Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Quidel Corporation and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included.
The information at
March 31, 2018
, and for the
three
months ended
March 31, 2018
and
2017
, is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended
December 31, 2017
included in the Company’s
2017
Annual Report on Form 10-K. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year.
For
2018
and
2017
, the Company’s fiscal year will end or has ended on December 30, 2018 and December 31, 2017, respectively. For
2018
and
2017
, the Company’s
first
quarter ended on April 1, 2018 and April 2, 2017, respectively. For ease of reference, the calendar quarter end dates are used herein. The
three
month periods ended
March 31, 2018
and
2017
each included 13 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
During the three months ended
March 31, 2018
, there have been no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, except as described below.
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. 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, determining 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. Performance obligation is considered to be satisfied once the control of a product is transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control.
A portion of product sales includes revenues for diagnostic kits, which are utilized on leased instrument systems under the Company’s “reagent rental” program. The reagent rental program provides customers the right to use the instruments at no separate cost to the customer in consideration for a multi-year agreement to purchase annual minimum amounts of consumables (“reagents” or “diagnostic kits”). When an instrument is placed with a customer under a reagent rental agreement, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheets as property, plant and equipment. The instrument is depreciated on a straight-line basis over the lower of the lease term or life of the instrument.
Depreciation expense is recorded in cost of sales included in the Consolidated Statements of 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
.
Contract price will be allocated between these two performance obligations based on their relative standalone selling prices. The instrument is considered an operating lease and revenue allocated to the instrument will be separately disclosed if material.
Reclassifications
The Company recorded a reclassification of
$1.6 million
for the
three
months ended
March 31, 2017
from amortization of intangible assets from acquired business and technology to cost of sales expense as previously reported in the Consolidated Statements of Income. In addition, the Company recorded a reclassification of
$0.7 million
for the
three
months ended
March 31, 2017
from amortization of intangible assets from acquired business and technology to sales and marketing expense to conform to current year presentation. These reclassifications did not impact the net income as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Cash Flows or Statements of Comprehensive Income.
The Company also recorded immaterial reclassifications of acquisition and integration costs totaling
$0.1 million
for the
three
months ended
March 31, 2017
from general and administrative expense to acquisition and integration costs as previously reported in the Consolidated Statements of Income to conform to current year presentation. The Company believes these reclassifications provide greater clarity and insight into the consolidated financial statements for the periods presented. The reclassification did not impact the net income as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Cash Flows or Statements of Comprehensive Income.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which amends the guidance in former
ASC 605, Revenue Recognition
(“ASU 2014-09”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The FASB has issued several amendments to the new standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses and principal vs. agent considerations. ASU 2014-09 and all subsequent amendments (collectively, the “ASC 606”) are effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein.
The Company adopted ASC 606 on January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date. The cumulative effect of applying the new revenue standard to all incomplete contracts as of January 1, 2018 was not material and, therefore, did not result in an adjustment to retained earnings. The adoption of ASC 606 did not have a material impact on the Company's consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three months ended March 31, 2018.
In February 2016, the FASB issued guidance codified in ASU 2016-02 (Topic 842),
Leases
. The guidance requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018 including interim periods within those years. Currently, the standard will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The FASB has proposed an alternative method to adopt the lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. While the Company is continuing to assess the effects of adoption, the Company believes the new standard will have a material effect on the consolidated financial statements and disclosures. We expect substantially all real-estate operating lease commitments to be recognized as lease liabilities with corresponding right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is currently evaluating the impact of Topic 842 on the consolidated financial statements as it relates to other aspects of its business.
In January 2017, the FASB issued guidance codified in ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). Under this new guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The guidance is effective for fiscal years beginning after December 15, 2019 including interim periods therein. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2020.
Note 2. Computation of Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net earnings by the weighted-average number of common shares outstanding, including restricted stock units (“RSUs”) vested during the period. Diluted earnings per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable from stock options, unvested RSUs and the
3.25%
Convertible Senior Notes due 2020 (“Convertible Senior Notes”). Potentially dilutive common shares from outstanding stock options and unvested RSUs are determined using the average share price for each period under the treasury stock method. Potentially dilutive shares from the Convertible Senior Notes are determined using the if-converted method. Under the provisions of the if-converted method, the Convertible Senior Notes are assumed to be converted and included in the denominator of the EPS calculation and the interest expense, net of tax, recorded in connection with the Convertible Senior Notes is added back to net income.
