Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve material risks and uncertainties. This discussion should be read in conjunction with the section entitled “Future Uncertainties and Forward-Looking Statements” on page 4 and the “Risk Factors” starting on page 26 of this Annual Report. In addition, our discussion of QuidelOrtho’s financial condition and results of operation
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s in this Item 7 should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Annual Report.
Overview
Our vision is to advance diagnostics to power a healthier future. With our expertise in immunoassay and molecular testing, clinical chemistry and transfusion medicine, we aim to provide clarity to clinicians and patients to help create better health outcomes. Our global infrastructure and commercial reach support our customers across more than 130 countries and territories with quality diagnostics, a broad test portfolio and market-leading service. We operate globally with manufacturing facilities in the U.S. and U.K. and with sales centers, administrative offices and warehouses located throughout the world.
We manage our business geographically to better align with the market dynamics of the specific geographic regions in which we operate, with our reportable segments being North America, EMEA and China. Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” We generate our revenue primarily in the following business units: Labs, Transfusion Medicine, Point of Care and Molecular Diagnostics.
On May 27, 2022, pursuant to the BCA, Quidel and Ortho consummated the Combinations and each of Quidel and Ortho became a wholly owned subsidiary of QuidelOrtho. Our Consolidated Financial Statements for 2023 include a full year of Ortho operations. For additional information about the Combinations, see Part II, Item 8, “Financial Statements and Supplementary Data—Note 2. Business Combination.”
For fiscal year 2023, Total revenues decreased by 8% to $2,997.8 million as compared to the prior year. For fiscal year 2022, Total revenues increased by 92% to $3,266.0 million as compared to the prior year. Currency exchange rates had an unfavorable impact of 100 basis points and 300 basis points on our growth rate for fiscal years 2023 and 2022, respectively. Our revenues can be highly concentrated over a small number of products, including certain of our respiratory products. For fiscal years 2023, 2022 and 2021, revenues related to our respiratory products accounted for approximately 24%, 57% and 81% of our Total revenues, respectively, primarily driven by sales of our COVID-19 products.
Planned Wind-Down of U.S. Donor Screening Portfolio
In February 2024, we initiated a wind-down plan to transition out of the U.S. donor screening portfolio. Specifically, we plan to wind-down only the VIP platform and microplate assays, which are only sold in the U.S., and have a lower growth and margin profile than other parts of our Transfusion Medicine business. This wind-down will not affect any donor screening portfolio outside of the U.S. While our goal is to wind-down this U.S. donor screening portfolio, we will continue to support our existing customers and honor our contractual commitments.
Supply Chains
As a result of the COVID-19 pandemic and other macroeconomic and geopolitical conditions, including inflationary pressures, general economic slowdown or a recession, rising interest rates, foreign exchange rate volatility and changes in monetary policy, we have experienced shortages and delays in receiving certain raw materials and other components for our products and have experienced logistics and distribution challenges, as well as challenges in labor availability and rising labor costs, all of which have affected our ability to fulfill customer orders, including instrument placements, on a timely basis. While we have made notable improvements in 2023, these supply, production, logistics, distribution and labor disruptions and challenges have impacted, and we expect will continue for some period of time to impact, our operations. However, the significance and frequency of such impact have lessened during the fourth quarter of 2023.
Some of our raw materials are available from a limited number of sources. During 2023 and 2022, we encountered some increasing pressures on raw material pricing, though they were less severe in fiscal year 2023 than in 2022. To mitigate these supply chain challenges, we continue to (i) partner with suppliers to invest in additional capacity and raw material inventory, (ii) diversify our supply base, where possible, to minimize reliance on a single source of supply for key raw materials and components and (iii) create redundancy in our global supply chain. In addition, we routinely evaluate our supply chain for potential gaps and continue to take other steps intended to help address continuity. In our distribution operations, we have been investing in and implementing automation capabilities to help improve accuracy and timeliness of customer shipments.
We continue to monitor these macroeconomic and geopolitical developments and the impact of such factors on our business. We cannot currently predict the frequency, duration or scope of these supply, production, logistics, distribution and labor disruptions and challenges. However, we proactively work with our suppliers, manufacturers, distributors, industry partners and government agencies to address these challenges in our efforts to meet the needs of our customers. Despite our mitigation efforts, such disruptions and challenges have materially affected and could further materially affect our ability to timely manufacture and distribute our products and could unfavorably impact our results of operations depending on the nature and duration of such disruptions and challenges.
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Outlook
Our financial performance and results of operations will depend on future developments and other factors that are highly uncertain, continuously evolving and unpredictable, including the occurrence, spread, severity, duration and emergence of new variants of respiratory diseases, including flu, strep, RSV and COVID-19, as well as ongoing supply, production and logistics challenges.
Demand for our respiratory products, which includes our COVID-19 products, declined in 2023 compared to 2022 due to the end of the U.S. public health emergency regarding COVID-19 and the transition of COVID-19 from a pandemic to an endemic environment. We expect demand for our respiratory products to continue to fluctuate and pricing pressures on certain products to persist as a result of a number of factors, including increased supply, emergence and spread of new variants, and the seasonal demands of the respiratory seasons, which are typically more prevalent during the fall and winter.
Because our business environment is highly competitive, our long-term growth and profitability will depend in part on our ability to retain and grow our current customers and attract new customers through developing and delivering new and improved products and services that meet our customers’ needs and expectations, including with respect to product performance, product offerings, cost, automation and other work-flow efficiencies. As a result, we expect to continue to maintain our emphasis on R&D investments for longer term growth, including for our next generation platforms and assays, as well as additional assays to be launched on our current platforms. In addition, we expect to continue to evaluate strategic opportunities to expand our product lines and services, production capabilities, technologies and geographic footprint and address other business challenges and opportunities.
While we expect the revenues and financial results from our respiratory products to be affected by the seasonal demands of the respiratory seasons, we intend to continue our focus on prudently managing our business and delivering improved financial results, while at the same time striving to introduce new products and services into the market.
Results of Operations
Comparison of fiscal years ended 2023, 2022 and 2021
Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31. Fiscal years 2023, 2022 and 2021 were 52 weeks.
Revenues
The following table compares Total revenues by business unit for fiscal years 2023, 2022 and 2021:
Fiscal Year Ended
* N/M - Not meaningful
For fiscal year 2023, Total revenues decreased to $2,997.8 million from $3,266.0 million for the prior year. The increases in Labs and Transfusion Medicine revenues were primarily related to incremental revenues from the Combinations. Additionally, the increase in Labs revenue included a $19.2 million settlement award from a third party related to one of our collaboration agreements. The Point of Care business unit contributed to revenue decline, driven by decreases of $846.0 million in sales of QuickVue SARS Antigen assays and $219.1 million in sales of Sofia SARS Antigen assays. Molecular Diagnostics revenue decreased by $65.0 million, primarily driven by lower demand for the Lyra SARS Antigen assay due to the end of the public health emergency in the U.S. Currency exchange rates had an unfavorable impact of approximately 100 basis points on the growth rate for fiscal year 2023.
For fiscal year 2022, Total revenues increased to $3,266.0 million from $1,698.6 million for the prior year. The increases in Labs and Transfusion Medicine were primarily related to new revenues from the Combinations. The Point of Care business unit contributed to revenue growth, primarily driven by an increase of $586.1 million in sales of QuickVue SARS Antigen assays, partially offset by lower sales of Sofia assays and $46.7 million lower BNP sales due to the transition of the BNP Business to Beckman. The decrease in revenues related to the transition of the BNP Business did not materially impact our gross profit.
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Molecular Diagnostics revenue decreased by $103.8 million, primarily driven by lower demand and pricing of the Lyra SARS Antigen assay. Currency exchange rates had an unfavorable impact of approximately 300 basis points on the growth rate for fiscal year 2022.
Cost of Sales, Excluding Amortization of Intangible Assets
Cost of sales, excluding amortization of intangible assets, increased to $1,503.4 million, or 50.2% of Total revenues, for fiscal year 2023, compared to $1,330.0 million, or 40.7% of Total revenues, for fiscal year 2022. The increase in cost of sales, excluding amortization of intangible assets as a percentage of revenue, was primarily driven by incremental revenues in the Labs and Transfusion Medicine business units as a result of the Combinations and a decrease in sales of respiratory products. We also recorded $60.6 million of expense related to the unwind of the inventory fair value adjustment related to the Combinations during fiscal year 2022.
Cost of sales, excluding amortization of intangible assets, increased to $1,330.0 million, or 40.7% of Total revenues, for fiscal year 2022, compared to $420.3 million, or 24.7% of Total revenues, for fiscal year 2021. The increase in cost of sales, excluding amortization of intangible assets, was primarily driven by a large increase in sales of QuickVue SARS Antigen assays in 2022, as well as new product sales in the Labs and Transfusion Medicine business units as a result of the Combinations. We also recorded $60.6 million of expense related to the unwind of the inventory fair value adjustment related to the Combinations during fiscal year 2022. There were also increases in supply chain and other indirect manufacturing costs, which were only partially offset by increased absorption driven by higher production volumes.
Operating Expenses
The following table summarizes operating expenses for fiscal years 2023, 2022 and 2021:
Fiscal Year Ended
Other operating expenses 27.1 0.9 % 12.3 0.4 % — — %
Selling, Marketing and Administrative Expenses
Selling, marketing and administrative expenses for fiscal year 2023 increased by $142.2 million, or 22.9%, to $763.2 million from $621.0 million for the prior year, primarily due to the incremental impact of the Combinations, partially offset by freight expense due to lower sales and shipment volume and lower employee compensation costs.
Selling, marketing and administrative expenses for fiscal year 2022 increased by $381.4 million, or 159.2%, to $621.0 million from $239.6 million for the prior year, primarily driven by the Combinations which contributed $326.5 million in increased expense, freight expense due to higher sales volume and expedited shipping, product promotional spend associated with the QuickVue At-Home OTC COVID-19 test, professional fees and higher employee-related costs.
Research and Development Expense
Research and development expense for fiscal year 2023 increased by $56.3 million, or 29.6%, to $246.8 million from $190.5 million for the prior year, primarily due to the incremental impact of the Combinations, as well as increased costs related to the development of Savanna, QuickVue OTC assays and Sofia products.
