Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities E
xchange Act of 1934, as amended (the “Exchange Act”),
include statements relating to future revenue growth rates,
future tax benefits; business trends,
earnings and other me
asures of financial performance;
t
he effect of economic downturns on our business performance; projected impact of foreign currency exchange rates; demand for our products;
realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending; interest expense; warranty expense; share-based compensation expense;
the adoption and projected impact of new accounting standards; 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 the matters discussed in Item 1A, “Risk Factors” described in our Annual Report on Form 10-K for the year ended December 31, 2016, (the “2016 Annual Report”) and this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with the U.S. Securities and Exchange Commission (the “SEC”).
A
ny forward-looking statements represent our estimates only as of the day this Quarterly Report
on Form 10-Q
was
filed with the
SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change
.
You should read the following discussion and analysis in conjunction with our 2016 Annual Report that includes additional information about us, our results of operations, our financial position, and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
During the fourth quarter of 2016, we modi
fied our management reporting and
reclassified the location of SNAP Pro service plans previously located in CAG Diagnostics capital - instruments to CAG Diagnostics service and accessories. The amount of revenue reclassified was $0.
4
million during the
three months ended September 30, 2016 and $1.1 million for the nine months ended September 30, 2016
.
Business Overview
We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy and water testing markets. We also sell a line of portable electrolytes and blood gas analyzers for the human point-of-care medical diagnostics market. Our primary products and services are:
|
·
|
|
Point-of-care veterinary diagnostic products, comprising instruments, consumables
,
and rapid assay test kits;
|
|
·
|
|
Veterinary reference laboratory diagnostic and consulting services;
|
|
·
|
|
Veterinary
management and diagnost
ic imaging systems and services
;
|
|
·
|
|
Bio
medical
research, reference laboratory diagnostic services and instruments;
|
|
·
|
|
Diagnostic, health-monitoring products for livestock, poultry and
antibiotic residue testing in
dairy;
|
|
·
|
|
Products that test water for certain microbiological contaminants;
|
|
·
|
|
Point-
of-care electrolytes and blood gas analyzers used in the human point-of-care medical diagnostics
market.
|
Operating Segments
. We operate primarily through three business segments: diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic
products and services
for livestock and poultry health and to ensure the quality and safety of milk and
improve dairy reproductive efficiency
, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other oper
ating segment combines and pres
ents products for the human point-of-care medical diagnostics market (“
OPTI
Medical”) with our pharmaceutical product line and our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
CAG develops, designs, manufactures and distributes products and performs services for veterinarians and the bioresearch market, primarily related to diagnostics and information management. Water develops, designs, manufactures and distributes a range of products used in the detection of various microbiological parameters in water. LPD develops, designs, manufactures and distributes diagnostic tests and related 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 manufactures and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.
Certain costs are not allocated to our operating segments and are instead reported under the caption “Unallocated Amounts.” These costs include costs that do not align with one of our existing operating segments or are cost prohibitive to allocate, which primarily consist of our R&D function,
regional or country expenses, certain foreign currency revaluation gains and losses on monetary balances in currencies other than our subsidiaries’ functional currency and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation are charged to our business segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or rates are captured within Unallocated Amounts.
Effects of Certain Factors
and Trends
on Results of Operations
Currency Impact
.
See “Part I. Item 3. Quantitative and Qualitative 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 2016 Annual Report for additional information regarding d
istributor
p
urchasing and
i
nventories
, economic conditions and patent expiration.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
. T
he critical accounting policies and the significant judgments and estimates used in the preparation of our condensed consolidated financial statements for the three
and nine
months
ended September 30, 2017,
are consistent with those discussed in our 201
6
Annual Report in the section under the heading “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
-
Critical Accounting Policies and
Estimates.”
Recent Accounting Pronouncements
Share-Based Comp
ensation.
We estimate that tax benefits related to share-based payments will
reduce income tax expense by app
roximately $27 million for the full
year 2017, primarily through a reduction in our effective income tax rate
.
We do not estimate that the level of share-based payment activity expected in 2017 will continue in future periods. We believe that the historical range of $13 million to $16 million
of annual tax benefits reflects a reasonable estimate for 2018, bas
ed on current settlement trends,
stock price levels
and assuming no change in U.S. corporate tax policy
.
These impacts may vary significantly by quarter based on the timing of actual settlement activity
. For more information regarding the adoption of the new share-based compensation guidance, ASU 2016-09, s
ee Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09, which will replace most of the existing revenue recognition guidance within U.S. GAAP
.
We plan to adopt ASU 2014-09, as amended, in the first quarter of 2018 on a modified-retrospective basis.
While ASU 2014-09 will not impact the overall economics of our products and services sold under customer
marketing and
incentive programs, we expect the New Revenue Standard will require us to
accelerate
revenue recognition related to certain of our customer programs and to
delay
revenue recognition for certain other customer programs
.
We expect to accelerate revenue recognition on instruments and systems placed through programs where customers are committed to purchase future goods and services, including our up-front customer loyalty programs
.
This change is the result of the New Revenue Standard no longer limiting revenue recognition to the amount of customer consideration received upon placement
.
Conversely, we expect to defer an increased portion of revenue related to instrument placements under programs that provide rebate incentives on future purchases, including certain of our instrument marketing programs. Under the New Revenue Standard, future purchases that are optional and not subject to a customer commitment, are
not
considered part of the customer arrangement, resulting in the instrument absorbing a higher relative allocation of rebate incentives
.
We expect this change to result in lower instrument revenue upon placement and higher recurring revenues over the term of the
rebate
incentive program
.
Based on our progress to date, we believe these will be the most significant impacts related to our adoption of the New Revenue Standard, however the overall impact on our 2018 revenues is not expected to be material, as we estimate the net impact of the modified-retrospective cumulative adjustments and the change in timing of revenue recognition on 2018 activity to be relatively neutral
.
This assessment is based on the anticipated volume, mix and design of our customer
marketing and
incentive programs, which may change in response to future customer and competitive demands
.
Furthermore, the New Revenue Standard requires the deferral of incremental costs to obtain a customer contract over the term of the customer arrangement, such as sales commissions
.
Based on the current design of our sales commission plans, the impact of implementing this element of the New Revenue Standard is als
o not expected to be material. For more information regarding the adoption of the revenue recognition guidance, ASU 2014-09, s
ee Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other Pronouncements.
We are evaluating the impact that other 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
mon
ths ended September 30, 2017
, as compared to the same period
s
for the prior year, net of the effect of changes in foreign currency exchange rates, acquisitions
,
and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for
,
or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers. We exclude the effect of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under
management’s control, are subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and operating
trends.
Organic revenue growth and the percentage changes in revenue from foreign currency exchange rates and acquisitions are non-GAAP financial measures. We calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year period and the comparable previous year period to foreign currency denominated revenues for the prior year period.
The percentage change in revenue resulting from acquisitions represents incremental revenues attributable to acquisitions that have occurred since the beginning of the prior year period.
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 n
on-GAAP financial measures that
sh
o
u
ld
b
e
c
o
ns
i
d
e
r
ed
in
a
dd
ition
t
o
, a
n
d
n
o
t
a
s
a
r
e
p
lac
e
m
e
n
t
f
o
r, financial measures presented according to U.S. GAAP.
M
a
n
a
g
e
m
e
n
t
b
elie
v
es
t
h
at
reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Results of Operations
Three Months Ended September 30, 2017, Compared to Three Months Ended September 30, 2016
Total Company.
