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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-39956

Ortho Clinical Diagnostics Holdings plc

(Exact name of registrant as specified in its charter)


England and Wales	98-1574150
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1001 Route 202 Raritan, New Jersey	08869
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 908-218-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

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Ordinary shares, $0.00001 par value per ordinary share

OCDX

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 29, 2022, the registrant had 237,734,877 ordinary shares outstanding ($0.00001 par value per share).

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Statements of Operations	1
	Consolidated Statements of Comprehensive Income (Loss)	2
	Consolidated Balance Sheets	3
	Consolidated Statements of Changes in Shareholders’ Equity (Deficit)	4
	Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Ortho Clinical Diagnostics Holdings plc

Consolidated Statements of Operations

(Unaudited)

(In millions, except per share data)


	Fiscal Quarter Ended
	April 3, 2022			April 4, 2021
Net revenue	$	500.1		$	506.8
Cost of revenue, excluding amortization of intangible assets		249.5			248.2
Selling, marketing and administrative expenses		129.5			131.5
Research and development expense		32.2			28.9
Amortization of intangible assets		33.2			33.4
Other operating expense, net		8.6			7.4
Income from operations		47.1			57.4
Interest expense, net		32.5			43.4
Tax indemnification income, net		(0.2	)		(0.2	)
Other (income) expense, net		(3.5	)		50.0
Income (loss) before income taxes		18.3			(35.8	)
Provision for income taxes		3.5			3.3
Net income (loss)	$	14.8		$	(39.1	)
Basic net income (loss) per ordinary share	$	0.06		$	(0.19	)
Basic weighted-average ordinary shares outstanding		237.2			206.2
Diluted net income (loss) per ordinary share	$	0.06		$	(0.19	)
Diluted weighted-average ordinary shares outstanding		242.0			206.2

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Ortho Clinical Diagnostics Holdings plc

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In millions)


	Fiscal Quarter Ended
	April 3, 2022			April 4, 2021
Net income (loss)	$	14.8		$	(39.1	)
Other comprehensive income, before tax:
Foreign currency derivatives		(2.8	)		3.6
Interest rate derivatives		21.4			12.4
Foreign currency translation adjustments		(6.6	)		(8.8	)
Other comprehensive income, before tax		12.0			7.2
Income tax provision related to items of other comprehensive income		—			—
Other comprehensive income, net of tax		12.0			7.2
Comprehensive income (loss)	$	26.8		$	(31.9	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Ortho Clinical Diagnostics Holdings plc

Consolidated Balance Sheets

(Unaudited)

(In millions, except share and per share data)


	April 3, 2022			January 2, 2022
Assets
Current assets:
Cash and cash equivalents	$	281.1		$	309.7
Accounts receivable (net of allowance for credit losses of $8.9 and $8.6, respectively)		241.0			257.2
Inventories		316.7			305.4
Other current assets		150.8			139.4
Total current assets		989.6			1,011.7
Property, plant and equipment, net		784.2			791.4
Goodwill		572.8			573.6
Intangible assets, net		840.7			879.2
Deferred income taxes		9.7			9.7
Other assets		119.4			98.2
Total assets	$	3,316.4		$	3,363.8
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	169.5		$	181.0
Accrued liabilities		259.5			299.6
Deferred revenue		30.5			34.5
Current portion of borrowings		63.2			63.4
Total current liabilities		522.7			578.5
Long-term borrowings		2,177.1			2,186.7
Employee-related obligations		36.9			37.1
Other liabilities		67.4			78.9
Deferred income taxes		69.0			72.1
Total liabilities		2,873.1			2,953.3
Commitments and contingencies (Note 14)
Shareholders’ Equity:
Preferred redeemable shares, $1.39 nominal value per share, 50,000 shares issued and outstanding as of both April 3, 2022 and January 2, 2022, respectively		0.1			0.1
Ordinary shares, $0.00001 par value, 1,000,000,000 shares authorized, 237,612,459 and 237,203,879 shares issued and outstanding as of April 3, 2022 and January 2, 2022, respectively		—			—
Additional paid-in capital		2,431.9			2,425.9
Accumulated deficit		(1,957.0	)		(1,971.8	)
Accumulated other comprehensive loss		(31.7	)		(43.7	)
Total shareholders’ equity		443.3			410.5
Total liabilities and shareholders’ equity	$	3,316.4		$	3,363.8

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Ortho Clinical Diagnostics Holdings plc

Consolidated Statements of Changes in Shareholders’ Equity (Deficit)

(Unaudited)

(In millions, except share data)


	Preferred redeemable shares issued		Preferred redeemable shares par value		Ordinary shares issued		Ordinary share par value		Additional paid-in capital		Accumulated deficit			Accumulated other comprehensive loss			Total
Balance as of January 2, 2022		50,000	$	0.1		237,203,879	$	—	$	2,425.9	$	(1,971.8	)	$	(43.7	)	$	410.5
Net income		—		—		—		—		—		14.8			—			14.8
Exercise of stock options, net of shares retained for taxes		—		—		405,544		—		3.4		—			—			3.4
Restricted stock grant, net of shares retained for taxes		—		—		3,036		—		—		—			—			—
Recognition of stock-based compensation		—		—		—		—		2.6		—			—			2.6
Foreign currency derivatives, net of tax of $0.0		—		—		—		—		—		—			(2.8	)		(2.8	)
Interest rate derivatives, net of tax of $0.0		—		—		—		—		—		—			21.4			21.4
Foreign currency translation adjustments		—		—		—		—		—		—			(6.6	)		(6.6	)
Balance as of April 3, 2022		50,000	$	0.1		237,612,459	$	—	$	2,431.9	$	(1,957.0	)	$	(31.7	)	$	443.3


	Preferred redeemable shares issued		Preferred redeemable shares par value		Ordinary shares issued		Ordinary share par value		Additional paid-in capital		Accumulated deficit			Accumulated other comprehensive loss			Total
Balance as of January 3, 2021		—	$	—		147,295,511	$	—	$	975.1	$	(1,917.5	)	$	(68.4	)	$	(1,010.8	)
Net loss		—		—		—		—		—		(39.1	)		—			(39.1	)
Issuance of ordinary shares upon completion of initial public offering, net of commissions, underwriting discounts and offering costs		—		—		87,400,000		—		1,414.7		—			—			1,414.7
Issuance of incorporation shares consisting of ordinary share and preferred redeemable shares		50,000		0.1		1		—		—		—			—			0.1
Exercise of stock options		—		—		147,540		—		1.0		—			—			1.0
Recognition of stock-based compensation		—		—		—		—		3.5		—			—			3.5
Foreign currency derivatives, net of tax of $0.0		—		—		—		—		—		—			3.6			3.6
Interest rate derivatives, net of tax of $0.0		—		—		—		—		—		—			12.4			12.4
Foreign currency translation adjustments		—		—		—		—		—		—			(8.8	)		(8.8	)
Balance as of April 4, 2021		50,000	$	0.1		234,843,052	$	—	$	2,394.3	$	(1,956.6	)	$	(61.2	)	$	376.6

