Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities E
xchange Act of 1934, as amended (the “Exchange Act”),
include statements relating to future revenue growth rates,
business trends,
earnings and other me
asures of financial performance;
t
he effect of economic downturns
on our business performance;
projected impact of foreign currency exchange rates; demand for our products;
realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending; interest expense; warranty expense; share-based compensation expense;
future commercial efforts;
and competition. Forward-looking statements can be identified by the use of words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” and similar words and expressions. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements.
These forward-looking statements involve a number of risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”) and this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with the U.S. Securities and Exchange Commission (the “SEC”).
A
ny forward-looking statements represent our estimates only as of the day this Quarterly Report
on Form 10-Q
was
filed with the
SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change.
You should read the following discussion and analysis in conjunction with our 2015 Annual Report that includes additional information about us, our results of operations, our financial position and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Business Overview
Operating Segments
. We operate primarily through three business segments: diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic
products and services
for livestock and poultry health and to ensure the quality and safety of milk and food, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other oper
ating segment combines and pres
ents products for the human point-of-care medical diagnostics market (“
OPTI
Medical”) with our pharmaceutical product line and our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
CAG develops, designs, manufactures and distributes products and performs services for veterinarians and the bioresearch market, primarily related to diagnostics and information management. Water develops, designs, manufactures and distributes a range of products used in the detection of various microbiological parameters in water. LPD develops, designs, manufactures and distributes diagnostic tests and related instrumentation and performs services that are used to manage the health status of livestock and poultry, to improve bovine reproductive efficiency, and to ensure the quality and safety of milk and food. OPTI Medical manufactures and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.
During the second quarter of 2016, we renamed our customer information management and diagnostic imaging systems line of business in the CAG segment to veterinary software, services and diagnostic imaging systems. Financial results were not adjusted as a result of this name change.
Certain costs are not allocated to our operating segments and are instead reported under the caption “Unallocated Amounts”. These costs include costs that do not align with one of our existing operating segments or are cost prohibitive to allocate, which primarily consist of our R&D function,
regional or country expenses, certain foreign currency revaluation gains and losses on monetary balances in currencies other than our subsidiaries’ functional currency and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation are charged to our business segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or rates are captured within Unallocated Amounts.
Effective January 1, 2016, we modified our management reporting to the Chief Operating Decision Maker to provide a more comprehensive view of the performance of our operating segments by including the capitalization and subsequent recognition of variances between standard and actual manufacturing costs, which adjusts the timing of cost recognition from when the variance is created to the period in which the related inventory is sold. Prior to January 1, 2016, the capitalization and subsequent recognition of these variances were not allocated to our operating segments and were instead reported under the caption “Unallocated Amounts”.
The segment gross profit and income (loss) from operations within this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2015 has been retrospectively revised to reflect the changes to our segment performance metrics described above.
The following is a summary of
restated segment gross profit from operations for the three and nine months ended September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
Net Impact of Standard Cost
|
|
|
For the Three
|
|
|
|
|
|
Months Ended
|
|
|
|
Variance Capitalization and
|
|
|
Months Ended
|
|
Adjusted
|
Gross Profit
|
|
September 30, 2015
|
|
Percent of
|
|
Subsequent Recognition
|
|
|
September 30, 2015
|
|
Percent of
|
(dollars in thousands)
|
|
As Previously Reported
|
|
Revenue
|
|
to the Operating Segments
|
|
|
As Adjusted
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
183,981
|
|
53.5%
|
|
$
|
(58)
|
|
$
|
183,923
|
|
53.5%
|
Water
|
|
|
18,266
|
|
70.4%
|
|
|
234
|
|
|
18,500
|
|
71.3%
|
LPD
|
|
|
18,286
|
|
60.1%
|
|
|
499
|
|
|
18,785
|
|
61.7%
|
Other
|
|
|
3,229
|
|
54.7%
|
|
|
(66)
|
|
|
3,163
|
|
53.6%
|
Unallocated Amounts
|
|
|
512
|
|
N/A
|
|
|
(609)
|
|
|
(97)
|
|
N/A
|
Total Company
|
|
$
|
224,274
|
|
55.2%
|
|
$
|
-
|
|
$
|
224,274
|
|
55.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
|
Net Impact of Standard Cost
|
|
|
For the Nine
|
|
|
|
|
|
Months Ended
|
|
|
|
Variance Capitalization and
|
|
|
Months Ended
|
|
Adjusted
|
Gross Profit
|
|
September 30, 2015
|
|
Percent of
|
|
Subsequent Recognition
|
|
|
September 30, 2015
|
|
Percent of
|
(dollars in thousands)
|
|
As Previously Reported
|
|
Revenue
|
|
to the Operating Segments
|
|
|
As Adjusted
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
552,372
|
|
54.1%
|
|
$
|
1,241
|
|
$
|
553,613
|
|
54.3%
|
Water
|
|
|
51,528
|
|
70.9%
|
|
|
133
|
|
|
51,661
|
|
71.1%
|
LPD
|
|
|
56,775
|
|
60.5%
|
|
|
2,188
|
|
|
58,963
|
|
62.9%
|
Other
|
|
|
8,191
|
|
52.9%
|
|
|
(890)
|
|
|
7,301
|
|
47.1%
|
Unallocated Amounts
|
|
|
3,709
|
|
N/A
|
|
|
(2,672)
|
|
|
1,037
|
|
N/A
|
Total Company
|
|
$
|
672,575
|
|
55.9%
|
|
$
|
-
|
|
$
|
672,575
|
|
55.9%
|
The following is a summary of
restated segment operating income (loss) from operations for the three and nine months ended September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
Net Impact of Standard Cost
|
|
|
For the Three
|
|
|
|
|
|
Months Ended
|
|
|
|
Variance Capitalization and
|
|
|
Months Ended
|
|
Adjusted
|
Operating Income (Loss)
|
|
September 30, 2015
|
|
Percent of
|
|
Subsequent Recognition
|
|
|
September 30, 2015
|
|
Percent of
|
(dollars in thousands)
|
|
As Previously Reported
|
|
Revenue
|
|
to the Operating Segments
|
|
|
As Adjusted
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
61,541
|
|
17.9%
|
|
$
|
(58)
|
|
$
|
61,483
|
|
17.9%
|
Water
|
|
|
12,408
|
|
47.8%
|
|
|
234
|
|
|
12,642
|
|
48.7%
|
LPD
|
|
|
5,562
|
|
18.3%
|
|
|
499
|
|
|
6,061
|
|
19.9%
|
Other
|
|
|
635
|
|
10.8%
|
|
|
(66)
|
|
|
569
|
|
9.6%
|
Unallocated Amounts
|
|
|
(8,251)
|
|
N/A
|
|
|
(609)
|
|
|
(8,860)
|
|
N/A
|
Total Company
|
|
$
|
71,895
|
|
17.7%
|
|
$
|
-
|
|
$
|
71,895
|
|
17.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
|
Net Impact of Standard Cost
|
|
|
For the Nine
|
|
|
|
|
|
Months Ended
|
|
|
|
Variance Capitalization and
|
|
|
Months Ended
|
|
Adjusted
|
Operating Income (Loss)
|
|
September 30, 2015
|
|
Percent of
|
|
Subsequent Recognition
|
|
|
September 30, 2015
|
|
Percent of
|
(dollars in thousands)
|
|
As Previously Reported
|
|
Revenue
|
|
to the Operating Segments
|
|
|
As Adjusted
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
181,845
|
|
17.8%
|
|
$
|
1,241
|
|
$
|
183,086
|
|
17.9%
|
Water
|
|
|
33,821
|
|
46.5%
|
|
|
133
|
|
|
33,954
|
|
46.7%
|
LPD
|
|
|
17,408
|
|
18.6%
|
|
|
2,188
|
|
|
19,596
|
|
20.9%
|
Other
|
|
|
204
|
|
1.3%
|
|
|
(890)
|
|
|
(686)
|
|
(4.4%)
|
Unallocated Amounts
|
|
|
(277)
|
|
N/A
|
|
|
(2,672)
|
|
|
(2,949)
|
|
N/A
|
Total Company
|
|
$
|
233,001
|
|
19.4%
|
|
$
|
-
|
|
$
|
233,001
|
|
19.4%
|
Effects of Certain Factors
and Trends
on Results of Operations
Distributor Purchasing and Inventories
. We employ an all-di
rect sales strategy in the U.S.;
however, we continue to sell our products through third party distri
butors in certain
markets. When sel
ling our
products through
distributors, changes in distributors’ inventory levels can impact our reported sales, and these changes may be affected by many factors, which may not be directly related to underlying demand for our products by veterinary practices, which are the end-users.
