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IDEXX Laboratories (IDXX) Announces Second Quarter Results



8/1/2017 2:06:09 PM

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WESTBROOK, Maine, Aug. 1, 2017 /PRNewswire/ -- IDEXX Laboratories, Inc. (NASDAQ: IDXX), a global leader in veterinary diagnostics, veterinary practice software and water microbiology testing, reports revenues for the second quarter of 2017 of $509 million, an increase of 9% compared to the prior year period on a reported basis and 10% on an organic basis. Second quarter results were driven by robust global gains in Companion Animal Group ("CAG") Diagnostics recurring revenue, including double-digit organic revenue growth in consumables and reference lab services, and solid growth in both rapid assay and veterinary software, services and diagnostic imaging systems.

Earnings per diluted share ("EPS") was $0.95 for the second quarter, representing 28% growth year over year on a reported basis and 30% on a constant currency basis. These results include an $0.08, or 11%, EPS benefit in the quarter from the adoption of the new accounting guidance related to share-based compensation (ASU 2016-09), on both a reported and constant currency basis.

"Our business continued to thrive in the second quarter as we focused on delivering best-in-class diagnostic and software solutions, while supporting the profession in increasing the companion animal standard of care," said Jonathan Ayers, the Company's Chairman and Chief Executive Officer.

"We are very pleased with the strong momentum we are driving in the U.S. market, reflected in this quarter's accelerated double-digit U.S. organic CAG Diagnostics recurring revenue growth the highest over the past two years, after implementing our fully direct sales approach. We intend to build on this momentum with increased investment in our U.S. commercial presence, while delivering 2017 profit performance consistent with our long-term goals."

"Consistent with our plan for strong long-term shareholder value creation, we're pleased to be raising our 2017 guidance for revenue and earnings per share, partly as a result of our strong operational performance in the first half of the year and continued positive outlook."

Second Quarter Performance Highlights

Companion Animal Group

CAG generated 10% reported and 11% organic revenue growth for the second quarter, supported by CAG Diagnostics recurring revenue growth of 12% reported and 13% organic. Veterinary software services and diagnostic imaging systems revenues grew 9% on a reported and organic basis.

  • IDEXX VetLab® consumables generated reported revenue growth of 15% and organic revenue growth of 17% in the second quarter, driven by an expanding premium instrument base in U.S. and international markets, increasing test utilization, moderate price gains and continued strong customer retention. IDEXX VetLab premium diagnostic instrument placements were 2,680, including 1,191 Catalyst® instruments, 861 premium hematology instruments and 628 IDEXX SediVue® Dx analyzers. Placement levels were slightly below strong prior year levels, which included the benefit of higher levels of LaserCyte® to ProCyte Dx® upgrades and second Catalyst placements in North America, as part of successful customer retention programs. Growth in high economic value placements continued, as evidenced by the placement of 341 Catalysts in North America in competitive or greenfield accounts, an increase of 14% over prior year levels. On a worldwide basis, our Catalyst instrument installed base increased 21% in the second quarter year over year, reflecting 11% year over year growth in North America and 37% year over year gains in international markets.
  • Reference laboratory diagnostic and consulting services grew 12% on a reported and 13% on an organic basis, reflecting accelerated growth in the U.S. which offset moderated international gains, impacted by the later timing of the Easter holiday in Europe. Globally, lab growth continues to be bolstered by the increasing appreciation for IDEXX SDMA®, our novel kidney function test, and the strength of our expanded direct commercial organizations.
  • Rapid assay products had reported revenue growth of 8% and organic growth of 9%, supported by strong gains in the U.S., reflecting continued growth in SNAP 4Dx® Plus Test revenues and specialty tests, as well as solid momentum in first generation product revenues.

Livestock, Poultry and Dairy ("LPD")

Reported revenue increased 2% on a reported basis and 4% on an organic basis for the second quarter, supported by growth in swine testing, herd health screening and pregnancy testing revenues, which offset lower revenues related to successful European disease eradication programs and lower Dairy revenues, reflecting market demand impacts from reductions in milk pricing.

Water

Reported Water revenue growth was 6% and organic revenue growth was 7% in the second quarter, driven by higher sales volumes of Colilert® test products and related accessories in Europe and Latin America, supported by our go-direct initiatives.

Gross Profit and Operating Profit

Gross profits increased 12%, and gross margin increased to 57.5% from 55.8% in the prior year period. On a constant currency basis, gross margin was 180 basis points higher than in the prior year period, driven by high consumable growth and mix impact, moderate price gains, volume leverage in reference labs, and operational productivity gains.

