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 2020 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 2020 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. Our fiscal quarter ended onMarch 31 . 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.
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, blood gas analyzers, and SARS-CoV-2 RT-PCR (COVID-19 test) 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 28 -------------------------------------------------------------------------------- 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.
Effects of Certain Factors and Trends on Results of Operations
CAG Market Trends. Companion animal healthcare markets continued to benefit in the first quarter from a step up in average clinical visits per week per practice that began in the second half of 2020, supported by high new patient growth.U.S. veterinary practices experienced strong clinical demand benefiting from high growth in both non-wellness and wellness clinical visits. Our analysis of companion animal practice data in theU.S. indicated same-store clinical visit growth reached 12% in the first quarter, including 9% growth in non-wellness visits and 16% growth in wellness visits. Clinical visits continued to benefit from an increase in new clinical patient visits. Revenue growth atU.S. veterinary practices was 15% in the first quarter, driven by a continued focus on expanded healthcare services, including increases in utilization of diagnostics. While these CAG market and other trends are encouraging, potential effects related to ongoing COVID-19 case management efforts are challenging to predict and may pressure future revenues in CAG and our other segments should enhanced social distancing policies and higher infection rates impact our customers in certain regions. 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 2020 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration.
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. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three months endedMarch 31, 2021 , are consistent with those discussed in our 2020 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."
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 months endedMarch 31 , 29 -------------------------------------------------------------------------------- 2021, 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. 30 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
Total Company . The following table presents total Company revenue by operating segment: For the Three Months Ended March 31, Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue (dollars in thousands) 2021 2020 Dollar Change Growth (1) from Currency from Acquisitions Growth (1) CAG$ 692,767 $ 551,996 $ 140,771 25.5 % 2.9 % 0.1 % 22.4 % United States 444,410 373,275 71,135 19.1 % - 0.1 % 19.0 % International 248,357 178,721 69,636 39.0 % 9.6 % 0.2 % 29.2 % Water 34,040 34,149 (109) (0.3 %) 2.3 % - (2.6 %) United States 16,568 16,941 (373) (2.2 %) - - (2.2 %) International 17,472 17,208 264 1.5 % 4.6 % - (3.1 %) LPD 39,270 34,154 5,116 15.0 % 5.7 % - 9.3 % United States 3,748 3,777 (29) (0.8 %) - - (0.8 %) International 35,522 30,377 5,145 16.9 % 6.5 % - 10.5 % Other 11,630 6,037 5,593 92.7 % - - 92.7 %Total Company $ 777,707 $ 626,336 $ 151,371 24.2 % 3.1 % 0.1 % 21.0 % United States 472,638 396,783 75,855 19.1 % - 0.1 % 19.0 % International 305,069 229,553 75,516 32.9 % 8.6 % 0.2 % 24.2 %
(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 gains in CAG Diagnostic recurring revenue reflecting a continued demand for companion animal diagnostics globally, supported by high growth in both non-wellness and wellness clinical visits. The growth in our LPD business was primarily due to the continued demand for swine testing inChina and the benefits from the timing of distributor shipments in the current period, which was offset by the impact of prior year accelerated customer stocking orders in response to the onset of the COVID-19 pandemic. Water revenues declined primarily from the impact of prior year accelerated customer stocking orders in response to the onset of the COVID-19 pandemic. The impact of currency movements increased total revenue by 3.1%, while acquisitions increased revenue by 0.1%. 31
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The following table presents total Company results of operations:
For the Three Months Ended March 31, Change
Total Company - Results of
Operations Percent of Percent of
(dollars in thousands) 2021 Revenue 2020 Revenue Amount Percentage
Revenues $ 777,707 $ 626,336 $ 151,371 24.2 %
Cost of revenue 306,925 266,746 40,179 15.1 %
Gross profit 470,782 60.5 % 359,590 57.4 % 111,192 30.9 %
Operating Expenses:
Sales and marketing 114,811 14.8 % 116,143 18.5 % (1,332) (1.1) %
General and administrative 70,770 9.1 % 65,812 10.5 % 4,958 7.5 %
Research and development 37,579 4.8 % 33,310 5.3 % 4,269 12.8 %
Total operating expenses 223,160 28.7 % 215,265 34.4 % 7,895 3.7 %
Income from operations $ 247,622 31.8 % $ 144,325 23.0 % $ 103,297 71.6 %
Gross Profit. Gross profit increased due to higher sales volumes, as well as a
310 basis point increase in the gross profit margin. The increase in the gross
profit margin was primarily due to volume leverage in our reference laboratories
and high growth in IDEXX VetLab® consumables, and the net benefit of price
increases in our CAG Diagnostics recurring revenue portfolio. The impact from
foreign currency movements decreased the gross profit margin by approximately 10
basis points, including the impact of hedge gains in the current year compared
to hedge losses in the prior year.