Research and development expense for fiscal year 2022 increased by $94.8 million, or 99.1%, to $190.5 million from $95.7 million for the prior year, primarily due to the Combinations which contributed $86.0 million in increased expense, as well as increased costs related to SARS, Sofia and Savanna projects, and increased costs related to compensation driven by increased headcount and clinical trials.
Amortization of Intangible Assets
Amortization of intangible assets for fiscal years 2023, 2022 and 2021 was $204.8 million, $132.5 million and $27.4 million, respectively. The increases in amortization expense in fiscal year 2023 compared to fiscal year 2022 and fiscal year 2022 compared to fiscal year 2021 were primarily due to the Combinations.
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Acquisition and Integration Costs
Acquisition and integration costs were $113.4 million, $136.0 million and $9.6 million for fiscal years 2023, 2022 and 2021, respectively. The decrease in costs in fiscal year 2023 compared to fiscal year 2022 was primarily due to acquisition costs attributable to the Combinations, partially offset by higher integration-related costs. The increase in costs in fiscal year 2022 compared to fiscal year 2021 was primarily due to acquisition and integration-related costs attributable to the Combinations. Costs for fiscal year 2021 were primarily related to the evaluation of new business development opportunities, including the Combinations.
Other Operating Expenses
Other operating expenses were $27.1 million and $12.3 million for fiscal years 2023 and 2022, respectively, which were primarily related to the profit share expense for our Joint Business with Grifols acquired in connection with the Combinations.
Non-operating Expenses
The following table summarizes non-operating expenses, net for fiscal years 2023, 2022 and 2021:
Fiscal Year Ended
Loss on extinguishment of debt — 24.0 — (100.0) % N/M
* N/M - Not meaningful
Interest Expense, Net
Interest expense, net was $147.6 million, $75.7 million and $5.8 million for fiscal years 2023, 2022 and 2021, respectively. The increases in interest expense, net in fiscal year 2023 compared to fiscal year 2022 and fiscal year 2022 compared to fiscal year 2021 were primarily related to the Term Loan under the Credit Agreement entered into in connection with the Combinations. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 8. Borrowings” for more information related to our Term Loan.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $24.0 million for fiscal year 2022, and was related to the satisfaction and discharge of the senior notes and termination of the former term loans and revolving credit facility of Ortho, which occurred in connection with the consummation of the Combinations.
Other Expense (Income), Net
Other expense (income), net was $20.6 million, $8.1 million and $(0.1) million for fiscal years 2023, 2022 and 2021, respectively. The increase in Other expense (income), net in fiscal year 2023 compared to fiscal year 2022 was primarily related to (i) the release of tax reserves upon the settlement of certain U.S. federal tax matters, with an offsetting benefit recorded to income tax expense and (ii) net foreign currency losses. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 6. Income Taxes” for more information related to our indemnification assets. The change in Other expense (income), net in fiscal year 2022 compared to fiscal year 2021 was primarily related to net foreign currency losses and loss on investment, partially offset by fair value gains in interest rate caps.
Income Taxes
For fiscal years 2023 and 2022, we recognized income tax benefits of $19.0 million in relation to loss before taxes of $29.1 million and income tax provisions of $187.2 million in relation to income before taxes of $735.9 million, resulting in effective tax rates of 65.3% and 25.4%, respectively. For fiscal year 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to a decrease in our pre-acquisition U.S. federal reserves for uncertain tax positions due to settlement of certain tax matters partially offset by net operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and Global Intangible Low-Taxed Income (“GILTI”). For fiscal year 2022, the effective tax rate was primarily impacted by income taxes owed in certain U.S. states, foreign income taxed at rates other than the applicable U.S. rate, and the deduction for foreign derived intangible income (“FDII”).
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We recognized an income tax provision of $187.2 million, resulting in an effective tax rate of 25.4% for fiscal year 2022. This effective tax rate is comparable to the effective tax rate of 21.8% for fiscal year 2021. The lower tax expense for fiscal year 2022 compared to the prior year was primarily due to a decrease in pre-tax profits and state taxes, foreign income taxed at rates other than the applicable U.S. rate, and an increased deduction for FDII, partially offset by increases in non-deductible executive compensation, GILTI and acquisition-related costs. The Company will treat any U.S. tax on foreign earnings under GILTI as a current period expense when incurred.
Segment Results
We operate under three geographically-based reportable segments: North America, EMEA and China. Our operations in Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.”
The key indicators that we monitor are as follows:
•Total revenues — This measure is discussed in the section entitled “Results of Operations.”
•Adjusted EBITDA — Adjusted EBITDA by reportable segment is used by our management to measure and evaluate the internal operating performance of our reportable segments. It is also the basis for calculating certain management incentive compensation programs. We believe that this measurement is useful to investors as a way to analyze the underlying trends in our core business, including at the segment level, consistently across the periods presented and to evaluate performance under management incentive compensation programs. Adjusted EBITDA consists of Net (loss) income before Interest expense, net, (Benefit from) provision for income taxes and depreciation and amortization and eliminates (i) certain non-operating income or expense items, and (ii) impacts of certain non-cash, unusual or other items that are included in Net (loss) income and that we do not consider indicative of our ongoing operating performance. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 5. Segment and Geographic Information” for a reconciliation of Adjusted EBITDA by reportable segment to (Loss) income before income taxes.
North America
Total revenues and Adjusted EBITDA for North America were as follows:
Fiscal Year Ended
Total revenues were $1,877.1 million for fiscal year 2023, compared to $2,536.5 million for fiscal year 2022. The decrease was primarily driven by lower demand for QuickVue and Sofia SARS Antigen assays, partially offset by incremental revenues of $433.8 million from the Combinations.
Total revenues were $2,536.5 million for fiscal year 2022, compared to $1,500.2 million for fiscal year 2021. During fiscal year 2022, the impact of the Combinations contributed $607.3 million to Total revenues. The remaining increase of $429.0 million was primarily driven by increased demand for QuickVue SARS Antigen assays and non-SARS related rapid tests, partially offset by a decrease in revenues for the Sofia SARS Antigen assay.
Adjusted EBITDA was $949.2 million for fiscal year 2023, compared to $1,614.6 million for fiscal year 2022. The decrease was primarily driven by lower demand for QuickVue and Sofia SARS Antigen assays, partially offset by decreased distribution costs and approximately $160 million of incremental impact of the Combinations.
Adjusted EBITDA was $1,614.6 million for fiscal year 2022, compared to $1,028.5 million for fiscal year 2021. During fiscal year 2022, the impact of the Combinations contributed $260.7 million to Adjusted EBITDA. The remaining increase of $325.4 million was primarily driven by increased revenues, partially offset by increased distribution and selling costs.
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EMEA
Total revenues and Adjusted EBITDA for EMEA were as follows:
Fiscal Year Ended
Total revenues were $327.3 million for fiscal year 2023, compared to $206.8 million for fiscal year 2022. The increase was primarily driven by incremental revenues of $110.1 million from the Combinations, partially offset by a decrease in Point of Care revenue.
Total revenues were $206.8 million for fiscal year 2022, compared to $69.6 million for fiscal year 2021. The increase was primarily driven by the impact of the Combinations, which contributed $146.2 million to Total revenues, partially offset by lower Point of Care revenue due to lower BNP sales from the transition of the BNP Business to Beckman.
Adjusted EBITDA was $58.3 million for fiscal year 2023, compared to $31.7 million for fiscal year 2022. The increase was primarily driven by incremental revenues from the Combinations, partially offset by lower Point of Care revenue and increased selling and distribution costs.
Adjusted EBITDA was $31.7 million for fiscal year 2022, compared to $28.1 million for fiscal year 2021. The increase was primarily driven by the impact of the Combinations, which contributed approximately $18 million to Adjusted EBITDA, partially offset by lower revenues and increased selling costs.
China
Total revenues and Adjusted EBITDA for China were as follows:
Fiscal Year Ended
Total revenueswere $310.1 million for fiscal year 2023, compared to $220.0 million for fiscal year 2022. The increase was primarily driven by incremental revenues of $95.0 million from the Combinations, partially offset by lower Point of Care revenue, primarily related to decreased demand for QuickVue SARS Antigen assays.
Total revenueswere $220.0 million for fiscal year 2022, compared to $58.0 million for fiscal year 2021. The increase was primarily driven by the impact of the Combinations, which contributed $161.3 million to Total revenues.
Adjusted EBITDA was $129.1 million for fiscal year 2023, compared to $104.1 million for fiscal year 2022. The increase was primarily driven by approximately $29 million of incremental impact of the Combinations, partially offset by lower Point of Care revenue and a shift in product mix.
Adjusted EBITDA was $104.1 million for fiscal year 2022, compared to $24.1 million for fiscal year 2021. The increase was primarily driven by the impact of the Combinations of approximately $81 million.
Other
Total revenues and Adjusted EBITDA for Other, which includes our Latin America, Japan and Asia Pacific operating segments, were as follows:
Fiscal Year Ended
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Total revenues were $483.3 million for fiscal year 2023, compared to $302.7 million for fiscal year 2022. The increase was primarily driven by incremental revenues of $177.1 million from the Combinations and higher Labs revenue, partially offset by lower Point of Care revenue.
Total revenues were $302.7 million for fiscal year 2022, compared to $70.8 million for fiscal year 2021. The increase was primarily driven by the impact of the Combinations, which contributed $250.5 million to Total revenues, partially offset by lower Point of Care revenue, driven by lower demand for QuickVue SARS Antigen and Sofia assays.
Adjusted EBITDA was $116.3 million for fiscal year 2023, compared to $92.7 million for fiscal year 2022. The increase was primarily driven by approximately $37 million of incremental impact of the Combinations, partially offset by lower Point of Care revenue.
Adjusted EBITDA was $92.7 million for fiscal year 2022, compared to $43.0 million for fiscal year 2021. The increase was primarily driven by the impact of the Combinations, which contributed approximately $63 million to Adjusted EBITDA, partially offset by lower revenues.