W
e do not believe the impact of changes in these distributors’ inventories had or would have
had
a material impact on our growth rates in the relevant periods.
Currency Impact
. For both the three and nine months
ended
September 30, 2016
,
approximately
26
percent
of
our consolidated revenue was derived from products manufactured
or purchased
in the U.S. and sold internationally in l
ocal currencies, as compared
to 25
percent
for
both the three and nine months ended September 30, 2015
.
Strengthening of the U.S. dollar exchange rate relative to other currencies has a negative impact on our revenues derived in currencies other than the U.S. dollar and on profits of products manufactured or purchased in the U.S. and sold internationally, and a weakening of the U.S. dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated operating expenses and foreign currency denominated supply contracts partly offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. denominated revenues. See “Part II, Item 7A. Quantitative and Qualitative Disclosure About Market Risks” included in our 2015 Annual Report for additional information regarding currency impact. Our future income tax expense could also be affected by changes in the mix of earnings, including as a result of changes in the rate of exchange for the U.S. dollar relative to currencies in countries with differing statutory tax rates. See “Part I, Item 1A. Risk Factors” included in our 2015 Annual Report for additional information regarding tax impacts.
Our foreign currency exchange impacts are comprised of three components: 1) revenues and expenses denominated in a foreign currency; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary. As of September 30, 2016, based on projected revenues and expenses, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, we estimate a 10 percent strengthening of the U.S. dollar would reduce operating income for the remainder of 2016 by
approximately $3 million. The
impact of the intercompany and monetary balances referred to in the third component above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably forecast the impact that changes in exchange rates would have on our operating income.
The impact on revenue resulting from changes in foreign currency exchange rates is not a measure defined by accounting principles generally
accepted in the United States of America (“U.S. GAAP”), otherwise referred to herein as a non-GAAP financial measure. We calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year pe
riod and the comparable prior
year period applied to foreign currency denominated revenues for the prior year period.
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results
normalized for changes in currency in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods.
During the three and nine months ended September 30, 2016, as compared to the same period of the prior year, changes in foreign currency exchange rates decreased total company revenue by approximately
$0.9
million and $11.3 million respectively, due primarily to the strengthening of the U.S. dollar against the British pound and Canadian dollar. Foreign currency hedging gains increased the total company operating income by $0.6 million and diluted earnings per share by less than $0.01 for the three months ended September 30, 2016, and increased total company operating income by $1.5 million and diluted earnings per share $0.01 during the nine months ended September 30, 2016. During the same periods of the prior year, foreign currency hedging gains increased total company operating income by $5.0 million and $14.5 million and diluted earnings per share by $0.04 and $0.11, respectively. Net of these lower relative foreign currency hedging gains, changes in foreign currency exchange rates reduced total company operating income by $4.5 million and diluted earnings per share by $0.04 during the three months ended September 30, 2016, and reduced total company operating income by $17.8 million and diluted earnings per share by $0.15 during the nine months ended September 30, 2016.
At our current currency exchange rate assumptions as compared to actual 2015 exchange rates, we estimate that the strengthening of the U.S. dollar relative to major foreign currencies in which we transact will decrease total company revenue by
$1
4
.
6
million for the full year ending December 31, 2016. Foreign currency hedging gains are expected to increase total company operating income by $
3.5
million and diluted earnings per share by $0.03 in the year ending December 31, 2016, as compared to a total company operating income increase of $
20.9
million and a $0.16 increase in diluted earnings per share in the year ended December 31, 2015. Net of these lower relative foreign currency hedging gains, changes in foreign currency exchange rates are expected to reduce total company operating income by $24.
4
million and diluted earnings per share by $0.
20
. The above estimate incorporates actual exchange rates for the nine months ended September 30, 2016, and assumes that the value
of the U.S. dollar relative to other currencies will reflect the euro at $1.08, the British pound at $1.20, the Canadian dollar at $0.75, the Australian dollar at $0.76 and the Japanese yen at ¥106 to the U.S. dollar for the remainder of 2016.
Effects of Economic Conditions
. Demand for our products and services is vulnerable to changes in the economic environment, including slow economic growth, high unemployment
and credit availability. Negative or cautious consumer sentiment can lead to reduced or delayed consumer spending, resulting in a decreased number of patient visits to veterinary clinics. Unfavorable economic conditions can impact sales of instruments and diagnostic imaging systems, which are larger capital purchases for
veterinarians
. Additionally, economic turmoil can cause our customers to remain sensitive to the pricing of our products and services. In the U.S., we monitor patient visits and clinic revenue data provided by a subset of our CAG customers. Although this data is a limited sample and susceptible to short-term impacts such as weather, which may affect the number of patient visits in a given period, we believe that this data provides a fair and meaningful long-term representation of the trend in patient visit activity in the U.S., providing us insight regarding demand for our products and services.
Economic conditions can also affect the purchasing decisions of our Water and LPD business customers. Water testing volumes may be susceptible to declines in discretionary testing for existing home and commercial sales and in mandated testing as a result of decreases in home and commercial construction. Testing volumes may also be impacted by severe weather conditions such as drought. In addition, fiscal difficulties can also reduce government funding for water and livestock testing programs.
We believe that the diversity of our products and services and the geographic diversity of our markets partially mitigate the potential effects of the economic environment and negative consumer sentiment on our revenue growth rates.
Effects of Patent Expiration
. Although
we
have
several patents and licenses of patents and technologies from third parties that expired during 2015 and are expected to expire during 2016 and 2017,
the expiration of these patents or licenses, individually or in the aggregate, is not expected to have a material effect on
our
financial position or future operations due to a range of factors including
our brand strength and reputation in the marketplace; the breadth, quality and integration of our product offerings; our existing customer relationships and our customer support; our sales force; the applicable regulatory approval status for certain products; our continued investments in innovative product improvements that often result in new technologies and/or additional patents; and
our
significant know-how, scale and investments related to manufacturing processes of associated product offerings. See
“Part I.
Item 1.
Business -
Patents and Licenses”
of our 2015 Annual Report
for more information.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
. T
he critical accounting policies and the significant judgments and estimates used in the preparation of our condensed consolidated financial statements for the three
and nine
months
ended September 30
, 2016 are consistent with those discussed in our 2015 Annual Report in the section under the heading “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”
Results of Operations
The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion to “revenue,” “revenues” or “revenue growth” are references to “organic revenue growth.” Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three
and nine
mon
ths ended September 30
, 2016, as compared to the same period
s
for the prior year, net of the effect of changes in foreign currency exchange rates, acquisitions and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for
,
or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers. We exclude the effect of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under
management’s control, are subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and operating trends.
Organic revenue growth and the percentage changes in revenue from
foreign
currenc
y exchange rates and acquisitions are non-
GAAP
financial
measures. See the subsection above titled “
Effects of Certain Factors
and Trends
on Results of Operations
– Currency Impact
”
for a description of the calculation of the percentage change in revenue resulting from changes in foreign currency exchange rates. The percentage change in revenue resulting from acquisitions represents incremental revenues attributable to acquisitions that have occurred since the beginning of the prior year period.
Three Months En
ded September 30, 2016 Compared to Three Months Ended September 30, 2015
Revenue
Total Company.
The following table presents revenue by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
385,288
|
|
$
|
344,081
|
|
$
|
41,207
|
|
12.0%
|
|
(0.1%)
|
|
0.1%
|
|
12.0%
|
Water
|
|
|
27,862
|
|
|
25,957
|
|
|
1,905
|
|
7.3%
|
|
(1.5%)
|
|
-
|
|
|
8.8%
|
LPD
|
|
|
29,799
|
|
|
30,448
|
|
|
(649)
|
|
(2.1%)
|
|
0.4%
|
|
-
|
|
|
(2.5%)
|
Other
|
|
|
5,359
|
|
|
5,901
|
|
|
(542)
|
|
(9.2%)
|
|
-
|
|
|
-
|
|
|
(9.2%)
|
Total
|
|
$
|
448,308
|
|
$
|
406,387
|
|
$
|
41,921
|
|
10.3%
|
|
(0.2%)
|
|
0.1%
|
|
10.4%
|
U.S. and International Revenue.