Operating Expenses. The decrease in sales and marketing expense was primarily
due to decreases in travel, trade shows and in-person sales meetings, due to
continued travel restrictions for the COVID-19 pandemic. This decrease was
partially offset by higher project costs and increased personnel-related costs.
The increase in general and administrative expense was primarily due to higher
personnel-related costs, partially offset by an increase in the bad debt reserve
during the first quarter of 2020 and lower travel costs. The increase in
research and development expense is primarily due to higher personnel-related
and project costs. The overall change in currency exchange rates increased
operating expenses by less than 1%.
32
--------------------------------------------------------------------------------The following table presents revenue by product and service category for CAG:
For the Three Months Ended March
31,
Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue
(dollars in thousands) 2021 2020 Dollar Change Growth (1) from Currency from Acquisitions Growth (1)
CAG Diagnostics
recurring revenue: $ 617,280 $ 487,925 $ 129,355 26.5 % 3.1 % 0.1 % 23.3 %
IDEXX VetLab
consumables 246,092 188,713 57,379 30.4 % 4.0 % - 26.4 %
Rapid assay products 69,611 57,430 12,181 21.2 % 1.2 % - 20.0 %
Reference laboratory
diagnostic and
consulting services 275,781 220,261 55,520 25.2 % 2.8 % 0.3 % 22.2 %
CAG diagnostics
services and
accessories 25,796 21,521 4,275 19.9 % 3.8 % - 16.0 %
CAG Diagnostics
capital - instruments 31,190 23,833 7,357 30.9 % 3.9 % - 27.0 %
Veterinary software,
services and
diagnostic imaging
systems 44,297 40,238 4,059 10.1 % 0.9 % - 9.2 %
Net CAG revenue $ 692,767 $ 551,996 $ 140,771 25.5 % 2.9 % 0.1 % 22.4 %
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. We continue to see strong market demand for companion animal diagnostics globally across modalities, including high levels of growth in testing volumes following the initial pandemic impacts, which constrained volumes beginning inmid-March 2020 throughMay 2020 . This volume growth includes higher clinical visits related to new patients and an increase in diagnostic utilization per clinical visit. 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, as well as higher realized prices. Rapid assay testing is supported by high demand for wellness testing. The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes globally, as well as higher average unit sales prices.
The increase in
CAG Diagnostics Capital - Instruments Revenue. The increase in instrument revenue was primarily due to strong premium instrument placements globally, as compared to constrained placements in the first quarter of 2020, when certain customers deferred instrument orders and placements at the onset of the pandemic.
33
--------------------------------------------------------------------------------The following table presents the CAG segment results of operations:
For the Three Months Ended March 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2021 Revenue 2020 Revenue Amount Percentage
Revenues $ 692,767 $ 551,996 $ 140,771 25.5 %
Cost of revenue 279,893 242,653 37,240 15.3 %
Gross profit 412,874 59.6 % 309,343 56.0 % 103,531 33.5 %
Operating Expenses:
Sales and marketing 104,291 15.1 % 106,002 19.2 % (1,711) (1.6) %
General and administrative 62,904 9.1 % 55,603 10.1 % 7,301 13.1 %
Research and development 32,469 4.7 % 29,079 5.3 % 3,390 11.7 %
Total operating expenses 199,664 28.8 % 190,684 34.5 % 8,980 4.7 %
Income from operations $ 213,210 30.8 % $ 118,659 21.5 % $ 94,551 79.7 %
Gross Profit. Gross profit increased primarily due to higher sales volume, as
well a 360 basis point increase in the gross profit margin. The increase in the
gross profit margin was primarily due to volume leverage in our reference
laboratories and high growth in VetLab consumables, and 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, including increased staffing and related personnel costs and systems.
