IDEXX Laboratories, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. IDEXX provides diagnostic and information technology products and services primarily for veterinary markets, with additional Water, Livestock and Poultry Diagnostics, Dairy and human point-of-care businesses. The Companion Animal Group represented approximately 83% of second-quarter revenue.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Revenue | $335.6 million | $317.9 million | $658.3 million | $610.5 million |
| Gross profit | $184.7 million | $174.0 million | $359.5 million | $329.0 million |
| Gross margin | 55.0% | 54.8% | 54.6% | 53.9% |
| Operating income | $75.8 million | $71.3 million | $136.2 million | $124.8 million |
| Operating margin | 22.6% | 22.4% | 20.7% | 20.5% |
| Net income attributable to IDEXX | $51.3 million | $48.7 million | $92.1 million | $85.3 million |
| Diluted EPS | $0.91 | $0.83 | $1.63 | $1.45 |
| Cash flow from operations | Not separately provided | Not separately provided | $78.8 million | $88.3 million |
Q2 revenue increased 5.6%; operating income increased 6.3%; and diluted EPS increased 9.6%. Six-month revenue increased 7.8%, operating income increased 9.1%, and diluted EPS increased 12.4%. Reported six-month organic revenue growth was 8.3%, including a 1.7% unfavorable currency effect and a 1.2% acquisition contribution.
- CAG revenue increased 7.1% in Q2 and 9.2% year to date; Q2 organic growth was 8.2% and year-to-date organic growth was 9.3%.
- Q2 CAG growth reflected higher reference laboratory testing volumes, ProCyte Dx and Catalyst Dx instrument sales, consumables, canine combination tests, and practice-management and digital-imaging systems.
- Water revenue increased 2.2% in Q2 and 2.7% year to date.
- LPD revenue decreased 9.1% in Q2 and 8.2% year to date, primarily because European Union changes reduced required BSE testing.
- Sales and marketing, general and administrative, and research and development expenses increased year over year, while unallocated expenses declined due partly to lower FTC-related costs and the absence of United Kingdom investigation costs.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $201.8 million at June 30, 2012, versus $183.9 million at December 31, 2011.
- Working capital was $136.2 million, compared with $87.3 million at year-end 2011.
- The company had $244.0 million outstanding under its $300 million unsecured revolving credit facility and approximately $55.0 million of remaining borrowing availability, before a $1.0 million letter-of-credit reduction.
- Long-term debt and current long-term debt totaled approximately $3.0 million, excluding the revolving credit facility. The company was in compliance with its credit-facility covenants, including the 3-to-1 consolidated leverage-ratio limit.
- Six-month investing cash use was $22.2 million, including $24.3 million of capital expenditures. Management estimated 2012 capital expenditures of approximately $60 million.
- Six-month share repurchases totaled $55.0 million for approximately 652,000 shares, compared with $98.4 million for approximately 1.3 million shares in 2011. Approximately 3.7 million shares remained available under the repurchase authorization at June 30.
- Approximately $196 million of cash was held by foreign subsidiaries and was subject to material repatriation tax effects.
Material Changes, Outlook and Unusual Items
- Management stated that existing cash, operating cash flow and available borrowing capacity should fund operations, capital requirements and strategic growth for the next twelve months and over the longer term as currently conducted.
- Management was cautiously optimistic that gradual, though inconsistent, improvement in U.S. patient visits could continue, while European economic conditions remained challenging.
- Foreign currency translation and exchange rates materially affected results: currency changes reduced Q2 revenue by approximately $8.2 million and six-month revenue by approximately $9.8 million.
- Effective January 1, 2012, U.S. distributor revenue was generally recognized upon delivery rather than shipment; the change was not material to the financial statements.
- The effective tax rate increased to 31.9% in Q2 and 31.8% year to date from 31.4% and 31.3%, respectively, primarily because federal research and development tax incentives were unavailable in 2012.
- The company’s FTC investigation remained unresolved. IDEXX planned to seek modification of an agreement with one national distributor to remove its competitive-products policy, potentially by January 1, 2013. The modification could reduce distributor compensation and increase competitive pressure, although management expected to reinvest savings in sales and marketing.
- The filing does not provide formal revenue or earnings guidance. It does provide an approximately $60 million 2012 capital-expenditure plan.
Principal Risks and Contingencies
- Uncertainty surrounding the FTC investigation, potential consent-order requirements or future litigation, and the effect of changes to distributor agreements.
- Dependence on distributors, distributor inventory purchasing patterns and a limited number of distributors; reported sales may not reflect underlying end-user demand.
- Economic weakness affecting veterinary visits, customer capital purchases, testing volumes and customer credit quality.
- Foreign currency exposure, particularly to the euro, British pound, Canadian dollar, Japanese yen and Australian dollar; approximately 41% of revenue came from customers outside the United States.
- Reliance on sole- or single-source suppliers and the complexity of manufacturing biologic products.
- Regulatory approval and compliance requirements involving the USDA, FDA, EPA and foreign regulators.
- Competitive pressure, corporate veterinary hospital ownership, buying consortiums, intellectual-property claims and changes in diagnostic testing requirements, including European BSE rules.
- Operational interruption risks involving manufacturing, laboratories, distribution facilities and information systems.
Investor Verification Checklist
- Reconcile reported growth with organic growth, currency effects, acquisitions and distributor inventory changes.
- Monitor the proposed national-distributor agreement modification and the status and eventual resolution of the FTC investigation.
- Assess sustainability of CAG growth and margins against higher sales, marketing, research and development spending.
- Track LPD revenue and profitability following European BSE testing-requirement changes.
- Evaluate cash availability after considering foreign cash repatriation taxes, the $244.0 million revolving-credit balance and planned 2012 capital expenditures.
- Review the pace and price of share repurchases and its effect on diluted share count and EPS.
- Monitor foreign exchange movements, tax-rate changes and the company’s ability to maintain supplier, manufacturing and regulatory continuity.