The following table provides further analysis of total company revenue by
domestic and international markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
277,240
|
|
$
|
252,076
|
|
$
|
25,164
|
|
10.0%
|
|
-
|
|
|
0.1%
|
9.9%
|
International
|
|
|
171,068
|
|
|
154,311
|
|
|
16,757
|
|
10.9%
|
|
(0.4%)
|
|
-
|
|
11.3%
|
Total
|
|
$
|
448,308
|
|
$
|
406,387
|
|
$
|
41,921
|
|
10.3%
|
|
(0.2%)
|
|
0.1%
|
|
10.4%
|
The increase in both U.S. and international orga
nic revenues was driven by CAG D
iagnostics recurring revenue primarily resulting from higher sales volumes
.
The increase in organic international revenues was driven primarily by growth in Europe and the Asia-Pacific markets and, to a lesser extent, Canada
and Latin America
.
Companion Animal Group.
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
324,233
|
|
$
|
290,502
|
|
$
|
33,731
|
|
11.6%
|
|
(0.1%)
|
|
0.1%
|
|
|
11.6%
|
IDEXX VetLab
®
consumables
|
|
|
113,963
|
|
|
98,957
|
|
|
15,006
|
|
15.2%
|
|
(0.2%)
|
|
-
|
|
|
15.4%
|
IDEXX VetLab service and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accessories
|
|
|
14,878
|
|
|
13,675
|
|
|
1,203
|
|
8.8%
|
|
0.3%
|
|
-
|
|
|
8.5%
|
Rapid assay products
|
|
|
48,720
|
|
|
47,534
|
|
|
1,186
|
|
2.5%
|
|
0.3%
|
|
-
|
|
|
2.2%
|
Reference laboratory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
146,672
|
|
|
130,336
|
|
|
16,336
|
|
12.5%
|
|
(0.3%)
|
|
0.3%
|
|
|
12.5%
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital - instruments
|
|
|
31,625
|
|
|
25,989
|
|
|
5,636
|
|
21.7%
|
|
-
|
|
|
-
|
|
|
21.7%
|
Veterinary software, services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and diagnostic imaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
systems
|
|
|
29,430
|
|
|
27,590
|
|
|
1,840
|
|
6.7%
|
|
-
|
|
|
-
|
|
|
6.7%
|
Net CAG revenue
|
|
$
|
385,288
|
|
$
|
344,081
|
|
$
|
41,207
|
|
12.0%
|
|
(0.1%)
|
|
0.1%
|
|
12.0%
|
The increase in CAG D
iagnostics recurring revenue
was due primarily to higher sales from our IDEXX VetLab consumables and reference laboratory diagnostic services from increased volumes and, to a
lesser extent, higher realized prices.
IDEXX VetLab
consumables revenue growth was
primarily
due
to higher sales volumes in the U.S., Europe and the Asia-Pacific region for our Catalyst consumables and, to a lesser extent, ProCyte Dx
®
consumables, resulting from growth i
n testing by existing customers and
an expanded menu of available tests
.
These favorable impacts were partly offset by lower consumables volumes from
our VetTest
®
chemistry
instrument due to customer upgrades from our previous generation VetTest to our Catalyst analyzers. IDEXX VetLab consumables revenu
e also benefited from higher average unit sales prices.
IDEXX VetLab
service and accessories revenue growth was primarily a result of the increase in our active installed base of instruments.
The increase in rapid assay revenue resulted from growth in our SNAP 4Dx
®
and single analyte SNAP
®
products
.
SNAP 4Dx revenue benefited from higher unit sales price, while volume growth moderated reflecting
the timing of our marketing programs
. Additionally, volume growth in our single analyte SNAP products was partially offset by
price declines in our first generation products
.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S., resulting from increased testing from existing customers, supported by our differentiated diagnostic technologies, such as IDEXX SDMA
™
. Additionally, the increase in revenue was the result of higher average unit sales prices due to price increases.
CAG Diagnostics
capital instrument placements, including our Sedivue
™
Dx
urinalysis instrument, which we began shipping
in April 2016, drives our highly profitable recurring diagnostics revenue
. Our Catalyst One
®
analyzer continues to yield strong worldwide chemistry placements, while our Procyte Dx analyzer had strong hematology placements in Europe. The increase in CAG Diagnostics capital instruments revenue resulted from our newly launched SediVue Dx analyzer, which contributed 31 percent to reported and organic instrument revenue growth. This growth was partly offset by lower instrument placements compared to the elevated prior year levels driven by the international launch of Catalyst One, a shift in placements from our Catalyst Dx
®
analyzer to our lower priced Catalyst One analyzer and the prior year benefit of recognizing previously deferred revenues associated with pre-orders of our Catalyst One analyzer in the U.S. in 2014.
The increase in veterinary software, services and diagnostic imaging systems revenue was primarily due to increasing veterinary subscription service revenue and higher support revenue resulting from an increase in our
installed base. These favorable factors were partially offset by fewer licensed-based Cornerstone
®
placements as we evolve to a subscription-based model for new practice management customer acquisitions.
Water.
The increase in Water revenue was attributable to all regions in which we operate, most notably from strong performance in North America, Europe and the Asia-Pacific region. Higher revenues resulted primarily from increased sales volumes of our Colilert
®
test products and related accessories used in coliform and
E. coli
testing.
Livestock, Poultry and Dairy.
The decrease in LPD revenue resulted from
a decrease in herd health screening in the Asia-Pacific region as well as a
decrease
in
bovine testing, most notably due to the success of certain disease eradication programs in
Western Europe, partially offset by growth in China and Brazil.
Other.
T
he decrease in Other revenue was primarily due to lower sales volumes of our OPTI Medical blood gas analyzers and related consumables, partially offset by increased royalty revenue associated with the commercialization of certain intellectual property related to our former pharmaceutical product line.
Gross Profit
Total Company.
The following table presents gross profit
(loss)
and gross profit percentages by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
208,205
|
|
54.0%
|
|
$
|
183,923
|
|
53.5%
|
|
$
|
24,282
|
|
13.2%
|
Water
|
|
|
19,211
|
|
69.0%
|
|
|
18,500
|
|
71.3%
|
|
|
711
|
|
3.8%
|
LPD
|
|
|
16,828
|
|
56.5%
|
|
|
18,785
|
|
61.7%
|
|
|
(1,957)
|
|
(10.4%)
|
Other
|
|
|
2,785
|
|
52.0%
|
|
|
3,163
|
|
53.6%
|
|
|
(378)
|
|
(12.0%)
|
Unallocated amounts
|
|
|
(299)
|
|
N/A
|
|
|
(97)
|
|
N/A
|
|
|
(202)
|
|
208.2%
|
Total Company
|
|
$
|
246,730
|
|
55.0%
|
|
$
|
224,274
|
|
55.2%
|
|
$
|
22,456
|
|
10.0%
|
Gross profit increased due to higher sales and price increases, partly offset by the unfavorable impacts of currency from lower relative hedging gains,
as compared to the same period in the prior year
. Excluding currency impacts of approximately
90
basis points, gross margins increased moderately, supported by
gains
in our CAG business.
Companion Animal Group.
Gross profit for
CAG
increased primarily due to higher sales volume and a 50 basis point increase in the gross profit percentage for the three months ended September 30, 2016, as compared to the same period in the prior year. The gross profit percentage was supported by price increases on our CAG Diagnostic
s
recurring revenue portfolio and profitability improvements across our worldwide network of laboratories and from higher relative revenue from expanded service offerings. These favorable impacts were partially offset by a reduction of approximately 90 basis points from currency movements, primarily from lower relative hedging gains, during the three months ended September 30, 2016, as compared to the same period of the prior year.
Water.
Gross profit for Water increased due to higher sales, offset by a 230 basis point reduction in the gross profit percentage. The gross profit percentage was unfavorably impacted by approximately 200 basis points of currency
impact
during the three months ended September 30, 2016, as compared to the same period of the prior year, resulting from lower hedging gains and changes in foreign currency exchange rates.
Livestock, Poultry and Dairy.
Gross profit for LPD decreased primarily from a 520 basis point reduction in the gross profit percentage during the three-month period, as compared to the same period in
the prior year. This reduction wa
s primarily from changes in foreign currency exchange rates
, relatively higher
manufacturing costs
and unfavorable business mix impacts primarily related to lower levels of herd health screening
. The overall change in exchange rates resulted in a decrease in the gross profit percentage of approximately 300 basis points, due to lower relative hedging gains during the three months ended September 30, 2016, as compared to the same period of the prior year.
