IDEXX Laboratories, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
IDEXX develops diagnostic products, information-management solutions and services primarily for veterinary, livestock, poultry, dairy and water-testing markets, with a smaller human point-of-care diagnostics business. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The report was filed April 28, 2017.
- Reportable segments: Companion Animal Group (CAG), Water, and Livestock, Poultry and Dairy (LPD); Other includes OPTI Medical, pharmaceuticals and out-licensing.
- CAG represented approximately 87% of consolidated revenue and was the principal growth driver.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $462.0 million | $417.6 million | 10.7% |
| Gross profit | $258.2 million | $227.5 million | 13.5% |
| Gross margin | 55.9% | 54.5% | +140 bps |
| Operating income | $92.2 million | $73.8 million | 25.0% |
| Operating margin | 20.0% | 17.7% | +230 bps |
| Net income | $69.1 million | $46.0 million | 50.0% |
| Net income attributable to IDEXX | $69.0 million | $46.0 million | 50.0% |
| Diluted EPS | $0.77 | $0.51 | 51.0% |
| Net cash from operating activities | $31.3 million | $27.0 million | +$4.3 million |
Product revenue was $272.0 million and service revenue was $190.1 million. Revenue growth was led by CAG revenue of $403.2 million, up 12.7%, including 13.4% organic growth. Water revenue increased 6.5% to $25.1 million, while LPD revenue declined 5.0% to $29.3 million and Other revenue declined 20.0% to $4.4 million.
- CAG operating income rose 30.1% to $79.9 million, with a 19.8% operating margin versus 17.2%.
- Water operating income increased 6.0% to $10.3 million, with a 40.9% margin.
- LPD operating income fell 16.8% to $3.8 million, with margin declining to 13.0% from 14.8%.
- Other operating income was $0.4 million compared with an operating loss of $0.8 million, primarily because Q1 2016 included a $1.1 million non-cash OPTI Medical intangible-asset impairment.
- The effective tax rate declined to 18.5% from 30.6%. Adoption of ASU 2016-09 reduced tax expense by approximately $11.2 million and lowered the effective tax rate by approximately 13 percentage points.
Cash flow, debt and liquidity
| Balance-sheet item | March 31, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $160.4 million | $154.9 million |
| Marketable securities | $239.9 million | $236.9 million |
| Line of credit | $671.0 million | $611.0 million |
| Long-term debt | $594.9 million | $593.1 million |
| Total assets | $1.57 billion | $1.53 billion |
- Cash, cash equivalents and marketable securities totaled $400.3 million, up from $391.8 million at year-end 2016; approximately $397.0 million was held outside the United States.
- The company had $178.0 million of remaining borrowing availability under its $850 million revolving credit facility, after considering a $1.0 million workers’ compensation letter of credit.
- Net cash used in investing activities was $29.0 million, including $23.6 million of capital expenditures, $2.3 million for an acquisition and net purchases of marketable securities.
- Financing activities provided $1.3 million, including $60.0 million of net revolving-credit borrowings, offset by $63.9 million of reported share repurchases and $7.3 million of shares withheld for employee taxes.
- Trailing-twelve-month adjusted EBITDA was $474.3 million. Gross debt to adjusted EBITDA was 2.67x and net debt to adjusted EBITDA was 1.83x; the company was in compliance with its 3.5x leverage covenant.
- Stockholders’ deficit was $73.9 million at March 31, 2017, reflecting substantial treasury stock accumulated through repurchases.
Material changes versus the prior comparable period
- Revenue growth accelerated through strong CAG recurring diagnostic volumes, reference laboratory testing, consumables and SediVue Dx instrument placements.
- Gross and operating margins expanded primarily because of price increases, volume leverage and favorable product cost absorption.
- LPD weakened because of lower herd-health screening in Asia-Pacific and lower dairy-testing volumes in China and Brazil; product mix and higher royalty expense also pressured margins.
- Other revenue declined because of temporary OPTI Medical product availability constraints, although the prior-year impairment charge did not recur.
- Operating cash flow improved despite greater use of cash for inventory and employee incentive compensation.
- Share repurchases declined to approximately 390,000 open-market shares from 708,000 in Q1 2016, but cash spent on open-market repurchases increased to $50.7 million because of a higher average purchase price.
Guidance, outlook, commentary and risks
- Management stated that cash on hand, marketable securities, operating cash flow and committed borrowing capacity should fund operations, capital needs and anticipated growth for at least the next twelve months.
- Management estimated that ASU 2016-09 would add approximately $0.22 to $0.26 to full-year 2017 diluted EPS, primarily through lower taxes. The filing stated that the historical annual benefit may be approximately $0.12 to $0.16 per share in 2018 and beyond.
- Management expected a stronger U.S. dollar to reduce 2017 revenue by approximately $21 million, operating income by approximately $6 million and diluted EPS by approximately $0.05, net of projected hedge benefits.
- The company hedged approximately 85% of estimated exposure from certain intercompany foreign-currency purchases and sales. A 1% strengthening of the U.S. dollar was estimated to reduce revenue by approximately $5 million and operating income by approximately $2 million for the remainder of 2017, before specified balance-sheet exposures.
- Management was evaluating new revenue-recognition, lease and nonfinancial-asset accounting standards. The revenue standard may delay recognition for some customer incentive programs and accelerate it for others; the filing did not provide a quantified net impact.
- Key risks include foreign-exchange volatility, demand for veterinary diagnostics, competition, product availability, execution of commercial investments, leverage and variable interest rates, customer incentive programs, regulatory or legal matters, and the concentration of cash and securities outside the United States.
- Pending legal matters were described as arising in the ordinary course and not expected by management to materially affect results, although unfavorable resolutions could materially affect a particular period.
Important facts for investors to verify
- Determine how much of reported EPS growth was attributable to the approximately $11.2 million tax benefit from ASU 2016-09 rather than operating performance.
- Reconcile GAAP revenue growth with the company’s non-GAAP organic revenue growth, including the effects of currency and acquisitions.
- Monitor CAG recurring revenue, SediVue Dx placements, installed-base utilization and pricing as drivers of margin and cash generation.
- Assess the sustainability of the $671.0 million revolving-credit balance, $594.9 million of long-term debt and 1.83x net debt-to-adjusted-EBITDA ratio.
- Review the effect of foreign-currency movements and hedge settlements on revenue, operating income and accumulated other comprehensive income.
- Evaluate LPD demand weakness, OPTI Medical product availability constraints and the future impact of pending accounting standards.
- Confirm the timing and size of future share repurchases and the implications of the company’s negative stockholders’ equity.