IDEXX LABORATORIES, INC. 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 Exchange Act of 1934, as amended (the "Exchange Act"), include statements relating to, among other things, the impact of the COVID-19 pandemic; future revenue growth rates; projected tax rates and the impact of tax legislation and regulatory action; business trends, earnings and other measures of financial performance; the 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, capital spending and operating expenditures; the working capital and liquidity outlook; interest expense; warranty expense; share-based compensation expense; the adoption and projected impact of new accounting standards; critical accounting estimates; 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, including, among other things, the adverse impact, and the duration, of the effects of the ongoing COVID-19 pandemic on our business, results of operations, liquidity, financial condition, and stock price, as well as the other matters described under the headings "Business," "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosure About Market Risk" in our 2019 Annual Report and in the corresponding sections of this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with theSEC . Any forward-looking statements represent our estimates only as of the day this Quarterly Report on Form 10-Q was filed with theSEC 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 2019 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. 34 --------------------------------------------------------------------------------
Effects of Certain Factors and Trends on Results of Operations
COVID-19 Update. The primary impacts of the COVID-19 pandemic have been seen in our CAG business. While veterinary care is widely recognized as an "essential" service, stay-at-home policies deployed to combat the spread of COVID-19 constrained visits to veterinary practices significantly in lateMarch 2020 through earlyApril 2020 , pressuring diagnostic testing volumes. Restrictions on sales professionals' access to veterinary clinics also contributed to deferrals on new CAG instrument placements As stay-at-home policies were relaxed, there was significant improvement in clinical visit activity which accelerated through the second quarter of 2020. WeeklyU.S. companion animal practice data show improvement in same-store clinical visits trends sincemid-April 2020 . Same-store clinical visits gains were 7% inJune 2020 , supported by high growth in wellness visits. Solid same-store clinical visit gains have continued inJuly 2020 , reflected in 6% same-store visit gains for the three-week period endedJuly 17, 2020 .
Companion animal market improvement trends globally have supported a strong
recovery in demand for CAG diagnostic products and services.
While these trends are encouraging, potential effects related to ongoing COVID-19 case management efforts are challenging to predict and may pressure future revenues should enhanced social distancing policies and higher infection rates impact veterinary clinic operations in certain regions. In addition to impacts on our CAG business, we have also seen pressure on Water testing volumes. There was some disruption to compliance Water testing early in the second quarter of 2020 related to business lockdown effects, as well as beach and pool closures. Approximately 20% of our Water revenues are related to non-compliance testing, which has seen declines related to reduced overall business activity and prioritization of laboratory spending. We anticipate that near-to-moderate-term demand for non-compliance testing will continue to be impacted by pandemic and related economic pressures. In managing our businesses, we continue to provide high levels of service delivery and product support for customers during this time and maintain high health and safety standards to protect our employees and ensure business continuity. In an effort to continue to protect the health and safety of our workforce and their families and our communities, the majority of our employees continue to work remotely and travel remains highly restricted. We have introduced new employee benefits to support remote workers. Given improved market and business trends, we have discontinued temporary reductions in employee salaries and benefits and Board of Directors compensation.
Human COVID-19 Testing
OnMay 7, 2020 , we announced that OPTI Medical was granted by theUnited States Food and Drug Administration (FDA) an Emergency Use Authorization (EUA) for the OPTI® SARS-CoV-2 RT-PCR laboratory test kit for the detection of SARS-CoV-2, the virus that causes COVID-19. This announcement followed an earlier validation of the test by theInstitut Pasteur ofFrance . The test kit provides results in approximately 2 to 3.5 hours and has been validated on commonly available PCR instruments. The OPTI SARS-CoV-2 RT-PCR test kit was developed by utilizing the EUA process outlined by the FDA inMarch 2020 . Use inthe United States is limited to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988, 42 U.S.C. §263a (CLIA), to perform high complexity tests to assist physicians in the diagnosis of COVID-19. OnJune 5, 2020 OPTI Medical announced that it has received the CE mark certification in theEuropean Union for its OPTI® SARS-CoV-2 RT-PCR laboratory test kit. Additionally, the FDA has granted EUA for the new OPTI DNA/RNA Magnetic Bead Kit for nucleic acid extraction from respiratory samples to be used with the OPTI SARS-CoV-2 RT-PCR test kit, which enablesOPTI Medical Systems to provide laboratories with a completeOPTI Medical Systems -manufactured workflow solution for COVID-19 testing. Currency Impact. See "Part I. Item 3. Quantitative and Qualitative Disclosures 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 2019 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration. 35 --------------------------------------------------------------------------------
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 design, manufacture, and distribute point of care and laboratory diagnostics for the human 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; •Practice management and diagnostic imaging systems and services used by veterinarians; •Health monitoring, biological materials testing, laboratory diagnostic instruments and services used by the biomedical research community; •Diagnostic, health-monitoring products for livestock, poultry, and dairy; •Products that test water for certain microbiological contaminants; and •Point-of-care electrolytes and blood gas analyzers, and laboratory diagnostics used in the human 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 theCompanion 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 improve dairy reproductive efficiency, which we refer to as Livestock, Poultry and Dairy ("LPD"). Our Other operating segment combines and presents products for the human medical diagnostics market ("OPTI Medical") with 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 biomedical analytics 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 software 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 develops, designs, manufactures and distributes point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable products) for the human medical diagnostics market. EffectiveJanuary 1, 2020 , 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 costs that were previously not allocated to our segments. Prior toJanuary 1, 2020 , certain costs were not allocated to our operating segments and were instead reported under the caption "Unallocated Amounts". These costs included costs primarily consisting of our R&D function, regional or country expenses and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation were charged to our business segments at pre-determined budgeted amounts or rates. BeginningJanuary 1, 2020 , the segments will reflect these actual costs allocated to the segment based on various allocation methods, including revenue and headcount. Foreign exchange losses on settlements of foreign currency denominated transactions are not allocated to our operating segments and are instead reported within our Other reporting segment. The following table reflects adjustments to previously reported costs in our Unallocated segment, that are now allocated to our CAG, Water, LPD and Other segments:
For the three months ended
(in thousands)
CAG Water LPD Other Unallocated
Cost of sales $ 344 $ 15 $ 19 $ 8 $ (386)
Gross profit (344) (15) (19) (8) 386
Operating Expenses:
Sales and marketing $ (18) $ (1) $ (1) $ - $ 20
General and administrative (893) (179) (206) 949 329
Research and development 3,960 10 13 - (3,983)
Total operating expenses 3,049 (170) (194) 949 (3,634)
Income from operations $ (3,393) $ 155 $ 175 $ (957) $ 4,020
36--------------------------------------------------------------------------------
For the six months ended
(in thousands)
CAG Water LPD Other Unallocated
Cost of sales $ 162 $ 7 $ 9 $ 4 $ (182)
Gross profit (162) (7) (9) (4) 182
Operating Expenses:
Sales and marketing $ 111 $ 5 $ 6 $ -
General and administrative (1,095) (219) (253)
1,164 403
Research and development 7,518 19 24 - (7,561)
Total operating expenses 6,534 (195) (223) 1,164 (7,280)
Income from operations $ (6,696) $ 188 $ 214 $ (1,168) $ 7,462
37-------------------------------------------------------------------------------- The following table reflects the impact to previously reported segment gross profit margin, operating income margin and operating expenses as a percentage of revenue, due to the allocation of these costs to our CAG, Water, LPD and Other segments:
For the three months ended
CAG Water LPD Other
Cost of sales 0.1 % - % 0.1 % 0.2 %
Gross profit (0.1) % - % (0.1) % (0.2) %
Operating Expenses:
Sales and marketing - % - % - % - %
General and administrative (0.2) % (0.5) % (0.6) % 19.4 %
Research and development 0.7 % - % - % - %
Total operating expenses 0.6 % (0.5) % (0.6) % 19.4 %
Income from operations (0.6) % 0.4 % 0.5 % (19.6) %
For the six months ended
CAG Water LPD Other
Cost of sales - % - % - % - %
Gross profit - % - % - % - %
Operating Expenses:
Sales and marketing - % - % - % - %
General and administrative (0.1) % (0.3) % (0.4) % 11.4 %
Research and development 0.7 % - % - % - %
Total operating expenses 0.6 % (0.3) % (0.3) % 11.4 %
Income from operations (0.6) % 0.3 % 0.3 % (11.4) %
Critical Accounting Estimates and Assumptions
The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance withU.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. Except as described below, the critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three and six months endedJune 30, 2020 , are consistent with those discussed in our 2019 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 Estimates and Assumptions."