The
following table presents total Company revenue by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
|
|
|
September 30,
|
|
September 30,
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
426,686
|
|
$
|
385,288
|
|
$
|
41,398
|
|
10.7%
|
|
0.9%
|
|
|
0.3%
|
|
|
9.6%
|
|
United States
|
|
|
280,651
|
|
|
258,208
|
|
|
22,443
|
|
8.7%
|
|
-
|
|
|
0.2%
|
|
|
8.5%
|
|
International
|
|
|
146,035
|
|
|
127,080
|
|
|
18,955
|
|
14.9%
|
|
2.8%
|
|
|
0.4%
|
|
|
11.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
|
31,030
|
|
|
27,862
|
|
|
3,168
|
|
11.4%
|
|
1.1%
|
|
|
-
|
|
|
10.3%
|
|
United States
|
|
|
14,972
|
|
|
13,980
|
|
|
992
|
|
7.1%
|
|
-
|
|
|
-
|
|
|
7.1%
|
|
International
|
|
|
16,058
|
|
|
13,882
|
|
|
2,176
|
|
15.7%
|
|
2.3%
|
|
|
-
|
|
|
13.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LPD
|
|
|
28,396
|
|
|
29,799
|
|
|
(1,403)
|
|
(4.7%)
|
|
1.8%
|
|
|
-
|
|
|
(6.5%)
|
|
United States
|
|
|
3,576
|
|
|
3,463
|
|
|
113
|
|
3.3%
|
|
-
|
|
|
-
|
|
|
3.3%
|
|
International
|
|
|
24,820
|
|
|
26,336
|
|
|
(1,516)
|
|
(5.8%)
|
|
2.0%
|
|
|
-
|
|
|
(7.8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
5,864
|
|
|
5,359
|
|
|
505
|
|
9.4%
|
|
0.4%
|
|
|
-
|
|
|
9.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
491,976
|
|
$
|
448,308
|
|
$
|
43,668
|
|
9.7%
|
|
1.0%
|
|
|
0.2%
|
|
|
8.5%
|
|
United States
|
|
|
301,457
|
|
|
277,240
|
|
|
24,217
|
|
8.7%
|
|
-
|
|
|
0.2%
|
|
|
8.6%
|
|
International
|
|
|
190,519
|
|
|
171,068
|
|
|
19,451
|
|
11.4%
|
|
2.5%
|
|
|
0.3%
|
|
|
8.5%
|
|
|
(1)
|
|
Amounts presented may not recalculate to organic revenue growth rates due to rounding.
|
The increase in both U.S. and international organic revenues, for the three months ended September 30, 2017, as compared to the same
period in the prior year, was driven by strong volume gains in CAG Diagnostics recurring revenue, supported by our differentiated diagnostic technologies that are driving increased volumes from new and existing customers in our reference laboratory business and the continued expansion of our CAG Diagnostics instrument installed base. International organic growth was strong in Europe and Asia Pacific, reflecting the aforementioned CAG Diagnostics recurring volume driven growth. Our Water business also contribut
ed to our international growth
, including benefits from our go-direct initiatives.
The decline in LPD revenue was primarily the result of lower global milk prices which drove lower dairy producer demand for diagnostic testing, particularly in China and Brazil, including lower herd health screening.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
Change
|
Total Company - Results of Operations
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
491,976
|
|
|
|
$
|
448,308
|
|
|
|
$
|
43,668
|
|
9.7%
|
|
Cost of revenue
|
|
|
217,974
|
|
|
|
|
201,578
|
|
|
|
|
16,396
|
|
8.1%
|
|
Gross profit
|
|
|
274,002
|
|
55.7%
|
|
|
246,730
|
|
55.0%
|
|
|
27,272
|
|
11.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
88,818
|
|
18.1%
|
|
|
79,972
|
|
17.8%
|
|
|
8,846
|
|
11.1%
|
|
General and administrative
|
|
|
57,186
|
|
11.6%
|
|
|
52,627
|
|
11.7%
|
|
|
4,559
|
|
8.7%
|
|
Research and development
|
|
|
27,585
|
|
5.6%
|
|
|
25,672
|
|
5.7%
|
|
|
1,913
|
|
7.5%
|
|
Total operating expenses
|
|
|
173,589
|
|
35.3%
|
|
|
158,271
|
|
35.3%
|
|
|
15,318
|
|
9.7%
|
|
Income from operations
|
|
$
|
100,413
|
|
20.4%
|
|
$
|
88,459
|
|
19.7%
|
|
$
|
11,954
|
|
13.5%
|
|
Total Company gross
profit increased during
the three months ended September 30, 2017, as compared to the same period in the prior year, due to higher sales volumes
and a
70
basis
point increase
in the gross profit percentage.
The increase in the gross profit percentage was supported by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, the favorable impact of lower product and manufacturing costs, and favorable mix benefits from high growth CAG Diagnostic recurring revenues. These favorable impacts were slightly offset by
a reduction
of
approximately
20 basis points from currency movements, including the combined impact of comparisons to hedge gains in the prior year and hedge losses in the current year.
The increase in
total Company sales and marketing expense during the three months ended September 30, 2017, as compared to the same period in the prior year,
was due primarily to
increased personnel-related costs
as we continue to
invest in
and grow
o
ur global commercial infrastructure. The increase in general and administrative expense resulted primarily from information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and higher personnel-related costs.
Research and development expense increased primarily due to higher personn
el-related and consultant costs.
Companion Animal Group
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
|
|
Net Revenue
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Change
|
|
Change
|
|
Organic
|
|
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
from
|
|
from
|
|
Revenue
|
|
(dollars in thousands)
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
364,937
|
|
$
|
324,603
|
|
$
|
40,334
|
|
12.4%
|
|
0.9%
|
|
0.2%
|
|
|
11.3%
|
|
IDEXX VetLab consumables
|
|
|
129,434
|
|
|
113,964
|
|
|
15,470
|
|
13.6%
|
|
1.1%
|
|
-
|
|
|
12.5%
|
|
Rapid assay products
|
|
|
50,924
|
|
|
48,720
|
|
|
2,204
|
|
4.5%
|
|
0.2%
|
|
-
|
|
|
4.3%
|
|
Reference laboratory diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
167,851
|
|
|
146,672
|
|
|
21,179
|
|
14.4%
|
|
1.1%
|
|
0.5%
|
|
|
12.8%
|
|
CAG diagnostics services and accessories
|
|
|
16,728
|
|
|
15,247
|
|
|
1,481
|
|
9.7%
|
|
0.9%
|
|
-
|
|
|
8.8%
|
|
CAG Diagnostics capital - instruments
|
|
|
29,119
|
|
|
31,255
|
|
|
(2,136)
|
|
(6.8%)
|
|
0.9%
|
|
-
|
|
|
(7.7%)
|
|
Veterinary software, services and diagnostic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
imaging systems
|
|
|
32,630
|
|
|
29,430
|
|
|
3,200
|
|
10.9%
|
|
0.4%
|
|
0.9%
|
|
|
9.6%
|
|
Net CAG revenue
|
|
$
|
426,686
|
|
$
|
385,288
|
|
$
|
41,398
|
|
10.7%
|
|
0.9%
|
|
0.3%
|
|
|
9.6%
|
|
|
(1)
|
|
Amounts presented may not recalculate to organic revenue growth rates due to rounding
|
CAG Diagnostic
s
Recurring Revenue.
The increase in CAG Diagnostics recurring revenue was due primarily to increased volumes in reference laboratory diagnostic services and IDEXX VetLab consumables and, to a lesser extent, higher realized prices, offset by the impact of fewer equivalent business days during the third quarter of 2017, as compared to the third quarter of 2016, changes in distributor inventory levels in select international markets and the impact of natural disasters in North America and the Caribbean, which are collectively estimated to have reduced overall growth by approximately 2 percent.
IDEXX VetLab
consumables revenue growth was
primarily
due
to higher sales volumes in the U.S.,
Europe, and the Asia-Pacific region
for our Catalyst consumables and, to a lesser extent, ProCyte Dx
®
consumables
and Sedivue Dx
®
analyzer pay-per-run sales
, resulting from growth i
n testing by existing customers and
an expanded menu of available tests
, as well as benefits
from higher average unit sales prices.
The increase in rapid assay revenue resulted from higher sales volume
of canine SNAP
®
4Dx
Plus tests
and higher sales volumes of single analyte SNAP products.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the
U.S., resulting from increased testing from existing customers, supported by our differentiated diagnostic technologies, such as IDEXX SDMA
™
and fecal antigen testing.
Additionally, the increase in revenue was the result of higher average unit sales prices.
CAG Diagnostics services and accessories r
evenue growth was primarily a result of the increase in our active installed base of instruments.
CAG Diagnostic
s
Capital – Instruments Revenue.
