IDEXX Laboratories, Inc. — Q2 2019 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 and poultry diagnostics, and human point-of-care diagnostic products. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Results are unaudited.
Reportable segments were Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other. Effective June 28, 2019, Jay Mazelsky became Interim President and Chief Executive Officer after Chairman and CEO Jonathan Ayers sustained a severe spinal cord injury. Management stated that the transition could present challenges but believed the existing leadership team could continue executing the strategy.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue | $620.1 million | $580.8 million | 6.8% |
| Gross profit | $357.9 million | $332.4 million | 7.6% |
| Gross margin | 57.7% | 57.2% | +50 bps |
| Income from operations | $164.3 million | $145.6 million | 12.8% |
| Operating margin | 26.5% | 25.1% | +140 bps |
| Net income attributable to IDEXX stockholders | $125.7 million | $108.7 million | 15.7% |
| Diluted EPS | $1.43 | $1.23 | 16.3% |
| Effective tax rate | 19.5% | 20.9% | Down 140 bps |
| Six-month metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1,196.2 million | $1,118.4 million | 7.0% |
| Gross margin | 57.6% | 56.8% | +80 bps |
| Income from operations | $297.4 million | $258.6 million | 15.0% |
| Net income attributable to IDEXX stockholders | $228.4 million | $198.1 million | 15.3% |
| Diluted EPS | $2.61 | $2.23 | 17.0% |
Revenue and segment performance
- CAG revenue increased 7.9% in Q2 and 8.0% year to date on a reported basis; organic growth was 9.5% and 10.0%, respectively. Growth was led by consumables, reference laboratory services, rapid assays, and veterinary software and services.
- CAG recurring revenue increased 9.1% in Q2 and 9.2% year to date. IDEXX VetLab consumables grew 10.4% in Q2, while reference laboratory diagnostic and consulting services grew 8.4%.
- CAG capital instrument revenue declined 8.7% in Q2 and 7.9% year to date, reflecting lower placements and unfavorable product mix, including lower SediVue Dx placements.
- Water revenue increased 6.4% in Q2 and 5.3% year to date, driven by higher volumes and pricing for Colilert products and accessories.
- LPD revenue declined 5.4% in Q2 and 3.9% year to date on a reported basis. Factors included foreign currency pressure, lower bovine testing, and reduced testing related to African swine fever outbreaks in China. Year-to-date organic growth was 1.7%.
- Other revenue declined 12.9% in Q2 and 7.6% year to date, primarily due to lower OPTI Medical analyzer and consumable volumes, lower pricing, and reduced royalties.
- Foreign currency reduced total reported revenue by approximately 2.1% in Q2 and 2.4% year to date.
Cash flow, liquidity, debt, and capital allocation
- Six-month operating cash flow was $171.5 million, compared with $153.7 million in 2018.
- Capital expenditures were $72.0 million, compared with $51.4 million in the prior-year period, reflecting expansion of the Westbrook headquarters and relocation of the core reference laboratory in Germany.
- Cash and cash equivalents were $110.8 million at June 30, 2019, down from $123.8 million at December 31, 2018.
- The company had $597.2 million of remaining availability under its $850 million revolving credit facility. The company stated that cash, operating cash flow, and available borrowing capacity should fund operations, capital requirements, and anticipated growth needs for at least the next twelve months.
- Credit-facility borrowings were $251.5 million and long-term debt was $700.6 million at June 30, 2019. Total debt was $952.1 million before other debt-related adjustments.
- IDEXX issued $100 million of Series C senior notes on March 14, 2019, bearing interest at 4.19% and due March 14, 2029. Proceeds were used for general corporate purposes, including partial repayment of the revolving facility.
- Trailing twelve-month Adjusted EBITDA was $643.7 million. Gross debt to Adjusted EBITDA was 1.49x and net debt to Adjusted EBITDA was 1.31x. The company was in compliance with its 3.5x consolidated leverage covenant.
- Share repurchases totaled $74.1 million in open-market purchases during the first six months and $20.3 million during Q2. The company repurchased approximately 86,000 shares in Q2 and had approximately 2.86 million shares remaining under its authorization at June 30.
Material changes, accounting, outlook, and risks
- Operating performance improved versus the prior year through volume growth, pricing, product mix, lower product costs, and operating leverage. Investments in global commercial infrastructure increased sales and marketing expense, while research and development spending also increased.
- IDEXX adopted the new lease standard on January 1, 2019. The adoption added $83.7 million of operating lease right-of-use assets and $86.7 million of operating lease liabilities at adoption, without a material impact on earnings or cash flow.
- Management did not provide a consolidated revenue or earnings guidance range in the supplied filing text. It stated that stronger U.S. dollar exchange rates were expected to reduce 2019 revenue by approximately $39 million, operating profit by $5 million, and diluted EPS by $0.04, including an estimated $12 million benefit from hedging.
- Management identified foreign exchange volatility, customer demand, competition, economic conditions, execution of commercial investments, product and technology development, customer incentive programs, and the leadership transition as relevant uncertainties.
- Revenue recognition depends partly on estimates of future purchases, rebates, price adjustments, and customer performance under multiyear commitment programs. Differences between estimates and actual purchases could affect the timing and amount of reported revenue.
- At June 30, 2019, capitalized customer acquisition costs were $126.4 million, volume-commitment contract assets were $60.4 million, and estimated future revenue from certain customer commitment programs was approximately $1.5 billion.
- Litigation accruals were not material, and management reported no material changes to previously disclosed contingencies. However, legal outcomes, including potential intellectual-property claims, could adversely affect results.
Important facts for investors to verify
- Whether recurring CAG revenue growth and margin expansion remain strong after adjusting for foreign exchange, pricing, customer stocking, and product mix.
- The effect of the CEO transition on commercial execution, innovation, employee retention, and investor guidance.
- Whether LPD weakness, including lower bovine testing and changes in African swine fever-related demand, persists.
- The pace of capital spending and its effect on free cash flow, particularly for the headquarters and German laboratory projects.
- Debt repayment plans, revolver utilization, interest rates, and continued compliance with the 3.5x leverage covenant.
- The realizability and revenue timing of customer acquisition costs, contract assets, deferred revenue, and multiyear customer commitments.
- Actual foreign currency results versus management’s stated 2019 assumptions and hedging benefits.