The Convertible Senior Notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the notes. The Senior Convertible Notes were convertible as of March 31, 2018 and were not convertible as of March 31, 2017.
The following table reconciles net income and the weighted-average shares used in computing basic and diluted earnings per share in the respective periods (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income used for basic earnings per share
|
$
|
33,958
|
|
|
$
|
14,290
|
|
Interest expense on Convertible Senior Notes, net of tax
|
2,144
|
|
|
—
|
|
Net income used for diluted earnings per share, if-converted method
|
$
|
36,102
|
|
|
$
|
14,290
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
35,236
|
|
|
33,202
|
|
Potentially dilutive shares issuable from Convertible Senior Notes, if-converted
|
4,957
|
|
|
—
|
|
Potentially dilutive shares issuable from stock options and unvested RSUs
|
1,755
|
|
|
796
|
|
Diluted weighted-average common shares outstanding, if-converted
|
41,948
|
|
|
33,998
|
|
Potentially dilutive shares excluded from calculation due to anti-dilutive effect
|
193
|
|
|
1,972
|
|
Potentially dilutive shares excluded from the calculation above represent stock options when the combined exercise price and unrecognized stock-based compensation are greater than the average market price for the Company’s common stock because their effect is anti-dilutive.
Note 3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following, net of immaterial excess and obsolete reserves, at
March 31, 2018
and
December 31, 2017
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
21,427
|
|
|
$
|
22,252
|
|
Work-in-process (materials, labor and overhead)
|
19,725
|
|
|
22,813
|
|
Finished goods (materials, labor and overhead)
|
16,809
|
|
|
22,013
|
|
Total inventories
|
$
|
57,961
|
|
|
$
|
67,078
|
|
Note 4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Customer incentives
|
$
|
7,307
|
|
|
$
|
7,165
|
|
Accrued interest
|
1,010
|
|
|
442
|
|
Other
|
5,745
|
|
|
5,059
|
|
Total other current liabilities
|
$
|
14,062
|
|
|
$
|
12,666
|
|
Note 5. Income Taxes
The Company calculates its interim income tax provision in accordance with ASC 270,
Interim Reporting
, and ASC 740,
Accounting for Income Taxes
(together, “ASC 740”). At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.
The Company recognized income tax expense of
$4.7 million
and
$2.1 million
for the
three months ended
March 31, 2018
and 2017, respectively. The Company’s
12%
effective tax rate for the three months ended
March 31, 2018
differed from the federal statutory rate of
21%
due to the projected impact to the Company’s valuation allowance from utilization of deferred tax assets shielding its tax liability, the tax benefit recorded for excess tax benefits of stock-based compensation, and the benefit from corporate deduction attributable to Foreign Derived Intangible Income ("FDII") related to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) effective for tax years beginning on or after January 1, 2018. The Company’s
13%
effective tax rate for the three months ended March 31, 2017 differed from the federal statutory rate of 35% primarily due to the projected impact to the Company’s full valuation allowance from utilization of deferred tax assets and the tax benefit recorded for excess tax benefits of stock-based compensation.
The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward are subject to examination by the U.S. authorities. The Company's state and foreign tax years for 2001 and forward 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 laws applied to the facts of each matter.
On December 22, 2017, the Tax Act was enacted into legislation, which includes a broad range of provisions affecting businesses. The Tax Act significantly revises how companies compute their U.S corporate tax liability by, among other provisions, reducing the corporate tax rate from
35%
to
21%
for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.
On December 22, 2017, the Securities and Exchange Commissions issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Additional work is still necessary for a more detailed analysis of the Company's deferred tax assets and
liabilities and its historical foreign earnings as well as potential correlative adjustments. Therefore, no measurement period adjustments were recorded during the three months ended March 31, 2018. Any subsequent adjustment to the amounts previously recorded in 2017 (the period of enactment of the Tax Act) will be a tax expense in the quarter of 2018 when the analysis is complete.
Note 6. Debt
Convertible Senior Notes
In December 2014, the Company issued
$172.5 million
aggregate principal amount of its Convertible Senior Notes. Debt issuance costs of approximately
$5.1 million
were primarily comprised of underwriters fees, legal, accounting and other professional fees, of which
$4.2 million
were capitalized and are recorded as a reduction to long-term debt and are being amortized using the effective interest method to interest expense over the
six
-year term of the Convertible Senior Notes. The remaining
$0.9 million
of debt issuance costs were allocated as a component of equity in additional paid-in capital. Deferred issuance costs related to the Convertible Senior Notes were
$1.1 million
and
$2.1 million
as of
March 31, 2018
and
December 31, 2017
, respectively.
