IDEXX Laboratories, Inc. — Q3 2017 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2017, compared primarily with the same periods in 2016. IDEXX provides veterinary diagnostic products and services, water-quality testing products, livestock, poultry and dairy diagnostics, and human point-of-care diagnostic products. Reportable segments are Companion Animal Group (CAG), Water, Livestock, Poultry and Dairy (LPD), and Other.
Key Financial Metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Revenue | $492.0 | $448.3 | $1,462.9 | $1,332.4 |
| Gross profit | $274.0 | $246.7 | $824.9 | $734.8 |
| Gross margin | 55.7% | 55.0% | 56.4% | 55.1% |
| Operating income | $100.4 | $88.5 | $315.2 | $266.4 |
| Operating margin | 20.4% | 19.7% | 21.5% | 20.0% |
| Net income attributable to IDEXX | $70.5 | $56.5 | $224.9 | $169.7 |
| Diluted EPS | $0.79 | $0.62 | $2.51 | $1.87 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $252.2 | $238.2 |
- Q3 revenue increased 9.7%; nine-month revenue increased 9.8%.
- Q3 operating income increased 13.5%; nine-month operating income increased 18.3%.
- The effective tax rate declined to 23.4% in Q3 from 30.8%, and to 22.8% for the nine months from 30.7%. The reduction primarily reflected adoption of ASU 2016-09 and expected foreign tax-credit utilization.
- Cash and cash equivalents were $169.0 million at September 30, 2017. Marketable securities were $285.1 million, resulting in total cash, cash equivalents and marketable securities of $454.1 million.
- Total debt was $1.290 billion, consisting of $686.3 million outstanding under the revolving credit facility and $604.1 million of long-term debt. Gross debt to trailing twelve-month Adjusted EBITDA was 2.55x; net debt to Adjusted EBITDA was 1.66x.
- Remaining borrowing availability under the $850 million revolving credit facility was $162.8 million, after consideration of a $1.0 million letter of credit. The company reported compliance with its 3.5x consolidated leverage covenant.
- Stockholders’ deficit was $48.4 million at September 30, 2017, compared with $108.2 million at December 31, 2016, primarily reflecting retained earnings partially offset by treasury-stock repurchases.
Material Changes Versus the Prior Comparable Period
- CAG revenue increased 10.7% in Q3 and 11.1% for the nine months. CAG Diagnostics recurring revenue increased 12.4% in Q3 and 12.7% year to date, led by reference-laboratory services and VetLab consumables.
- Water revenue increased 11.4% in Q3 and 7.9% for the nine months, supported by pricing, go-direct initiatives and Colilert products.
- LPD revenue declined 4.7% in Q3 and 2.4% for the nine months. Lower global milk prices reduced dairy producer demand, particularly in China and Brazil. Q3 LPD operating income fell 70.2%.
- CAG capital-instrument revenue declined 6.8% in Q3 and 3.5% for the nine months, reflecting comparisons with strong 2016 placements and a shift toward customer commitment programs that recognize more revenue over the contract term.
- Gross margin expanded by 70 basis points in Q3 and 130 basis points for the nine months, driven by price increases, lower product and manufacturing costs, and favorable mix toward recurring CAG revenue.
- Interest expense increased to $9.8 million in Q3 from $7.8 million and to $27.5 million for the nine months from $24.3 million, reflecting higher borrowings and floating interest rates.
- Share repurchases totaled $228.7 million for the nine months, compared with $91.6 million in the prior-year period. Net borrowings under revolving credit facilities increased cash by $75.3 million, compared with an $85.0 million repayment in 2016.
- Investing cash use increased to $114.2 million from $76.5 million, primarily due to net purchases of marketable securities, capital expenditures of $54.4 million, and $14.5 million of business acquisitions.
Cash Flow, Liquidity and Capital Allocation
- Nine-month cash flow from operations was $252.2 million. Cash used in investing activities was $114.2 million, and cash used in financing activities was $130.0 million. Cash increased by $14.1 million during the period.
- Working capital, including the credit facility, was negative $53.8 million at September 30, 2017, compared with negative $89.0 million at year-end 2016.
- Management stated that cash, short-duration marketable securities, operating cash flow and committed borrowing availability should fund operations, capital requirements and anticipated growth needs for at least the next twelve months.
- Cash, cash equivalents and marketable securities were concentrated outside the United States: $451.4 million was held by foreign subsidiaries versus $2.7 million in the United States.
Guidance, Outlook, Commentary and Risks
- The filing does not provide a clear full-year revenue or EPS guidance range.
- Management expected foreign currency movements to increase 2017 revenue by approximately $5 million but reduce full-year operating profit by approximately $1 million and diluted EPS by approximately $0.01, based on stated exchange-rate assumptions.
- Management projected that a 1% strengthening of the U.S. dollar would reduce revenue by approximately $2 million and operating income by approximately $1 million for the remainder of 2017, before specified balance-sheet effects.
- The company plans to adopt the new revenue standard, ASU 2014-09, in the first quarter of 2018 using the modified-retrospective method. Management expects acceleration of some instrument revenue, deferral of other instrument revenue, and a relatively neutral overall impact on 2018 revenue; the assessment could change with customer-program mix.
- Management estimated share-based compensation tax benefits would reduce 2017 income tax expense by approximately $27 million. It expected annual benefits of approximately $13 million to $16 million in 2018, subject to settlement activity, stock prices and tax policy.
- Key risks include foreign-currency volatility, floating interest rates and leverage, dependence on continued growth in CAG recurring revenue, weaker livestock and dairy demand, competitive pressures, customer-program changes, product availability constraints, execution of acquisitions and new accounting implementation, and potential adverse legal outcomes.
- The company reported no material changes to previously disclosed risk factors. Pending and threatened legal matters were not expected by management to materially affect results, although outcomes cannot be predicted with certainty.
- Unusual or non-recurring items included a $2.2 million non-cash OPTI Medical intangible-asset impairment recorded in the first half of 2016, with no comparable 2017 charge, and favorable 2017 tax effects from ASU 2016-09.
Most Important Facts for Investors to Verify
- Whether CAG Diagnostics recurring revenue and installed-base growth continue to offset lower upfront instrument revenue.
- The sustainability of gross-margin expansion after pricing, manufacturing-cost and product-mix benefits.
- LPD demand trends, particularly the effect of global milk prices and conditions in China and Brazil.
- Debt balances, borrowing availability, floating-rate exposure and compliance with the 3.5x leverage covenant.
- The effect of the 2018 revenue-standard adoption on instrument placements, recurring revenue timing and deferred revenue.
- The extent to which lower tax rates depend on share-based compensation settlements and foreign tax credits.
- Foreign-exchange assumptions, hedge effectiveness and the concentration of liquidity in foreign subsidiaries.
- The cash-flow impact of continued share repurchases, acquisitions, inventory investment and capital expenditures.