IDEXX LABORATORIES, INC.
AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH
FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
69,058
|
|
|
$
|
46,025
|
|
Adjustments to reconcile net income to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,307
|
|
|
|
18,546
|
|
Impairment charge
|
|
|
-
|
|
|
|
1,110
|
|
Benefit of deferred income taxes
|
|
|
1,941
|
|
|
|
2,520
|
|
Share-based compensation expense
|
|
|
5,655
|
|
|
|
4,922
|
|
Other
|
|
|
860
|
|
|
|
586
|
|
Tax benefit from share-based compensation arrangements (Note 2)
|
|
|
-
|
|
|
|
(2,063)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,429)
|
|
|
|
(21,504)
|
|
Inventories
|
|
|
(5,369)
|
|
|
|
1,764
|
|
Other assets and liabilities
|
|
|
(38,531)
|
|
|
|
(23,752)
|
|
Accounts payable
|
|
|
(3,687)
|
|
|
|
(1,801)
|
|
Deferred revenue
|
|
|
469
|
|
|
|
637
|
|
Net cash provided by operating activities
|
|
|
31,274
|
|
|
|
26,990
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(23,647)
|
|
|
|
(21,906)
|
|
Purchase of marketable securities
|
|
|
(90,492)
|
|
|
|
(72,079)
|
|
Proceeds from the sale and maturities of marketable securities
|
|
|
87,476
|
|
|
|
70,186
|
|
Acquisitions of a business, net of cash acquired
|
|
|
(2,349)
|
|
|
|
-
|
|
Net cash used by investing activities
|
|
|
(29,012)
|
|
|
|
(23,799)
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facilities, net
|
|
|
60,000
|
|
|
|
49,000
|
|
Debt issue costs
|
|
|
-
|
|
|
|
(57)
|
|
Repurchases of common stock
|
|
|
(63,910)
|
|
|
|
(53,480)
|
|
Proceeds from exercises of stock options and employee stock purchase plans
|
|
|
12,526
|
|
|
|
5,760
|
|
Payment of acquisition-related contingent consideration
|
|
|
-
|
|
|
|
(2,084)
|
|
Shares withheld for statutory tax withholding on restricted stock (Note 2)
|
|
|
(7,303)
|
|
|
|
(3,764)
|
|
Tax benefit from share-based compensation arrangements (Note 2)
|
|
|
-
|
|
|
|
2,063
|
|
Net cash provided (used) by financing activities
|
|
|
1,313
|
|
|
|
(2,562)
|
|
Net effect of changes in exchange rates on cash
|
|
|
1,932
|
|
|
|
3,330
|
|
Net increase in cash and cash equivalents
|
|
|
5,507
|
|
|
|
3,959
|
|
Cash and cash equivalents at beginning of period
|
|
|
154,901
|
|
|
|
128,994
|
|
Cash and cash equivalents at end of period
|
|
$
|
160,408
|
|
|
$
|
132,953
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
2
IDEXX LABORATORIES, INC.
AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
In order to aid the reader, we have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q below:
|
|
|
|
Term/ Abbreviation
|
Definition
|
|
|
AOCI
|
Accumulated other comprehensive income or loss
|
ASU 2016-09
|
ASU 2016-09, “
Compensation – Stock Compensation (Topic 781):
Improvements to Employee Share-Based Payment Accounting
”
|
CAG
|
Companion Animal Group, a reporting segment that provides to veterinarians diagnostic capabilities and information management solutions that enhance the health and well-being of pets
|
Credit Facility
|
Our
$850
million
five
-year unsecured revolving credit facility under an amended and restated credit agreement that was executed in December 2015
|
EPS
|
Earnings per share, if not specifically stated, EPS refers to earnings per share on a diluted basis
|
EU
|
European Union
|
FASB
|
Financial Accounting Standards Board
|
LPD
|
Livestock, Poultry and Dairy,
a
reporting segment that provides diagnostic products
and services
for livestock and poultry health and to ensure the quality and safety of milk
|
OCI
|
Other comprehensive income or loss
|
OPTI Medical
|
OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., supplies dry slide electrolyte consumables and instruments for the human point-of-care medical diagnostics market, also referred to as OPTI
|
Organic revenue growth
|
A non-GAAP financial measure and represents the percentage change in revenue, as compared to the same period 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.
|
R&D
|
Research and Development
|
SEC
|
U.S. Securities
and
Exchange Commission
|
Senior Notes Agreement
|
P
rivate placement senior notes having an aggregate principal amount of approximately
$600
million, referred to as senior notes
|
U.S. GAAP
|
Accounting principles generally accepted in the United States of America
|
Water
|
Water,
a
reporting segment that provides water quality products around the world
|
The accompanying condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "IDEXX," the "Company," "we," "our" or "us" refer to IDEXX Laboratories, Inc. and its subsidiaries.
The accompanying condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. We do not have any variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
The
accompanying condensed consolidated financial statements
reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, 201
6,
was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three
months ended
March 31
, 201
7,
are not necessarily indicative of the results to be expected for the full year or any future period. These condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-
Q for the quarter ended March 31
, 201
7,
and our Annual Report on Form 10-K for the year ended December 31, 201
6, (the “2016
Annual Report”) filed with the
U.S.
Securities and Exchange Commission (“SEC”).
For the three months ended March 31, 2017
, changes in stockholders’ equity included (i) changes in other comprehensive income reflected in the condensed consolidated statements of comprehensive incom
e; (ii) changes in common stock and
additional paid-in capital
reflected in the condensed consolidated statements of cash flows (including share-based compensation expense, proceeds from exercise of stock option
s
and
employee stock purchase plans
and repurchases of common stock); (iii)
changes in
noncontrolling interest; and (iv)
changes in
net income.
N
OTE
2.
ACCOUNTING POLICIES
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2017 are consistent with those discussed in Note 2 to the consolidated financial statements in our 2016 Annual Report, except as noted below.
New Accounting Pronouncements Adopted
Effective January 1, 2017, we adopted the Financial Accounting Standards
Board (“FASB”) standard update
ASU 2016-09, “
Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
” (“ASU 2016-09”) which simplifies
several aspects of the accounting for share-based payment transactions, including income tax consequences, recognition of stock compensation award forfeitures, classification of awards as either equity or liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows.