The Convertible Senior Notes are convertible into cash, shares of common stock, or a combination of cash and shares of common stock based on an initial conversion rate, subject to adjustment, of
31.1891
shares per $1,000 principal amount of the Convertible Senior Notes (which represents an initial conversion price of approximately
$32.06
per share). The conversion will occur in the following circumstances and to the following extent: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015, if the last reported sales price of the Company’s common stock, for at least
20
trading days (whether or not consecutive) in the period of
30
consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than
130%
of the conversion price of the notes in effect on each applicable trading day; (2) during the
five
consecutive business day period following any
five
consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Senior Notes for each such trading day was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; or (3) upon the occurrence of specified events described in the indenture for the Convertible Senior Notes. On or after September 15, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
During the first quarter of 2018, the last reported sales price of the Company’s common stock was greater than
130%
of the Convertible Senior Notes conversion price for
20
or more of the
30
consecutive trading days preceding the quarter-end. Consequently, the Convertible Senior Notes are convertible as of
March 31, 2018
. If the Convertible Senior Notes were converted as of
March 31, 2018
, the if-converted amount would exceed the principal by
$1.4 million
.
The Convertible Senior Notes may be settled in cash or a combination of cash and shares of common stock. Therefore, the Convertible Senior Notes have been classified as short-term as of
March 31, 2018
. In general, for each $1,000 in principal, the “principal portion” is defined as the lesser of $1,000, or the conversion value during the
25
-day observation period as described in the indenture for the Convertible Senior Notes. The conversion value is the sum of the daily conversion value, which is the product of the effective conversion rate divided by
25
days and the daily volume weighted-average price (“VWAP”) of the Company’s common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.
The Company pays
3.25%
interest per annum on the principal amount of the Convertible Senior Notes semi-annually in arrears in cash on June 15 and December 15 of each year. The Convertible Senior Notes mature on December 15, 2020. During the
three months ended
March 31, 2018
, the Company recorded total interest expense of
$2.6 million
related to the Convertible Senior Notes, of which
$1.3 million
related to the amortization of the debt discount and issuance costs and
$1.3 million
related to the coupon due semi-annually. During the
three months ended March 31, 2017
, the Company recorded total interest expense of
$2.8 million
related to the Convertible Senior Notes of which
$1.4 million
related to the amortization of the debt discount and issuance costs and
$1.4 million
related to the coupon due semi-annually.
If a fundamental change, as defined in the indenture for the Convertible Senior Notes, such as an acquisition, merger or liquidation of the Company, occurs prior to the maturity date, subject to certain limitations, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash at a repurchase price equal to
100%
of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
The Company accounts separately for the liability and equity components of the Convertible Senior Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company had no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the Convertible Senior Notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry with similar credit ratings and with similar maturity, the Company estimated the implied interest rate of its Convertible Senior Notes to be
6.9%
, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, which were defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Convertible Senior Notes, which resulted in a fair value of the liability component of
$141.9 million
upon issuance, calculated as the present value of implied future payments based on the
$172.5 million
aggregate principal amount. The
$30.7 million
difference between the cash proceeds of
$172.5 million
and the estimated fair value of the liability component was recorded in additional paid-in capital, net of tax and issuance costs, as the Convertible Senior Notes were not considered redeemable.
During the three months ended March 31, 2016, the Company repurchased and retired
$5.2 million
in principal amount of the outstanding Convertible Senior Notes. The Company made no repurchases in principal amount of the outstanding Convertible Senior Notes during the remainder of 2016 or during the year ended December 31, 2017.
In March 2018, the Company entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of the Convertible Senior Notes. Pursuant to the Exchange Agreements, the Company exchanged
$70.2 million
in aggregate principal amount of the Convertible Senior Notes for
2.4 million
newly issued shares of the Company’s common stock with a total value of
$118.1 million
. As a result of the Exchange Agreements, for the three months ended March 31, 2018, the Company recognized a loss on extinguishment of debt of
$1.6 million
. To measure such loss as of the settlement date, the applicable interest rate was estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation.
The following table summarizes information about the equity and liability components of the Convertible Senior Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices, and is a Level 2 measurement.
