IDEXX Laboratories, Inc. — Q2 2017 Form 10-Q Summary
Business Context and Reporting Period
IDEXX develops diagnostic products, information-management systems and services for companion-animal veterinary practices, livestock and dairy markets, water testing, and selected human point-of-care applications. Reported segments are Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other.
The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The unaudited report was filed August 1, 2017.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Total revenue | $508.9 million | $466.6 million | 9.1% |
| Gross profit | $292.7 million | $260.5 million | 12.3% |
| Gross margin | 57.5% | 55.8% | +170 bps |
| Operating income | $122.6 million | $104.2 million | 17.7% |
| Operating margin | 24.1% | 22.3% | +180 bps |
| Net income attributable to IDEXX | $85.4 million | $67.2 million | 27.0% |
| Diluted EPS | $0.95 | $0.74 | 28.4% |
| Metric | Six Months 2017 | Six Months 2016 | Change |
|---|---|---|---|
| Total revenue | $971.0 million | $884.1 million | 9.8% |
| Gross profit | $550.9 million | $488.1 million | 12.9% |
| Gross margin | 56.7% | 55.2% | +150 bps |
| Operating income | $214.8 million | $178.0 million | 20.7% |
| Operating margin | 22.1% | 20.1% | +200 bps |
| Net income attributable to IDEXX | $154.4 million | $113.2 million | 36.4% |
| Diluted EPS | $1.72 | $1.25 | 37.6% |
- Revenue mix: Q2 CAG revenue was $439.9 million, Water $29.4 million, LPD $33.6 million and Other $6.0 million. CAG recurring diagnostics revenue increased 12.3% reported and 13.4% organically.
- Cash flow: Six-month operating cash flow was $141.5 million versus $137.9 million in 2016. Capital expenditures were $38.6 million, acquisitions used $14.5 million, and net cash used in investing activities was $72.7 million.
- Share repurchases: The company spent $170.8 million on common-stock repurchases during the first six months, including $114.2 million in the second quarter. The quarterly repurchase authorization was increased to 68 million shares in May 2017.
- Liquidity: Cash and cash equivalents were $166.0 million and marketable securities were $256.9 million at June 30, 2017, for total cash, cash equivalents and marketable securities of $422.9 million.
- Debt: The company had $704.0 million outstanding under its $850 million revolving credit facility and $600.9 million of long-term debt. Remaining borrowing availability was approximately $145 million, after consideration of a $1 million letter of credit.
- Leverage: Trailing-twelve-month Adjusted EBITDA was $493.8 million; gross debt was $1.310 billion, net debt was $887.1 million, gross debt to Adjusted EBITDA was 2.65x, and net debt to Adjusted EBITDA was 1.80x. The company was in compliance with its 3.5x leverage covenant.
Material Changes Versus the Prior Comparable Period
- Growth was led by CAG recurring diagnostics, particularly veterinary consumables and reference laboratory testing, supported by higher testing volumes, expanded instrument placements and price increases.
- CAG capital-instrument revenue declined 13.8% in Q2 because of a strong prior-year comparison and a shift toward placements with greater long-term recurring-revenue value.
- Gross-margin expansion reflected pricing, lower product and manufacturing costs, and favorable mix toward recurring diagnostics revenue, partly offset by foreign currency effects.
- Sales and marketing expense increased 14.4% in Q2 as IDEXX invested in global commercial infrastructure. General and administrative expense increased 2.1%, while research and development expense increased 6.2%.
- LPD revenue decreased 1.3% for the first six months, primarily because of lower dairy testing and Asia-Pacific herd-health screening, partly offset by higher swine and pregnancy testing.
- Other-segment operating income improved to $1.2 million for the first six months from a $1.8 million loss, primarily because 2016 included a $2.2 million non-cash OPTI Medical intangible-asset impairment and reduced research spending following a strategy change.
- Adoption of ASU 2016-09 reduced income-tax expense by approximately $7.1 million in Q2 and $18.3 million for the first six months. The effective tax rate declined to 25.5% in Q2 and 22.5% year to date, from 30.6% in each 2016 comparable period.
Outlook, Commentary, Risks and Unusual Items
- Management stated that cash, short-duration marketable securities, operating cash flow and committed borrowing capacity should fund operations, capital requirements and anticipated growth needs for the next twelve months and the foreseeable future.
- Management estimated that share-based-payment tax benefits would reduce 2017 income-tax expense by approximately $27 million to $30 million, with quarterly variability based on settlement activity. The filing does not provide a clear full-year revenue or EPS guidance range.
- For the remainder of 2017, management estimated that a 1% strengthening of the U.S. dollar would reduce revenue by approximately $4 million and operating income by approximately $2 million, partly offset by approximately $1 million of hedge gains.
- The company expects the new revenue-recognition standard, ASU 2014-09, to alter the timing of recognition for certain customer incentive programs. It planned to adopt the standard on a modified-retrospective basis in the first quarter of 2018 and provide an impact estimate by October 2017.
- IDEXX acquired two software businesses in June 2017 for a combined purchase price of $15 million, including a $3 million contingent payment, and acquired an Austrian reference laboratory for approximately $1.3 million earlier in the year.
- Approximately 20% of consolidated revenue was derived from products manufactured in the United States and sold internationally in local currencies. Foreign exchange, competition, demand, execution of commercial investments, product availability, regulatory matters and international operations remain key risks.
- Legal proceedings were described as arising in the ordinary course, with no currently pending matter expected by management to materially affect results, financial condition or cash flows; adverse outcomes nevertheless could be material in a particular period.
- Most operating earnings of certain non-U.S. subsidiaries were considered indefinitely invested outside the United States. Repatriation could result in additional tax expense.
Important Facts for Investors to Verify
- Verify the sustainability of CAG recurring-revenue growth and whether margin expansion continues after the benefit of pricing, mix and lower costs.
- Assess the effect of the $704 million revolving-credit balance, floating interest rates, remaining borrowing capacity and the 3.5x leverage covenant.
- Separate the recurring operating improvement from the temporary benefit of ASU 2016-09 tax accounting and the absence of the 2016 OPTI Medical impairment.
- Monitor working-capital requirements, particularly the increases in accounts receivable and inventories, and the seasonal pattern of operating cash flow.
- Evaluate the timing and ultimate financial-statement impact of ASU 2014-09, including customer incentive programs and deferred revenue.
- Review foreign-exchange sensitivity, hedge effectiveness and the concentration of cash and marketable securities in foreign subsidiaries.
- Confirm acquisition-related contingent consideration, purchase-price allocations and the commercial performance of the acquired veterinary software businesses.