The impact from foreign currency movements increased the gross profit margin by
less than 10 basis points, including the impact of hedge losses in the current
year compared to hedge gains in the prior year.
Operating Expenses. The decrease in sales and marketing expense was primarily
due to decreases in travel, trade shows, and in-person sales meetings due to
continued travel restrictions from the COVID-19 pandemic, partially offset by
higher personnel-related costs. The increase in general and administrative
expense was primarily due to higher personnel-related costs, partially offset by
an increase in the bad debt reserve during the first quarter of 2020 and lower
travel costs. The increase in research and development expense was primarily due
to increased personnel-related and project costs. The overall change in currency
exchange rates resulted in an increase in operating expenses by approximately
1%.
34
--------------------------------------------------------------------------------Water
The following table presents the Water segment results of operations:
For the Three Months Ended March 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2021 Revenue 2020 Revenue Amount Percentage
Revenues $ 34,040 $ 34,149 $ (109) (0.3) %
Cost of revenue 10,575 9,400 1,175 12.5 %
Gross profit 23,465 68.9 % 24,749 72.5 % (1,284) (5.2) %
Operating Expenses:
Sales and marketing 4,358 12.8 % 4,374 12.8 % (16) (0.4 %)
General and administrative 3,236 9.5 % 3,496 10.2 % (260) (7.4) %
Research and development 1,099 3.2 % 997 2.9 % 102 10.2 %
Total operating expenses 8,693 25.5 % 8,867 26.0 % (174) (2.0) %
Income from operations $ 14,772 43.4 % $ 15,882 46.5 % $ (1,110) (7.0) %
Revenue. The decrease in revenue was primarily due to the impact of prior year
accelerated customer stocking orders in response to the onset of the COVID-19
pandemic. This impact was partially offset by price increases in our Colilert
test products and related accessories used in coliform and E. coli testing and
improvement in non-compliance testing volume that has been constrained during
the pandemic. The impact of currency movements also increased revenue by
approximately 2.3%.
Gross Profit. Gross profit decreased due to a 360 basis point decrease in the
gross profit margin, primarily due to higher distribution and freight costs and
higher product costs, as well as a 130 basis point reduction from foreign
currency movements including the impact of hedge losses in the current year
compared to hedge gains the prior year. These reductions in the gross profit
margin were partially offset by the net benefits of price increases.
Operating Expenses. Sales and marketing and research and development expenses
were relatively flat. The decrease in general and administrative expenses was
primarily due to an increase in the bad debt reserve during the first quarter of
2020. The overall change in currency exchange rates resulted in an increase in
operating expenses of approximately 1%.
35
--------------------------------------------------------------------------------Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Three Months Ended March 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2021 Revenue 2020 Revenue Amount Percentage
Revenues $ 39,270 $ 34,154 $ 5,116 15.0 %
Cost of revenue 12,389 11,842 547 4.6 %
Gross profit 26,881 68.5 % 22,312 65.3 % 4,569 20.5 %
Operating Expenses:
Sales and marketing 5,538 14.1 % 5,382 15.8 % 156 2.9 %
General and administrative 4,308 11.0 % 4,489 13.1 % (181) (4.0 %)
Research and development 3,227 8.2 % 2,778 8.1 % 449 16.2 %
Total operating expenses 13,073 33.3 % 12,649 37.0 % 424 3.4 %
Income from operations $ 13,808 35.2 % $ 9,663 28.3 % $ 4,145 42.9 %
Revenue. Revenue increased primarily due to the continued demand for diagnostic
testing in China supported by the rebuilding of the swine herd impacted by the
African Swine Fever outbreaks, partially offset by lower realized prices and
decreased herd health screening. The benefits from the timing of distributor
shipments in the current period, offset the impact of prior year accelerated
customer stocking orders in response to the onset of the COVID-19 pandemic. The
favorable impact of foreign currency movements increased revenue by 5.7%.