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Ortho Clinical Diagnostics Holdings plc

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)


	Fiscal Quarter Ended
	April 3, 2022			April 4, 2021
Cash Flows from Operating Activities:
Net income (loss)	$	14.8		$	(39.1	)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization		79.4			82.7
Unrealized foreign exchange (gains) losses, net		(10.1	)		22.0
Loss on extinguishment of debt		—			50.3
Amortization of deferred financing costs and original issue discount		2.0			2.4
Stock-based compensation		2.6			3.5
Deferred tax (benefit) provision		(0.8	)		1.0
Change in allowance for credit losses		0.6			0.3
Other, net		0.6			(15.9	)
Changes in operating assets and liabilities:
Accounts receivable		13.7			(10.3	)
Inventories		(35.8	)		(41.7	)
Other current and non-current assets		(25.2	)		(15.0	)
Accounts payable and accrued liabilities		(39.8	)		(56.5	)
Deferred revenue		(3.9	)		(1.0	)
Other current and non-current liabilities		(2.1	)		7.4
Cash used in operating activities		(4.0	)		(9.9	)
Cash Flows from Investing Activities:
Purchase of property, plant and equipment		(27.0	)		(13.4	)
Proceeds from cross currency swaps		—			2.4
Milestone payments and other, net		(0.2	)		0.3
Cash used in investing activities		(27.2	)		(10.7	)
Cash Flows from Financing Activities:
Proceeds from initial public offering		—			1,426.4
Payment of initial public offering costs		—			(5.0	)
Payments on long-term borrowings		(1.3	)		(1,375.9	)
Payments on short-term borrowings, net		—			(5.4	)
Proceeds from exercise of stock options		3.4			1.0
Cash provided by financing activities		2.1			41.1
Effect of exchange rate changes on cash		0.5			(0.2	)
(Decrease) increase in cash, cash equivalents and restricted cash		(28.6	)		20.3
Cash, cash equivalents and restricted cash at beginning of period		311.6			144.2
Cash, cash equivalents and restricted cash at end of period	$	283.0		$	164.5

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

(1) General and description of the business

Ortho Clinical Diagnostics Holdings plc and its consolidated subsidiaries (“Ortho” or “the Company”) is a leading global provider of in-vitro diagnostics (“IVD”) solutions to the clinical laboratory and transfusion medicine communities. The Company maintains a commercial presence in more than 130 countries and territories. The Company’s instruments, assays, reagents and other consumables are used in hospitals, laboratories, clinics, blood banks and donor centers worldwide. The Company is globally operated with manufacturing facilities in the United States (“U.S.”) and the United Kingdom (“U.K.”) and with sales centers, administrative offices and warehouses located throughout the world.

Business Combination with Quidel

On December 22, 2021, the Company, Coronado Topco, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Coronado Topco”), Laguna Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Topco (“U.S. Merger Sub”), Orca Holdco, Inc., a Delaware corporation and a wholly owned subsidiary of Topco (“U.S. Holdco Sub”), Orca Holdco 2, Inc., a Delaware corporation and a wholly owned subsidiary of U.S. Holdco Sub (“U.S. Holdco Sub 2”) and Quidel Corporation, a Delaware corporation (“Quidel”) entered into a Business Combination Agreement (the “Business Combination Agreement,” and the transactions contemplated thereby, the “Combinations”), pursuant to which, among other things and subject to the terms and conditions contained therein, (i) under a scheme of arrangement under UK corporate law, each issued and outstanding share of the Company will be acquired by a depository nominee (or transferred within the depository nominee) on behalf of Coronado Topco in exchange for (x) 0.1055 shares of common stock of Coronado Topco and (y) $7.14 in cash (the “Ortho Scheme”) and (ii) immediately after the consummation of the Ortho Scheme, U.S. Merger Sub will merge with and into Quidel, pursuant to which each issued and outstanding share of Quidel common stock will be converted into one share of Coronado Topco common stock, with Quidel surviving as a wholly owned subsidiary of Coronado Topco. The boards of directors of both the Company and Quidel have unanimously approved the terms of the Business Combination Agreement, which is expected to close during the first half of fiscal year 2022. Upon completion of the Combinations, which requires shareholder approval, the Company's shareholders are expected to own approximately 38% of Coronado Topco and Quidel stockholders are expected to own approximately 62% of Coronado Topco on a fully diluted basis, based on the respective capitalizations of the Company and Quidel as of the date the parties entered into the Business Combination Agreement.

In the event that the Business Combination Agreement is terminated by Ortho as a result of the occurrence of certain terms and conditions as specified therein, the Company must pay Quidel a termination fee of approximately $46.9 million, less any expenses reimbursable by Quidel pursuant to the Business Combination Agreement. If the Business Combination Agreement is terminated by Quidel as a result of the occurrence of certain terms and conditions as specified therein, the Company will receive approximately $207.8 million, less any expenses reimbursable by Ortho pursuant to the Business Combination Agreement.

Costs incurred related to the proposed transaction, including integration-related activities, were $5.7 million during the fiscal quarter ended April 3, 2022 and were recorded to Other operating expenses, net in the consolidated statement of operations.

(2) Basis of presentation of the unaudited consolidated financial statements

These unaudited consolidated financial statements for the Company include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. Results for the fiscal quarter ended April 3, 2022 should not be considered indicative of results for the fiscal year ending January 1, 2023. These unaudited consolidated financial statements do not represent complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto for the fiscal year ended January 2, 2022 in the Company’s most recent Annual Report on Form 10-K.

The Company follows the concept of a fiscal year which ends on the Sunday nearest to the end of the month of December, and fiscal quarters which end on the Sunday nearest to the end of the months of March, June, and September. Each fiscal quarter presented in this Quarterly Report on Form 10-Q consists of 13 weeks.

Amounts reported in millions have been calculated based on underlying, unrounded amounts. Amounts presented in tables may not total due to rounding. Percentages have been calculated using underlying, unrounded amounts.

These unaudited consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As shown in the unaudited consolidated financial statements, the Company has total Cash and cash equivalents of $281.1 million and an Accumulated deficit of $1,957.0 million as of April 3, 2022. The Company reported Net income of $14.8 million and Cash used in operating activities of

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

$4.0 million during the fiscal quarter ended April 3, 2022. The Company’s primary future cash needs will be to meet debt service requirements, working capital needs and capital expenditures. Management is required to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued and, if so, disclose that fact.

