its products through a network of
distributors and a direct sales force.
The accompanying consolidated financial statements of the Company and its
subsidiaries have been prepared in accordance with generally accepted accounting
principles in the U.S.
Consolidation-The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Cash and Cash Equivalents-The Company considers cash equivalents to be highly
liquid investments with a maturity at the date of purchase of three months or
less. The Company invests its cash equivalents primarily in money market funds
with high quality institutions.
Accounts Receivable-The Company sells its products directly to hospitals and
reference laboratories as well as to distributors in the U.S. and sells directly
to hospitals and labs and through distribution internationally (see Note 9). The
Company periodically assesses the financial strength of these customers and
establishes reserves for anticipated losses when necessary, which historically
have not been material. The balance of accounts receivable is net of reserves of
$16.0 million and $12.0 million at December 31, 2019 and 2018, respectively, of
which the reserve related to contract rebates was $15.7 million and $11.5
million , respectively.
Concentration of Credit Risk-Financial instruments that potentially subject the
Company to significant concentrations of credit risk consists principally of
trade accounts receivable.
The Company performs credit evaluations of its customers' financial condition
and limits the amount of credit extended when deemed necessary, but generally
requires no collateral. Credit quality is monitored regularly by reviewing
credit history. The Company believes that the concentration of credit risk in
its trade accounts receivables is moderated by its credit evaluation process,
relatively short collection terms, the high level of credit worthiness of its
customers, and letters of credit issued on the Company's behalf. Potential
credit losses are limited to the gross value of accounts receivable.
Inventories-Inventories are stated at the lower of cost (first-in, first-out) or
net realizable value. The Company reviews the components of its inventory
periodically for excess, obsolete and impaired inventory and records a reduction
to the carrying value when identified.
Property, Plant and Equipment-Property, plant and equipment is recorded at cost
and depreciated over the estimated useful lives of the assets (three to fifteen
years) using the straight-line method. Amortization of leasehold improvements is
computed on the straight-line method over the shorter of the lease term or the
estimated useful lives of the related assets.
Goodwill and Intangible Assets-Intangible assets are recorded at cost and
amortized on a straight-line basis over their estimated useful lives, except for
indefinite-lived intangibles such as goodwill. Software development costs
associated with software to be leased or otherwise marketed are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, software development costs are
capitalized. The capitalized cost is amortized on a straight-line basis over the
estimated product life or on the ratio of current revenues to total projected
product revenues, whichever is greater.
Convertible Debt-The Company accounts for convertible debt instruments that may
be settled in cash upon conversion (including combination settlement of cash
equal to the "principal portion" and delivery of the "share amount" in excess of
the conversion value over the principal portion in shares of common stock and/or
cash) by separating the liability and equity components of the instruments in a
manner that reflects our nonconvertible debt borrowing rate. The Company
determines the carrying amount of the liability component by measuring the fair
value of similar debt instruments that do not have the conversion feature. If no
similar debt instrument exists, the Company estimates fair value by using
assumptions that market
56
--------------------------------------------------------------------------------
participants would use in pricing a debt instrument, including market interest
rates, credit standing, yield curves and volatilities. Determining the fair
value of the debt component requires the use of accounting estimates and
assumptions. These estimates and assumptions are judgmental in nature and could
have a significant impact on the determination of the debt component, and the
associated non-cash interest expense. See Note 3 for additional discussion of
the Convertible Senior Notes issued in December 2014 .
Revenue Recognition-The Company records revenues primarily from product sales.
These revenues are recorded net of rebates and other discounts. These rebates
and discounts are estimated at the time of sale, and are largely driven by
various customer program offerings, including special pricing agreements,
promotions and other volume-based incentives. Rebates and discounts are
calculated based upon historical experience, estimated discounting levels and
estimated distributor inventory balances and recorded as a reduction of sales
with offsets to accounts receivable and other current liabilities, respectively.
Revenue is recognized when control of the products is transferred to the
customers in an amount that reflects the consideration the Company expects to
receive from the customers in exchange for those products and services. This
process involves identifying the contract with a customer, determining the
performance obligations in the contract and the contract price, allocating the
contract price to the distinct performance obligations in the contract and
recognizing revenue when the performance obligations have been satisfied. A
performance obligation is considered distinct from other obligations in a
contract when it provides a benefit to the customer either on its own or
together with other resources that are readily available to the customer and is
separately identified in the contract. A performance obligation is considered to
be satisfied once the control of a product is transferred to the customer or the
service is provided to the customer, meaning the customer has the ability to use
and obtain the benefit of the goods or service.
A portion of product sales includes revenues for diagnostic kits, which are
utilized on leased instrument systems under the Company's "reagent rental"
program. The reagent rental program provides customers the right to use the
instruments at no separate cost to the customer in consideration for a
multi-year agreement to purchase annual minimum amounts of consumables
("reagents" or "diagnostic kits"). When an instrument is placed with a customer
under a reagent rental agreement, the Company retains title to the equipment and
it remains capitalized on the Company's Consolidated Balance Sheets as property,
plant and equipment, net. The instrument is depreciated on a straight-line basis
over the lesser of the lease term or life of the instrument. Depreciation
expense is recorded in cost of sales included in the Consolidated Statements of
Operations. Instrument and consumables under the reagent rental agreements are
deemed two distinct performance obligations. Though the instrument and
consumables do not have any use to customers without one another, they are not
highly interdependent because they do not significantly affect each other. The
Company would be able to fulfill its promise to transfer the instrument even if
its customers did not purchase any consumables and the Company would be able to
fulfill its promise to provide the consumables even if customers acquired
instruments separately. The contract price is allocated between these two
performance obligations based on the relative standalone selling prices. The
instrument is considered an operating lease and revenue allocated to the
instrument will be separately disclosed, if material.
Research and Development Costs-Research and development costs are charged to
operations as incurred. In conjunction with certain third-party service
agreements, the Company is required to make periodic payments based on
achievement of certain milestones. The costs related to these research and
development services are also charged to operations as incurred.
Product Shipment Costs-Product shipment costs are included in sales and
marketing expense in the accompanying Consolidated Statements of Operations.
Shipping and handling costs were $9.5 million , $8.3 million and $3.7 million for
the years ended December 31, 2019 , 2018 and 2017, respectively.
Advertising Costs-Advertising costs are expensed as incurred. Advertising costs
were $1.3 million , $0.9 million and $0.5 million for the years ended
December 31, 2019 , 2018 and 2017, respectively.
Income Taxes-Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The Company's policy
is to recognize the interest expense and penalties related to income tax matters
as a component of the income tax provision.