Operating margin was 24.1% in the second quarter compared to 22.3% operating margin in the prior year period. On a constant currency basis, operating margin improved 180 basis points, driven by gross margin gains. Operating expenses increased 9% in the second quarter compared to the prior year period, driven by accelerated growth in sales and marketing investments aligned with our U.S. commercial expansion.

2017 Financial Outlook

We are raising our 2017 revenue outlook by $17.5 million at the midpoint of prior guidance to $1,945 million - $1,965 million, reflecting an expectation for organic revenue growth of 10% - 11% and approximately a $13 million revenue benefit from updated assumptions related to foreign exchange rates, as noted below. At these rates compared to rates in effect in 2016, we estimate that the stronger U.S. dollar will adversely impact 2017 reported revenue growth by approximately 0.5%, EPS growth by 1%, and reduce EPS by an estimated $0.03 per share, including the net impact from projected hedge gains of approximately $3 million in 2017 compared to $4 million in 2016.

We are also increasing our 2017 EPS outlook to $3.12 - $3.22 per share, reflecting an incremental increase of $0.14 per share at the midpoint of our earlier guidance range. This higher outlook is supported by a projected $0.04 incremental operating profit flow-through from strong revenue trends and higher expectations for annual operating margin improvement, while covering incremental investments in the U.S. CAG business, enabling information technology, R&D and acquisition integration.  We now expect full-year operating margin to improve 100 - 125 basis points on a reported basis and 110 - 135 basis points on a constant currency basis, compared to the prior year period.  The raised EPS guidance also reflects a $0.02 benefit due to reduced headwind from updated foreign exchange rate assumptions, and an additional $0.08 per share related to raised projections for 2017 benefits from share-based compensation accounting changes.

The updated outlook represents EPS growth of 28% - 32% on a reported basis and 29% - 33% constant currency EPS growth. This outlook includes the impact of the new accounting guidance related to share-based compensation, which we estimate will result in $0.30 - $0.34 of EPS benefit in 2017 reflecting an estimated $27 million to $30 million reduction in our tax provision. While these impacts may vary significantly by quarter based on the timing of actual settlement activity, an estimated $0.15 of the projected full-year 2017 benefit reflects higher than normal stock option exercising in 2017, a level of activity that is not expected to continue in future periods. For 2018 and future years, we estimate the annual benefit from share-based compensation will be approximately $14 million to $17 million assuming the current share price and no change in U.S. tax policy.

The guidance for 2017 reflects the assumptions that the value of the U.S. dollar relative to other currencies will remain at the following rates: euro at $1.12, British pound at $1.28, Canadian dollar at $0.76, Australian dollar at $0.75, Japanese yen at ¥114, Chinese renminbi at RMB 6.80 and Brazilian real at R$3.40 to the U.S. dollar for the remainder of 2017.

We are providing the following updated guidance for 2017:

Amounts in millions except per share data and percentages


Guidance Range

Growth Definition

Year Over Year Growth





Revenue

$1,945 - $1,965

Reported

10% - 11%



Organic Revenue Growth

10% - 11%





EPS

$3.12 - $3.22

Reported

28% - 32%



Constant Currency

29% - 33%





Operating Cash Flow


~130% of net income






Free Cash Flow


~95% of net income






Capital Expenditures


~$90 million


We expect an effective tax rate of 24.0% - 25.0%, after a projected reduction of 700 - 800 basis points related to the new share-based compensation accounting guidance. We are projecting a reduction in weighted average shares outstanding of approximately 1.5%, net of 0.5% related to the new share-based compensation accounting guidance, and interest expense, net of interest income, of approximately $33 million reflecting current and projected borrowings.

For a quick-reference snapshot of our quarterly performance, please visit www.idexx.com/investors.

Conference Call and Webcast Information

IDEXX Laboratories, Inc. will be hosting a conference call today at 8:30 a.m. (Eastern) to discuss its second quarter results and management's outlook. To participate in the conference call, please dial 1-877-777-1968 or 1-612-332-0802 and reference confirmation code 426796. Replay of the conference call will be available through Tuesday, August 8, 2017 by dialing 1-800-475-6701 or 1-320-365-3844 and referencing replay code 426796. Individuals can access a live webcast of the conference call through a link on the IDEXX website, www.idexx.com/investors. An archived edition of the webcast will be available after 1:00 p.m. (Eastern) on that day via the same link and will remain available for one year.

IDEXX Laboratories, Inc. logo. (PRNewsFoto/IDEXX Laboratories, Inc.)

About IDEXX Laboratories, Inc.