Valuation of
A significant portion of the purchase price for acquired businesses is generally assigned to intangible assets. Intangible assets other than goodwill are initially valued at fair value. If a quoted price in an active market for the identical asset is not readily available at the measurement date, the fair value of the intangible asset is estimated based on discounted cash flows using market participant assumptions, which are assumptions that are not specific toIDEXX . The selection of appropriate valuation methodologies and the estimation of discounted cash flows require significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the useful lives of intangible assets. When material, we utilize independent valuation experts to advise and assist us in determining the fair values of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets.Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair 38 --------------------------------------------------------------------------------
value of acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and whenever events or circumstances indicate impairment may exist. Our reporting units are the individual product and service categories that comprise our CAG operating segment, our Water and LPD operating segments and goodwill remaining from the restructuring of our pharmaceutical business in the fourth quarter of 2008. We also assess the realizability of other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We considered the effects of the ongoing COVID-19 pandemic and have evaluated factors specific to our reporting units, as well as industry and macroeconomic factors that are reasonably likely to have a material impact on the fair value of our reporting units and determined it is more likely than not that the fair value of our reporting units and intangible assets continues to exceed the carrying amount. Examples of the factors considered in assessing the fair value of our reporting units include: the results of the most recent goodwill impairment test, recent and anticipated revenue growth trends, the market price of our common stock, our overall financial position including our working capital and liquidity levels, the competitive environment, the regulatory environment, anticipated changes in product or labor costs, the consistency of operating margins and cash flows and current and long-range financial forecasts. The results of our most recent goodwill impairment test in the fourth quarter of 2019, indicated an excess of estimated fair value over the carrying amount for each of our reporting units with a minimum of 71% and an average of approximately 1,060% in total. The majority of our goodwill is related to ourCAG Diagnostics reporting units with an average of approximately 1,200% excess of estimated fair value over the carrying amount, including our Reference Laboratory Diagnostic and Consulting Services, Rapid Assay Products, andIDEXX VetLab Consumables, Instruments, Services and Accessories. We also maintain approximately$45 million of goodwill associated with ourVeterinary Software and Services reporting unit, which is primarily comprised of recent acquisitions of early-stage software companies that expand our suite of technology applications for the veterinary profession, including SaaS-based practice management systems, applications that extend workflow capabilities, client marketing, wellness plan management and other connectivity and communication needs. These software applications continue to be in the earlier stages of commercial development, and therefore ourVeterinary Software and Services reporting unit has a relatively lower excess of estimated fair value over the carrying amount, as indicated by the results of our most recent goodwill impairment test, which indicated approximately$208 million and 217% of the reporting unit's carrying value. Realization of this goodwill is dependent on our successful commercialization of these early-stage software applications. Additionally, we maintain approximately$6.5 million of goodwill associated with our remaining pharmaceutical intellectual property, out-licensing arrangements, and certain retained drug delivery technologies (collectively "Pharmaceutical Activities") that we seek to commercialize through arrangements with third parties. Currently, our primary support for the carrying value of this goodwill is royalty revenue associated with the commercialization of certain intellectual property. There is no guarantee that we will be able to maintain or increase revenues from our remaining Pharmaceutical Activities. The results of our most recent goodwill impairment test for these Pharmaceutical Activities indicate an excess of estimated fair value over the carrying amount of this reporting unit by approximately$4.7 million and 71% of the reporting unit's carrying value. Realization of this goodwill is dependent upon the success of those third parties in developing and commercializing products, which will result in our receipt of royalties and other payments. While we believe that the assumptions used in our determination that the fair values of our reporting units continue to exceed the carrying amounts are reasonable, a change in these underlying assumptions could result in a material negative effect on the estimated fair value of the reporting units. A prolonged economic downturn in theU.S. or internationally resulting in lower long-term growth rates and reduced long-term profitability may reduce the fair value of our reporting units. Industry specific events or circumstances could have a negative impact on our reporting units and may also reduce the fair value of our reporting units. Should such events occur, and it becomes more likely than not that a reporting unit's fair value or intangible asset value has fallen below its carrying value, we will perform an interim impairment test, in addition to the annual goodwill impairment test. Future impairment tests may result in an impairment of goodwill or other intangible assets, depending on the outcome of future impairment tests. An impairment of goodwill or other intangible assets would be reported as a non-cash charge to earnings. 39 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
For more information regarding the impact that recent accounting standards and amendments will have on our consolidated financial statements as described in Note 2 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q.
