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For the transition period from                      to                     

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $0.001 Par Value			QDEL			The Nasdaq Stock 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, a 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.

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 October 25, 2023, 66,818,718 shares of the registrant’s common stock were outstanding.

 

PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of October 1, 2023 and January 1, 2023			3
Consolidated Statements of (Loss) Income for the three and nine months ended October 1, 2023 and    October 2, 2022			4
Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended October 1, 2023    and October 2, 2022			5
Consolidated Statements of Stockholders’ Equity for the three and nine months ended October 1, 2023 and    October 2, 2022			6
Consolidated Statements of Cash Flows for the nine months ended October 1, 2023 and October 2, 2022			8
Notes to Consolidated Financial Statements			9
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			33
ITEM 4. Controls and Procedures			35
PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings			36
ITEM 1A. Risk Factors			36
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
ITEM 3. Defaults Upon Senior Securities			36
ITEM 4. Mine Safety Disclosures			36
ITEM 5. Other Information			36
ITEM 6. Exhibits			37
Signatures			38

 

 

			Three Months Ended												Nine Months Ended
			October 1, 2023						October 2, 2022						October 1, 2023						October 2, 2022
Total revenues			$	744.0					$	783.8					$	2,255.2					$	2,399.5
Cost of sales, excluding amortization of intangibles			375.9						376.3						1,142.1						912.5
Selling, marketing and administrative			194.1						204.2						575.6						407.4
Research and development			62.4						65.6						187.5						126.2
Amortization of intangible assets			51.4						50.5						153.6						78.6
Acquisition and integration costs			26.5						26.4						80.4						109.6
Other operating expenses			7.4						4.0						17.0						8.0
Operating income			26.3						56.8						99.0						757.2
Interest expense, net			37.7						29.7						110.9						41.0
Loss on extinguishment of debt			—						—						—						24.0
Other expense (income), net			4.1						(4.2)						8.0						(2.6)
(Loss) income before income taxes			(15.5)						31.3						(19.9)						694.8
(Benefit from) provision for income taxes			(2.8)						12.1						(2.8)						176.4
Net (loss) income			$	(12.7)					$	19.2					$	(17.1)					$	518.4
Basic (loss) earnings per share			$	(0.19)					$	0.29					$	(0.26)					$	9.67
Diluted (loss) earnings per share			$	(0.19)					$	0.28					$	(0.26)					$	9.56
Weighted-average shares outstanding - basic			66.9						66.9						66.8						53.6
Weighted-average shares outstanding - diluted			66.9						67.5						66.8						54.2

 

			Three Months Ended												Nine Months Ended
			October 1, 2023						October 2, 2022						October 1, 2023						October 2, 2022
Net (loss) income			$	(12.7)					$	19.2					$	(17.1)					$	518.4
Other comprehensive (loss) income
Changes in cumulative translation adjustment, net of tax			(55.3)						(92.9)						(17.2)						(158.9)
Changes in unrealized gains (losses) from investments, net of tax			0.2						—						0.3						(0.6)
Changes in unrealized gains (losses) from cash flow hedges, net of tax:
Net unrealized gains on derivative instruments			24.5						9.3						47.6						13.9
Reclassification of net realized (gains) losses on derivative instruments included in net (loss) income			(6.3)						(0.2)						(16.3)						0.7
Total change in unrealized gains from cash flow hedges, net of tax			18.2						9.1						31.3						14.6
Comprehensive (loss) income			$	(49.6)					$	(64.6)					$	(2.7)					$	373.5

