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. 35 --------------------------------------------------------------------------------
Effects of Certain Factors and Trends on Results of Operations
Market Trends and COVID-19 Pandemic Impact 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 a sharp rebound in clinical visit activity which accelerated through the second quarter of 2020, and continued in the third 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 and sustained at 6% in the third quarter of 2020, supported by 11% growth in wellness visits and 3% growth in non-wellness visits during the third quarter of 2020. Companion animal market improvement trends globally have supported a strong recovery in demand for CAG diagnostic products and services.Global CAG Diagnostics recurring revenues declined approximately 16% inApril 2020 , followed by increases of approximately 8% inMay 2020 , 30% inJune 2020 , 24% inJuly 2020 , and approximately 20% for the remainder of the third quarter of 2020. CAG growth dynamics remained healthy across regions in the third quarter of 2020. 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. We have also seen impacts from the COVID-19 pandemic 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, which has since had a solid recovery. 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.
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. These products and services are included within our OPTI Medical business in our Other segment and are the primary driver of growth in that segment. 36
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Currency and Other Items
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.
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. 37 -------------------------------------------------------------------------------- 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 $ (428) $ (19) $ (24) $ (10) $ 481
Gross profit 428 19 24 10 (481)
Operating Expenses:
Sales and marketing $ 211 $ 9 $ 12 $ - $ (232) General and administrative 2,472 105 131
1,058 (3,766)
Research and development 4,544 20 25 - (4,589)
Total operating expenses
$ 1,058 $ (8,587) Income from operations$ (6,799) $ (115) $ (144) $ (1,048) $ 8,106
For the nine months ended
(in thousands)
CAG Water LPD Other Unallocated
Cost of sales $ (266) $ (12) $ (15) $ (6) $ 299
Gross profit 266 12 15 6 (299)
Operating Expenses:
Sales and marketing $ 322 $ 14 $ 18 $ - $ (354)
General and administrative 1,377 (114) (122) 2,222 (3,363)
Research and development 12,062 39 49 - (12,150)
Total operating expenses
$ 2,222 $ (15,867) Income from operations$ (13,495) $ 73 $ 70 $ (2,216) $ 15,568 38
-------------------------------------------------------------------------------- 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) % (0.1) % (0.2) %
Gross profit 0.1 % 0.1 % 0.1 % 0.2 %
Operating Expenses:
Sales and marketing - % - % - % - %
General and administrative 0.5 % 0.3 % 0.4 % 17.9 %
Research and development 0.9 % 0.1 % 0.1 % - %
Total operating expenses 1.4 % 0.4 % 0.5 % 17.9 %
Income from operations (1.3) % (0.3) % (0.5) % (17.8) %
For the nine months ended
CAG Water LPD Other
Cost of sales - % - % - % - %
Gross profit - % - % - % - %
Operating Expenses:
Sales and marketing - % - % - % - %
General and administrative 0.1 % (0.1) % (0.1) % 13.8 %
Research and development 0.8 % - % 0.1 % - %
Total operating expenses 0.9 % (0.1) % (0.1) % 13.8 %
Income from operations (0.8) % 0.1 % 0.1 % (13.8) %
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 nine months endedSeptember 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 39 --------------------------------------------------------------------------------
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. No triggering events have occurred since the date of our last annual impairment test. 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. 40 --------------------------------------------------------------------------------
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 nine months endedSeptember 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.