The decrease in CAG Diagnostics capital instruments revenue reflects comparison to strong prior year placement levels, including fulfillment of SediVue Dx backlog orders and our shift to focus sales incentives on the long-term economic value of instrument placements. Our focus on long-term economic value continues to drive new and competitive Catalyst placements, which are the highest economic value placements due to the incremental CAG Diagnostic recurring revenue. As part of this focus, we saw declines in the lower relative economic value second Catalyst placements, as well as growth of our long-term customer commitment programs, including up-front customer loyalty programs in the U.S. and reagent rental programs internationally. These customer commitment programs result in lower upfront instrument revenue recognized at the time of placement and instead the recognition of revenues for these programs occurs over the term of the customer agreement.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue.
The increase in customer information management and diagnostic imaging systems revenue was primarily due to increasing diagnostic imaging system placements, veterinary subscription service revenue and higher support revenue resulting from an increase in our installed base
. These favorable factors were partially offset by fewer licensed-based Cornerstone
®
placements as we evolve to a subscription-based model for new practice manageme
nt customer acquisitions and lower relative diagnostic imaging system prices
.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
426,686
|
|
|
|
$
|
385,288
|
|
|
|
$
|
41,398
|
|
10.7%
|
|
Cost of revenue
|
|
|
191,920
|
|
|
|
|
177,083
|
|
|
|
|
14,837
|
|
8.4%
|
|
Gross profit
|
|
|
234,766
|
|
55.0%
|
|
|
208,205
|
|
54.0%
|
|
|
26,561
|
|
12.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
78,684
|
|
18.4%
|
|
|
69,049
|
|
17.9%
|
|
|
9,635
|
|
14.0%
|
|
General and administrative
|
|
|
46,624
|
|
10.9%
|
|
|
43,025
|
|
11.2%
|
|
|
3,599
|
|
8.4%
|
|
Research and development
|
|
|
20,187
|
|
4.7%
|
|
|
18,638
|
|
4.8%
|
|
|
1,549
|
|
8.3%
|
|
Total operating expenses
|
|
|
145,495
|
|
34.1%
|
|
|
130,712
|
|
33.9%
|
|
|
14,783
|
|
11.3%
|
|
Income from operations
|
|
$
|
89,271
|
|
20.9%
|
|
$
|
77,493
|
|
20.1%
|
|
$
|
11,778
|
|
15.2%
|
|
CAG Gross Profit.
Gross
profit for
CAG
increased
during the three months ended September 30, 2017, as compared to the same period in the prior year, primarily due to higher sales volume and a 100 basis
point increase in the
gross profit percentage for the three months ended September 30, 2017, as compared to the same period in the prior year. The gross profit percentage was supported by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, the favorable impact of lower product and manufacturing costs and favorable mix benefits from high growth in IDEXX VetLab consumables revenue. These favorable impacts were slightly offset by
a reduction
of
approximately
20 basis points from currency movements, including the combined impact of comparisons to hedge gains in the prior year and hedge losses in the current year.
CAG Operating Expense.
The increase in
sales and marketing expense during the three months ended September 30, 2017, as compared to the same period in the prior year,
was due primarily to increased personnel-related costs as we continue to
invest in
o
ur global commercial infrastructure.
The increase in general and administrative expense resulted primarily from higher personnel-related costs and, to a lesser extent, incremental inf
ormation technology investments.
The increase in r
esearch and development expense was due primarily to increased personnel-related costs.
Water
The following table
presents the Water segment results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
Change
|
Results of Operations
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
31,030
|
|
|
|
$
|
27,862
|
|
|
|
$
|
3,168
|
|
11.4%
|
|
Cost of revenue
|
|
|
9,401
|
|
|
|
|
8,651
|
|
|
|
|
750
|
|
8.7%
|
|
Gross profit
|
|
|
21,629
|
|
69.7%
|
|
|
19,211
|
|
69.0%
|
|
|
2,418
|
|
12.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,546
|
|
11.4%
|
|
|
3,453
|
|
12.4%
|
|
|
93
|
|
2.7%
|
|
General and administrative
|
|
|
2,949
|
|
9.5%
|
|
|
2,778
|
|
10.0%
|
|
|
171
|
|
6.2%
|
|
Research and development
|
|
|
629
|
|
2.0%
|
|
|
538
|
|
1.9%
|
|
|
91
|
|
16.9%
|
|
Total operating expenses
|
|
|
7,124
|
|
23.0%
|
|
|
6,769
|
|
24.3%
|
|
|
355
|
|
5.2%
|
|
Income from operations
|
|
$
|
14,505
|
|
46.7%
|
|
$
|
12,442
|
|
44.7%
|
|
$
|
2,063
|
|
16.6%
|
|
Revenue.
The increase in
Water revenue during the three months ended September 30, 2017, as compared to the same period in the prior year, was attributable to the benefits of price increases, partially driven by our go-direct initiative in Brazil and, to a lesser extent, higher sales volumes of our Colilert test products
and related accessories, used in coliform and
E. coli
testing in
North America, the Asia-Pacific region and Europe. These overall favorable impacts also benefited by
approximately
110
basis
points
from currency movements.
Gross Profit.
Gross profit for Water increased during the three months ended September 30, 2017, as compared to the same period in the prior year, due to higher sales volumes as well as a 70 basis point increase in the gross profit percentage. The increase in the gross profit percentage was primarily due to the net benefit of price increases, partially driven by our go-direct initiatives as well as decreases in manufacturing costs. The overall change in currency exchange rates resulted in a decrease in the gross profit percentage of approximately 90 basis points during the three months ended September 30, 2017, as compared to the same period of the prior year, including the combined impact of comparisons to hedge gains in the prior year and hedge losses in the current year.
Operating Expenses.
The increase in
Water operating expense during the three months ended September 30, 2017, as compared to the same period in the prior year, was primarily due to higher personnel-related costs in sales and marketing expense and general administrative expenses. The increase in research and development expense for the three months ended September 30, 2017, as
compared to the same period in the prior year, was
primarily due to lower product development costs in the third quarter of 2016.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
28,396
|
|
|
|
$
|
29,799
|
|
|
|
$
|
(1,403)
|
|
(4.7%)
|
|
Cost of revenue
|
|
|
13,740
|
|
|
|
|
12,971
|
|
|
|
|
769
|
|
5.9%
|
|
Gross profit
|
|
|
14,656
|
|
51.6%
|
|
|
16,828
|
|
56.5%
|
|
|
(2,172)
|
|
(12.9%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
6,052
|
|
21.3%
|
|
|
5,674
|
|
19.0%
|
|
|
378
|
|
6.7%
|
|
General and administrative
|
|
|
4,765
|
|
16.8%
|
|
|
5,121
|
|
17.2%
|
|
|
(356)
|
|
(7.0%)
|
|
Research and development
|
|
|
2,937
|
|
10.3%
|
|
|
3,007
|
|
10.1%
|
|
|
(70)
|
|
(2.3%)
|
|
Total operating expenses
|
|
|
13,754
|
|
48.4%
|
|
|
13,802
|
|
46.3%
|
|
|
(48)
|
|
(0.3%)
|
|
Income from operations
|
|
$
|
902
|
|
3.2%
|
|
$
|
3,026
|
|
10.2%
|
|
$
|
(2,124)
|
|
(70.2%)
|
|
Revenue.
The decrease in LPD revenue for the three months ended September 30, 2017, as compared to the same period in the prior year, primarily resulted from lower global milk prices which drove lower dairy producer demand for diagnostic testing particularly in China and Brazil, including lower herd health screening
. These decreases were partially offset by an increase in swine testing, primarily in China
.
The overall change in exchange rat
es increased revenue growth by approximately 180 basis points.
Gross Profit.
The decrease in LPD gross profit for the three months ended September 30, 2017, as compared to the same period in the prior year, was due to lower sales volume as well as a 4.9 percent reduction in the gross profit percentage reflecting higher product costs and lower realized prices due primarily to unfavorable regional mix.
These
un
favorable factors were offset by approximately
10
b
asis points of a favorable currency impact, as compared to the same period in the prior year.
Operating Expenses.