Other.
Gross profit for Othe
r decreased due to lower sales and higher overall OPTI Medical product costs, partly offset by higher OPTI Medical prices and a favorable product mix from higher relative sales of OPTI Medical consumables.
Unallocated Amounts.
Gross profit for Unallocated Amounts decreased due primarily to higher personnel-related costs.
We estimate certain personnel-related costs and allocate the budgeted expenses to the operating segments. This allocation differs from the actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.” The increase in personnel-related costs was due primarily to higher than budgeted employee incentives
and
higher self-insured healthcare costs reported within Unallocated Amounts during the three months ended September 30, 2016, as compared to the same period of the prior year.
Operating Expenses and Operating Income
Total Company.
The following tables present operating expenses and operating income by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
130,712
|
|
33.9%
|
|
$
|
122,440
|
|
35.6%
|
|
$
|
8,272
|
|
6.8%
|
Water
|
|
|
6,769
|
|
24.3%
|
|
|
5,858
|
|
22.6%
|
|
|
911
|
|
15.6%
|
LPD
|
|
|
13,802
|
|
46.3%
|
|
|
12,724
|
|
41.8%
|
|
|
1,078
|
|
8.5%
|
Other
|
|
|
1,777
|
|
33.2%
|
|
|
2,594
|
|
44.0%
|
|
|
(817)
|
|
(31.5%)
|
Unallocated amounts
|
|
|
5,211
|
|
N/A
|
|
|
8,763
|
|
N/A
|
|
|
(3,552)
|
|
(40.5%)
|
Total Company
|
|
$
|
158,271
|
|
35.3%
|
|
$
|
152,379
|
|
37.5%
|
|
$
|
5,892
|
|
3.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Income
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
77,493
|
|
20.1%
|
|
$
|
61,483
|
|
17.9%
|
|
$
|
16,010
|
|
26.0%
|
Water
|
|
|
12,442
|
|
44.7%
|
|
|
12,642
|
|
48.7%
|
|
|
(200)
|
|
(1.6%)
|
LPD
|
|
|
3,026
|
|
10.2%
|
|
|
6,061
|
|
19.9%
|
|
|
(3,035)
|
|
(50.1%)
|
Other
|
|
|
1,008
|
|
18.8%
|
|
|
569
|
|
9.6%
|
|
|
439
|
|
77.2%
|
Unallocated amounts
|
|
|
(5,510)
|
|
N/A
|
|
|
(8,860)
|
|
N/A
|
|
|
3,350
|
|
(37.8%)
|
Total Company
|
|
$
|
88,459
|
|
19.7%
|
|
$
|
71,895
|
|
17.7%
|
|
$
|
16,564
|
|
23.0%
|
Companion Animal Group.
The following table presents
CAG
operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
69,049
|
|
17.9%
|
|
$
|
64,421
|
|
18.7%
|
|
$
|
4,628
|
|
7.2%
|
General and administrative
|
|
|
43,025
|
|
11.2%
|
|
|
39,941
|
|
11.6%
|
|
|
3,084
|
|
7.7%
|
Research and development
|
|
|
18,638
|
|
4.8%
|
|
|
18,078
|
|
5.3%
|
|
|
560
|
|
3.1%
|
Total operating expenses
|
|
$
|
130,712
|
|
33.9%
|
|
$
|
122,440
|
|
35.6%
|
|
$
|
8,272
|
|
6.8%
|
The increase in sales and marketi
ng expense was due primarily to increased headcount and related benefits
.
The increase in general and administrative expense resulted primarily from information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and higher personnel-related costs.
Research and development expense for the three months ended
September
30, 2016 was generally consistent with the same period of the prior year.
Water.
The following table presents Water operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
3,453
|
|
12.4%
|
|
$
|
2,935
|
|
11.3%
|
|
$
|
518
|
|
17.6%
|
General and administrative
|
|
|
2,778
|
|
10.0%
|
|
|
2,225
|
|
8.6%
|
|
|
553
|
|
24.9%
|
Research and development
|
|
|
538
|
|
1.9%
|
|
|
698
|
|
2.7%
|
|
|
(160)
|
|
(22.9%)
|
Total operating expenses
|
|
$
|
6,769
|
|
24.3%
|
|
$
|
5,858
|
|
22.6%
|
|
$
|
911
|
|
15.6%
|
The increase in sales and marketing expense was due primarily to higher personnel
-
related costs and increased
advertising and marketing materials
. The increase in general
and
administrative expense was due primarily to higher personnel
-
related costs. Research and development expense for the three months ended
September 30, 2016, decreased $0.2 million, as compared to the same period in the prior year, as a result of lower product development costs during the third quarter of 2016.
Livestock, Poultry and Dairy.
The following table presents LPD operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
5,674
|
|
19.0%
|
|
$
|
5,283
|
|
17.4%
|
|
$
|
391
|
|
7.4%
|
General and administrative
|
|
|
5,121
|
|
17.2%
|
|
|
4,524
|
|
14.9%
|
|
|
597
|
|
13.2%
|
Research and development
|
|
|
3,007
|
|
10.1%
|
|
|
2,917
|
|
9.6%
|
|
|
90
|
|
3.1%
|
Total operating expenses
|
|
$
|
13,802
|
|
46.3%
|
|
$
|
12,724
|
|
41.8%
|
|
$
|
1,078
|
|
8.5%
|
The
in
crease
in sales and marketing expense, as well as the increase
in general and administrative expense
,
resulted from higher personnel
-
related costs
, including investments in emerging markets.
Research and development expense for the three months ended
September
30, 2016 was generally consistent with the same period of the prior
year.
Other.
Operating expenses for Other, which totaled $
1.8
mill
ion for the three months ended September
30, 2016,
decreased $0.8
million
,
as compared to the same period of the prior year
,
due primarily to
lower amortization expense on intangible assets related to an impairment within our OPTI Medical business during the six months ended June 30, 2016
.
Unallocated Amounts.
Operating expenses that are not allocated to our operating segments decreased $3.6 million to $5.2 million for the three months ended September 30, 2016, as compared to the same period in the prior year. This decrease was primarily due to a $8.2 million
impairment charge recorded in the third quarter of 2015, related to
internally-developed software not yet placed into service as a result of a strategic shift to refocus our development efforts within our veterinary software and service business. Partially offsetting this reduction were
higher personnel-related costs as compared to budget, reflecting increased employee incentives and higher self-insured healthcare costs. This compares to prior period cost control initiatives that resulted in lower than budgeted costs. We estimate certain personnel-related costs and allocate these budgeted expenses to the operating segments. This allocation differs from actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.” Additionally, foreign exchange losses on monetary assets increased, due to a strengthening of the U.S. dollar during the third quarter of 2016.
Interest Income and Interest Expense
Interest income was $0.9 million for the three months ended September 30, 2016, as compared to $0.7 million for the same period in the prior year. The increase in interest income was due primarily to a larger relative portfolio of marketable securities during the three months ended September 30, 2016, as compared to the same period of the prior year.
I
nterest expense was relatively unchanged
at $7.8 million for the three months ended September 30, 2016, as compared to the same period of the prior year. The mix between our average relative borrowings and interest rates on our unsecured revolving credit facility (“Credit Facility”) and long-term debt, as compared to the same period in the prior year, resulted in no
change
in interest expense.
Provision for Income Taxes
Our effective income tax rate was 30.8 percent for the three months ended September 30, 2016, as compared to 31.8 percent for the same period
in the prior year. The decrease in our effective rate for the three months ended September 30, 2016, as compared to the same period of the prior year, was primarily related to the U.S. R&D tax credit. There was no available R&D tax credit during the period ending September 30, 2015 because the credit had not yet been extended. In December 2015, the R&D tax credit was permanently extended with retroactive
application to January 1, 2015. As a result, we fully recognized the related 2015 tax benefit entirely in the fourth quarter of 2015.
This favorable factor was offset by a shift in earnings mix in 2016, with relatively higher earnings subject to domestic tax rates as opposed to lower international tax rates, including the impact of foreign currency exchange rates.