Fair Value of Financial Instruments- The Company uses the fair value hierarchy
established in Accounting Standards Codification ("ASC") Topic 820, Fair Value
Measurements and Disclosures, which requires that the valuation of assets and
liabilities subject to fair value measurements be classified and disclosed by
the Company in one of the following three categories:
57
--------------------------------------------------------------------------------
Level 1: Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets,
quoted prices in markets that are not active, or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or
liability; and
Level 3: Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e. supported by
little or no market activity).
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, accounts receivables, accounts payable and accrued liabilities
approximate their fair values due to their short-term nature.
Stock-Based Compensation-Compensation expense related to stock options granted
is recognized ratably over the service vesting period for the entire option. For
stock options with graded vesting, the Company ensures that the cumulative
amount of compensation expense recognized at the end of any reporting period at
least equals the portion of the stock option that has vested at that date. The
total number of stock options expected to vest is adjusted by estimated
forfeiture rates. The Company determined the estimated fair value of each stock
option on the date of grant using the Black-Scholes option valuation model. The
fair value of restricted stock units is determined based on the closing market
price of the Company's common stock on the grant date. Compensation expense for
time-based restricted stock units ("RSUs") is measured at the grant date and
recognized ratably over the vesting period. A portion of the restricted stock
granted are performance-based and vesting is tied to achievement of specific
Company goals over a three-year time period, subject to early vesting upon
achievement of the performance goals. For purposes of measuring compensation
expense for performance-based restricted stock units ("PSUs"), the number of
shares ultimately expected to vest is estimated at each reporting date based on
management's expectations regarding the relevant performance criteria. The grant
date of the PSUs takes place when the grant is authorized and the specific
achievement goals are communicated.
Comprehensive Income (loss)-Comprehensive income (loss) includes unrealized
gains and losses which are related to the cumulative translation adjustments and
derivative instruments excluded from the Company's Consolidated Statements of
Operations.
Use of Estimates-The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting Periods-Each of the Company's fiscal quarters end on the Sunday
closest to the end of the calendar quarter. The Company's fiscal years ended
December 29, 2019 , December 30, 2018 and December 31, 2017 were all 52 weeks.
For ease of reference, the calendar year end dates are used herein.
Leases-Lease liabilities represent the obligation to make lease payments and
right-of-use ("ROU") assets represent the right to use the underlying asset
during the lease term. Lease liabilities and ROU assets are recognized at the
commencement date of the lease based on the present value of lease payments over
the lease term at the commencement date. When the implicit rate is unknown, an
incremental borrowing rate based on the information available at the
commencement date is used in determining the present value of the lease
payments. Options to extend or terminate the lease are included in the
determination of the lease term when it is reasonably certain that the Company
will exercise such options.
For certain classes of assets, the Company accounts for lease and non-lease
components as a single lease component. Variable lease payments, including those
related to changes in the consumer price index, are recognized in the period in
which the obligation for those payments are incurred and are not included in the
measurement of the ROU assets or lease liabilities. Short-term leases are
excluded from the calculation of the ROU assets and lease liabilities.
Operating leases are included in right-of-use assets, current portion of
operating lease liabilities and operating lease liabilities in the Consolidated
Balance Sheet. Finance leases are included in property and equipment, other
current liabilities and other non-current liabilities.
Recent Accounting Pronouncements-Accounting Standards Update ("ASU") 2016-02 and
ASU 2018-11 (collectively, "ASC 842") requires a lessee to recognize a lease
liability for the obligation to make lease payments and a ROU asset representing
the right to use the underlying asset for the lease term on the balance sheet.
Deferred rent, recorded in other current liabilities and other non-current
liabilities, is derecognized. The Company adopted ASC 842 as of January 1, 2019
using the
58
-------------------------------------------------------------------------------- alternative transition method to apply the guidance. The Company elected the package of practical expedients which, among other things, allows the Company to carry forward its historical lease classifications. The following table presents the effect of the change in accounting principle on the Company's Consolidated Balance Sheets as ofJanuary 1, 2019 : After change in January 1, Effect of Change in Accounting Consolidated Balance Sheets (in thousands) 2019 Accounting Principle Principle ASSETS Right-of-use assets $ -$ 87,086 $ 87,086 Total assets$ 806,371 $ 87,086 $ 893,457 LIABILITIES AND STOCKHOLDERS' EQUITY Operating lease liabilities $ -$ 5,290 $ 5,290 Other current liabilities 12,992 (448 ) 12,544 Total current liabilities 159,735 4,842 164,577 Operating lease liability - 84,866 84,866 Other non-current liabilities 9,577 (2,622 ) 6,955
Total liabilities and stockholders' equity
InJanuary 2017 , theFinancial Accounting Standards Board ("FASB") issued guidance codified in ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). Under this new guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The guidance is effective for fiscal years beginning afterDecember 15, 2019 including interim periods therein, with early adoption permitted. The Company adopted the guidance during fiscal year 2019 with no impact to the Company's consolidated financial statements. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The standard is effective for the Company beginning in the first quarter of 2020, with early adoption permitted. The Company adopted the guidance during the fourth quarter of fiscal year 2019 with no impact to the Company's consolidated financial statements. 59 --------------------------------------------------------------------------------
Note 2. Balance Sheet Account Details
Prepaid expenses and other current assets
The following is a summary of prepaid expenses and other current assets (in
thousands):
December 31,
2019 2018
Other receivables $ 7,857 $ 15,507
Prepaid expenses 4,568 4,508
Income taxes receivable 2,560 2,703
Other 1,885 928
Total prepaid expenses and other current assets
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. The following is a summary of inventories (in thousands):
December 31,
2019 2018
Raw materials $ 23,294 $ 24,292 Work-in-process (materials, labor and overhead) 20,514 21,280 Finished goods (materials, labor and overhead) 14,278 21,807 Total inventories
$ 58,086 $ 67,379 Property, Plant and Equipment The following is a summary of property, plant and equipment (in thousands): December 31, 2019 2018 Equipment, furniture and fixtures$ 96,347 $ 89,285 Building and improvements 46,878 37,335 Leased instruments 47,656 42,647 Land 1,080 1,080
Total property, plant and equipment, gross 191,961 170,347
Less: accumulated depreciation and amortization (112,199 ) (96,446 )
Total property, plant and equipment, net
The equipment, furniture and fixtures category above includes construction in progress and instruments that have not been placed at a customer under a lease agreement. These items will be reclassified when the assets are placed in service. The total expense for depreciation of fixed assets and amortization of leasehold improvements was$19.4 million ,$17.7 million and$14.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Maintenance and minor repairs are charged to operations as incurred. 60 --------------------------------------------------------------------------------
December 31, 2019 December 31, 2018
Weighted-average
useful life Gross Accumulated Gross Accumulated
Description (years) assets amortization Net assets amortization Net
Purchased technology 9.1 $ 112,100 $ (64,632 ) $ 47,468 $ 112,100 $ (57,495 ) $ 54,605
Customer relationships 7.0 122,178 (44,045 ) 78,133 122,389 (27,561 ) 94,828
License agreements 9.9 6,509 (4,931 ) 1,578 6,511 (4,530 ) 1,981
Patent and trademark
costs 10.8 28,740 (10,331 ) 18,409 28,740 (7,624 ) 21,116
Software development
costs 5.0 7,432 (4,908 ) 2,524 6,629 (4,130 ) 2,499
Total finite-lived
intangible assets $ 276,959 $ (128,847 ) $ 148,112 $ 276,369 $ (101,340 ) $ 175,029
Amortization expense related to the capitalized software costs was $0.8 million ,
$1.0 million and $0.8 million for the years ended December 31, 2019 , 2018 and
2017, respectively. Amortization expense (including capitalized software costs)
was $27.5 million , $28.8 million and $16.1 million for the years ended
December 31, 2019 , 2018 and 2017, respectively.