The overall decrease in LPD operating expenses for the three months ended September 30, 2017, as compared to the same period in the prior year, was primarily due to lower LPD allocation of overall overhead costs reflecting the higher relative growth in our CAG business as compared to
LPD
. This decrease was offset by higher personnel-related costs related to increased headcount in sales and marketing.
Research and development expense for the three months ended
September
30, 2017,
as compared to the same period in the prior year,
was
lower primarily due to lower personnel-related costs and consultant costs, slightly offset by higher regulatory costs.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,864
|
|
|
|
$
|
5,359
|
|
|
|
$
|
505
|
|
9.4%
|
|
Cost of revenue
|
|
|
2,252
|
|
|
|
|
2,574
|
|
|
|
|
(322)
|
|
(12.5%)
|
|
Gross profit
|
|
|
3,612
|
|
61.6%
|
|
|
2,785
|
|
52.0%
|
|
|
827
|
|
29.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
438
|
|
7.5%
|
|
|
664
|
|
12.4%
|
|
|
(226)
|
|
(34.0%)
|
|
General and administrative
|
|
|
843
|
|
14.4%
|
|
|
558
|
|
10.4%
|
|
|
285
|
|
51.1%
|
|
Research and development
|
|
|
217
|
|
3.7%
|
|
|
555
|
|
10.4%
|
|
|
(338)
|
|
(60.9%)
|
|
Total operating expenses
|
|
|
1,498
|
|
25.5%
|
|
|
1,777
|
|
33.2%
|
|
|
(279)
|
|
(15.7%)
|
|
Income from operations
|
|
$
|
2,114
|
|
36.1%
|
|
$
|
1,008
|
|
18.8%
|
|
$
|
1,106
|
|
109.7%
|
|
Revenue.
T
he increase in Other revenue during the three months ended September 30, 2017, as compared to the same period in the prior year, was primarily due to higher realized prices, partially offset by product availability constraints.
The overall change in exchange rat
es increased revenue growth by approximately 40
basis points.
Gross Profit.
Gross profit for Other increased due to higher sales volumes and a 9.6 percent increase in the gross profit percentage related to higher realized prices and, to a lesser extent, lower overall OPTI Medical product costs. The overall change in currency exchange rates had no impact on the gross profit percentage.
Operating Expenses.
The decrease in operating expense for the three months ended September 30, 2017, as compared to the same period in the prior year, was due primarily to lower personnel cost in sales and marketing, due to targeted cost reductions, and research and development, due to discontinuing our product development activities in the human point-of-care medical diagnostics market. These decreases were partially offset by increases in general and administrative costs, primarily related to personnel related expense.
Unallocated Amounts
The following table
presents the Unallocated Amounts results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
Change
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
|
|
2016
|
|
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
N/A
|
|
Cost of revenue
|
|
|
661
|
|
|
|
|
299
|
|
|
|
|
362
|
|
121.1%
|
|
Gross profit
|
|
|
(661)
|
|
|
|
|
(299)
|
|
|
|
|
(362)
|
|
121.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
98
|
|
|
|
|
1,132
|
|
|
|
|
(1,034)
|
|
(91.3%)
|
|
General and administrative
|
|
|
2,005
|
|
|
|
|
1,145
|
|
|
|
|
860
|
|
75.1%
|
|
Research and development
|
|
|
3,615
|
|
|
|
|
2,934
|
|
|
|
|
681
|
|
23.2%
|
|
Total operating expenses
|
|
|
5,718
|
|
|
|
|
5,211
|
|
|
|
|
507
|
|
9.7%
|
|
Loss from operations
|
|
$
|
(6,379)
|
|
|
|
$
|
(5,510)
|
|
|
|
$
|
(869)
|
|
15.8%
|
|
We estimate certain personnel-related costs and allocate these budgeted expenses to the operating segments. This allocation differs from actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.”
Gross Profit.
Costs of revenues that were not allocated to segments during the three months ended September 30, 2017, as compared to the same period in the prior year, were relatively consistent.
Operating Expenses.
The increase in operating expenses during the three months ended
September
30, 2017, as compared to the same period in the prior y
ear, was primarily due to
corporate function spending in
research and development and
information technology
, as well as employee incentives. The decrease in sales and marketing expense was primarily due to lower consulting costs. The overall increase in operating expenses was
partially offset
by favorable foreign exchange gains on monetary assets, as compared to losses in the prior year period
.
Non-Operating Items
Interest Income.
In
terest income was $1.4 million for the three months ended September 30, 2017, as compared to $0.9 million for the three months ended September 30, 2016. The increase in interest income was due primarily to a relatively larger portfolio of marketable securities during the three months ended September 30, 2017, as compared to the same period of the prior year.
Interest Expense.
Interest expense was $9.8 million for the three
months ended
September 30
, 2017
,
as compared to $
7.8 million for the same period in
the prior year. The increase in interest expense was due to
higher outstanding balances and
higher floating interest rates
on our Credit Facility
.
Provision for Income Taxes.
Our effective income tax rate was 23.4 percent for
the three months ended September 30, 2017, and 30.8 percent for the three months ended September 30, 2016.
The
decrease in our effective tax rate
for the three months ended September 30, 2017, as compared to the same period in the prior year,
was primarily related
to the adoption of ASU 2016-09 related to share-based compensation, which reduced our effective tax rate by approximately 4 percent and the expected utilization of foreign tax credits, which reduced our effective tax rate by approximately 3 percent. See
Note 2 to the unaudited condensed consolidated financial statements in Part I, Item I of thi
s Quarterly Report on Form 10-Q for more information on the adoption of ASU 2016-09
.
Nine Months Ended September
30, 2017, Compared to
Nine Months Ended September
30, 201
6
Total Company.
The following table presents
total Company revenue by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
|
|
For the Nine
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
September 30,
|
|
September 30,
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
1,269,861
|
|
$
|
1,143,150
|
|
$
|
126,711
|
|
11.1%
|
|
(0.3%)
|
|
|
0.2%
|
|
|
11.2%
|
|
United States
|
|
|
846,968
|
|
|
766,625
|
|
|
80,343
|
|
10.5%
|
|
-
|
|
|
0.1%
|
|
|
10.4%
|
|
International
|
|
|
422,893
|
|
|
376,525
|
|
|
46,368
|
|
12.3%
|
|
(1.1%)
|
|
|
0.4%
|
|
|
13.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
|
85,531
|
|
|
79,243
|
|
|
6,288
|
|
7.9%
|
|
(0.4%)
|
|
|
-
|
|
|
8.3%
|
|
United States
|
|
|
42,357
|
|
|
40,359
|
|
|
1,998
|
|
5.0%
|
|
-
|
|
|
-
|
|
|
5.0%
|
|
International
|
|
|
43,174
|
|
|
38,884
|
|
|
4,290
|
|
11.0%
|
|
(0.8%)
|
|
|
-
|
|
|
11.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LPD
|
|
|
91,266
|
|
|
93,511
|
|
|
(2,245)
|
|
(2.4%)
|
|
-
|
|
|
-
|
|
|
(2.4%)
|
|
United States
|
|
|
10,493
|
|
|
9,965
|
|
|
528
|
|
5.3%
|
|
-
|
|
|
-
|
|
|
5.3%
|
|
International
|
|
|
80,773
|
|
|
83,546
|
|
|
(2,773)
|
|
(3.3%)
|
|
-
|
|
|
-
|
|
|
(3.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
16,279
|
|
|
16,523
|
|
|
(244)
|
|
(1.5%)
|
|
-
|
|
|
-
|
|
|
(1.5%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
1,462,937
|
|
$
|
1,332,427
|
|
$
|
130,510
|
|
9.8%
|
|
(0.3%)
|
|
|
0.2%
|
|
|
9.9%
|
|
United States
|
|
|
905,765
|
|
|
821,937
|
|
|
83,828
|
|
10.2%
|
|
-
|
|
|
0.1%
|
|
|
10.1%
|
|
International
|
|
|
557,172
|
|
|
510,490
|
|
|
46,682
|
|
9.1%
|
|
(0.8%)
|
|
|
0.3%
|
|
|
9.7%
|
|
|
(1)
|
|
Amounts presented may not recalculate to organic revenue growth rates due to rounding.