The following table summarizes the most significant impacts of the new accounting guidance for the th
ree months ended March 31, 2017 and 2016, if applicable
:
|
|
|
|
|
Description of Change:
|
|
Impact of Change for the
Three Months Ended March 31, 2017 and 2016 if applicable:
|
|
Adoption Method:
|
Tax benefits related to share-based payments at settlement are recorded through the income statement instead of equity
|
|
Decrease in income tax expense by approximately $11.2 million for the three months ended March 31, 2017
|
|
Prospective (elected)
|
|
|
|
|
|
Calculation of diluted shares outstanding under the treasury method will no longer assume that tax benefits related to share-based payments are used to repurchase common stock
|
|
Increase in the weighted average diluted shares outstanding by approximately 450,000 shares for the three months ended March 31, 2017
|
|
Prospective (required)
|
|
|
|
|
|
An election can be made to reduce share-based compensation expense for forfeitures as they occur instead of estimating forfeitures that are expected to occur
|
|
No change to share-based compensation expense, as we have elected to continue to estimate forfeitures that are expected to occur
|
|
N/A
|
|
|
|
|
|
Tax benefits related to share-based payments at settlement are classified as operating cash flows instead of financing cash flows
|
|
Increase in cash flow from operating activities and decrease in cash flow from financing activities by approximately $11.2 million for the three months ended March 31, 2017
|
|
Prospective (elected)
|
|
|
|
|
|
Cash payments to tax authorities for shares withheld to meet employee tax withholding requirements on restricted stock units are classified as financing cash flow instead of operating cash flow
|
|
Increase in cash flow from operating activities and decrease in cash flow from financing activities for the three months ended March 31, 2017 and 2016 by approximately $7.3 million and $3.8 million, respectively
|
|
Retrospective (required)
|
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which will replace most of the existing revenue recognition guidance within U.S. GAAP. The FASB has also issued several updates to ASU 2014-09. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services to customers in an amount that it expects to be entitled to receive for those goods or services. In doing so, companies will be required to make certain judgments and estimates, including identifying contract performance obligations, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price among separate performance obligations. Additionally, disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, significant judgments reached in the application of the guidance and assets recognized from the costs to obtain or fulfill a contr
act will be required
. In July 2015, the FASB approved a one-year deferral of the effective date to all annual and interim periods beginning after December 15, 2017.
The new guidance
permits two methods of adoption: a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. We are continuing to evaluate the impact of this new
standard
. While
ASU 2014-09
will not impact the overall economics of our products and services sold under customer incentive programs, we do expect the new standard will require us to delay revenue recognition related to certain of our customer ince
ntive programs and to accelerate
revenue recognition for certain other customer incentive programs. The volume and mix of future customer incentive programs will affect our assessment of the overall net impact of the new standard on our results and will also influence our choice of adoption method. We plan to determine our method of adoption and provide an estimate of any impacts by October 2017, in connection with our financial reporting for the quarter ending September 30, 2017.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, to increase transparency and comparability among organizations’ leasing arrangements. The principal difference from previous guidance is that effective upon adoption, the lease assets and lease liabilities arising from operating leases will be recognized in the balance sheet. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In transition, we are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including the option to utilize a number of practical expedients. We are in process of evaluating our lessee and lessor arrangements to determine the impact of this amendment on the consolidated financial statements. This evaluation includes an extensive review of revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease arrangements for most of our facilities.
In February 2017, the FASB issued ASU
2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.
The ASU clarifies the scope and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and defines the term, “in-substance nonfinancial asset.” The ASU also adds guidance for parti
al sales of nonfinancial assets
. The new guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods beginning after December 15, 2016. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The Company is currently evaluating the effects of ASU 2017-05 on its consolidated financial statements.
NOTE 3
. SHARE-BASED COMPENSATION
The fair value of
options, restricted stock units, deferred stock units and employee stock purchase rights awarded
during the three
months ended March 31, 2017,
totaled
$27.9
million
as compared to
$24.0
million
for the three months ended March 31, 2016
.
T
he total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensatio
n awards outstanding at March 31, 2017,
was
$58.0
million, which will be recognized over a weighted average period of approximately
2
.3
years
.
We determine the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at each grant date. As such, we may use different assumptions for options granted throughout the year.
Option awards are granted with an exercise price equal to the closing market price of our common stock at the date of grant.
We have never paid any cash dividends on our common stock, and we have no intention to pay such a dividend at this time; therefore, we assume that no dividends will be paid over the expected terms of option awards.
The
weighted averages of the
valuation assumptions used to determine the
fair value of each option award on the date of grant and the weighted average estimated fair values were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Share price at grant
|
|
$
|
141.60
|
|
$
|
67.85
|
|
Expected stock price volatility
|
|
|
26
|
%
|
|
25
|
%
|
Expected term, in years
|
|
|
5.8
|
|
|
5.7
|
|
Risk-free interest rate
|
|
|
2.0
|
%
|
|
1.2
|
%
|
Weighted average fair value of options granted
|
|
$
|
40.51
|
|
$
|
17.54
|
|
Note 4
. marketable securities
The amortized cost and fair value of marketable securities were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
120,898
|
|
$
|
76
|
|
$
|
(81)
|
|
$
|
120,893
|
|
Certificates of deposit
|
|
|
43,198
|
|
|
-
|
|
|
-
|
|
|
43,198
|
|
Asset backed securities
|
|
|
37,610
|
|
|
6
|
|
|
(16)
|
|
|
37,600
|
|
Commercial paper
|
|
|
17,013
|
|
|
-
|
|
|
-
|
|
|
17,013
|
|
U.S. government bonds
|
|
|
16,644
|
|
|
1
|
|
|
(15)
|
|
|
16,630
|
|
Agency bonds
|
|
|
4,600
|
|
|
-
|
|
|
(1)
|
|
|
4,599
|
|
Total marketable securities
|
|
$
|
239,963
|
|
$
|
83
|
|
$
|
(113)
|
|
$
|
239,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
130,833
|
|
$
|
40
|
|
$
|
(102)
|
|
$
|
130,771
|
|
Certificates of deposit
|
|
|
40,400
|
|
|
-
|
|
|
-
|
|
|
40,400
|
|
Asset backed securities
|
|
|
27,290
|
|
|
25
|
|
|
-
|
|
|
27,315
|
|
Commercial paper
|
|
|
20,228
|
|
|
-
|
|
|
-
|
|
|
20,228
|
|
U.S. government bonds
|
|
|
12,244
|
|
|
1
|
|
|
(14)
|
|
|
12,231
|
|
Agency bonds
|
|
|
4,600
|
|
|
4
|
|
|
-
|
|
|
4,604
|
|
Municipal bonds
|
|
|
1,400
|
|
|
-
|
|
|
-
|
|
|
1,400
|
|
Total marketable securities
|
|
$
|
236,995
|
|
$
|
70
|
|
$
|
(116)
|
|
$
|
236,949
|
|
As of March 31, 2017, unrealized losses on marketable securities that have been in a continuous loss position for more than twelve months were not material. Our portfolio of marketable securities had an
average AA-
credit rating as of March 31, 2017. There were
no
marketable securities that we consider to be other-than-temporarily impaired as of March 31, 2017.
