IDEXX Laboratories, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2016, filed November 1, 2016. IDEXX operates primarily through Companion Animal Group (CAG) veterinary diagnostics and information technology, Water, Livestock, Poultry and Dairy (LPD), and Other businesses, including OPTI Medical and pharmaceutical-related royalties.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $448.3 million | $406.4 million | $1,332.4 million | $1,202.2 million |
| Revenue growth | 10.3% | — | 10.8% | — |
| Organic revenue growth | 10.4% | — | 11.3% | — |
| Gross profit / margin | $246.7m / 55.0% | $224.3m / 55.2% | $734.8m / 55.1% | $672.6m / 55.9% |
| Income from operations / margin | $88.5m / 19.7% | $71.9m / 17.7% | $266.4m / 20.0% | $233.0m / 19.4% |
| Net income attributable to IDEXX | $56.5 million | $44.2 million | $169.7 million | $147.7 million |
| Diluted EPS | $0.62 | $0.48 | $1.87 | $1.57 |
| Operating cash flow | — | — | $234.5 million | $142.5 million |
Q3 diluted EPS increased 29.2%, while nine-month diluted EPS increased 19.1%. The Q3 effective tax rate was 30.8%, compared with 31.8% in the prior-year quarter; the nine-month rate was 30.7%, compared with 30.8%.
Segment and operating performance
- CAG: Q3 revenue increased 12.0% to $385.3 million; nine-month revenue increased 12.0% to $1,143.2 million. Growth was led by recurring diagnostics revenue, VetLab consumables, reference laboratory services, and instrument placements, including the SediVue Dx analyzer.
- Water: Q3 revenue increased 7.3% to $27.9 million; nine-month revenue increased 9.0% to $79.2 million, driven primarily by Colilert products and related accessories.
- LPD: Q3 revenue declined 2.1% to $29.8 million, while nine-month organic revenue increased 1.7%. Profitability declined due to unfavorable currency, higher product costs, and weaker herd health screening and Western European bovine testing.
- Other: Q3 revenue declined 9.2% to $5.4 million, primarily because of lower OPTI Medical sales. Nine-month revenue increased 6.7%, supported by royalty revenue.
Material changes versus the prior comparable period
- Revenue growth was primarily volume-driven, especially in CAG recurring diagnostics, with higher realized prices also contributing.
- Gross margin declined 20 basis points in Q3 and 80 basis points for the nine-month period. Management attributed much of the pressure to foreign currency effects and lower relative hedging gains; excluding currency impacts, margins increased moderately.
- Operating margin expanded 200 basis points in Q3 and 60 basis points for the nine-month period. Q3 benefited from the absence of the $8.2 million software impairment charge recorded in Q3 2015.
- Foreign currency movements reduced revenue by approximately $0.9 million in Q3 and $11.3 million for nine months. Relative to the prior year, lower hedging gains reduced operating income by approximately $4.5 million in Q3 and $17.8 million for nine months.
- Operating cash flow increased $92.0 million year over year, benefiting from higher earnings and more favorable working-capital movements, including lower cash use from receivables and inventories.
- Share repurchases declined substantially to $88.2 million for nine months, compared with $313.1 million in the prior-year period, as the company moderated repurchases after reaching its targeted debt leverage range.
Debt, liquidity and cash flows
- At September 30, 2016, cash and cash equivalents were $150.1 million and marketable securities were $241.4 million, totaling $391.5 million.
- Outstanding debt consisted of $488.0 million under the revolving credit facility and $599.1 million of long-term debt. Remaining borrowing availability under the $850 million facility was approximately $361 million, subject to a $1.0 million letter of credit reduction.
- Trailing twelve-month adjusted EBITDA was $434.8 million. Gross debt to adjusted EBITDA was 2.51x and net debt to adjusted EBITDA was 1.61x. The company was in compliance with its 3.5x leverage covenant.
- Nine-month investing cash use was $76.5 million, including $50.0 million of capital expenditures. Management estimated total 2016 capital expenditures of approximately $80 million.
- Management stated that cash, marketable securities, operating cash flow, and committed borrowing capacity should fund operations, capital requirements, and anticipated growth needs for at least the next twelve months.
Outlook, commentary, risks and unusual items
- Based on then-current assumptions, management expected full-year 2016 foreign exchange movements to reduce revenue by approximately $14.6 million, operating income by approximately $24.4 million, and diluted EPS by approximately $0.20, net of expected hedging gains.
- Management estimated that a 10% strengthening of the U.S. dollar would reduce operating income for the remainder of 2016 by approximately $3 million, excluding certain intercompany and monetary-balance exposures.
- During the first half of 2016, IDEXX discontinued OPTI Medical human point-of-care product development and focused commercial efforts on the OPTI CCA-TS2. The related review resulted in $2.2 million of non-cash intangible impairment charges, with the affected human point-of-care intangibles fully written off.
- Key disclosed risks include foreign currency volatility, economic conditions affecting veterinary visits and capital purchases, customer and distributor inventory changes, competition, product demand, regulatory and patent matters, execution of the subscription-model transition, and potential adverse legal outcomes.
- Pending and threatened legal matters were considered not expected to materially affect results, financial condition, or cash flows, although management noted that unfavorable resolutions could have a material effect in a particular period.
- The company planned to adopt new share-based payment accounting guidance on January 1, 2017 and estimated that related tax benefits could add approximately $0.08 to $0.12 to annual diluted EPS in 2017, subject to significant quarterly variability.
Most important facts to verify
- Whether CAG recurring diagnostics growth and the SediVue Dx launch continue to offset weakness in LPD and OPTI Medical.
- Actual foreign exchange effects versus the company’s 2016 assumptions and the effectiveness of its hedging program.
- Debt reduction, share repurchase levels, and compliance with the 3.5x leverage covenant.
- Conversion of strong operating cash flow into capital investments, repurchases, and debt repayment.
- The financial impact of the OPTI Medical strategic change and any further impairment risk.
- Implementation effects of new revenue recognition, lease, and share-based payment accounting standards.