Environmental, Social and Governance
During the third quarter of 2020, we established a charitable donor-advised
fund, the
Comparison to Prior Periods
Our fiscal quarter ended onSeptember 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. 41 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
Total Company . The following table presents total Company revenue by operating segment: For the Three Months Ended September 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$ 638,017 $ 533,130 $ 104,887 19.7 % 1.0 % 0.7 % 18.0 % United States 428,105 357,810 70,295 19.6 % - 1.1 % 18.6 % International 209,912 175,320 34,592 19.7 % 2.9 % - 16.8 % Water 33,272 34,906 (1,634) (4.7 %) (0.7 %) - (4.0 %) United States 16,634 16,794 (160) (1.0 %) - - (1.0 %) International 16,638 18,112 (1,474) (8.1 %) (1.2 %) - (6.9 %) LPD 36,971 31,370 5,601 17.8 % 0.3 % - 17.5 % United States 3,784 3,649 135 3.7 % - - 3.7 % International 33,187 27,721 5,466 19.7 % 0.4 % - 19.3 % Other 13,529 5,897 7,632 129.5 % - - 129.5 %Total Company $ 721,789 $ 605,303 $ 116,486 19.2 % 0.8 % 0.6 % 17.8 % United States 454,836 380,184 74,652 19.6 % - 1.0 % 18.6 % International 266,953 225,119 41,834 18.6 % 2.2 % - 16.4 %
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in bothU.S. and international organic revenues was driven by strong volume gains in CAG Diagnostic recurring revenue, reflecting a continued recovery in market demand for companion animal diagnostics globally, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. In our LPD business, we continue to see strong demand for swine testing inChina . Lower revenues in our Water business are primarily the result of the COVID-19 pandemic with lower demand for non-compliance testing. 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 0.8%, while acquisitions increased revenue by 0.6%. 42 --------------------------------------------------------------------------------
The following table presents total Company results of operations:
For the Three Months Ended September 30 , Change
Total Company - Results of Operations Percent of Percent of (dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage Revenues$ 721,789 $ 605,303 $ 116,486 19.2 % Cost of revenue 299,183 260,353 38,830 14.9 % Gross profit 422,606 58.5 % 344,950 57.0 % 77,656 22.5 % Operating Expenses: Sales and marketing 108,202 15.0 % 104,551 17.3 % 3,651 3.5 % General and administrative 105,031 14.6 % 66,337 11.0 % 38,694 58.3 % Research and development 37,517 5.2 % 34,260 5.7 % 3,257 9.5 % Total operating expenses 250,750 34.7 % 205,148 33.9 % 45,602 22.2 % Income from operations$ 171,856 23.8 %$ 139,802 23.1 %$ 32,054 22.9 % Gross Profit. Gross profit increased due to higher sales volumes and a 150 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by several factors including productivity in our reference laboratories, the mix benefits from strong IDEXX VetLab consumable and Rapid Assay products, and lowerCAG Diagnostics instrument revenue, the net benefit of price increases, as well as the benefit from OPTI COVID-19 PCR testing. The impact from foreign currency movements decreased the gross profit margin by approximately 45 basis points, including the impact of hedge losses in the current year compared to hedge gains in the prior year. Operating Expenses. The increase in sales and marketing expense was primarily due to higher personnel-related costs, partially offset by restricted travel and overall prudent expense management. The increase in general and administrative expense was primarily due to an accrual related to an ongoing litigation matter and a charitable donation, as well as increases in personnel and facilities costs. The increase in research and development expense was primarily due to increased project costs. The overall change in currency exchange rates resulted in a decrease in operating expenses by less than 1%. 43 --------------------------------------------------------------------------------
[[Image Removed: idxx-20200930_g2.jpg]]
The following table presents revenue by product and service category for CAG:
?
?
For the Three Months Ended
September 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: $ 567,416 $ 460,974 $ 106,442 23.1 % 1.0 % 0.8 % 21.3 %
IDEXX VetLab
consumables 218,605 177,276 41,329 23.3 % 1.2 % - 22.1 %
Rapid assay products 70,593 58,930 11,663 19.8 % - % - 19.8 %
Reference laboratory
diagnostic and
consulting services 254,223 204,919 49,304 24.1 % 1.2 % 1.8 % 21.1 %
CAG diagnostics
services and
accessories 23,995 19,849 4,146 20.9 % 1.0 % - 19.9 %
CAG Diagnostics
capital - instruments 29,336 32,608 (3,272) (10.0 %) 1.2 % - (11.2 %)
Veterinary software,
services and
diagnostic imaging
systems 41,265 39,548 1,717 4.3 % 0.2 % - 4.2 %
Net CAG revenue $ 638,017 $ 533,130 $ 104,887 19.7 % 1.0 % 0.7 % 18.0 %
(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 beginning in June and sustaining through the third quarter of 2020, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. The increase inCAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables, reference laboratory diagnostic services, and rapid assay products, 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 increase in rapid assay revenue resulted primarily from higher SNAP® 4Dx Plus sales volumes and higher realized prices. We continued to see a sharp rebound in rapid assay testing volumes, 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 higher testing volumes in all major regions, most prominently in theU.S. , as well as higher average unit sales prices. Acquisitions increased revenue by 1.8%.
