IDEXX Laboratories, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2010, compared with the corresponding 2009 periods. IDEXX operates in Companion Animal Group (CAG) diagnostics and information technology, Water testing, Livestock and Poultry Diagnostics (LPD), and smaller Dairy and OPTI Medical businesses. The Production Animal segment was renamed Livestock and Poultry Diagnostics during the quarter.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Change |
|---|
| Total revenue | $281.5 million | $265.7 million | 5.9% |
| Gross profit | $149.3 million | $138.4 million | 7.8% |
| Gross margin | 53.0% | 52.1% | +0.9 percentage points |
| Operating income | $54.8 million | $49.2 million | 11.5% |
| Operating margin | 19.5% | 18.5% | +1.0 percentage point |
| Net income attributable to IDEXX stockholders | $37.2 million | $33.7 million | 10.5% |
| Diluted EPS | $0.62 | $0.55 | 12.7% |
| Metric | Six months 2010 | Six months 2009 | Change |
|---|
| Total revenue | $550.0 million | $502.2 million | 9.5% |
| Gross profit | $291.6 million | $262.9 million | 10.9% |
| Gross margin | 53.0% | 52.3% | +0.7 percentage points |
| Operating income | $103.3 million | $87.6 million | 17.9% |
| Operating margin | 18.8% | 17.4% | +1.4 percentage points |
| Net income attributable to IDEXX stockholders | $70.2 million | $59.7 million | 17.6% |
| Diluted EPS | $1.17 | $0.98 | 19.4% |
- Q2 revenue consisted of $179.8 million of product revenue and $101.7 million of service revenue. Six-month revenue consisted of $356.6 million of product revenue and $193.4 million of service revenue.
- Six-month net cash provided by operating activities was $75.1 million, versus $70.9 million in 2009. Investing cash outflow was $17.5 million, including $17.4 million of capital expenditures. Financing cash outflow was $43.2 million, including $83.7 million of share repurchases.
- Cash and cash equivalents were $118.0 million at June 30, 2010, compared with $106.7 million at December 31, 2009. Working capital was $139.4 million. Remaining availability under the $200 million credit facility was $65.1 million.
- Debt included $133.9 million outstanding under the revolving credit facility and approximately $4.7 million of current and long-term debt outside the facility. The company was in compliance with its debt covenants, including a maximum consolidated leverage ratio of 3-to-1.
- The company’s 2010 capital expenditure plan was approximately $45 million, including approximately $12 million for headquarters renovation and expansion.
Material changes versus the prior comparable period
- CAG revenue increased 6.9% in Q2 and 10.4% for the six months. Six-month growth was led by laboratory diagnostic and consulting services, instruments and consumables, and practice information systems and digital radiography.
- Q2 CAG revenue growth was partly offset by a 2.6% decline in rapid assay revenue, driven by competitive pricing and unfavorable distributor inventory changes. For the six months, rapid assay revenue was essentially flat on an organic basis.
- Water revenue increased 1.5% in Q2 and 6.6% for the six months, while LPD revenue declined 2.4% in Q2 but increased 3.2% for the six months.
- Operating margin improved as gross margin expanded and unallocated expenses declined, partly because 2009 included a software write-off. CAG operating income increased 22.7% for the six months, while Water and LPD operating income declined 5.5% and 11.3%, respectively.
- Revenue growth was affected by foreign currency movements, distributor purchasing patterns, and acquisitions. Six-month reported revenue growth was 7.2% after adjusting for currency and acquisition or divestiture effects.
- The diluted share count declined to 59.875 million for the six months from 60.688 million, reflecting share repurchases. The company repurchased 1.562 million shares for $86.3 million during the first six months.
- The effective tax rate increased modestly to 31.4% for the six months from 31.2%, primarily because federal research and development tax incentives available in 2009 expired.
Guidance, outlook, commentary, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided in the filing text. Management expects weak economic conditions to continue in the near term but believes underlying market fundamentals will support improved growth as major economies stabilize.
- Management reported continued pressure on veterinary visits, elective procedures, capital purchases, water testing volumes, and certain livestock and poultry testing volumes because of the weak economy and reduced government funding.
- Management expects interest expense may increase during the remainder of 2010 because interest-rate swaps effectively fixed $80 million of revolving-credit borrowings at 2% plus the applicable credit spread through March 2012.
- Approximately 25% of revenue was generated from products manufactured in the U.S. and sold internationally in local currencies, and 40% of six-month revenue came from customers outside the U.S. Currency movements, particularly a stronger U.S. dollar, remain a material risk.
- The Federal Trade Commission opened an investigation in January 2010 into possible unfair methods of competition involving pricing and marketing policies for companion animal products and services. IDEXX received an FTC subpoena in April 2010 and stated that it intended to cooperate. The company believes its practices comply with antitrust law, but the outcome and duration of the investigation were uncertain.
- Other principal risks include intense competition, dependence on sole or single-source suppliers, biologic manufacturing complexity, distributor purchasing volatility and concentration, regulatory approvals, patent disputes, changes in testing patterns, facility or system interruptions, economic weakness, international operations, and tax uncertainties.
- The company adopted revised revenue-recognition guidance for multiple-element arrangements and tangible products containing software prospectively on January 1, 2010. Management reported no significant impact on financial position, results of operations, or cash flows.
- Share-based compensation expense was $6.5 million for the six months, with $32.4 million of unrecognized expense remaining at June 30, 2010. The company has never paid a cash dividend and had no present intention to do so.
Important facts for investors to verify
- Review the sustainability of CAG growth, particularly laboratory services, instruments and consumables, and digital radiography, against continued economic and pricing pressure.
- Monitor the FTC investigation, any resulting enforcement action, and related legal or operational consequences.
- Assess distributor inventory levels and purchasing patterns separately from underlying end-user demand.
- Track Water and LPD margin deterioration, currency effects, and exposure to reduced regulated or government-funded testing.
- Reconcile cash generation with substantial share repurchases, planned capital expenditures, and $133.9 million of revolving-credit borrowings.
- Evaluate the impact of the $80 million interest-rate swaps and potential increases in interest expense during the remainder of 2010.