Liquidity and Capital Resources
As of December 31, 2023 and January 1, 2023, the principal sources of liquidity consisted of the following:
Cash and cash equivalents $ 118.9 $ 292.9
Marketable securities, current 48.4 52.1
Marketable securities, non-current 7.4 21.0
Total cash, cash equivalents and marketable securities $ 174.7 $ 366.0
Amount available to borrow under the Revolving Credit Facility $ 787.1 $ 786.9
As of December 31, 2023, we had $118.9 million in Cash and cash equivalents, a $174.0 million decrease from January 1, 2023. Our cash requirements fluctuate as a result of numerous factors, including cash generated from operations, progress in R&D, capital expansion projects and acquisition and business development activities. We believe our organizational structure allows us the necessary flexibility to move funds throughout our subsidiaries to meet our operational working capital needs.
Our Credit Agreement consists of a $2,750.0 million Term Loan and an $800.0 million Revolving Credit Facility. As of December 31, 2023 and January 1, 2023, there were no amounts outstanding under the Revolving Credit Facility. As of December 31, 2023, letters of credit issued under the Revolving Credit Facility totaled $12.9 million, which reduced the available amount under the Revolving Credit Facility to $787.1 million. The Term Loan and the Revolving Credit Facility will mature on May 27, 2027. In fiscal year 2023, we made $226.7 million in payments on our Term Loan, including a voluntary prepayment of $20.0 million. Refer to Part II, Item 8, “Financial Statements and Supplementary Data—Note 8. Borrowings” for further information.
On March 31, 2023, we entered into an amendment to our existing receivables purchase agreement (the “RPA”), by and among Ortho-Clinical Diagnostics US FinanceCo I, LLC (“Ortho FinanceCo I”), as Seller, our wholly owned receivables financing subsidiary, Wells Fargo Bank, N.A., as administrative agent (the “Agent”), Ortho-Clinical Diagnostics, Inc., as the Master Servicer and as an Originator (“Ortho Inc.”), Quidel Corporation, as an Originator, and certain Purchasers. Under the RPA, as amended, Ortho FinanceCo I may sell receivables in amounts up to a $150.0 million limit, subject to certain conditions, including that, at any date of determination, the aggregate capital paid to Ortho FinanceCo I does not exceed a “capital coverage amount,” equal to an adjusted net receivables pool balance minus a required reserve. Ortho FinanceCo I has guaranteed the prompt payment of the sold receivables, and to secure the prompt payment and performance of such guaranteed obligations, Ortho FinanceCo I has granted a security interest to the Agent, for the benefit of the Purchasers, in all assets of Ortho FinanceCo I. Ortho Inc., in its capacity as Master Servicer under the RPA, is responsible for administering and collecting the receivables and has made customary representations, warranties, covenants and indemnities. We have also provided a performance guaranty for the benefit of Ortho FinanceCo I to cause the due and punctual performance by Ortho Inc. of its obligations as Master Servicer.
Our Stock Repurchase Program allows us to repurchase up to $300.0 million of our common stock through August 17, 2024. The Stock Repurchase Program does not obligate us to acquire any specific number of shares. Under the Stock Repurchase Program, shares of common stock may be repurchased using a variety of methods, including privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act, as part of accelerated stock repurchases and other methods. The timing, manner, price and amount of any repurchases are determined by us in our
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discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions. For the fiscal year ended December 31, 2023, we repurchased 120,000 shares of outstanding common stock under the Stock Repurchase Program for approximately $7.2 million. The repurchased shares were retired and returned to the status of authorized but unissued shares of our common stock. As of December 31, 2023, we had approximately $218.4 million available under the Stock Repurchase Program. Refer to Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further information.
Our investment portfolio includes marketable debt securities, which are subject to changes in fair value as a result of interest rate fluctuations and other market factors. Our investment policy establishes limits on the amount and time to maturity of investments with any institution. The investment policy also requires that investments are only entered into with corporate and financial institutions that meet high credit quality standards. Refer to Part II, Item 8, “Financial Statements and Supplementary Data—Note 13. Fair Value Measurements.”
Capital Expenditures
Annual capital expenditures, net of proceeds from government assistance allocated to fixed assets, were approximately $196 million, $123 million and $256 million in fiscal years 2023, 2022 and 2021, respectively. We continue to make capital expenditures in connection with the expansion of our manufacturing capabilities and other facility-related activities.
Cash Flow Summary
Fiscal Year Ended
Net cash provided by operating activities $ 280.2 $ 885.3 $ 805.9
Net cash (used for) provided by financing activities (265.8) 252.0 (173.1)
Effect of exchange rates on cash (1.2) (2.0) (0.4)
Fiscal Year Ended December 31, 2023
Cash provided by operating activities was $280.2 million for fiscal year 2023, and reflected a net loss of $10.1 million and non-cash adjustments of $485.2 million, primarily associated with depreciation and amortization, stock-based compensation expense and accretion of interest on deferred consideration. In addition, we benefited from collections on accounts receivables, which contributed $160.0 million to Cash provided by operating activities, offset by other changes in working capital, including $211.6 million of cash outflows for inventories.
Cash used for investing activities was $187.6 million for fiscal year 2023, and was primarily related to $209.3 million in purchases of property, equipment, investments and intangibles. We also purchased $60.1 million and sold $78.3 million of marketable securities during fiscal year 2023.
Cash used for financing activities was $265.8 million for fiscal year 2023, and was primarily related to payments on long-term borrowings of $228.0 million, payments of deferred consideration of $30.3 million and payments of tax withholdings related to vesting of stock-based awards of $13.5 million.
Fiscal Year Ended January 1, 2023
Cash provided by operating activities was $885.3 million for fiscal year 2022, and reflected net income of $548.7 million and non-cash adjustments of $389.8 million, primarily associated with depreciation and amortization, stock-based compensation expense, deferred income taxes, loss on extinguishment of debt and the unwind of the inventory fair value step up initially recorded in connection with the Combinations. In addition, we benefited from collections on accounts receivables, which contributed $150.2 million to Cash provided by operating activities, offset by net cash outflows related to inventories, prepaid and other current and non-current assets and liabilities as well as income taxes payable and other current and non-current liabilities.
Cash used for investing activities was $1,644.2 million for fiscal year 2022, and was primarily related to the Combinations. We purchased $140.9 million of property, equipment, investments and intangibles and received $18.4 million of proceeds from government assistance allocated to fixed assets. We also purchased $63.7 million and sold $53.4 million of marketable securities during fiscal year 2022. See Part II, Item 8, “Financial Statements and Supplementary Data—Note 2. Business Combination” for further discussion regarding the Combinations.
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Cash provided by financing activities was $252.0 million for fiscal year 2022, and was primarily related to proceeds from long-term borrowings, net of debt issuance costs of $2,734.5 million, payments on long-term borrowings and extinguishment costs of $2,388.3 million, repurchases of common stock of $74.3 million and payments of $37.7 million for contingent and deferred consideration.
Fiscal Year Ended January 2, 2022
Cash provided by operating activities was $805.9 million for fiscal year 2021, and reflected net income of $704.2 million and non-cash adjustments of $104.5 million, primarily associated with depreciation and amortization, stock-based compensation expense and accretion of interest on deferred consideration. Partially offsetting these inflows was a net working capital use of cash of $30.7 million, primarily driven by an increase in product inventory associated with the increased demand due to the COVID-19 pandemic and a decrease in income taxes payable, partially offset by a decrease in accounts receivable.
Cash used for investing activities was $319.5 million for fiscal year 2021, and was primarily related to investments in manufacturing equipment, building improvements, Sofia, Solana and Triage instruments available for lease and scientific equipment, partially offset by government proceeds received to fund such investments. Additionally, we purchased $67.4 million of available-for-sale securities and sold $3.8 million of our available-for-sale securities during 2021.
Cash used for financing activities was $173.1 million for fiscal year 2021, and was primarily related to repurchases of common stock of $103.5 million, payments of tax withholdings for vesting of stock-based awards of $37.1 million, and the payment of deferred and contingent consideration of $39.8 million, partially offset by proceeds of $7.6 million from the issuance of common stock under the ESPP (as defined in this Annual Report) and pursuant to stock option exercises. Refer to Part II, Item 8, “Financial Statements and Supplementary Data—Note 10. Stockholders’ Equity.”
Liquidity Outlook
Short-term Liquidity Outlook
Our primary source of liquidity, other than our holdings of Cash and cash equivalents, has been cash flows from operations. 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 and amounts available under our Revolving Credit Facility, 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, R&D and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to:
•interest on and repayments of our long-term borrowings and lease obligations;
•acquisitions of property, equipment and other fixed assets in support of our manufacturing facility expansions;
•the continued advancement of R&D efforts;
•our integration of the Ortho business arising from the Combinations;
•support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources; and
•potential strategic acquisitions and investments.
Due to the risks inherent in the product development process, we are unable to estimate with meaningful certainty the costs we will incur in the continued development of our product candidates for commercialization. Our R&D costs may be substantial as we move product candidates into preclinical and clinical trials and advance our existing product candidates into later stages of development.
The primary purposes of our capital expenditures are to invest in manufacturing capacity expansion, acquire certain of our instruments,acquire scientific equipment, purchase or develop IT and implement facility improvements. We plan to fund the capital expenditures with the cash on our balance sheet.
We are focused on expanding the number of instruments placed in the field and solidifying long-term contractual relationships with customers. In order to achieve this goal, in certain jurisdictions where it is permitted, we have leveraged a reagent rental model that has been recognized as more attractive to certain customers. In this model, we lease, rather than sell, instruments to our customers. Over the term of the contract, the purchase price of the instrument is embedded in the price of the assays and reagents. Going forward, we intend to increase the number of reagent rental placements in developed markets, a strategy that we believe is beneficial to our commercial goals because it lowers our customers’ upfront capital costs and therefore allows purchasing decisions to be made at the lab manager level. For these same reasons, the reagent rental model also benefits our commercial strategy in emerging markets. We believe that the shift in our sales strategy will grow our installed base, thereby
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increasing sales of higher-margin assays, reagents and other consumables over the life of the customer contracts and enhancing our recurring revenue and cash flows. During fiscal year 2023, we transferred $154.6 million of instrument inventories from Inventories to Property, plant and equipment, net, further increasing our investment in property, plant and equipment.
