IDEXX LABORATORIES INC annual report, FY2011

IDEXX Laboratories, Inc. — 2011 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2011, with fourth-quarter data included. IDEXX develops veterinary diagnostic and information-technology products and services, water-quality tests, livestock and poultry diagnostics, dairy tests, and human point-of-care electrolyte and blood-gas analyzers. Reportable segments were Companion Animal Group (CAG), Water, Livestock and Poultry Diagnostics (LPD), and Other.

Financial performance and key metrics

Metric	2011	2010	Change
Revenue	$1,218.7 million	$1,103.4 million	+10.4%
Gross profit	$646.5 million	$578.6 million	+11.7%
Gross margin	53.0%	52.4%	+0.6 percentage points
Operating income	$236.2 million	$203.9 million	+15.9%
Operating margin	19.4%	18.5%	+0.9 percentage points
Net income attributable to IDEXX stockholders	$161.8 million	$141.3 million	+14.5%
Diluted EPS	$2.78	$2.37	+17.3%
Cash flow from operations	$220.7 million	$178.8 million	+23.4%

Fourth-quarter 2011 revenue was $307.2 million, gross profit was $158.9 million, operating income was $55.3 million, net income attributable to stockholders was $38.0 million, and diluted EPS was $0.67. Fourth-quarter revenue increased from $283.8 million in the comparable 2010 quarter.

CAG revenue was $999.7 million, up 10.4%, led by reference laboratory services, instruments and consumables, and rapid assays.
Water revenue was $82.1 million, up 7.3%.
LPD revenue was $94.1 million, up 15.9%, primarily from bovine testing and German government tenders.
International customers represented approximately 43% of revenue, compared with 41% in 2010.
Sales and marketing expense was $204.9 million, or 16.8% of revenue; research and development expense was $76.0 million, or 6.2% of revenue.

Liquidity, debt and capital allocation

Cash and cash equivalents were $183.9 million at year-end, compared with $156.9 million in 2010.
Working capital was $87.3 million, down from $175.5 million, primarily reflecting higher borrowings classified as current liabilities.
Total debt was $246.4 million, including $243.0 million outstanding under the revolving credit facility.
In July 2011, IDEXX replaced its $200 million facility with a five-year, $300 million unsecured revolving facility maturing July 25, 2016. Remaining borrowing availability at year-end was $56.0 million, after a $1.0 million letter-of-credit reduction.
The company was in compliance with its debt covenants, including a consolidated leverage-ratio limit of 3-to-1.
Capital expenditures were $52.5 million. Management expected approximately $60 million of 2012 capital expenditures, including approximately $11 million for headquarters renovation and expansion.
Investing cash outflow was $97.0 million, including $46.8 million for business acquisitions. Financing cash outflow was $97.7 million, including $255.5 million of share repurchases partially offset by $113.9 million of net revolving-credit borrowings.
IDEXX repurchased 3.4 million shares in 2011 and had authorization to repurchase approximately 4.4 million additional shares at year-end. The company paid no cash dividends and stated it had no present intention to do so.

Material changes versus the prior comparable period

Revenue growth accelerated to 10.4% from 7.0% in 2010; reported growth included a 2.4% foreign-currency benefit, 0.2% from acquisitions, and 7.8% organic growth.
Operating margin expanded as gross margin improved and unallocated operating expenses declined, partly because of lower FTC/OFT investigation costs, the absence of a 2010 facilities-project impairment charge, and other favorable items.
Interest expense increased to $3.5 million from $2.4 million because of higher debt balances and higher credit spreads following the refinancing. Management expected interest expense to increase further in 2012.
The effective tax rate increased to 31.0% from 30.1%, primarily because of lower research-and-development tax benefits, lower benefits from expiring statutes of limitations, and higher state taxes.
Customer-program revenue reductions increased to $33.2 million from $24.2 million, and accrued customer-program liabilities rose to $37.8 million from $23.3 million.
IDEXX acquired RADIL, a research and diagnostic laboratory business, in November 2011 for $43.0 million; management stated the acquisition was not material to 2011 results and was not expected to be material to 2012 results.
The company observed a slight improvement in U.S. veterinary patient visits in the fourth quarter after generally flat to slightly declining activity since 2009.

Guidance, outlook, risks and unusual items

Management stated that cash on hand, operating cash flow, and available borrowings should fund operations, capital requirements, and strategic growth for at least the next twelve months and over the longer term under current conditions.
Management was cautiously optimistic that fourth-quarter macroeconomic improvement could continue, while noting persistent sensitivity among pet owners and veterinarians to economic conditions.
The company expected to introduce SNAP 4Dx Plus in the U.S. during the second quarter of 2012, subject to USDA approval.
Key risks include intense competition, changing technologies, regulatory approvals, dependence on sole- or single-source suppliers, biologic manufacturing complexity, distributor concentration and purchasing volatility, foreign-exchange exposure, economic weakness, and dependence on veterinary testing volumes.
The FTC was investigating IDEXX marketing and sales practices and was considering potential Sherman Act Section 2 issues. IDEXX was cooperating and had not accrued a loss contingency because an adverse outcome was not considered probable or reasonably estimable. The FTC could seek prospective remedies but not financial penalties in an administrative action.
The U.K. Office of Fair Trading concluded in November 2011 that it had no grounds for action regarding its competition investigation.
Unaccrued contingent commitments were up to $10.3 million, primarily tied to milestone payments for an acquired intangible asset. Total contractual cash obligations were $179.7 million, including operating leases, purchase obligations, debt-related payments, and minimum royalties.
Approximately $180 million of cash was held by foreign subsidiaries and could be subject to material repatriation tax effects. Cumulative undistributed foreign earnings considered indefinitely invested abroad were $275.2 million.
No goodwill impairment was identified in the 2011 fourth-quarter annual test, although the valuation depends on forecast cash flows, growth rates, discount rates, and market conditions.

Most important facts an investor should verify

Whether organic revenue growth and fourth-quarter veterinary demand remain durable after separating foreign-exchange effects, acquisitions, and distributor inventory movements.
The sustainability of margin expansion amid higher sales investments, customer incentives, freight costs, currency movements, and increased debt service.
Progress integrating RADIL and the economic returns from the company’s acquisition and capital-investment program.
Compliance with the revolving-credit facility and the effect of variable interest rates, credit spreads, and scheduled interest-rate swaps on future interest expense.
The status and potential commercial impact of the FTC investigation and any related changes to marketing or distribution practices.
Exposure to sole-source suppliers, international markets, regulatory approvals, and the expiration of tax holidays in the Netherlands and Switzerland in 2015.
The level and redemption pattern of customer-program liabilities and the resulting timing of revenue recognition and cash flows.