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March 31, 2018
|
|
December 31, 2017
|
Principal amount of Convertible Senior Notes outstanding
|
$
|
97,095
|
|
|
$
|
167,314
|
|
Unamortized discount of liability component
|
(8,207
|
)
|
|
(15,356
|
)
|
Unamortized debt issuance costs
|
(1,098
|
)
|
|
(2,090
|
)
|
Net carrying amount of liability component
|
87,790
|
|
|
149,868
|
|
Less: current portion
|
(87,790
|
)
|
|
—
|
|
Long-term debt
|
$
|
—
|
|
|
$
|
149,868
|
|
Carrying value of equity component, net of issuance costs
|
$
|
16,750
|
|
|
$
|
29,211
|
|
Fair value of outstanding Convertible Senior Notes
|
$
|
169,609
|
|
|
$
|
257,245
|
|
Remaining amortization period of discount on the liability component
|
2.8 years
|
|
|
3.0 years
|
|
Senior Credit Agreement
On October 6, 2017, the Company entered into a Credit Agreement (the “Credit Agreement”), which provided the Company with a
$245.0 million
senior secured term loan facility (the “Term Loan”) and a
$25.0 million
Revolving Credit Facility ("Revolving Credit Facility") together (the “Senior Credit Facility”). Also on October 6, 2017, the Company closed on the acquisition of the Triage® MeterPro® Cardiovascular (CV) and toxicology business ("Triage Business"), and B-type Naturietic Peptide (BNP) assay business run on Beckman Coulter analyzers ("BNP Business" and, together, the "Triage and BNP Businesses") from Alere Inc. On the closing date of the Credit Agreement, the Company borrowed the entire amount of the Term Loan and
$10.0 million
under the Revolving Credit Facility. The Company used the proceeds of the Term Loan along with its cash on hand, to pay (i) the consideration for the Triage Business and (ii) the fees and expenses incurred in connection with the acquisition of the Triage and BNP Businesses.
The Credit Agreement includes an accordion feature that allows the Revolving Credit Facility to be increased by
$50.0 million
upon the satisfaction of certain conditions. The Senior Credit Facility is guaranteed by certain material domestic subsidiaries of the Company (the “Guarantors”) and is secured by liens on substantially all of the assets of the Company and the Guarantors, excluding real property and certain other types of excluded assets.
Loans under the Credit Agreement bear interest at a rate equal to (i) the London Interbank Offered Rate (“LIBOR”) plus the “applicable rate” or (ii) the “base rate” (defined as the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus one-half of one percent and (c) LIBOR plus one percent) plus the “applicable rate.” The initial applicable rate is
2.50%
per annum for base rate loans and
3.50%
per annum for LIBOR rate loans, and thereafter will be determined in accordance with a pricing grid based on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement) ranging from
2.50%
to
3.50%
per annum for LIBOR rate loans and from
1.50%
to
2.50%
per annum for base rate loans. In addition, the Company pays a commitment fee on the unused portion of the Credit Agreement based on the Company’s Consolidated Leverage Ratio ranging from
0.10%
to
0.50%
per annum.
The Term Loan is subject to quarterly amortization of the principal amount on the last business day of each fiscal quarter of the Company (commencing on March 30, 2018) in such amounts as are set forth in the Credit Agreement. The Senior Credit Facility will mature on October 6, 2022, provided that if any of Convertible Senior Notes remain outstanding on the date that is 91 days prior to the maturity date of the Convertible Senior Notes, which is December 15, 2020, and the Company has not satisfied certain refinancing conditions, then the maturity date for the Senior Credit Facility will be the date that is 91 days prior to the maturity date of the Convertible Senior Notes.
The Company must prepay loans outstanding under the Credit Agreement in an amount equal to
50%
of Excess Cash Flow (as defined in the Credit Agreement) for each fiscal year (commencing with fiscal 2018) less any amount voluntarily prepaid during such fiscal year, but only if the Consolidated Senior Secured Leverage Ratio (as defined in the Credit Agreement) as of the last day of such fiscal year is greater than or equal to
1.25
to 1.00. The Company must also prepay loans outstanding under the Credit Agreement in an amount equal to
100%
of the Net Cash Proceeds (as defined in the Credit Agreement) from (i) certain property dispositions and (ii) the receipt of certain other amounts not in the ordinary course of business, in each case, if not reinvested within a specified time period as contemplated in the Credit Agreement, and with a carve out of up to
30%
of the Net Cash Proceeds from the sale leaseback transaction relating to the Company’s Summers Ridge property to the extent the excluded amounts are used for specified purposes.