Long-term Liquidity Outlook
Our future capital requirements and the adequacy of our available funds to service any long-term debt outstanding and to fund working capital expenditures and business development efforts will depend on many factors, including:
•our ability to successfully integrate the recently acquired Ortho business and realize cross-selling revenue synergies;
•our ability to realize revenue growth from our new technologies and create innovative products in our markets;
•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
•our entry into strategic collaborations with other companies or acquisitions of other companies or technologies to enhance or complement our product and service offerings.
In January 2023, we entered into a lease for warehouse space in the U.S. that has not yet commenced, with total lease payments of approximately $36 million. This lease is expected to commence during the first half of 2024 with a lease term of five years.
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. Information regarding our obligations relating to debt, income taxes, lease arrangements, purchase obligations and licensing arrangements are provided in Part II, Item 8, “Financial Statements and Supplementary Data—Note 8. Borrowings,” “—Note 6. Income Taxes,” “—Note 9. Leases” and “—Note 12. Commitments and Contingencies,” respectively.
We do not have any off-balance sheet arrangements that are material or reasonably likely to become material to our financial condition or results of operations.
Recent Accounting Pronouncements
Information about recently adopted and proposed accounting pronouncements is included in Part II, Item 8, “Financial Statements and Supplementary Data—Note 1. Basis of Presentation and Summary of Significant Accounting Policies.”
Critical Accounting 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 generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. Our critical accounting estimates are those that significantly affect our financial condition and results of operations and require the most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain. Because of this uncertainty, actual results may vary from these estimates.
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
We record revenues primarily from product sales. These revenues are recorded net of rebates that are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements and promotions. Rebates are calculated based on historical experience, estimated distributor inventory balances, contractual and statutory requirements and other relevant information, and are recorded as a reduction of sales. These rebates are presented as either an offset to trade accounts receivable or a liability based on forms of settlement. The allowance for contractual rebates involves estimating adjustments to revenue based on a high volume of data including inputs from third-party sources. In addition, the determination of such adjustments includes estimating rebate percentages which are dependent on estimated end-user sales mix and customer contractual terms, which vary across customers, the related balance of which was $31.3 million of our rebate reserves at December 31, 2023. Our total rebate reserve was $75.6 million at December 31, 2023.
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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. For our annual evaluation for impairment of goodwill as of October 2, 2023, we bypassed the qualitative assessment and proceeded directly to the quantitative goodwill impairment test for all reporting units. This quantitative analysis required us to make estimates and assumptions in order to calculate the fair value of our reporting units. We utilized the values separately derived from both income and market approach valuation techniques to develop an overall estimate of reporting unit fair values. Under the income approach, we calculated the fair value of our reporting units based on estimated future discounted cash flows which required significant assumptions surrounding projected revenue growth rates, projected EBITDA margins and discount rates. Under the market approach, we estimated the fair value based on market multiples of our revenue and EBITDA. In all instances, the estimated fair values of our reporting units exceeded their carrying values and consequently did not result in an impairment. The excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for our North America, EMEA, Latin America, Japan and Asia Pacific reporting units as of the testing date ranged from approximately 8% to 70%. The excess of the estimated fair value over carrying value for our China reporting unit was approximately 170%. To evaluate the sensitivity of the fair value calculations used in the goodwill impairment test, the Company applied a hypothetical 5% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values. Based on this hypothetical 5% decrease, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of our reporting units ranged from approximately 3% to approximately 160%.
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 of December 31, 2023, we had a valuation allowance of $274.7 million, which represents the portion of our 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 Part II, Item 8, “Financial Statements and Supplementary Data—Note 6. Income Taxes” for more information on income taxes.
Accounting for Business Combinations
Under the acquisition method of accounting, 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
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approach and a market approach, such as the estimation of future cash flows of the acquired business and current selling prices of similar assets. These valuations require us to make estimates and assumptions, especially with respect to intangible 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 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 are recognized 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.
If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. We record these adjustments to the provisional amounts with a corresponding offset to goodwill. Any adjustments identified after the measurement period are recorded in the Consolidated Statements of (Loss) Income.
Inventory Valuations
We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory and based on these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and the net realizable value. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our earnings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our business and financial results are affected by fluctuations in world financial markets, including interest rates and currency exchange rates. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We have policies governing our use of derivative instruments, and we do not enter into financial instruments for trading or speculative purposes.
Interest Rate Risk
We are subject to interest rate risk in connection with our long-term debt. Our principal interest exposure relates to outstanding amounts under our Credit Agreement. Our Credit Agreement provides for variable rate borrowings of up to $2,750.0 million under the Term Loan and $800.0 million under the Revolving Credit Facility. Assuming facilities under the Credit Agreement are fully drawn, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on our outstanding borrowings under the Credit Agreement by approximately $4.0 million per year before considering the impact of derivative instruments. For further discussion of the risks related to our Credit Agreement, see “Risk Factors—Risks Relating to Corporate Finance—Our indebtedness could adversely affect our financial condition, limit our ability to raise additional capital to fund our operations and prevent us from fulfilling our obligations under our indebtedness” in Part I, Item 1A, “Risk Factors” of this Annual Report.
We selectively use derivative instruments to reduce market risk associated with changes in interest rates. The use of derivatives is intended for hedging purposes only, and we do not enter into derivative instruments for speculative purposes.
We entered into interest rate swap contracts, commencing on December 30, 2022, with a total notional value of $1.3 billion, which increased to $1.8 billion on December 29, 2023, to hedge future interest rate exposures on variable rate debt, including the Revolving Credit Facility and Term Loan.
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 continue to evaluate our investments, our cash equivalents as of December 31, 2023 consisted primarily of government money market funds and other high credit quality debt securities. These funds provide daily liquidity and may be subject to interest rate risk and decrease in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates.
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Foreign Currency Exchange Risk
We are exposed to foreign currency exchange risk by virtue of our international operations. These risks include the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany balances with foreign subsidiaries and transactions denominated in currencies other than the functional currency of the local jurisdiction. We derived approximately 39% of our Total revenues for the fiscal year ended December 31, 2023, from operations outside the U.S. For translation of operations in non-U.S. Dollar currencies, the local currency of most entities is the functional currency. Foreign exchange effects from the translation of our balance sheet resulted in comprehensive income of $50.4 million and a comprehensive loss of $69.8 million for the fiscal years ended December 31, 2023 and January 1, 2023, respectively. Foreign exchange effects from the translation of our balance sheet were not material during the fiscal year ended January 2, 2022. Adjustments resulting from the re-measurement of transactions denominated in foreign currencies other than the functional currency of our subsidiaries are expensed as incurred.
In the majority of our jurisdictions, we earn revenue and incur costs in the currency used in such jurisdiction. We incur significant costs in foreign currencies, including Australian Dollar, Brazilian Real, British Pound, Canadian Dollar, Chilean Peso, Chinese Yuan/Renminbi, Colombian Peso, Euro, Indian Rupee, Japanese Yen, Mexican Peso, Philippine Peso, South Korean Won, Swiss Franc, Danish Krone, Czech Koruna and Thai Baht. As a result, movements in exchange rates cause our revenue and expenses to fluctuate, impacting our profitability and cash flows. Future business operations and opportunities, including the continued expansion of our business outside North America, may further increase the risk that cash flows resulting from these activities may be adversely affected by changes in currency exchange rates.
Like many multi-national companies, we have exposure to the British Pound. We are negatively impacted by a lower British Pound exchange rate from translation impact when compared to the U.S. Dollar, but we also benefit from expenses denominated in British Pound, as well as some cross-border transactions at a lower exchange rate. The magnitude of the impact is dependent on our level of operations and business volumes in the U.K., forward contract hedge positions, cross currency volume and the exchange rate.
Additionally, in order to fund the purchase price for the assets and capital stock of certain non-U.S. entities, a combination of equity contributions and intercompany loans were utilized to capitalize certain non-U.S. subsidiaries. In many instances, the intercompany loans are denominated in currencies other than the functional currency of the affected subsidiaries. Where intercompany loans are not a component of permanently invested capital of the affected subsidiaries, increases or decreases in the value of the subsidiaries’ functional currency against other currencies can affect our results of operations. During the fiscal years ended December 31, 2023 and January 1, 2023, we recorded net foreign currency exchange losses of $2.6 million and $6.0 million, respectively. Net foreign currency exchange impact was not material for the fiscal year ended January 2, 2022. The foreign currency gains/losses in each period primarily consist of unrealized gains/losses related to intercompany loans denominated in currencies other than the functional currency of the affected subsidiaries. We have entered into and may in the future enter into derivative instruments to manage our foreign currency exposure on these intercompany loans in the future.
We have entered into foreign currency forward contracts to manage our foreign currency exposures on foreign currency denominated firm commitments and forecasted foreign currency denominated intercompany and third-party transactions. We had forward contracts outstanding with a total notional amount of $1,252.2 million as of December 31, 2023, with maturity dates through December 2024. Foreign currency forward contracts that qualified and were designated for hedge accounting are recorded at their fair value as of December 31, 2023 and the pre-tax unrealized loss of $6.7 million is reported as a component of Other comprehensive income (loss) (“OCI”), all of which is expected to be reclassified to earnings in the next 12 months. Actual gains (losses) upon settlement will be recognized in earnings, within the line item impacted, during the estimated time in which the transactions are incurred. Actual losses upon settlement recognized in earnings during the fiscal year ended December 31, 2023 were $6.2 million. Actual gains upon settlement recognized in earnings during the fiscal year ended January 1, 2023 were $3.5 million. Actual losses/gains upon settlement recognized in earnings during the fiscal year ended January 2, 2022 were not material.
A sensitivity to changes in the value of the U.S. dollar on foreign currency denominated derivatives and investments indicated that if the U.S. dollar uniformly weakened by 10% against all currency exposures of the Company at December 31, 2023, (Loss) income before income taxes would have declined by approximately $4.4 million in fiscal year 2023. Because the Company was in a net short (payable) position relative to its major foreign currencies after consideration of forward contracts, a uniform weakening of the U.S. dollar will yield the largest overall potential net loss in earnings due to exchange. This measurement assumes that a change in one foreign currency relative to the U.S. dollar would not affect other foreign currencies relative to the U.S. dollar. Although not predictive in nature, the Company believes that a 10% threshold reflects reasonably possible near-term changes in the Company’s major foreign currency exposures relative to the U.S. dollar. The cash flows from these contracts are reported as operating activities in the Consolidated Statements of Cash Flows.