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. 44 --------------------------------------------------------------------------------Veterinary Software , Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to 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. These increases were partially offset by 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.
The following table presents the CAG segment results of operations:
For the Three Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 638,017 $ 533,130 $ 104,887 19.7 %
Cost of revenues 269,720 234,613 35,107 15.0 %
Gross profit 368,297 57.7 % 298,517 56.0 % 69,780 23.4 %
Operating Expenses:
Sales and marketing 98,995 15.5 % 94,445 17.7 % 4,550 4.8 %
General and administrative 97,258 15.2 % 56,896 10.7 % 40,362 70.9 %
Research and development 32,610 5.1 % 29,485 5.5 % 3,125 10.6 %
Total operating expenses 228,863 35.9 % 180,826 33.9 % 48,037 26.6 %
Income from operations $ 139,434 21.9 % $ 117,691 22.1 % $ 21,743 18.5 %
Gross Profit. Gross profit increased primarily due to higher sales volume, as
well as a 170 basis point increase in the gross profit margin. The increase in
the gross profit margin was driven by productivity in our reference laboratories
and the mix benefits from high growth in IDEXX VetLab consumable revenues and
Rapid Assay products, and lower CAG Diagnostics instrument revenue, as well as
the net benefit of price increases in our CAG Diagnostics recurring revenue
portfolio. These favorable factors were partially offset by incremental
investments in reference laboratory capacity and systems, including
acquisitions, a write-down of excess inventory related to product transition,
and a software impairment charge. The impact from foreign currency movements
decreased the gross profit margin by approximately 30 basis points, including
the impact of hedge losses in the current year compared to hedge gains in the
prior year.
Operating Expenses. Sales and marketing expense increased primarily due to
higher personnel-related costs, partially offset by restricted travel and
overall prudent expense management. General and administrative expense increased
primarily due to an accrual related to an ongoing litigation matter and a
charitable donation, as well as increases in personnel-related and facilities
costs. Research and development expense increased primarily due to increased
project costs, including our new ProCyte One analyzer. The overall change in
currency exchange rates increased operating expenses by approximately 1%.
45
--------------------------------------------------------------------------------[[Image Removed: idxx-20200930_g3.jpg]]Water
The following table presents the Water segment results of operations:
For the Three Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 33,272 $ 34,906 $ (1,634) (4.7) %
Cost of revenue 10,208 9,517 691 7.3 %
Gross profit 23,064 69.3 % 25,389 72.7 % (2,325) (9.2) %
Operating Expenses:
Sales and marketing 3,470 10.4 % 4,021 11.5 % (551) (13.7 %)
General and administrative 3,329 10.0 % 3,395 9.7 % (66) (1.9) %
Research and development 1,022 3.1 % 1,043 3.0 % (21) (2.0) %
Total operating expenses 7,821 23.5 % 8,459 24.2 % (638) (7.5) %
Income from operations $ 15,243 45.8 % $ 16,930 48.5 % $ (1,687) (10.0) %
Revenue. The decrease in revenue was primarily due to the impact of the COVID-19
pandemic, primarily due to lower non-compliance testing, which was partially
offset by the benefit of price increases. The impact of currency movements
decreased revenue by approximately 0.7%.
Gross Profit. Gross profit decreased due to lower sales volumes, and a 340 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 hedge losses in the current year compared to hedge gains in the prior year.
The remaining decrease in the gross profit margin was primarily due to higher
distribution and freight costs, as well as higher product costs and product mix,
partially offset by the net benefit of price increases.
Operating Expenses. Overall operating expenses were lower primarily as a result
of travel restrictions and prudent expense management implemented in response to
the COVID-19 pandemic. The overall change in currency exchange rates resulted in
a decrease in operating expenses of approximately 1%.
46
--------------------------------------------------------------------------------[[Image Removed: idxx-20200930_g4.jpg]]Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Three Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 36,971 $ 31,370 $ 5,601 17.9 %
Cost of revenue 14,203 13,201 1,002 7.6 %
Gross profit 22,768 61.6 % 18,169 57.9 % 4,599 25.3 %
Operating Expenses:
Sales and marketing 5,245 14.2 % 5,728 18.3 % (483) (8.4 %)
General and administrative 4,299 11.6 % 4,305 13.7 % (6) (0.1 %)
Research and development 2,719 7.4 % 3,286 10.5 % (567) (17.3 %)
Total operating expenses 12,263 33.2 % 13,319 42.5 % (1,056) (7.9 %)
Income from operations $ 10,505 28.4 % $ 4,850 15.5 % $ 5,655 116.6 %
Revenue. The increase in revenue was primarily due to the continued demand for
swine testing in China , as well as increased poultry diagnostic testing. These
increases were partially offset by the impact of lower dairy testing volumes and
herd health screening.