Non-GAAP Financial 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 and six months endedJune 30, 2020 , as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business 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 withU.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 from organic revenue growth 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 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 prior-year period to foreign currency denominated revenues for the prior-year period. We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and operating trends. We exclude only acquisitions that are considered to be a business from organic revenue growth. In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single asset or group of similar assets, we do not consider these assets to be a business and include these acquisitions in organic revenue growth. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth. We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio, in this Quarterly Report on Form 10-Q, all of which are non-GAAP financial measures that should be considered in addition to, and not as a replacement for, financial measures presented according toU.S. GAAP. Management believes that 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. Comparison to Prior Periods Our fiscal quarter ended onJune 30 . Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior-year periods. 40 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
Total Company . The following table presents total Company revenue by operating segment: For the Three Months Ended June 30, Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue (dollars in thousands) 2020 2019 Dollar Change Growth(1) from Currency from Acquisitions Growth(1) CAG$ 566,100 $ 547,349 $ 18,751 3.4 % (1.0 %) 0.7 % 3.8 % United States 387,113 367,031 20,082 5.5 % - 1.0 % 4.5 % International 178,987 180,318 (1,331) (0.7 %) (3.1 %) - 2.3 % Water 28,116 34,764 (6,648) (19.1 %) (3.0 %) - (16.2 %) United States 13,935 16,759 (2,824) (16.8 %) - - (16.8 %) International 14,181 18,005 (3,824) (21.2 %) (5.8 %) - (15.5 %) LPD 32,244 33,104 (860) (2.6 %) (4.3 %) - 1.7 % United States 3,242 3,309 (67) (2.0 %) - - (2.0 %) International 29,002 29,795 (793) (2.6 %) (4.8 %) - 2.2 % Other 11,132 4,886 6,246 127.8 % - - 127.8 %Total Company $ 637,592 $ 620,103 $ 17,489 2.8 % (1.3 %) 0.6 % 3.6 % United States 405,998 388,875 17,123 4.4 % - 0.9 % 3.5 % International 231,594 231,228 366 0.2 % (3.6 %) - 3.8 %
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. In our CAG business, following a period of significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines, we saw a sharp recovery in market demand for diagnostics globally, including high levels of growth in testing volumes in June, supported by pent-up demand as social distancing procedures and guidelines began to be lifted. In our LPD business, the increased demand for African swine fever testing programs and core swine testing volumes inChina were partially offset by the decrease in testing volumes in other regions as a result of the impact of the COVID-19 pandemic, as well as lower herd health screening revenue this quarter. Lower revenues in our Water business are primarily the result of the COVID-19 pandemic, both in part due to customer stocking in the first quarter of 2020 and lower demand for non-compliance testing in the second quarter of 2020. Our new OPTI COVID-19 PCR test for humans increased our overall revenue growth by approximately 1%. The impact of currency movements decreased total revenue by 1.3%, while acquisitions increased revenue by 0.6%. 41 --------------------------------------------------------------------------------
The following table presents total Company results of operations:
For the Three Months Ended June 30, Change
Total Company - Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 637,592 $ 620,103 $ 17,489 2.8 %
Cost of revenue 258,250 262,250 (4,000) (1.5 %)
Gross profit 379,342 59.5 % 357,853 57.7 % 21,489 6.0 %
Operating Expenses:
Sales and marketing 94,181 14.8 % 101,364 16.3 % (7,183) (7.1 %)
General and administrative 60,268 9.5 % 59,955 9.7 % 313 0.5 %
Research and development 31,645 5.0 % 32,259 5.2 % (614) (1.9 %)
Total operating expenses 186,094 29.2 % 193,578 31.2 % (7,484) (3.9 %)
Income from operations $ 193,248 30.3 % $ 164,275 26.5 % $ 28,973 17.6 %
Gross Profit. Gross profit increased due to higher sales volumes and a 180 basis
point increase in the gross profit margin. The increase in the gross profit
margin was driven by several factors, including mix benefits from strong IDEXX
VetLab consumable and lower CAG Diagnostics instrument revenue, the net benefit
of price increases, benefits from productivity gains and cost controls in our
reference laboratories, as well as the benefit from the OPTI COVID-19 PCR test.
These favorable factors were offset by incremental investments in reference
laboratory capacity and systems, including acquisitions, as well as business mix
impacts from lower Water testing volumes. The impact from foreign currency
movements decreased the gross profit margin by approximately 35 basis points,
including the impact of hedges.
Operating Expenses. Overall operating expenses were lower primarily as a result
of cost containment efforts implemented in response to the COVID-19 pandemic,
including temporary reductions to compensation and benefits. Sales and marketing
expense decreased approximately 6%, excluding the impact of foreign currency,
primarily due to the temporary cost containment efforts, which reduced travel
and personnel-related costs. General and administrative expense increased
approximately 2.6%, excluding the impact of foreign currency, primarily due to
increases in facilities costs, partially offset by the benefits of cost
containment initiatives across our business segments. Research and development
expense decreased 1.9%, excluding the impact of foreign currency, primarily due
to the benefits of cost containment initiatives. The overall change in currency
exchange rates resulted in a decrease in operating expenses of approximately
1.5%.
42--------------------------------------------------------------------------------
[[Image Removed: idxx-20200630_g2.jpg]]
The following table presents revenue by product and service category for CAG:
?
?
For the Three Months Ended June
30,
Reported
Net Revenue Revenue Growth Percentage Change Percentage Change Organic Revenue
(dollars in thousands) 2020 2019 Dollar Change (1) from Currency from Acquisitions Growth (1)
CAG Diagnostics
recurring revenue: $ 510,254 $ 477,431 $ 32,823 6.9 % (1.1 %) 0.8 % 7.2 %
IDEXX VetLab
consumables 196,061 175,159 20,902 11.9 % (1.6 %) - 13.5 %
Rapid assay products 64,658 68,605 (3,947) (5.8) % (0.6 %) - (5.1) %
Reference laboratory
diagnostic and
consulting services 228,816 213,892 14,924 7.0 % (0.8 %) 1.7 % 6.1 %
CAG diagnostics
services and
accessories 20,719 19,775 944 4.8 % (1.3 %) - 6.1 %
CAG Diagnostics
capital - instruments 18,871 31,526 (12,655) (40.1 %) (1.0 %) - (39.1 %)
Veterinary software,
services and
diagnostic imaging
systems 36,975 38,392 (1,417) (3.7) % (0.3 %) - (3.4) %
Net CAG revenue $ 566,100 $ 547,349 $ 18,751 3.4 % (1.0 %) 0.7 % 3.8 %
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. Following a period of significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines, we saw a sharp recovery in market demand for CAG diagnostics recurring revenues globally across modalities, including high levels of growth in testing volumes in June, supported by pent-up demand as social distancing procedures and guidelines began to be lifted. The increase inCAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, and to a lesser extent, higher realized prices. The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes for our Catalyst® consumables and, to a lesser extent, Procyte Dx® consumables. These increases were supported by an expansion of our instrument installed base, growth in testing by new and existing customers, our expanded menu of available tests, and to a lesser extent, benefits from higher average unit sales prices. The decrease in rapid assay revenue resulted primarily from lower SNAP® 4Dx Plus sales volumes, as a result of the impact of COVID-19 and timing of prior-year promotions, partially offset by higher realized prices. Rapid assay testing is relatively more dependent on wellness visits, which were impacted more severely by COVID-19 stay-at-home policies and procedures due to typical seasonality of wellness testing that occurs in the second quarter, however we saw a sharp rebound in rapid assay testing volumes in June, consistent with the broader U.S. market recovery for wellness testing. The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes, most prominently in theU.S. as well as higher average unit sales prices. Modest growth internationally was driven by strong growth inGermany ,Japan , andAustralia , offset by the extended COVID-19-related impacts in theUnited Kingdom andCanada .