|
The increase in both U.S. and international organic revenues, for the nine months ended September 30, 2017, as compared to the same period in the prior year, was driven by strong volume gains in CAG Diagnostics recurring revenue, supported by our differentiated diagnostic technologies that are driving increased volumes from new and existing customers in our reference laboratory business and continued expansion of our CAG Diagnostics instrument installed base, as well as growth in our Sedivue analyzer
. International organic growth
was strong in Europe and the
Asia Pacific
region
, reflecting
the aforementioned
CAG Diagnostic
s
recurring volume driven growth, and growth in our Water business
primarily due to
our Colilert
®
test products,
offset by declines in LPD
,
primarily the result of lower global milk prices which drove lower dairy producer demand for diagnostic testing, including herd health screening revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
Change
|
Total Company - Results of Operations
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,462,937
|
|
|
|
$
|
1,332,427
|
|
|
|
$
|
130,510
|
|
9.8%
|
|
Cost of revenue
|
|
|
638,029
|
|
|
|
|
597,617
|
|
|
|
|
40,412
|
|
6.8%
|
|
Gross profit
|
|
|
824,908
|
|
56.4%
|
|
|
734,810
|
|
55.1%
|
|
|
90,098
|
|
12.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
263,755
|
|
18.0%
|
|
|
236,453
|
|
17.7%
|
|
|
27,302
|
|
11.5%
|
|
General and administrative
|
|
|
165,560
|
|
11.3%
|
|
|
156,239
|
|
11.7%
|
|
|
9,321
|
|
6.0%
|
|
Research and development
|
|
|
80,373
|
|
5.5%
|
|
|
75,704
|
|
5.7%
|
|
|
4,669
|
|
6.2%
|
|
Total operating expenses
|
|
|
509,688
|
|
34.8%
|
|
|
468,396
|
|
35.2%
|
|
|
41,292
|
|
8.8%
|
|
Income from operations
|
|
$
|
315,220
|
|
21.5%
|
|
$
|
266,414
|
|
20.0%
|
|
$
|
48,806
|
|
18.3%
|
|
Total Company gross prof
it increased during the nine months ended September 30, 2017, as compared to the same period in the prior year, due to higher sales volumes
and a
130 basis point increase
in the gross profit percentage.
The increase in the gross profit percentage was primarily supported by the net benefit of price increases in our CAG Diagnostic recurring portfolio, the favorable impact of lower product and manufacturing costs and favorable mix benefits from high growth in CAG Diagnostics recurring revenues. The gross profit percentage was unfavorably impacted by approximately 20 basis points of currency impact during the nine months ended September 30, 2017, as compared to the same period in the prior year.
The increase in
total Company sales and marketing expense during the nine months ended September 30, 2017, as compared to the same period in the prior year,
was due primarily to increased personnel-related costs as we continue to
invest in and grow
o
ur global commercial infrastructure.
The increase in general and administrative expense resulted primarily from information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and h
igher personnel-related costs, offset by a prior year non-cash intangible asset impairment within our OPTI Medical business.
Research and development expense increased primarily due to higher personnel-related and consultant costs.
Companion Animal Group
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
|
|
Net Revenue
|
|
For the Nine
|
|
For the Nine
|
|
|
|
|
|
Change
|
|
Change
|
|
Organic
|
|
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
from
|
|
from
|
|
Revenue
|
|
(dollars in thousands)
|
|
September 30, 2017
|
|
September 30, 2016
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
1,091,936
|
|
$
|
969,097
|
|
$
|
122,839
|
|
12.7%
|
|
(0.4%)
|
|
0.2%
|
|
|
12.8%
|
|
IDEXX VetLab consumables
|
|
|
385,081
|
|
|
336,493
|
|
|
48,588
|
|
14.4%
|
|
(0.4%)
|
|
-
|
|
|
14.8%
|
|
Rapid assay products
|
|
|
159,085
|
|
|
147,583
|
|
|
11,502
|
|
7.8%
|
|
(0.2%)
|
|
-
|
|
|
8.0%
|
|
Reference laboratory diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
498,218
|
|
|
440,514
|
|
|
57,704
|
|
13.1%
|
|
(0.4%)
|
|
0.5%
|
|
|
13.0%
|
|
CAG diagnostics services and accessories
|
|
|
49,552
|
|
|
44,507
|
|
|
5,045
|
|
11.3%
|
|
(0.5%)
|
|
-
|
|
|
11.8%
|
|
CAG Diagnostics capital - instruments
|
|
|
83,018
|
|
|
86,063
|
|
|
(3,045)
|
|
(3.5%)
|
|
(0.5%)
|
|
-
|
|
|
(3.1%)
|
|
Veterinary software, services and diagnostic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
imaging systems
|
|
|
94,907
|
|
|
87,990
|
|
|
6,917
|
|
7.9%
|
|
-
|
|
0.3%
|
|
|
7.5%
|
|
Net CAG revenue
|
|
$
|
1,269,861
|
|
$
|
1,143,150
|
|
$
|
126,711
|
|
11.1%
|
|
(0.3%)
|
|
0.2%
|
|
|
11.2%
|
|
|
(1)
|
|
Amounts presented may not recalculate to organic revenue growth rates due to rounding.
|
CAG Diagnostic
s
Recurring Revenue.
The
increase in CAG D
iagnostics recurring revenue
was due primarily to
increased volumes in
reference laboratory diagn
ostic services and IDEXX VetLab consumables
and, to a
lesser
extent, higher realized prices.
IDEXX VetLab
consumables revenue growth was
primarily
due
to higher sales volumes in the U.S., Europe
,
and the Asia-Pacific region for our Catalyst consumables and, to a lesser extent, ProCyte Dx
®
consumables
and SediVue Dx analyzer pay-per-run sales
, resulting from growth i
n testing by existing customers and
an expanded menu of available tests
, as well as benefits
from higher average unit sales prices.
The increase in rapid assay revenue resulted from higher sales volume and average unit price of canine SNAP 4Dx
Plus tests
and higher sales volumes of single analyte SNAP products.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S., resulting from increased testing from existing customers, supported by our differentiated diagnostic
technologies, such as IDEXX SDMA
and fecal antigen testing
. Additionally, the increase in revenue was the result of higher average unit sales prices.
CAG Diagnostics services and accessories r
evenue growth was primarily a result of the increase in our active installed base of instruments.
CAG Diagnostic
s
Capital – Instruments Revenue.
The decrease in CAG Diagnostics capital instruments revenue reflects comparison to strong prior year placement levels, including the introduction of SediVue Dx in the second quarter of 2016 and our shift to focus sales incentives on the long-term economic value of instrument placements during 2017. Our focus on long-term economic value continues to drive new and competitive Catalyst placements, which are the highest economic value placements due to the incremental CAG Diagnostic recurring revenue. As part of this focus, we continue to see declines in the lower relative long-term economic value second Catalyst placements, as well as growth of our customer commitment programs, including up-front customer loyalty programs in the U.S. and reagent rental programs internationally. These customer commitment programs result in lower upfront instrument revenue recognized at the time of placement, and instead the recognition of revenue for these programs occurs over the term of the customer agreement.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue.
The increase in customer information management and diagnostic imaging systems revenue was primarily due to increasing veterinary subscription service revenue and higher support revenue resulting from an increase in our installed base. These favorable factors were partially offset by fewer licensed-based Cornerstone
®
placements as we evolve to a subscription-based model for new practice management customer acquisitions and lower relative diagnostic imaging system prices.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,269,861
|
|
|
|
$
|
1,143,150
|
|
|
|
$
|
126,711
|
|
11.1%
|
|
Cost of revenue
|
|
|
563,939
|
|
|
|
|
524,182
|
|
|
|
|
39,757
|
|
7.6%
|
|
Gross profit
|
|
|
705,922
|
|
55.6%
|
|
|
618,968
|
|
54.1%
|
|
|
86,954
|
|
14.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
232,840
|
|
18.3%
|
|
|
206,482
|
|
18.1%
|
|
|
26,358
|
|
12.8%
|
|
General and administrative
|
|
|
136,087
|
|
10.7%
|
|
|
128,104
|
|
11.2%
|
|
|
7,983
|
|
6.2%
|
|
Research and development
|
|
|
59,138
|
|
4.7%
|
|
|
54,524
|
|
4.8%
|
|
|
4,614
|
|
8.5%
|
|
Total operating expenses
|
|
|
428,065
|
|
33.7%
|
|
|
389,110
|
|
34.0%
|
|
|
38,955
|
|
10.0%
|
|
Income from operations
|
|
$
|
277,857
|
|
21.9%
|
|
$
|
229,858
|
|
20.1%
|
|
$
|
47,999
|
|
20.9%
|
|
CAG Gross Profit.