The Company’s debt agreements contain various covenants that may restrict the Company’s ability to borrow on available credit facilities and future financing arrangements and require the Company to remain below a specific credit coverage threshold. The Company’s credit agreement that governs its Senior Secured Credit Facilities (as defined in Note 7–Borrowings, the “Credit Agreement”) has a financial covenant referred to as the First Lien Net Leverage Ratio, (as defined in the Credit Agreement, not to exceed 5.5-to-1, subject to a 50 basis point step-down on September 30, 2022) that is tested when borrowings and letters of credit issued under the Revolving Credit Facility (as defined in Note 7–Borrowings) exceed 30% of the committed amount at any period end reporting date. As of April 3, 2022, the Company had no outstanding borrowings under its Revolving Credit Facility and letters of credit issued under the Revolving Credit Facility totaled $43.7 million. As of April 3, 2022, the Company was in compliance with the financial covenant. In the event the Company does not comply with the financial covenant of the Revolving Credit Facility, the lenders will have the right to call on all of the borrowings under the Revolving Credit Facility. If the lenders on the Revolving Credit Facility terminate their commitments and accelerate the loans, this would become a cross default to other material indebtedness.

The Company evaluated its liquidity position and ability to comply with financial covenants in its Revolving Credit Facility as of the date of the issuance of these unaudited consolidated financial statements. Based on this evaluation, management believes that the Company’s financial position, Cash provided by operating activities combined with Cash and cash equivalents, and borrowing capacity available under its Revolving Credit Facility, will be sufficient to fund its current obligations, capital spending, debt service requirements and working capital requirements for a period of at least the next 12 months from the issuance of these unaudited consolidated financial statements.

Should it become necessary, the Company may seek to raise additional capital within the next 12 months through borrowings on credit facilities, other financing activities and/or the public or private sale of equity securities. The Company may also need to control discretionary spending, which could impact its planned general and administrative, research and development, or capital spend in an effort to provide sufficient funds to continue its operations or maintain compliance with the financial covenants, and the Company may be subject to adverse business conditions due to the global COVID-19 pandemic, all of which could adversely affect the Company’s business.

(3) Recent accounting pronouncements

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments, which amends the accounting for lease contracts that have variable lease payments that do not depend on a reference index or rate, and which would have resulted in the recognition of a loss at lease commencement if classified as a sales-type or direct financing lease. Upon adoption, lessors will classify and account for leases with variable payments that do not depend on a reference index or rate as an operating lease if the lease would have been classified as a sales-type or direct financing lease, and if the lessor would have otherwise recognized a loss at lease commencement. The guidance in ASU 2021-05 is effective for fiscal years beginning after December 15, 2021 and can be applied either prospectively or retrospectively for reporting entities that have adopted Topic 842 prior to the issuance date of this amendment. The Company adopted this guidance prospectively on January 3, 2022, and the adoption did not have a material impact on its unaudited consolidated financial statements.

(4) Net income (loss) per share

Basic net income (loss) per ordinary share is based on the weighted-average number of ordinary shares outstanding during the period. Diluted net income (loss) per ordinary share is based on the weighted-average number of ordinary shares and ordinary share equivalents, calculated using the treasury stock method, outstanding during the period. The Company excludes potential ordinary share equivalents from the calculation if the effect would be anti-dilutive. For the fiscal quarter ended April 4, 2021, during which the Company incurred a Net loss, it excluded potential ordinary share equivalents from the calculations of Diluted net loss per ordinary share because the effect was anti-dilutive. The weighted-average number of ordinary shares used in the computation of Basic and Diluted net income (loss) per share were as follows:


	Fiscal Quarter Ended
(In millions)	April 3, 2022		April 4, 2021
Basic weighted-average ordinary shares outstanding		237.2		206.2
Effect of stock options, unvested restricted shares and restricted stock units		4.8		—
Diluted weighted-average ordinary shares		242.0		206.2

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

The following table provides the total outstanding ordinary share equivalents, unaffected by the treasury stock method weighted-average calculation, as of the end of each period below:


	Fiscal Quarter Ended
(In millions)	April 3, 2022		April 4, 2021
Stock options		12.6		15.9
Unvested restricted shares and restricted stock units		0.5		1.0
		13.1		16.9

(5) 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 (“contract asset”). Contract assets are included within Other current assets or Other assets in the Company’s unaudited consolidated balance sheet and are transferred to accounts receivable when the right to payment becomes unconditional. The balance of Contract assets recorded in the Company’s unaudited consolidated balance sheets were as follows:


	April 3, 2022		January 2, 2022
Other current assets	$	52.2	$	47.2
Other assets		—		1.0
Total contract assets	$	52.2	$	48.1

The contract asset balance consists of the following components:

•

A customer supply agreement under which the difference between the timing of invoicing and revenue recognition resulted in a contract asset of $9.0 million as of April 3, 2022 was recorded in Other current assets. As of January 2, 2022, the balance of the contract asset related to this agreement was $12.4 million, of which $11.5 million was recorded in Other current assets and $1.0 million was recorded in Other assets.

•

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 $43.2 million and $35.7 million as of April 3, 2022 and January 2, 2022, 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 the fiscal quarters ended April 3, 2022 and April 4, 2021.

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 noncurrent based on the timing of the transfer of control or performance of the service. The balance of the Company’s current deferred revenue was $30.5 million and $34.5 million as of April 3, 2022 and January 2, 2022, 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 $8.7 million and $5.6 million as of April 3, 2022 and January 2, 2022, respectively, and was included in Other liabilities in the unaudited consolidated balance sheets. The amount of deferred revenue as of January 2, 2022 that was recorded in Net revenue during the fiscal quarter ended April 3, 2022 was $19.3 million.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

Disaggregation of revenue

The Company generates product revenue in the following lines of business:

•

Clinical Laboratories—Focused on (i) clinical chemistry, which is the measurement of target chemicals in bodily fluids for the evaluation of health and the clinical management of patients, (ii) immunoassay instruments, which test the measurement of proteins as they act as antigens in the spread of disease, antibodies in the immune response spurred by disease, or markers of proper organ function and health, and (iii) testing to detect and monitor disease progression across a broad spectrum of therapeutic areas.

•

Transfusion Medicine—Focused on (i) immunohematology instruments and tests used for blood typing to ensure patient-donor compatibility in blood transfusions, and (ii) donor screening instruments and tests used for blood and plasma screening for infectious diseases for customers primarily in the U.S.

•

Other Product Revenue—Includes revenues primarily from contract manufacturing.

