IDEXX Laboratories, Inc. — Q2 2016 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. IDEXX operates primarily through Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other segments. CAG represented approximately 86% of second-quarter revenue and remained the principal growth driver.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Total revenue | $466.6 million | $413.3 million | 12.9% |
| Gross profit / margin | $260.5 million / 55.8% | $232.8 million / 56.3% | 11.9%; margin down 50 bps |
| Income from operations / margin | $104.2 million / 22.3% | $88.3 million / 21.4% | 18.0%; margin up 90 bps |
| Net income attributable to IDEXX | $67.2 million | $56.9 million | 18.1% |
| Diluted EPS | $0.74 | $0.60 | 23.3% |
| Metric | Six months 2016 | Six months 2015 | Change |
|---|---|---|---|
| Total revenue | $884.1 million | $795.8 million | 11.1% |
| Gross profit / margin | $488.1 million / 55.2% | $448.3 million / 56.3% | 8.9%; margin down 110 bps |
| Income from operations / margin | $178.0 million / 20.1% | $161.1 million / 20.2% | 10.5%; margin down 10 bps |
| Net income attributable to IDEXX | $113.2 million | $103.5 million | 9.4% |
| Diluted EPS | $1.25 | $1.09 | 14.7% |
CAG second-quarter revenue increased 13.8% to $400.2 million, including 13.5% organic growth. CAG diagnostics recurring revenue increased 12.7%, reference laboratory diagnostic and consulting services increased 15.0%, and diagnostic capital instruments increased 35.1%, helped by the SediVue Dx launch. Water revenue increased 11.1%, LPD increased 2.5%, and Other increased 22.7%.
Six-month operating cash flow was $134.1 million versus $65.5 million in 2015. Investing cash usage was $53.6 million versus $227.6 million, primarily reflecting lower net purchases of marketable securities. Financing cash usage was $72.0 million, including $76.5 million of share repurchases. Cash and cash equivalents increased to $141.1 million from $129.0 million at year-end 2015; cash, cash equivalents and marketable securities totaled $370.2 million.
At June 30, 2016, the company had $558.0 million outstanding under its revolving credit facility, $598.0 million of long-term debt, and approximately $291 million of remaining borrowing availability. Gross debt was $1.16 billion, net debt was $790.0 million, and trailing-twelve-month gross and net debt to Adjusted EBITDA ratios were 2.73x and 1.86x, respectively. The company was in compliance with its debt covenants, including the 3.5x leverage limit. Stockholders’ deficit was $8.5 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher CAG testing volumes, reference laboratory activity, consumables sales, instrument placements, price increases, and subscription revenue.
- Reported growth was reduced by foreign currency movements: currency decreased second-quarter revenue by approximately $2.8 million and six-month revenue by approximately $10.4 million.
- Lower relative foreign-currency hedging gains reduced operating income by approximately $7.2 million in Q2 and $13.3 million for the first six months versus the prior-year periods.
- Gross margin declined because of currency effects, product mix, higher product costs, and weaker LPD margins; operating margin nevertheless improved in Q2 because of revenue growth and operating leverage.
- Interest expense increased to $8.2 million in Q2 and $16.5 million for the first six months, reflecting higher average borrowings, credit-facility rates, and interest on senior notes issued in 2015.
- Share repurchases declined to approximately 1.0 million shares costing $76.5 million in the first six months, compared with 3.1 million shares costing $220.1 million in 2015.
Guidance, outlook, risks and unusual items
- Management estimated that continued U.S. dollar strength would reduce full-year 2016 revenue by approximately $13.0 million. Lower relative hedging gains were expected to reduce operating income by approximately $23.4 million and diluted EPS by approximately $0.20, net of expected 2016 hedging gains.
- The 2016 capital expenditure plan was approximately $90 million, covering manufacturing and laboratory equipment, information technology, software, and facilities.
- Management believed available cash, short-duration marketable securities, operating cash flow, and committed borrowing capacity were sufficient for operations and anticipated needs for at least the next twelve months.
- The company discontinued OPTI Medical human point-of-care product development and focused commercial efforts on the latest-generation analyzer. It recorded a $2.2 million non-cash intangible impairment for the first six months, including $1.1 million in Q2; related human point-of-care intangibles were fully written off.
- Water revenue benefited from large project orders and U.K. cryptosporidium-related demand, which management expected to subside in the second half of 2016.
- Key risks include foreign currency volatility, economic conditions affecting veterinary visits and capital purchases, competition, product and technology execution, debt covenant compliance, legal proceedings, tax consequences of foreign earnings, and the realization of asset forecasts. Management reported no material changes to previously disclosed risk factors and no material pending legal matter was expected to affect results, although outcomes remain uncertain.
- The filing provides no clear consolidated revenue or EPS operating guidance beyond the currency and capital-spending estimates described above.
Important facts for investors to verify
- Whether CAG recurring revenue, reference laboratory volumes, and instrument placements—particularly SediVue Dx—continue to support growth.
- The effect of foreign exchange rates and lower hedging benefits on 2016 revenue, margins, operating income, and EPS.
- LPD margin pressure and the expected normalization of Water revenue after temporary project and outbreak-related demand.
- Debt reduction, share repurchase pace, leverage covenant headroom, and approximately $291 million of remaining credit-facility availability.
- Execution of the OPTI Medical strategy and whether additional tangible-asset impairments arise.
- Implementation effects of forthcoming revenue-recognition, lease, credit-loss, and share-based-payment accounting standards.