QUIDELORTHO CORPORATION In this Quarterly Report, all references to "we," "our" and "us" refer toQuidel Corporation and its subsidiaries. Future Uncertainties and Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks, assumptions and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those that may be described or implied in the forward-looking statements. As such, no forward-looking statement can be guaranteed. Differences in actual results and performance may arise as a result of a number of factors including, without limitation: the impact of the novel virus (COVID-19) global pandemic; adverse changes in competitive conditions, the reimbursement system currently in place and future changes to that system, changes in economic conditions in our domestic and international markets, lower than anticipated market penetration of our products, our reliance on sales of our influenza and other respiratory or novel virus diagnostic tests, fluctuations in our operating results resulting from the timing of the onset, length and severity of cold and flu seasons, seasonality, government and media attention focused on influenza and other respiratory or novel viruses and the related potential impact on humans from such viruses, the quantity of our product in our distributors' inventory or distribution channels, changes in the buying patterns of our distributors, and changes in the healthcare market and consolidation of our customer base; our development, acquisition and protection of proprietary technology rights; our development of new technologies, products and markets; our reliance on a limited number of key distributors; our exposure to claims and litigation that could result in significant expenses and could ultimately result in an unfavorable outcome for us, including the ongoing litigation between us andBeckman Coulter, Inc. ; intellectual property risks, including but not limited to, infringement litigation; our need for additional funds to finance our capital or operating needs; the financial soundness of our customers and suppliers; acceptance of our products among physicians and other healthcare providers; competition with other providers of diagnostic products; failures or delays in receipt of new product reviews or related to currently-marketed products by theU.S. Food and Drug Administration (the "FDA") or other regulatory authorities or loss of any previously received regulatory approvals or clearances or other adverse actions by regulatory authorities; changes in government policies; costs of and adverse operational impact from failure to comply with government regulations in addition to FDA regulations; compliance with government regulations relating to the handling, storage and disposal of hazardous substances; third-party reimbursement policies and potential cost constraints; our failure to comply with laws and regulations relating to billing and payment for healthcare services; our ability to meet demand for our products; interruptions in our supply of raw materials; product defects; business risks not covered by insurance; costs and disruptions from failures in our information technology and storage systems; our exposure to data corruption, cyber-based attacks, security breaches and privacy violations; competition for and loss of management and key personnel; international risks, including but not limited to, compliance with product registration requirements, compliance with legal requirements, tariffs, exposure to currency exchange fluctuations and foreign currency exchange risk, longer payment cycles, lower selling prices and greater difficulty in collecting accounts receivable, reduced protection of intellectual property rights, social, political and economic instability, increased financial accounting and reporting burdens and complexities, taxes, and diversion of lower priced international products intoU.S. markets; changes in tax rates and exposure to additional tax liabilities or assessments; risks relating to our acquisition and integration of the Triage MeterPro Cardiovascular and toxicology business and B-type Naturietic Peptide assay business (the "Triage and BNP Businesses"); that we may have to write off goodwill relating to our acquisitions; our ability to manage our growth strategy and identify and integrate acquired companies or technologies and our ability to obtain financing; the level of our indebtedness and deferred payment obligations; our ability to generate sufficient cash to meet our debt service and deferred and contingent payment obligations; that our Revolving Credit Facility is secured by substantially all of our assets; the agreements for our indebtedness place operating and financial restrictions on us and our ability to operate our business; that an event of default could trigger acceleration of our outstanding indebtedness; that we may incur additional indebtedness; increases in interest rate relating to our variable rate debt; dilution resulting from future sales of our equity; volatility in our stock price; provisions in our charter documents,Delaware law and the indenture governing our Convertible Senior Notes that might delay or impede stockholder actions with respect to business combinations or similar transactions; our intention of not paying dividends; and our ability to identify and successfully acquire and integrate potential acquisition targets. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "expect," "anticipate," "estimate," "plan," "intend," "goal," "project," "strategy," "future," and similar words, although some forward-looking statements are expressed differently. Forward-looking statements in this Quarterly Report include, among others, statements concerning: our outlook for the remainder of 2020 regarding our strategy, revenue growth, gross margins and earnings, including the sources of expected growth; that we expect to continue to make substantial expenditures for research and development activities; the nature and amount of projected capital expenditures for the remainder of 2020 and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; our strategy, goals, initiatives and objectives; our strategy, exposure to, and defenses against, claims and litigation, including the pending litigation with Beckman; the sufficiency of our liquidity and our short-term needs for capital; the sufficiency of our insurance coverage; that we may incur additional debt or issue additional equity; and our intention to continue to evaluate technology, product lines and acquisition and licensing opportunities. The risks described under "Risk Factors" in Item 1A Part II of this quarterly report on Form 10-Q and item 1A of our Annual Report on 17 -------------------------------------------------------------------------------- Form 10-K for the year endedDecember 31, 2019 , and elsewhere herein and in reports and registration statements that we file with theSecurities and Exchange Commission (the "SEC") from time to time, should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to publicly release the results of any revision or update of these forward-looking statements, whether as a result of new information, future events or otherwise. The following should be read in conjunction with the Consolidated Financial Statements and Notes thereto beginning on page 3 of this Quarterly Report. Overview 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 immunoassay, cardiometabolic immunoassay, 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. We operate in one business segment that develops, manufactures and markets our four product categories. Outlook We anticipate continued revenue growth during the remainder of 2020, including a favorable impact from the sale of testing products related to the COVID-19 pandemic, 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, including our most recent focus on the development of assays to address the COVID-19 pandemic. 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. Three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 Total Revenues The following table compares total revenues for the three months endedMarch 31, 2020 and 2019 (in thousands, except percentages): Three Months Ended March 31, Increase (Decrease) 2020 2019 $ % Rapid Immunoassay$ 95,930 $ 62,494 $ 33,436 54 % Cardiometabolic Immunoassay 53,901 65,872 (11,971) (18) % Specialized Diagnostic Solutions 16,459 13,854 2,605 19 % Molecular Diagnostic Solutions 8,363 5,748 2,615 45 % Total revenues$ 174,653 $ 147,968 $ 26,685 18 % For the three months endedMarch 31, 2020 , total revenue increased to$174.7 million from$148.0 million in the prior period. The Rapid Immunoassay category was the largest contributor to revenue growth, primarily resulting from respiratory products, bolstered by a strong respiratory season. Molecular products grew 45% over prior year, driven by continued revenue growth on the Solana platform as well as sales from our Lyra SARS-CoV-2 assay. The increase in Specialized Diagnostic Solutions was also driven by higher sales of respiratory products. The decrease in Cardiometabolic Immunoassay sales was driven mainly by lower demand resulting from the COVID-19 pandemic. Currency exchange rate impact for the quarter was unfavorable by$0.5 million , which had a minimal impact on the growth rate. 18 -------------------------------------------------------------------------------- Gross Profit Gross profit increased to$115.0 million , or 66% of revenue for the three months endedMarch 31, 2020 , compared to$90.9 million , or 61% of revenue for the three months endedMarch 31, 2019 . The increased gross profit was driven by higher sales volumes, favorable product mix, higher manufacturing overhead absorption and improved geographic mix. This was partially offset by increased incentives to our distribution channel partners associated with higher sales volumes in the quarter. Gross margin increased compared to the same period in the prior year due to higher manufacturing overhead absorption as well as favorable product and geographic mix. Operating Expenses The following table compares operating expenses for the three months endedMarch 31, 2020 and 2019 (in thousands, except percentages): Three Months Ended March 31, 2020 2019 Operating As a % of Operating As a % of Increase (Decrease) expenses total revenues expenses total revenues $ % Research and development$ 16,379 9 %$ 13,930 9 % $ 2,449 18 % Sales and marketing$ 30,738 18 %$ 29,589 20 % $ 1,149 4 % General and administrative$ 14,332 8 %$ 13,431 9 % $ 901 7 % Acquisition and integration costs$ 1,914 1 %$ 2,824 2 % $ (910) (32) % Research and Development Expense Research and development expense for the three months endedMarch 31, 2020 increased from$13.9 million to$16.4 million due primarily to higher employee-related costs, increased spending on clinical trials andSofia assay and next-generation platform development projects. 