IDEXX Laboratories, Inc. is a member of the S&P 500® Index and is a leader in pet healthcare innovation, serving practicing veterinarians around the world with a broad range of diagnostic and information technology-based products and services. IDEXX products enhance the ability of veterinarians to provide advanced medical care, improve staff efficiency and build more economically successful practices. IDEXX is also a worldwide leader in providing diagnostic tests and information for livestock and poultry and tests for the quality and safety of water and milk. Headquartered in Maine, IDEXX Laboratories employs more than 7,000 people and offers products to customers in over 175 countries. For more information about IDEXX, visit: www.idexx.com.

Statement Regarding Non-GAAP Financial Measures

The following provides information regarding certain measures used in this earnings release and/or the accompanying earnings conference call that are not required by, or presented in accordance with, generally accepted accounting principles in the United States of America ("GAAP"), otherwise referred to as non-GAAP financial measures. To supplement the Company's consolidated results presented in accordance with GAAP, the Company has disclosed non-GAAP financial measures that exclude or adjust certain items. Management believes these non-GAAP financial measures provide useful supplemental information for its and investors' evaluation of the Company's business performance and liquidity and are useful for period-over-period comparisons of the performance of the Company's business and its liquidity and to the performance and liquidity of our peers. While management believes that these non-GAAP financial measures are useful in evaluating the Company's business, this information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly titled measures reported by other companies.

The following section defines terms and conventions used in this earnings release and/or the accompanying earnings conference call, including non-GAAP financial measures, and includes applicable information regarding reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, as appropriate:

Accounting Standards Update 2016-09 (ASU 2016-09): Effective January 1, 2017, we adopted the FASB issued amendments which simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, recognition of share compensation award forfeitures, classification of awards as either equity or liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows.

Constant currency - Constant currency references are non-GAAP financial measures which exclude the impact of changes in foreign currency exchange rates and are consistent with how management evaluates our performance and comparisons with prior and future periods. We estimated the net impacts of currency on our revenue, gross profit, operating profit, and EPS results by restating results to the average exchange rates or exchange rate assumptions for the comparative period, which includes adjusting for the estimated impacts of foreign currency hedging transactions and certain impacts on our effective tax rates.  These estimated currency changes reduced second quarter 2017 revenue growth by 1%, gross profit margin growth by 10 basis points, had an immaterial impact on operating profit margin growth, and reduced EPS growth by 2%; reduced projected full-year 2017 revenue growth by approximately 0.5%, projected operating profit margin growth by 10 basis points, and projected 2017 EPS growth by approximately 1%. Constant currency revenue growth represents the percentage change in revenue during the applicable period, as compared to the prior year period, excluding the impact of changes in foreign currency exchange rates. See the supplementary analysis of results below for revenue percentage change from currency for the three and six months ended June 30, 2017.

Free cash flow - Free cash flow is a non-GAAP financial measure and means, with respect to a measurement period, the cash generated from operations during that period, including tax benefits attributable to share-based compensation, reduced by the Company's investments in property and equipment.  Management believes free cash flow is a useful measure because it indicates the cash the operations of the business are generating after appropriate reinvestment for recurring investments in property and equipment that are required to operate the business. See the supplementary analysis of results below for our calculation of free cash flow for the six months ended June 30, 2017 and 2016.  Since adoption of ASU 2016-09 in 2017, the tax benefit from share-based compensation is included in cash generated from operations and will no longer be an adjustment in our free cash flow calculation.  To estimate projected 2017 free cash flow, we have deducted projected purchases of property and equipment (also referred to as capital expenditures) of $90 million.

Growth and organic growth - All references to growth and organic growth refer to growth compared to the equivalent prior year period unless specifically noted.

Organic revenue growth - Organic revenue growth is a non-GAAP financial measure that excludes the impact of changes in foreign currency exchange rates and revenue from business acquisitions. See the supplementary analysis of results below for a reconciliation of reported revenue growth to organic revenue growth for the three and six months ended June 30, 2017.  See the constant currency note above for the impacts of estimated currency changes to the projected 2017 organic revenue growth for the Company.  For the calculation of projected 2017 organic revenue growth, the impacts of revenue from acquisitions is immaterial. 

Note Regarding Forward-Looking Statements 

This earnings release contains statements about the Company's business prospects and estimates of the Company's financial results for future periods that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are included above under "2017 Financial Outlook" and elsewhere and can be identified by the use of words such as "expects," "may," "anticipates," "intends," "would," "will," "plans," "believes," "estimates," "projected", "should," and similar words and expressions. Our forward-looking statements include statements relating to our revenue growth and EPS outlooks; operating and free cash flow forecast; projected impact of foreign currency exchange rates; and projected operating margins and expenses, capital expenditures, gains from foreign currency hedging transactions, tax and EPS benefits from share-based compensation arrangements, effective tax rates, weighted average shares outstanding and interest expense. These statements are based on management's expectation of future events as of the date of this earnings release, and the Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.

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