The expected future annual amortization expense of the Company's intangible
assets is as follows (in thousands):
For the years ending December 31, Amortization expense
2020 $ 27,258
2021 27,124
2022 26,593
2023 25,882
2024 21,322
Thereafter 19,933
Total $ 148,112
Other current liabilities
The following is a summary of other current liabilities (in thousands):
December 31,
2019 2018
Customer incentives $ 7,369 $ 7,516 Income and other taxes payable 1,214 1,962 Customer deposits
1,500 -
Other 4,779 3,514
Total other current liabilities
Note 3. Debt Convertible Senior Notes InDecember 2014 , the Company issued$172.5 million aggregate principal amount of 3.25% Convertible Senior Notes due 2020. Debt issuance costs of approximately$5.1 million were primarily comprised of underwriters fees, legal, accounting, and other professional fees of which$4.2 million were capitalized and are recorded as a reduction to long-term debt and are being amortized using the effective interest method to interest expense over the six-year term of the Convertible Senior Notes. The remaining$0.9 million of debt issuance costs were allocated as a component of equity in additional paid-in capital. 61 -------------------------------------------------------------------------------- Deferred issuance costs related to the Convertible Senior Notes were$0.1 million and$0.5 million as ofDecember 31, 2019 and 2018, respectively. The holders of the Convertible Senior Notes may surrender their notes for conversion, subject to specified circumstances, into cash, shares of common stock, or a combination of cash and shares of common stock, at the election of the Company, based on an initial conversion rate, subject to adjustment, of 31.1891 shares per$1,000 principal amount of the Convertible Senior Notes (which represents an initial conversion price of approximately 32.06 per share) up until the business day immediately precedingSeptember 15, 2020 . This conversion may, in the discretion of the holder, occur in the following circumstances and to the following extent: (1) during any calendar quarter commencing after the calendar quarter ending onMarch 31, 2015 , if the last reported sales price of the Company's common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the notes in effect on each applicable trading day; (2) during the 5 consecutive business day period following any 5 consecutive trading day period in which the trading price per$1,000 principal amount of the Convertible Senior Note for each such trading day was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such day; or (3) upon the occurrence of specified events described in the indenture for the Convertible Senior Notes. On or afterSeptember 15, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances. In general, for each$1,000 in principal, the "principal portion" of cash upon settlement is defined as the lesser of$1,000 , or the conversion value during the 25-day observation period as described in the indenture for the Convertible Senior Notes. The conversion value is the sum of the daily conversion value, which is the product of the effective conversion rate divided by 25 days and the daily volume weighted-average price ("VWAP") of the Company's common stock. The "share amount" is the cumulative "daily share amount" during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and$1,000 . The Company pays 3.25% interest per annum on the principal amount of the Convertible Senior Notes semi-annually in arrears in cash onJune 15 andDecember 15 of each year. The effective interest rate during fiscal year 2019 was 6.7%. The Convertible Senior Notes mature onDecember 15, 2020 . During the year endedDecember 31, 2019 , the Company recorded total interest expense of$2.2 million related to the Convertible Senior Notes of which$1.1 million related to the amortization of the debt discount and issuance costs and$1.1 million related to the coupon due semi-annually. During the year endedDecember 31, 2018 , the Company recorded total interest expense of$6.1 million related to the Convertible Senior Notes of which$3.1 million related to the amortization of the debt discount and issuance costs and$3.0 million related to the coupon due semi-annually. During the year endedDecember 31, 2017 , the Company recorded total interest expense of$10.9 million related to the Convertible Senior Notes of which$5.5 million related to the amortization of the debt discount and issuance costs and$5.4 million related to the coupon due semi-annually. If a fundamental change, as defined in the indenture for the Convertible Senior Notes, such as certain acquisitions, mergers, or a liquidation of the Company, occurs prior to the maturity date, subject to certain limitations, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date. The Company accounts separately for the liability and equity components of the Convertible Senior Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company had no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the Convertible Senior Notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry with similar credit ratings and with similar maturity, the Company estimated the implied interest rate of its Convertible Senior Notes to be 6.9%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, which were defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Convertible Senior Notes, which resulted in a fair value of the liability component of$141.9 million upon issuance, calculated as the present value of implied future payments based on the$172.5 million aggregate principal amount. The$30.7 million difference between the cash proceeds of$172.5 million and the estimated fair value of the liability component was recorded in additional paid-in capital, net of tax and issuance costs, as the Convertible Senior Notes were not considered redeemable. 62 -------------------------------------------------------------------------------- During the fourth quarter of 2019, the last reported sales price of the Company's common stock was greater than 130% of the Convertible Senior Notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end. Consequently, the Convertible Senior Notes were convertible as ofDecember 31, 2019 . If the Convertible Senior Notes were converted as ofDecember 31, 2019 , the if-converted amount would exceed the principal by$0.4 million . The Convertible Senior Notes may be settled at the Company's option in cash or a combination of cash and shares of common stock. During the year endedDecember 31, 2019 , the Company entered into separate, privately negotiated exchange agreements with certain holders of the notes. To measure the resulting loss as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation. The following table summarizes information about the settlement of the Convertible Senior Notes (in thousands): Year ended December 31, 2019 Principal amount settled $ 45,372 Number of shares of common stock issued 1,497 Loss on extinguishment of debt $ 748
The following table summarizes information about the equity and liability components of the Convertible Senior Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices:
December 31, 2019
2018
Principal amount of Convertible Senior Notes outstanding
58,503
Unamortized discount of liability component (415 ) (3,637 ) Unamortized deferred issuance costs (55 ) (487 ) Net carrying amount of liability component 12,661
54,379
Carrying value of equity component, net of issuance costs
$ 2,265 $
10,092
Fair value of outstanding Convertible Senior Notes
85,999