During the three months ended March 31, 2018, the Company used
$100.0 million
of net cash proceeds from the sale and leaseback transaction related to the Summers Ridge property to pay down a portion of the existing Term Loan. Due to the early payment on the Term Loan, the Company recorded a
$3.0 million
loss on extinguishment of debt. Additionally, the Company paid approximately
$1.8 million
of the existing Term Loan in accordance with contractual maturities of the principal balance. Separately, the Company also repaid the entire outstanding
$10.0 million
balance on its Revolving Credit Facility under the Credit Agreement.
The Credit Agreement contains affirmative and negative covenants that are customary for credit agreements of this nature. The negative covenants include, among other things, limitations on asset sales, mergers, indebtedness, liens, dividends and other distributions, investments and transactions with affiliates. The Credit Agreement contains
two
financial covenants: (i) a maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) as of the last day of each fiscal quarter for the most recently completed four fiscal quarters of (a)
5.00
to 1.00 for the fiscal quarter ending December 31, 2017, (b)
4.25
to 1.00 for the fiscal quarters ending March 31, 2018 through December 31, 2018 and (c)
3.50
to 1.00 for the fiscal quarter ending March 31, 2019 and each fiscal quarter thereafter; and (ii) a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of
1.25
to 1.00 as of the end of any fiscal quarter for the most recently completed four fiscal quarters. The Company was in compliance with all financial covenants as of
March 31, 2018
.
The Term Loan consists of the following (dollars in thousands):
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|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Principal balance
|
$
|
143,187
|
|
|
$
|
245,000
|
|
Unamortized deferred issuance costs
|
(4,102
|
)
|
|
(7,422
|
)
|
Term Loan, net
|
139,085
|
|
|
237,578
|
|
Less: current portion
|
(6,918
|
)
|
|
(10,184
|
)
|
Term Loan, non-current
|
$
|
132,167
|
|
|
$
|
227,394
|
|
As of
March 31, 2018
, the aggregate contractual maturities of long-term borrowings for the Term Loan are as follows (dollars in thousands):
|
|
|
|
|
Fiscal year:
|
|
2018
|
$
|
5,437
|
|
2019
|
10,875
|
|
2020
|
14,500
|
|
2021
|
14,500
|
|
2022
|
97,875
|
|
Total
|
$
|
143,187
|
|
Interest expense recognized on the Term Loan for the
three months ended
March 31, 2018
totaled
$2.0 million
for the stated interest. Amortization of debt issuance costs associated with the Term Loan was
$0.3 million
for the
three months ended
March 31, 2018
, and was recorded to interest expense in the Company's Consolidated Statement of Income.
Interest expense and amortization of debt issuance costs associated with the Revolving Credit Facility for the
three months ended
March 31, 2018
was immaterial.
Note 7. Stockholders’ Equity
Issuances of Common Stock
During the
three months ended March 31, 2018
, the Company issued
202,851
shares of common stock in conjunction with the vesting and release of RSUs. The Company also issued
291,555
shares of common stock upon the exercise of stock options and
21,342
shares of common stock in connection with the Company’s employee stock purchase plan (the “ESPP”), resulting in net proceeds to the Company of approximately
$5.7 million
during the
three
months ended
March 31, 2018
. The Company withheld
72,713
shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain RSUs with a value of approximately
$3.2 million
during the
three
months ended
March 31, 2018
.
During the
three months ended March 31, 2017
, the Company issued
57,713
shares of common stock in conjunction with the vesting and release of RSUs. The Company also issued
222,378
shares of common stock upon the exercise of stock options and
32,358
shares of common stock in connection with the Company’s ESPP, resulting in net proceeds to the Company of approximately
$3.1 million
during the
three
months ended
March 31, 2017
. The Company withheld
21,538
shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain RSUs with a value of approximately
$0.4 million
during the
three
months ended
March 31, 2017
.
As discussed in Note 6, during the
three months ended March 31, 2018
, the Company issued
2,427,547
of common stock in exchange for
$70.2 million
in aggregate principal of the Convertible Senior Notes.