The increase in
CAG Diagnostics Capital - Instruments Revenue. The decrease in instrument revenue was primarily due to the impacts of the COVID-19 pandemic, including restrictions on our sales professionals' access to clinics and certain customers deferring new purchase decisions. 43 --------------------------------------------------------------------------------Veterinary Software , Services and Diagnostic Imaging Systems Revenue. The decrease in revenue was primarily due to the impacts of the COVID-19 pandemic on new diagnostic imaging placements, including restrictions on our sales professionals' access to clinics and certain customers deferring purchase decisions. These decreases were partially offset by increased veterinary software and diagnostic imaging subscription-based services, due to increases in our active installed base, and to a lesser extent higher realized prices.
The following table presents the CAG segment results of operations:
For the Three Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues$ 566,100 $ 547,349 $ 18,751 3.4 % Cost of revenues 231,633 236,054 (4,421) (1.9 %) Gross profit 334,467 59.1 % 311,295 56.9 % 23,172 7.4 % Operating Expenses: Sales and marketing 86,096 15.2 % 91,169 16.7 % (5,073) (5.6 %) General and administrative 53,533 9.5 % 51,157 9.3 % 2,376 4.6 % Research and development 26,869 4.7 % 27,779 5.1 % (910) (3.3 %) Total operating expenses 166,498 29.4 % 170,105 31.1 % (3,607) (2.1 %) Income from operations$ 167,969 29.7 %$ 141,190 25.8 %$ 26,779 19.0 % Gross Profit. Gross profit increased primarily due to higher sales volume, as well as a 220 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by the mix benefits from high growth inIDEXX VetLab consumable revenues and lowerCAG Diagnostics instrument revenue, lower product costs, productivity in our reference laboratories, as well as the net benefit of price increases in ourCAG Diagnostics recurring revenue portfolio, partially offset by incremental investments in reference laboratory capacity and systems, including acquisitions, and software services field resources. The impact from foreign currency movements decreased the gross profit margin by approximately 20 basis points, including the impact of hedges. Operating Expenses. Overall operating expenses were lower primarily as a result of cost containment efforts implemented in response to the COVID-19 pandemic, including temporary reductions to compensation and benefits. Sales and marketing expense decreased primarily due to the temporary cost containment efforts that reduced travel and personnel-related costs. General and administrative expense increased primarily due to increases in personnel-related and facilities costs, partially offset by the benefits of cost containment initiatives. Research and development expense decreased primarily due to the temporary cost containment efforts that reduced personnel-related costs, partially offset by increased project costs. The overall change in currency exchange rates decreased operating expenses by approximately 1%. 44 --------------------------------------------------------------------------------
[[Image Removed: idxx-20200630_g3.jpg]]Water
The following table presents the Water segment results of operations:
For the Three Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 28,116 $ 34,764 $ (6,648) (19.1) %
Cost of revenue 8,438 9,903 (1,465) (14.8 %)
Gross profit 19,678 70.0 % 24,861 71.5 % (5,183) (20.8) %
Operating Expenses:
Sales and marketing 3,399 12.1 % 3,960 11.4 % (561) (14.2 %)
General and administrative 3,193 11.4 % 3,153 9.1 % 40 1.3 %
Research and development 828 2.9 % 1,026 3.0 % (198) (19.3) %
Total operating expenses 7,420 26.4 % 8,139 23.4 % (719) (8.8) %
Income from operations $ 12,258 43.6 % $ 16,722 48.1 % $ (4,464) (26.7) %
Revenue. The decrease in revenue was primarily due to the impact of the COVID-19
pandemic, primarily due to lower non-compliance testing, as well as some
disruption in compliance testing due to social distancing policies, including
beach and pool closures, and the impact of customer stocking orders in the first
quarter of 2020. These factors were partially offset by the benefit of price
increases. The decline in non-compliance testing was primarily related to lower
overall business activity, including special projects, construction, and real
estate transactions. The impact of currency movements decreased revenue by
approximately 3.0%.
Gross Profit. Gross profit decreased due to lower sales volumes, and a 150 basis
point decrease in the gross profit margin. Foreign currency movements decreased
the gross profit margin by approximately 110 basis points, including the impact
of hedges. The remaining decrease in the gross profit margin was primarily due
to higher freight and distribution costs, partially offset by the net benefit of
price increases and favorable product costs.
Operating Expenses. Overall operating expenses were lower primarily as a result
of cost containment efforts implemented in response to the COVID-19 pandemic,
including temporary reductions to compensation and benefits. These reductions
were primarily in travel and personnel-related costs. The overall change in
currency exchange rates resulted in a decrease in operating expenses of
approximately 3%.
45--------------------------------------------------------------------------------
[[Image Removed: idxx-20200630_g4.jpg]]Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Three Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 32,244 $ 33,104 $ (860) (2.6 %)
Cost of revenue 13,405 13,425 (20) (0.1 %)
Gross profit 18,839 58.4 % 19,679 59.4 % (840) (4.3 %)
Operating Expenses:
Sales and marketing 4,298 13.3 % 5,900 17.8 % (1,602) (27.2 %)
General and administrative 3,678 11.4 % 4,168 12.6 % (490) (11.8 %)
Research and development 2,614 8.1 % 3,043 9.2 % (429) (14.1 %)
Total operating expenses 10,590 32.8 % 13,111 39.6 % (2,521) (19.2 %)
Income from operations $ 8,249 25.6 % $ 6,568 19.8 % $ 1,681 25.6 %
Revenue. The unfavorable impact of foreign currency movements decreased revenue
by 4.3%. Excluding the impact of currency, revenue increased primarily from the
continued demand for African swine fever testing and improved core swine testing
volumes in China , as well as increased poultry testing. These increases were
partially offset by the impact of lower testing volumes in other regions related
to the COVID-19 pandemic, including the impact of accelerated stocking orders in
the first quarter of 2020, as well as decreased herd health screening, which
reflects comparisons to a strong prior year.
