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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 0-10961

QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)

        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 ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        As of October 31, 2003, 29,227,188 shares of common stock were outstanding.

QUIDEL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
September 30, 2003

INDEX

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PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

QUIDEL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes.

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QUIDEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

See accompanying notes.

4

QUIDEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See accompanying notes.

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Quidel Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of Quidel Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles 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 accounting principles generally accepted in the U.S. 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 September 30, 2003, and for the three and nine month periods ended September 30, 2003 and 2002, is unaudited. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2002 included in the Company's 2002 Annual Report on Form 10-K.

        The Company's first, second and third fiscal quarters end on the Sunday closest to March 31, June 30 and September 30, respectively. For ease of reference, the calendar quarter end date is used herein.

Note 2. Comprehensive Earnings

        The components of comprehensive earnings are as follows (in thousands, unaudited):

Note 3. Stock Compensation

        The Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations, in accounting for its employee and director stock options. Under APB No. 25, because the exercise price of the Company's employee and director stock options equals or exceeds the estimated market price of the underlying stock on the date of grant, no compensation expense has been recognized.

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        The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants for the three and nine months ended September 30, 2003 and 2002.

        The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company's employee and director stock option plans have characteristics significantly different from those of traded options, the resulting pro forma compensation cost may not be representative of the compensation cost expected in future years. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards for the three and nine months ended September 30, 2003 and 2002, consistent with the provisions of SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been as indicated below (in thousands, unaudited):

Note 4. Computation of Earnings Per Share

        Basic earnings (loss) per share was computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if the earnings were divided by the weighted-average number of common shares and potentially dilutive common shares from outstanding stock options. Potential dilutive common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company's outstanding stock options. Potentially dilutive shares have not been included for the three months ended September 30, 2003 and 2002, as their inclusion would be antidilutive.

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        The following table reconciles the weighted average shares used in computing basic and diluted earnings (loss) per share in the respective periods (in thousands, unaudited):

Note 5. Inventories

        Inventories are recorded at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):

Note 6. Deferred Revenue

        The Company has discussed future collaborative arrangements with several companies. In connection with these efforts, the company has received approximately $0.6 million in cash, which has been recorded as deferred revenue in the accompanying balance sheet, pending finalization of any agreements.

Note 7. Income Taxes

        The Company has significant tax net operating loss carryforwards (NOL's) and other deferred tax assets which may be used to reduce future income taxes payable. The Company currently has a valuation allowance of approximately $13.0 million against its deferred tax assets. These NOL's and other deferred tax assets may be available to reduce income taxes payable and the effective tax rate during 2003. The Company continues to monitor the need for the deferred tax asset valuation allowance and will remove all or a portion of the valuation allowance upon management's determination that it is more likely than not that such asset will be realized. Upon removal of the valuation allowance, the Company will record a corresponding income tax benefit in its statement of operations.

Note 8. Stockholders' Equity

        During the nine months ended September 30, 2003, 251,215 shares of common stock were issued due to the exercise of common stock options and 50,628 shares of common stock were issued in connection with the Company's employee stock purchase plan, resulting in proceeds to the Company of approximately $1.0 million.

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Note 9. Recent Accounting Pronouncements

        In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. We are required to adopt this provision for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company's financial position, results of operations or cash flows.

        Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Quidel has not invested in any variable interest entities after January 31, 2003. For those arrangements entered into prior to January 31, 2003, the FASB recently delayed the required implementation date such that the provisions of FIN 46 are required to be adopted at the beginning of the first interim or annual period beginning after December 15, 2003. The Company does not expect the finalization of FIN 46 by the FASB relating to variable interest entities created prior to January 31, 2003 to impact its financial position, results of operations or cash flows.

        In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments issued in the form of shares that are mandatorily redeemable as well as certain other financial instruments be classified as liabilities in the financial statements. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Adoption of SFAS 150 did not have a material impact on the Company's financial position, results of operations or cash flows.

Note 10. Industry and Geographic Information

        The Company operates in one reportable segment. Sales to customers outside the U.S. represented 44% and 28% for the nine months ended September 30, 2003 and 2002, respectively. As of September 30, 2003 and December 31, 2002, balances due from foreign customers were $8.5 million and $9.2 million, respectively.

        The Company had sales to individual customers in excess of 10% of net sales, as follows:

        As of September 30, 2003, accounts receivable from two customers with a balance due in excess of 10% of total accounts receivable totaled $7.7 million while at December 31, 2002, accounts receivable from two customers with balances due in excess of 10% of total accounts receivable totaled $8.2 million.

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        The following presents net sales for the nine months ended September 30, 2003 and 2002 and long-lived assets as of September 30, 2003 and December 31, 2002 by geographic territory (in thousands):

Note 11. Restructuring

        During the second quarter of 2003, the Company announced and implemented a restructuring plan (the "Restructuring Plan"). The Restructuring Plan was primarily driven by manufacturing automation in the Company's San Diego facility, completion of certain research and development projects, implementation of the Company's BaaN enterprise resource planning system in its Santa Clara facility, and the transition of its foreign sales and support offices to independent distributors. The Restructuring Plan included a workforce reduction of 63 positions (18% of our total workforce at such time) and closure of the Company's sales and support offices in Heidelberg, Germany and Milan, Italy.

        The Company recorded a restructuring charge of approximately $0.8 million in the second quarter of 2003. The significant components of the restructuring charge in the second quarter were $0.7 million for employee severance costs and $0.1 million for professional fees.

