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IDEXX Laboratories (IDXX) Tops Q1 Earnings; Lifts '16 View

IDEXX Laboratories Inc. IDXX reported first-quarter 2016 earnings per share (EPS) of 51 cents, beating the Zacks Consensus Estimate by a nickel. On a constant currency basis, this figure improved 14% year over year; after accounting for an adverse 5 cent per share impact related to net changes in foreign exchange. The quarter's EPS was up 4.1% year over year on a reported basis.

Moreover, the federal research and development tax credit boosted the company’s first-quarter 2016 EPS growth by 2%. Strong top-line growth and better-than-expected operating margins in the first quarter as well as consistent share repurchases drove the upside in EPS.

Revenues in Detail

IDEXX’s first-quarter revenues improved 9.2% year over year to $417.6 million and steered past the Zacks Consensus Estimate of $405 million. Organic revenue growth was 11% driven by strong performance by the Companion Animal Group (CAG) and Water segments.  Favorable foreign currency exchange benefitted first-quarter revenue growth by $5 million.

Region-wise, in the reported quarter, IDEXX witnessed a 10% improvement in the U.S. amounting to revenues of $258.9 million (up 9.7% on an organic basis). In the international market, the company's sales increased 7.8% year over year to $158.6 million (up 12.1% on an organic basis). CAG Diagnostics’ recurring revenue growth was 13% in international markets, reflecting increased consumable revenue growth supported by high levels of instrument placements as well as improved lab revenue gains.

Segmental Analysis

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

In the first quarter, revenues improved 11.2% to $357.6 million organically at CAG , driven by 11% organic growth in CAG Diagnostics recurring revenues, 16% organic revenue growth in CAG Diagnostics instruments, and 14% organic revenue growth in customer information management and diagnostic imaging systems. Favorable U.S. weather conditions also supported strong CAG growth. CAG Diagnostics’ recurring revenue gains reflected 15% organic growth in reference laboratory diagnostic and consulting services, driven by high teen organic revenue growth in the U.S. and 12% organic revenue growth in IDEXX VetLab consumables.

The Water segment’s revenues grew 11.2% organically to $23.6 million, primarily boosted by worldwide increases in core coliform and E.coli products, as well as benefits from the launch of IDEXX’s recent Quanti-Tray Sealer PLUS product, the extra day from the leap year, and favorable weather conditions.

First-quarter LPD revenues increased 3.5% organically to $30.9 million. Solid growth in new products worldwide, strong growth in China porcine and poultry products and higher livestock services revenues in Australia primarily drove growth at this segment. However, this was partially offset by lower bovine revenues in Europe. Meanwhile, revenues in the 'Other' segment were up 10.8% organically to $5.5 million.

Margins

Gross profit increased 6% to $227.5 million in the reported quarter. However, gross margin contracted 190 basis points (bps) to 54.5% due to unfavorable impact of foreign exchange rates (including the lapping of prior year hedge gains), higher manufacturing costs, and mix impacts from strong instrument sales; partially offset by benefits from moderate price gains. Sales and marketing expenses increased 6.2% to $79.8 million while general and administrative expenses rose 15.7% to $49.3 million. Research and development expenses dropped 1.5% to $24.6 million.  

Operating margin in the quarter contracted 130 bps to 17.7%. However, this was better than management’s expectations, thanks to volume leverage and timing of operating expenses, which moderated cost growth in the first quarter.

Financial Position

IDEXX exited the first quarter with cash and cash equivalents of $133 million compared with $129 million at the end of the previous quarter. The quarter’s net operating cash flow was $23.2 million, compared with operating cash outflow of $14.6 million a year ago.

During the reported quarter, the company bought back 700,000 shares for $50 million. Notably, the company achieved debt leverage ratios within its long-term target range during the first quarter. The company is left with 6.1 million shares under its current repurchase authorization.

Outlook for 2016

Encouraged by its strong start to 2016 and expected favorable foreign exchange rates, IDEXX raised its full-year 2016 outlook. Management currently expects revenues of $1.73–$1.75 billion for 2016, reflecting organic revenue growth of approximately 9–10% (reported 8–9%) against the previous top-line guidance of $1.69–$1.71 billion, reflecting normalized organic revenue growth of approximately 8–9% (reported 6–7%). The current Zacks Consensus Estimate for revenues is pegged at $1.70 billion for the year.

EPS is currently projected in the band of $2.18–$2.25, reflecting annualized growth of 3–7% (adjusted); 13–17% (constant currency adjusted) and 6–10% (reported); against the previous guidance of  $2.10–$2.17, reflecting annualized growth of 0–3% (adjusted); 12–15% (constant currency adjusted) and 2–6% (reported). The current Zacks Consensus Estimate for EPS is pegged at $2.14 for full-year 2016.

Our Take

IDEXX started off 2016 on a strong note; with its first-quarter results squarely beating the Zacks Consensus Estimate. Also, the company’s trend of consistent share buybacks for the past few quarters reflects its strong free cash flow reserve as well as management’s success in optimizing IDEXX’s capital structure. The company’s raised its guidance for 2016 which also buoys optimism.

Strong instrument placements, global lab momentum reflecting the company’s leverage of expanded commercial capability as well as strong test menu expansion remained some of the key highlights for IDEXX’s business at the start of 2016. However, foreign currency fluctuations are expected to consistently hurt IDEXX’s operating results, although lower than the extent as expected before through all the remaining quarters of 2016.

Zacks Rank & Other Key Picks

IDEXX currently carries a Zacks Rank #2 (Buy). Other favorably ranked medical stocks are Baxter International Inc. BAX, Orthofix International N.V. OFIX and Boston Scientific Corp. BSX. While Baxter and Orthofix sport a Zacks Rank #1 (Strong Buy), Boston Scientific carries a Zacks Rank #2.

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