Gross Profit. The increase in gross profit was primarily due to higher sales
volume and a 370 basis point increase in the gross profit margin. The gross
profit margin increased primarily as a result of favorable product costs from
volume leverage and favorable product mix from high levels of swine testing, and
to a lesser extent, price increases, partially offset by lower herd health
screening. Foreign currency movements, including the impact of hedge losses in
the current year compared to hedge gains in the prior year, which decreased the
gross profit margin by approximately 210 basis points.
Operating Expenses. Overall operating expenses were lower primarily as a result
of prudent expense management implemented in response to the COVID-19 pandemic,
as well as travel restrictions. The reduction in sales and marketing expense was
primarily personnel-related costs and travel expenses. The decrease in research
and development expense was primarily due to leveraging LPD personnel to support
our human COVID testing initiative and lower project costs. The overall change
in currency exchange rates resulted in an increase in operating expenses of less
than 1%.
47
--------------------------------------------------------------------------------Other
The following table presents the Other results of operations: ?
For the Three Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 13,529 $ 5,897 $ 7,632 129.4 %
Cost of revenue 5,052 3,022 2,030 67.2 %
Gross profit 8,477 62.7 % 2,875 48.8 % 5,602 194.9 %
Operating Expenses:
Sales and marketing 492 3.6 % 357 6.1 % 135 37.8 %
General and administrative 145 1.1 % 1,741 29.5 % (1,596) (91.7 %)
Research and development 1,166 8.6 % 446 7.6 % 720 161.4 %
Total operating expenses 1,803 13.3 % 2,544 43.1 % (741) (29.1 %)
Income from operations $ 6,674 49.3 % $ 331 5.6 % $ 6,343 1,916.3 %
Revenue. The increase in revenue was primarily due to our new OPTI COVID-19 PCR
testing products and services. 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 testing products and services and a 1,390 basis point
increase in the gross profit margin, primarily due to favorable product mix from
OPTI COVID-19 PCR testing and higher royalties associated with our former
pharmaceutical product line, partially offset by higher product costs in our
other OPTI products. 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 testing initiative. 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. The increase in research and development cost was primarily due
to higher personnel-related and project costs.
Non-Operating Items
Interest Expense. Interest expense was$8.1 million for the three months endedSeptember 30, 2020 , as compared to$7.1 million for the same period in the prior year. The increase in interest expense was the result of higher average debt levels, as well as lower capitalized interest related to the expansion of ourWestbrook, Maine headquarters and relocation of our core reference laboratory inGermany , partially offset by slightly lower interest rates. Provision for Income Taxes. Our effective income tax rate was 10.8% for the three months endedSeptember 30, 2020 , as compared to 18.0% for the three months endedSeptember 30, 2019 . The decrease in our effective tax rate was primarily driven by higher tax benefits from share-based compensation. 48 --------------------------------------------------------------------------------
Results of Operations
Nine Months Ended
Total Company . The following table presents total Company revenue by operating segment: For the Nine Months Ended September 30, Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue (dollars in thousands) 2020 2019 Dollar Change Growth (1) from Currency from Acquisitions Growth (1) CAG$ 1,756,113 $ 1,589,397 $ 166,716 10.5 % (0.4 %) 0.7 % 10.1 % United States 1,188,493 1,062,715 125,778 11.8 % - 1.1 % 10.8 % International 567,620 526,682 40,938 7.8 % (1.1 %) - 8.9 % Water 95,537 99,980 (4,443) (4.4 %) (2.1 %) - (2.3 %) United States 47,510 48,157 (647) (1.3 %) - - (1.3 %) International 48,027 51,823 (3,796) (7.3 %) (4.1 %) - (3.2 %) LPD 103,369 95,980 7,389 7.7 % (2.7 %) - 10.4 % United States 10,803 10,221 582 5.7 % - - 5.7 % International 92,566 85,759 6,807 7.9 % (3.0 %) - 10.9 % Other 30,698 16,105 14,593 90.6 % - - 90.6 %Total Company $ 1,985,717 $ 1,801,462 $ 184,255 10.2 % (0.6 %) 0.6 % 10.2 % United States 1,257,617 1,127,347 130,270 11.6 % - 1.0 % 10.6 % International 728,100 674,115 53,985 8.0 % (1.6 %) - 9.6 %