			Common Stock															Additional paid-in capital						Accumulated other comprehensive (loss) income						Retained earnings						Total stockholders’ equity
			Shares						Par
Balance at January 1, 2023			66.4						$	—																	$	2,804.3					$	(67.6)					$	2,197.9					$	4,934.6
Issuance of common stock under equity compensation plans			0.3						0.1																		3.8						—						—						3.9
Stock-based compensation expense			—						—																		10.4						—						—						10.4
Tax withholdings related to vesting of stock-based awards			(0.1)						—																		(9.5)						—						—						(9.5)
Other comprehensive income, net of tax			—						—																		—						8.3						—						8.3
Net income			—						—																		—						—						48.8						48.8
Balance at April 2, 2023			66.6						0.1																		2,809.0						(59.3)						2,246.7						4,996.5
Issuance of common stock under equity compensation plans			0.2						—																		5.5						—						—						5.5
Stock-based compensation expense			—						—																		13.7						—						—						13.7
Tax withholdings related to vesting of stock-based awards			—						—																		(3.0)						—						—						(3.0)
Other comprehensive income, net of tax			—						—																		—						43.0						—						43.0
Net loss			—						—																		—						—						(53.2)						(53.2)
Balance at July 2, 2023			66.8						0.1																		2,825.2						(16.3)						2,193.5						5,002.5
Issuance of common stock under equity compensation plans			—						—																		0.8						—						—						0.8
Stock-based compensation expense			—						—																		13.5						—						—						13.5
Tax withholdings related to vesting of stock-based awards			—						—																		(0.5)						—						—						(0.5)
Other comprehensive loss, net of tax			—						—																		—						(36.9)						—						(36.9)
Net loss			—						—																		—						—						(12.7)						(12.7)
Balance at October 1, 2023			66.8						$	0.1																	$	2,839.0					$	(53.2)					$	2,180.8					$	4,966.7

.

The accompanying unaudited Consolidated Financial Statements of QuidelOrtho Corporation and its subsidiaries (the “Company” or “QuidelOrtho”) have been prepared in accordance with generally accepted accounting principles in the U.S. (“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 October 1, 2023, and for the three and nine months ended October 1, 2023 and October 2, 2022, is unaudited. For further information, refer to the Company’s Consolidated Financial Statements and notes thereto for the fiscal year ended January 1, 2023 included in QuidelOrtho’s 2022 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.

The Company follows the concept of a fiscal year that ends on the Sunday nearest to the end of the month of December, and fiscal quarters that end on the Sunday nearest to the end of the months of March, June and September. For 2023 and 2022, the Company’s fiscal year will end or has ended on December 31, 2023 and January 1, 2023, respectively. For 2023 and 2022, the Company’s third quarter ended on October 1, 2023 and October 2, 2022, respectively. The three and nine months ended October 1, 2023 and October 2, 2022 each included 13 and 39 weeks, respectively.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

During the nine months ended October 1, 2023, there have been no changes to the Company’s significant accounting policies as described in the Company’s 2022 Annual Report on Form 10-K, except for the following policy, which was the result of a change in accounting estimates:

The Company generates a portion of its revenue from sales of the QuickVue At-Home OTC COVID-19 tests to retail customers. The Company estimates the transaction price for revenue from sales to retail customers based on historical experience and current trends to evaluate when uncertainties related to right of return provisions are resolved. In prior periods, due to a lack of history on which to base an estimate of products to be returned from retailers, the Company established a reserve based on an estimate of total inventory remaining at our retailers that was subject to return.

During the three months ended October 1, 2023, the Company concluded that it had developed sufficient historical experience regarding the pattern in customer returns to be able to estimate the amount of consideration to which we expect to be entitled, excluding consideration for the products expected to be returned. Amounts received or receivable that are expected to be returned are recognized as a refund liability, which is included in Other current liabilities. The refund liability is estimated utilizing historical sale and return rates over the period during which customers have a right of return, taking into account available information on competitive products and contract changes. The refund liability is remeasured at each reporting period to reflect changes in assumptions about expected returns. Revenue from sales to retail customers amounted to approximately 3% of Total revenues for the nine months ended October 1, 2023. This change in estimate did not have a material impact on the Company’s Consolidated Financial Statements.

There have been no accounting pronouncements issued or adopted during the nine months ended October 1, 2023 that are expected to have a material impact on the Company’s Consolidated Financial Statements.