Remaining amortization period of discount on the liability component 1 year 2 years Credit Agreement OnAugust 31, 2018 , the Company entered into an Amended and Restated Credit Agreement (the "Credit Agreement") which provides the Company with a$175.0 million Revolving Credit Facility. The Company repaid$53.2 million in principal during the year endedDecember 31, 2019 and no balance remained outstanding as ofDecember 31, 2019 . The Credit Agreement has a term of five years and matures onAugust 31, 2023 . Loans will bear interest at a rate equal to (i) the London Interbank Offered Rate ("LIBOR") plus the "applicable rate" or (ii) the "base rate" (defined as the highest of (a) theBank of America prime rate, (b) the Federal Funds rate plus one-half of one percent and (c) LIBOR plus one percent) plus the "applicable rate." The applicable rate is determined in accordance with a pricing grid based on the Company's Consolidated Leverage Ratio (as defined in the Credit Agreement) ranging from 1.75% to 2.50% per annum for LIBOR rate loans and from 0.75% to 1.50% per annum for base rate loans. In addition, the Company pays a commitment fee on the unused portion of the Credit Agreement based on the Company's Consolidated Leverage Ratio ranging from 0.15% to 0.30% per annum. The Credit Agreement is guaranteed by certain material domestic subsidiaries of the Company (the "Guarantors") and is secured by liens on substantially all of the assets of the Company and the Guarantors, excluding real property and certain other types of excluded assets, and contains affirmative and negative covenants that are customary for credit agreements of this nature. The negative covenants include, among other things, limitations on asset sales, mergers, indebtedness, liens, dividends and other distributions, investments and transactions with affiliates. The Credit Agreement contains two financial covenants: (i) maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) as of the last day of each fiscal quarter of 3.50 to 1.00, which ratio may be increased to 4.50 to 1.00 in case of certain qualifying acquisitions; and (ii) a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25 to 1.00 as of the end of any fiscal quarter for the most recently completed four fiscal quarters. The Company was in compliance with all financial covenants as ofDecember 31, 2019 . 63 -------------------------------------------------------------------------------- Interest expense recognized on the Credit Agreement including amortization of deferred issuance cost was$1.7 million and$6.5 million , respectively, for the years endedDecember 31, 2019 and 2018. Note 4. Income Taxes Significant components of the provision (benefit) for income taxes are as follows (in thousands): December 31, 2019 2018 2017 Current: Federal$ 1,559 $ -$ (615 ) State 746 755 314 Foreign 2,007 6,575 57
Total current provision (benefit) 4,312 7,330 (244 ) Deferred: Federal
1,234 (9,970 ) 131
State (1,186 ) (7,944 ) 238
Foreign (103 ) (215 ) 4
Total deferred (benefit) provision (55 ) (18,129 ) 373
Provision (benefit) for income taxes
The Company's income (loss) before income taxes was subject to taxes in the following jurisdictions for the following periods (in thousands):
December 31,
2019 2018 2017
United States $ 70,606 $ 46,592 $ (8,198 )
Foreign 6,572 16,792 162
Income (loss) before income taxes
64
-------------------------------------------------------------------------------- Significant components of the Company's deferred tax assets and deferred tax liabilities as ofDecember 31, 2019 and 2018 are shown below (in thousands): December 31, 2019 2018 Deferred tax assets: Lease liability$ 22,009 $ - Net operating loss carryforwards 591 711 Intangible assets 3,951 3,502 Sale-leaseback, net 593 617 Allowance for returns and discounts 5,266 4,541 Stock-based compensation 5,197 5,333 Tax credit carryforwards 13,846 12,246 Other, net 5,426 6,883 Total deferred tax assets 56,879 33,833 Valuation allowance for deferred tax assets (2,353 ) (1,830 ) Total deferred tax assets, net of valuation allowance 54,526 32,003 Deferred tax liabilities: Convertible Senior Notes - (636 ) Right-of-use assets (20,334 ) - Intangible assets (1,633 ) (2,165 ) Property, plant and equipment (8,057 ) (7,010 ) Total deferred tax liabilities (30,024 ) (9,811 ) Net deferred tax assets$ 24,502 $ 22,192 Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. For the three years endedDecember 31, 2019 , the Company has demonstrated positive cumulative pre-tax book income. Such objective positive evidence allowed the Company to consider other subjective evidence, such as the Company's projections for future profitability, to determine the realizability of its deferred tax assets. On the basis of this evaluation, during the quarter endedDecember 31, 2019 , the Company increased the valuation allowance by$0.5 million related to theU.S. Foreign Tax Credit, which is shown as a deferred detriment during the period. The valuation allowance of$2.4 million as ofDecember 31, 2019 represents the portion of the deferred tax asset that management could not conclude was more likely than not to be realized. The amount of the deferred tax assets considered realizable could be adjusted in the future based on changes in available positive and negative evidence. As ofDecember 31, 2019 , the Company had no federal net operating loss ("NOL") carryforwards. The Company had state NOLs of approximately$31.3 million which will begin to expire in 2029 unless previously utilized. The Company has federal research credits of$3.8 million which will begin to expire onDecember 31, 2032 unless previously utilized. The Company has federal foreign tax credits of$2.4 million which will begin to expire onDecember 31, 2028 unless previously utilized. The Company has state research credits of$14.7 million , of which$14.2 million do not expire. The remaining$0.5 million will begin to expire in 2028 unless previously utilized. Pursuant to Internal Revenue Code Sections 382 and 383, the Company's use of its NOL and tax credit carryforwards may be limited as a result of cumulative changes in ownership of more than 50% over a three-year period. As ofDecember 31, 2019 , the Company does not believe any historical ownership change has limited the use of its NOLs or tax credit carryforwards. 65 -------------------------------------------------------------------------------- The reconciliation of income tax computed at the federal statutory rate to the provision (benefit) for income taxes from continuing operations is as follows (in thousands): Year ended December 31, 2019 2018 2017 Tax expense (benefit) at statutory tax rate$ 16,207 $ 13,311 $ (2,812 ) State tax (benefits), net of federal tax 1,061 1,526 (239 ) Permanent differences 611 635
327
Federal and state research credits-current year (4,269 ) (3,628 ) (484 ) Accrual of uncertain tax positions - -
142
Stock-based compensation (10,408 ) (9,286 ) (5,851 ) Impact of change in federal and state tax rate on revaluing deferred tax assets - -
3,357
Change in valuation allowance 523 (13,374 )
5,799
Foreign Derived Intangible Income Deduction (FDII) (159 ) (786 ) - Other 691 803 (110 ) Provision (benefit) for income taxes$ 4,257 $ (10,799 )
OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Tax Act") was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute theirU.S corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning afterDecember 31, 2017 , implementing a territorial tax system, and requiring a mandatory one-time tax onU.S. owned undistributed foreign earnings and profits known as the transition tax. Pursuant to theSEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), a company may select between one of three scenarios to determine a reasonable estimate arising from the Tax Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the provisional revaluation of deferred taxes and the effects of the transition tax on undistributed foreign earnings and profits for the period endedDecember 31, 2017 . During the quarter endedDecember 31, 2018 , the Company completed its accounting for the impacts of the Tax Act. Additionally, the Company has elected to treat global intangible low taxed income (GILTI) as a period cost and will expense GILTI in the period it is incurred. Because of the Company's current operational structure, there is minimal expected GILTI impacts for the year endedDecember 31, 2019 and future years. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes. The following table summarizes the activity related to the Company's unrecognized tax benefits (in thousands): Year ended December 31, 2019 2018 2017 Beginning balance$ 15,245 $ 9,565 $ 8,604 Increases (decreases) related to prior year tax positions 287 (558 ) 10 Increases related to current year tax positions 2,209 6,238