(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 companion animal diagnostics globally, including high levels of growth in testing volumes beginning inJune 2020 through the third quarter, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. In our LPD business, the increased demand for swine testing inChina was partially offset by lower herd health screening revenue. Lower revenues in our Water business are primarily the result of the COVID-19 pandemic, due to lower demand for non-compliance testing in the second and third quarters of 2020. The impact of currency movements decreased total revenue by 0.6%, while acquisitions increased revenue by 0.6%. 49 --------------------------------------------------------------------------------
The following table presents total Company results of operations:
For the Nine Months Ended September 30 , Change
Total Company - Results of Operations Percent of Percent of (dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage Revenues$ 1,985,717 $ 1,801,462 $ 184,255 10.2 % Cost of revenue 824,179 767,062 57,117 7.4 % Gross profit 1,161,538 58.5 % 1,034,400 57.4 % 127,138 12.3 % Operating Expenses: Sales and marketing 318,526 16.0 % 312,499 17.3 % 6,027 1.9 % General and administrative 231,111 11.6 % 186,653 10.4 % 44,458 23.8 % Research and development 102,472 5.2 % 98,033 5.4 % 4,439 4.5 % Total operating expenses 652,109 32.8 % 597,185 33.2 % 54,924 9.2 % Income from operations$ 509,429 25.7 %$ 437,215 24.3 %$ 72,214 16.5 % Gross Profit. Gross profit increased due to higher sales volumes, as well as a 110 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by several factors, including productivity in our reference laboratories, the mix benefits from strong IDEXX VetLab consumable and lowerCAG Diagnostics instrument revenue, the net benefit of price increases, as well as the benefit from OPTI COVID-19 PCR testing. These favorable factors were offset by the incremental investments in reference laboratory capacity and systems, including acquisitions. The impact from foreign currency movements decreased the gross profit margin by approximately 30 basis points, including the impact of lower hedge gains in the current year compared to higher hedge gains in the prior year. Operating Expenses. The increase in sales and marketing expense was 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 and travel restrictions. The increase in general and administrative expense was primarily due to an accrual related to an ongoing litigation matter and a charitable donation, as well as increases in bad debt reserves and facilities costs, partially offset by temporary cost containment efforts and prudent expense management across our business segments. The increase in research and development expense was 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%. 50 --------------------------------------------------------------------------------
[[Image Removed: idxx-20200930_g2.jpg]]
The following table presents revenue by product and service category for CAG:
?
For the For the Nine Months Ended
September 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: $ 1,565,595 $ 1,382,196 $ 183,399 13.3 % (0.4 %) 0.8 % 12.8 %
IDEXX VetLab
consumables 603,379 519,646 83,733 16.1 % (0.6 %) - 16.7 %
Rapid assay products 192,681 181,966 10,715 5.9 % (0.4 %) - 6.3 %
Reference laboratory
diagnostic and
consulting services 703,300 621,469 81,831 13.2 % (0.2 %) 1.8 % 11.5 %
CAG diagnostics
services and
accessories 66,235 59,115 7,120 12.0 % (0.6 %) - 12.7 %
CAG Diagnostics
capital - instruments 72,040 92,883 (20,843) (22.4 %) (0.4 %) - (22.0 %)
Veterinary software,
services and
diagnostic imaging
systems 118,478 114,318 4,160 3.6 % (0.1 %) - 3.8 %
Net CAG revenue $ 1,756,113 $ 1,589,397 $ 166,716 10.5 % (0.4 %) 0.7 % 10.1 %
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. We had significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines. We then saw a sharp recovery in market demand for CAG diagnostics recurring revenues globally across modalities, including high levels of growth in testing volumes beginning in June and sustaining through the third quarter of 2020, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. 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 increase in rapid assay revenue resulted primarily from higher SNAP® 4Dx Plus sales volumes, as well as 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, and continued during the third quarter of 2020, 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. Solid growth internationally was driven by strong growth inCanada andAsia Pacific . 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. 51 --------------------------------------------------------------------------------Veterinary Software , Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software and diagnostic imaging subscription-based services due to the increases in our active installed base, veterinary software, and hardware upgrades, 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 Nine Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 1,756,113 $ 1,589,397 $ 166,716 10.5 %
