IDEXX Laboratories, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
IDEXX develops diagnostic products, services and information-management solutions for companion-animal veterinary, livestock, poultry and dairy, water-testing, and human point-of-care markets. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the same period in 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $576.1 million | $537.7 million | +7.1%; organic growth +9.8% |
| Gross profit | $331.6 million | $303.1 million | +9.4% |
| Gross margin | 57.6% | 56.4% | +120 basis points |
| Income from operations | $133.1 million | $113.0 million | +17.8% |
| Operating margin | 23.1% | 21.0% | +210 basis points |
| Net income attributable to IDEXX | $102.7 million | $89.5 million | +14.8% |
| Diluted EPS | $1.17 | $1.01 | +15.8% |
| Cash flow from operations | $34.4 million | $34.9 million | Down $0.5 million |
- CAG revenue was $508.9 million, up 8.1% reported and 10.5% organically. Recurring CAG revenue increased 9.3% reported, led by VetLab consumables and reference laboratory services.
- Water revenue increased 4.0% to $30.3 million, while LPD revenue declined 2.3% to $31.5 million. Other revenue declined 2.2% to $5.3 million.
- Cash and cash equivalents were $116.6 million at March 31, 2019, compared with $123.8 million at December 31, 2018.
- Capital expenditures were $38.2 million, compared with $23.7 million in Q1 2018, primarily related to the Westbrook headquarters expansion and relocation of the core reference laboratory in Germany.
- Debt consisted of $347.0 million outstanding under the revolving credit facility and $699.3 million of long-term debt. Gross debt was $1.05 billion, and net debt was $934.9 million.
- Trailing-twelve-month adjusted EBITDA was $623.9 million. Gross debt to adjusted EBITDA was 1.69x and net debt to adjusted EBITDA was 1.50x, compared with a 3.5x maximum leverage covenant; the company was in compliance.
- Remaining availability under the $850 million revolving credit facility was $501.7 million, subject to a $1.3 million letter-of-credit reduction.
Material changes versus the prior comparable period
- Revenue growth was driven by higher testing volumes, expansion of the veterinary instrument installed base, increased reference laboratory activity, price increases and favorable product mix. Foreign currency movements reduced reported revenue growth by 2.8%.
- Gross margin improved because of pricing, higher-margin VetLab consumables, reference-laboratory scale and productivity benefits, volume leverage and lower product costs.
- Sales and marketing expense rose 6.5% due primarily to expanded global commercial infrastructure. Research and development expense rose 8.6%, while general and administrative expense decreased 0.9%.
- Interest expense declined to $8.4 million from $9.3 million, reflecting lower average debt, cross-currency swap benefits and increased capitalized interest, partly offset by higher interest rates.
- The effective tax rate increased to 17.7% from 14.3%, primarily because of lower share-based compensation tax benefits and a nonrecurring benefit in Q1 2018 related to the Tax Cuts and Jobs Act.
- Operating cash flow was broadly stable, but working-capital use increased. Accounts receivable and inventories used $33.4 million and $14.5 million of cash, respectively.
- The company repurchased $53.9 million of stock in the open market and acquired an additional $7.4 million of shares through employee tax withholding. Total shares repurchased or surrendered were 303,000.
Guidance, outlook, commentary and risks
- Management stated that cash on hand, operating cash generation and committed borrowing availability should fund operations, capital requirements and anticipated growth for the next twelve months and for the foreseeable future.
- The company did not provide a clear consolidated revenue or earnings guidance range in the filing. It estimated that, under its currency assumptions, a stronger U.S. dollar for the remainder of 2019 would reduce full-year revenue by approximately $38 million, operating profit by $3 million and diluted EPS by $0.03, including an approximately $12 million offset from hedging.
- A 1% strengthening of the U.S. dollar was projected to reduce revenue by approximately $6 million and operating income by approximately $3 million, with approximately $1 million of incremental offsetting hedge gains.
- IDEXX adopted the new leasing standard on January 1, 2019. The adoption added approximately $83.7 million of operating lease right-of-use assets and $86.7 million of operating lease liabilities at adoption and was not material to earnings or cash flow for the quarter.
- On March 14, 2019, IDEXX issued $100 million of 4.19% senior notes due March 14, 2029; proceeds were used for general corporate purposes, including partial repayment of the revolving facility.
- Key risks include foreign exchange volatility, customer demand and testing volumes, competition, product development and commercialization, customer incentive and multi-year contract estimates, debt covenant compliance, litigation and potential intellectual-property claims. Management reported no material changes to previously disclosed risk factors and no material litigation accruals.
Important facts for investors to verify
- Reconcile reported revenue growth with organic growth and assess the continuing effect of foreign exchange, pricing and customer stocking.
- Monitor recurring CAG growth, instrument placements, reference laboratory volumes and the sustainability of gross-margin expansion.
- Review debt maturities, revolving-facility utilization, leverage covenant headroom and interest-rate exposure.
- Assess working-capital trends, particularly accounts receivable, inventories and first-quarter seasonality, against full-year operating cash flow.
- Evaluate the realizability and revenue timing of customer acquisition costs, contract assets, deferred revenue and approximately $1.4 billion of estimated future revenue under customer commitment programs.
- Consider the effects of the new leasing standard and sales-type classification of certain reagent-rental placements on future revenue and cost recognition.
- Review foreign-currency assumptions and hedge effectiveness, including the filing’s estimated full-year currency impact.