Remaining effective
maturities of marketable securities were as follows (
in thousands
):
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
144,581
|
|
$
|
144,547
|
|
Due after one year through three years
|
|
|
95,382
|
|
|
95,386
|
|
|
|
$
|
239,963
|
|
$
|
239,933
|
|
Our investment strategy is to buy short-duration marketable securities with a high credit rating. Some of our marketable securities have call features that can effectively shorten the lifespan from the contractual maturity date. We use the effective maturity date to measure the duration of the marketable securities.
Note
5
. Inventories
Inventories, which are stated at the lower of cost (first-in, first-out) or market, include material, conversion costs and inbound freight charges.
The components of inventories were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
28,232
|
|
$
|
27,561
|
|
Work-in-process
|
|
|
18,804
|
|
|
14,998
|
|
Finished goods
|
|
|
125,147
|
|
|
115,475
|
|
Inventories
|
|
$
|
172,183
|
|
$
|
158,034
|
|
Note 6. Goodwill
and
Intangible Assets, NET
We believe that acquisitions of business and other assets enhances our existing businesses by either expanding ou
r geographic range and customer
base or expanding our existing product lines. During the three months ended March 31, 2017, we acquired one reference laboratory in Austria for approximately $1.6 million, with a majority of the acquisition price valued as an intangible asset.
During 2016, management reviewed our OPTI Medical product offerings. As a result of this review, we discontinued our product development activities in human point-of-care medical diagnostics. As a result of this change in strategy, we assessed the realizability of the related tangible and intangible assets and determined the expected future cash flows were less than the carrying value of the asset group and recorded a non-cash intangible asset impairment of $
2
.
2
million
within our condensed consolidated statement of operations
within general and administration expense during 2016, of which, $1.1 million of expense was recorded during the first quarter of 2016
.
NOTE 7. Other current and long-term ASSETS
Other current assets consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
25,330
|
|
$
|
25,746
|
|
Taxes receivable
|
|
|
20,217
|
|
|
27,672
|
|
Customer acquisition costs, net
|
|
|
19,364
|
|
|
18,085
|
|
Other assets
|
|
|
15,800
|
|
|
19,703
|
|
Other current assets
|
|
$
|
80,711
|
|
$
|
91,206
|
|
Other long-term assets consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Investment in long-term product supply arrangements
|
|
$
|
10,170
|
|
$
|
10,978
|
|
Customer acquisition costs, net
|
|
|
54,602
|
|
|
50,309
|
|
Other assets
|
|
|
35,344
|
|
|
36,321
|
|
Deferred income taxes
|
|
|
5,867
|
|
|
5,707
|
|
Other long-term assets
|
|
$
|
105,983
|
|
$
|
103,315
|
|
Note
8
. Accrued liabilities
Accrued liabilities consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
55,545
|
|
$
|
71,984
|
|
Accrued employee compensation and related expenses
|
|
|
49,249
|
|
|
91,113
|
|
Accrued taxes
|
|
|
21,272
|
|
|
23,973
|
|
Accrued customer programs
|
|
|
48,697
|
|
|
49,061
|
|
Accrued liabilities
|
|
$
|
174,763
|
|
$
|
236,131
|
|
Note 9
. Repurchases of common STOCK
We primarily acquire shares by repurchases in the open market. However, we also acquire shares tha
t are surrendered by employees in
payment for the minimum required
statutory
withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders.
We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury st
ock issued during the three months
ended
March 31, 2017
and 201
6
was not material.
The following is a summary of our open market common stock repurchases
, reported on a trade date basis, and shares acquired through employee surrender
for the three
months ended March 31
, 201
7
and 201
6
(in thousands, except per share amounts)
:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Shares repurchased in the open market
|
|
|
390
|
|
|
708
|
|
Shares acquired through employee surrender for statutory tax withholding
|
|
|
52
|
|
|
52
|
|
Total shares repurchased
|
|
|
442
|
|
|
760
|
|
|
|
|
|
|
|
|
|
Cost of shares repurchased in the open market
|
|
$
|
50,744
|
|
$
|
49,715
|
|
Cost of shares for employee surrenders
|
|
|
7,303
|
|
|
3,529
|
|
Total cost of shares
|
|
$
|
58,047
|
|
$
|
53,244
|
|
|
|
|
|
|
|
|
|
Average cost per share - open market repurchase
|
|
$
|
130.12
|
|
$
|
70.21
|
|
Average cost per share - employee surrenders
|
|
$
|
141.09
|
|
$
|
67.96
|
|
Average cost per share - total
|
|
$
|
131.41
|
|
$
|
70.06
|
|
Note 10
. Income Taxes
Our effective income tax rate was
18.5
percent for the three months ended March 31, 2017,
as compared to
30.6
percent for the three months ended March 31, 2016.
The decrease in our effective tax rate for the three months ended March 31, 2017, as compared to the same period of the prior year, was primarily related to the adoption of FASB issued amendments related to
share
-based compensation discussed further in “Note 2
.
Accounting Policies”. The change in accounting guidance reduced our effective income tax rate for the three months ended March 31, 2017, by approximately 13 percentage points.