Stock-Based Compensation
The compensation expense related to the Company’s stock-based compensation plans included in the accompanying Consolidated Statements of Income was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2018
|
|
2017
|
|
Cost of sales
|
$
|
231
|
|
|
$
|
130
|
|
|
Research and development
|
592
|
|
|
412
|
|
|
Sales and marketing
|
796
|
|
|
470
|
|
|
General and administrative
|
1,317
|
|
|
909
|
|
|
Total stock-based compensation expense
|
$
|
2,936
|
|
|
$
|
1,921
|
|
Total compensation expense recognized for the
three
months ended
March 31, 2018
includes
$1.0 million
related to stock options and
$1.9 million
related to RSUs. Total compensation expense recognized for the
three
months ended
March 31, 2017
includes
$1.1 million
related to stock options and
$0.8 million
related to RSUs. As of
March 31, 2018
, total unrecognized compensation expense related to non-vested stock options was
$7.0 million
, which is expected to be recognized over a weighted-average period of approximately
2.3 years
. As of
March 31, 2018
, total unrecognized compensation expense related to non-vested restricted stock was
$13.5 million
, which is expected to be recognized over a weighted-average period of approximately
2.5 years
. Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the
three
months ended
March 31, 2018
or
2017
.
The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants.
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
Risk-free interest rate
|
2.49
|
%
|
|
2.33
|
%
|
Expected option life (in years)
|
6.29
|
|
|
6.63
|
|
Volatility rate
|
36
|
%
|
|
36
|
%
|
Dividend rate
|
—
|
%
|
|
—
|
%
|
The weighted-average fair value of stock options granted during the
three
months ended
March 31, 2018
and
2017
was
$18.76
and
$8.55
, respectively. The Company granted
158,758
and
230,261
stock options during the
three
months ended
March 31, 2018
and
2017
, respectively. The fair value of RSUs is determined based on the closing market price of the Company’s common stock on the grant date. The weighted-average fair value of RSUs granted during the
three
months ended
March 31, 2018
and
2017
was
$46.48
and
$21.06
, respectively. The Company granted
184,377
and
289,338
shares of restricted stock during the
three
months ended
March 31, 2018
and
2017
, respectively.
Note 8. Industry and Geographic Information
The Company operates in
one
reportable segment. Sales to customers outside the U.S. represented
$41.9 million
(
25%
) and
$8.3 million
(
11%
) of total revenue for the
three
months ended
March 31, 2018
and
2017
, respectively. As of
March 31, 2018
and
December 31, 2017
, balances due from foreign customers were
$22.0 million
and
$18.8 million
, respectively.
The Company had sales to individual customers in excess of
10%
of total revenues, as follows:
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2018
|
|
2017
|
Customer:
|
|
|
|
A
|
20
|
%
|
|
17
|
%
|
B
|
16
|
%
|
|
27
|
%
|
C
|
13
|
%
|
|
15
|
%
|
|
49
|
%
|
|
59
|
%
|
Consolidated net revenues by product category for the three months ended
March 31, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
2018
|
|
2017
|
Rapid Immunoassay
|
$
|
80,685
|
|
|
$
|
57,533
|
|
Cardiac Immunoassay
|
68,444
|
|
|
—
|
|
Specialized Diagnostic Solutions
|
14,871
|
|
|
13,048
|
|
Molecular Diagnostic Solutions
|
5,143
|
|
|
3,111
|
|
Total revenues
|
$
|
169,143
|
|
|
$
|
73,692
|
|
As of
March 31, 2018
and
December 31, 2017
, accounts receivable from customers with balances due in excess of
10%
of total accounts receivable totaled
$58.4 million
and
$44.4 million
, respectively.
Note 9. Commitments and Contingencies
Operating Lease - Summers Ridge Property
On January 5, 2018, the Company entered into a sale and leaseback transaction for the San Diego property on Summers Ridge Road (the "Summers Ridge Property") that was acquired as part of the Triage Business from Alere discussed in Note 11. The Summers Ridge Property was included as assets held for sale on the Consolidated Balance Sheet as of the year ended December 31, 2017. The Company sold the Summers Ridge Property for a net consideration of
$146.6 million
. In addition, the Company entered into a lease agreement with the buyer to lease two of the four buildings on the Summers Ridge Property for an initial term of
15
years. The Summers Ridge lease is subject to certain must-take provisions related to an additional
two
buildings, consisting of approximately 124,461 square feet, upon the expiration of certain leases with the tenants of the other portion of the Summers Ridge Property. The initial term can be extended by the Company for two additional five-year terms upon satisfaction of certain conditions.
Base rent for the Premises must be paid over the Initial Term on an absolute triple net basis. The initial annual base rent is approximately
$6.0 million
and is subject to future rent escalation adjustments. In addition to the base rent, the Company must pay all operating expenses for an Amenity Center on the Summers Ridge Property, a portion of which will be charged back to the other tenants of the Summers Ridge Property, and a portion of the Summers Ridge Property operating expenses.