On May 27, 2022, pursuant to a Business Combination Agreement entered into as of December 22, 2021 (the “BCA”), by and among Quidel Corporation (“Quidel”), Ortho Clinical Diagnostics Holdings plc (“Ortho”), QuidelOrtho (formerly Coronado Topco, Inc.), Orca Holdco, Inc., Laguna Merger Sub, Inc. and Orca Holdco 2, Inc., Quidel and Ortho consummated a business combination (the “Combinations”) and each of Quidel and Ortho became a wholly owned subsidiary of QuidelOrtho. As a result of the Combinations, QuidelOrtho became the successor issuer to Quidel. The Combinations enhance the Company’s revenue profile and expand the Company’s geographic footprint and product diversity.

The Combinations were completed for a total consideration of approximately $4.3 billion, which included the fair value of equity issued based on the May 26, 2022 closing price of $99.60 per share of Quidel common stock. Former Ortho shareholders received $7.14 in cash and 0.1055 shares of QuidelOrtho common stock for each Ortho ordinary share. The Company funded the cash portion of the purchase price with cash on its balance sheet and a portion of the Term Loan proceeds from the Financing (each as defined in Note 8).

The Combinations have been accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair value as of the date of the consummation of the Combinations, with Quidel considered the accounting and the legal acquirer. The assessment of the fair value of assets acquired and liabilities assumed was finalized in the second quarter of 2023. Measurement period adjustments in fiscal year 2023 decreased goodwill by $23.9 million, reflecting (i) a decrease of $22.3 million to deferred tax liability, (ii) a decrease of $2.9 million to income tax payable and (iii) a decrease of $1.3 million in deferred tax asset. The related impact to net earnings that would have been recognized in previous periods if the adjustments were recognized as of the date of the consummation of the Combinations is immaterial to the Company’s Consolidated Financial Statements.

The following unaudited supplemental pro forma financial information shows the combined results of operations of the Company as if the Combinations had occurred on January 4, 2021, the beginning of the periods presented:

This unaudited supplemental pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the Combinations been completed at the beginning of fiscal year 2021. In addition, the unaudited supplemental pro forma financial information is not a projection of the Company’s future results of operations, nor does it reflect the expected realization of any synergies or cost savings associated with the Combinations. The unaudited supplemental pro forma financial information includes adjustments for:

•incremental intangible assets amortization expense based on the preliminary fair values of the identifiable intangible assets acquired;

•incremental cost of sales related to the fair value step-up of inventory;

•decreases in interest expense associated with the issuance of debt to finance the Combinations and to repay Ortho’s then-outstanding indebtedness, including the net impact of the removal of the amortization of the discount on Ortho’s indebtedness and the change in amortization of deferred financing fees;

•the removal of loss on extinguishment of debt from Ortho’s results in fiscal year 2021 and the reclassification of loss on extinguishment of debt in fiscal years 2021 and 2022;

•the reclassification of expense related to the accelerated vesting of certain stock awards of Ortho’s former chief executive officer; and

•tax impacts related to the above adjustments.

Basic earnings per share (“EPS”) is computed by dividing Net (loss) income by the weighted-average number of shares of common stock outstanding. Diluted EPS is computed based on the sum of the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares of common stock consist of shares issuable from stock options and unvested restricted stock units (“RSUs”). Potentially dilutive shares of common stock from outstanding stock options and unvested RSUs are determined using the average share price for each period under the treasury stock method.

The following table presents the calculation of the weighted-average shares used in computing basic and diluted EPS:

(1) In the three and nine months ended October 1, 2023, all potential shares of common stock issuable for stock options and RSUs were excluded from the dilutive calculations above because the effect of including them would have been anti-dilutive. The dilutive effect of potential shares of common stock issuable for stock options and RSUs on the weighted-average number of shares of common stock outstanding would have been as follows:

Stock options and RSUs where the combined exercise price and unrecognized stock-based compensation was greater than the average market price for the Company’s common stock were not included in the computations of diluted weighted-average shares because the effect would have been anti-dilutive. These stock options and RSUs represented 1.7 million and 1.6 million shares of common stock for the three and nine months ended October 1, 2023, respectively, and 1.0 million shares of common stock for each of the three and nine months ended October 2, 2022.

