IDEXX Laboratories, Inc. — Q1 2011 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2011, compared with the three months ended March 31, 2010. IDEXX operates primarily in veterinary diagnostics and information technology through its Companion Animal Group (CAG), Water, and Livestock and Poultry Diagnostics (LPD) segments, with smaller Dairy and OPTI Medical activities included in Other.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $292.7 million | $268.5 million | 9.0% |
| Gross profit | $154.9 million | $142.4 million | 8.8% |
| Gross margin | 52.9% | 53.0% | Down 0.1 percentage point |
| Operating income | $53.5 million | $48.4 million | 10.5% |
| Operating margin | 18.3% | 18.0% | Up 0.3 percentage point |
| Net income attributable to IDEXX | $36.6 million | $33.0 million | 10.9% |
| Diluted EPS | $0.62 | $0.55 | 12.7% |
| Effective tax rate | 31.2% | 31.4% | Down 0.2 percentage point |
| Operating cash flow | $25.2 million | $19.2 million | Up $6.0 million |
| Capital expenditures | $9.6 million | $8.5 million | Up $1.1 million |
Revenue growth was led by CAG revenue of $240.6 million, up 8.7%, and LPD revenue of $23.9 million, up 20.0%. Water revenue increased 6.2%, while Other revenue declined 1.3%. CAG growth was driven primarily by instruments and consumables and reference laboratory services; rapid assay revenue declined 2.1% due largely to distributor inventory effects.
At March 31, 2011, cash and cash equivalents were $153.5 million, total assets were $909.5 million, and working capital was $192.9 million. The company had $126.6 million outstanding under its revolving Credit Facility and $72.4 million of remaining borrowing availability under the $200 million facility. Long-term debt was $3.2 million, excluding the current portion of $0.9 million. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased $24.1 million, with reported growth including a 1.2% favorable currency effect and 7.8% organic growth.
- Operating income increased $5.1 million despite higher sales and marketing, general and administrative, and research and development spending.
- CAG operating margin declined to 17.9% from 18.4%, while LPD operating margin improved to 29.9% from 23.0%. Water operating margin declined to 36.6% from 42.1%.
- Gross margin was broadly stable. CAG margin was pressured by higher freight, personnel and hedging costs; Water margin declined due to manufacturing timing, freight costs and lower average prices; LPD benefited from scale and product mix.
- Cash flow from operations improved primarily because of higher net income and more favorable inventory-related working-capital changes.
- Financing activities used $23.5 million, including $39.9 million for treasury-stock purchases. The company repurchased approximately 538,000 shares under its repurchase program at an aggregate cost of $39.9 million.
- The company changed its segment profitability measure and restated 2010 segment operating results for comparability. Management stated that the change did not materially affect individual segment results.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2011 capital expenditures of approximately $50 million.
- Management believed cash on hand, operating cash flow and available borrowings would fund operations, capital requirements and strategic growth needs for at least the next twelve months.
- Management continued to observe essentially flat patient visits and expected weak economic conditions to constrain veterinary demand, capital purchases, water testing volumes and pricing.
- Approximately 42% of revenue came from customers outside the United States, creating exposure to currency movements. Currency changes increased Q1 revenue by approximately $3.2 million year over year.
- The company received a $3.0 million milestone payment related to the prior disposition of a feline insulin product line, which reduced investing cash use.
- Interest expense increased to $0.7 million from $0.4 million, partly because interest-rate swaps effectively fixed the rate on $80 million of Credit Facility borrowings at 2% plus the applicable credit spread through March 2012.
- Government investigations by the U.S. Federal Trade Commission and the U.K. Office of Fair Trading concerning companion-animal pricing and marketing practices remained ongoing. The company was cooperating and could not predict their duration or outcome.
- Key risks include economic weakness, distributor purchasing volatility, competition, reliance on sole or single-source suppliers, biologic manufacturing complexity, regulatory requirements, foreign exchange exposure, facility or information-system disruptions, changing diagnostic testing patterns, and potential reductions in European BSE testing.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in CAG instruments, consumables and reference laboratory services reflects sustainable end-user demand rather than distributor inventory changes.
- The effect of continued economic weakness, flat veterinary patient visits and pricing pressure on future organic growth and margins.
- The outcome and potential financial or operational effects of the FTC and U.K. OFT investigations.
- Credit Facility borrowing levels, covenant compliance, interest-rate exposure and remaining availability.
- Progress toward the approximately $50 million 2011 capital-expenditure plan and the company’s ability to continue share repurchases.
- The impact of the planned July 2011 increase in the European Union BSE testing age to 72 months on LPD revenue.
- Foreign exchange movements and the effectiveness and cost of the company’s currency and interest-rate hedges.