The Company also uses forward exchange contracts to hedge a portion of its net investment in foreign operations against movements in exchange rates. The forward contracts are designated as hedges of the net investment in a foreign operation. The
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unrealized gains or losses on these contracts are recorded in foreign currency translation adjustment within OCI, and remain in Accumulated other comprehensive loss (“AOCI”) until either the sale or complete or substantially complete liquidation of the subsidiary. The Company excludes certain portions of the change in fair value of its derivative instruments from the assessment of hedge effectiveness (excluded components). Changes in fair value of the excluded components are recognized in OCI. The Company recognizes in earnings the initial value of the excluded components on a straight-line basis over the life of the derivative instrument. The cash flows from these contracts are reported as investing activities in the Consolidated Statement of Cash Flows.
See Part II, Item 8, “Financial Statements and Supplementary Data—Note 14. Derivative Instruments and Hedging Activities” for additional information related to such forward contracts, which information is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data
Index of Consolidated Financial Statements and Schedule
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 69
Consolidated Balance Sheets 71
Consolidated Statements of (Loss) Income 72
Consolidated Statements of Comprehensive Income 73
Consolidated Statements of Stockholders’ Equity 74
Consolidated Statements of Cash Flows 75
Notes to Consolidated Financial Statements 76
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of QuidelOrtho Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of QuidelOrtho Corporation (the Company) as of December 31, 2023 and January 1, 2023, the related consolidated statements of (loss) income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (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, 2023 and January 1, 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. 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, 2023, 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 29, 2024 expressed an unqualified opinion thereon.
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 included 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.
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Reserve for contractual rebates
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
San Diego, California
February 29, 2024
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QUIDELORTHO CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents $ 118.9 $ 292.9
Marketable securities 48.4 52.1
Prepaid expenses and other current assets 262.1 252.1
Marketable securities 7.4 21.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued payroll and related expenses 84.8 139.2
Current portion of borrowings 139.8 207.5
Commitments and contingencies (Note 12)
Stockholders’ equity:
Accumulated other comprehensive loss (30.0) (67.6)
Total liabilities and stockholders’ equity $ 8,563.1 $ 8,855.8
See accompanying notes.
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QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In millions, except per share data)
Fiscal Year Ended
Cost of sales, excluding amortization of intangibles 1,503.4 1,330.0 420.3
Other operating expenses 27.1 12.3 —
Loss on extinguishment of debt — 24.0 —
Other expense (income), net 20.6 8.1 (0.1)
(Benefit from) provision for income taxes (19.0) 187.2 196.1
Basic (loss) earnings per share $ (0.15) $ 9.66 $ 16.74
Diluted (loss) earnings per share $ (0.15) $ 9.56 $ 16.43
Weighted-average shares outstanding - basic 66.8 56.8 42.1
Weighted-average shares outstanding - diluted 66.8 57.4 42.9
See accompanying notes.
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QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Fiscal Year Ended
Other comprehensive income (loss)
Changes in cumulative translation adjustment, net of tax 50.4 (69.8) (1.6)
Changes from pension and other post-employment benefits, net of tax (2.0) 0.7 —
Changes in unrealized gains (losses) from cash flow hedges, net of tax:
Net unrealized gains on derivative instruments 12.6 6.7 0.1
See accompanying notes.
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QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
Shares Par
Issuance of common stock under equity compensation plans 0.6 — 9.6 — — 9.6
Stock-based compensation expense — — 22.7 — — 22.7
Repurchases of common stock (1.0) — (103.5) — — (103.5)
Other comprehensive income, net of tax — — — 0.8 — 0.8
Issuance of common stock under equity compensation plans 0.7 — 30.8 — — 30.8
Stock-based compensation expense — — 45.1 — — 45.1
Repurchases of common stock (1.0) — (74.3) — — (74.3)
Other comprehensive loss, net of tax — — — (68.0) — (68.0)
Issuance of common stock under equity compensation plans 0.6 0.1 13.5 — — 13.6
Stock-based compensation expense — — 50.9 — — 50.9
Repurchases of common stock (0.1) — (7.2) — — (7.2)
Other comprehensive income, net of tax — — — 37.6 — 37.6
See accompanying notes.
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QUIDELORTHO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Fiscal Year Ended
OPERATING ACTIVITIES:
Stock-based compensation expense 51.6 48.4 25.4
Net change in operating lease right-of-use assets and liabilities — 18.4 3.0
Loss on extinguishment of debt — 24.0 —
Unwind inventory fair value adjustment — 60.6 —
Changes in assets and liabilities:
Prepaid expenses and other current and non-current assets (26.9) (26.2) (13.3)
Accrued payroll and related expenses (53.9) 18.2 5.0
Other current and non-current liabilities (5.9) (75.2) 27.9
INVESTING ACTIVITIES
Proceeds from government assistance allocated to fixed assets 13.5 18.4 36.9
Purchases of marketable securities (60.1) (63.7) (67.4)
Proceeds from sale of marketable securities 78.3 53.4 3.8
Other payments (10.0) — —
FINANCING ACTIVITIES
Proceeds from issuance of common stock 11.6 26.4 7.6
Short-term borrowings, net 1.6 — —
Proceeds from long-term borrowings, net of debt issuance costs — 2,734.5 —
Repurchases of common stock (7.2) (74.3) (103.5)
Principal payments of acquisition contingent consideration — (4.2) (4.7)
Principal payments of deferred consideration (30.3) (33.5) (35.1)
Net cash (used for) provided by financing activities (265.8) 252.0 (173.1)
Effect of exchange rates on cash (1.2) (2.0) (0.4)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 150.0 $ 95.1 $ —
Cash paid during the period for income taxes $ 86.6 $ 264.8 $ 235.6
Transfer of instrument inventories to fixed assets $ 154.6 $ 73.7 $ —
See accompanying notes.
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QuidelOrtho Corporation
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Organization and Business
The Company’s vision is to advance diagnostics to power a healthier future. With its expertise in immunoassay and molecular testing, clinical chemistry and transfusion medicine, the Company aims to provide clarity to clinicians and patients to help create better health outcomes. The Company’s global infrastructure and commercial reach support its customers across more than 130 countries and territories with quality diagnostics, a broad test portfolio and market-leading service. The Company operates globally with manufacturing facilities in the U.S. and U.K. and with sales centers, administrative offices and warehouses located throughout the world.
On May 27, 2022, pursuant to the BCA, Quidel and Ortho consummated the Combinations and each of Quidel and Ortho became a wholly owned subsidiary of QuidelOrtho. As a result of the Combinations, QuidelOrtho became the successor issuer to Quidel. The results of operations of Ortho have been included in the Company’s Consolidated Financial Statements from the date of acquisition. See “—Note 2. Business Combination” for further information regarding the Combinations.
Basis of Presentation
The accompanying Consolidated Financial Statements of the Company have been prepared in accordance with GAAP.
Accounting Periods
The Company follows the concept of a fiscal year that ends on the Sunday nearest to the end of the month of December, and fiscal quarters that end on the Sunday nearest to the end of the months of March, June, and September. For fiscal years 2023, 2022 and 2021, the Company’s fiscal years ended on December 31, 2023, January 1, 2023 and January 2, 2022, respectively. Fiscal years 2023, 2022 and 2021 were 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related 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. The estimates and underlying assumptions can impact all elements of the financial statements, including, but not limited to, accounting for deductions from revenues (e.g. rebates, returns, sales allowances, and discounts), receivable and inventory valuations, fixed asset valuations, useful lives, impairment of goodwill and tangible and intangible assets, the fair value of assets acquired and liabilities assumed in a business combination and related purchase price allocation, long-term employee benefit obligations, income taxes, environmental matters, litigation and allocations of costs. Estimates are based on historical experience, complex judgments, facts and circumstances available at the time and various other assumptions that are believed to be reasonable under the circumstances but are inherently uncertain and unpredictable. Actual results could differ from those estimates.
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. They are carried at cost plus accrued interest, which approximates fair value because of the short-term maturity of these instruments. Cash equivalents include money market funds and debt securities of high quality institutions. Cash balances may exceed government insured limits in certain jurisdictions.
Marketable Securities
The Company invests excess cash balances in investment-grade corporate and government debt securities, corporate asset-backed securities and commercial paper. The Company seeks to diversify investments and limits the amount of investment concentrations for individual institutions, maturities and investment types. These marketable securities are classified as available-for-sale and, accordingly, such securities are recorded at fair value. Unrealized gains and losses that are deemed temporary are included in Accumulated other comprehensive loss as a separate component of stockholders’ equity. If any adjustment to fair value reflects a significant decline in the value of the security, the Company evaluates the extent to which the decline is determined to be other-than-temporary and would mark the security to market through a charge to its Consolidated Statements of (Loss) Income. Marketable securities are classified as non-current when maturities are one year or more.
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Accounts Receivable and Allowance for Credit Losses and Concentration of Credit Risk
The Company sells its products directly to physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies, wellness screening centers, other POC settings, blood banks and donor centers, as well as to individual, non-professional OTC customers, and other distributors in the U.S. and internationally (see “—Note 4. Revenue”). 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 Company establishes a reserve based on historical losses, the age of receivables, customer mix and credit policies, current economic conditions in customers’ country or industry, and expectations associated with reasonable and supportable forecasts, and specific allowances for large or risky accounts. Amounts later determined to be uncollectible are charged or written off against this allowance. The balance of accounts receivable is net of reserves of $91.8 million and $89.1 million at December 31, 2023 and January 1, 2023, respectively, of which the reserve related to contract rebates was $75.6 million and $73.5 million, respectively.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, marketable securities and trade accounts receivable.
Credit losses are identified when cash flows received are not expected to be sufficient to recover the amortized cost basis of a security. In the event of a credit loss, only the amount associated with the credit loss is recognized in operating results, with the amount of loss relating to other factors recorded in Accumulated other comprehensive loss.