Timing of revenue recognition may differ from timing of invoicing to customers. The Company records an asset when revenue is recognized prior to invoicing a customer (a “contract asset”). Contract assets are included within Prepaid expenses and other current assets in the Company’s Consolidated Balance Sheets and are transferred to accounts receivable when the right to payment becomes unconditional. The balance of contract assets recorded in the Company’s Consolidated Balance Sheets as of October 1, 2023 and January 1, 2023 was $53.5 million and $49.6 million, respectively.

The contract asset balance consisted of the following components, all of which related to agreements acquired by the Company in connection with the Combinations:

•a customer supply agreement under which the difference between the timing of invoicing and revenue recognition resulted in a contract asset of $3.8 million and $6.8 million as of October 1, 2023 and January 1, 2023, respectively;

•contractual arrangements with certain customers under which the Company invoices the customers based on reportable results generated by its reagents; however, control of the goods transfers to the customers upon shipment or delivery of the products, as determined under the terms of the contract. Using the expected value method, the Company estimates the number of reagents that will generate a reportable result. The Company records the revenue upon shipment and an associated contract asset, and relieves the contract asset upon completion of the invoicing. The balance of the contract asset related to these arrangements was $42.4 million and $38.5 million as of October 1, 2023 and January 1, 2023, respectively; and

•one of the Company’s contract manufacturing agreements that recognizes revenue as the products are manufactured resulted in a contract asset of $7.3 million and $4.3 million as of October 1, 2023 and January 1, 2023, respectively.

The Company reviews contract assets for expected credit losses resulting from the collectability of customer accounts. Expected losses are established based on historical losses, customer mix and credit policies, current economic conditions in customers’ country or industry, and expectations associated with reasonable and supportable forecasts. No credit losses related to contract assets were recognized during the three and nine months ended October 1, 2023.

The Company recognizes a contract liability when a customer pays an invoice prior to the Company transferring control of the goods or services (“contract liabilities”). The Company’s contract liabilities consist of deferred revenue primarily related to customer service contracts. The Company classifies deferred revenue as current or non-current based on the timing of the transfer of control or performance of the service. The balance of the Company’s current deferred revenue was $34.6 million as of October 1, 2023 and $76.4 million as of January 1, 2023.

The Company has one arrangement with a customer where the revenue is expected to be recognized beyond one year. The balance of the deferred revenue included in long-term liabilities was $13.5 million and $9.4 million as of October 1, 2023 and January 1, 2023, respectively, and was included in Other liabilities in the Consolidated Balance Sheets. The amount of deferred revenue as of January 1, 2023 that was recorded in Total revenues during the three and nine months ended October 1, 2023 was $2.4 million and $70.9 million, respectively.

In connection with the Combinations, the Company acquired the ongoing collaboration arrangement (the “Joint Business”) between Ortho and Grifols Diagnostic Solutions, Inc. (“Grifols”), under which Ortho and Grifols agreed to pursue a collaboration relating to Ortho’s Hepatitis and HIV diagnostics business. The governance of the Joint Business is shared through a supervisory board made up of equal representation by Ortho and Grifols, which is responsible for all significant decisions relating to the Joint Business that are not exclusively assigned to either Ortho or Grifols, as defined in the Joint Business agreement. The Company’s portion of the pre-tax net profit shared under the Joint Business was $8.9 million and $38.6 million during the three and nine months ended October 1, 2023, respectively, and $7.9 million and $13.5 million during the three and nine months ended October 2, 2022, respectively. These amounts included the Company’s portion of the pre-tax net profit of $7.3 million and $14.0 million during the three and nine months ended October 1, 2023, respectively, and $5.2 million and $8.8 million during the three and nine months ended October 2, 2022, respectively, on sales transactions with third parties where the Company is the principal. The Company recognized revenues, cost of sales, excluding amortization of intangibles, and operating expenses, on a gross basis on these sales transactions in their respective lines in the Consolidated Statements of (Loss) Income. The Company’s portion of the pre-tax net profit also included revenue from collaboration and royalty agreements of $1.6 million and $24.6 million during the three and nine months ended October 1, 2023, respectively, and $2.7 million and $4.7 million during the three and nine months ended October 2, 2022, respectively, which is presented on a net basis within Total revenues.

