IDEXX LABORATORIES INC annual report, FY2019

IDEXX Laboratories, Inc. — Fiscal 2019 Form 10-K Summary

Business context and reporting period

IDEXX develops and sells diagnostic products and services for companion-animal veterinary, livestock, poultry, dairy, water-testing, and human point-of-care markets. The filing covers the fiscal year ended December 31, 2019. The company reports through Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other segments. Approximately 38% of revenue came from customers outside the United States.

Financial performance and key metrics

Metric	2019	2018	Change
Revenue	$2.407 billion	$2.213 billion	8.8%
Gross profit	$1.366 billion	$1.242 billion	10.0%
Gross margin	56.7%	56.1%	+60 bps
Operating income	$552.8 million	$491.3 million	12.5%
Operating margin	23.0%	22.2%	+80 bps
Net income attributable to IDEXX stockholders	$427.7 million	$377.0 million	13.4%
Diluted EPS	$4.89	$4.26	14.8%
Cash flow from operations	$459.2 million	$400.1 million	14.8%

• CAG revenue was $2.119 billion, up 9.5%; organic growth was 10.8%. CAG recurring diagnostic revenue increased 10.5% to $1.828 billion and represented approximately 76% of consolidated revenue.
• Water revenue increased 6.1% to $132.9 million, with operating income up 10.3% to $62.4 million.
• LPD revenue increased 1.6% to $132.6 million, while operating income increased 30.7% to $25.4 million, helped by African swine fever testing, alternative food-source testing, and herd-health screening.
• Research and development expense was $133.2 million, or 5.5% of revenue, compared with $117.9 million, or 5.3%, in 2018.
• The effective income tax rate was 18.1%, compared with 17.6% in 2018. Management stated that the 2019 rate benefited from share-based payment tax benefits but was affected by lower benefits than in the prior year.

Liquidity, cash flow, debt, and capital allocation

• Cash and cash equivalents were $90.3 million at December 31, 2019, compared with $123.8 million at year-end 2018. Working capital was negative $45.7 million.
• Net cash used in investing activities was $205.5 million, including $155.0 million of property and equipment purchases and $50.3 million for acquisitions. Capital spending increased for the Westbrook headquarters expansion and German laboratory relocation.
• Management estimated 2020 capital expenditures of approximately $140 million to $155 million.
• Total debt was approximately $987.7 million, consisting primarily of $288.8 million outstanding under the revolving credit facility and $698.9 million of long-term debt. Gross debt to Adjusted EBITDA was 1.45 times and net debt to Adjusted EBITDA was 1.32 times.
• The $850 million revolving credit facility had $559.8 million of remaining borrowing availability at year-end and matures December 4, 2020. IDEXX was in compliance with its debt covenants.
• During 2019, IDEXX issued $100 million of 4.19% unsecured senior notes due in 2029 and repurchased approximately 1.2 million shares for $303.8 million under its repurchase program. The company has not paid cash dividends and did not intend to do so at the time of filing.

Material changes versus the prior comparable period

• Revenue growth accelerated across the business, driven primarily by CAG recurring diagnostics, higher instrument utilization, reference-laboratory testing volumes, and expansion of the installed instrument base.
• The CAG premium Catalyst chemistry installed base increased to approximately 43,900 units from 37,000, while the combined Catalyst and VetTest base increased to approximately 56,200 units from 50,800.
• Premium ProCyte and LaserCyte Dx hematology units increased to approximately 31,500 from 29,000, and premium SediVue Dx units increased to nearly 8,900 from approximately 6,600.
• Operating leverage and favorable product mix increased consolidated gross and operating margins despite continued investment in sales, marketing, research and development, and reference-laboratory capacity.
• Operating cash flow increased by $59.1 million, while investing cash flow shifted from $138.6 million provided in 2018 to $205.5 million used in 2019. The 2018 investing inflow included proceeds from liquidated marketable securities.
• Cash used for financing declined to $286.4 million from $597.8 million, principally because 2018 included a larger credit-facility repayment and 2019 included new senior-note proceeds and lower share repurchases.
• The company adopted the new leasing standard in 2019, recording operating lease right-of-use assets of $80.6 million and long-term operating lease liabilities of $67.5 million at year-end. Management stated that adoption did not materially affect earnings or cash flow.
• Former CEO Jonathan W. Ayers transitioned to external Senior Advisor in November 2019. CEO transition costs, including severance and accelerated equity compensation, reduced 2019 net income by approximately $12.2 million after tax.

Guidance, outlook, management commentary, risks, and unusual items

• The filing does not provide a clear consolidated revenue or EPS guidance range for 2020. Management stated that available cash, operating cash flow, and committed borrowing capacity should fund operations, capital requirements, and anticipated growth for the foreseeable future.
• Management expects continued growth in Catalyst, ProCyte, SediVue, consumables, reference-laboratory services, software, and recurring diagnostic revenue, partly offset by declining legacy instrument placements and consumable streams.
• Based on stated 2020 currency assumptions, management estimated that a stronger U.S. dollar could reduce 2020 revenue by approximately $11 million, operating profit by approximately $10 million, and diluted EPS by approximately $0.09, including hedging effects.
• Key risks include intense competition, veterinary customer consolidation and purchasing pressure, reliance on sole or single-source suppliers, biologic manufacturing complexity, regulatory approvals, cybersecurity and data privacy, foreign-exchange volatility, economic weakness affecting veterinary visits, and disease-related volatility in LPD markets.
• The company relies on Ortho for certain chemistry slides and on other suppliers for critical analyzers, consumables, and components. Some supply agreements contain minimum purchase obligations.
• Contractual cash obligations totaled approximately $1.525 billion, including $837.6 million of long-term debt obligations, $288.8 million under the credit facility, $99.0 million of operating leases, and $298.4 million of purchase obligations.
• Remaining obligations from the deemed-repatriation tax under the 2017 Tax Act were approximately $27.0 million, payable through 2025. The Netherlands tax ruling that contributed approximately $13.7 million to 2019 net income expires December 31, 2022 and is not expected to be renewed.
• No material litigation accruals, goodwill impairments, or intangible-asset impairments were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

• Whether recurring CAG revenue, consumables utilization, reference-laboratory volumes, and premium instrument installations continue to support organic growth and margin expansion.
• The refinancing or repayment plan for the $288.8 million revolving credit balance ahead of its December 2020 maturity.
• Execution and returns from the $140 million to $155 million 2020 capital-spending plan, including the headquarters and German laboratory projects.
• The effect of foreign-exchange movements, hedging gains or losses, and international revenue exposure on 2020 results.
• The sustainability of the Netherlands tax benefit and the potential impact of future tax-law changes or tax audits.
• Whether the CEO transition, former CEO separation costs, and leadership changes affect execution, retention, or operating performance.
• The impact of supplier concentration, regulatory changes, cybersecurity events, veterinary-market consolidation, and African swine fever or other disease trends on demand and profitability.
• Revenue-recognition estimates for customer commitment programs, including approximately $1.9 billion of estimated future revenue tied to up-front loyalty and volume-commitment programs.