951
Expiration of the statute of limitations for the assessment of taxes (505 ) - - Ending balance$ 17,236 $ 15,245 $ 9,565 66
-------------------------------------------------------------------------------- As ofDecember 31, 2019 , 2018 and 2017, the Company had unrecognized tax benefits of$17.2 million ,$15.2 million , and$9.6 million respectively, of which$11.1 million and$9.3 million and$8.1 million , respectively, would reduce the Company's annual effective tax rate. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company's policy is to recognize the interest expense and penalties related to income tax matters as a component of the income tax expense. The Company has accrued approximately$0.4 million of interest and penalties associated with uncertain tax positions as ofDecember 31, 2019 and$0.3 million for both of the years endedDecember 31, 2018 and 2017. Interest expense, net of accrued interest (reversed), was approximately$0.1 million for the years endedDecember 31, 2019 , 2018 and 2017. The Company is subject to periodic audits by domestic and foreign tax authorities. The Company is currently under audit with theState of Texas . Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2012 and forward and state tax years 2001 and forward are subject to examination by tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. Note 5. Stockholders' Equity Preferred Stock. The Company's certificate of incorporation, as amended, authorizes the issuance of up to 5 million preferred shares. The Board of Directors is authorized to fix the number of shares of any series of preferred stock and to determine the designation of such shares. However, the amended certificate of incorporation specifies the initial series and the rights of that series. No shares of preferred stock were outstanding as ofDecember 31, 2019 , 2018 or 2017. Equity Incentive Plan. The Company grants stock options, RSUs and PSUs to employees and non-employee directors under its 2018 Equity Incentive Plan (the "2018 Plan"). The Company previously granted stock options under its 2016 Equity Incentive Plan (the "2016 Plan"), Amended and Restated 2010 Equity Incentive Plan (the "2010 Plan") and the Amended and Restated 2001 Equity Incentive Plan (the "2001 Plan"). The 2016 Plan, 2010 Plan and 2001 Plan were terminated at the time of adoption of the 2018 Plan, but the terminated Plans continue to govern outstanding options granted thereunder. The Company has stock options, RSUs and PSUs outstanding, which were issued under each of these equity incentive plans to certain employees and directors. Stock options granted under these plans have terms ranging up to ten years, have exercise prices ranging from$13.25 to$60.75 per share, and generally vest over four years. As ofDecember 31, 2019 , approximately 2.6 million shares remained available for grant and 4.3 million shares of common stock were reserved for future issuance under the 2018 Plan. Restricted Stock Units. The Company grants both RSUs and PSUs to certain officers, directors and management. Until the restrictions lapse, ownership of the affected restricted stock units granted to the Company's officers, directors and management is conditional upon continuous employment with the Company. For the years endedDecember 31, 2019 , 2018 and 2017, the Company granted approximately 0.3 million, 0.2 million and 0.3 million shares, respectively, of RSUs to Board of Directors, officers and management, which either have a time-based four-year vesting provision or performance-based vesting provisions. During the years endedDecember 31, 2019 and 2018, RSUs were granted to certain members of the Board of Directors in lieu of cash compensation as a part of the Company's non-employee director's deferred compensation program. During the year endedDecember 31, 2017 , common stock was issued to certain members of the Board of Directors in lieu of cash compensation for these members that elected to participate and agree to hold the stock for the elected deferral period. The compensation expense associated with these RSU grants were$0.5 million ,$0.4 million and$0.1 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Employee Deferred Bonus Compensation Program. For the years endedDecember 31, 2019 and 2018, certain employees of the Company were eligible to participate in the Company's deferred bonus compensation program with respect to any payments received under the Company's cash incentive plan. Participating employees could elect to receive 50% or 100% of the cash value of their cash bonus in the form of fully vested RSUs plus an additional premium as additional RSUs, issued under the 2018 Plan. The premium RSUs are subject to a one-year vesting requirement from the date of issuance. The additional premium will be determined based on the length of time of the deferral period selected by the participating employee as follows: (i) if one year from the date of grant, a premium of 10% on the amount deferred, (ii) if two years from the date of grant, a premium of 20% on the amount deferred, or (iii) if four years from the date of grant, a premium of 30% on the amount deferred. 67 -------------------------------------------------------------------------------- Employee Stock Purchase Plan. Under the Company's Amended and Restated 1983 Employee Stock Purchase Plan (the "ESPP"), full-time employees are allowed to purchase common stock through payroll deductions (which cannot exceed 10% of the employee's compensation) at the lower of 85% of fair market value at the beginning or end of each six-month purchase period. As ofDecember 31, 2019 , 136,543 shares remained available for future issuance. Share Repurchase Program. OnDecember 12, 2018 , the Board of Directors authorized a stock repurchase program pursuant to which up to$50.0 million of the Company's shares of common stock may be purchased throughDecember 12, 2020 . There were no repurchases during 2018 and 2019 and atDecember 31, 2019 ,$50.0 million remained available under the new repurchase program. Note 6. Stock-Based Compensation Stock-based compensation expense was as follows (in thousands): Year ended December 31, 2019 2018 2017 Cost of sales$ 1,162 $ 763 $ 579 Research and development 2,332 2,266 1,886 Sales and marketing 3,497 2,843 2,129 General and administrative 6,261 5,837 4,467
Total stock-based compensation expense