Gross
profit for
CAG
increased during the nine months ended September 30, 2017, as compared to the same period in the prior year, primarily due to higher sales volume and a 150 basis point increase in the gross profit percentage for the nine months ended September 30, 2017, as compared to the same period in the prior year. The gross profit percentage was primarily supported by the net benefit of price increases in our CAG Diagnostic recurring portfolio, the favorable impact of lower product and manufacturing costs, and favorable mix benefits from high growth in IDEXX VetLab consumables and rapid assay
revenues. These favorable impacts were slightly offset by a reduction of approximately 20 basis points from currency movements.
CAG Operating Expense.
The increase in
sales and marketing expense during the nine months ended September 30, 2017, as compared to the same period in the prior year,
was due primarily to increased personnel-related costs as we continue to
invest in
and grow
o
ur global commercial infrastructure
. The increase in general and administrative expense resulted primarily from higher personnel-related costs to support overall growth.
The increase in r
esearch and development expense was
also
due primarily to increased personnel-related costs.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
85,531
|
|
|
|
$
|
79,243
|
|
|
|
$
|
6,288
|
|
7.9%
|
|
Cost of revenue
|
|
|
25,775
|
|
|
|
|
24,546
|
|
|
|
|
1,229
|
|
5.0%
|
|
Gross profit
|
|
|
59,756
|
|
69.9%
|
|
|
54,697
|
|
69.0%
|
|
|
5,059
|
|
9.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
10,714
|
|
12.5%
|
|
|
9,943
|
|
12.5%
|
|
|
771
|
|
7.8%
|
|
General and administrative
|
|
|
8,734
|
|
10.2%
|
|
|
7,883
|
|
9.9%
|
|
|
851
|
|
10.8%
|
|
Research and development
|
|
|
1,887
|
|
2.2%
|
|
|
2,007
|
|
2.5%
|
|
|
(120)
|
|
(6.0%)
|
|
Total operating expenses
|
|
|
21,335
|
|
24.9%
|
|
|
19,833
|
|
25.0%
|
|
|
1,502
|
|
7.6%
|
|
Income from operations
|
|
$
|
38,421
|
|
44.9%
|
|
$
|
34,864
|
|
44.0%
|
|
$
|
3,557
|
|
10.2%
|
|
Revenue.
The
increase in Water revenue during the nine months ended September 30, 2017, as compared to the same period in the prior year, was attributable to the benefits of price increases, partially driven by our go-direct initiative in Brazil and, to a lesser extent, higher sales volumes of our Colilert test products
and related accessories, used in coliform and
E. coli
testing in
North America, the Asia-Pacific region. These overall favorable impacts were offset by a reduction of
approximately
40
basis points
from currency movements, in the current period.
Gross Profit.
Gross profit for Water increased during the nine months ended September 30, 2017, as compared to the same period in the prior year, due to higher sales volumes as well as a 90 basis point increase in the gross profit percentage. The increase in the gross profit percentage was primarily due to the net benefit of price increases, partially driven by our go-direct initiatives. The overall change in currency exchange rates resulted in a decrease in the gross profit percentage of approximately 40 basis points during the nine months ended September 30, 2017, as compared to the same period of the prior year, primarily due to lower relative hedge gains in the current year, compared to the prior year.
Operating Expenses.
The
increase in Water operating expense during the nine months ended September 30, 2017, as compared to the same period in the prior year, was primarily due to higher personnel-related costs related to increased head count in sales and marketing expense and general administrative expenses. Research and development expense for the nine months ended September 30, 2017, as compared to the same period in the prior year, was lower primarily due to certain project costs that were incurred in the first half of 2016.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
91,266
|
|
|
|
$
|
93,511
|
|
|
|
$
|
(2,245)
|
|
(2.4%)
|
|
Cost of revenue
|
|
|
40,083
|
|
|
|
|
39,528
|
|
|
|
|
555
|
|
1.4%
|
|
Gross profit
|
|
|
51,183
|
|
56.1%
|
|
|
53,983
|
|
57.7%
|
|
|
(2,800)
|
|
(5.2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
18,528
|
|
20.3%
|
|
|
17,084
|
|
18.3%
|
|
|
1,444
|
|
8.5%
|
|
General and administrative
|
|
|
13,927
|
|
15.3%
|
|
|
15,107
|
|
16.2%
|
|
|
(1,180)
|
|
(7.8%)
|
|
Research and development
|
|
|
8,848
|
|
9.7%
|
|
|
9,127
|
|
9.8%
|
|
|
(279)
|
|
(3.1%)
|
|
Total operating expenses
|
|
|
41,303
|
|
45.3%
|
|
|
41,318
|
|
44.2%
|
|
|
(15)
|
|
(0.0%)
|
|
Income from operations
|
|
$
|
9,880
|
|
10.8%
|
|
$
|
12,665
|
|
13.5%
|
|
$
|
(2,785)
|
|
(22.0%)
|
|
Revenue.
The decrease in LPD revenue for the nine months ended September 30, 2017, as compared to the same period in the prior year, resulted from lower global milk prices which drove lower dairy producer demand for diagnostic testing particularly in China and Brazil, including lower herd health screening. These decreases were partially offset by an increase in swine testing, primarily in China, as well as expanded pregnancy testing primarily in North America and Europe. The overall change in exchange rates had no impact to overall revenue growth for the nine months ended September 30, 2017, as compared to the same period in the prior year
.
Gross Profit.
The decrease in LPD gross profit for the nine months ended September 30, 2017, as compared to the same period in the prior year, was due to lower sales volume as well as a 160 basis point reduction in the gross profit percentage reflecting higher product costs. These unfavorable factors were offset by approximately 20 basis points of currency impact during the nine months ended September 30, 2017,
primarily due to lower relative hedge losses in the current year compared to the prior year.
Operating Expenses.
Overall LPD operating expenses for the nine months ended September 30, 2017, as compared to the same period in the prior year, was relatively unchanged. Sales and marketing expenses increased during the nine months ended September 30, 2017, as compared to the same period in the prior year, due to increases in commercial infrastructure investments in emerging markets. General and administration expenses were lower due to a lower LPD allocation of overall overhead costs reflecting the higher relative growth in our CAG business as compared to LPD. Research and development expense for the nine months ended September 30, 2017, was lower due to lower consultant and personnel-related costs, slightly offset by increases in regulatory costs, as compared to the same period in the prior year.
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)
|
|
2017
|
|
Revenue
|
|
|
2016
|
|
Revenue
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,279
|
|
|
|
$
|
16,523
|
|
|
|
$
|
(244)
|
|
(1.5%)
|
|
Cost of revenue
|
|
|
8,053
|
|
|
|
|
8,524
|
|
|
|
|
(471)
|
|
(5.5%)
|
|
Gross profit
|
|
|
8,226
|
|
50.5%
|
|
|
7,999
|
|
48.4%
|
|
|
227
|
|
2.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,658
|
|
10.2%
|
|
|
2,208
|
|
13.4%
|
|
|
(550)
|
|
(24.9%)
|
|
General and administrative
|
|
|
2,460
|
|
15.1%
|
|
|
4,158
|
|
25.2%
|
|
|
(1,698)
|
|
(40.8%)
|
|
Research and development
|
|
|
833
|
|
5.1%
|
|
|
2,382
|
|
14.4%
|
|
|
(1,549)
|
|
(65.0%)
|
|
Total operating expenses
|
|
|
4,951
|
|
30.4%
|
|
|
8,748
|
|
52.9%
|
|
|
(3,797)
|
|
(43.4%)
|
|
Income (loss) from operations
|
|
$
|
3,275
|
|
20.1%
|
|
$
|
(749)
|
|
(4.5%)
|
|
$
|
4,024
|
|
(537.2%)
|
|
Revenue.