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 are recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method as follows:
Asset type Useful life
Building and building improvements 7-47 years
Machinery and equipment 3-15 years
Customer leased instruments 3-8 years
Computer software 3-5 years
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.
When assets are surrendered, retired, sold or otherwise disposed of, their gross carrying values and related accumulated depreciation are removed from the accounts and included in determining gain or loss on such disposals. Maintenance and repairs are expensed as incurred; major replacements and improvements that extend the useful life are capitalized.
Goodwill
Goodwill represents the excess of purchase price over the fair values of underlying net assets acquired in an acquisition. The Company assesses goodwill for impairment at the reporting unit level on an annual basis, or whenever events or changes in circumstances occur that indicate that the fair value of a reporting unit is below its carrying amount. The Company’s annual impairment assessment date is the first day of the fourth quarter of the fiscal year.
The chief operating decision maker (“CODM”) reviews the Company’s performance and allocates resources based on six operating segments: North America, EMEA, China, Latin America, Japan and Asia Pacific. North America, EMEA and China are the Company’s reportable segments; Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” Each of these six operating segments is considered a reporting unit for the purpose of allocating goodwill and performing the annual goodwill impairment assessment.
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When testing goodwill for impairment, the Company first has an option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that impairment exists. Such qualitative factors may include the following: macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and other relevant entity-specific events. In the event the qualitative assessment indicates that an impairment is more likely than not, the Company would be required to perform a quantitative impairment test. Under the quantitative goodwill impairment test, the evaluation of impairment involves comparing the current fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of its reporting units by using forecasts of discounted future cash flows and peer market multiples. If the fair value of a reporting unit is less than its carrying value, impairment will be recognized in the amount by which the carrying value exceeds the fair value.
For fiscal year 2023, the Company bypassed the qualitative assessment and proceeded directly to the quantitative goodwill impairment test for all reporting units as of the beginning of the fiscal fourth quarter. In all instances, the estimated fair values of the Company’s reporting units exceeded their carrying values and consequently did not result in an impairment.
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 and amortized on a straight-line basis over the estimated product life.
Long-lived Assets
The process of evaluating the potential impairment of long-lived assets, such as property, plant and equipment and intangible assets, is subjective and requires judgment. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. If these circumstances exist, recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset group to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
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 on 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.
Transaction price for a contract represents the amount to which the Company is entitled in exchange for providing goods and services to the customer. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. 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.
The Company generates a portion of its revenue from sales of the QuickVue At-Home OTC COVID-19 tests to retail customers. The Company estimates the transaction price for revenue from sales to retail customers based on historical experience and current trends to evaluate when uncertainties related to right of return provisions are resolved. In fiscal years 2022 and 2021, due to a lack of history on which to base an estimate of products to be returned from the retailers, the Company established a reserve based on an estimate of total inventory remaining at our retailers which was subject to return. During fiscal year 2023, the Company concluded that it had developed sufficient historical experience regarding the pattern in customer returns to be able to estimate the amount of consideration to which the Company expects to be entitled, excluding consideration for the products expected to be returned. Amounts received or receivable that are expected to be returned are recognized as a refund liability, which is included in Other current liabilities. The refund liability is estimated utilizing historical sale and return rates over the period during which customers have a right of return, taking into account available information on competitive products and contract changes. The refund liability is remeasured at each reporting period to reflect changes in assumptions about expected returns. Revenues from sales to retail customers amounted to approximately 3% of Total revenues for fiscal year
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2023. The impact from this change in estimate is approximately $0.3 million and is not material to the Company’s Consolidated Financial Statements.
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. 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 (Loss) Income. 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. Variable lease revenue and fixed lease revenue represented approximately 4% and 1%, respectively, of the Company’s Total revenues for fiscal year 2023. Revenue allocated to the instrument was not material for fiscal years 2022 and 2021.
Government Assistance
During fiscal year 2020, the Company entered into a contract with the National Institutes of Health (“NIH”), through its newly launched Rapid Acceleration of Diagnostics - Advanced Technology Platforms initiative, to support the Company’s expansion of its manufacturing capacity for its diagnostic assays that test for the SARS-CoV-2 antigen. The contract originally provided for consideration to the Company of up to $65.0 million and had a performance period of one year, which began in July 2020. During 2021, the Company entered into several amendments to the contract, which added additional deliverables and milestones, as well as extended the performance period. The contract and amendments included key deliverables and milestones that directly supported the upgrade and addition of new manufacturing lines, as well as the outfitting of the new distribution center. The Company also provided instruments and assays to NIH. There were no refund provisions under the contract.
Consideration from the contract was allocated to each deliverable identified within the contract using a relative fair value allocation method and recognized when there was reasonable assurance the Company would meet the milestones and receive the consideration. Consideration allocated to the delivery of instruments and assays was recognized in accordance with the Company’s existing revenue recognition policy described above. Consideration that related to capital expenditures was recorded as a reduction to the carrying value of such assets and amortized over the useful life of the assets. Consideration allocated to the remainder of the contract was recorded as reductions to the related expense. As of January 2, 2022, the Company had achieved and collected payments for all milestones under the NIH contract.
In connection with the Combinations, the Company acquired a previously established agreement between Ortho and the Biomedical Advanced Research and Development Authority (“BARDA”), a division of HHS, which provides funding for Ortho to build manufacturing space and production support equipment to increase COVID-19 assay production capacity, as well as to build a manufacturing facility to produce certain analyzers needed to support COVID-19 testing. Amounts received from BARDA under this grant are recorded as a reduction to the carrying value of the related assets. A portion of the grant is for purposes of reimbursement of certain general and administrative expenses related to the project, which are not capitalized as part of the equipment constructed in connection with the project and are recorded as a reduction to the related expense. The Company received $13.5 million and $18.4 million during fiscal years 2023 and 2022, respectively, which were recorded as reductions to the carrying value of the related assets.
Research and Development Costs
Research and development costs are charged to operations as incurred. Upfront and milestone payments made to third parties in connection with R&D collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties at or subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are included in other intangibles, net of accumulated amortization.
The Company enters into collaborative arrangements to develop and commercialize intellectual property. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. These collaborations usually involve various activities by one or more parties, including R&D, marketing and selling and distribution. Often, these collaborations require upfront, milestone and royalty or profit share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations.
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Product Shipment Costs
Product shipment costs are included in Selling, marketing and administrative expense in the accompanying Consolidated Statements of (Loss) Income. Shipping and handling costs were $124.1 million, $104.9 million and $29.3 million for fiscal years 2023, 2022 and 2021, respectively.
Advertising Costs
Advertising costs are expensed as incurred and included in Selling, marketing and administrative expense in the accompanying Consolidated Statements of (Loss) Income. Advertising costs were $15.1 million, $26.8 million and $13.7 million for fiscal years 2023, 2022 and 2021, 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.
The Company does not intend to permanently reinvest earnings of foreign subsidiaries at this time. Accordingly, the Company provides for income taxes and foreign withholding taxes, where applicable, on undistributed earnings. Any repatriation of undistributed earnings would be done at little or no tax cost.
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:
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 cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities approximate their fair values due to their short-term nature.
Stock-based Compensation
Stock-based compensation, comprised of stock options, restricted stock units (“RSUs”) and restricted stock awards to employees and directors, is measured at fair value on the grant date. Compensation expense is recognized over the requisite service period, which is generally the vesting period, and includes an estimate of the awards that will be forfeited, and an estimate of the level of performance the Company will achieve for performance-based awards.
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 is 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 ROU assets, operating lease liabilities and operating lease liabilities non-current in the Consolidated Balance Sheets.
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Comprehensive Income
Comprehensive income includes unrealized gains and losses that are related to cumulative translation adjustments; unrealized gains and losses on marketable securities; changes in unamortized pension and post-employment actuarial gains and losses; and changes in the fair value of derivatives that are designated and qualify as cash flow hedging instruments excluded from the Consolidated Statements of (Loss) Income.
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. The Company assesses 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 the acquired business and current selling prices of similar assets. Fair value of the assets acquired and liabilities assumed, including intangible assets, IPR&D, and contingent payments, are measured based on the assumptions and estimations with regards to 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, the Company determines 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 are recognized 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.
Defined Benefit Plans and Other Post-Employment Benefits
In connection with the Combinations, the Company assumed Ortho’s defined benefit plans in certain countries and a retiree healthcare reimbursement plan for certain U.S. employees. Defined benefit plans specify an amount of pension benefit that an employee will receive on retirement, usually dependent on factors such as age, years of service and compensation. The net obligation with respect to defined benefit plans is calculated separately for each plan by estimating the amount of the future benefits that employees have earned in return for their service in the current and prior periods. These benefits are then discounted to determine the present value of the obligations and are then adjusted for the impact of any unamortized prior service costs. The net obligation is then determined with reference to the fair value of the plan assets (if any). The discount rate used is the yield on bonds that are denominated in the currency in which the benefits will be paid and that have maturity dates approximating the terms of the obligations. The calculations are performed by qualified actuaries using the projected unit credit method.
Recent Accounting Pronouncements
There have been no accounting pronouncements issued or adopted during fiscal year 2023 that are expected to have a material impact on the Company’s Consolidated Financial Statements.
Note 2. Business Combination
On May 27, 2022, pursuant to the BCA, Quidel and Ortho consummated the Combinations and each of Quidel and Ortho became a wholly owned subsidiary of QuidelOrtho. As a result of the Combinations, QuidelOrtho became the successor issuer to Quidel. The Combinations enhance the Company’s revenue profile and expand the Company’s geographic footprint and product diversity.
The Combinations were completed for a total consideration of $4.3 billion, which included the fair value of equity issued based on the May 26, 2022 closing price of $99.60 per share of Quidel common stock. Former Ortho shareholders received $7.14 in
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cash and 0.1055 shares of QuidelOrtho common stock for each Ortho ordinary share. The total purchase consideration was calculated as follows (in millions, except value per share data and Ortho Exchange Ratio):
Total Ortho shares subject to exchange 237.487
Ortho Exchange Ratio 0.1055
QuidelOrtho shares issued 25.055
Fair value of stock consideration $ 2,495.5
Fair value of replacement equity awards (1) 47.9
Total purchase consideration $ 4,291.1
(1) Represents the fair value of replacement stock options (which include options with time-based, performance-based, and both performance- and market-based vesting conditions), RSUs and restricted stock outstanding as of May 27, 2022 that are attributable to service prior to the Combinations. The terms of the replacement awards are substantially similar to the former Ortho equity awards for which they were exchanged. The portion of the fair value of the replacement equity awards attributable to service after the Combinations is $46.6 million and will be recognized as compensation expense based on the vesting terms of the replacement equity awards.