Gross Profit. The decrease in gross profit was primarily due to lower sales
volume related to the impacts of the COVID-19 pandemic and a 100 basis point
decrease in the gross profit margin. Foreign currency movements decreased the
gross profit margin by approximately 170 basis points, including the impact of
hedges. Excluding the impact of currency, the gross profit margin increased
primarily as a result of favorable product costs from volume leverage, partially
offset by unfavorable mix, primarily due to lower heard health screening.
Operating Expenses. Overall operating expenses were lower primarily as a result
of cost containment efforts implemented in response to the COVID-19 pandemic,
including temporary reductions to compensation and benefits. The reductions in
sales and marketing and general and administrative expenses were primarily
travel and personnel-related. The decrease in research and development expense
was primarily due to the cost containment initiatives, primarily in personnel
related costs, partially offset by third-party services. The overall change in
currency exchange rates resulted in a decrease in operating expenses of
approximately 2%.
46
--------------------------------------------------------------------------------Other
The following table presents the Other results of operations: ?
For the Three Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 11,132 $ 4,886 $ 6,246 127.8 %
Cost of revenue 4,774 2,868 1,906 66.5 %
Gross profit 6,358 57.1 % 2,018 41.3 % 4,340 215.1 %
Operating Expenses:
Sales and marketing 388 3.5 % 335 6.9 % 53 15.8 %
General and administrative (136) (1.2 %) 1,477 30.2 % (1,613) (109.2 %)
Research and development 1,334 12.0 % 411 8.4 % 923 224.6 %
Total operating expenses 1,586 14.2 % 2,223 45.5 % (637) (28.7 %)
Income from operations $ 4,772 42.9 % $ (205) (4.2 %) $ 4,977 NM
NM - Not meaningful
Revenue. The increase in revenue was primarily due to our new OPTI COVID-19 PCR
test for humans, which was introduced in the second quarter of 2020. The future
demand for this product is difficult to project given the uncertain nature of
the COVID-19 pandemic, including short-term project commitments, available PCR
testing capacity and alternative suppliers. The impact of currency movements on
revenue was immaterial.
Gross Profit. The increase in gross profit was primarily due to sales volumes of
our new OPTI COVID-19 PCR test for humans and a 15.8% increase in the gross
profit margin, primarily due to favorable product mix from OPTI COVID-19 PCR
testing, partially offset by higher product costs in our other OPTI products and
lower royalties associated with our former pharmaceutical product line. The
overall change in currency exchange rates had an immaterial impact on gross
profit.
Operating Expenses. The increase in sales and marketing expense was primarily
due to higher personnel-related costs related to new positions associated with
our new OPTI COVID-19 PCR test. The decrease in general and administrative
expense was primarily due to foreign exchange gains on settlements of foreign
currency denominated transactions, as compared to losses in the prior year, for
all operating segments, which are reported within our Other segment, as well as
cost control initiatives. The increase in research and development cost was
primarily due to higher personnel-related and project costs associated with the
development of the OPTI COVID-19 PCR test.
Non-Operating Items
Interest Expense. Interest expense was$9.5 million for the three months endedJune 30, 2020 , as compared to$8.2 million for the same period in the prior year. The increase in interest expense was the result of higher average debt levels, offset by slightly lower interest rates. Provision for Income Taxes. Our effective income tax rate was 18.9% for the three months endedJune 30, 2020 , as compared to 19.5% for the three months endedJune 30, 2019 . The decrease in our effective tax rate was primarily driven by regional earnings mix, with relatively higher statutory earnings subject to lower international tax rates than domestic tax rates. 47 --------------------------------------------------------------------------------
Results of Operations
Six Months Ended
Total Company . The following table presents total Company revenue by operating segment: For the Six Months Ended June 30, Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue (dollars in thousands) 2020 2019 Dollar Change Growth (1) from Currency from Acquisitions Growth (1) CAG$ 1,118,096 $ 1,056,267 $ 61,829 5.9 % (1.0 %) 0.7 % 6.1 % United States 760,388 704,905 55,483 7.9 % - 1.1 % 6.8 % International 357,708 351,362 6,346 1.8 % (2.9 %) - 4.7 % Water 62,265 65,074 (2,809) (4.3 %) (3.0 %) - (1.4 %) United States 30,876 31,363 (487) (1.6 %) - - (1.6 %) International 31,389 33,711 (2,322) (6.9 %) (5.7 %) - (1.2 %) LPD 66,398 64,610 1,788 2.8 % (4.0 %) - 6.8 % United States 7,019 6,572 447 6.8 % - - 6.8 % International 59,379 58,038 1,341 2.3 % (4.4 %) - 6.8 % Other 17,169 10,208 6,961 68.2 % - - 68.2 %Total Company $ 1,263,928 $ 1,196,159 $ 67,769 5.7 % (1.2 %) 0.6 % 6.3 % United States 802,781 747,163 55,618 7.4 % - 1.0 % 6.4 % International 461,147 448,996 12,151 2.7 % (3.3 %) - 6.0 %
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. In our CAG business, following a period of significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines, we saw a sharp recovery in market demand for diagnostics globally, including high levels of growth in testing volumes inJune 2020 , supported by pent-up demand as social distancing procedures and guidelines began to be lifted. In our LPD business, the increased demand for African swine fever testing programs and core swine testing volumes inChina were partially offset by the decrease in volume on other regions as a result of the impact of the COVID-19 pandemic, as well as lower herd health screening revenue. Lower revenues in our Water business is primarily the result of the COVID-19 pandemic, due to lower demand for non-compliance testing in the second quarter of 2020. Our new OPTI COVID-19 PCR test for humans increased our overall revenue growth by approximately 0.5%. The impact of currency movements decreased total revenue by 1.2%, while acquisitions increased revenue by 0.6%. 48 --------------------------------------------------------------------------------
The following table presents total Company results of operations:
For the Six Months Ended June 30, Change
Total Company - Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 1,263,928 $ 1,196,159 $ 67,769 5.7 %
Cost of revenue 524,996 506,709 18,287 3.6 %
Gross profit 738,932 58.5 % 689,450 57.6 % 49,482 7.2 %
Operating Expenses:
Sales and marketing 210,324 16.6 % 207,948 17.4 % 2,376 1.1 %
General and administrative 126,080 10.0 % 120,316 10.1 % 5,764 4.8 %
Research and development 64,955 5.1 % 63,773 5.3 % 1,182 1.9 %
Total operating expenses 401,359 31.8 % 392,037 32.8 % 9,322 2.4 %
Income from operations $ 337,573 26.7 % $ 297,413 24.9 % $ 40,160 13.5 %
Gross Profit. Gross profit increased due to higher sales volumes, as well as a
90 basis point increase in the gross profit margin. The increase in the gross
profit margin was driven by several factors, including mix benefits from strong
IDEXX VetLab consumable and lower CAG Diagnostics instrument revenue, the net
benefit of price increases, benefits from productivity gains and cost controls
in our reference laboratories, as well as the benefit from the OPTI COVID-19 PCR
test. These favorable factors were offset by the incremental investments in
reference laboratory capacity and systems, including acquisitions, as well as
business mix impacts from lower Water testing volumes. The impact from foreign
currency movements decreased the gross profit margin by approximately 30 basis
points, including the impact of hedges.