Our effective tax rate may fluctuate in future periods due to the impacts of foreign exchange rates and jurisdictional mix changes. Furthermore, beginning on January 1, 2017, our effective tax rate will be impacted by the adoption of new accounting guidance related to the accounting for share-based payments, which we expect will reduce our effective tax rate as a result of recording the related tax benefits through the income statement. These impacts may vary significantly based on the timing of actual share-based payment settlement and the corresponding price per share at the time of settlement.
Nine
Months En
ded September 30, 2016 Compared to Nine Months Ended September 30, 2015
Revenue
Total Company.
The following table presents revenue by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
For the Nine
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
1,143,150
|
|
$
|
1,020,232
|
|
$
|
122,918
|
|
12.0%
|
|
(0.6%)
|
|
0.4%
|
|
12.2%
|
Water
|
|
|
79,243
|
|
|
72,706
|
|
|
6,537
|
|
9.0%
|
|
(1.8%)
|
|
-
|
|
10.8%
|
LPD
|
|
|
93,511
|
|
|
93,777
|
|
|
(266)
|
|
(0.3%)
|
|
(2.0%)
|
|
-
|
|
1.7%
|
Other
|
|
|
16,523
|
|
|
15,492
|
|
|
1,031
|
|
6.7%
|
|
-
|
|
-
|
|
6.7%
|
Total
|
|
$
|
1,332,427
|
|
$
|
1,202,207
|
|
$
|
130,220
|
|
10.8%
|
|
(0.8%)
|
|
0.3%
|
|
11.3%
|
U.S. and International Revenue.
The following table provides further analysis of total company revenue by
domestic and international markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
For the Nine
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
821,937
|
|
$
|
741,726
|
|
$
|
80,211
|
|
10.8%
|
|
-
|
|
|
0.2%
|
|
10.6%
|
International
|
|
|
510,490
|
|
|
460,481
|
|
|
50,009
|
|
10.9%
|
|
(2.1%)
|
|
0.6%
|
|
12.4%
|
Total
|
|
$
|
1,332,427
|
|
$
|
1,202,207
|
|
$
|
130,220
|
|
10.8%
|
|
(0.8%)
|
|
0.3%
|
|
11.3%
|
The increase in both U.S. and international orga
nic revenues was driven by CAG D
iagnostics recurring revenue primarily resulting from higher sales volumes. The increase in organic international revenues was driven primarily by growth in Europe and the Asia-Pacific
regions
and, to a lesser extent, Canada and Latin America.
Companion Animal Group.
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
For the Nine
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
968,041
|
|
$
|
869,413
|
|
$
|
98,628
|
|
11.3%
|
|
(0.6%)
|
|
0.4%
|
|
11.5%
|
IDEXX VetLab consumables
|
|
|
336,483
|
|
|
298,093
|
|
|
38,390
|
|
12.9%
|
|
(0.7%)
|
|
-
|
|
|
13.6%
|
IDEXX VetLab service and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accessories
|
|
|
43,461
|
|
|
41,223
|
|
|
2,238
|
|
5.4%
|
|
(0.2%)
|
|
-
|
|
|
5.6%
|
Rapid assay products
|
|
|
147,583
|
|
|
143,353
|
|
|
4,230
|
|
3.0%
|
|
-
|
|
-
|
|
|
3.0%
|
Reference laboratory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
440,514
|
|
|
386,744
|
|
|
53,770
|
|
13.9%
|
|
(0.8%)
|
|
1.0%
|
|
13.7%
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital - instruments
|
|
|
87,119
|
|
|
70,166
|
|
|
16,953
|
|
24.2%
|
|
(0.6%)
|
|
-
|
|
|
24.8%
|
Veterinary software, services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and diagnostic imaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
systems
|
|
|
87,990
|
|
|
80,653
|
|
|
7,337
|
|
9.1%
|
|
(0.3%)
|
|
-
|
|
|
9.4%
|
Net CAG revenue
|
|
$
|
1,143,150
|
|
$
|
1,020,232
|
|
$
|
122,918
|
|
12.0%
|
|
(0.6%)
|
|
0.4%
|
|
12.2%
|
The increase in CAG D
iagnostics recurring revenue was due primarily to higher sales from our reference laboratory diagnostic services and of our IDEXX VetLab
consumables resulting from increased volumes and, to a lesser extent, higher realized prices.
IDEXX VetLab
consumables revenue growth was due primarily to higher sales volumes in the U.S., Europe and the Asia-Pacific region for our Catalyst consumables and, to a lesser extent, ProCyte Dx
consumables, resulting from growth in testing by existing customers, an expanded menu of available tests and the net acquisition of new customers. These favorable impacts were partly offset by lower consumables volumes from our VetTest
chemistry instrument due to customer upgrades from our previous generation VetTest to our Catalyst analyzers. IDEXX VetLab consumables revenue also benefited from higher average unit sales prices.
IDEXX VetLab
service and accessories revenue growth was primarily a result of the increase in our active installed base of instruments.
The increase in rapid assay revenue resulted from higher
average unit price and sales volumes of
SNAP 4Dx and
higher sales volumes of
single analyte SNAP
products
. These favorable factors were partly offset by the unfavorable impact of lower average unit sales prices in the U.S. for certain earlier generation rapid assay products.
The increase in reference laboratory diagnostic and consulting services revenue was due primarily to the impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S
., resulting from increased testing from existing customers
and
the net acquisition of new customers
,
supported by our differentiated diagnostic technologies,
such as
IDEXX SDMA
.
Also, revenue increased, to a lesser extent, from
higher average unit sales prices due to price
in
creases. Testing volumes benefi
ted slightly from favorable weather trends experienced during the first quarter of 2016, as compared to the same period of the prior year, and an extra business day in the first
quarter
of 2016 due to a leap year.
The increase in CAG Diagnostics capital instruments revenue resulted from our newly launched SediVue Dx analyzer, which
contributed 21
percent to reported and organic
instrument revenue growth
, and higher ProCyte Dx revenues
,
partly offset by lower Catalyst revenues resulting from a shift in placements from our Catalyst Dx analyzer to our lower priced
Catalyst One analyzer and the prior year benefit of recognizing previously deferred revenues associated with pre-orders of our Catalyst One analyzer in the U.S. in 2014.
The increase in v
eterinary
s
oftware
, services and diagnostic i
maging
s
ystems revenue was due primarily to increasing diagnostic imaging systems revenue, higher veterinary
subscription
service revenue, higher support revenue resulting from an increa
se in our active installed base
of diagnostic imaging and practice management systems and higher reven
ues resulting from an increase
in our Pet Health Network Pro
®
subscriber
base.
Revenues from diagnostic imaging systems were higher due to the timing of revenue recognized from fewer deferred revenue placements under up-front customer loyalty programs, as compared to the same period in the prior year, and the recognition of previously deferred
revenues. These favorable factors were partially offset by fewer licensed-based Cornerstone placements as we evolve to a subscription-based model for new practice management customer acquisitions, as well as lower average unit sale prices on diagnostic imaging system placements.
Water.
The increase in Water revenue was attributable to all regions in which we operate, most notably from strong performance in North America, Europe and the Asia-Pacific region. Higher revenues
resulted primarily from increased
sales volumes and price increases of our Colilert test products and related accessories used in coliform and
E. coli
testing, placements of our Quanti-Tray Sealer PLUS instrument, which we launched in June
2015
,
several large project orders during the first half of 2016 and to a
lesser extent, from higher sales volumes of our products designed to detect
cryptosporidium
,
related to an outbreak in the United Kingdom
in the first half of
2016
. Testing volumes
also
ben
efi
ted slightly from favorable weather trends experienced during the first quarter of 2016
,
as compared to the same period of the prior year.
Livestock, Poultry and Dairy.
The increase in LPD organic revenue resulted from strong performance in emerging markets
, most notably resulting from higher sales volumes of swine, poultry and bovine pregnancy testing products in various regions and increased sales volumes of our dairy testing products in Brazil. We also benefited from increased
herd health screening
products and
services
in Brazil and the Asia-Pacific region. This increase was partially offset by a decrease in sales volumes of bovine testing products within Western Europe in large part due to the success of certain disease eradication programs in the region.
Other.
The increase in Other revenue was due primarily to royalty revenue associated with the commercialization of certain intellectual property related to our former pharmaceutical product line
, partially offset by
lower sales volumes of our OPTI Medical blood gas analyzers and related consumables.
Gross Profit
Total Company.