The following table summarizes Total revenues by business unit:

For the nine months ended October 1, 2023, no customers individually accounted for more than 10% of Total revenues. For the nine months ended October 2, 2022, one customer and one distributor represented 27% and 10%, respectively, of Total revenues.

As of October 1, 2023 and January 1, 2023, customers with a balance due in excess of 10% of Accounts receivable, net totaled $99.4 million and $161.9 million, respectively. Revenue related to our respiratory products accounted for 25% and 24% of Total revenues for the three and nine months ended October 1, 2023, respectively, and 30% and 63% for the three and nine months ended October 2, 2022, respectively.

Total revenues by reportable segment are as follows:

In the fourth quarter of 2022, the Company revised the internal allocation of certain global costs primarily between the North America segment and Corporate to better align costs that impact the Company as a whole. Prior periods have been revised to align with the current period presentation. The following table sets forth Adjusted EBITDA by segment and the reconciliations to (Loss) income before income taxes for the three and nine months ended October 1, 2023 and October 2, 2022:

(1) Primarily consists of costs related to executive and staff functions, including certain finance, human resources, manufacturing and information technology (“IT”) functions, which benefit the Company as a whole. These costs are primarily related to the general management of these functions on a corporate level and the design and development of programs, policies and procedures that are then implemented in the individual segments, with each segment bearing its own cost of implementation. The Company’s corporate function also includes debt and stock-based compensation associated with all employee stock-based awards.

(2) Represents incremental consulting costs and research and development (“R&D”) manufacturing site costs to align compliance of the Company’s existing, on-market products that were previously registered under the European In Vitro Diagnostics Directive regulatory framework with the requirements under the EU’s In Vitro Diagnostic Regulation, which generally apply from May 2022 onwards.

The chief operating decision maker does not review capital expenditures, total depreciation and amortization or assets by segment, and therefore this information has been excluded as it does not comprise part of management’s key performance metrics.

The Company calculates its interim income tax provision in accordance with ASC 270, Interim Reporting, and ASC 740, Accounting for Income Taxes. 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.

For the three months ended October 1, 2023, the Company recognized an income tax benefit of $2.8 million in relation to loss before income taxes of $15.5 million, resulting in an effective benefit tax rate of 18.1%. For the three months ended October 2, 2022, the Company recognized a provision for income taxes of $12.1 million in relation to income before income taxes of $31.3 million, resulting in an effective tax rate of 38.7%. For the three months ended October 1, 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and Global Intangible Low-Tax Income, partially offset by non-U.S. earnings being taxed at rates that are different than the U.S. statutory rate, R&D credits, foreign tax credits and foreign exchange losses. For the three months ended October 2, 2022, the effective tax rate was impacted primarily by income taxes owed in certain U.S. states.

For the nine months ended October 1, 2023, the Company recognized an income tax benefit of $2.8 million in relation to loss before income taxes of $19.9 million, resulting in an effective benefit tax rate of 14.1%. For the nine months ended October 2, 2022, the Company recognized a provision for income taxes of $176.4 million in relation to income before income taxes of $694.8 million, resulting in an effective tax rate of 25.4%. For the nine months ended October 1, 2023, the effective tax rate differed from the U.S. federal statutory rate primarily due to net operating losses in certain subsidiaries not being benefited due to the establishment of valuation allowances and Global Intangible Low-Tax Income, partially offset by non-U.S. earnings being taxed at rates that are different than the U.S. statutory rate, R&D credits, foreign tax credits and foreign exchange losses. For the nine months ended October 2, 2022, the effective tax rate was primarily impacted by incomes taxes owed in certain U.S. states.