Note 1
1
. ACCUMULATED OTHER Comprehensive Income
The changes in accumulated other comprehensive income (“
AOCI
”), net of tax, for the three months ended March 31
, 201
7
consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2017
|
|
|
Unrealized Gain (Loss) on Investments, Net of Tax
|
|
|
Unrealized Gain (Loss) on Derivative Instruments, Net of Tax
|
|
|
Unrealized Gain (Loss) on Net Investment Hedge, Net of Tax
|
|
|
Cumulative Translation Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
20
|
|
$
|
4,916
|
|
$
|
4,036
|
|
$
|
(52,025)
|
|
$
|
(43,053)
|
|
Other comprehensive (loss) income before reclassifications
|
|
|
(39)
|
|
|
(1,534)
|
|
|
(1,093)
|
|
|
8,014
|
|
|
5,348
|
|
Gains reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
(674)
|
|
|
-
|
|
|
-
|
|
|
(674)
|
|
Balance as of March 31, 2017
|
|
$
|
(19)
|
|
$
|
2,708
|
|
$
|
2,943
|
|
$
|
(44,011)
|
|
$
|
(38,379)
|
|
The following is a summary of reclassifications out of
AOCI
for the three
months ended March 31
, 201
7
and 201
6
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components
|
|
Affected Line Item in the Statement of Operations
|
|
|
Amounts Reclassified from AOCI For the Three Months Ended March 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Gains (losses) on derivative instruments classified as cash flow hedges included in net income:
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Cost of revenue
|
|
$
|
1,075
|
|
$
|
809
|
|
Interest rate swaps
|
|
Interest expense
|
|
|
-
|
|
|
(210)
|
|
|
|
Total gains before tax
|
|
|
1,075
|
|
|
599
|
|
|
|
Tax expense
|
|
|
401
|
|
|
170
|
|
|
|
Gains, net of tax
|
|
$
|
674
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
|
|
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,”
“project,”
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, 2016, (the “2016 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 2016 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
We develop, manufacture and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy and water testing markets. We also sell a line of portable electrolytes and blood gas analyzers for the human point-of-care medical diagnostics market. Our primary products and services are:
|
·
|
|
Point-of-care veterinary diagnostic products, comprising instruments, consumables and rapid assay test kits;
|
|
·
|
|
Veterinary reference laboratory diagnostic and consulting services;
|
|
·
|
|
Veterinary
management and diagnost
ic imaging systems and services
;
|
|
·
|
|
Bio
medical
research, reference laboratory diagnostic services and instruments;
|
|
·
|
|
Diagnostic, health-monitoring products for livestock, poultry and
antibiotic residue testing in
dairy;
|
|
·
|
|
Products that test water for certain microbiological contaminants;
|
|
·
|
|
Point-
of-care electrolytes and blood gas analyzers used in the human point-of-care medical diagnostics
market.
|
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.
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.
Effects of Certain Factors
and Trends
on Results of Operations
Currency Impact
.
See “Part I. Item 3. Quantitative and Qualitative Disclosure about Market Risk” included in this Quarterly Report on Form 10-Q for additional information regarding the impact of foreign currency exchange rates.
Other Items.
See
“Part I. Item 1. Business - Patents and Licenses”
and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2016 Annual Report for additional information regarding d
istributor
p
urchasing and
i
nventories
, economic conditions and patent expiration.
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
months
ended March 31, 2017,
are consistent with those discussed in our 201
6
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.”
Recent Accounting Pronouncements
Share-Based Compensation.
We estimate that tax benefits related to share-based payments will add approximately $0.22 to $0.26 in diluted earnings per share for the full year 2017, primarily through a reduction in
our
effective
income
tax rate, partially offset by an increase in diluted shares outstanding resulting from this accounting change. These impacts may vary significantly by quarter based on the timing of actual settlement activity. We do not estimate that the level of share-based payment activity expected in 2017 will continue in fu
ture periods. We believe
that the historical range of $0.12 to $0.16 per share of annual tax benefits reflects a reasonable estimate for 2018 and beyond, based on current settlement trends and stock price levels.
For more information regarding the adoption of the new share-based guidance, ASU 2016-09, s
ee Note 2 to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Other Pronouncements.
We are evaluating the impact that several recent accounting amendments related to
revenue recognition and
lease
s
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.
Non-GAAP Measures
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 mon
ths ended March 31, 2017
, as compared to the same period 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 currency exchange rates and acquisitions are non-GAAP financial measures. 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 period and the comparable previous year period to foreign currency denominated revenues for the prior year period.
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.
Results of Operations
Total Company.
The
following table presents total Company 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)
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
403,227
|
|
$
|
357,639
|
|
$
|
45,588
|
|
12.7%
|
|
(0.8%)
|
|
|
0.1%
|
|
|
13.4%
|
United States
|
|
|
270,488
|
|
|
241,810
|
|
|
28,678
|
|
11.9%
|
|
-
|
|
|
0.1%
|
|
|
11.8%
|
International
|
|
|
132,739
|
|
|
115,829
|
|
|
16,910
|
|
14.6%
|
|
(2.5%)
|
|
|
0.4%
|
|
|
16.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
|
25,077
|
|
|
23,552
|
|
|
1,525
|
|
6.5%
|
|
(0.8%)
|
|
|
-
|
|
|
7.3%
|
United States
|
|
|
13,019
|
|
|
12,323
|
|
|
696
|
|
5.6%
|
|
-
|
|
|
-
|
|
|
5.6%
|
International
|
|
|
12,058
|
|
|
11,229
|
|
|
829
|
|
7.4%
|
|
(1.8%)
|
|
|
-
|
|
|
9.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LPD
|
|
|
29,317
|
|
|
30,856
|
|
|
(1,539)
|
|
(5.0%)
|
|
(0.4%)
|
|
|
-
|
|
|
(4.6%)
|
United States
|
|
|
3,484
|
|
|
3,169
|
|
|
315
|
|
9.9%
|
|
-
|
|
|
-
|
|
|
9.9%
|
International
|
|
|
25,833
|
|
|
27,687
|
|
|
(1,854)
|
|
(6.7%)
|
|
(0.4%)
|
|
|
-
|
|
|
(6.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
4,400
|
|
|
5,503
|
|
|
(1,103)
|
|
(20.0%)
|
|
(0.1%)
|
|
|
-
|
|
|
(19.9%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
462,021
|
|
$
|
417,550
|
|
$
|
44,471
|
|
10.7%
|
|
(0.7%)
|
|
|
0.2%
|
|
|
11.2%
|
United States
|
|
|
288,613
|
|
|
258,939
|
|
|
29,674
|
|
11.5%
|
|
-
|
|
|
0.1%
|
|
|
11.4%
|
International
|
|
|
173,408
|
|
|
158,611
|
|
|
14,797
|
|
9.3%
|
|
(2.0%)
|
|
|
0.3%
|
|
|
11.0%
|
The increase in both U.S. and international organic revenues, for the three months ended March 31, 2017, as compared to the same period in the prior year, was driven by strong volume gains in CAG Diagnostics recurring revenue, supported by our differentiated diagnostic technologies that are driving increased volumes from new and existing customers in our reference laboratory business, and strong growth in CAG
Diagnostic
s
capital instrument pl
acements, including our Sedivue analyzer, which increased overall revenue by approximately 2 percent
. International organic growth
was strong in Europe and
Asia Pacific, reflecting
the aforementioned
CAG Diagnostic
s
recurring volume driven growth, and growth in our Water business
primarily due to
our Colilert
®
test products,
offset by declines in LPD
,
primarily from lower herd health screening in the Asia-Pacific region
.