The following table presents gross profit
(loss)
and gross profit percentages by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Nine
|
|
|
|
|
|
|
|
Gross Profit
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
618,968
|
|
54.1%
|
|
$
|
553,613
|
|
54.3%
|
|
$
|
65,355
|
|
11.8%
|
Water
|
|
|
54,697
|
|
69.0%
|
|
|
51,661
|
|
71.1%
|
|
|
3,036
|
|
5.9%
|
LPD
|
|
|
53,983
|
|
57.7%
|
|
|
58,963
|
|
62.9%
|
|
|
(4,980)
|
|
(8.4%)
|
Other
|
|
|
7,999
|
|
48.4%
|
|
|
7,301
|
|
47.1%
|
|
|
698
|
|
9.6%
|
Unallocated amounts
|
|
|
(837)
|
|
N/A
|
|
|
1,037
|
|
N/A
|
|
|
(1,874)
|
|
(180.7%)
|
Total Company
|
|
$
|
734,810
|
|
55.1%
|
|
$
|
672,575
|
|
55.9%
|
|
$
|
62,235
|
|
9.3%
|
Gross profit increased due to higher sales and price increases,
partly offset
by an 80 basis point reduction in the gross profit percentage during the nine months ended September 30, 2016, as compared to the same period of the prior year
. Excluding currency impacts of approximately 1
1
0 basis points, gross margins increased moderately, supported by favorability in our CAG business.
Companion Animal Group.
Gross profit for
CAG
increased due to higher sales and price increases, partially offset by a 20 basis point reduction in the gross profit percentage during the nine months ended September 30, 2016, as compared to the same period in the prior year. The unfavorable impact of currency during the nine months ended September 30, 2016, as compared to the same period of the prior year, impacted gross profit percentage by approximately 90 basis points, resulting primarily from lower hedging gains.
Excluding currency impacts, gross margins increased moderately, supported by
price increases for our reference laboratory diagnostic services and IDEXX VetLab consumables and profitability improvements from higher relative revenue of our expanded subscription service offerings, and within our worldwide network of reference laboratories. These favorable factors were
partially
offset by an increase in IDEXX VetLab product costs and
unfavorable
product mix
from higher relative instrument revenues and lower relative rapid assay revenues
.
Water.
Gross profit for Water increased due to higher sales, offset by a 210 basis point reduction in the gross profit percentage. The gross profit percentage
was
unfavorably impacted by approximately 220 basis points of currency
impact
during the nine months ended September 30, 2016, as compared to the same period of the prior year, resulting from lower hedging gains and changes in foreign currency exchange rates. Excluding currency impacts, the gross profit percentage increased slightly due to price increases on our Colilert testing products and related accessories.
Livestock, Poultry and Dairy.
Gross profit for LPD decreased due to a reduction in the gross profit percentage of 520 basis points for the nine months ended September 3
0
, 2016, as compared to the same period in the prior year. The decrease in the gross profit percentage resulted primarily from approximately 390 basis points of unfavorable impact from changes in foreign currency exchange rates, primarily due to lower relative hedging gains during the nine months ended September 30, 2016,
as compared to the same period of the prior year, as well as higher overall product costs. These unfavorable factors were partly offset by the expiration of royalties on certain of our swine testing products and a favorable product mix resulting from higher relative herd health screening revenues.
Other.
Gross profit for Other
increased due to
higher sales
and an increase
in the
gross profit percentage of 130 basis points for the nine months ended September 30, 2016, as compared to the same period in the prior year. The in
crease in the gross profit percentage
resulted primarily from
higher relative royalty revenue associated with the commercialization of certain intellectual property related to our former pharmaceutical product line
, partly offset by an increase in
overall OPTI Medical
product costs
.
Unallocated Amounts.
Gross profit for Unallocated Amounts decreased due primarily to higher personnel-related costs.
We estimate certain personnel-related costs and allocate the budgeted expenses to the operating segments. This allocation differs from the actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.” The increase in personnel-related costs was due primarily to higher self-insured healthcare costs and higher than budgeted employee incentives reported within Unal
located Amounts during the nine months ended September 30
, 2016
,
as compared to the same period of the prior year.
Operating Expenses and Operating Income
Total Company.
The following tables present operating expenses and operating income by operating segment
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Nine
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
389,110
|
|
34.0%
|
|
$
|
370,527
|
|
36.3%
|
|
$
|
18,583
|
|
5.0%
|
Water
|
|
|
19,833
|
|
25.0%
|
|
|
17,707
|
|
24.4%
|
|
|
2,126
|
|
12.0%
|
LPD
|
|
|
41,318
|
|
44.2%
|
|
|
39,367
|
|
42.0%
|
|
|
1,951
|
|
5.0%
|
Other
|
|
|
8,748
|
|
52.9%
|
|
|
7,987
|
|
51.6%
|
|
|
761
|
|
9.5%
|
Unallocated amounts
|
|
|
9,387
|
|
N/A
|
|
|
3,986
|
|
N/A
|
|
|
5,401
|
|
135.5%
|
Total Company
|
|
$
|
468,396
|
|
35.2%
|
|
$
|
439,574
|
|
36.6%
|
|
$
|
28,822
|
|
6.6%
|
Total Company.
The following tables present operating expenses and operating income by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Nine
|
|
|
|
|
|
|
|
Operating Income
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
229,858
|
|
20.1%
|
|
$
|
183,086
|
|
17.9%
|
|
$
|
46,772
|
|
25.5%
|
Water
|
|
|
34,864
|
|
44.0%
|
|
|
33,954
|
|
46.7%
|
|
|
910
|
|
2.7%
|
LPD
|
|
|
12,665
|
|
13.5%
|
|
|
19,596
|
|
20.9%
|
|
|
(6,931)
|
|
(35.4%)
|
Other
|
|
|
(749)
|
|
(4.5%)
|
|
|
(686)
|
|
(4.4%)
|
|
|
(63)
|
|
9.2%
|
Unallocated amounts
|
|
|
(10,224)
|
|
N/A
|
|
|
(2,949)
|
|
N/A
|
|
|
(7,275)
|
|
246.7%
|
Total Company
|
|
$
|
266,414
|
|
20.0%
|
|
$
|
233,001
|
|
19.4%
|
|
$
|
33,413
|
|
14.3%
|
Companion Animal Group.
The following table presents
CAG
operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Nine
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
206,482
|
|
18.1%
|
|
$
|
196,636
|
|
19.3%
|
|
$
|
9,846
|
|
5.0%
|
General and administrative
|
|
|
128,104
|
|
11.2%
|
|
|
119,642
|
|
11.7%
|
|
|
8,462
|
|
7.1%
|
Research and development
|
|
|
54,524
|
|
4.8%
|
|
|
54,249
|
|
5.3%
|
|
|
275
|
|
0.5%
|
Total operating expenses
|
|
$
|
389,110
|
|
34.0%
|
|
$
|
370,527
|
|
36.3%
|
|
$
|
18,583
|
|
5.0%
|
The increase in sales and marketing expense was due primarily to increased personnel-related costs, including investments in our global sales infrastructure and
performance incentives
, partly off
set by the favorable impact of
changes in foreign currency exchange rates.
The increase in general and administrative expense resulted primarily from information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and higher personnel-related costs.
Research and development expense for the
nine
months ended
September
30, 2016 was generally consistent with the same period of the prior year.
Water.
The following table presents Water operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Nine
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
9,943
|
|
12.5%
|
|
$
|
8,920
|
|
12.3%
|
|
$
|
1,023
|
|
11.5%
|
General and administrative
|
|
|
7,883
|
|
9.9%
|
|
|
6,610
|
|
9.1%
|
|
|
1,273
|
|
19.3%
|
Research and development
|
|
|
2,007
|
|
2.5%
|
|
|
2,177
|
|
3.0%
|
|
|
(170)
|
|
(7.8%)
|
Total operating expenses
|
|
$
|
19,833
|
|
25.0%
|
|
$
|
17,707
|
|
24.4%
|
|
$
|
2,126
|
|
12.0%
|
The increase in sales and marketing expense was due primarily to higher
personnel-related costs
and increased
advertising and marketing materials
. The increase in general
and
administrative expense was du
e primarily to higher personnel-
related costs.
The decrease in r
esearch and development expense
was a result of lower product development costs during the nine months ended September 30, 2016.
Livestock, Poultry and Dairy.
