IDEXX Laboratories, Inc. (IDXX), a veterinary healthcare services provider, reported adjusted earnings per share (EPS) of $1.05 in the third quarter of 2014, up a robust 25% from the year-ago tally of 84 cents. Earnings also breezed past the Zacks Consensus Estimate by 17 cents or 19.3%.
The year-over-year earnings improvement came on the back of remarkable revenue growth across all business segments and regions coupled with double-digit normalized organic growth in Companion Animal Group (CAG) Diagnostics recurring revenues, during the reported quarter. Strong profit flow-through and benefits obtained from reduced shares outstanding also contributed to the positive earnings growth at IDEXX.
However, without taking into consideration the one-time items, reported EPS for the third quarter came in at $1.03, an impressive improvement of 19.8% from the prior-year period's equivalent of 86 cents.
IDEXX's upbeat earnings have naturally impressed investors. Since the news release, IDEXX's share price has climbed 9.8% to eventually close at $138.76 yesterday.
Revenues in Detail
IDEXX reported revenues of $383.5 million in the third quarter, increasing 13.4% year over year. The top line also comfortably beat the Zacks Consensus Estimate of $372 million. The year-over-year improvement was led by strong growth across all regions in the company's CAG business, continued solid momentum in Water revenues as well as better-than-expected performance in Livestock, Poultry and Dairy (LPD).
Region-wise, IDEXX experienced solid 12.4% year-over-year growth in the U.S amounting to revenues of $225.3 million. Revenue growth in the U.S. was driven by 11% normalized gains in CAG diagnostic recurring levels reflecting 14% gains in reference lab and consultant service revenues, 13% gains in instrument consumable revenues and 3% growth in revenues from rapid assay kits.
In the international market, the company's sales rose 14.7% year over year to $158.2 million, on account of solid growth observed in international CAG diagnostic recurring revenues fueled by strong double digit organic gains in Europe, Asia, Australia and Latin America.
Segment Analysis
IDEXX derives revenues from four operating segments, viz. CAG; Water; Livestock, Poultry and Dairy (LPD); and Other.
In the third quarter, the company reported revenues of $320.7 million in CAG, up 13% year over year. The segment's top line increased 12% organically primarily due to 15% growth in IDEXX instrument consumables, a 14% rise in reference lab services and 5% growth in rapid assay kits. Additionally, organic revenue growth of 10% in the company's practice management and digital imaging systems business, owing to continued expansion of the Pet Health Network Pro business, also contributed to this segment's growth.
The Water segment reported revenues of $25.7 million, up 10.8% year over year and up 9% organically. Organic growth was primarily driven by solid growth observed across North America, Europe and Asia-Pacific, primarily reflecting benefits from the new customer acquisitions.
Third-quarter LPD revenues grossed $29.6 million, registering an increase of 18% year over year and organic growth of 14%. The better-than-expected results came on the back of increased sales in China and high levels 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 increased 21.8% year over year to $7.4 million.
Margin Trends
Gross profit increased 14.8% to $213.3 million in the third quarter of 2014. Consequently gross margin improved 70 basis points (bps) compared to the year-ago quarter equivalent of 55.6%. Gross margins gained from reduced products and service cost which in turn reflected volume leverage and modest increases in selling price. However, lower foreign exchange hedging gains partially offset these positive impacts.
Sales and marketing expenses spiked 17.5% to $70.6 million while general and administrative expenses increased 18.2% to $45.7 million. Research and development expenses also scaled up 15.2% year over year to $24.8 million. Operating margin contracted 50 bps to 18.8% in the reported quarter, on account of higher year-over-year operating expenses.
Financial Position
IDEXX exited the third quarter with cash and cash equivalents of $292.7 million, up from $279.1 million at year-end 2013. At the end of Sep 30, 2014 net operating cash flow was $208.5 million, up 15.5% year over year. The company also reported total long-term debt of $350 million (net of current portion) as of Sep 30, 2014.
During the quarter under review, the company bought back approximately 2.2 million shares at a price of $272 million.
Outlook for 2014
IDEXX has raised its EPS guidance, while lowered its revenue guidance for fiscal 2014. Revenues are now expected in the range of $1.505 million to $1.510 million, (down from earlier guidance of $1.510-$1.520 million) representing annualized growth of 9.5% organically. This pins the current outlook at the high end of the earlier guided organic growth range of 9.0% to 9.5%. The current Zacks Consensus Estimate of $1.50 billion for 2014 revenues, however, lies below the company's guidance.
IDEXX has also raised its EPS guidance for 2014. The company now expects adjusted EPS in the range of $3.85 to $3.90 (previous guidance was $3.79–$3.86). Adjusted EPS growth is projected in the range of 12% to 14%. The current Zacks Consensus Estimate of $3.79 lies lower than the company guided EPS range.
IDEXX expects operating margins of about 19.5% consistent with its prior outlook and goals for full year 2014.
Outlook for 2015
Management has also raised its baseline preliminary outlook for 2015 and now expects 13% to 14% organic revenue growth in the next fiscal, up from the previous guidance of 9%-10% organic growth.
The company has also provided guidance for EPS for 2015. The company expects the adjusted EPS to be in the range of $4.38-$4.48 in 2015.
Our Take
We are impressed with IDEXX's robust third-quarter 2014 results which handily beat both the top and bottom-line estimates. We believe IDEXX's outstanding business momentum will support the company's successful expansion in the quarters ahead.
Currently IDEXX is placing Catalyst Dx test ahead of its future plans for the global rollout of Catalyst One in 2015. This, in turn, is expected to result in market expansion for the company and garner higher profitability.
Currently, IDEXX carries a Zacks Rank #3 (Hold). Some other medical instrument stocks that warrant a look are AngioDynamics Inc. (ANGO), Alphatec Holdings, Inc. (ATEC) and Edwards Lifesciences Corp. (EW). While AngioDynamics sports a Zacks Rank #1 (Strong Buy), Alphatec and Edwards hold a Zacks Rank #2 (Buy).
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