(2) Represents cash consideration of $7.14 per share paid to Ortho shareholders and holders of vested Ortho stock options on the closing date of the Combinations for 237.5 million outstanding Ortho shares and 7.3 million vested Ortho stock options.
The Company funded the cash portion of the purchase price with cash on its balance sheet and a portion of the Term Loan proceeds from the Financing.
The Combinations have been accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair value as of the date of the consummation of the Combinations, with Quidel considered the accounting and the legal acquirer. The assessment of the fair value of assets acquired and liabilities assumed was finalized in fiscal year 2023. The measurement period adjustments reflected in fiscal year 2023 resulted from finalization of tax related matters. The related impact to net earnings that would have been recognized in previous periods if the adjustments were recognized as of the date of the consummation of the Combinations is immaterial to the Company’s Consolidated Financial Statements.
The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below:
Cash and cash equivalents $ 234.5 $ — $ 234.5
Property, plant and equipment 948.9 — 948.9
Prepaid expenses and other assets 271.7 (1.3) 270.4
Accrued payroll and related expenses (81.1) — (81.1)
Long-term borrowings, including current portion (3) (2,268.4) — (2,268.4)
Other current and non-current liabilities (372.5) 2.9 (369.6)
Total purchase consideration $ 4,291.1 $ — $ 4,291.1
(1) As reported in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
(2)Includes an estimated fair value adjustment to inventory of $61.7 million, which was fully recognized in the Consolidated Statements of (Loss) Income in fiscal year 2022.
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(3) Immediately following the closing of the Combinations, the Company repaid long-term borrowings assumed, which consisted of $1,608.4 million aggregate principal amount related to Ortho’s Dollar Term Loan and Euro Term Loan Facilities, $240.0 million aggregate principal amount of 7.375% Senior Notes due 2025 and $405.0 million aggregate principal amount of 7.250% Senior Notes due 2028. The 7.375% and 7.250% Senior Notes were fully discharged following the Combinations. The Company recorded a $23.5 million loss on extinguishment in connection with the Combinations, representing the difference between the reacquisition value, inclusive of $35.9 million of redemption premium, and the net carrying value of the extinguished debt.
Goodwill represents the excess of the total purchase consideration over the estimated fair value of the net assets acquired, and is primarily attributable to synergies which are expected to expand the Company’s revenue profile and product diversity, as well as Ortho’s assembled workforce. Goodwill is not deductible for tax purposes. The assignment of goodwill by reportable segment at the acquisition date is as follows (in millions):
The following table sets forth the amounts assigned to the identifiable intangible assets acquired (in millions, except years):
Intangible Asset Amortization Period Fair Value of Assets Acquired
Customer relationships (1) 20 years $ 1,907.0
Developed technology (2) 15 years 888.0
(1) The fair value was estimated using the Multi-Period Excess Earnings Method, which is a form of the income approach. Significant assumptions include: (i) the estimated annual net cash flows, which are a function of expected earnings attributable to the asset, contributory asset charges and the applicable tax rate, and (ii) the discount rate.
(2) The fair value was estimated using the Relief from Royalty Method, which is another form of the income approach. Significant assumptions include: (i) the estimated annual net cash flows, which are a function of expected earnings attributable to the asset, the probability of use of the asset, the royalty rate and the applicable tax rate, and (ii) the discount rate.
Intangible assets are amortized on a straight-line basis over the amortization periods noted above, which reflects the estimated useful life of the underlying assets.
For fiscal year 2022, the Company incurred $46.9 million of transaction costs related to the Combinations, which primarily consisted of financial advisory, legal, accounting and valuation-related expenses. These expenses were recorded in Acquisition and integration costs in the Consolidated Statements of (Loss) Income.
The following supplemental pro forma financial information shows the combined results of operations of the Company as if the Combinations had occurred on January 4, 2021, the beginning of the periods presented:
Fiscal Year Ended
This supplemental pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the Combinations been completed at the beginning of fiscal year 2021. In addition, the supplemental pro forma financial information is not a projection of the Company’s future results of operations, nor does it reflect the expected realization of any synergies or cost savings associated with the Combinations. The supplemental pro forma financial information includes adjustments for:
•incremental intangible assets amortization expense based on the preliminary fair values of the identifiable intangible assets acquired;
•incremental cost of sales related to the fair value step-up of inventory;
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•decreases in interest expense associated with the issuance of debt to finance the Combinations and to repay Ortho’s then-outstanding indebtedness, including the net impact of the removal of the amortization of the discount on Ortho’s indebtedness and the change in amortization of deferred financing fees;
•the removal of loss on extinguishment of debt from Ortho’s results in fiscal year 2021 and the reclassification of loss on extinguishment of debt in fiscal years 2021 and 2022;
•the reclassification of expense related to the accelerated vesting of certain stock awards of Ortho’s former chief executive officer; and
•tax impacts related to the above adjustments.
From the acquisition date through January 1, 2023, the acquired results of operations of Ortho contributed total revenues of $1,165.2 million and net loss of $126.2 million to the Company’s consolidated results, which included amortization of acquired intangible assets of $104.7 million and recognition in Cost of sales, excluding amortization of intangibles of the fair value step-up of inventory of $60.6 million.
Note 3. Computation of Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing Net (loss) income by the weighted-average number of shares of common stock outstanding. Diluted EPS is computed based on the sum of the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares of common stock consist of shares issuable from stock options and unvested RSUs. Potentially dilutive shares of common stock from outstanding stock options and unvested RSUs are determined using the average share price for each period under the treasury stock method.
The following table presents the calculation of the weighted-average shares used in computing basic and diluted EPS in the respective periods:
Fiscal Year Ended
Basic weighted-average shares of common stock outstanding 66.8 56.8 42.1
Dilutive potential shares issuable from stock options and RSUs (1) — 0.6 0.8
Diluted weighted-average shares of common stock outstanding 66.8 57.4 42.9
(1) In fiscal year 2023, all potential shares of common stock issuable for stock options and RSUs were excluded from the dilutive calculations above because the effect of including them would have been anti-dilutive. The dilutive effect of potential shares of common stock issuable for stock options and RSUs on the weighted-average number of shares of common stock outstanding would have been as follows:
Fiscal Year Ended
Basic weighted-average shares of common stock outstanding 66.8
Dilutive potential shares issuable from stock options and RSUs 0.5
Diluted weighted-average shares of common stock outstanding 67.3
Stock options and RSUs where the combined exercise price and unrecognized stock-based compensation was greater than the average market price for the Company’s common stock were not included in the computations of diluted weighted-average shares because the effect would have been anti-dilutive. These stock options and RSUs represented 1.6 million, 0.9 million and 0.1 million shares of common stock for fiscal years 2023, 2022 and 2021, respectively.
Note 4. Revenue
Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing a customer (a “contract asset”). Contract assets are included within Prepaid expenses and other current assets in the Company’s Consolidated Balance Sheets and are transferred to accounts receivable when the right to payment becomes unconditional. The balance of contract assets recorded in the Company’s Consolidated Balance Sheets as of December 31, 2023 and January 1, 2023 was $46.2 million and $49.6 million, respectively.
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The contract asset balance consisted of the following components, all of which related to agreements acquired by the Company in connection with the Combinations:
•a customer supply agreement under which the difference between the timing of invoicing and revenue recognition resulted in a contract asset of $1.9 million and $6.8 million as of December 31, 2023 and January 1, 2023, respectively;
•contractual arrangements with certain customers under which the Company invoices the customers based on reportable results generated by its reagents; however, control of the goods transfers to the customers upon shipment or delivery of the products, as determined under the terms of the contract. Using the expected value method, the Company estimates the number of reagents that will generate a reportable result. The Company records the revenue upon shipment and an associated contract asset, and relieves the contract asset upon completion of the invoicing. The balance of the contract asset related to these arrangements was $41.8 million and $38.5 million as of December 31, 2023 and January 1, 2023, respectively; and
•one of the Company’s contract manufacturing agreements that recognizes revenue as the products are manufactured resulted in a contract asset of $2.5 million and $4.3 million as of December 31, 2023 and January 1, 2023, respectively.
The Company reviews contract assets for expected credit losses resulting from the collectability of customer accounts. Expected losses are established based on historical losses, customer mix and credit policies, current economic conditions in customers’ country or industry, and expectations associated with reasonable and supportable forecasts. No credit losses related to contract assets were recognized during fiscal years 2023 and 2022.
The Company recognizes a contract liability when a customer pays an invoice prior to the Company transferring control of the goods or services (“contract liabilities”). The Company’s contract liabilities consist of deferred revenue primarily related to customer service contracts. The Company classifies deferred revenue as current or non-current based on the timing of the transfer of control or performance of the service. The balance of the Company’s current deferred revenue was $36.8 million and $76.4 million as of December 31, 2023 and January 1, 2023, respectively. The Company has one arrangement with a customer where the revenue is expected to be recognized beyond one year. The balance of the deferred revenue included in long-term liabilities was $13.9 million and $9.4 million as of December 31, 2023 and January 1, 2023, respectively, and was included in Other liabilities in the Consolidated Balance Sheets. The amount of deferred revenue as of January 1, 2023 that was recorded in Total revenues during fiscal year 2023 was $72.1 million. The amount of deferred revenue as of January 2, 2022 that was recorded in Total revenues during fiscal year 2022 was not material.