The following table presents total Company results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
Increase (Decrease)
|
Results of Operations
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
462,021
|
|
|
|
$
|
417,550
|
|
|
|
$
|
44,471
|
|
10.7%
|
|
Cost of revenue
|
|
|
203,830
|
|
|
|
|
190,013
|
|
|
|
|
13,817
|
|
7.3%
|
|
Gross profit
|
|
|
258,191
|
|
55.9%
|
|
|
227,537
|
|
54.5%
|
|
|
30,654
|
|
13.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
87,244
|
|
18.9%
|
|
|
79,829
|
|
19.1%
|
|
|
7,415
|
|
9.3%
|
|
General and administrative
|
|
|
52,914
|
|
11.5%
|
|
|
49,295
|
|
11.8%
|
|
|
3,619
|
|
7.3%
|
|
Research and development
|
|
|
25,790
|
|
5.6%
|
|
|
24,620
|
|
5.9%
|
|
|
1,170
|
|
4.8%
|
|
Total operating expenses
|
|
|
165,948
|
|
35.9%
|
|
|
153,744
|
|
36.8%
|
|
|
12,204
|
|
7.9%
|
|
Income from operations
|
|
$
|
92,243
|
|
20.0%
|
|
$
|
73,793
|
|
17.7%
|
|
$
|
18,450
|
|
25.0%
|
|
Total Company gross prof
it increased during the three months ended March 31, 2017, as compared to the same period in the prior year, due to higher sale volumes
and a 1
40-basis point increase
in the gross profit percentage. The increase in gross profit percentage was due primarily to
the net benefit of
price increases and
the favorable impact of volume leverage on IDEXX VetLab products cost.
The gross profit percentage was unfavorably impacted by approximately 10-basis points of currency impact during the three months ended March 31, 2017, as compared to the same period of the prior year.
The increase in
total Company sales and marketing expense during the three months ended March 31, 2017, as compared to the same period in the prior year,
was due primarily to increased personnel-related costs as we continue to
invest in
o
ur global commercial infrastructure.
The increase in general and administrative expense resulted primarily from information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and h
igher personnel-related costs.
Research and development expense increased primarily due to higher personnel-related and consultant costs.
Companion Animal Group
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
|
|
Net Revenue
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Change
|
|
Change
|
|
Organic
|
|
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
from
|
|
from
|
|
Revenue
|
|
(dollars in thousands)
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
346,680
|
|
$
|
305,841
|
|
$
|
40,839
|
|
13.4%
|
|
(0.8%)
|
|
0.2%
|
|
|
14.0%
|
|
IDEXX VetLab consumables
|
|
|
123,553
|
|
|
107,969
|
|
|
15,584
|
|
14.4%
|
|
(0.9%)
|
|
-
|
|
|
15.3%
|
|
Rapid assay products
|
|
|
47,895
|
|
|
43,086
|
|
|
4,809
|
|
11.2%
|
|
(0.2%)
|
|
-
|
|
|
11.4%
|
|
Reference laboratory diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
159,069
|
|
|
140,708
|
|
|
18,361
|
|
13.0%
|
|
(0.9%)
|
|
0.4%
|
|
|
13.5%
|
|
CAG diagnostics services and accessories
|
|
|
16,163
|
|
|
14,078
|
|
|
2,085
|
|
14.8%
|
|
(1.0%)
|
|
-
|
|
|
15.8%
|
|
CAG Diagnostics capital - instruments
|
|
|
26,183
|
|
|
22,643
|
|
|
3,540
|
|
15.6%
|
|
(1.8%)
|
|
-
|
|
|
17.4%
|
|
Veterinary software, services and diagnostic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
imaging systems
|
|
|
30,364
|
|
|
29,155
|
|
|
1,209
|
|
4.1%
|
|
0.1%
|
|
-
|
|
|
4.0%
|
|
Net CAG revenue
|
|
$
|
403,227
|
|
$
|
357,639
|
|
$
|
45,588
|
|
12.7%
|
|
(0.8%)
|
|
0.1%
|
|
|
13.4%
|
|
CAG Diagnostic Recurring Revenue.
The
increase in CAG D
iagnostics recurring revenue
was due primarily to
increased volumes in
reference laboratory diagn
ostic services and IDEXX VetLab consumables
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
and Sedivue pay-per-run sales
, resulting from growth i
n testing by existing customers and
an expanded menu of available tests
, as well as benefits
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 sales volume and average unit price of canine SNAP 4Dx
Plus Tests
and higher sales volumes of single analyte SNAP 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.
CAG Diagnostic Capital – Instruments Revenue.
The increase in CAG Diagnostics capital instruments revenue resulted primarily from sales of the SediVue Dx analyzer, launched in North
America in April of 2016. During the first quarter of 2017, we also launched the SediVue Dx analyzer in select international markets. This growth was partly offset by a slight decline in Catalyst placements compared to the elevated prior year levels driven by the international launch of Catalyst One and relatively higher prior year levels of second Catalyst placements in the U.S. as part of customer retention programs.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue.
The increase in customer information management 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.
The following table
presents the CAG segment results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
Increase (Decrease)
|
Results of Operations
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
403,227
|
|
|
|
$
|
357,639
|
|
|
|
$
|
45,588
|
|
12.7%
|
|
Cost of revenue
|
|
|
182,157
|
|
|
|
|
166,847
|
|
|
|
|
15,310
|
|
9.2%
|
|
Gross profit
|
|
|
221,070
|
|
54.8%
|
|
|
190,792
|
|
53.3%
|
|
|
30,278
|
|
15.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
77,782
|
|
19.3%
|
|
|
70,566
|
|
19.7%
|
|
|
7,216
|
|
10.2%
|
|
General and administrative
|
|
|
44,067
|
|
10.9%
|
|
|
41,097
|
|
11.5%
|
|
|
2,970
|
|
7.2%
|
|
Research and development
|
|
|
19,366
|
|
4.8%
|
|
|
17,751
|
|
5.0%
|
|
|
1,615
|
|
9.1%
|
|
Total operating expenses
|
|
|
141,215
|
|
35.0%
|
|
|
129,414
|
|
36.2%
|
|
|
11,801
|
|
9.1%
|
|
Income from operations
|
|
$
|
79,855
|
|
19.8%
|
|
$
|
61,378
|
|
17.2%
|
|
$
|
18,477
|
|
30.1%
|
|
CAG Gross Profit.