The following table presents LPD operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
|
|
For the Nine
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
September 30, 2016
|
|
Revenue
|
|
September 30, 2015
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
17,084
|
|
18.3%
|
|
$
|
16,665
|
|
17.8%
|
|
$
|
419
|
|
2.5%
|
General and administrative
|
|
|
15,107
|
|
16.2%
|
|
|
13,926
|
|
14.9%
|
|
|
1,181
|
|
8.5%
|
Research and development
|
|
|
9,127
|
|
9.8%
|
|
|
8,776
|
|
9.4%
|
|
|
351
|
|
4.0%
|
Total operating expenses
|
|
$
|
41,318
|
|
44.2%
|
|
$
|
39,367
|
|
42.0%
|
|
$
|
1,951
|
|
5.0%
|
Sales and marketing expense for the
nine
months ended
September
30, 2016
,
increased due to higher
commercial
infrastructure investments within emerging markets
and was partially
offset by the favorable impact of changes in foreign currency exchange rates. The increase in general and administrative expense
resulted primarily from higher personnel-related costs
. The increase in research and development expense resulted
primarily
from higher external product development and material costs.
Other.
Operating expenses for Other, which totaled $
8.7 million for the nine
months ended
September
30, 2016, increased $
0.8
million
,
as compared to the same period of the prior year
, due primarily to
intangible impairments within our OPTI Medical business, partly offset by
lower amortization expense on the aforementioned intangible assets and a reduction in personnel-
related costs.
During the first half of 2016, management reviewed the OPTI Medical product offerings. As a result of this review, we discontinued our product development activities in the human point-of-care medical diagnostics market during March 2016 and focused our commercial efforts in this market on supporting our latest generation OPTI CCA-TS2 Blood Gas and Electrolyte Analyzer. Management identified unfavorable trends in our OPTI Medical line of business resulting from this change in strategy. We revised our forecasts downward, causing us to assess the realizability of the related tangible and intangible assets and determined the expected future cash flows were less than the carrying value
of the OPTI Medical asset group. Non-cash intangible asset impairments of $2.2 million were recorded within our condensed consolidated statement of operations for the nine months ended September 30, 2016.
Unallocated Amounts.
Operating expenses that are not allocated to our operating segments increased $5.4 million to $9.4 million for the nine months ended September 30, 2016, due primarily to higher personnel-related costs as compared to budget, reflecting increased employee incentives and higher self-insured healthcare costs. This compares to prior period cost control initiatives that resulted in lower than budgeted costs. We estimate certain personnel-related costs and allocate these budgeted expenses to the operating segments. This allocation differs from actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.” To a lesser extent, certain foreign exchange losses on monetary assets increased due to a strengthening of the U.S. dollar relative to certain foreign currencies and certain state tax incentives, which decreased during the nine months ended September 30, 2015. Partially offsetting these increases was an
$8.2 million impairment charge recorded in the third quarter of 2015, related to
internally-developed software not yet placed into service as a result of a strategic shift to refocus our development efforts within our veterinary software and services business.
Interest Income and Interest Expense
Interest income was $2.6 million for the nine months ended September 30, 2016, as compared to $1.7 million for
the same period in the prior year
. The increase in interest income was due primarily to a larger relative portfolio of marketable securities during the nine months ended September 30, 2016, as compared to the same period of the prior year.
Interest expense
was $24.3 million for the nine months ended September 30, 2016, as compared to $21.3 million for the same period of the prior year. The increase in interest expense resulted from higher relative interest incurred in 2016 as result of approximately $250 million in senior notes that we issued and sold through private placements during the first half of 2015, for which fixed interest rates range from 1.785 percent to 3.72 percent. Additionally, the increase in interest expense was due to higher relative interest rates on our Credit Facility. See Note 11 to the consolidated financial statements in our 2015 Annual Report for additional information regarding our senior notes and Credit Facility.
Provision for Income Taxes
Our effective income tax rate was 30.7 percent for the nine months ended September 30, 2016, as compared to 30.8 percent for the same period in the prior year. In the rate for the nine months ended September 30, 2016, we recognized a tax benefit associated with the U.S. R&D tax credit. There was no available R&D tax credit during the period ending September 30, 2015, because the credit had not yet been extended. In December 2015, the R&D tax credit was permanently extended with retroactive
application to January 1, 2015. As a result, we fully recognized the related 2015 tax benefit entirely in the fourth quarter of 2015.
This favorable factor was offset by a shift in earnings mix in 2016, with relatively higher earnings subject to domestic tax rates as opposed to lower international tax rates, including the impact of foreign currency exchange rates.
Recent Accounting Pronouncements
We are evaluating the impact that several recent accounting amendments related to share-based payment transactions, leases, and revenue recognition will have on our consolidated financial statements. Other recently issued accounting pronouncements did not have and are not expected to have a significant effect on our financial condition
and results of operations. See Note 2 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item1 of this Form 10-Q.
Liquidity and Capital Resources
Liquidity
We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings and amounts available under our $850 million Credit Facility. At September 30, 2016 and December 31, 2015, we had $391.5 million and $342.6 million, respectively, of cash, cash equivalents and marketable securities. Working capital, including our Credit Facility, totaled $67.9 million and negative $35.1 million, respectively, at September 30, 2016 and December 31, 2015.
Additionally, at September 30, 2016, we had remaining borrowing availability of $361 million under our $850 million Credit Facility. We believe that, if necessary, we could obtain additional borrowings at
similar rates to our existing borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, our portfolio of short-duration marketable securities, funds generated from operations and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing on favorable terms will also be sufficient for the foreseeable future to fund our business as currently conducted.
We consider the majority of the operating earnings of certain of our non-U.S. subsidiaries to be indefinitely invested outside the U.S.
No provision has been made for the payment of U.S. federal and state or international taxes that may result from future remittances of these undistributed earnings of our non-U.S. subsidiaries.
Changes to this position could have adverse tax consequences.
A determination of the related tax liability that would be paid on these undistributed earnings if repatriated is not practicable for several reasons, including the complexity of laws and regulations in the various jurisdictions where we operate, the varying tax treatment of potential repatriation scenarios and the timing of any future repatriation.
We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside the U.S.
Of our total cash, cash equivalents and marketable securities at September 30, 2016, approximately $389.5 million was held by our foreign subsidiaries and was subject to material repatriation tax effects. We
held marketable securities with original maturities of three years or less that had an average AA- credit rating as of
September
30, 2016. Of the $241.4 million in marketable securities held as of September 30, 2016, approximately 59 percent of the fair value of our marketable securities consisted of corporate bonds, 13 percent consisted of certificates of deposit, 12 percent consisted of asset backed securities, with the remainder consisting of commercial paper, U
.S. government bonds and municipal bonds. Of the $150.1 million of cash and cash equivalents held as of September 30, 2016, 94 percent was held as bank deposits, with the remainder invested in money market funds invested in highly liquid investment-grade and U.S. government and agency fixed-income securities, commercial paper and agency bonds
with original maturities of less than ninety days.
As of September 30, 2016, approximately 68 percent of cash, cash equivalents and marketable securities held by our foreign subsidiaries was held in U.S. dollars.
Should we require more capital in the U.S. than is generated by our operations domestically, for example to fund significant discretionary activities, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense and other dilution of our earnings. We have borrowed funds domestically and believe we will continue to have the ability to borrow funds domestically at reasonable interest rates.
The following table presents additional key information concerning working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
September 30,
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days sales outstanding
(1)
|
|
|
42.4
|
|
|
41.5
|
|
|
43.7
|
|
|
43.3
|
|
|
43.8
|
Inventory turns
(2)
|
|
|
1.8
|
|
|
1.7
|
|
|
1.6
|
|
|
1.5
|
|
|
1.5
|
(1)
Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.
(2)
Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the inventory balance at the end of the quarter.
Sources and Uses of Cash
The following table presents cash
provided (
used
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
(dollars in thousands)
|
|
2016
|
|
2015
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
234,456
|
|
$
|
142,468
|
|
$
|
91,988
|
|
Net cash used by investing activities
|
|
|
(76,508)
|
|
|
(282,393)
|
|
|
205,885
|
|
Net cash used by financing activities
|
|
|
(141,212)
|
|
|
(36,394)
|
|
|
(104,818)
|
|
Net effect of changes in exchange rates on cash
|
|
|
4,342
|
|
|
(5,067)
|
|
|
9,409
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
21,078
|
|
$
|
(181,386)
|
|
$
|
202,464
|
|
Operating Activities.
Cash provide
d by operating activities was $2
3
4
.