The approximate future minimum lease payments of the Summers Ridge Property are
$6.2 million
for 2019,
$6.4 million
for 2020,
$6.6 million
for 2021,
$6.8 million
for 2022,
$7.0 million
for 2023 and
$73.0 million
in the aggregate after 2023.
Litigation and Other Legal Proceedings
In Beckman Coulter Inc. v. Quidel Corporation, which was filed in the Superior Court for the County of San Diego, California, on November 27, 2017, Beckman Coulter (“Beckman”) alleges that a provision of an agreement between Quidel and Beckman Coulter violates state antitrust laws. Our acquisition of the BNP Business consisted of assets and liabilities relating to a contractual arrangement with Beckman (the “Beckman Agreement”) for the supply of antibodies and other inputs related to, and distribution of, the Triage® BNP Test for the Beckman Coulter Access Family of Immunoassay Systems. The
Beckman Agreement further provides that Beckman, for a specified period, cannot research or develop an assay for use in the diagnosis of cardiac diseases that measures or detects the presence or absence of BNP or NT-pro-BNP (a related biomarker). In the lawsuit, Beckman asserts that this provision violates certain state antitrust laws and is unenforceable. Beckman contends that it has suffered damages due to this provision and seeks a declaration that this provision is void.
We deny that the contractual provision is unlawful, deny any liability with respect to this matter, and intend to vigorously defend ourselves. There are multiple factors that prevent us from being able to estimate the amount of loss, if any, that may result from this matter including: (1) we are vigorously defending ourselves and believe that we have a number of meritorious legal defenses; (2) there are unresolved questions of law and fact that could be important to the ultimate resolution of this matter; and (3) discovery is in the very early stages. Accordingly, at this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations or liquidity.
From time to time, the Company is involved in other litigation and proceedings, including matters related to product liability claims, commercial disputes and intellectual property claims, as well as regulatory, employment, and other claims related to our business. The Company accrues for legal claims when, and to the extent that, amounts associated with the claims become probable and are reasonably estimable. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For those matters as to which we are not able to estimate a possible loss or range of loss, we are not able to determine whether the loss will have a material adverse effect on our business, financial condition or results of operations or liquidity. No accrual has been recorded as of
March 31, 2018
and December 31, 2017 related to such matters as they are not probable and/or reasonably estimable.
Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. However, the resolution of, or increase in any accruals for, one or more matters may have a material adverse effect on the Company's results of operations and cash flows.
The Company also maintains insurance, including coverage for product liability claims, in amounts which management believes are appropriate given the nature of its business.
Note 10. Fair Value Measurements
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
101,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,812
|
|
|
$
|
36,086
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,086
|
|
Total assets measured at fair value
|
$
|
101,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101,812
|
|
|
$
|
36,086
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,086
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
23,284
|
|
|
23,284
|
|
|
—
|
|
|
—
|
|
|
$
|
24,301
|
|
|
$
|
24,301
|
|
Deferred consideration
|
$
|
—
|
|
|
$
|
225,952
|
|
|
$
|
—
|
|
|
$
|
225,952
|
|
|
$
|
—
|
|
|
$
|
223,158
|
|
|
$
|
—
|
|
|
$
|
223,158
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
225,952
|
|
|
$
|
23,284
|
|
|
$
|
249,236
|
|
|
$
|
—
|
|
|
$
|
223,158
|
|
|
$
|
24,301
|
|
|
$
|
247,459
|
|
There were
no
transfers of assets or liabilities between Level 1, Level 2 and Level 3 categories of the fair value hierarchy during the
three
month periods ended
March 31, 2018
and the year ended
December 31, 2017
.
The Company used Level 1 inputs to determine the fair value of its cash equivalents, which primarily consist of funds held in government money market accounts and commercial paper. As such, the carrying value of cash equivalents approximates fair value. As of
March 31, 2018
and
December 31, 2017
, the carrying value of cash equivalents was
$101.8 million
and
$36.1 million
, respectively.
In connection with the acquisition of the BNP Business, the Company will pay up to
$280.0 million
in cash, of which
$256.0 million
is guaranteed and is considered deferred consideration and
$24.0 million
is contingent consideration. The fair value of the deferred consideration was determined to be
$220.6 million
on the acquisition date based on the net present value of cash payments using an estimated borrowing rate using a quoted price for a similar liability. The Company recorded
$2.8 million
for the accretion of interest on the deferred consideration in the
first
quarter of
2018
. The fair value of contingent
consideration on the acquisition date was
$19.7 million
and was calculated using a discounted probability weighted valuation model.