Gross
profit for
CAG
increased during the three months ended March 31, 2017, as compared to the same period in the prior year, primarily due to higher sales volume and a 150-basis point increase in the gross profit percentage for the three months ended March 31, 2017, as compared to the same period in the prior year. The gross profit percentage was primarily supported by the net benefit of price increases on our CAG Diagnostics recurring revenue portfolio and the favorable impact of volume leverage on IDEXX VetLab product costs. These favorable impacts were slightly offset by a reduction of approximately 20-basis points from currency movements.
CAG Operating Expense.
The increase in
CAG operating expense during the three months ended March 31, 2017, as compared to the same period in the prior year,
was due primarily to increased personnel-related costs as we continue to
invest in
o
ur global commercial infrastructure.
The increase in general and administrative expense resulted primarily from higher personnel-related costs and, to a lesser extent, incremental information technology investments.
The increase in r
esearch and development expense was due primarily to increased personnel-related costs.
Water
The following table
presents the Water segment results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
Increase (Decrease)
|
Results of Operations
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,077
|
|
|
|
$
|
23,552
|
|
|
|
$
|
1,525
|
|
6.5%
|
|
Cost of revenue
|
|
|
7,602
|
|
|
|
|
7,446
|
|
|
|
|
156
|
|
2.1%
|
|
Gross profit
|
|
|
17,475
|
|
69.7%
|
|
|
16,106
|
|
68.4%
|
|
|
1,369
|
|
8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,663
|
|
14.6%
|
|
|
3,222
|
|
13.7%
|
|
|
441
|
|
13.7%
|
|
General and administrative
|
|
|
2,931
|
|
11.7%
|
|
|
2,498
|
|
10.6%
|
|
|
433
|
|
17.3%
|
|
Research and development
|
|
|
618
|
|
2.5%
|
|
|
707
|
|
3.0%
|
|
|
(89)
|
|
(12.6%)
|
|
Total operating expenses
|
|
|
7,212
|
|
28.8%
|
|
|
6,427
|
|
27.3%
|
|
|
785
|
|
12.2%
|
|
Income from operations
|
|
$
|
10,263
|
|
40.9%
|
|
$
|
9,679
|
|
41.1%
|
|
$
|
584
|
|
6.0%
|
|
Revenue.
The
increase in Water revenue during the three months ended March 31, 2017, as compared to the same period in the prior year, was attributable to the benefits of price increases and, to a lesser extent, higher sales volumes of our Colilert test products
and related accessories, used in coliform and
E. coli
testing in
North America, the Asia-Pacific region and Europe, slightly offset by lower volumes in Latin America. These overall favorable impacts were offset by a reduction of
approximately 80-basis points
from currency movements.
Gross Profit.
Gross profit for Water increased during the three months ended March 31, 2017, as compared to the same period in the prior year, due to higher sales volumes as well as a 130-basis point increase in the gross profit percentage. The increase in the gross profit percentage was primarily due to the net benefit of price increases. The overall change in currency exchange rates resulted in a decrease in the gross profit percentage of approximately 30-basis points during the three months ended March 31, 2017, as compared to the same period of the prior year.
Operating Expenses.
The
increase in Water operating expense during the three months ended March 31, 2017, as compared to the same period in the prior year, was primarily due to higher personnel-related costs related to increased head count in sales and marketing expense and general administrative expenses. Research and development expense for the three months ended March 31, 2017, as compared to the same period in the prior year, was lower due to certain project cost incurred in the first quarter of 2016.
Livestock, Poultry and Dairy
The following table
presents the LPD segment results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
Increase (Decrease)
|
Results of Operations
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
29,317
|
|
|
|
$
|
30,856
|
|
|
|
$
|
(1,539)
|
|
(5.0%)
|
|
Cost of revenue
|
|
|
12,472
|
|
|
|
|
12,879
|
|
|
|
|
(407)
|
|
(3.2%)
|
|
Gross profit
|
|
|
16,845
|
|
57.5%
|
|
|
17,977
|
|
58.3%
|
|
|
(1,132)
|
|
(6.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
5,535
|
|
18.9%
|
|
|
5,579
|
|
18.1%
|
|
|
(44)
|
|
(0.8%)
|
|
General and administrative
|
|
|
4,409
|
|
15.0%
|
|
|
4,836
|
|
15.7%
|
|
|
(427)
|
|
(8.8%)
|
|
Research and development
|
|
|
3,099
|
|
10.6%
|
|
|
2,992
|
|
9.7%
|
|
|
107
|
|
3.6%
|
|
Total operating expenses
|
|
|
13,043
|
|
44.5%
|
|
|
13,407
|
|
43.5%
|
|
|
(364)
|
|
(2.7%)
|
|
Income from operations
|
|
$
|
3,802
|
|
13.0%
|
|
$
|
4,570
|
|
14.8%
|
|
$
|
(768)
|
|
(16.8%)
|
|
Revenue.
The decrease in LPD revenue for the three months ended March 31, 2017, as compared to the same period in the prior year, resulted from lower herd health screening in the Asia-Pacific region, as well as lower dairy testing volumes in China and Brazil. These decreases were partially offset by an increase in swine and poultry testing, primarily in China, as well as expanded pregnancy testing worldwide. The overall change in exchange rat
es contributed approximately 40-
basis points to the overall decline.
Gross Profit.
The decrease in LPD gross profit for the three months ended March 31, 2017, as compared to the same period in the prior year, was
primarily due to an 80-basis point reduction in the gross profit percentage reflecting higher royalty expense, and unfavorable product mix, primarily related to lower levels of herd health screening. Royalty expense was
lower in the first quarter of 2016, due to the receipt of a royalty
credit. These unfavorable factors were offset by approximately
80
-basis points of currency impact, due to hedging gains during
the three months ended March 31, 2017, as compared to hedging losses in the same period of the prior year.
Operating Expenses.
The decrease in LPD operating expenses for the three months ended March 31, 2017, as compared to the same period in the prior year, was primarily due to lower personnel-related costs, in part due to a lower LPD allocation of overall overhead costs reflecting the higher relative growth in our CAG business as compared to LPD. This decrease was partially offset by increases in commercial infrastructure investments within emerging markets. Research and development expense for the three months ended March 31, 2017, was generally consistent with the same period of the prior year.