Cost of revenue 744,006 691,915 52,091 7.5 %
Gross profit 1,012,107 57.6 % 897,482 56.5 % 114,625 12.8 %
Operating Expenses:
Sales and marketing 291,093 16.6 % 282,562 17.8 % 8,531 3.0 %
General and administrative 206,394 11.8 % 160,162 10.1 % 46,232 28.9 %
Research and development 88,558 5.0 % 84,158 5.3 % 4,400 5.2 %
Total operating expenses 586,045 33.4 % 526,882 33.1 % 59,163 11.2 %
Income from operations $ 426,062 24.3 % $ 370,600 23.3 % $ 55,462 15.0 %
Gross Profit. Gross profit increased primarily due to higher sales volume, as
well a 110 basis point increase in the gross profit margin. The increase in the
gross profit margin was primarily due to productivity gains in our reference
laboratories and the mix benefits from higher growth in IDEXX VetLab consumable
revenues and lower CAG Diagnostics instrument revenues, as well as the net
benefit of price increases in our CAG Diagnostics recurring revenue portfolio.
These favorable factors were partially offset by incremental investments in
reference laboratory capacity and systems, including acquisitions. The impact
from foreign currency movements decreased the gross profit margin by
approximately 20 basis points, including the impact of lower hedge gains in the
current year compared to higher hedge gains in the prior year.
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 and travel restrictions. The increase in general and administrative
expense was primarily due to an accrual related to an ongoing litigation matter
and a charitable donation, as well as 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 project and personnel-related costs, partially offset by temporary
cost containment initiatives. The overall change in currency exchange rates
resulted in a decrease in operating expenses by less than 1%.
52
--------------------------------------------------------------------------------[[Image Removed: idxx-20200930_g3.jpg]]Water
The following table presents the Water segment results of operations:
For the Nine Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 95,537 $ 99,980 $ (4,443) (4.4) %
Cost of revenue 28,046 27,583 463 1.7 %
Gross profit 67,491 70.6 % 72,397 72.4 % (4,906) (6.8) %
Operating Expenses:
Sales and marketing 11,243 11.8 % 11,982 12.0 % (739) (6.2 %)
General and administrative 10,018 10.5 % 9,822 9.8 % 196 2.0 %
Research and development 2,847 3.0 % 3,126 3.1 % (279) (8.9) %
Total operating expenses 24,108 25.2 % 24,930 24.9 % (822) (3.3) %
Income from operations $ 43,383 45.4 % $ 47,467 47.5 % $ (4,084) (8.6) %
Revenue. The decrease in revenue was primarily due to the impact of the COVID-19
pandemic, primarily from reductions in our non-compliance testing in the second
and third quarters 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
2.1%.
Gross Profit. Gross profit decreased due to lower sales volumes, and a 180 basis
point decrease in the gross profit margin, primarily due to a 110 basis point
reduction from foreign currency movements, including the impact of lower hedge
gains in the current year compared to the prior year, as well as higher
distribution and freight costs and higher product costs. These reductions in the
gross profit margin were partially offset by the net benefits of price
increases.
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 and travel restrictions.
The overall change in currency exchange rates resulted in a decrease in
operating expenses of approximately 2%.
53
--------------------------------------------------------------------------------[[Image Removed: idxx-20200930_g4.jpg]]Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Nine Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 103,369 $ 95,980 $ 7,389 7.7 %
Cost of revenue 39,450 39,083 367 0.9 %
Gross profit 63,919 61.8 % 56,897 59.3 % 7,022 12.3 %
Operating Expenses:
Sales and marketing 14,925 14.4 % 16,916 17.6 % (1,991) (11.8 %)
General and administrative 12,466 12.1 % 12,891 13.4 % (425) (3.3 %)
Research and development 8,111 7.8 % 9,383 9.8 % (1,272) (13.6) %
Total operating expenses 35,502 34.3 % 39,190 40.8 % (3,688) (9.4 %)
Income from operations $ 28,417 27.5 % $ 17,707 18.4 % $ 10,710 60.5 %
Revenue. Revenue increased primarily due to the continued demand for swine
testing in China , as well as increased poultry, bovine disease, and pregnancy
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 unfavorable impact of foreign currency movements
decreased revenue by 2.7%.