Joint Business with Grifols
In connection with the Combinations, the Company acquired the Joint Business between Ortho and Grifols, under which Ortho and Grifols agreed to pursue a collaboration relating to Ortho’s Hepatitis and HIV diagnostics business. The governance of the Joint Business is shared through a supervisory board made up of equal representation by Ortho and Grifols, which is responsible for all significant decisions relating to the Joint Business that are not exclusively assigned to either Ortho or Grifols, as defined in the Joint Business agreement. The Company’s portion of the pre-tax net profit shared under the Joint Business was $47.3 million and $18.6 million during fiscal years 2023 and 2022, respectively. These amounts included the Company’s portion of the pre-tax net profit of $21.4 million and $11.1 million during fiscal years 2023 and 2022, respectively, on sales transactions with third parties where the Company is the principal. The Company recognized revenues, cost of sales, excluding amortization of intangibles, and operating expenses, on a gross basis on these sales transactions in their respective lines in the Consolidated Statements of (Loss) Income. The Company’s portion of the pre-tax net profit also included revenue from collaboration and royalty agreements of $26.0 million and $7.5 million during fiscal years 2023 and 2022, respectively, which is presented on a net basis within Total revenues.
Disaggregation of Revenue
The following table summarizes Total revenues by business unit:
Fiscal Year Ended
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Concentration of Revenue and Credit Risk
For fiscal year 2023, no customer individually accounted for more than 10% of Total revenues. Customers that accounted for 10% or more of the Company’s Total revenues for fiscal years 2022 and 2021 were as follows:
Fiscal Year Ended
Customer A 20 % 1 %
As of December 31, 2023 and January 1, 2023, customers with balances due in excess of 10% of Accounts receivable, net totaled $63.5 million and $161.9 million, respectively. Revenue related to our respiratory products accounted for 24%, 57% and 81% of Total revenues for fiscal years 2023, 2022 and 2021, respectively.
Note 5. Segment and Geographic Information
The Company operates in three geographically-based reportable segments: North America, EMEA, and China. Although all three segments are engaged in the marketing, distribution and sale of diagnostic instruments and assays for hospitals, retailers, distributors, laboratories and/or blood and plasma centers worldwide, each region is managed separately to better align with the market dynamics of the specific geographic region. Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.”
Total revenues by reportable segment are as follows:
Fiscal Year Ended
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The following table sets forth Adjusted EBITDA by segment and the reconciliations to (Loss) income before income taxes for fiscal years 2023, 2022 and 2021:
Fiscal Year Ended
Acquisition and integration costs (113.4) (136.0) (9.6)
Tax indemnification expense (12.6) (0.3) —
Amortization of deferred cloud computing implementation costs (9.2) (5.4) (3.7)
Impairment of long-lived assets (4.5) (2.8) —
(Loss) gain on investments (3.6) (5.8) 1.5
EU medical device regulation transition costs (2) (2.5) (1.5) —
Unwind inventory fair value adjustment — (60.6) —
Loss on extinguishment of debt — (24.0) —
Employee compensation charges — (3.2) —
Derivative mark-to-market gain — 4.4 —
Other adjustments (1.7) (0.6) (0.2)
(Loss) income before income taxes $ (29.1) $ 735.9 $ 900.3
(1) Primarily consists of costs related to executive and staff functions, including certain finance, human resources, manufacturing and IT functions, which benefit the Company as a whole. These costs are primarily related to the general management of these functions on a corporate level and the design and development of programs, policies and procedures that are then implemented in the individual segments, with each segment bearing its own cost of implementation. The Company’s corporate function also includes debt and stock-based compensation associated with all employee stock-based awards.
(2) Represents incremental consulting costs and R&D manufacturing site costs to align compliance of the Company’s existing, on-market products that were previously registered under the European In Vitro Diagnostics Directive regulatory framework with the requirements under the EU’s In Vitro Diagnostic Regulation, which generally apply from May 2022 onwards.
The CODM does not review capital expenditures, total depreciation and amortization or assets by segment, and therefore this information has been excluded as it does not comprise part of management’s key performance metrics.
The following presents long-lived assets (excluding intangible assets) and total net revenue by geographic territory:
Long-lived Assets as of Total Revenues for Fiscal Year
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Note 6. Income Taxes
Significant components of the provision for income taxes were as follows:
Fiscal Year Ended
Current:
Deferred:
Total deferred (benefit) provision (4.5) (41.4) 2.6
(Benefit from) provision for income taxes $ (19.0) $ 187.2 $ 196.1
The Company’s income before income taxes was subject to taxes in the following jurisdictions for the following periods:
Fiscal Year Ended
(Loss) income before income taxes $ (29.1) $ 735.9 $ 900.3
Significant components of the Company’s deferred tax assets and deferred tax liabilities as of December 31, 2023 and January 1, 2023 are shown below:
Deferred tax assets:
Allowance for returns and discounts 42.3 45.9
Stock-based compensation 15.8 14.6
Tax loss, interest expense and credit carryforwards 603.8 565.3
Research & development expenses 75.9 50.7
Employee related obligations 6.0 19.9
Valuation allowance for deferred tax assets (274.7) (251.3)
Total deferred tax assets, net of valuation allowance 541.1 546.7
Deferred tax liabilities:
Right-of-use assets (38.9) (43.8)
Property, plant and equipment (114.3) (109.5)
Total deferred tax liabilities (707.4) (743.5)
Net deferred tax liabilities $ (166.3) $ (196.8)
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 fiscal years ended December 31, 2023, January 1, 2023 and January 2, 2022, 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.
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The valuation allowance of $274.7 million as of December 31, 2023 represents the portion of the deferred tax asset that management could not conclude was more likely than not to be realized. The Company’s valuation allowance relates primarily to the realization of recorded tax benefits on tax loss carryforwards from operations in Luxembourg and credits in U.S. state jurisdictions. 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 of December 31, 2023, the Company had U.S. federal net operating loss (“NOL”) carryforwards of $792.5 million, of which $304.1 million are subject to expiration through 2037 and $488.4 million are not subject to expiration. In addition, the Company has state NOLs of approximately $512.0 million, which will expire in years 2024 through 2043. As of December 31, 2023, the Company had U.S. federal research credit carryforwards of $26.7 million and federal foreign tax credits of $3.2 million, which will begin to expire in 2034 and 2028, respectively. In addition, the Company had state research credits of $16.2 million and state business credit carryforwards of $25.6 million, of which none expire. As of December 31, 2023, the Company had $560.7 million of NOL carryforwards in certain non-U.S. jurisdictions, net of uncertain tax positions. Of these, $296.6 million have no expiration and the remaining $264.1 million will expire in years through 2040.
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 a result of an ownership change that occurred in the second quarter of fiscal year 2022, the Company may be limited in its ability to utilize its NOL carryforwards and certain other attributes, starting on the ownership change date.
The reconciliation of income tax computed at the federal statutory rate to the provision for income taxes from continuing operations was as follows:
Fiscal Year Ended
Tax (benefit) expense at statutory tax rate $ (6.1) $ 154.5 $ 189.1
State tax (benefit) expense, net of federal tax (2.8) 29.3 30.1
Permanent differences (4.3) 8.2 1.8
Federal and state research credits—current year (10.3) (7.3) (7.7)
Stock-based compensation 1.5 1.5 (9.2)
Change in valuation allowance 10.4 26.2 (0.1)
Foreign Derived Intangible Income Deduction — (10.2) (8.4)
Global Intangible Low-Taxed Income 20.1 3.8 —
Change in uncertain tax positions (11.8) — —
(Benefit from) provision for income taxes $ (19.0) $ 187.2 $ 196.1
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:
Fiscal Year Ended
Increases related to current year tax positions 2.6 1.8 0.9
(Decreases) increases related to prior year tax positions (0.1) (0.6) 0.5
Increases due to current year acquisitions — 27.8 —
Decreases due to settlements (13.7) (6.7) —
Decreases from voluntary disclosure agreements — — (6.3)
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As of December 31, 2023, January 1, 2023 and January 2, 2022, the Company had unrecognized tax benefits of $28.8 million, $40.0 million, and $17.7 million, respectively, of which $21.6 million, $28.3 million and $11.3 million, respectively, would reduce the Company’s annual effective tax rate, if recognized. The Company estimates that within the next 12 months, its uncertain tax positions, excluding interest, will decrease by $11.7 million related to the lapse of statutes of limitations as well as an on-going multi-state tax commission audit that is expected to be settled within 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 had accrued interest and penalties associated with uncertain tax positions of $4.0 million as of December 31, 2023 and $8.3 million as of January 1, 2023. The Company recognized net interest income of $4.3 million for fiscal year 2023 due to the reversals of prior year accrued interest; interest expense for fiscal years 2022 and 2021 was approximately $0.3 million and $0.7 million, respectively.
The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized credits, the Company’s federal tax years from 2012 and onwards are subject to examination by the U.S. authorities. The Company’s state and foreign tax years for 2001 and onwards are subject to examination by applicable 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.
Ortho is currently under audit in certain jurisdictions for tax years under the responsibility of Johnson & Johnson. Pursuant to the stock and asset purchase agreement entered into by Ortho and Johnson & Johnson in January 2014, Johnson & Johnson retained all income tax liabilities accrued as of the date of acquisition, including reserves for unrecognized tax benefits. Accordingly, all tax liabilities related to these tax years will be indemnified by Johnson & Johnson. During the fourth quarter of fiscal year 2023, the federal examination for tax years 2013 through 2014 closed with no liability due. As such, the related unrecognized tax benefits and interest were released totaling $19.9 million, offset by $5.4 million of competent authority benefits reversed. As of December 31, 2023, the remaining indemnification receivable from Johnson & Johnson totaled $3.0 million and is included as a component of Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheet.
The following table summarizes the changes to the valuation allowance for balances for fiscal years 2023, 2022 and 2021:
Deferred tax valuation allowance
Fiscal year ended January 2, 2022 $ 2.3 — — — $ 2.3
Note 7. Balance Sheet Account Details
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents $ 118.9 $ 292.9
Restricted cash included in Other assets 0.6 1.0
Cash, cash equivalents and restricted cash $ 119.5 $ 293.9
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Marketable Securities
The following table is a summary of marketable securities:
Corporate asset-backed securities 8.9 — 8.9 6.7 — 6.7
U.S. government securities — — — 2.0 — 2.0
Sovereign government bonds — — — 1.9 — 1.9
Foreign and other — — — 0.5 — 0.5
Corporate asset-backed securities, non-current 0.9 — 0.9 7.9 (0.1) 7.8
Sovereign government bonds, non-current 2.0 — 2.0 — — —
Accounts Receivable, Net