For the years endedDecember 31, 2019 , 2018 and 2017, the Company recorded$1.4 million ,$1.6 million and$0.1 million in stock-based compensation expense, respectively, associated with the deferred bonus compensation program, described in Note 5. During the years endedDecember 31, 2019 and 2018,$0.8 million and$1.6 million , respectively, was initially recorded as a component of accrued payroll and related expenses. Stock-based compensation expense capitalized to inventory and compensation expense related to the Company's ESPP were not material for the years endedDecember 31, 2019 , 2018 and 2017. Stock Options Compensation expense related to stock options granted is recognized ratably over the service vesting period for the entire option award. The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions: Year ended December 31, 2019 2018 2017 Risk-free interest rate 2.51 % 2.49 % 2.30 % Expected option life (in years) 5.68 6.29 6.63 Volatility rate 39 % 36 % 36 % Dividend rate 0 % 0 % 0 % The computation of the expected option life is based on a weighted-average calculation combining the average life of options that have already been exercised and post-vest cancellations with the estimated life of the remaining vested and unexercised options. The expected volatility is based on the historical volatility of the Company's stock. The risk-free interest rate is based on theU.S. Treasury yield curve over the expected term of the option. The Company has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company's estimated forfeiture rate is based on its historical experience and future expectations. The Company's determination of fair value is affected by the Company's stock price as well as a number of assumptions that require judgment. The weighted-average fair value per share was$23.67 ,$18.76 and$8.99 for options granted during the years endedDecember 31, 2019 , 2018 and 2017, respectively. The total intrinsic value was$49.8 million ,$38.2 million and$26.8 million for options exercised during the years endedDecember 31, 2019 , 2018 and 2017, respectively. As ofDecember 31, 2019 , total unrecognized compensation expense related to stock options was approximately$5.2 million and the 68 -------------------------------------------------------------------------------- related weighted-average period over which it is expected to be recognized is approximately 1.7 years. The maximum contractual term of the Company's stock options is ten years. A summary of the status of stock option activity for the years endedDecember 31, 2017 , 2018 and 2019 is as follows (in thousands, except price data and years): Weighted- Weighted- average exercise average remaining Aggregate Number price per
contractual intrinsic
of Shares share term (in years) value
Outstanding at January 1, 2017 3,941 $ 17.49
Granted 263 22.21
Exercised (1,527 ) 16.38
Forfeited (18 ) 24.91
Outstanding at December 31, 2017 2,659 18.54
Granted 159 46.50
Exercised (891 ) 17.07
Forfeited (50 ) 21.19
Outstanding at December 31, 2018 1,877 21.53
Granted 169 59.18
Exercised (1,091 ) 19.22
Forfeited (11 ) 49.71
Outstanding at December 31, 2019 944 $ 30.63 6.77 $ 41,185
Vested and expected to vest at
December 31, 2019 919 $ 30.12 6.73 $ 40,560
Exercisable at December 31, 2019 388 $ 20.12 5.41 $ 21,030
Restricted Stock Units
A summary of the status of restricted stock unit activity for the years ended
December 31, 2017 , 2018 and 2019 is as follows (in thousands, except price
data):
Weighted-average
grant date
Shares fair value
Non-vested at January 1, 2017 501 $ 20.37
Granted 349 22.34
Vested (100 ) 23.49
Forfeited (4 ) 18.69
Non-vested at December 31, 2017 746 20.88
Granted 242 49.97
Vested (296 ) 21.70
Forfeited (16 ) 28.40
Non-vested at December 31, 2018 676 30.75
Granted 279 59.75
Vested (148 ) 24.26
Forfeited (21 ) 43.90
Non-vested at December 31, 2019 786 $ 41.88
The total amount of unrecognized compensation expense related to non-vested
restricted stock units as of
69
--------------------------------------------------------------------------------
Note 7. Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed by dividing net income
(loss) by the weighted-average number of common shares outstanding. Diluted EPS
is computed based on the sum of the weighted average number of common shares and
potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares consist of shares issuable from stock options, unvested
RSUs and the 3.25% Convertible Senior Notes. Potentially dilutive common shares
from outstanding stock options and unvested RSUs are determined using the
average share price for each period under the treasury stock method. Potentially
dilutive shares from the Convertible Senior Notes are determined using the
if-converted method. Under the provisions of the if-converted method, the
Convertible Senior Notes are assumed to be converted and the resulting commons
shares are included in the denominator of the EPS calculation and the interest
expense, net of tax, recorded in connection with the Convertible Senior Notes is
added back to net income.
The Convertible Senior Notes have a dilutive impact when the average market
price of the Company's common stock exceeds the applicable conversion price of
the notes. The Convertible Senior Notes became convertible on March 31, 2018 and
remained convertible through December 31, 2019 .
The following table reconciles net income (loss) and the weighted-average shares
used in computing basic and diluted earnings per share in the respective periods
(in thousands):
Year ended December 31,
2019 2018 2017
Numerator:
Net income (loss) used for basic earnings per share
1,848 4,927 -
Net income (loss) used for diluted earnings per
share, if-converted method $ 74,769 $ 79,110 Basic weighted-average common shares outstanding 40,860 37,995
33,734
Potentially dilutive shares issuable from Convertible Senior Notes
1,062 2,850 -
Potentially dilutive shares issuable from stock
options and unvested RSUs 1,189 1,709 -
Diluted weighted-average common shares outstanding, if-converted
43,111 42,554 33,734
Potentially dilutive shares excluded from calculation due to anti-dilutive effect 199 161 37 Potentially dilutive shares excluded from the calculation above represent stock options when the combined exercise price and unrecognized stock-based compensation are greater than the average market price for the Company's common stock because their effect is anti-dilutive. The number of potentially dilutive shares issuable under the Convertible Senior Notes that would have been included in the diluted EPS calculation if the Company had earnings amounted to 1.4 million for the year endedDecember 31, 2017 . Stock options and RSUs that would have been included in the diluted EPS calculation if the Company had earnings amounted to 1.4 million for the year endedDecember 31, 2017 . Note 8. Commitments and Contingencies Leases We lease administrative, research and development, sales and marketing and manufacturing facilities and certain equipment under various non-cancelable lease agreements. Facility leases generally provide for periodic rent increases, and may contain clauses for rent escalation, renewal options or early termination. 70 --------------------------------------------------------------------------------
The components of lease expense and supplemental cash flow information related to leases were as follows (in thousands):
Year ended December
31,
2019
Finance lease ROU asset amortization $ 314
Finance lease interest expense 835 Total finance lease costs 1,149 Operating lease costs 10,130 Total lease costs $ 11,279
Cash paid for amounts included in the measurement of operating lease liabilities Operating cash flows from operating leases
$ 9,385
Operating cash flows from finance leases $
835
ROU assets obtained in exchange for new lease liabilities Operating leases $ 12,231 Finance leases $ 1,369 The Company leases its facilities and certain equipment. Commitments for minimum rentals under non-cancelable leases at the end of 2019 are as follows (dollars in thousands): Years ending December 31, Operating Finance 2020$ 10,603 $ 1,264 2021 10,812 1,272 2022 9,836 1,282 2023 9,458 1,293 2024 9,446 1,106 Thereafter 80,300 2,097 Total lease payments 130,455 8,314 Less: imputed interest (30,816 ) (3,465 ) Total 99,639 4,849 Less: current portion (6,412 ) (474 ) Non-current portion$ 93,227 $ 4,375
Weighted average remaining lease term 12.2 years 5.6 years Weighted average discount rate
4 % 18 %