The Company also enters into collaboration and license agreements pursuant to which the Company derives collaboration and royalty revenues. During the fiscal quarter ended September 27, 2020, the Company entered into two agreements with the Biomedical Advanced Research and Development Authority, a division of the U.S. Department of Health and Human Services, for two awards of up to $13.6 million to develop and submit Emergency Use Authorizations and 510(k) applications to the U.S. Food and Drug Administration for its COVID-19 antigen and antibody tests. An additional award was granted to the Company on April 16, 2021 for an amount up to $3.6 million to submit a 510(k) application for its COVID-19 antigen test. During the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company recognized $0.2 million and $4.0 million, respectively, of Net revenue related to these grants based upon project milestones completed to date.

The following table summarizes Net revenue by line of business for the fiscal quarter ended April 3, 2022 and April 4, 2021:


	Fiscal Quarter Ended
	April 3, 2022		April 4, 2021
Clinical Laboratories	$	321.2	$	334.0
Transfusion Medicine		173.6		161.4
Other Product Revenue		0.4		4.3
Total Product Revenue		495.2		499.7
Collaborations and Other Revenue		4.8		7.1
Net Revenue	$	500.1	$	506.8

(6) Inventories

The Company’s inventories were as follows:


	April 3, 2022		January 2, 2022
Raw materials and supplies	$	74.8	$	76.4
Goods in process		34.7		32.4
Finished goods		207.2		196.5
Total Inventories	$	316.7	$	305.4

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

(7) Borrowings

As of April 3, 2022 and January 3, 2021, the components of borrowings were as follows:


	April 3, 2022			January 2, 2022
Senior Secured Credit Facilities
Dollar Term Loan Facility	$	1,292.8		$	1,292.8
Euro Term Loan Facility		324.8			335.8
Revolving Credit Facility		—			—
2028 Notes		405.0			405.0
2025 Notes		240.0			240.0
Finance lease obligation		0.8			0.7
Other long-term borrowings		2.2			2.6
Unamortized deferred financing costs		(20.2	)		(21.4	)
Unamortized original issue discount		(4.9	)		(5.3	)
Total borrowings		2,240.4			2,250.2
Less: Current portion		(63.2	)		(63.4	)
Long-term borrowings	$	2,177.1		$	2,186.7

Senior secured credit facilities

The Company’s Senior Secured Credit Facilities consist of (i) the senior secured term loan facility in an amount of $2,325.0 million (the “Dollar Term Loan Facility”), (ii) the euro-denominated senior secured term loan facility in an amount equal to €337.4 million (the “Euro Term Loan Facility”, as described below, and, together with the Dollar Term Loan Facility, the “Term Loan Facilities”), and (iii) the multi-currency senior secured revolving facility with commitments of $500.0 million (the “Revolving Credit Facility”).

In February 2021, the Company used a portion of the proceeds from its initial public offering (“IPO”) to repay $892.7 million of borrowings under the Dollar Term Loan Facility and recognized a loss on early extinguishment of debt of $11.4 million, which is recorded as a component of Other expense, net during the fiscal quarter ended April 4, 2021.

As of April 3, 2022, there was no outstanding balance under the Revolving Credit Facility, and letters of credit issued under the Revolving Credit Facility totaled $43.7 million, which reduced the availability under the Revolving Credit Facility to $456.3 million. The Senior Secured Credit Facilities are subject to various covenants that may restrict the Company’s ability to borrow on available credit facilities and future financing arrangements or require the Company to remain below a specific credit coverage threshold as indicated in our debt agreements. The Senior Secured Credit Facilities include a financial covenant that is tested when borrowings and letters of credit issued under the Revolving Credit Facility exceed 30% of the committed amount at any period end reporting date and provides that Ortho-Clinical Diagnostics S.A. (“LuxCo”) will not permit the First Lien Net Leverage Ratio as of the end of each fiscal quarter of LuxCo and its Restricted Subsidiaries (as defined in the Credit Agreement) to be greater than (i) 5.50:1.00 for each fiscal quarter ending on or prior to September 30, 2022 and (ii) 5.00:1:00 for each fiscal quarter ending thereafter. The Company was in compliance with the covenants as of April 3, 2022.

As of April 3, 2022 and January 2, 2022, the remaining balance of deferred financing costs related to the Dollar Term Loan Facility was $7.5 million and $8.1 million, respectively. As of April 3, 2022 and January 2, 2022, the remaining balance of deferred financing costs related to the Euro Term Loan Facility was $3.4 million and $3.6 million, respectively. As of April 3, 2022 and January 2, 2022, the remaining unamortized balance related to the Revolving Credit Facility was $2.2 million and $2.7 million, respectively. The effective interest rate of the Dollar Term Loan Facility and Euro Term Loan Facility as of April 3, 2022 is 5.76% and 3.88%, respectively.

Original issue discount related to the Senior Secured Credit Facilities was recorded as a reduction of the principal amount of the borrowings and is amortized using the effective interest method as a component of interest expense over the life of the Senior Secured Credit Facilities. As of April 3, 2022 and January 2, 2022, the remaining unamortized balance was $4.9 million and $5.3 million, respectively.

2025 Notes

On June 11, 2020, LuxCo and Ortho-Clinical Diagnostics, Inc. (collectively, the “Issuers”), issued $400.0 million aggregate principal amount of 7.375% Senior Notes due 2025 (the “2025 Notes’), on which interest is payable semi-annually in arrears on June 1 and December 1 of each year. The 2025 Notes will mature on June 1, 2025. The 2025 Notes and guarantees thereof are senior unsecured obligations and rank equally in right of payment with all of the Issuers’ and guarantors’ existing and future senior debt, including the 2028 Notes (as defined below). The

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

2025 Notes and the guarantees thereof are effectively subordinated to any of the Issuers’ and guarantors’ existing and future secured debt, including the Senior Secured Credit Facilities, to the extent of the value of the assets securing such debt. In addition, the 2025 Notes and the guarantees thereof rank senior in right of payment to all of the Issuers’ and guarantors’ future subordinated debt and will be structurally subordinated to the liabilities of the Issuers’ non-guarantor subsidiaries. The Company incurred deferred financing costs of $7.5 million related to the 2025 Notes, which were capitalized as deferred financing costs and are being amortized using the effective interest method as a component of interest expense over the life of the 2025 Notes.

On or after June 1, 2022, the Issuers have the option to redeem all or part of the 2025 Notes at the following redemption prices (expressed as percentages of principal amount):


Year		Price
2022		103.688%
2023		101.844%
2024 and thereafter		100.000%

Notwithstanding the foregoing, at any time and from time to time prior to June 1, 2022, the Issuers may at their option redeem in the aggregate up to 100% of the original aggregate principal amount of the 2025 Notes plus accrued and unpaid interest, if any to, but not including, the date of redemption, plus a “make-whole premium.” The Issuers may also, at their option, redeem up to 40% of the principal amount of the 2025 Notes with the net cash proceeds of certain equity offerings at a redemption price of 107.375% of the principal amount of the 2025 Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.