Other
The following table
presents the Other results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
Increase (Decrease)
|
Results of Operations
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,400
|
|
|
|
$
|
5,503
|
|
|
|
$
|
(1,103)
|
|
(20.0%)
|
|
Cost of revenue
|
|
|
2,289
|
|
|
|
|
2,580
|
|
|
|
|
(291)
|
|
(11.3%)
|
|
Gross profit
|
|
|
2,111
|
|
48.0%
|
|
|
2,923
|
|
53.1%
|
|
|
(812)
|
|
(27.8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
619
|
|
14.1%
|
|
|
805
|
|
14.6%
|
|
|
(186)
|
|
(23.1%)
|
|
General and administrative
|
|
|
791
|
|
18.0%
|
|
|
1,956
|
|
35.5%
|
|
|
(1,165)
|
|
(59.6%)
|
|
Research and development
|
|
|
308
|
|
7.0%
|
|
|
999
|
|
18.2%
|
|
|
(691)
|
|
(69.2%)
|
|
Total operating expenses
|
|
|
1,718
|
|
39.0%
|
|
|
3,760
|
|
68.3%
|
|
|
(2,042)
|
|
(54.3%)
|
|
Income (loss) from operations
|
|
$
|
393
|
|
8.9%
|
|
$
|
(837)
|
|
-15.2%
|
|
$
|
1,230
|
|
(147.0%)
|
|
Revenue.
T
he decrease in Other revenue during the three months ended March 31, 2017, as compared to the same period in the prior year, was primarily due to lower sales volumes of our OPTI Medical blood gas analyzers and related consumables as a result of temporary product availability constraints, partially offset by price
increases.
Gross Profit.
Gross profit for Other decreased due to lower sales volumes and a 510-basis points reduction to the gross profit percentage related to higher overall OPTI Medical product costs, partially offset by the net benefit of price increases. The overall change in currency exchange rates resulted in a decrease in the gross profit percentage of approximately 20-basis points.
Operating Expenses.
The decrease in operating expense for the three months ended March 31, 2017, as compared to the same period in the prior year, was due primarily to an intangible asset impairment within our OPTI Medical business during the first quarter of 2016 and lower personnel cost in research and development as a result of discontinuing our product development activities in the human point-of-care medical diagnostics market. As a result of this change in strategy, we assessed the realizability of the related tangible and intangible assets and determined the expected future cash flows were less than the carrying value of the asset group and recorded a non-cash intangible asset impairment of $1.1 million during the three months ended March 31, 2016.
Unallocated Amounts
The following table
presents the Unallocated Amounts results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
Increase (Decrease)
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
|
|
2016
|
|
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
N/A
|
|
Cost of revenue
|
|
|
(690)
|
|
|
|
|
261
|
|
|
|
|
(951)
|
|
(364.4%)
|
|
Gross profit
|
|
|
690
|
|
|
|
|
(261)
|
|
|
|
|
951
|
|
(364.4%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
(355)
|
|
|
|
|
(343)
|
|
|
|
|
(12)
|
|
3.5%
|
|
General and administrative
|
|
|
716
|
|
|
|
|
(1,092)
|
|
|
|
|
1,808
|
|
(165.6%)
|
|
Research and development
|
|
|
2,399
|
|
|
|
|
2,171
|
|
|
|
|
228
|
|
10.5%
|
|
Total operating expenses
|
|
|
2,760
|
|
|
|
|
736
|
|
|
|
|
2,024
|
|
275.0%
|
|
Loss from operations
|
|
$
|
(2,070)
|
|
|
|
$
|
(997)
|
|
|
|
$
|
(1,073)
|
|
107.6%
|
|
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.”
Gross Profit.
The increase in g
ross profit
during the three months ended March 31, 2017, as compared to the same period in the prior year,
was
primarily
due
to
lower
than budgeted personnel-related
costs, including self-insured health claims.
Operating Expenses.
The increase in operating expenses during the three months ended March 31, 2017, as compared to the same period in the prior year,
was
primarily
due to higher than budgeted costs in information technology and human resources infrastructure spending, employee incentives and workers’ compensation claims, partially offset by lower than budgeted self-insured health claims
.
Non-Operating Items
Interest Income.
In
terest income was $1.1 million for the three months ended March 31, 2017, as compared to $0.8 million for the three months ended March 31, 2016. The increase in interest income was due primarily to a relatively larger portfolio of marketable securities during the three months ended March 31, 2017, as compared to the same period of the prior year.
Interest Expense.
Interest expense was $8.6 million for the three
months ended March 31, 2017
,
as compared to $8.3 million for the same period of the prior year. The increase in interest expense was due to higher floating interest rates
on our Credit Facility and senior notes
.
Provision for Income Taxes.
Our effective income tax rate was 18.5 percent for the three months ended March 31, 2017, and 30.6 percent for the three months ended March 31, 2016.
The decrease in our effective tax rate for the three months ended March 31, 2017, as compared to the same period of the prior year, was primarily related to the adoption of FASB issued ASU 2016-09 related to share-based compensation discussed further in “Note 2: Accounting Policies”. The change in accounting guidance reduced tax expense by $11.2 million and our effective income tax rate by approximately 13 percentage points, for the three months ended March 31, 2017.
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 on our $850 million five-year unsecured revolving credit facility under an amended and restated credit agreement that we executed in December 2015 (the “Credit Facility”). At
March 31, 2017,
we had $
400.3 million of cash,
cash equivalents and marketable securities, as compared to $
391.8
million on
December 31, 2016.
Working capital, including our Credit Facility, totaled negative $
57.5
million at
March 31, 2017
, as compared to negative $
89.0
million at
December 31
, 201
6
. Additionally, at
March
31, 201
7
, we had remain
ing borrowing availability of $178.0
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.
The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries at March 31, 2017, and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
|
March 31,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
3,342
|
|
$
|
4,833
|
|
Foreign
|
|
|
396,999
|
|
|
387,017
|
|
Total
|
|
$
|
400,341
|
|
|
391,850
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities held in U.S. dollars
|
|
$
|
280,509
|
|
$
|
285,756
|
|
|
|
|
|
|
|
|
|
Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars
|
|
|
70.1%
|
|
|
72.9%
|
|
The following table presents marketable securities at fair value as of March 31, 2017, and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
(dollars in thousands)
|
|
|
March 31, 2017
|
|
Total
|
|
December 31, 2016
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
120,893
|
|
50.4%
|
|
$
|
130,771
|
|
55.2%
|
|
Certificates of deposit
|
|
|
43,198
|
|
|
18.0%
|
|
|
40,400
|
|
|
17.1%
|
|
Asset backed securities
|
|
|
37,600
|
|
|
15.7%
|
|
|
27,315
|
|
|
11.5%
|
|
Commercial paper
|
|
|
17,013
|
|
|
7.1%
|
|
|
20,228
|
|
|
8.5%
|
|
U.S. government bonds
|
|
|
16,630
|
|
|
6.9%
|
|
|
12,231
|
|
|
5.2%
|
|
Agency bonds
|
|
|
4,599
|
|
|
1.9%
|
|
|
4,604
|
|
|
1.9%
|
|
Other
|
|
|
-
|
|
0.0%
|
|
|
1,400
|
|
0.6%
|
|
Total marketable securities
|
|
$
|
239,933
|
|
|
|
$
|
236,949
|
|
|
|
Of the $160.4 million of cash and cash equivalents held as of March 31, 2017, 80 percent was held as bank deposits, 17 percent was invested in money market funds restricted to U.S. government and agency securities, and the remainder consisted of commercial paper and other securities with original maturities of less than ninety days.