71--------------------------------------------------------------------------------Summers Ridge Lease - The Company leased two of the four buildings that are located on the Summers Ridge Property inSan Diego, California with an initial term of 15 years beginning as ofJanuary 2018 with options to extend the lease for two additional five-year terms upon satisfaction of certain conditions, which have not been included in the determination of the lease term. The lease is subject to must-take provisions related to two additional buildings, which will have the same lease term as the buildings originally leased. The lease for one building commenced during the year endedDecember 31, 2019 , at which time the Company relocated its headquarters into the facility. The remaining building is subject to the expiration of the lease with its current tenant for which the expiration date is not yet known. As a result of the relocation of its headquarters, the Company recorded an impairment charge of$1.5 million during the year endedDecember 31, 2019 related to the ROU asset and leasehold improvements for the existing headquarters facility. Such impairment loss was measured using discounted cash flows and available market data and recorded within acquisition and integration costs in the accompanying Consolidated Statements of Operations. The company entered into an agreement to sublease its former headquarters building inJanuary 2020 , with minimum rent of$2.5 million under the sublease agreement.McKellar Lease - During 1999, the Company completed a sale and leaseback transaction of itsSan Diego facility at McKellar Court to a partnership for which the Company is a 25% limited partner. The partnership is deemed to be a variable interest entity (VIE). The Company is not, however, the primary beneficiary of the VIE as it does not have the power to direct the activities of the partnership and does not have the obligation to absorb losses or receive benefits of the partnership that could potentially be significant to the partnership. The McKellar Court lease ends inDecember 2020 and contains options to extend the lease for three additional five-year periods, of which one five-year period is included in the determination of the term. The Company made lease payments to the partnership of approximately$1.0 million for the year endedDecember 31, 2019 and$0.9 million for each of the years endedDecember 31, 2018 and 2017, respectively. Purchase Commitments The Company has$15.1 million in firm inventory purchase commitments as ofDecember 31, 2019 , the majority of which will be purchased within the next twelve months. Litigation and Other Legal ProceedingsIn Beckman Coulter Inc. v.Quidel Corporation , which was filed in theSuperior Court for the County of San Diego, California , onNovember 27, 2017 , Beckman Coulter ("Beckman") alleges that a provision of an agreement between Quidel and Beckman violates state antitrust laws. Our acquisition of the B-type Naturietic Peptide assay business ("BNP Business") consisted of assets and liabilities relating to a contractual arrangement with Beckman (the "Beckman Agreement") for the supply of antibodies and other inputs related to, and distribution of, the Triage® BNP Test for the Beckman Coulter Access Family of Immunoassay Systems. The Beckman Agreement further provides that Beckman, for a specified period, cannot research, develop, manufacture or sell an assay for use in the diagnosis of cardiac diseases that measures or detects the presence or absence of BNP or NT-pro-BNP (a related biomarker) (the "Exclusivity Provision"). In the lawsuit, Beckman asserts that this provision violates certain state antitrust laws and is unenforceable. Beckman contends that it has suffered damages due to this provision and seeks a declaration that this provision is void. OnDecember 7, 2018 , the trial court granted a motion by Beckman for summary adjudication, holding that the Exclusivity Provision is void underCalifornia law (the "December 7 Order"). OnDecember 18, 2018 , the trial court stayed the effect of theDecember 7 Order pending a decision on a writ petition Quidel intended to file with theCourt of Appeal . Quidel filed its writ petition onJanuary 18, 2019 , asking theCourt of Appeal to review and reverse theDecember 7 Order. OnFebruary 7, 2019 , the trial court stayed all the remaining litigation pending the outcome of the writ petition and vacated all deadlines in the case. OnMarch 14, 2019 , theCourt of Appeal issued an order to show cause why the relief sought in Quidel's petition should not be granted. The Court also stayed theDecember 7 Order pending a further order from theCourt of Appeal . OnAugust 29, 2019 , theCourt of Appeal issued a written decision ruling in Quidel's favor and overturning theDecember 7 Order. Beckman challenged theCourt of Appeal's ruling with a petition for rehearing onSeptember 10, 2019 , which was denied onSeptember 13, 2019 . OnOctober 1, 2019 , Beckman filed a petition for review of theCourt of Appeal's ruling with theSupreme Court of California (the "Supreme Court "). We subsequently filed an answer to Beckman's petition, Beckman filed a response to our reply and onNovember 13, 2019 , the Supreme Court granted review of theCourt of Appeal ruling, with further action in this matter being deferred pending consideration and disposition of a related issue in Ixchel Pharma v. Biogen, or pending further order of the Supreme Court. OnNovember 22, 2019 , the trial court continued the stay at the trial court level and scheduled a status conference for 72 --------------------------------------------------------------------------------December 11, 2020 . Quidel denies that the Exclusivity Provision is unlawful, denies any liability with respect to this matter, and intends to vigorously defend itself. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter, some of which are subject to review by the Supreme Court; and (3) discovery is ongoing. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity. From time to time, the Company is involved in other litigation and proceedings, including matters related to product liability claims, commercial disputes and intellectual property claims, as well as regulatory, employment, and other claims related to our business. The Company accrues for legal claims when, and to the extent that, amounts associated with the claims become probable and are reasonably estimable. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. No accrual has been recorded as ofDecember 31, 2019 andDecember 31, 2018 related to such matters as they are not probable and/or reasonably estimable. Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. However, the resolution of, or increase in any accruals for, one or more matters may have a material adverse effect on the Company's results of operations and cash flows. The Company also maintains insurance, including coverage for product liability claims, in amounts that management believes are appropriate given the nature of its business. Licensing Arrangements The Company has entered into various licensing and royalty agreements, which largely require payments by the Company based on specified product sales as well as the achievement of specified milestones. The Company had royalty and license expenses relating to those agreements of approximately$1.1 million ,$0.4 million and$0.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Note 9. Industry and Geographic InformationThe Company operates in one reportable segment. Sales to customers outside theU.S. represented 33%, 32% and 18% of total revenue for the years endedDecember 31, 2019 , 2018 and 2017, respectively, of which sales to customers inChina comprised 13%, 10% and 1%, respectively. As ofDecember 31, 2019 and 2018, balances due from foreign customers were$23.0 million and$23.4 million , respectively. For the years endedDecember 31, 2019 , 2018 and 2017, sales of our influenza products accounted for 26%, 24%, and 39% respectively, of total revenue.