On February 5, 2021, the Company used a portion of the proceeds from its IPO to redeem $160.0 million aggregate principal amount of the 2025 Notes, plus accrued interest thereon and $11.8 million of redemption premium, which was recorded as a component of Other expense, net, during the fiscal quarter ended April 4, 2021. The redemption resulted in an extinguishment loss recognized of $14.5 million, which consisted of $2.7 million of unamortized deferred issuance costs and $11.8 million of the redemption premium. As of April 3, 2022 and January 2, 2022, the remaining unamortized balance of deferred issuance costs was $3.2 million and $3.4 million, respectively. The effective interest rate on the 2025 Notes is 8.03%.

2028 Notes

On January 27, 2020, the Issuers issued $675.0 million aggregate principal amount of 7.250% Senior Notes due 2028 (the “2028 Notes” and together with the 2025 Notes, the “Notes”), on which interest is payable semi-annually in arrears on February 1 and August 1 of each year. The 2028 Notes will mature on February 1, 2028. The 2028 Notes and the guarantees thereof are senior unsecured obligations and rank equally in right of payment with all of the Issuers’ and guarantors’ existing and future senior debt, including the 2025 Notes. The 2028 Notes and the guarantees thereof are effectively subordinated to any of the Issuers’ and guarantors’ existing and future secured debt, including the Senior Secured Credit Facilities, to the extent of the value of the assets securing such debt. In addition, the 2028 Notes and the guarantees thereof rank senior in right of payment to all of the Issuers’ and guarantors’ future subordinated debt and will be structurally subordinated to the liabilities of the Issuers’ non-guarantor subsidiaries. The Company incurred deferred financing costs of $12.9 million related to the 2028 Notes, which were capitalized as deferred financing costs and are being amortized using the effective interest method as a component of interest expense over the life of the 2028 Notes.

On or after February 1, 2023, the Issuers have the option to redeem all or part of the 2028 Notes at the following redemption prices (expressed as percentages of principal amount):


Year		Price
2023		103.625%
2024		101.813%
2025 and thereafter		100.000%

Notwithstanding the foregoing, at any time and from time to time prior to February 1, 2023, the Issuers may at their option redeem in the aggregate up to 100% of the original aggregate principal amount of the 2028 Notes plus accrued and unpaid interest, if any to, but not including, the date of redemption, plus a “make-whole premium.” The Issuers may also, at their option, redeem up to 40% of the principal amount of the 2028 Notes with the net cash proceeds of certain equity offerings at a redemption price of 107.25% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

On February 5, 2021, the Company used a portion of the proceeds from its IPO to redeem $270.0 million aggregate principal amount of the 2028 Notes, plus accrued interest thereon and $19.6 million of redemption premium. The redemption resulted in an extinguishment loss recognized of $24.3 million, which consisted of $4.7 million of unamortized deferred issuance costs and $19.6 million of the redemption premium, which is recorded as a component of Other expense, net during the fiscal quarter ended April 4, 2021. As of April 3, 2022 and January 2, 2022, the remaining unamortized balance of deferred issuance costs was $6.2 million and $6.4 million, respectively. The effective interest rate on the 2028 Notes is 7.76%.

The following table provides the detail of amounts within Interest expense, net for the fiscal quarter ended April 3, 2022 and April 4, 2021:


	Fiscal Quarter Ended
	April 3, 2022		April 4, 2021
Interest expense:
Dollar Term Loan Facility	$	10.2	$	14.1
Euro Term Loan Facility		2.9		3.6
Revolving Credit Facility		0.7		—
2028 Notes		7.4		9.1
2025 Notes		4.5		5.5
Accounts receivable financing		—		0.9
Amortization of:
Deferred financing costs		1.6		1.7
Original issue discount		0.4		0.3
Derivative instruments and other		4.8		8.2
Interest expense, net	$	32.5	$	43.4

(8) Supplemental balance sheet information

Cash and cash equivalents and restricted cash within the unaudited consolidated balance sheets are presented below:


	April 3, 2022		January 2, 2022
Cash and cash equivalents	$	281.1	$	309.7
Restricted cash included in Other assets		1.9		1.9
Cash, cash equivalents and restricted cash	$	283.0	$	311.6

Accrued liabilities included in Total current liabilities consisted of the following:


	April 3, 2022		January 2, 2022
Accrued compensation and employee-related obligations	$	79.2	$	123.9
Accrued commissions and rebates		34.4		32.6
Accrued taxes other than income		22.9		22.9
Accrued interest		16.5		19.8
Derivatives		12.5		5.4
Current portion of operating lease liabilities		12.5		13.4
Income taxes payable		7.3		7.3
Other accrued liabilities		74.3		74.4
Total accrued liabilities	$	259.5	$	299.6

(9) Collaborations and other relationships

In the normal course of business, the Company has entered into various collaboration arrangements which provide the Company with rights to develop, produce and market products using certain know-how, technology and patent rights maintained by the Company’s collaborative partners. The arrangements are often entered into in order to share risks and rewards related to a specific program or product. The Company’s collaborative arrangements include agreements with respect to transition services and a number of on-going relationships.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

Grifols / Novartis Vaccines and Diagnostics, Inc.

The Company and Grifols Diagnostic Solutions, Inc. (“Grifols”) have an ongoing collaboration arrangement (the “Joint Business”) to pursue income-generating opportunities through the development of certain intellectual properties (“IP”). The governance of the Joint Business is shared through a Supervisory Board made up of equal representation by the Company and Grifols, which is responsible for all significant decisions relating to the Joint Business that are not exclusively assigned to either the Company 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 $10.3 million and $10.8 million during the fiscal quarter ended April 3, 2022 and April 4, 2021, respectively. This includes the Company's portion of the pre-tax net profit of $5.6 million and $7.6 million during the fiscal quarter ended April 3, 2022 and April 4, 2021, respectively, on sales transactions with third parties where the Company is the principal. The Company recognized revenues, cost of revenue, excluding amortization of intangible assets, and operating expenses on a gross basis on these sales transactions in their respective lines in the consolidated statements of operations. This also includes revenue from collaboration and royalty agreements, which is presented on a net basis within Collaboration and other revenues, of $4.7 million, and $3.2 million during the fiscal quarter ended April 3, 2022 and April 4, 2021, respectively.