Operating Expenses. Sales and marketing expense increased approximately 2.4%,
excluding the impact of foreign currency, primarily due to increased
personnel-related costs related to our expanded global commercial
infrastructure, partially offset by cost containment efforts implemented in
response to the COVID-19 pandemic, including temporary compensation and benefit
reductions. General and administrative expense increased approximately 5.5%,
excluding the impact of foreign currency, primarily due to increases in bad debt
reserves and facilities costs, partially offset by temporary cost containment
efforts and the benefits of earlier cost control initiatives across our business
segments. Research and development expense increased 1.9% excluding the impact
of foreign currency, primarily due to higher personnel-related costs, partially
offset by temporary cost containment efforts. The overall change in currency
exchange rates decreased operating expenses by approximately 1%.
49
--------------------------------------------------------------------------------
[[Image Removed: idxx-20200630_g2.jpg]]
The following table presents revenue by product and service category for CAG:
?
For the Six Months Ended June 30,
Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue
(dollars in thousands) 2020 2019 Dollar Change Growth (1) from Currency from Acquisitions Growth (1)
CAG Diagnostics
recurring revenue: $ 998,179 $ 921,222 $ 76,957 8.4 % (1.0 %) 0.8 % 8.5 %
IDEXX VetLab
consumables 384,774 342,370 42,404 12.4 % (1.4 %) - 13.8 %
Rapid assay products 122,088 123,036 (948) (0.8) % (0.6 %) - (0.2) %
Reference laboratory
diagnostic and
consulting services 449,077 416,550 32,527 7.8 % (0.8 %) 1.8 % 6.8 %
CAG diagnostics
services and
accessories 42,240 39,266 2,974 7.6 % (1.4 %) - 9.0 %
CAG Diagnostics
capital - instruments 42,704 60,275 (17,571) (29.2 %) (1.1 %) - (28.0 %)
Veterinary software,
services and
diagnostic imaging
systems 77,213 74,770 2,443 3.3 % (0.3 %) - 3.5 %
Net CAG revenue $ 1,118,096 $ 1,056,267 $ 61,829 5.9 % (1.0 %) 0.7 % 6.1 %
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. Following a period of significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines, we saw a sharp recovery in market demand for CAG diagnostics recurring revenue globally across modalities, including high levels of growth in testing volumes in June, supported by pent-up demand as social distancing procedures and guidelines began to be lifted. The increase inCAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, and to a lesser extent, higher realized prices. The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes for our Catalyst consumables and, to a lesser extent, Procyte Dx consumables. These increases were supported by an expansion of our instrument installed base, growth in testing by new and existing customers, our expanded menu of available tests, and to a lesser extent, benefits from higher average unit sales prices. The decrease in rapid assay revenue resulted primarily from lower SNAP® 4Dx Plus sales volumes, as a result of the impact of COVID-19, partially offset by higher realized prices. Rapid assay testing is relatively more dependent on wellness visits, which were impacted more severely by COVID-19 stay-at-home policies and procedures due to typical seasonality of wellness testing that occurs in the second quarter, however we saw a sharp rebound in rapid assay testing volumes in June, consistent with the broader U.S. market recovery for wellness testing. The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes, most prominently in theU.S. , as well as higher average unit sales prices. Modest growth internationally was driven by strong growth inAustralia ,Japan , andGermany , offset by the extended COVID-19 related impact in theUnited Kingdom ,France , andCanada . The increase inCAG Diagnostics services and accessories revenue was primarily a result of the increase in our active installed base of instruments.CAG Diagnostics Capital - Instruments Revenue. The decrease in instrument revenue was primarily due to the impacts of the COVID-19 pandemic, including restrictions on our sales professionals' access to clinics and certain customers deferring new purchase decisions. 50 --------------------------------------------------------------------------------Veterinary Software , Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software and hardware upgrades, subscription-based services, as well as higher diagnostic imaging services as a result of the increase in our active installed base, and to a lesser extent, higher realized prices on these service offerings. These factors were partially offset by impacts of the COVID-19 pandemic on new diagnostic imaging placements, including restrictions on our sales professionals' access to clinics and certain customers deferring purchase decisions, which began to occur in mid-March of 2020.
The following table presents the CAG segment results of operations:
For the Six Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 1,118,096 $ 1,056,267 $ 61,829 5.9 %
Cost of revenue 474,286 457,302 16,984 3.7 %
Gross profit 643,810 57.6 % 598,965 56.7 % 44,845 7.5 %
Operating Expenses:
Sales and marketing 192,098 17.2 % 188,117 17.8 % 3,981 2.1 %
General and administrative 109,136 9.8 % 103,266 9.8 % 5,870 5.7 %
Research and development 55,948 5.0 % 54,673 5.2 % 1,275 2.3 %
Total operating expenses 357,182 31.9 % 346,056 32.8 % 11,126 3.2 %
Income from operations $ 286,628 25.6 % $ 252,909 23.9 % $ 33,719 13.3 %
Gross Profit. Gross profit increased primarily due to higher sales volume, as
well a 100 basis point increase in the gross profit margin. The increase in the
gross profit margin was primarily due to mix benefits from higher growth in
IDEXX VetLab consumable revenues and lower CAD Diagnostics instrument revenues,
as well as the net benefit of price increases in our CAG Diagnostics recurring
revenue portfolio, partially offset by incremental investments in reference
laboratory capacity and systems, including acquisitions, and software services
field resources. The impact from foreign currency movements decreased the gross
profit margin by approximately 15 basis points, including the impact of hedges.
Operating Expenses. The increase in sales and marketing expense was primarily
due to increased personnel-related costs related to our global commercial
infrastructure, partially offset by cost containment efforts implemented in
response to the COVID-19 pandemic, including temporary compensation and benefit
reductions. The increase in general and administrative expense resulted
primarily from higher personnel-related costs, facility costs, and bad debt
reserves, partially offset by temporary cost containment efforts. The increase
in research and development expense was primarily due to increased
personnel-related costs and higher project costs, partially offset by temporary
cost containment initiatives. The overall change in currency exchange rates
resulted in a decrease in operating expenses of approximately 1%.