Gross Profit. The increase in gross profit was primarily due to higher sales
volumes and a 250 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, offset by the impact from foreign currency movements, which
decreased gross profit margin by approximately 150 basis points, including the
impact of lower hedge gains in the current year compared to higher hedge gains
in the prior year.
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 and travel restrictions.
Sales and marketing and general and administrative expenses decreased primarily
from reduced travel and personnel-related costs, partially offset by higher bad
debt reserves. The decrease in research and development expense was primarily
due to leveraging LPD personnel to support our human COVID testing initiative
and lower project costs, partially offset by third-party services. The overall
change in currency exchange rates resulted in a decrease in operating expenses
of approximately 1%.
54
--------------------------------------------------------------------------------Other
The following table presents the Other results of operations: ?
For the Nine Months Ended September 30, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2020 Revenue 2019 Revenue Amount Percentage
Revenues $ 30,698 $ 16,105 $ 14,593 90.6 %
Cost of revenue 12,677 8,481 4,196 49.5 %
Gross profit 18,021 58.7 % 7,624 47.3 % 10,397 136.4 %
Operating Expenses:
Sales and marketing 1,265 4.1 % 1,039 6.5 % 226 21.8 %
General and administrative 2,233 7.3 % 3,778 23.5 % (1,545) (40.9 %)
Research and development 2,956 9.6 % 1,366 8.5 % 1,590 116.4 %
Total operating expenses 6,454 21.0 % 6,183 38.4 % 271 4.4 %
Income from operations $ 11,567 37.7 % $ 1,441 8.9 % $ 10,126 702.7 %
Revenue. The increase in revenue was primarily due to our new OPTI COVID-19 PCR
testing products and services, 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 testing products and services. The gross profit margin
increased 1,140 basis points primarily due to favorable product mix from OPTI
COVID-19 PCR testing and the net benefit of price increases in our core OPTI
products, partially offset by higher product costs in our other OPTI products.
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 testing initiative. The decrease in general and
administrative expense was primarily due to lower foreign exchange losses on
settlements of foreign currency denominated transactions, as compared to the
prior year, for all operating segments, which are reported within our Other
segment, partially offset by an increase in costs associated with our COVID-19
PCR testing . 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 $25.3 million for the nine months ended
September 30, 2020 , as compared to $23.7 million for the same period in the
prior year. The increase in interest expense was the result of higher average
debt levels, as well as lower capitalized interest related to the expansion of
our Westbrook, Maine headquarters and relocation of our core reference
laboratory in Germany , partially, offset by lower interest rates.
Provision for Income Taxes. Our effective income tax rate was 16.0% for the nine
months ended September 30, 2020 , as compared to 18.5% for the nine months ended
September 30, 2019 . The decrease in our effective tax rate was primarily driven
by higher tax benefits from share-based compensation.
55
--------------------------------------------------------------------------------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. AtSeptember 30, 2020 , we had$175.6 million of cash and cash equivalents, as compared to$90.3 million onDecember 31, 2019 . Working capital, including our Credit Facility, totaled$341.8 million atSeptember 30, 2020 , as compared to negative$45.7 million atDecember 31, 2019 . Additionally, atSeptember 30, 2020 , we had remaining borrowing availability of$998.6 million under our$1 billion Credit Facility, which was expanded inApril 2020 , from$850 million , and extended through 2023. The general availability of funds under our Credit Facility is reduced by$1.4 million for outstanding letters of credit. Also inApril 2020 , we further enhanced our liquidity and financial flexibility by issuing$200 million in 10-year, 2.50% fixed-rate senior notes. We believe that, if necessary, we could obtain additional borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in theU.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in theU.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings. We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside theU.S. The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries:? Cash, cash equivalents and marketable securities September 30, (dollars in thousands) 2020 December 31, 2019 U.S.$ 67,893 $ 1,135 Foreign 107,694 89,191 Total$ 175,587 $ 90,326
Total cash, cash equivalents and marketable securities held in
$ 13,474 $ 6,469
Percentage of total cash, cash equivalents and marketable
securities held in
7.7 % 7.2 %
Of the
The following table presents additional key information concerning working
capital:
?