T
he decrease in Other revenue during the nine months ended September 30, 2017, as compared to the same period in the prior year, was primarily due to lower sales volumes of our OPTI Medical blood gas analyzers and related consumables as a result of temporary product availability constraints, partially offset by price
increases.
Gross Profit
.
Gross profit for Other increased due to a 210 basis points increase in the gross profit percentage due to lower manufacturing costs and, to a lesser extent, higher realized pricing on overall OPTI Medical product and services. The overall change in currency exchange rates resulted in a decrease in the gross profit percentage of less than 10 basis points.
Operating Expenses.
The decrease in operating expense for the nine months ended September 30, 2017, as compared to the same period in the prior year, was due primarily to an intangible asset impairment within our OPTI Medical business during the first half of 2016 and lower personnel cost in research and development as a result of discontinuing our product development activities in the human point-of-care medical diagnostics market.
During the first quarter of 2016, management reviewed our OPTI Medical product offering, which resulted in the discontinuance of our instrument development activities in the human point-of-care medical diagnostics market and a decision to focus our commercial and development efforts to support our latest generation OPTI CCA-TS2 Blood Gas and Electrolyte Analyzer. During the second quarter of 2016, management identified unfavorable trends in our OPTI Medical business resulting from this change in strategy. We revised our forecasts downward, causing us to assess the realizability of the related tangible and intangible assets and determined the expected future cash flows were less than the carrying value of the OPTI Medical asset group. N
on-cash intangible asset impairments of $2.2 million were recognized during the six months ended June 30, 2016.
Unallocated Amounts
The following table
presents the Unallocated Amounts results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
Change
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
2017
|
|
|
|
|
2016
|
|
|
|
Amount
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
N/A
|
|
Cost of revenue
|
|
|
179
|
|
|
|
|
837
|
|
|
|
|
(658)
|
|
(78.6%)
|
|
Gross profit
|
|
|
(179)
|
|
|
|
|
(837)
|
|
|
|
|
658
|
|
(78.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
15
|
|
|
|
|
736
|
|
|
|
|
(721)
|
|
(98.0%)
|
|
General and administrative
|
|
|
4,352
|
|
|
|
|
987
|
|
|
|
|
3,365
|
|
340.9%
|
|
Research and development
|
|
|
9,667
|
|
|
|
|
7,664
|
|
|
|
|
2,003
|
|
26.1%
|
|
Total operating expenses
|
|
|
14,034
|
|
|
|
|
9,387
|
|
|
|
|
4,647
|
|
49.5%
|
|
Loss from operations
|
|
$
|
(14,213)
|
|
|
|
$
|
(10,224)
|
|
|
|
$
|
(3,989)
|
|
39.0%
|
|
We estimate certain personnel-related costs and allocate these budgeted expenses to the operating segments. This allocation differs from actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.”
Gross Profit.
The cost of revenue that was not allocated to segments was relatively consistent during the nine months ended September 30, 2017, as compared to the same period in the prior year.
Operating Expenses.
The increase in operating expenses during the nine months ended September 30, 2017,
as compared to the same period in the prior year, was primarily due to higher than budgeted
employee incentive costs, as well as corporate function spending
in
research and development,
information
technology and human resources. Th
e
overall
increase
in operating expenses was
partially offset
by favorable foreign exchange gains on monetary assets, as compared to losses in the prior year, as well as cu
stomer interest payments on overdue accounts.
Non-Operating Items
Interest Income.
In
terest income was $3.7 million for the nine months ended September 30, 2017, as compared to $2.6 million for the nine months ended September 30, 2016. The increase in interest income was due primarily to a relatively larger portfolio of marketable securities during the nine months ended September 30, 2017, as compared to the same period in the prior year.
Interest Expense.
Interest expense was $27.5 million for the nine
months ended
September 30
, 2017
,
as compared to $
24.3
million for the same period of the prior year. The increase in interest expense was due to
higher outstanding balances and
higher floating interest rates
on our Credit Facility
.
Provision for Income Taxes.
Our effective income tax rate was 22.8 percent for the nine months
ended September 30, 2017, and 30.7 percent for the nine months ended September 30, 2016.
The
decrease in our effective tax rate
for the nine months ended September 30, 2017,
as compared to the same period in the prior year,
was primarily related
to the adoption of ASU 2016-09 related to share-based compensation, which reduced our effective tax rate by approximately 8 percent and the expected utilization of foreign tax credits, which reduced our effective tax rate by approximately 1 percent.
Liquidity and Capital Resources
Liquidity
We fund the capital needs of our business through cash on hand, funds generated from operations,
proceeds from long-term senior note financings
and amounts available on our $850 million five-year unsecured revolving credit facility under an amended and restated credit agreement that we executed in December 2015 (the “Credit Facility”). At
September 30, 2017,
we had $
454.1 million of cash,
cash equivalents and marketable securities, as compared to $
391.8
million on
December 31, 2016.
Working capital, including our Credit Facility,
totaled negative $
53.8
million at
September 30, 2017
, as compared to negative $
89.0
million at
December 31
, 201
6
. Additionally, at
September 30
, 201
7
, we had remain
ing borrowing availability of $162.8
million under our $850 million Credit Facility. We believe that, if necessary, we could obtain additional borrowings at similar rates to our existing borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, our portfolio of short-duration marketable securities, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing on favorable terms will also be sufficient for the foreseeable future to fund our business as currently conducted.
We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions.
We consider the majority of the operating earnings of certain
of our
non-U.S. subsidiaries to be indefinitely invested outside the U.S.
No provision has been made for the payment of U.S. federal and state or international taxes that may result from future remittances of these undistributed earnings of
our
non-U.S. subsidiaries.
Changes to this position could have adverse tax consequences.
A determination of the related tax liability that would be paid on these undistributed earnings if repatriated, is not practicable for several reasons including the complexity of laws and regulations in the various jurisdictions where we operate, the varying tax treatment of potential repatriation scenarios, and
the
timing of any future repatriation.
We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions
to fund ordinary business operations outside the U.S.
The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries at September 30, 2017, and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
|
September 30,
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
2,733
|
|
$
|
4,833
|
|
Foreign
|
|
|
451,371
|
|
|
387,017
|
|
Total
|
|
$
|
454,104
|
|
|
391,850
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable securities held in U.S. dollars
|
|
$
|
324,874
|
|
$
|
285,756
|
|
|
|
|
|
|
|
|
|
Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars
|
|
|
71.5%
|
|
|
72.9%
|
|
The following table presents marketable securities at fair value as of September 30, 2017, and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
Percent of
|
|
|
|
Percent of
|
|
(dollars in thousands)
|
|
|
September 30, 2017
|
|
Total
|
|
December 31, 2016
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
139,631
|
|
49.0%
|
|
$
|
130,771
|
|
55.2%
|
|
Certificates of deposit
|
|
|
60,473
|
|
|
21.2%
|
|
|
40,400
|
|
|
17.1%
|
|
Commercial paper
|
|
|
24,234
|
|
|
8.5%
|
|
|
20,228
|
|
|
8.5%
|
|
Asset backed securities
|
|
|
22,481
|
|
|
7.9%
|
|
|
27,315
|
|
|
11.5%
|
|
U.S. government bonds
|
|
|
16,286
|
|
|
5.7%
|
|
|
12,231
|
|
|
5.2%
|
|
Treasury bills
|
|
|
10,993
|
|
|
3.9%
|
|
|
-
|
|
|
0.0%
|
|
Agency bonds
|
|
|
10,987
|
|
|
3.9%
|
|
|
4,604
|
|
|
1.9%
|
|
Municipal bonds
|
|
|
-
|
|
0.0%
|
|
|
1,400
|
|
0.6%
|
|
Total marketable securities
|
|
$
|
285,085
|
|
|
|
$
|
236,949
|
|
|
|
Of the $169 million of cash and cash equivalents held as of September 30, 2017, 84 percent was held as bank deposits, 12 percent was invested in money market funds restricted to U.S. government and agency securities, and the remainder consisted of commercial paper and other securities with original maturities of less than ninety days.