In conjunction with the acquisitions of BioHelix Corporation in May 2013, AnDiaTec GmbH & Co. KG in August 2013 and Immutopics, Inc. in March 2016, the Company recorded contingent consideration of
$3.6 million
as of
March 31, 2018
and
$4.6 million
as of
December 31, 2017
. The Company assesses the fair value of contingent consideration to be settled in cash related to these prior acquisitions using a discounted revenue model. Significant assumptions used in the measurement include revenue projections and discount rates. This fair value measurement of contingent consideration is based on significant inputs not observed in the market and thus represent Level 3 measurements.
Changes in estimated fair value of contingent consideration liabilities from
December 31, 2017
through
March 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
Contingent consideration liabilities
(Level 3 measurement)
|
Balance at December 31, 2017
|
$
|
24,301
|
|
Cash payments
|
(1,017
|
)
|
Balance at March 31, 2018
|
$
|
23,284
|
|
Note 11. Acquisition
On October 6, 2017, the Company acquired the Triage and BNP Businesses. The acquisition has been accounted for in conformity with ASC Topic 805,
Business Combinations
. In connection with the acquisition of the Triage Business, the Company paid
$399.8 million
in cash and assumed certain liabilities. These acquisitions enhance the Company's revenue profile and expand the Company's geographic footprint and product diversity. The Company used proceeds from the Term Loan (defined and discussed in
Note 6
) of
$245.0 million
and cash on hand to pay (i) the consideration for the Triage Business and (ii) fees and expenses incurred in connection with the acquisition of the Triage and BNP Businesses. In connection with the acquisition of the BNP Business, the Company: (i) will pay (A)
$16.0 million
in cash plus up to an additional
$24.0 million
in contingent consideration, payable in
five
annual installments of up to
$8.0 million
, the first of which was due and paid in April 2018, (B)
$240.0 million
in cash, payable in
six
annual installments of
$40.0 million
each, the first of which was due and paid in April 2018 and (C)
$0.2 million
in cash for certain inventory related adjustments; and (ii) assumed certain liabilities.
The purchase price consideration is as follows (in thousands):
|
|
|
|
|
Cash consideration—Triage Business
|
$
|
399,798
|
|
Deferred consideration—BNP Business
|
220,550
|
|
Contingent consideration—BNP Business
|
19,700
|
|
Inventory related adjustment
|
205
|
|
Net consideration
|
$
|
640,253
|
|
The fair value of the deferred consideration was determined to be
$220.6 million
on the acquisition date based on the net present value of cash payments using an estimated borrowing rate using a quoted price for a similar liability. The fair value of contingent consideration on the acquisition date was
$19.7 million
and was calculated using a discounted probability weighted valuation model.
The Company is still finalizing the allocation of the purchase price, therefore, the purchase price allocation or the provisional measurements of intangible assets, goodwill and deferred income tax assets or liabilities may be adjusted if the Company recognizes additional assets or liabilities 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. The Company expects to complete the allocation of purchase price during fiscal year 2018.
The components of the preliminary purchase price allocation at the acquisition date and the purchase price consideration transferred at
March 31, 2018
are as follows (in thousands):
|
|
|
|
|
Prepaid expenses and other current assets
|
$
|
796
|
|
Assets held for sale
|
146,540
|
|
Inventories
|
52,205
|
|
Property, plant and equipment
|
10,608
|
|
Intangible assets
|
184,900
|
|
Goodwill
|
245,531
|
|
Other non-current assets
|
182
|
|
Total assets acquired
|
$
|
640,762
|
|
Other current liabilities
|
(509
|
)
|
Total net assets and liabilities acquired
|
$
|
640,253
|
|
Goodwill represents the excess of the total purchase price over the fair value of the underlying net assets, largely arising from synergies expected to be achieved by the combined Company and the expanded revenue profile and product diversity. The goodwill is expected to be fully deductible for tax purposes.
The following sets forth results of the amounts assigned to the identifiable intangible assets acquired (in thousands):
|
|
|
|
|
|
|
|
Intangible Asset
|
|
Amortization period
|
|
Fair value of assets acquired
|
Purchased technology
|
|
10 years
|
|
$
|
52,400
|
|
Customer relationships
|
|
7 years
|
|
115,000
|
|
Trademarks
|
|
10 years
|
|
17,500
|
|
Total intangible assets
|
|
|
|
$
|
184,900
|
|
The fair value of the identified intangible assets was determined primarily using an income based approach. Intangible assets are amortized on a straight-line basis over the amortization periods noted above.