Quotient Limited

In January 2015, the Company entered into an exclusive agreement with Quotient Limited (“Quotient”), a commercial-stage diagnostics company, to distribute and sell Quotient’s transfusion diagnostics platform MosaiQ™. Under the terms of a distribution and supply agreement, Quotient is responsible for the development and launch of MosaiQ™, while the Company will leverage its worldwide commercial capabilities to sell the product to customers. The Company has exclusive rights to distribute MosaiQ™ for the global patient testing market (for blood grouping) and the donor testing market in the developing world and Japan (for blood grouping and serological disease screening). Quotient retains all rights to commercialize MosaiQ™ in the developed world, excluding Japan, for the donor testing market. On September 4, 2020, the Company and Quotient amended the distribution and supply agreement and entered into a binding letter agreement (the “Letter Agreement”), under which the Company may be required to make up to $60.0 million of payments upon achievement of certain regulatory milestones and commercial sales benchmarks, which include up to $25.0 million of payments upon the achievement by the Company of certain cumulative revenue milestones. The Company did not make such payments during the fiscal quarter ended April 3, 2022 and does not anticipate making any such payments for the remainder of fiscal year 2022.

During the fiscal quarter ended April 3, 2022 and April 4, 2021, under a separate supply agreement, the Company purchased inventories from a subsidiary of Quotient amounting to $6.2 million and $5.5 million, respectively. As of April 3, 2022 and January 2, 2022, Accounts payable included amounts related to purchases from the Quotient subsidiary of $3.2 million and $4.1 million, respectively. During the fiscal quarters ended April 3, 2022 and April 4, 2021, sales to Quotient were immaterial. As of April 3, 2022 and January 2, 2022, amounts due from Quotient were immaterial.

(10) Income taxes

During the fiscal quarter ended April 3, 2022, the Company reported income before provision for income taxes of $18.3 million and recognized a provision for income taxes of $3.5 million, resulting in an effective tax rate of 19.1%. The effective tax rate for the fiscal quarter ended April 3, 2022 differs from the U.S. federal statutory rate primarily due to (i) a net cost of $2.5 million for the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and (ii) a net benefit of $2.5 million related to non-U.S. earnings being taxed at rates that are different than the U.S. statutory rate.

During the fiscal quarter ended April 4, 2021, the Company incurred a loss before provision for income taxes of $35.8 million and recognized a provision for income taxes of $3.3 million, resulting in a negative effective tax rate of 9.2%. The effective tax rate for the fiscal quarter ended April 4, 2021 differs from the U.S. federal statutory rate primarily due to (i) a net cost of $14.8 million for the impacts of operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and (ii) a net benefit of $4.9 million due to the non-U.S. earnings being taxed at rates that are different than the U.S. statutory rate.

The balance of unrecognized tax benefits at April 3, 2022, not including interest and penalties, was $27.9 million, of which $23.0 million would affect the effective income tax rate in future periods, if recognized. The Company also recognizes interest and penalties related to unrecognized tax benefits in tax expense. At April 3, 2022, the Company had approximately $6.6 million of interest and penalties accrued related to unrecognized tax benefits. The Company estimates that within the next twelve months, its uncertain tax positions, excluding interest, will decrease by $3.0 million.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

Indemnification assets

On January 16, 2014, Bermuda Holdco entered into a stock and asset purchase agreement (the “Acquisition Agreement”) of (i) certain assets and liabilities and (ii) all of the equity interests and substantially all of the assets and liabilities of certain entities which, together with their subsidiaries, comprised the Ortho Clinical Diagnostics business from Johnson & Johnson. The Acquisition Agreement generally provided that Johnson & Johnson retained all income tax liabilities accrued as of the date of the acquisition, including reserves for unrecognized tax benefits. The indemnification receivable from Johnson & Johnson totaled $16.5 million and $16.1 million as of April 3, 2022 and January 2, 2022, respectively. The Company recorded $0.2 million of interest and penalties during the fiscal quarter ended April 3, 2022. These receivables are included as a component of Other current assets and Other assets on the unaudited consolidated balance sheets.

(11) Segment and geographic information

The Company has three geographically-based reportable segments: Americas, Europe, the Middle East and Africa (“EMEA”), and Greater China. Although all three segments are engaged in the marketing, distribution and sale of diagnostic instruments and assays for hospitals, 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. Japan and Asia Pacific (“ASPAC”) are immaterial operating segments not considered as reportable segments and are included in “Other.”

Net revenue by segment is as follows:


	Fiscal Quarter Ended
	April 3, 2022		April 4, 2021
Americas	$	315.4	$	321.4
EMEA		68.7		68.5
Greater China		54.5		55.0
Net revenue of reportable segments	$	438.7	$	444.9
Other		61.4		61.9
Net revenue	$	500.1	$	506.8

Adjusted EBITDA by segment is as follows:


	Fiscal Quarter Ended
	April 3, 2022			April 4, 2021
Americas	$	143.2		$	141.1
EMEA		19.7			17.5
Greater China		24.7			25.2
Other		17.0			19.4
Total Segment Adjusted EBITDA (a)		204.6			203.2
Corporate (b)		(65.2	)		(50.8	)
Depreciation and amortization		(79.4	)		(82.7	)
Interest expense, net		(32.5	)		(43.4	)
Loss on extinguishment of debt		—			(50.3	)
Stock-based compensation		(2.5	)		(3.5	)
Restructuring and severance-related costs		(1.0	)		(1.3	)
Quidel acquisition-related costs		(5.7	)		—
Tax indemnification income, net		0.2			0.2
Costs related to Ortho's initial public offering		—			(3.8	)
EU medical device regulation transition costs		(0.7	)		(0.9	)
Other adjustments		0.4			(2.5	)
Income (loss) before provision for income taxes	$	18.3		$	(35.8	)

(a)

For a reconciliation of Net income (loss) to Adjusted EBITDA, refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Use of Non-GAAP Financial Measures - Reconciliation of Net Income (Loss) to Adjusted EBITDA.

(b)

Corporate primarily consists of costs related to executive and staff functions, including certain finance, human resources, manufacturing and information technology, 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.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

(12) Noncash investing and financing activities

During the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company made noncash transfers of instrument inventories from Inventories to Property, plant and equipment, net of $21.9 million and $25.6 million, respectively.

As of April 3, 2022 and January 2, 2022, Accounts payable and Accrued liabilities included amounts related to purchases of property, plant and equipment and capitalized internal-use software costs of $8.2 million and $17.2 million, respectively. As of April 4, 2021 and January 3, 2021, Accounts payable and Accrued liabilities included amounts related to purchases of property, plant and equipment and capitalized internal-use software costs of $1.9 million and $11.4 million, respectively. The changes in these balances are excluded from changes in Accounts payable and Accrued liabilities in the unaudited consolidated statements of cash flows.

(13) Related party transactions

The Company entered into consulting services agreements with Carlyle Investment Management, L.L.C. (“CIM”), pursuant to which the Company pays CIM a fee for advisory, consulting and other services to be provided to the Company (the “Consulting Services Agreement”). Pursuant to the Consulting Services Agreement, which has an initial term of ten years, the Company pays an annual management fee to CIM of $3.0 million (the “Management Fee”). The Management Fee is payable on a quarterly basis. The Company will also reimburse CIM’s reasonable out-of-pocket expenses incurred in connection with services provided pursuant to the Consulting Services Agreement, and the Company may pay CIM additional fees associated with other future transactions or in consideration of any additional services provided to the Company under the Consulting Services Agreement. During both the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company recorded $0.8 million of Management Fee expense and other out-of-pocket expenses. As of April 3, 2022 and January 2, 2022, there were no amounts due to CIM.

The Company, as part of the normal course of business, entered into agreements to sell products and provide services to healthcare diagnostics companies that are portfolio companies of a fund affiliated with Carlyle. During the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company recognized revenues from business conducted with these healthcare diagnostics companies of $1.5 million and $0.9 million, respectively. As of April 3, 2022 Accounts receivable included amounts related to these healthcare diagnostics companies of $1.3 million. As of January 2, 2022, Accounts receivable included amounts related to these healthcare diagnostics companies of $1.2 million.

The Company, as part of the normal course of business, purchased inventories from a healthcare equipment company that is a portfolio company of a fund affiliated with Carlyle. During the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company recorded expenses for business conducted with this healthcare equipment company of $0.3 million and $0.8 million, respectively. As of April 3, 2022 Accounts payable included $0.1 million of amounts due to this healthcare equipment company. As of January 2, 2022, Accounts payable included immaterial amounts due to this healthcare equipment company.

Portfolio companies of funds affiliated with Carlyle provide Information Technology (“IT”) services to the Company. During the fiscal quarter ended April 3, 2022, the Company recorded expenses for business conducted with these companies of $0.2 million. During the fiscal quarter ended April 4, 2021. the Company recorded expenses for business conducted with these companies of $0.3 million. As of April 3, 2022. Accounts payable included $0.1 million of amounts related to these companies. As of January 2, 2022, Accounts payable included immaterial amounts related to these companies.

A portfolio company of a fund affiliated with Carlyle provides consulting services to the Company. During the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company recorded expenses for business conducted with this portfolio company of $0.1 million and $0.7 million, respectively. As of January 2, 2022, Accounts payable included immaterial amounts related to this portfolio company. As of April 3, 2022, there were no amounts due to this portfolio company.

A security services company that is affiliated with Carlyle provides services to the Company at one of its facilities. This was a new Carlyle investment in 2021. During the fiscal quarter ended April 3, 2022, the Company recorded expenses for these services of $0.3 million. As of April 3, 2022, Accounts payable included $0.1 million of amounts due to this company. As of January 2, 2022, Accounts payable included $0.2 million of amounts due to this company.

A pharmacy benefit management organization that is a portfolio company of a fund affiliated with Carlyle provides pharmacy services to the Company. During the fiscal quarter ended April 3, 2022 and April 4, 2021, the Company recorded expenses for business conducted with this pharmacy benefit management organization of $1.4 million and $1.6 million, respectively. As of both April 3, 2022 and January 2, 2022, Accounts payable included amounts related to this pharmacy benefit management organization of $0.3 million.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

As part of the normal course of business, the Company may purchase from or sell to portfolio companies of funds affiliated with Carlyle or the Company’s officers and directors. These expenses and revenues are not expected to be material.

(14) Commitments and contingencies

At times, the entities that carry out the Company’s business are the subject of governmental investigations and various legal actions and claims from governmental agencies and other parties. The outcomes of these matters are not within the Company’s complete control and may not be known for prolonged periods of time. The Company records a liability in the unaudited consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from these matters are inherently difficult to predict.

The Company is involved in an arbitration related to a commercial contract dispute. Although the Company believes it has meritorious defenses against the claim which it intends to pursue vigorously, arbitration is inherently uncertain and it could result in an unfavorable ruling to the Company. Given the early stage of this matter, an estimate of the possible loss or range of loss cannot be made at this time.

(15) Fair value measurements

The carrying amount of cash and cash equivalents, current accounts receivable, accounts payable, and short term borrowings approximates fair value because of their short outstanding terms.

The estimated fair values of the Company’s Long-term borrowings were based on trades as reported by a third-party bond pricing service. Due to the infrequency of trades of the Notes and Term Loans, these inputs are considered Level 2 inputs. The following table presents the fair values of Long-term borrowings:


	April 3, 2022		January 2, 2022
Long-term borrowings:
Dollar Term Loan Facility	$	1,288.0	$	1,291.4
Euro Term Loan Facility		322.2		335.7
2028 Notes		416.6		435.4
2025 Notes		247.5		253.2

(16) Derivative instruments and hedging activities

The Company selectively uses derivative and non-derivative instruments to manage market risk associated with changes in interest rates and foreign currency exchange rates. The use of derivatives is intended for hedging purposes only, and the Company does not enter into derivative transactions for speculative purposes. The Company’s derivative contracts do not require cash collateral.

Interest rate hedging instruments

The Company’s interest rate risk relates primarily to interest rate exposures on variable rate debt including the Senior Secured Credit Facilities. Refer to Note 7–Borrowings for additional information on the currently outstanding components of the Senior Secured Credit Facilities. The Company entered into a series of interest rate cap and swap agreements to hedge the related risk of the variability to the Company’s cash flows due to the rates specified for these credit facilities.

The Company designates certain interest rate derivative instruments as cash flow hedges, including a portion of the outstanding interest rate swaps. The Company records gains and losses due to changes in fair value of the derivatives within Other comprehensive income (loss) (“OCI”) and reclassifies these amounts to Interest expense, net in the same period or periods for which the underlying hedged transaction affects earnings. In the event the Company determines the hedged transaction is no longer probable to occur or concludes the hedge relationship is no longer effective, the hedge is prospectively de-designated. The pre-tax unrealized gain of $1.1 million within OCI as of April 3, 2022 is expected to be reclassified to earnings in the next 12 months.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

The following tables summarize the Company’s interest rate derivative agreements as of April 3, 2022:


Effective date	Expiration date	Interest rate cap amount	Notional amount (a)		Hedge designation
December 31, 2020	December 31, 2023	3.5%	$	1,000.0	Non-designated

Effective date

Expiration date

Description

Fixed rate

Floating rate

Notional amount(a)

Hedge designation

September 27,
2019

December 31,
2023

Pay fixed,
receive float

1.635%

1-month LIBOR rate

1,000.0

Cash Flow
Hedge

(a)

The notional value of this instrument is expected to be $500.0 million in fiscal 2023.