The balance of unrecognized tax benefits at October 1, 2023, not including interest and penalties, was $38.7 million, of which $27.5 million could 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 October 1, 2023, the Company had approximately $8.5 million of interest and penalties accrued related to unrecognized tax benefits. The Company estimates that within the next 12 months, its uncertain tax positions, excluding interest, will decrease by $14.2 million.

The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized credits, the Company’s federal tax years from 2012 and onwards are subject to examination by the U.S. authorities. The Company’s state and foreign tax years for 2001 and onwards are subject to examination by applicable tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax laws applied to the facts of each matter.

On January 16, 2014, Ortho entered into a stock and asset purchase 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 business from Johnson & Johnson. The 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 $16.4 million and $16.8 million as of October 1, 2023 and January 1, 2023, respectively, and is included as a component of Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets. The Company recorded $0.3 million and $1.0 million of interest and penalties during the three and nine months ended October 1, 2023, respectively, and $0.3 million and $0.4 million during the three and nine months ended October 2, 2022, respectively.

The following table is a summary of marketable securities:

Accounts receivables primarily consisted of trade accounts receivables with maturities of one year or less and are presented net of reserves:

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following:

(1) Includes adjustment of approximately $39 million in the nine months ended October 1, 2023 due to changes in estimates to decrease inventory obsolescence reserves from the prior period.

(2) Other assets includes inventory expected to remain on hand beyond one year.

Prepaid expenses and other current assets consisted of the following:

Changes in goodwill were as follows:

Other current liabilities consisted of the following:

The components of borrowings were as follows:

The credit agreement, dated May 27, 2022, by and among the Company, as borrower, Bank of America, N.A., as administrative agent and swing line lender, and the other lenders and L/C issuers party thereto (the “Credit Agreement”) consists of a $2,750.0 million senior secured term loan facility (the “Term Loan”) and an $800.0 million revolving credit facility (the “Revolving Credit Facility” and with the Term Loan, the “Financing”). As of October 1, 2023 and January 1, 2023, there were no amounts outstanding under the Revolving Credit Facility. As of October 1, 2023, letters of credit issued under the Revolving Credit Facility totaled $12.9 million, which reduced the available amount under the Revolving Credit Facility to $787.1 million. During the nine months ended October 1, 2023, the Company made $174.7 million in payments on the Term Loan, including a voluntary prepayment of $20.0 million.

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, 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 of (a) 4.50 to 1.00 for the first four fiscal quarters ending after the closing date of the Credit Agreement (the “Initial Measurement Period”), (b) 4.00 to 1.00 for the first four fiscal quarters ending after the Initial Measurement Period and (c) 3.50 to 1.00 for each fiscal quarter thereafter; and (ii) a minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of 3.00 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 the financial covenants as of October 1, 2023.

The following table provides the detailed amounts within Interest expense, net for the three and nine months ended October 1, 2023 and October 2, 2022:

Stock-based compensation expense was as follows:

The table above includes compensation expense related to liability-classified awards of $3.0 million and $8.8 million for the three and nine months ended October 1, 2023, respectively, and $3.0 million and $13.9 million for the three and nine months ended October 2, 2022, respectively, which has been or is expected to be settled in cash. These awards primarily represent the $7.14 per share cash-settled portion of the replacement awards issued in connection with the Combinations.

The Company granted 253 thousand stock options during the nine months ended October 1, 2023. As of October 1, 2023, total unrecognized compensation expense related to stock options was approximately $20.0 million and the related weighted-average period over which it is expected to be recognized is approximately 2.0 years. The maximum contractual term of the Company’s stock options is ten years.

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:

In January 2023, the Compensation Committee of the Company’s Board of Directors approved a modification to the vesting terms of certain stock options that were previously granted by Ortho to certain Ortho employees, such that the stock options will vest on December 31, 2023. The modification resulted in an additional $2.9 million and $8.0 million of stock-based compensation expense recognized during the three and nine months ended October 1, 2023, respectively. The total unrecognized expense relating to unvested shares for these stock options as of October 1, 2023 was $3.1 million and will be recognized through December 31, 2023.

