IDEXX Laboratories, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2018, compared with the same period in 2017. IDEXX provides veterinary diagnostic and information-management products and services, water-quality testing products, livestock, poultry and dairy diagnostics, and human point-of-care medical diagnostics. Reportable segments are Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $537.7 million | $462.0 million | 16.4% |
| Gross profit | $303.1 million | $258.2 million | 17.4% |
| Gross margin | 56.4% | 55.9% | +50 bps |
| Operating income | $113.0 million | $92.2 million | 22.6% |
| Operating margin | 21.0% | 20.0% | +100 bps |
| Net income attributable to IDEXX | $89.5 million | $69.0 million | 29.6% |
| Diluted EPS | $1.01 | $0.77 | 31.2% |
| Effective tax rate | 14.3% | 18.5% | Lower by 420 bps |
| Cash flow from operations | $34.9 million | $31.3 million | 11.6% |
CAG revenue was $470.8 million, up 16.8%, including 13.1% organic growth. Water revenue was $29.1 million, up 16.2%, including 11.8% organic growth. LPD revenue was $32.2 million, up 10.0%, but operating income declined 22.1% to $3.0 million as gross margin contracted to 54.7% from 57.5%.
CAG Diagnostics recurring revenue increased 17.1% to $406.0 million, driven by higher reference laboratory testing volumes, VetLab consumables, expanded instrument placements and pricing. Reference laboratory revenue increased 17.5% to $186.9 million; VetLab consumables increased 21.0% to $149.5 million.
Liquidity, debt and cash flows
- Cash and cash equivalents were $159.2 million at March 31, 2018, down from $187.7 million at December 31, 2017. Including marketable securities, liquidity declined from $471.9 million to $159.2 million because the company liquidated foreign marketable securities and repatriated the proceeds.
- Operating cash flow was $34.9 million. Capital expenditures were $23.7 million.
- Cash flow from investing activities was $260.3 million, primarily from $284.1 million of marketable-security sales and maturities.
- Cash flow from financing activities was negative $325.0 million, including a $247.5 million net repayment under the revolving credit facility and $83.5 million of open-market share repurchases.
- Debt consisted of $407.5 million outstanding under the revolving credit facility and $609.0 million of long-term debt, for total reported debt of approximately $1.02 billion.
- Remaining borrowing availability under the $850 million credit facility was $441.5 million, after consideration of a $1.0 million letter of credit. The company was in compliance with its debt covenants.
- Trailing twelve-month Adjusted EBITDA was $545.9 million; gross debt to Adjusted EBITDA was 1.87x and net debt to Adjusted EBITDA was 1.58x. These are non-GAAP measures.
Material changes versus the prior comparable period
- Revenue growth was broad-based, with total organic growth of 12.3%; reported growth included a 4.0% favorable currency effect and a 0.1% acquisition effect.
- Profitability improved as pricing, product mix, lower product and manufacturing costs, and growth in recurring CAG revenue supported gross-margin expansion. Operating expenses increased 14.5% as the company invested in commercial infrastructure, information technology and personnel.
- The effective tax rate declined primarily because of the lower U.S. statutory tax rate under the 2017 Tax Act.
- The company adopted the new revenue standard on January 1, 2018 using the modified retrospective method. The adoption increased Q1 revenue by approximately $12.3 million, gross profit by $5.7 million, operating income by $6.3 million and net income by $4.5 million versus the previous accounting guidance. Prior-period results were not restated.
- The new standard accelerated recognition of certain instrument revenue, changed treatment of customer incentives, increased deferred revenue and contract assets, and resulted in a $5.0 million reduction to opening retained earnings. Adoption of ASU 2016-16 reduced other long-term assets by $7.7 million and also reduced opening retained earnings.
- The company repurchased 465,304 shares under its program for $86.2 million and acquired an additional 47,839 shares through employee tax-withholding surrenders.
Outlook, commentary, risks and unusual items
Management stated that cash, operating cash generation and committed borrowing capacity should fund operations, capital requirements and anticipated growth for at least the next twelve months and the foreseeable future. The filing does not provide explicit full-year revenue or earnings guidance. Management expects no material interest income for the remainder of 2018 following liquidation of marketable securities.
At the filing’s currency assumptions, management estimated that a weaker U.S. dollar would increase 2018 revenue by approximately $31 million, operating profit by $8 million and diluted EPS by $0.07, including expected hedging effects. A 1% strengthening of the U.S. dollar was estimated to reduce revenue by approximately $6 million and operating income by approximately $3 million, partly offset by approximately $1.3 million of incremental hedge gains.
- Key risks include foreign-exchange volatility, customer demand, competition, execution of commercial investments, realizability of customer-acquisition costs and contract assets, debt covenant compliance, interest-rate exposure, and legal matters.
- The company hedges approximately 85% of estimated exposure from selected intercompany foreign-currency purchases and sales. Foreign-currency hedge losses recognized in cost of revenue were $1.8 million in Q1 2018 versus a $1.1 million gain in Q1 2017.
- The company reported no material changes to previously disclosed risk factors and no pending legal matters expected by management to have a material effect, although unfavorable legal outcomes could still materially affect a future period.
- The company expects adoption of the new lease standard to increase reported assets and liabilities, primarily from recognition of operating lease right-of-use assets and liabilities.
- No acquisitions occurred in Q1 2018. The company recognized an approximately $0.3 million loss on liquidation of foreign marketable securities.
Investor verification checklist
- Reconcile reported growth and profitability with the approximately $12 million revenue benefit from the new revenue standard and assess the sustainability of accelerated instrument revenue recognition.
- Monitor CAG recurring revenue, instrument placements, customer-program commitments, deferred revenue and contract assets.
- Review LPD margin deterioration and the impact of higher product costs and continued dairy-market pressure.
- Assess liquidity after the liquidation of marketable securities, the $247.5 million debt repayment and continued share repurchases.
- Verify leverage ratios, borrowing availability and compliance with the 3.5-to-1 debt covenant.
- Track foreign-exchange movements, hedge gains and losses, and the sensitivity of 2018 results to the U.S. dollar.
- Evaluate the provisional accounting for the 2017 Tax Act and the future balance-sheet impact of the lease standard.