Should we require more capital in the U.S. than is generated by our operations domestically, for example to fund significant discretionary activities, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could result in higher effective tax rates or increased interest expense and other dilution of our earnings. We have borrowed funds domestically and believe we will continue to have the ability to borrow funds domestically at reasonable interest rates.
The following table presents additional key information concerning working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days sales outstanding
(1)
|
|
|
43.4
|
|
|
41.7
|
|
|
42.4
|
|
|
42.1
|
|
|
42.4
|
Inventory turns
(2)
|
|
|
1.9
|
|
|
2.0
|
|
|
1.9
|
|
|
2.0
|
|
|
1.8
|
(1)
Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.
(2)
Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the inventory balance at the end of the quarter
.
Sources and Uses of Cash
The following table presents cash
provided (
used
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
252,150
|
|
$
|
238,188
|
|
$
|
13,962
|
|
Net cash used by investing activities
|
|
|
(114,201)
|
|
|
(76,508)
|
|
|
(37,693)
|
|
Net cash used by financing activities
|
|
|
(129,958)
|
|
|
(144,944)
|
|
|
14,986
|
|
Net effect of changes in exchange rates on cash
|
|
|
6,127
|
|
|
4,342
|
|
|
1,785
|
|
Net change in cash and cash equivalents
|
|
$
|
14,118
|
|
$
|
21,078
|
|
$
|
(6,960)
|
|
Operating Activities.
The increase in cash provided by operating activities of $14.0 million was driven primarily by the increase in net income, including the impact of adopting the new accounting guidance to share-based compensation, offset by the changes in operating assets and liabilities.
The following table presents cash flows from changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
(dollars in thousands)
|
|
2017
|
|
2016
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(18,724)
|
|
$
|
(16,647)
|
|
$
|
(2,077)
|
|
Inventories
|
|
|
(22,966)
|
|
|
(2,503)
|
|
|
(20,463)
|
|
Accounts payable
|
|
|
(3,540)
|
|
|
(2,496)
|
|
|
(1,044)
|
|
Deferred revenue
|
|
|
2,279
|
|
|
3,798
|
|
|
(1,519)
|
|
Other assets and liabilities
|
|
|
(10,734)
|
|
|
12,380
|
|
|
(23,114)
|
|
Tax benefit from share-based compensation arrangements
|
|
|
-
|
|
|
(10,225)
|
|
|
10,225
|
|
Total change in cash due to changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements
|
|
$
|
(53,685)
|
|
$
|
(15,693)
|
|
$
|
(37,992)
|
|
Cash used by accounts receivable during the nine months
ended
September
30, 2017, as compared to cash
used
during the same period in the prior year,
increased approximately $2.1 million as a result of higher revenues, period over period.
Cash used by inventory during
the
nine
months ended
September
30, 2017, as compared to cash
used
during the same period in th
e prior year, increased by $20.5
million, driven by operational initiatives to optimize inventory levels that were implemented in the first half of 2016, which followed a period of inventory growth to support new
products and increasing demand, as well as
timing impacts of inventory shipments between the fourth quarter of 2016 and the first quarter of 2017
.
Cash used by other assets and liabilities during the
nine
months ended
September
30, 2017 increased $23.1 million primarily as a
result of
higher relative employee incentive compensation payments, compared to the same period in the prior year.
We
have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally
higher cash flows from operating activities for the remainder of the year and for the annual period driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned and the seasonality of vector-borne disease testing, which has historically resulted in significant increases in accounts receivable balances during the first quarter of the year.
Investing Activities.
Ca
sh used by investing activities was $
114.2 million for the nine
months ended
September 30, 2017
, as compared to $
76.5
million for the same
period
in
the prior year.
The increase in
cash used by investing activities was primarily due to
net purchases of marketable securities and acquisitions of businesses during the first nine months of 2017
.
Financing Activities.
Cash
used
by financing activities was $
130.0
million for the
nine
months ended
September 30
, 2017, as compared to cash
used by financing activities of $
144.9
million for the
same period in the prior year.
The decrease in cash used by financing activities was due to an increase
in borrowings on our revolving C
redit
F
acility
partially offset by an increase in
repurchase
s of
our common stock
and
the impacts of adopting the new accounting guidance related to share-based compensation, which resulted in reclassification to operating activities.
Cash used to repurchase shares of our common stock increased $
137.1
million during the
nine
months ended
September 30
, 2017, as compared to the same period
in
the prior year. We believe that the repurchase of our common stock is a favorable means of returning value to our shareholders and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing activities and the share price. See Note
10
to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about our share repurchases.
Net borrowing and repayment activity under the Credit Facility resulted in incremental cash
provided of $160.3 million during the nine
months ended
September 30
, 201
7
, as compared to the same period of the prior year.
At September 30, 2017, we had $686.3
million outstanding under the Credit Facility.
The
general availability of funds under the Credit Facility was further reduced by $1.0 million for a letter of credit
that was issued in connection with claims under our workers’ compensation policy.
The Credit Facility contains affirmative, negative
,
and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The obligations under the Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default.
Since December 2013, we have issued and sold through private placements senior notes having an aggregate principal amount of
approximately $600 million
pursuant to certain note purchase agreements (collectively, the “Senior Note Agreements”). The Senior Note Agreements contain affirmative, negative, and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. See Note 11 to the consolidated financial statements in our 2016 Annual Report for additional information regarding our senior notes.
Should we elect to prepay the senior notes, such aggregate prepayment will include the applicable make-whole amount(s), as defined within the applicable Senior Note Agreements. Additionally,
in the event of a change in control of the Company or upon the disposition of certain assets of the Company the proceeds of which are not reinvested (as defined in the Senior Note Agreements), we may be required to prepay all or a portion of the Senior Notes.
The obligations under the Senior Notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreement, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness and cross-acceleration to specified indebtedness.
The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization and certain other non-cash charges (“Adjusted EBITDA”) not to exceed 3.5-to-1. At September 30, 2017, we were in compliance with the covenants of the Credit Facility and Senior Note Agreements.
The following details our consolidated leverage ratio calculation as of September 30, 2017:
|
|
|
|
|
|
September 30,
|
Trailing 12 Months Adjusted EBITDA:
|
|
|
2017
|
|
|
|
|
Net income attributable to stockholders
|
|
$
|
277,256
|
Interest expense
|
|
|
35,263
|
Provision for income taxes
|
|
|
91,148
|
Depreciation and amortization
|
|
|
81,861
|
Share-based compensation expense
|
|
|
22,632
|
Adjusted EBITDA
|
|
$
|
508,160
|
|
|
|
|
|
|
September 30,
|
Debt to Adjusted EBITDA Ratio:
|
|
|
2017
|
|
|
|
|
Line of credit
|
|
$
|
686,250
|
Long-term debt
|
|
|
604,149
|
Total debt
|
|
|
1,290,399
|
Acquisition-related contingent consideration payable
|
|
|
5,087
|
Capitalized leases
|
|
|
467
|
U.S. GAAP change - deferred financing costs
|
|
|
507
|
Gross debt
|
|
|
1,296,460
|
Gross debt to Adjusted EBITDA ratio
|
|
|
2.55
|
|
|
|
|
Less: Cash and cash equivalents
|
|
|
(169,019)
|
Less: Marketable securities
|
|
|
(285,085)
|
Net debt
|
|
$
|
842,356
|
Net debt to Adjusted EBITDA ratio
|
|
|
1.66
|
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
sh
o
u
ld
b
e
c
o
ns
i
d
e
r
ed
in
a
dd
ition
t
o
, a
n
d
n
o
t
a
s
a
r
e
p
lac
e
m
e
n
t
f
o
r, financial measures presented according to U.S. GAAP.
M
a
n
a
g
e
m
e
n
t
b
elie
v
es
t
h
at
reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Other Commitments, Contingencies and Guarantees
Significant commitments, contingencies and guarantees at
September 30, 2017,
are consistent with those discussed
in the section under the heading “Part
II
, Item 7. Management’s Discussion and Analysis of Financial Cond
ition and Results of Operations-
Liquidity and Capital Resources,” and
in Note 14
to the consolidated financial statements
contained
in our
2016
Annual Report
.