Gross Profit. The increase in gross profit was primarily due to higher sales
volumes and a 320 basis point increase in the gross profit margin. The increase
in the gross profit margin is primarily due to favorable product mix and from
volume leverage, offset by lower realized prices and the impact from foreign
currency movements, which decreased gross profit margin by approximately 100
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 was primarily due to
higher personnel-related costs, offset by reduced travel costs. The decrease in
general and administrative expenses was primarily due to an increase in the bad
debt reserve during the first quarter of 2020, partially offset by higher
personnel-related costs. The increase in research and development expense is
primarily due to higher personnel-related costs and third-party development
costs, partially offset by leveraging LPD personnel to support our human COVID
testing products. The overall change in currency exchange rates resulted in an
increase in operating expenses of approximately 3%.
36
--------------------------------------------------------------------------------Other
The following table presents the Other results of operations:
For the Three Months Ended March 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2021 Revenue 2020 Revenue Amount Percentage
Revenues $ 11,630 $ 6,037 $ 5,593 92.7 %
Cost of revenue 4,068 2,851 1,217 42.7 %
Gross profit 7,562 65.0 % 3,186 52.8 % 4,376 137.4 %
Operating Expenses:
Sales and marketing 624 5.4 % 385 6.4 % 239 62.1 %
General and administrative 322 2.8 % 2,224 36.8 % (1,902) (85.5 %)
Research and development 784 6.7 % 456 7.6 % 328 71.9 %
Total operating expenses 1,730 14.9 % 3,065 50.8 % (1,335) (43.6 %)
Income from operations $ 5,832 50.1 % $ 121 2.0 % $ 5,711 4,719.8 %
Revenue. The increase in revenue was primarily due to our OPTI COVID-19 PCR
testing products and services, which were 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 the availability of
vaccines, available PCR testing capacity, and alternative suppliers, we
currently anticipate lower revenues in the second half of 2021, as compared to
the prior year. The impact of currency movements on revenue was immaterial.
Gross Profit. The increase in gross profit was primarily due to sales volumes of
our OPTI COVID-19 PCR testing products and services. The gross profit margin
increased 1,220 basis points primarily due to favorable product mix from OPTI
COVID-19 PCR testing, 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 associated with our OPTI COVID-19 PCR
product and services. 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. The increase in
research and development cost was primarily due to higher personnel-related and
project costs associated with the OPTI COVID-19 PCR test.
Non-Operating Items
Interest Expense. Interest expense was$7.6 million for the three months endedMarch 31, 2021 , as compared to$7.7 million for the same period in the prior year. Provision for Income Taxes. Our effective income tax rate was 14.9% for the three months endedMarch 31, 2021 , as compared to 18.2% for the three months endedMarch 31, 2020 . The decrease in our effective tax rate as compared to the same period in the prior year, was primarily driven by higher tax benefits from share-based compensation and regional earnings mix. 37 --------------------------------------------------------------------------------
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. AtMarch 31, 2021 , we had$351.2 million of cash and cash equivalents, as compared to$383.9 million onDecember 31, 2020 . Working capital totaled$477.1 million atMarch 31, 2021 , as compared to$480.0 million atDecember 31, 2020 . Additionally, atMarch 31, 2021 , we had remaining borrowing availability of$998.6 million under our$1 billion Credit Facility, with no outstanding borrowings on the Credit Facility. The general availability of funds under our Credit Facility is reduced by$1.4 million for outstanding letters of credit. We believe that, if necessary, we could obtain additional borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in theU.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in theU.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings. We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside theU.S. The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries: Cash, cash equivalents and marketable securities December 31, (dollars in millions) March 31, 2021 2020 U.S.$ 204.2 $ 248.4 Foreign 147.0 135.5 Total$ 351.2 $ 383.9
Total cash, cash equivalents and marketable securities held in
$ 32.3
Of the
The following table presents additional key information concerning working
capital:
For the Three Months Ended
June 30,
March 31, 2021 December 31, 2020 September 30, 2020 2020 March 31, 2020
Days sales outstanding(1) 41.8 42.2 41.5 44.4 41.5
Inventory turns(2) 2.0 2.1 1.9 1.6 1.9
(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.
