IDEXX Laboratories, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2015. IDEXX operates through Companion Animal Group (CAG) diagnostics and information-management products and services, Water products, Livestock, Poultry and Dairy (LPD) diagnostics, and an Other segment including human point-of-care diagnostics and pharmaceuticals. The company completed a two-for-one stock split in June 2015; share and per-share data are presented retrospectively.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $406.4 million | $383.5 million | $1,202.2 million | $1,133.8 million |
| Gross profit | $224.3 million | $213.3 million | $672.6 million | $634.0 million |
| Gross margin | 55.2% | 55.6% | 55.9% | 55.9% |
| Operating income | $71.9 million | $72.2 million | $233.0 million | $225.5 million |
| Operating margin | 17.7% | 18.8% | 19.4% | 19.9% |
| Net income attributable to IDEXX | $44.2 million | $52.1 million | $147.7 million | $155.9 million |
| Diluted EPS | $0.48 | $0.52 | $1.57 | $1.51 |
| Operating cash flow | Not separately provided | Not separately provided | $142.5 million | $208.5 million |
Q3 revenue increased 6.0% year over year, while nine-month revenue increased 6.0%. Reported organic revenue growth was 11.5% in Q3 and 11.7% for the first nine months, excluding foreign currency and acquisition effects. CAG generated $344.1 million of Q3 revenue and $1,020.2 million for the nine months. Q3 CAG organic growth was 13.2%; Water grew 6.7%, LPD 5.5%, and Other declined 19.7%.
Q3 net income and diluted EPS declined primarily because of higher interest expense, a higher tax rate, and an $8.2 million impairment charge. The nine-month diluted EPS increase reflects the substantially lower weighted-average share count following share repurchases, despite lower net income.
At September 30, 2015, cash and cash equivalents were $141.2 million, marketable securities were $208.4 million, and total cash, cash equivalents and marketable securities were $349.5 million. Accounts receivable were $190.9 million and inventories were $192.4 million. Total assets were $1.477 billion.
Debt consisted of $542.5 million outstanding under the revolving credit facility and $599.6 million of long-term debt. Remaining borrowing availability under the $700 million credit facility was $156.5 million, after consideration of a $1.0 million letter of credit. The company was in compliance with its debt covenants, including a maximum consolidated leverage ratio of 3.5-to-1.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by CAG recurring diagnostics, VetLab consumables, reference laboratory services, Catalyst One placements, and U.S. distributor-margin capture following the transition to an all-direct sales strategy.
- Foreign currency reduced revenue by approximately $24.1 million in Q3 and $71.0 million for the nine months. Currency reduced operating profit by approximately $4.8 million and $17.0 million, respectively, net of hedging gains.
- Q3 gross margin decreased to 55.2% from 55.6%, primarily because of unfavorable CAG product mix from higher instrument revenue and lower relative rapid-assay revenue. Nine-month gross margin was unchanged at 55.9%.
- Q3 operating income was broadly flat despite higher revenue; an $8.2 million impairment of internally developed software offset operating improvement. Excluding the impairment, management reported adjusted Q3 operating income of approximately $80.1 million, or 19.7% of revenue.
- Interest expense increased to $7.8 million in Q3 and $21.3 million for the nine months, from $4.3 million and $10.0 million, respectively, due primarily to newly issued senior notes and higher average revolving-facility borrowings.
- Operating cash flow decreased $66.1 million to $142.5 million for the nine months, mainly because of increased accounts receivable, inventory, accrued-liability and deferred-revenue uses of cash.
- Investing cash outflow increased to $282.4 million, principally because the company purchased $231.4 million of marketable securities and spent $67.5 million on property and equipment.
- The company issued approximately $250 million of senior notes during the nine months, repurchased 4.3 million shares for $313.1 million, and ended the period with a stockholders’ deficit of $38.8 million.
Guidance, outlook, commentary and risks
- Management estimated 2015 capital expenditures of approximately $100 million and stated that cash, short-duration marketable securities, operating cash flow and available borrowing capacity should fund operations, capital needs and anticipated growth for the next twelve months and the foreseeable future.
- At current exchange-rate assumptions, management expected 2015 currency effects to reduce revenue by approximately $89.7 million, operating profit by $22.1 million and diluted EPS by $0.16, net of anticipated hedging benefits of $20.5 million and $0.15 per share.
- The all-direct U.S. sales model is expected to capture distributor margin and support future growth, but increases working-capital requirements and accounts-receivable collection time. Days sales outstanding increased to 43.8 days from 39.2 days a year earlier, while inventory turns declined to 1.5 from 1.8.
- Management launched IDEXX Neo practice-management software and IDEXX Web PACS during Q3. The company expects subscription-based software to improve profitability once established, but noted that the transition may moderate growth from new licensed-based Cornerstone placements.
- Key risks include continued U.S. dollar appreciation, competition and technological advances, execution of the direct-sales transition, economic weakness affecting veterinary and testing demand, market-value and credit risks in the investment portfolio, regulatory and patent issues, and legal contingencies.
- Pending and threatened legal matters arise in the ordinary course of business and were not expected by management to have a material effect, although unfavorable outcomes could materially affect a particular period.
- Approximately $348.5 million of cash, cash equivalents and marketable securities was held by foreign subsidiaries and was subject to material repatriation tax effects.
Important facts for investors to verify
- Reconcile reported versus organic growth, particularly the effects of currency, acquisitions, distributor inventory changes and U.S. distributor-margin capture.
- Assess the sustainability of margins after the Q3 software impairment, favorable manufacturing-variance recognition and currency-hedging benefits.
- Review leverage, interest-rate exposure, covenant calculations and the maturity and terms of the approximately $600 million of senior notes.
- Monitor working-capital effects of the direct-sales model, including receivables, inventories, deferred revenue and cash conversion.
- Evaluate the performance and competitive position of Catalyst One, VetLab consumables, reference laboratories and subscription software offerings.
- Review the concentration and credit quality of the $208.4 million marketable-securities portfolio; management estimated that a 1% increase in market rates would reduce its fair value by approximately $0.9 million.