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. Sales and Marketing Expense Sales and marketing expense for the three months endedMarch 31, 2020 increased from$29.6 million to$30.7 million due primarily to higher employee-related costs driven by improved performance during the current quarter. General and Administrative Expense General and administrative expense for the three months endedMarch 31, 2020 increased from$13.4 million to$14.3 million compared with the prior year period primarily due to higher employee related costs driven by improved performance during the current quarter. Acquisition and Integration Costs Acquisition and integration costs of$1.9 million for the three months endedMarch 31, 2020 primarily related to the evaluation of new business development opportunities. Acquisition and integration costs of$2.8 million for the three months endedMarch 31, 2019 consisted primarily of global operation integration costs. Other Expense, Net Interest and other expense, net decreased from$4.6 million to$2.8 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 amortization of deferred financing costs associated with our Credit Agreement. The decrease in interest expense of$1.8 million over the prior year was primarily due to lower debt balances under the Company's Convertible Senior Notes, 19 -------------------------------------------------------------------------------- Revolving Credit Facility and lower accretion of interest as the total deferred consideration liability outstanding declined through 2019. See further discussion in Note 5 of the Notes to the Consolidated Financial Statements in this Quarterly Report. Income Taxes For the three months endedMarch 31, 2020 and 2019 respectively, the income tax expense was$8.6 million and$1.7 million . The higher tax expense for the three months endedMarch 31, 2020 compared to the same period in the prior year is a result of higher pre-tax profits partially offset by lower discrete tax benefits recorded in 2020 for excess tax benefits of stock-based compensation. Liquidity and Capital Resources As ofMarch 31, 2020 andDecember 31, 2019 , the principal sources of liquidity consisted of the following (in thousands): March 31, December 31, 2020 2019 Cash and cash equivalents$ 108,770 $ 52,775 Amount available to borrow under the Revolving Credit Facility$ 175,000 $ 175,000 Working capital including cash and cash equivalents$ 150,283 $ 96,336 Adjusted working capital (1)$ 163,060 $ 108,997 (1) The Convertible Senior Notes of$12.8 million and$12.7 million as ofMarch 31, 2020 andDecember 31, 2019 respectively are excluded from the adjusted working capital amount as such notes may be settled at the Company's option in cash or a combination of cash and shares of common stock. As ofMarch 31, 2020 , we had$108.8 million in cash and cash equivalents, a$56.0 million increase fromDecember 31, 2019 . Our cash requirements fluctuate as a result of numerous factors, such as cash generated 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. As such, we have not applied for and do not anticipate needing to apply for any loans under the Paycheck Protection Program (the "PPP"), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). 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. Our Convertible Senior Notes due in 2020 have a coupon rate of 3.25% and are convertible as ofMarch 31, 2020 . The principal balance outstanding as ofMarch 31, 2020 was$13.1 million . The Amended and Restated Credit Agreement provides us with a Revolving Credit Facility of$175.0 million and there is no balance outstanding as ofMarch 31, 2020 . The Revolving Credit Facility matures onAugust 31, 2023 . See Note 5 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for further discussion of the Convertible Senior Notes and the Revolving Credit Facility. 20
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As ofMarch 31, 2020 , we have$16.5 million in fair value of contingent consideration and$153.3 million of deferred consideration associated with acquisitions to be settled in future periods, of which$48.0 million is payable inApril 2020 . OnDecember 12, 2018 , the Company's 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 shares repurchased under such program during the three months endedMarch 31, 2020 . 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.
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