IDEXX Laboratories, Inc. — 2011 Q2 Form 10-Q Summary
Business context and reporting period
IDEXX Laboratories develops diagnostic and information-management products and services primarily for veterinary markets, along with water-quality, livestock and poultry, dairy, and human point-of-care diagnostics. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenue | $317.9 million | $281.5 million | $610.5 million | $550.0 million |
| Revenue growth | 12.9% | — | 11.0% | — |
| Gross profit | $174.0 million | $149.3 million | $329.0 million | $291.6 million |
| Gross margin | 54.8% | 53.0% | 53.9% | 53.0% |
| Income from operations | $71.3 million | $54.8 million | $124.8 million | $103.3 million |
| Operating margin | 22.4% | 19.5% | 20.5% | 18.8% |
| Net income attributable to IDEXX stockholders | $48.7 million | $37.2 million | $85.3 million | $70.2 million |
| Diluted EPS | $0.83 | $0.62 | $1.45 | $1.17 |
| Net cash from operating activities | Not separately provided | Not separately provided | $88.3 million | $75.1 million |
Six-month product revenue was $391.9 million and service revenue was $218.6 million. The Companion Animal Group generated $500.3 million of six-month revenue and represented the principal source of consolidated growth. At June 30, 2011, cash and cash equivalents were $159.4 million, working capital was $195.4 million, and total assets were $950.6 million.
The company had $132.5 million outstanding under its revolving credit facility, $66.5 million of remaining borrowing availability, and approximately $3.9 million of current and long-term debt other than the line of credit. The company was in compliance with its debt covenants, including a maximum consolidated leverage ratio of 3-to-1.
Material changes versus the prior comparable period
- Second-quarter revenue increased 12.9%; six-month revenue increased 11.0%. Management reported six-month organic revenue growth of 7.9%, excluding currency and acquisitions.
- Second-quarter net income attributable to stockholders increased 30.8%, while diluted EPS increased 33.9%. Six-month net income increased 21.4% and diluted EPS increased 23.9%.
- Gross and operating margins improved, supported by higher-margin consumables and reference-laboratory services, lower manufacturing costs, and operating leverage.
- CAG revenue increased 11.8% in the second quarter and 10.3% for the six months. LPD revenue increased 32.4% and 26.1%, respectively, partly reflecting German government testing tenders and higher bovine-test volumes.
- Practice-management systems and digital-radiography revenue declined 7.7% in the second quarter and 3.4% for the six months, primarily because of fewer digital-radiography placements and customer-acquisition programs that defer revenue recognition.
- Water gross margin declined to 60.3% in the second quarter from 63.4% and to 60.2% for the six months from 64.1%, reflecting lower average selling prices, higher freight costs, and unfavorable hedging effects.
- Operating cash flow increased $13.2 million year over year to $88.3 million. However, accounts receivable used $24.2 million of cash, compared with $16.5 million in the prior-year period.
- Capital expenditures were $26.2 million, compared with $17.4 million, and management anticipated approximately $55 million of 2011 capital expenditures.
- Share repurchases totaled $98.4 million for the six months, compared with $83.7 million in 2010. The company repurchased 1.3 million shares during the period and had 2.5 million shares remaining under the announced repurchase authorization at June 30.
Guidance, outlook, commentary, risks and unusual items
- Management stated that cash on hand, operating cash flow, and available borrowing capacity should be sufficient for operations, capital requirements, and strategic growth needs over the next twelve months and in the long term under the current business plan. Specific earnings or revenue guidance was not provided in the filing text.
- Management continued to observe flat to slightly declining veterinary patient visits, cautious consumer and veterinarian spending, limited pricing increases, and reduced discretionary water testing. These conditions were expected to continue affecting growth until broader economic conditions improve.
- Foreign currency benefited reported revenue by approximately $13.4 million in the second quarter and $16.6 million for the six months. Approximately 43% of revenue came from customers outside the United States, and approximately 26% came from products manufactured in the United States and sold internationally in local currencies.
- The company hedged foreign-currency and interest-rate exposures. Interest-rate swaps effectively fixed rates on $80 million of variable-rate debt through March 30, 2012. Estimated net derivative losses expected to be reclassified from accumulated other comprehensive income within twelve months were $3.1 million, assuming rates remained unchanged.
- The FTC and U.K. Office of Fair Trading continued investigations into IDEXX marketing and sales practices for companion-animal veterinary products and services. IDEXX was cooperating and had not recorded a loss contingency because potential losses were not probable or reasonably estimable.
- LPD revenue benefited from German government tenders, but BSE testing demand may decline following the European Union’s increase in the testing age to 72 months effective July 1, 2011. Competitive pricing pressure also affected BSE-test margins.
- Share-based compensation expense was $7.5 million for the six months, and unrecognized share-based compensation of $35.1 million remained at June 30, 2011. The company stated that it had never paid cash dividends and did not presently intend to do so.
- Key risks include economic weakness, distributor purchasing volatility and concentration, competition, dependence on sole or single-source suppliers, biologic manufacturing complexity, regulatory approvals, foreign-exchange exposure, facility or information-system disruptions, intellectual-property claims, and changes in diagnostic testing patterns.
Important facts for investors to verify
- Whether revenue growth remains organic after separating currency effects, acquisitions, distributor inventory movements, and customer-acquisition programs.
- The sustainability of improved consolidated margins, particularly amid higher freight costs, competitive pricing, hedging losses, and foreign-exchange volatility.
- Accounts-receivable growth, working-capital conversion, seasonal operating cash flows, and the effect of continued capital spending.
- The pace and pricing of share repurchases relative to cash generation and revolving-credit borrowings.
- The outcome and potential commercial implications of the FTC and U.K. competition investigations.
- The effect of weaker veterinary visits, economic conditions, digital-radiography placement trends, and the European BSE testing-age change on future demand.