        During the third quarter of 2003, the Company recorded a restructuring charge of approximately $1.4 million. The significant components of the restructuring charge in the third quarter were $0.6 million for employee severance costs, $0.5 million for contractual lease and commercial contract terminations, $0.2 million for professional fees and $0.1 million for impairment charges related to assets that were deemed obsolete due to restructuring activities.

        As of September 30, 2003, $1.4 million of the restructuring charge has been paid and $0.8 million is included in other accrued liabilities in the accompanying unaudited consolidated balance sheet.

        The following table provides a detailed activity related to our restructuring activity (in thousands):

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        In this quarterly report, all references to "we," "our" and "us" refer to Quidel Corporation and its subsidiaries.

Future Uncertainties

        This discussion contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially. As such, no forward-looking statement can be guaranteed. Differences in operating results may arise as a result of a number of factors, including, without limitation, intellectual property, product liability, environmental and other litigation, required patent license fee payments not currently reflected in our costs, seasonality, adverse changes in the competitive and economic conditions in domestic and international markets, actions of our major distributors, manufacturing and production delays or difficulties, adverse actions or delays in product reviews by the United States Food and Drug Administration ("FDA"), and the lower acceptance of our new products than forecast. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "believe," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. The risks described in this report and in other reports and registration statements filed with the SEC from time to time should be carefully considered. The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. We undertake no obligation to publicly release the results of any revision of these forward-looking statements.

Overview

        We commenced our operations in 1979 and launched our first products, dipstick-based pregnancy tests, in 1984. Our product base has expanded through internal development and acquisitions of other products and technologies. Our primary product areas are pregnancy and ovulation, infectious diseases, autoimmune diseases, osteoporosis and urinalysis. We discover, develop, manufacture and market rapid diagnostic products for point-of-care ("POC") detection. These products provide simple, accurate and cost-effective diagnoses for acute and chronic conditions. Products are sold worldwide to professionals in physician offices and clinical laboratories, and to consumers through organizations that provide private label, store brand products.

Results of Operations

Net Sales

        Net sales increased 30% to $18.3 million for the three months ended September 30, 2003 from $14.1 million for the three months ended September 30, 2002 and increased 16% to $60.6 million for the nine months ended September 30, 2003 from $52.3 million for the nine months ended September 30, 2002. The increase in sales for the three and nine months ended September 30, 2003 as compared to the three and nine months ended September 30, 2002 was primarily due to certain distributors not making expected quarter-end purchases as well as changes in distributors' inventory management practices during the third quarter of 2002, which adversely impacted sales for the three and nine months ended September 30, 2002. Other factors contributing to the increased sales were increases in sales of our influeza and Group A Strep products for the three and nine months ended September 30, 2003, partially offset by decreased sales of our pregnancy products for the nine months ended September 30, 2003.

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Distribution Developments and Trends

        A significant portion of our U.S. sales are made to distribution partners. We offer various incentives, largely through volume discount programs, to certain of these distributors based on sales objectives developed with the distributor. We also provide other incentives from time to time, in addition to these volume discount programs.

        In the third quarter of 2003, we made increased sales of our Group A Strep and pregnancy products to one of our largest distributors. These products were sold with incentives above and beyond the volume discount program currently in effect with this distributor. We believe that by placing these products into our distribution channel, our distribution partner has a competitive advantage to more readily meet end-user demand. To date, based on projected fourth quarter demand, we are satisfied with this approach and do not anticipate that these early purchases will adversely impact expected aggregate sales in the fourth quarter of 2003.

        Our sales estimates for future periods are closely based on estimated end-user demand for our products. Sales to our distribution partners would fall short of expectations if distributor inventories increase because of less than estimated end-user consumption. With the introduction of low cost pregnancy test products by competitors, we have observed a decline in U.S. sales of our own pregnancy products over the past several quarters. Given current estimates of existing distributor inventories and a shortfall in end-user demand as compared to sales to distributors to date, we believe that our U.S. sales of pregnancy products may decline in the near future. Our estimated future growth, therefore, is based on significant increases in sales of our other products, primarily influenza and Group A Strep.

        As discussed under the "Restructuring Charge" section below, the transition from direct sales to independent distribution in Germany and Italy was largely completed as of September 30, 2003. We believe that continued market penetration will offset the revenue decline resulting from this distribution change.

Research Contracts, License Fees and Royalty Income

        Research contracts, license fees and royalty income decreased to $0.3 million for the three months ended September 30, 2003 from $0.4 million for the three months ended September 30, 2002 and remained constant at $1.3 million for both the nine months ended September 30, 2003 and September 30, 2002. The revenue for all periods principally relates to royalties received on our patented technologies utilized by third-parties. The agreements covering the majority of our royalty payments extends through November 2009, the expiration date of the patents.

Cost of Sales and Gross Profit From Net Sales

        Gross profit increased to $9.2 million for the three months ended September 30, 2003 from $6.1 million for the three months ended September 30, 2002 and increased to $31.0 million for the nine months ended September 30, 2003 from $24.9 million for the nine months ended September 30, 2002. Gross profit as a percentage of net sales increased to 50% for the three months ended September 30, 2003 from 43% for the three months ended September 30, 2002 and increased to 51% for the nine months ended September 30, 2003 from 48% for the nine months ended September 30, 2002. The incr