The Company previously entered into an interest rate cap that was designated as a cash flow hedge. During the fiscal quarter ended September 29, 2019, the Company de-designated its 3.5% interest rate caps upon entering into the interest rate swap agreement that hedges a portion of the Company’s borrowings under the Senior Secured Credit Facilities. Upon de-designation, the Company began prospectively recognizing mark-to-market gains and losses within Other expense, net on the interest rate caps. The remaining loss on the interest rate caps that was deferred in Accumulated other comprehensive income (loss) (“AOCI”) was amortized to Interest expense, net until the Company concluded that a portion of the interest on the Company’s previously hedged borrowings was no longer probable of being paid due to the pay down of a portion of the borrowings using proceeds from the IPO. Accordingly, $0.6 million of losses that had previously been deferred within AOCI were released into Interest expense, net during the fiscal quarter ended April 4, 2021. During the fiscal quarter ended April 3, 2022, the Company reclassified $0.9 million of deferred losses from AOCI to Interest expense, net. As of April 3, 2022 and January 2, 2022, the remaining balance of the deferred loss in AOCI was $4.7 million and $5.6 million, respectively.

In February 2021, the Company concluded that a portion of the interest on the Company’s previously hedged borrowings related to the interest rate swap was no longer probable of being paid due to the pay down of a portion of the borrowings using the proceeds from the IPO. Due to this reduction in the hedged borrowings, the Company de-designated the hedging relationship, and contemporaneously re-designated the remaining borrowings. Accordingly, $3.1 million of losses that had previously been deferred within AOCI were released into Interest expense, net during the fiscal quarter ended April 4, 2021. As of April 3, 2022 and January 2, 2022, the remaining balance of the deferred gain and deferred loss in AOCI was $6.7 million and $13.9 million, respectively.

Currency hedging instruments

The Company has currency risk exposures relating primarily to foreign currency denominated monetary assets and liabilities and forecasted foreign currency denominated intercompany and third-party transactions. The Company uses foreign currency forward, option contracts and cross currency swaps to manage its currency risk exposures. The Company’s foreign currency forward contracts are denominated primarily in Australian Dollar, Brazilian Real, British Pound, Canadian Dollar, Chilean Peso, Chinese Yuan/Renminbi, Colombian Peso, Euro, Indian Rupee, Japanese Yen, Mexican Peso, Philippine Peso, Singapore Dollar, Swiss Franc and the Thai Baht.

The Company designates certain foreign currency forward contracts as cash flow hedges. The Company records gains and losses due to changes in fair value of the derivatives within OCI and reclassifies these amounts to Cost of revenue, excluding amortization of intangible assets in the same period or periods for which the underlying hedged transaction affects earnings. In the event the Company determines the hedged transaction is no longer probable to occur or concludes the hedge relationship is no longer effective, the hedge is de-designated prospectively. The pre-tax unrealized loss of $1.1 million within OCI as of April 3, 2022 is expected to be reclassified to earnings in the next 12 months.

Foreign exchange risk is also managed through the use of foreign currency debt. During the fiscal quarter ended April 3, 2022, €260.0 million ($287.1 million) of the Company's senior secured Euro Term Loan Facility has been designated as, and is effective as, economic hedges of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the Euro-denominated debt instruments are included in foreign currency translation adjustments within AOCI. In April 2022, the Company de-designated the net investment hedge.

The Company also enters into foreign currency forward contracts that are not part of designated hedging relationships, which are intended to mitigate exchange rate risk of monetary assets and liabilities and related forecasted transactions. The Company records these non-designated derivatives at mark-to-market with gains and losses recognized currently in earnings within Other expense, net.

Concurrent with the issuance of the 2028 Notes, the Company entered into U.S. Dollar to Japanese Yen cross currency swaps for total notional of $350.0 million at a weighted average interest rate of 5.56%, with a five-year term to lower interest expense on the 2028 Notes. These cross currency swaps were not designated for hedge accounting, and consequently, changes in their fair value were recorded to Other expense, net.

Ortho Clinical Diagnostics Holdings plc

Notes to unaudited consolidated financial statements

April 3, 2022

(Dollars in millions, unless otherwise stated)

The Company terminated the cross currency swaps on April 1, 2021 and received $12.8 million of cash from net settlement subsequent to April 4, 2021.

The following table provides details of the currency hedging instruments outstanding as of April 3, 2022:


Description	Notional amount		Hedge designation
Foreign currency forward contracts	$	356.4	Cash Flow Hedge
Foreign currency forward contracts		333.2	Not designated

Gains and losses from designated derivative and non-derivative instruments within AOCI during the fiscal quarter ended April 3, 2022 and April 4, 2021 were recorded as follows:


Designated Hedging Instruments	Amount of loss (gain) recognized in OCI on hedges			Location of amounts reclassified from AOCI into income	Amount of loss (gain) reclassified from AOCI into income
Fiscal Quarter Ended April 3, 2022
Cash flow hedges:
Foreign currency forward contracts	$	1.5		Cost of revenue, excluding amortization of intangible assets	$	(1.3	)
Interest rate derivative contracts		(16.8	)	Interest expense, net		4.6
Net investment hedges:
Foreign currency-denominated debt(a)		(8.9	)	N/A	N/A
Fiscal Quarter Ended April 4, 2021
Cash flow hedges:
Foreign currency forward contracts	$	(3.5	)	Cost of revenue, excluding amortization of intangible assets	$	0.1
Interest rate derivative contracts		(3.3	)	Interest expense, net		9.1

(a)

The amount of loss (gain) recognized in OCI for the foreign-currency denominated debt is presented within the CTA component of OCI. These gains and losses will remain in CTA until the related hedged item affects earnings, which would occur upon disposal or complete or substantial liquidation of the underlying hedged entities.

The following tables present the effect of the Company’s designated derivative instruments within Interest expense, net and Cost of revenue, excluding amortization of intangible assets in the unaudited consolidated statements of operations:


	Fiscal Quarter Ended April 3, 2022					Fiscal Quarter Ended April 4, 2021
	Interest expense, net		Cost of revenue, excluding amortization of intangible assets				Interest expense, net		Cost of revenue, excluding amortization of intangible assets
Total amount of line item in unaudited consolidated statements of operations where effects of hedges are presented:	$	32.5	$	249.5			$	43.4	$	248.2
Effects of cash flow hedging relationships
Loss (Gain) on cash flow hedging relationships
Foreign currency forward contracts:
Amount of loss (gain) reclassified from AOCI into income	N/A		$	(1.3	)		N/A		$	0.1
Amount reclassified from AOCI into income due to forecast transaction that is no longer probable of occurring	N/A		$	—			N/A		$	—
Interest rate derivative contracts:
Amount of net loss reclassified from AOCI into income	$	4.6	N/A				$	9.1	N/A
Amount reclassified from AOCI into income due to a forecast transaction that is no longer probable of occurring (a)	$	—	N/A				$	3.7	N/A

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Ortho Clinical Diagnostics Holdings plc 10-Q