The Company granted 609 thousand RSUs during the nine months ended October 1, 2023. 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 nine months ended October 1, 2023 and October 2, 2022 was $87.14 and $97.52, respectively. The total amount of unrecognized compensation expense related to non-vested RSUs as of October 1, 2023 was approximately $78.4 million, which is expected to be recognized over a weighted-average period of approximately 2.2 years.

From time to time, the Company is involved in litigation and other legal proceedings, including matters related to product liability claims, commercial disputes and intellectual property claims, as well as regulatory, employment, and other claims related to its business. The Company accrues for legal claims when, and to the extent that, amounts associated with the claims become probable and are reasonably estimable. 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 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 the Company is not able to estimate a possible loss or range of loss, the Company is not able to determine whether the loss will have a material adverse effect on its business, financial condition, results of operations or liquidity.

Management believes that all such current legal actions, in the aggregate, are not expected to 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 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:

There were no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy during the three and nine months ended October 1, 2023 and fiscal year 2022.

Cash equivalents consist of funds held in money market accounts that are valued using quoted prices in active markets for identical instruments and highly liquid corporate debt securities with maturities within three months from purchase. Marketable securities consist of investment-grade corporate and government debt securities, corporate asset-backed securities and commercial paper. Derivative financial instruments are based on observable inputs that are corroborated by market data. Observable inputs include broker quotes, daily market foreign currency rates and forward pricing curves.

In connection with the acquisition of the B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers from Alere Inc., the Company paid its last annual installment of $40.0 million during the nine months ended October 1, 2023.

The estimated fair value of the Company’s borrowings under the Term Loan was $2,444.4 million at October 1, 2023, compared to the carrying amount, excluding debt issuance costs, of $2,472.2 million. The estimated fair value of the Company’s borrowings under the Term Loan was $2,630.3 million at January 1, 2023, compared to the carrying amount, excluding debt issuance costs, of $2,646.9 million.

The estimate of fair value is generally based on the quoted market prices for similar issuances of long-term debt with the same maturities, which is classified as a Level 2 input.

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.

Credit risk represents the Company’s gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract. The Company generally enters into master netting arrangements that reduce credit risk by permitting net settlement of transactions with the same counterparty. The Company does not have any derivative instruments with credit-risk related contingent features that would require it to post collateral.

The Company’s interest rate risk relates primarily to interest rate exposures on variable rate debt, including the Revolving Credit Facility and Term Loan. See Note 8 for additional information on the currently outstanding components of the Revolving Credit Facility and Term Loan. The Company entered into interest rate 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 its interest rate swaps as cash flow hedges. The Company records gains and losses due to changes in fair value of the derivatives within Other comprehensive (loss) income (“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. Pre-tax unrealized gains of $29.0 million as of October 1, 2023 are expected to be reclassified from OCI to earnings in the next 12 months.

The following table summarizes the Company’s interest rate derivative agreements as of October 1, 2023, all of which were interest rate swaps:

(1) The notional value of interest rate swap contracts with an effective date of December 30, 2022 is expected to increase to $1.8 billion on December 29, 2023.

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 contracts and may use 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, South Korean Won, 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 Total revenues and Cost of sales, excluding amortization of intangibles 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. Pre-tax unrealized loss of $2.0 million as of October 1, 2023 is expected to be reclassified from OCI to earnings in the next 12 months.

The Company also enters into foreign currency forward contracts that are not part of designated hedging relationships and 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 in earnings within Other expense (income), net.

The following table provides details of the currency hedging instruments outstanding as of October 1, 2023:

The following table summarizes pre-tax gains and losses from designated derivative and non-derivative instruments within Accumulated other comprehensive (loss) income (“AOCI”) for the three and nine months ended October 1, 2023 and October 2, 2022: