IDEXX Laboratories, Inc. — Form 10-Q Summary
Business context and reporting period
IDEXX develops diagnostic products, veterinary reference laboratory and information-management services, water-quality testing products, livestock, poultry and dairy diagnostics, and human point-of-care diagnostics. The filing covers the unaudited three and nine months ended September 30, 2018, compared with the same 2017 periods.
Reportable segments were Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other. CAG represented approximately 88% of third-quarter revenue and remained the primary growth driver.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $545.4 million | $492.0 million | $1.664 billion | $1.463 billion |
| Reported revenue growth | 10.9% | — | 13.7% | — |
| Organic revenue growth | 12.0% | — | 12.1% | — |
| Gross profit | $305.6 million | $274.0 million | $941.2 million | $824.9 million |
| Gross margin | 56.0% | 55.7% | 56.6% | 56.4% |
| Income from operations | $117.4 million | $100.4 million | $376.0 million | $315.2 million |
| Operating margin | 21.5% | 20.4% | 22.6% | 21.5% |
| Net income attributable to IDEXX stockholders | $93.3 million | $70.5 million | $291.4 million | $224.9 million |
| Diluted EPS | $1.05 | $0.79 | $3.29 | $2.51 |
Q3 revenue increased 10.9%, operating income increased 16.9%, and diluted EPS increased 32.9%. Nine-month revenue increased 13.7%, operating income increased 19.3%, and diluted EPS increased 31.1%.
Revenue and segment performance
- CAG: Q3 revenue was $478.1 million, up 12.0% reported and 12.9% organically. Growth was led by consumables, reference laboratory services, instrument placements, and veterinary software and imaging.
- Water: Q3 revenue was $33.1 million, up 6.7% reported and 8.9% organically, driven primarily by Colilert products and accessories.
- LPD: Q3 revenue was $29.4 million, up 3.6% reported and 7.0% organically. Herd-health screening and poultry testing improved, while African swine fever in China and pressure in dairy markets were headwinds.
- Other: Q3 revenue declined 17.7% to $4.8 million, primarily because of lower OPTI Medical analyzer and consumable volumes in the Middle East and Asia.
Cash flow, liquidity and debt
- Operating cash flow for the first nine months was $264.4 million, compared with $252.2 million in 2017.
- Investing activities provided $178.4 million, primarily because the company sold marketable securities after repatriating foreign cash. Capital expenditures were $82.6 million, including investments in the Westbrook headquarters and the German core laboratory.
- Financing activities used $480.0 million, including $240.5 million of net revolving-credit repayments and $263.7 million of common-stock repurchases.
- Cash and cash equivalents were $146.9 million at September 30, 2018, versus $187.7 million at December 31, 2017. Marketable securities were zero at September 30, compared with $284.3 million at year-end 2017.
- Debt consisted of $414.5 million outstanding under the revolving credit facility and $602.4 million of long-term debt. Remaining borrowing availability under the $850 million facility was $434.5 million, before the effect of a $1.0 million letter of credit.
- Gross debt to Adjusted EBITDA was 1.74x and net debt to Adjusted EBITDA was 1.49x. The company was in compliance with its 3.5x consolidated leverage covenant.
Material changes versus the prior comparable period
- The company adopted the new revenue standard on January 1, 2018 using the modified retrospective method. Reported Q3 revenue was increased by approximately $13.9 million and nine-month revenue by approximately $41.1 million relative to previous U.S. GAAP; operating cash flow was unchanged.
- The new standard accelerated recognition of certain instrument revenue, particularly under the IDEXX 360 volume commitment program, while increasing contract assets, customer acquisition costs and deferred revenue.
- Q3 operating margin improved by 110 basis points, and nine-month operating margin improved by 110 basis points, despite higher investments in commercial infrastructure, reference laboratory capacity, information technology and employee benefits.
- The effective tax rate declined to 14.5% in Q3 and 16.9% for the first nine months, from 23.4% and 22.8%, respectively, primarily because of the 2017 Tax Act and share-based compensation tax benefits.
- The company repurchased $263.7 million of stock during the first nine months, compared with $228.7 million in the prior-year period.
Guidance, outlook, commentary and unusual items
- The filing does not provide clear full-year revenue or EPS guidance. Management stated that cash, operating cash flow and available borrowing capacity should fund operations, capital requirements and anticipated growth for at least the next twelve months.
- Management expects no material interest income for the remainder of 2018 following the liquidation of marketable securities.
- Management projected that, based on its currency assumptions, foreign exchange would increase 2018 revenue by approximately $12 million, operating profit by approximately $1 million and diluted EPS by approximately $0.01. A 1% strengthening of the U.S. dollar was estimated to reduce revenue by approximately $2 million and operating income by less than $1 million.
- The company acquired substantially all assets of a veterinary software company for $25.0 million, including holdback and contingent consideration. Preliminary purchase accounting included approximately $20.3 million of goodwill and $5.0 million of identifiable intangible assets.
- The company discontinued development of its in-house SNAP Fecal product and recorded a $2.6 million impairment charge on related production equipment.
- LPD results remain exposed to African swine fever in China, lower milk prices and dairy-market weakness. Other-segment results include bad-debt reserves tied to economic and political instability affecting certain Middle Eastern customers.
- Key ongoing risks include foreign-exchange volatility, customer-program estimates and rebate obligations, competition, product demand, patent and infringement claims, execution of growth investments, debt covenant compliance and the timing effects of revenue recognition.
- Accrued litigation reserves were not material, although management noted that actual losses could exceed accruals and that patent claims could affect product sales or require damages.
Investor verification checklist
- Reconcile reported growth with organic growth and isolate the $41.1 million nine-month revenue benefit from the new revenue standard.
- Monitor the sustainability of CAG recurring revenue growth, instrument placements and the IDEXX 360 program, including effects on future cash collection and deferred revenue.
- Assess liquidity after substantial share repurchases, the $414.5 million revolver balance and the company’s reliance on foreign cash and credit availability.
- Review the assumptions and valuation of the recently acquired software business, including the preliminary goodwill and contingent consideration.
- Track foreign-exchange movements, hedging results, LPD market conditions, Middle East customer credit exposure and the discontinued SNAP Fecal investment.
- Confirm implementation effects of the new leasing standard expected to be adopted beginning in 2019, including additional operating lease assets and liabilities.