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IDEXX Laboratories Tops Q2 Earnings & Revenue Estimates

Zacks Equity Research

IDEXX Laboratories, Inc. (IDXX) reported earnings per share (EPS) of $1.10 in the second-quarter of 2014, up 11.1% from the year-ago tally of 99 cents. Earnings also beat the Zacks Consensus Estimate by 4 cents or 3.8%. The earnings improvement was a result of robust revenue growth coupled with strong cash flows in the business and the company's firm capital structure, as can be observed in the quarter's outcome.

However, this positive earnings news failed to impress investors. Consequently, IDEXX Laboratories' share price declined 2.7% yesterday, to eventually close at $129.40 yesterday.

Idexx Laboratories, Inc - Earnings Surprise | FindTheBest


Revenues in Detail

IDEXX reported revenues of $390.1 million in the second quarter, increasing 10.6% year over year. The top line also beat the Zacks Consensus Estimate of $386 million. The year-over-year improvement was led by solid worldwide growth in Companion Animal Group's recurring diagnostic revenues as well as better-than-expected performance in Livestock, Poultry and Dairy (:LPD).

Region-wise, IDEXX experienced solid 9.7% year-over-year growth in the U.S and 11.9% growth in the international market.

Segment Analysis

IDEXX derives revenues from four operating segments, viz. Companion Animal Group (CAG); Water; Livestock, Poultry and Dairy (:LPD); and Other.

In the second quarter, the company reported revenues of $326.7 million in CAG, up 10.4% year over year. The segment's top line increased 12% organically primarily due to a 13% growth in IDEXX VetLab consumables and an 11% rise in reference lab services. Furthermore, a 34% year-over-year increase in Catalyst instrument placement to nearly 800 and a 13% improvement in hematology placements also boosted growth in this segment.

The Water segment reported revenues of $24.5 million, up 9.4% year over year and up 7% organically. Organic growth was primarily driven by increased sales of E. coli testing products on account of new customer acquisitions, and higher sales volumes in North America and the Asia-Pacific region.

Second-quarter LPD revenues grossed $32.7 million, registering an increase of 15.8% year over year and organic growth of 6%. Organic revenue growth in this segment was primarily driven by increased sales in China along with higher number of testing in New Zealand related to Livestock exports. Further, in this segment, IDEXX continued to benefit from the slower-than-expected ramp down in bovine programs in Western Europe

Revenues in the 'Other' segment grew 1.8% year over year to $6.2 million.

Margin Trends

Gross profit increased 10.5% to $218.5 million in the second quarter of 2014. However, gross margin remained almost flat at 56% compared to the year-ago quarter equivalent. This flat margin was an outcome of gains in price which was offset by the absence of prior-year foreign exchange hedging gains and higher freight and distribution costs.

Sales and marketing expenses spiked 17.5% to $68 million while general and administrative expenses increased 7.7% to $41.8 million. Research and development expenses also scaled up 14.7% year over year to $25.4 million. Operating margin contracted roughly 100 basis points to 21.3% in the reported quarter.

Financial Position

IDEXX exited the first quarter with cash and cash equivalents of $305 million, up from $279.1 million at year-end 2013. For the first half of 2014, net operating cash flow was $115.3 million, up 12.5% year over year. The company also reported total long-term debt of $150 million (net of current portion) as of June 30, 2014.

During the quarter under review, the company bought back approximately 975,000 shares at an average price of $129.77 a share.

Bolstered by a strong second quarter, IDEXX has revised its fiscal 2014 guidance. Revenues are now expected in the range of $1.51 billion to $1.52 billion, representing annualized growth of 10.0% to 10.5% and 9.0% to 9.5% organically. This marks an improvement from the earlier guided range of organic growth of 8% to 9%. Adjusting for the deferred revenue impacts of Catalyst One introductory offer in 2014, the company expects organic revenue growth in the range of 8.5% to 9.0%. The current Zacks Consensus Estimate of $1.49 billion for 2014 revenue lies below the company's guidance range.

IDEXX has raised the lower end of its EPS guidance for 2014. The company now expects adjusted EPS in the range of $3.79 to $3.86 (previous guidance was $3.76–$3.86). Adjusted EPS growth is projected in the range of 11% to 14%. The current Zacks Consensus Estimate of $3.86 is pegged at the higher end of the company guided EPS range.

Management has also provided a baseline preliminary outlook for 2015 and expects 9% to 10% organic revenue growth in the next year.

Our Take

We are encouraged with IDEXX's solid second-quarter 2014 results which comfortably beat both the top and bottom line estimates. Moreover, the company experienced strong revenue growth in each of its segments and across geographical regions. IDEXX's new sales force structure has delivered an impressive performance in the reported quarter, with increased number of Catalyst placements in both North America and the international market. In addition, management observed robust double digit placement gains in the international market, particularly in Europe and the emerging markets of Asia Pacific.

Management expects gains from SNAP Pro launch will propel consistent growth in rapid assay's contribution to recurring diagnostics revenues. In addition, IDEXX is expanding its sales coverage to geographies previously covered only through telephonic sales. To serve this purpose, the company has added 25 more field service representatives to its existing force of 48 and increased insight sales and order taking representatives from 24 to 68. This, in turn, should result in market expansion for the company and garner higher profitability.

Currently, IDEXX carries a Zacks Rank #2 (Buy). Other medical instrument stocks that also warrant a look include RTI Surgical Inc. (RTIX), Accuray Incorporated (ARAY) and Bacterin International Holdings, Inc. (BONE). While RTI Surgical and Accuray sport a Zacks Rank #1 (Strong Buy), Bacterin holds a Zacks Rank #2 (Buy).

Read the Full Research Report on ARAY
Read the Full Research Report on IDXX
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