51
--------------------------------------------------------------------------------[[Image Removed: idxx-20200630_g3.jpg]]Water
The following table presents the Water segment results of operations:
For the Six Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 62,265 $ 65,074 $ (2,809) (4.3) %
Cost of revenue 17,838 18,066 (228) (1.3 %)
Gross profit 44,427 71.4 % 47,008 72.2 % (2,581) (5.5) %
Operating Expenses:
Sales and marketing 7,773 12.5 % 7,961 12.2 % (188) (2.4 %)
General and administrative 6,689 10.7 % 6,427 9.9 % 262 4.1 %
Research and development 1,825 2.9 % 2,083 3.2 % (258) (12.4) %
Total operating expenses 16,287 26.2 % 16,471 25.3 % (184) (1.1) %
Income from operations $ 28,140 45.2 % $ 30,537 46.9 % $ (2,397) (7.8) %
Revenue. The decrease in revenue was primarily due to the impact of the COVID-19
pandemic, primarily by reductions in our non-compliance testing in the second
quarter of 2020, partially offset by higher sales volumes of our Colilert test
products and related accessories used in coliform and E. coli testing during the
first quarter of 2020, as well as the benefit of price increases. The impact of
currency movements decreased revenue by approximately 3.0%.
Gross Profit. Gross profit decreased due to lower sales volumes, and an 80 basis
point decrease in the gross profit margin, primarily due to a 75 basis point
reduction from foreign currency movements, including the impact of hedges, as
well as higher distribution costs. These reductions in the gross profit margin
were partially offset by the net benefits of price increases and product mix.
Operating Expenses. Overall operating expenses were lower primarily as a result
of cost containment efforts implemented in response to the COVID-19 pandemic,
including temporary compensation and benefit reductions. The decrease in sales
and marketing expense was primarily due to lower personnel-related costs. The
increased in general and administrative expense was primarily due to higher bad
debt reserves, partially offset by temporary cost containment efforts. The
decrease in research and development expense was primarily as a result of
temporary cost containment efforts. The overall change in currency exchange
rates resulted in a decrease in operating expenses of approximately 2.5%.
52
--------------------------------------------------------------------------------[[Image Removed: idxx-20200630_g4.jpg]]Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Six Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 66,398 $ 64,610 $ 1,788 2.8 %
Cost of revenue 25,247 25,882 (635) (2.5 %)
Gross profit 41,151 62.0 % 38,728 59.9 % 2,423 6.3 %
Operating Expenses:
Sales and marketing 9,680 14.6 % 11,188 17.3 % (1,508) (13.5 %)
General and administrative 8,167 12.3 % 8,586 13.3 % (419) (4.9 %)
Research and development 5,392 8.1 % 6,097 9.4 % (705) (11.6) %
Total operating expenses 23,239 35.0 % 25,871 40.0 % (2,632) (10.2 %)
Income from operations $ 17,912 27.0 % $ 12,857 19.9 % $ 5,055 39.3 %
Revenue. The increase in revenue was primarily due to the continued demand for
new diagnostic programs related to African swine fever and improved core swine
testing volumes in China , as well as increased poultry testing. These increases
were offset by decreased herd health screening, which reflects comparisons to a
strong prior year, and lower volumes as the result of the COVID-19 pandemic. The
impact of currency decreased revenue by approximately 4.0%.
Gross Profit. The increase in gross profit was primarily due to higher sales
volumes and a 210 basis point increase in the gross profit margin. The increase
in the gross profit margin is primarily due to favorable product costs from
volume leverage. The impact from foreign currency movements decreased gross
profit margin by approximately 120 basis points, including the impact of hedges.
Operating Expenses. Overall operating expenses were lower primarily as a result
of cost containment efforts implemented in response to the COVID-19 pandemic,
including temporary compensation and benefit reductions. The reductions in sales
and marketing and general and administrative expenses were primarily travel and
personnel-related, partially offset by higher bad debt reserves. The decrease in
research and development expense was primarily personnel-related costs,
partially offset by third-party services. The overall change in currency
exchange rates resulted in a decrease in operating expenses of approximately 2%.
53
--------------------------------------------------------------------------------Other
The following table presents the Other results of operations: ?
For the Six Months Ended June 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 17,169 $ 10,208 $ 6,961 68.2 %
Cost of revenue 7,625 5,459 2,166 39.7 %
Gross profit 9,544 55.6 % 4,749 46.5 % 4,795 101.0 %
Operating Expenses:
Sales and marketing 773 4.5 % 682 6.7 % 91 13.3 %
General and administrative 2,088 12.2 % 2,037 20.0 % 51 2.5 %
Research and development 1,790 10.4 % 920 9.0 % 870 94.6 %
Total operating expenses 4,651 27.1 % 3,639 35.6 % 1,012 27.8 %
Income from operations $ 4,893 28.5 % $ 1,110 10.9 % $ 3,783 340.8 %
Revenue. The increase in revenue was primarily due to our new OPTI COVID-19 PCR
test for humans, which was introduced in the second quarter of 2020. The future
demand for this product is difficult to project given the uncertain nature of
the COVID-19 pandemic, including short-term project commitments, available PCR
testing capacity and alternative suppliers. The impact of currency movements on
revenue was immaterial.
Gross Profit. The increase in gross profit was due to the new OPTI COVID-19 PCR
test for humans. The gross profit margin decreased 910 basis points primarily
due to higher OPTI Medical product costs and lower royalties associated with our
former pharmaceutical product line. These factors were mostly offset by the
favorable product mix impact of our new OPTI COVID-19 PCR testing and the net
benefit of price increases. The overall change in currency exchange rates had an
immaterial impact on gross profit.
Operating Expenses. The increase in sales and marketing expense was primarily
due to higher personnel-related costs related to new positions associated with
our new OPTI COVID-19 PCR test. The increase in general and administrative
expense was primarily due to higher foreign exchange losses on settlements of
foreign currency denominated transactions for all operating segments, which are
reported within our Other segment, partially offset by cost control initiatives.
The increase in research and development cost was primarily due to higher
personnel-related and project costs associated with the development of the OPTI
COVID-19 PCR test.
Non-Operating Items
Interest Expense. Interest expense was $17.2 million for the six months ended
June 30, 2020 , as compared to $16.6 million for the same period in the prior
year. The increase in interest expense was the result of higher average debt
levels, offset by interest rates.
Provision for Income Taxes. Our effective income tax rate was 18.6% for the six
months ended June 30, 2020 , as compared to 18.7% for the six months ended June
30, 2019 . The decrease in our effective tax rate was primarily driven by
regional earnings mix, with relatively higher statutory earnings subject to
lower international tax rates than domestic tax rates.
