IDEXX Laboratories Misses on Q1 Earnings, Cuts '15 View - Analyst Blog

Veterinary healthcare services provider, IDEXX Laboratories, Inc. IDXX, reported lower-than-expected first quarter 2015 with earnings per share (EPS) of 98 cents missing the Zacks Consensus Estimate by a penny. However, on a year-over-year basis, it reflected a solid 10.1% improvement fueled by strong organic growth and improved operating margins.

 

Idexx Laboratories Inc. - Earnings Surprise | FindTheCompany

 

Revenues in Detail

 

IDEXX reported revenues of $382.5 million in the first quarter, up 6.2% year over year but considerably short of the Zacks Consensus Estimate of $393 million. Foreign exchange weighed on revenue growth to the tune of 6%. Normalized organic revenue growth was 11.4% driven by solid growth across the company’s business segments.

Region-wise, IDEXX experienced a 13.4% year-over-year improvement in the U.S. amounting to revenues of $235.4 million. In the international market, the company's sales declined 3.6% year over year to $147.1 million, on account of 9% normalized organic growth. Normalized CAG diagnostic recurring revenue growth was 11% in international markets, reflecting continued strong gains across major regions.

Segment Analysis

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

In the first quarter, the company reported revenues of $324.5 million in CAG, up 8.6% year over year, driven by constant strong gains in instrument consumable and reference lab sales. However, the segment’s revenues increased 13% organically, primarily due to a 14% improvement in IDEXX’s normalized CAG Diagnostics recurring organic revenue growth, a 22% gain in IDEXX VetLab consumables and 12% growth in reference lab and consulting services.

The Water segment reported revenues of $21.7 million, up 1.3% from the year-earlier quarter and up 6% organically. Organic growth was primarily driven by higher worldwide volume including strong customer acquisitions in North America. The year-over-year improvement reflected continued new business inroads across major regions.

First-quarter LPD revenues grossed $31.3 million, reflecting a decline of 8.6% year over year and organic growth of 3%. Organic revenue growth in this segment was driven by strong global dairy and poultry product volume. However, an expected moderate decline in bovine testing volume partially neutralized this growth.

Revenues in the 'Other' segment declined 14.8% year over year to $5 million.

Margin Trends

Gross profit increased 6.7% to $215.5 million in the first quarter of 2015. Consequently, gross margin expanded 30 basis points (bps) to 56.4% from the year-ago quarter. According to management, lower production costs benefited the company’s gross margin in the reported quarter.

Sales and marketing expenses spiked 10.7% to $75.1 million while general and administrative expenses increased 3.7% to $42.6 million. Research and development expenses also scaled up 8.2% year over year to $25 million. Accordingly, operating margin contracted 40 bps to 19% in the reported quarter.

Financial Position

IDEXX exited the quarter with cash and cash equivalents of $182.2 million, compared with $322.5 million at year-end 2014. The company also reported total long-term debt of $500 million as of Mar 31, 2015. As of Mar 31, 2015, net operating cash outflow was $14.6 million, compared to net operating cash inflow of $33.5 million.

During the quarter under review, the company bought back approximately 859,000 shares for $134 million.

2015 Outlook

IDEXX has revised its fiscal 2015 outlook, reflecting a significant continuity in the strengthening of the US dollar over the last three months.

Management now expects revenues of $1.60–$1.62 billion in 2015, to reflect an additional $15 million of currency headwind at current rates. Further, the company has trimmed its earlier provided normalized organic revenue growth guidance by 1.5% to 12-13%. The current Zacks Consensus Estimate for revenues stands at $1.65 billion, which lies above the company-provided guidance.

The company has also reduced its EPS guidance for 2015. IDEXX now expects adjusted EPS in the band of $4.14–$4.24, down from the earlier guided $4.33–$4.43. The current Zacks Consensus Estimate for 2015 EPS is pegged at $4.38, which exceeds the projected range.

Our Take

IDEXX delivered disappointing first-quarter 2015 financial results with both its top and bottom line missing the Zacks Consensus Estimate. The company’s reduced guidance also raises caution. However, according to management, global expansion of IDEXX’s commercial capability was observed driven by strong instrument placements across the U.S. as well as international markets. This resulted in consistent expansion of its CAG Diagnostics recurring revenues worldwide.

Nevertheless, we are impressed that despite facing significant foreign exchange headwinds, the company was able to deliver positive top-line growth on a year-over-year basis coupled with solid growth in instrument placements in both the U.S. and international markets.

Zacks Rank

Currently, IDEXX carries a Zacks Rank #3 (Hold). Some better-ranked medical instrument stocks are RTI Surgical Inc. RTIX, ABIOMED, Inc. ABMD and Cepheid CPHD. While RTI Surgical sports a Zacks Rank #1 (Strong Buy), ABIOMED and Cepheid hold a Zacks Rank #2 (Buy).

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