For the Three Months Ended
September 30,
September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 2019
Days sales outstanding(1) 41.5 44.4 41.5 40.5 41.8
Inventory turns(2) 1.9 1.6 1.9 2.2 2.0
(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.
56
--------------------------------------------------------------------------------Sources and Uses of Cash
The following table presents cash provided (used): ?
For the Nine Months Ended September 30,
(in thousands) 2020 2019 Dollar Change
Net cash provided by operating activities $
429,129
(93,686) (109,617) 15,931
Net cash used by financing activities (248,814) (212,020) (36,794)
Net effect of changes in exchange rates on cash (1,368) (1,906) 538
Net change in cash and cash equivalents $
85,261
Operating Activities. The increase in cash provided by operating activities of$125.4 million was driven primarily by an increase in net income and changes in other assets and liabilities. The following table presents cash flow impacts from changes in operating assets and liabilities: ? For the Nine Months Ended September 30, (in thousands) 2020 2019 Dollar Change Accounts receivable$ (72,409) $ (24,451) $ (47,958) Inventories (25,091) (36,582) 11,491 Accounts payable 512 1,181 (669) Deferred revenue (10,433) (10,826) 393 Other assets and liabilities 30,579 (54,770) 85,349 Total change in cash due to changes in operating assets and liabilities$ (76,842) $ (125,448) $ 48,606 Cash used due to changes in operating assets and liabilities during the nine months endedSeptember 30, 2020 , as compared to the same period in the prior year, decreased approximately$48.6 million . The change in other assets and liabilities was due to higher non-cash operating expenses recorded as accrued liabilities, including an accrued charge related to an ongoing litigation matter and higher accrued personnel-related costs related to higher incentives and delayed employer payroll taxes under the COVID-19 stimulus guidance, as well as lower investments in customer volume commitment programs to support instrument placements, Additionally, lower inventory levels due to high demand levels contributed to lower cash used compared to the same period in the prior year. These factors were partially offset by increases in accounts receivable related to high levels of revenue growth. 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$93.7 million for the nine months endedSeptember 30, 2020 , as compared to$109.6 million for the same period in the prior year. The decrease in cash used by investing activities was primarily due to the completion of our long-term major facilities projects during 2020, partially offset by the purchase of one of our reference laboratory facilities that was previously leased. Financing Activities. Cash used by financing activities was$248.8 million for the nine months endedSeptember 30, 2020 , as compared to$212.0 million for the same period in the prior year. The increase in cash used by financing activities was due to an increase in repayments on our Credit Facility and repurchases of our common stock, partially offset by the issuance of senior notes in the current year. Cash used to repurchase shares of our common stock increased$21.8 million during the nine months endedSeptember 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. The existing share repurchase program remains authorized by our Board of Directors. and we may resume share repurchases in the future at any time, depending upon market conditions, our capital needs, eligibility to trade, and other factors. See Note 12 to 57 -------------------------------------------------------------------------------- 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. Net repayment activity under our Credit Facility resulted in cash used of$289.6 million during the nine months endedSeptember 30, 2020 , as compared to$169.5 million in the same period of the prior year. AtSeptember 30, 2020 , we had no outstanding borrowings under the Credit Facility. The general availability of funds under our Credit Facility is reduced by$1.4 million for outstanding letters of credit. 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 September 30, 2020 , we were in
compliance with such covenant. The following details our consolidated leverage
ratio calculation:
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(in thousands) Twelve months ended
Trailing 12 Months Adjusted EBITDA:September 30 ,
2020
Net income attributable to stockholders (as reported) $ 497,482 Interest expense 32,690 Provision for income taxes 95,338 Depreciation and amortization 94,026 Acquisition-related expense 1,822 Share-based compensation expense
39,663
Extraordinary and other non-recurring non-cash charges 2,962 Adjusted EBITDA $ 763,983 (in thousands) Debt to Adjusted EBITDA Ratio: September 30,
2020
Line of credit $ - Current and long-term portions of long-term debt
903,299
Total debt
903,299
Acquisition-related contingent consideration payable 1,500 Financing leases 46 Deferred financing costs 681 Gross debt $ 905,526 Gross debt to Adjusted EBITDA ratio
1.19
Less: Cash and cash equivalents $
(175,587)
Net debt $
729,939
Net debt to Adjusted EBITDA ratio
0.96
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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