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
|
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days sales outstanding
(1)
|
|
|
42.4
|
|
|
42.1
|
|
|
42.4
|
|
|
41.5
|
|
|
43.7
|
Inventory turns
(2)
|
|
|
1.9
|
|
|
2.0
|
|
|
1.8
|
|
|
1.7
|
|
|
1.6
|
(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 Three Months Ended March 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
31,274
|
|
$
|
26,990
|
|
$
|
4,284
|
|
Net cash used by investing activities
|
|
|
(29,012)
|
|
|
(23,799)
|
|
|
(5,213)
|
|
Net cash provided (used) by financing activities
|
|
|
1,313
|
|
|
(2,562)
|
|
|
3,875
|
|
Net effect of changes in exchange rates on cash
|
|
|
1,932
|
|
|
3,330
|
|
|
(1,398)
|
|
Net increase in cash and cash equivalents
|
|
$
|
5,507
|
|
$
|
3,959
|
|
$
|
1,548
|
|
Operating Activities.
The increase in cash provided by operating activities of $4.3 million was driven primarily by the increase in net income, including the impact of adopting the new accounting guidance to share-based compensation, offset by the changes in operating assets and liabilities.
The following table presents cash flows from changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(19,429)
|
|
$
|
(21,504)
|
|
$
|
2,075
|
|
Inventories
|
|
|
(5,369)
|
|
|
1,764
|
|
|
(7,133)
|
|
Accounts payable
|
|
|
(3,687)
|
|
|
(1,801)
|
|
|
(1,886)
|
|
Deferred revenue
|
|
|
469
|
|
|
637
|
|
|
(168)
|
|
Other assets and liabilities
|
|
|
(38,531)
|
|
|
(23,752)
|
|
|
(14,779)
|
|
Tax benefit from share-based compensation arrangements
|
|
|
-
|
|
|
(2,063)
|
|
|
2,063
|
|
Total change in cash due to changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements
|
|
$
|
(66,547)
|
|
$
|
(46,719)
|
|
$
|
(19,828)
|
|
Cash used by inventory during the
three
months ended
March 31, 2017, as compared to cash provided during the same period in the prior year,
increased by $7.1 million, primarily
as a result of
timing of inventory shipments between the fourth quarter of 2016 and the first quarter of 2017
. Cash used by other assets and liabilities during the
three
months ended
March 31, 2017, was
primarily
the result of
higher relative employee incentive compensation payments during the first quarter of 2017, as compared to the same period in the prior year.
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 $
29.0 million for the three
months ended
March 31, 2017
, as compared to $
23.8
million for the same
period of the prior year. The
in
crease in cash used by investing activities was primarily due to
acquisitions of businesses, as well as higher
relative
purchases of property, equipment and
marketable securities during the
three
months ended
March 31, 2017,
as compared to the same period of the prior year.
Financing Activities.
Cash provided by financing activities was $1.3 million for the three months ended March 31, 2017, as compared to cash used by financing activities of $
2.6
million for the
same period in
the prior year
.
The increase in cash provided by financing activities was primarily due to an increase in
proceeds from
the
exercises of stock options and
under
the employee stock
purchase plan primarily due to the increase in share price, as compared to the same period in the prior year.
This increase was partially offset by the impacts of adopting the new accounting guidance related to share-based compensation, which resulted in reclassification to operating activities, as compared to the same period in the prior year.
Cash used to repurchase shares of our common stock increased $10.4 million during the three months ended March 31, 2017, as compared to the same period of the prior year. From the inception of our share repurchase program in August 1999 to March 31, 201
7
, we have repurchased 61.7 million shares. During the three months ended March 31, 2017, we purchased 0.4 million shares for a cash outflow of $58.0 million, as compared to purchases of 0.7 million shares for a cash outflow of $49.7 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
provided of $11.0 million during the three
months ended
March
3
1
, 201
7
, as compared to the same period of the prior year.
At March 31, 2017, we had $671
.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 2016 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 March 31, 2017, 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 March 31, 2017:
|
|
|
|
|
|
|
March 31,
|
|
Trailing 12 Months Adjusted EBITDA:
|
|
|
2017
|
|
|
|
|
|
|
Net income attributable to stockholders
|
|
$
|
245,045
|
|
Interest expense
|
|
|
32,334
|
|
Provision for income taxes
|
|
|
95,187
|
|
Depreciation and amortization
|
|
|
79,979
|
|
Share-based compensation expense
|
|
|
20,624
|
|
Extraordinary and other non-recurring non-cash charges
|
|
|
1,118
|
|
Adjusted EBITDA
|
|
$
|
474,287
|
|
|
|
|
|
|
|
|
March 31,
|
|
Debt to Adjusted EBITDA Ratio:
|
|
|
2017
|
|
|
|
|
|
|
Line of credit
|
|
$
|
671,000
|
|
Long-term debt
|
|
|
594,868
|
|
Total debt
|
|
|
1,265,868
|
|
Acquisition-related contingent consideration payable
|
|
|
1,667
|
|
Capitalized leases
|
|
|
560
|
|
U.S. GAAP change - deferred financing costs
|
|
|
538
|
|
Gross debt
|
|
|
1,268,633
|
|
Gross debt to Adjusted EBITDA ratio
|
|
|
2.67
|
|
|
|
|
|
|
Less: Cash and cash equivalents
|
|
|
(160,408)
|
|
Less: Marketable securities
|
|
|
(239,933)
|
|
Net debt
|
|
$
|
868,292
|
|
Net debt to Adjusted EBITDA ratio
|
|
|
1.83
|
|
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
March 31, 2017,
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
contained
in our
2016
Annual Report
.