54
--------------------------------------------------------------------------------Liquidity and Capital Resources
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 Credit Facility. AtJune 30, 2020 , we had$105.3 million of cash and cash equivalents, as compared to$90.3 million onDecember 31, 2019 . Working capital, including our Credit Facility, totaled$239.0 million atJune 30, 2020 , as compared to negative$45.7 million atDecember 31, 2019 . Additionally, atJune 30, 2020 , we had remaining borrowing availability of$877.0 million under our$1 billion Credit Facility, which was expanded inApril 2020 , from$850 million , and extended through 2023. Also inApril 2020 , we further enhanced our liquidity and financial flexibility by issuing$200 million in 10-year, 2.50% fixed-rate senior notes. We believe that, if necessary, we could obtain additional borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in theU.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in theU.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings. We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside theU.S. The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries:? Cash, cash equivalents and marketable securities (dollars in thousands) June 30, 2020 December 31, 2019 U.S.$ 3,892 $ 1,135 Foreign 101,401 89,191 Total$ 105,293 $ 90,326
Total cash, cash equivalents and marketable securities held in
$ 9,047 $ 6,469
Percentage of total cash, cash equivalents and marketable
securities held in
8.6 % 7.2 %
Of the
The following table presents additional key information concerning working
capital:
?
For the Three Months Ended
June 30, December 31, September 30, June 30,
2020 March 31, 2020 2019 2019 2019
Days sales outstanding(1) 44.4 41.5 40.5 41.8 41.7
Inventory turns(2) 1.6 1.9 2.2 2.0 2.1
(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 average inventory balances
at the beginning and end of each quarter.
55
--------------------------------------------------------------------------------Sources and Uses of Cash
The following table presents cash provided (used): ?
For the Six Months Ended June 30,
(in thousands) 2020 2019 Dollar Change
Net cash provided by operating activities $ 236,013 $ 171,480 $ 64,533
Net cash used by investing activities (74,226) (72,291) (1,935)
Net cash provided (used) by financing activities (144,630) (112,269) (32,361)
Net effect of changes in exchange rates on cash (2,190) 131 (2,321)
Net change in cash and cash equivalents $ 14,967 Operating Activities. The increase in cash provided by operating activities of$64.5 million was driven primarily by changes in other assets and liabilities and an increase in net income. The following table presents cash flows from changes in operating assets and liabilities: ? For the Six Months Ended June 30, (in thousands) 2020 2019 Dollar Change Accounts receivable$ (57,277) $ (37,699) $ (19,578) Inventories (29,254) (22,911) (6,343) Accounts payable (6,729) (4,030) (2,699) Deferred revenue (6,695) (6,849) 154 Other assets and liabilities 4,540 (45,822) 50,362 Total change in cash due to changes in operating assets and liabilities$ (95,415) $ (117,311) $ 21,896 Cash used due to changes in operating assets and liabilities during the six months endedJune 30, 2020 , as compared to the same period in the prior year, decreased approximately$21.9 million and was primarily due to lower cash income taxes paid, asU.S. Federal and state payments are delayed untilJuly 15, 2020 , under COVID-19 stimulus guidance, and timing of employee payroll as compared to prior year, partially offset by increases in accounts receivable from customers related to late quarter revenue growth, as well as increases in instrument inventory, due to deferred customer purchase decisions, and new human COVID-19 testing inventory. 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 driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned. Investing Activities. Cash used by investing activities was$74.2 million for the six months endedJune 30, 2020 , as compared to$72.3 million for the same period in the prior year and is primarily due to increased capital spending related to the purchase of one of our reference laboratory facilities that was previously leased, partially offset by the completion of our major facilities projects. Financing Activities. Cash used by financing activities was$144.6 million for the six months endedJune 30, 2020 , as compared to cash used by financing activities of$112.3 million for the same period in the prior year. The increase in cash used by financing activities was due to an increase in repurchases of our common stock and an increase in the amount repaid on our Credit Facility, partially offset by the issuance of senior notes in the current year. Cash used to repurchase shares of our common stock increased$107.8 million during the six months endedJune 30, 2020 . We believe that the repurchase of our common stock is a favorable means of returning value to our stockholders, 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. In light of the uncertainty of the duration and magnitude of the COVID-19 pandemic and its impacts, we have suspended share repurchase activity. See Note 12 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our share repurchases. 56 -------------------------------------------------------------------------------- Net repayment activity under our Credit Facility resulted in cash used of$167.7 million during the six months endedJune 30, 2020 , as compared to$147.5 million of cash used in the same period of the prior year. AtJune 30, 2020 , we had$121.6 million outstanding under the Credit Facility. The general availability of funds under our Credit Facility was further reduced by$1.4 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 our 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 ("ERISA"), the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default.
See Note 11 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our debt issuance and Credit Facility.
The Credit Agreement 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 sanctions laws and regulations. The financial covenant is a consolidated leverage ratio test. 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 Agreements, 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 ERISA, the failure to pay specified indebtedness and cross-acceleration to specified indebtedness. Effect of Currency Translation on Cash. The net effect of changes in foreign currency exchange rates is related to changes in exchange rates between theU.S. dollar and the functional currencies of our foreign subsidiaries. These changes will fluctuate for each period presented as the value of theU.S. dollar relative to the value of the foreign currencies changes. A currency's value depends on many factors, including interest rates and the country's debt levels and strength of economy.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities, except for letters of credit and third-party guarantees.
Financial Covenant. 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,
non-recurring transaction expenses incurred in connection with acquisitions,
share-based compensation expense, and certain other non-cash losses and charges
("Adjusted EBITDA") not to exceed 3.5-to-1. At June 30, 2020 , we were in
compliance with such covenant. The following details our consolidated leverage
ratio calculation:
?
57
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(in thousands) Twelve months ended
Trailing 12 Months Adjusted EBITDA:June 30, 2020
Net income attributable to stockholders (as reported) $ 460,100 Interest expense
31,670
Provision for income taxes 101,665
Depreciation and amortization 91,821
Acquisition-related expense 1,910
Share-based compensation expense 41,127
Extraordinary and other non-recurring non-cash charges 1,353
Adjusted EBITDA $ 729,646
(in thousands)
Debt to Adjusted EBITDA Ratio: June 30, 2020
Line of credit $ 121,596
Long-term debt 899,562
Total debt 1,021,158
Acquisition-related contingent consideration payable 2,000
Financing leases 65
Deferred financing costs 705
Gross debt $ 1,023,928
Gross debt to Adjusted EBITDA ratio 1.40
Less: Cash and cash equivalents $ (105,293)
Net debt $ 918,635 Net debt to Adjusted EBITDA ratio 1.26 Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which should be considered in addition to, and not as a replacement for, financial measures presented according toU.S. GAAP. Management believes that 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
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