The Company had sales to individual customers in excess of 10% of total revenue, as follows:
Year ended December 31,
2019 2018 2017
Customer:
A 18 % 19 % 20 %
B 15 % 13 % 13 %
C 13 % 12 % 21 %
46 % 44 % 54 %
As of December 31, 2019 and 2018, accounts receivable from individual customers
with balances due in excess of 10% of total accounts receivable totaled $67.4
million and $33.3 million , respectively.
73
--------------------------------------------------------------------------------The following presents long-lived assets (excluding intangible assets) and total net revenue by geographic territory (in thousands):
Total revenue
Long-lived assets as of December 31, for the years ended December 31,
2019 2018 2019 2018 2017
Domestic $ 78,254 $ 72,569 $ 358,381 $ 354,895 $ 227,611
Foreign 1,508 1,332 176,509 167,390 50,132
Total $ 79,762 $ 73,901 $ 534,890 $ 522,285 $ 277,743
Consolidated net revenues by product category are as follows (in thousands):
Year ended December 31,
2019 2018 2017
Rapid Immunoassay $ 191,736 $ 183,160 $ 165,099
Cardiac Immunoassay 266,505 266,524 47,030Specialized Diagnostic Solutions 54,933 53,243 51,978 Molecular Diagnostic Solutions 21,716 19,358 13,636 Total revenues
$ 534,890 $ 522,285 $ 277,743
Note 10. Fair Value Measurement The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods (in thousands):
December 31, 2019 December 31, 2018
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets:
Derivative assets $ - $ 321 $ - $ 321 $ - $ - $ - $ -
Total assets
measured at fair
value $ - $ 321 $ - $ 321 $ - $ - $ - $ -
Liabilities:
Derivative
liabilities $ - $ 433 $ - $ 433 $ - $ - $ - $ -
Contingent
consideration - - 16,535 16,535 - - 19,112 19,112
Deferred
consideration - 151,382 - 151,382 - 187,158 - 187,158
Total liabilities
measured at fair
value $ - $ 151,815 $ 16,535 $ 168,350 $ - $ 187,158 $ 19,112 $ 206,270
There were no transfers of assets or liabilities between Level 1, Level 2 and
Level 3 categories of the fair value hierarchy during the years ended
December 31, 2019 and 2018.
Derivative financial instruments are based on observable inputs that are
corroborated by market data. Observable inputs include broker quotes and daily
market foreign currency rates and forward pricing curves.
In connection with the acquisition of the BNP Business, the Company pays annual
installments of $40.0 million each in deferred consideration through April 2023
and up to $8.0 million each in contingent consideration through April 2022 . The
fair value of the deferred consideration is calculated based on the net present
value of cash payments using an estimated borrowing rate based on a quoted price
for a similar liability. The fair value of contingent consideration is
calculated using a discounted probability weighted valuation model. Significant
assumptions used in the measurement include revenue projections and discount
rates that are not observed in the market and thus represent Level 3
measurements.
The Company assesses the fair value of contingent consideration to be settled in
cash related to these prior acquisitions using a discounted revenue model.
Significant assumptions used in the measurement include revenue projections and
discount rates. This fair value measurement of contingent consideration is based
on significant inputs not observed in the market and
74
--------------------------------------------------------------------------------
thus represent Level 3 measurements. The changes in fair value of the contingent
considerations during the years ended 2019, 2018 and 2017 were due to changes in
the estimated payments and discounting periods.
Changes in estimated fair value of contingent consideration liabilities from
Contingent consideration
liability
(Level 3 measurement)
Balance at December 31, 2016 $ 5,175
Cash payments (498 )
Change in estimated fair value, recorded in cost of sales (81 )
Additional liability recorded for the BNP Business 19,700
Unrealized loss on foreign currency translation 5 Balance at December 31, 2017 24,301 Cash payments (6,303 ) Change in estimated fair value, recorded in general and administrative expenses 1,114 Balance at December 31, 2018 19,112 Cash payments (4,044 ) Change in estimated fair value recorded in general and administrative expenses 1,467 Balance at December 31, 2019 $ 16,535 Note 11. Employee Benefit Plan The Company has a defined contribution 401(k) plan (the "401(k) Plan") covering all employees who are eligible to join the 401(k) Plan upon employment. Employee contributions are subject to a maximum limit by federal law. This Plan includes an employer match of 50% on the first 6% of pay contributed by the employee. The Company contributed approximately$2.5 million ,$2.6 million and$1.5 million to the 401(k) Plan during the years endedDecember 31, 2019 , 2018 and 2017, respectively. Note 12. Derivatives and Hedging In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses designated cash flow hedges in the form of foreign currency forward contracts to mitigate the impact of foreign currency translation on transactions that are denominated primarily in the Euro and the Chinese Yuan. All hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions are formally documented. The Company does not use any derivative financial instruments for trading or other speculative purposes. Such forward foreign currency contracts are carried at fair value in prepaid expenses and other current assets or other current liabilities depending on the unrealized gain or loss position of the hedged contract as of the balance sheet date. Changes in the value of the derivatives are recorded to other comprehensive income (loss) until the underlying hedged item is recognized in earnings, or the derivative no longer qualifies as a highly effective hedge. The cash flows from derivatives treated as hedges are classified in the Consolidated Statements of Cash Flows in the same category as the item being hedged. The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current currency exchange rates at each respective date. We generally enter into master netting arrangements, which reduces credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their net fair values. We did not have any derivative instruments with credit-risk related contingent features that would require us to post collateral. 75 --------------------------------------------------------------------------------
The following table summarizes the fair value and notional amounts of the
foreign currency forward contracts as of
December 31, 2019 Notional Amount Fair Value,
Net
Prepaid expenses and other current assets$ 27,944 $ 321 Other current liabilities$ 6,219 $ 433
Note 13. Selected Quarterly Financial Data (unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
(in thousands, except per share data)
2019
Total revenues $ 147,968 $ 108,252 $ 126,492 $ 152,178
Gross profit $ 90,927 $ 59,179 $ 75,859 $ 94,840
Operating income $ 31,153 $ 5,818 $ 20,682 $ 35,063
Net income $ 24,844 $ 1,270 $ 16,181 $ 30,626
Basic income per share $ 0.63 $ 0.03 $ 0.39 $ 0.73
Diluted income per share $ 0.60 $ 0.03 $ 0.38 $ 0.71
2018
Total revenues $ 169,143 $ 103,155 $ 117,399 $ 132,588
Gross profit $ 106,271 $ 57,668 $ 69,642 $ 82,132
Operating income $ 51,093 $ 404 $ 16,894 $ 27,538
Net income (loss) $ 33,958 $ (3,076 ) $ 10,822 $ 32,479
Basic income (loss) per share $ 0.96 $ (0.08 ) $ 0.28 $ 0.82
Diluted income (loss) per share $ 0.86
0.27 $ 0.78
76
--------------------------------------------------------------------------------
© Edgar Online, source
