IDEXX Laboratories, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. IDEXX operates through the Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other segments. CAG is the primary business, providing veterinary diagnostics, information-management products and services, reference laboratory services, instruments and consumables.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $417.6 million | $382.5 million | 9.2% |
| Gross profit | $227.5 million | $215.5 million | 5.6% |
| Gross margin | 54.5% | 56.4% | Down 190 bps |
| Operating income | $73.8 million | $72.8 million | 1.4% |
| Operating margin | 17.7% | 19.0% | Down 130 bps |
| Net income attributable to IDEXX | $46.0 million | $46.6 million | Down 1.2% |
| Diluted EPS | $0.51 | $0.49 | 4.1% |
| Cash provided by operating activities | $23.2 million | $(14.6) million | Improved $37.9 million |
Revenue growth was driven primarily by higher CAG recurring revenue, including reference laboratory services and VetLab consumables. Reported revenue increased 10.2% in CAG, 8.5% in Water and 10.5% in Other, while LPD revenue declined 1.3%. Organic revenue growth was 10.6% company-wide, including 11.2% for CAG and Water, 3.5% for LPD and 10.8% for Other.
International revenue increased 7.8% as reported, or 12.1% organically, while U.S. revenue increased 10.0% as reported, or 9.7% organically. Foreign currency movements reduced reported revenue by approximately $7.6 million, operating income by $6.2 million and diluted EPS by $0.05.
Cash, cash equivalents and marketable securities totaled $350.6 million at March 31, 2016, comprising $133.0 million of cash and $217.6 million of marketable securities. The investment portfolio had an average AA- credit rating and no securities were considered other-than-temporarily impaired.
Total debt was approximately $1.22 billion, consisting of $622.0 million outstanding under the revolving credit facility and $600.0 million of long-term debt. Gross debt to trailing twelve-month Adjusted EBITDA was 3.03x and net debt to Adjusted EBITDA was 2.17x. These are non-GAAP measures.
Material changes versus the prior comparable period
- Revenue increased $35.1 million, led by higher testing volumes, new customers, price increases and growth in reference laboratory services and consumables.
- Gross margin declined because of currency effects, higher IDEXX VetLab and LPD product costs, and unfavorable CAG mix, including relatively higher instrument revenue and lower rapid-assay revenue.
- Operating income grew only 1.4% as sales and marketing, general and administrative, and unallocated personnel-related costs increased.
- Interest expense increased to $8.3 million from $6.3 million, primarily due to senior notes issued during 2015 and higher borrowing costs under the credit facility.
- Operating cash flow improved substantially because the prior-year period included significant working-capital usage associated with the U.S. transition to an all-direct sales strategy.
- Investing cash use declined to $23.8 million from $160.6 million because of lower net purchases of marketable securities. Capital expenditures were $21.9 million; full-year 2016 capital expenditures were estimated at approximately $90 million.
- Share repurchases declined to $53.5 million from $133.6 million. The company repurchased 708,051 shares under its repurchase program and acquired an additional 51,926 shares through employee share surrenders.
- Management discontinued OPTI Medical product-development activities in the human point-of-care market and recorded a $1.1 million non-cash intangible-asset impairment. Commercial efforts will focus on the OPTI CCA-TS2 analyzer.
Guidance, outlook, commentary and risks
The filing does not provide a conventional full-year revenue or earnings guidance range. Based on currency assumptions stated in the filing, management estimated that foreign exchange would reduce 2016 revenue by approximately $13.4 million, operating income by $24.5 million and diluted EPS by $0.21, net of anticipated hedging benefits.
Management expected available cash, marketable securities, operating cash flow and borrowing capacity to fund operations, capital expenditures and anticipated growth for at least the next twelve months. Remaining borrowing availability under the $850 million credit facility was $227 million at March 31, 2016, subject to a $1.0 million letter-of-credit reduction.
The company was in compliance with the 3.5-to-1 consolidated leverage covenant under its credit facility and senior note agreements. Debt obligations include customary covenants and events of default, including payment defaults, covenant breaches, bankruptcy, specified indebtedness defaults and change-of-control provisions.
- Foreign exchange exposure remains material; management estimated that a 10% strengthening of the U.S. dollar would reduce operating income for the remainder of 2016 by approximately $11 million, excluding certain intercompany and monetary-balance effects.
- Economic weakness could reduce veterinary patient visits, instrument purchases, water-testing activity and livestock-testing demand.
- LPD margins and revenue were pressured by currency, lower dairy pricing, higher product costs and reduced Western European bovine testing volumes.
- Approximately $348.4 million of cash, cash equivalents and marketable securities was held by foreign subsidiaries and was subject to material potential repatriation-tax effects.
- Pending and threatened legal matters arose in the ordinary course of business; management did not expect them to have a material effect, but unfavorable outcomes could still materially affect a particular period.
- The company was evaluating new accounting guidance for revenue recognition, leases and share-based payments; the filing states that the eventual impact had not yet been determined.
Important facts for investors to verify
- Whether recurring CAG growth, particularly reference laboratory and consumables volumes, continues to offset weaker margins and LPD performance.
- The sustainability of the 54.5% gross margin and the effects of currency, product mix, manufacturing costs and hedging.
- Debt reduction, credit-facility availability and compliance with the 3.5x leverage covenant.
- Actual foreign exchange outcomes compared with management’s 2016 assumptions and the sensitivity of earnings to further dollar appreciation.
- Progress and financial impact of the OPTI Medical strategy change following the $1.1 million impairment.
- Actual 2016 capital expenditures relative to the approximately $90 million estimate and the pace of share repurchases.
- The impact and adoption method of pending accounting standards, particularly revenue recognition, leases and share-based compensation.