5
million for the
nine
months ended
September 30, 2016, as compared to $142
.5 million for the same period of the prior
year.
The total of net income and net non-cash charges, excluding the impact of reclassifying the tax benefit from share-based compensation arrangements to a financing activity, was $253.9 million for the nine months ended September 30, 2016, as compared to $219.8 million for the same period in 2015, resulting in incremental operating cash flows of $34.1 million driven primarily by higher net income, higher
provision for
deferred income taxes and increased depreciation and amortization expense during the n
i
ne months ended Sep
tember 30, 2016. These increases
were partially offset by
an
impairment charge of software-in-development
in the third quarter of 2015
. The total of changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements decreased cash by $19.4 million and $77.3 million for the nine months ended September 30, 2016 and 2015, respectively, resulting in an incremental increase in cash of $57.9 million.
The following table presents cash flows from changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
(dollars in thousands)
|
|
2016
|
|
2015
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(16,647)
|
|
$
|
(51,024)
|
|
$
|
34,377
|
|
Inventories
|
|
|
(2,503)
|
|
|
(27,238)
|
|
|
24,735
|
|
Accounts payable
|
|
|
(2,496)
|
|
|
(2,841)
|
|
|
345
|
|
Deferred revenue
|
|
|
3,798
|
|
|
(2,688)
|
|
|
6,486
|
|
Other assets and liabilities
|
|
|
8,648
|
|
|
16,538
|
|
|
(7,890)
|
|
Tax benefit from share-based compensation arrangements
|
|
|
(10,225)
|
|
|
(10,044)
|
|
|
(181)
|
|
Total change in cash due to changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements
|
|
$
|
(19,425)
|
|
$
|
(77,297)
|
|
$
|
57,872
|
|
The decrease in cash used by accounts receivable during the
nine
months ended
September
30, 2016 resulted from the absence of one-time impacts related to our change in U.S. commercial strategy beginning in the fourth quarter of 2014. Our transition to an all-direct strategy in the U.S., including the establishment of accounts receivable directly with our U.S. end-users that previously purchased from our U.S. distribution partners, resulted in a significant use of cash during the first half of 2015. Cash provided by inventory during the
nine
months ended
September
30, 2016, as compared to cash used during the same period in the prior year, was the result of operational initiatives to optimize inventory levels following a period of inventory growth to support new products and increasing demand. Cash used by other assets and liabilities during the
nine
months ended
September
30, 2016, was the result of higher taxable income as compared to the same period in the prior year. Income tax payments were lower during the first
nine months
of 2015 resulting from one-time impacts of implementing our U.S. all-direct strategy and the benefit from the Tax Increase Prevention Act enactment late in the fourth quarter of 2014, resulting in cash provided by other assets and liabilities during the
nine
months ended
September
30, 2015.
We
have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally
higher cash flows from operating activities for the remainder of the year and for the annual period driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned and the seasonality of vector-borne disease testing, which has historically resulted in significant increases in accounts receivable balances during the first quarter of the year.
Investing Activities.
Ca
sh used by investing activities was $76.5 million for the nine months ended September 30, 2016, as compared to $282.4 million for the same
period of the prior year. The decrease in cash used by investing activities was primarily due to lower relative net purchases of marketable securities during the nine months ended September 30, 2016
,
as compared to the same period of the prior year.
Our total capital expenditure plan for 2016 is e
stimated to be
approximately $80 million,
which includes capital investments in manufacturing and reference laboratory equipment, investments in internal use software and information technology infrastructure and the renovation and expansion of our facilities and reference laboratories.
Financing Activities.
Cash used b
y financing activities was $141.2
million
for the nine months ended September 30
, 2016
,
as compared to cash
used by financing activities
of
$3
6
.
4
million
for the same p
eriod in 2015.
Cash used
for financing activities during the nine months ended September 30, 2016, was due to the absence of a long-term debt issuance in the first half of 2016, as compared to the aggregate issuance of approximately $250 million of senior notes during the same period of the prior year, partly offset by a decrease in cash used to repurchase our common stock with higher net repayments under the Credit Facility during the nine months ended September 30, 2016, as compared to the same period of the prior year.
Cash used to repurchase shares of our common stock decreased $
217
.
5
million during the
nine
months ended
September
30, 2016, as compared to the same period of the prior year.
Share repurchases have moderated relative to the same period of the prior year as we have achieved a debt leverage ratio consistent with our long-term target range. From the inception of our share repurchase
program in August 1999 to September
3
0, 2016, we have repurchased 59.3
million shares. During the nine months ended September 30, 2016, we purchased 1.1 million shares for a cash outflow of $88.2 million, as compared to purchases of 4.3 million shares for a cash outflow of $313.1 million during the same period of the prior year. We
believe that the repurchase of our common stock is a favorable means of returning value to our shareholders and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing activities and the share price. See Note 9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about our share repurchases.
Net borrowing and repayment activity under the Credit Facility resulted in incremental cash
used of $78
.
5 million during the nine
months ended September 30, 2016, as compared to the same period of the prior year. At September 30, 2016, we had $488.0
million outstanding under the Credit Facility.
The
general availability of funds under the Credit Facility was further reduced by $1.0 million for a letter of credit
that was issued in connection with claims under our workers’ compensation policy.
The Credit Facility contains affirmative, negative and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The obligations under the Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default.
Since December 2013, we have issued and sold through private placements senior notes having an aggregate principal amount of
approximately $600 million
pursuant to certain note purchase agreements (collectively, the “Senior Note Agreements”). The Senior Note Agreements contain affirmative, negative and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. See Note 11 to the consolidated financial statements in our 2015 Annual Report for additional information regarding our senior notes.
Should we elect to prepay the senior notes, such aggregate prepayment will include the applicable make-whole amount(s), as defined within the applicable Senior Note Agreements. Additionally,
in the event of a change in control of the Company or upon the disposition of certain assets of the Company the proceeds of which are not reinvested (as defined in the Senior Note Agreements), we may be required to prepay all or a portion of the Senior Notes.
The obligations under the Senior Notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreement, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness and cross-acceleration to specified indebtedness.
The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization and certain other non-cash charges (“Adjusted EBITDA”) not to exceed 3.5-to-1. At September 30, 2016, we were in compliance with the covenants of the Credit Facility and Senior Note Agreements.
The following details our consolidated leverage ratio calculation as of September 30, 2016:
|
|
|
|
|
|
|
September 30,
|
|
Trailing 12 Months Adjusted EBITDA:
|
|
|
2016
|
|
|
|
|
|
|
Net income attributable to stockholders
|
|
$
|
214,025
|
|
Interest expense
|
|
|
32,220
|
|
Provision for income taxes
|
|
|
90,431
|
|
Depreciation and amortization
|
|
|
75,706
|
|
Share-based compensation expense
|
|
|
20,145
|
|
Extraordinary and other non-recurring non-cash charges
|
|
|
2,228
|
|
Adjusted EBITDA
|
|
$
|
434,755
|
|
|
|
|
|
|
|
|
September 30,
|
|
Debt to Adjusted EBITDA Ratio:
|
|
|
2016
|
|
|
|
|
|
|
Line of credit
|
|
$
|
488,000
|
|
Long-term debt
|
|
|
599,137
|
|
Total debt
|
|
|
1,087,137
|
|
Acquisition-related contingent consideration payable
|
|
|
2,021
|
|
Capitalized leases
|
|
|
711
|
|
U.S. GAAP change - deferred financing costs
|
|
|
570
|
|
Gross debt
|
|
|
1,090,439
|
|
Gross debt to Adjusted EBITDA ratio
|
|
|
2.51
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
(150,072)
|
|
Marketable securities
|
|
|
(241,402)
|
|
Net debt
|
|
$
|
698,965
|
|
Net debt to Adjusted EBITDA ratio
|
|
|
1.61
|
|
Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which
sh
o
u
ld
b
e
c
o
ns
i
d
e
r
ed
in
a
dd
ition
t
o
, a
n
d
n
o
t
a
s
a
r
e
p
lac
e
m
e
n
t
f
o
r, financial measures presented according to U.S. GAAP.
M
a
n
a
g
e
m
e
n
t
b
elie
v
es
t
h
at
reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Other Commitments, Contingencies and Guarantees
Significant commitments, contingencies and guarantees at
September 30, 2016,
are consistent with those discussed
in the section under the heading “Part
II
, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and
in Note 14
to the consolidated financial statements in our
2015
Annual Report
.