38
--------------------------------------------------------------------------------Sources and Uses of Cash
The following table presents cash provided (used):
For the Three Months Ended March 31,
(in thousands) 2021 2020 Dollar Change
Net cash provided by operating activities $ 124,422 $ 27,871 $ 96,551
Net cash used by investing activities (24,587) (49,670) 25,083
Net cash (used) provided by financing activities (129,651) 16,901 (146,552)
Net effect of changes in exchange rates on cash (2,949) (4,033) 1,084
Net change in cash and cash equivalents $ (32,765) Operating Activities. The increase in cash provided by operating activities of$96.6 million was driven primarily by an increase in net income. The following table presents cash flow impacts from changes in operating assets and liabilities: For the Three Months Ended March 31, (in thousands) 2021 2020 Dollar Change Accounts receivable$ (54,735) $ (38,062) $ (16,673) Inventories (7,919) (14,434) 6,515 Accounts payable 2,460 (1,755) 4,215 Deferred revenue (2,287) (2,410) 123 Other assets and liabilities (57,081) (64,881) 7,800 Total change in cash due to changes in operating assets and liabilities$ (119,562) $ (121,542) $ 1,980 Cash used due to changes in operating assets and liabilities during the three months endedMarch 31, 2021 , as compared to the same period in the prior year, decreased by approximately$2.0 million . The change in other assets and liabilities was due to favorable timing of payroll, as well as higher non-cash operating expenses recorded as accrued liabilities, including annual employee incentive programs, partially offset by higher incentive payments in 2021, as compared to 2020. Additionally, lower inventory growth due to high demand in the current year contributed to lower cash used as compared to the same period in the prior year, which was impacted by the onset of the COVID-19 pandemic. These factors were partially offset by an increase in accounts receivable related to revenue growth compared to the same period in the prior year, which was impacted by the onset of the COVID-19 pandemic. 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$24.6 million for the three months endedMarch 31, 2021 , as compared to$49.7 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. Financing Activities. Cash used by financing activities was$129.7 million for the three months endedMarch 31, 2021 , as compared to$16.9 million of cash provided for the same period in the prior year. The increase in cash used by financing activities was due to lower borrowings on our Credit Facility compared to the first quarter of 2020, partially offset by using less cash to repurchase shares of our common stock during the first quarter of 2021, as compared to the same period in the prior year. Cash used to repurchase shares of our common stock decreased$50.6 million during the three months endedMarch 31, 2021 . 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. 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 share repurchases. 39 -------------------------------------------------------------------------------- There was no activity under our Credit Facility during the three months endedMarch 31, 2021 , as compared to$198.1 million of net borrowings in the same period of the prior year. AtMarch 31, 2021 , we had no outstanding borrowings under the Credit Facility. 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. 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. OnJuly 21, 2021 , our 2021 Series A Notes for$50 million becomes due, and we anticipate paying the Series A Notes with cash provided by operations. 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.
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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 March 31, 2021 , we were in
compliance with such covenant. The following details our consolidated leverage
ratio calculation:
(in thousands) Twelve months ended
Trailing 12 Months Adjusted EBITDA: March 31, 2021 Net income attributable to stockholders (as reported) $ 674,206 Interest expense 33,017 Provision for income taxes 90,738 Depreciation and amortization 97,851 Acquisition-related expense 773 Share-based compensation expense
32,542
Extraordinary and other non-recurring non-cash charges 2,501 Adjusted EBITDA $ 931,628 (in thousands) Debt to Adjusted EBITDA Ratio: March 31, 2021 Line of credit $ - Current and long-term portions of long-term debt
903,718
Total debt
903,718
Acquisition-related contingent consideration payable 2,608 Financing leases 22 Deferred financing costs 609 Gross debt $ 906,957 Gross debt to Adjusted EBITDA ratio
0.97
Less: Cash and cash equivalents $
(351,163)
Net debt $
555,794
Net debt to Adjusted EBITDA ratio
0.60
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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