IDEXX Laboratories Announces Third Quarter Results -- Achieves 12% normalized organic revenue growth and Adjusted EPS of $0.54, reflecting continued strong gains in instrument consumable and reference lab sales, and impr

IDEXX Laboratories Announces Third Quarter Results

WESTBROOK, Maine, Oct. 28, 2015 /PRNewswire/ -- IDEXX Laboratories, Inc. (NASDAQ: IDXX) today reported revenues for the third quarter of 2015 of $406 million, an increase of 6% compared to the prior year period. Impacts from the strengthening of the US dollar reduced reported revenue growth by 6%. Normalized organic revenue growth 1,2 for the quarter was 12%, supported by strong growth in the Companion Animal Group ( CAG ) segment, including over 11% normalized organic growth in CAG Diagnostics recurring revenues. Earnings per diluted share ( EPS ) for the quarter was $0.48. During the third quarter we recognized an $8 million non-cash impairment charge for capitalized software associated with changes in our customer information management business strategy which had a $0.06 negative impact on EPS and has been excluded from Adjusted EPS 3 . Adjusted EPS was $0.54 for the quarter, an increase of 2% compared to the prior year period while absorbing a negative $0.04 per share impact related to net changes in foreign exchange.

The Company's strong growth momentum continued, supported by exceptionally strong instrument placements in both North American and international markets. Total premium instrument placements were up 54%, with Catalyst placements up almost 100%, compared to last year. We achieved 569 Catalyst placements in North America and 756 in international markets, benefiting from our expanded global launch of Catalyst One in Asia and Brazil. Growth in instrument placements is fundamental to our strategy of driving high margin CAG Diagnostics recurring revenue, and we are well positioned to achieve well over 9,000 chemistry and hematology instrument placements for the full year 2015, said Jonathan Ayers, the Company's Chairman and Chief Executive Officer.

We also continue to see very strong growth in reference laboratory diagnostic and consulting services. SDMA, our unique kidney function test which is now included in all IDEXX reference lab chemistry panels in both the US and Canada, continues to gain traction. We have seen a substantive increase in the number of customers that use a competitive lab requesting SDMA panels, an indicator of overall market recognition of the importance of having an SDMA result.

Normalized organic revenue growth for our rapid assay products improved to 7%, supported by growth in SNAP 4Dx Plus in-clinic volume and stabilized trends in first generation products. These results are a testament to our superior test accuracy, as demonstrated by published head-to-head comparison studies. The expanded reach of our fully direct US sales organization allows us to effectively detail these accuracy differences to our customers.

As we look forward, we are refining our 2015 revenue outlook to reflect expectations at the lower end of our earlier guidance range. This outlook reflects moderated market growth trends in Europe and recent macroeconomic impacts, including effects from foreign currency erosion, limiting emerging market gains. We are also refining our 2015 Adjusted EPS outlook to reflect additional headwinds from recent foreign currency changes in emerging markets and a higher effective tax rate, impacted by updated estimates for regional profit mix including foreign currency impacts. Our revised outlook is for 2015 Adjusted EPS performance of $2.04-$2.07 per share, an increase of 11% to 12% on a constant currency 4 basis.

For 2016, we are providing preliminary financial guidance today for 8% to 9% normalized organic growth and EPS of $2.09-$2.16 per share, supported by a targeted 50 basis point improvement in constant currency operating margins, adjusted to exclude the third quarter 2015 software impairment charge. Excluding foreign currency impacts, our outlook equates to 13% to 16% Adjusted EPS growth. Foreign exchange impacts will create year-over-year EPS headwinds of ~ $0.21 per share in 2016, reflecting the lapping of 2015 hedge gains, year-on-year foreign exchange impacts and impacts on our effective tax rate from changes in our regional profit mix related to the strengthening dollar.

Third Quarter Financial Performance Highlights

Third quarter revenue increased 6% to $406 million. Normalized organic revenue growth was 12% and benefited in part from incremental margin capture associated with the move to an all-direct sales model for US CAG Diagnostics.

Gross profits increased 5%, and gross margins decreased slightly to 55.2% from 55.6% in the prior year period. The decrease in gross margins was primarily due to mix impacts from higher instrument revenue.

The following table presents adjusted operating profit, operating margin, EPS, and EPS growth, which are non-GAAP financial measures that have been adjusted for the following items in the current and prior year periods:

Adjusting for items included in the table above, operating margins were 19.7% in the third quarter, down slightly from prior year period adjusted operating margins of 20.1%, including operating expenses that increased 6% primarily due to recurring costs associated with the all-direct US CAG Diagnostics sales strategy and other increases in global commercial resources, partly offset by the favorable impact of foreign exchange.

Financial Outlook

The following guidance for 2015 and 2016 reflects the assumptions that the value of the US dollar relative to other currencies will remain at our current assumptions of the euro at $1.11, the British pound at $1.52, the Canadian dollar at $0.75, the Australian dollar at $0.70 and the Japanese yen at 120 to the US dollar for the balance of 2015 and the full year of 2016, and that the Federal R&D tax credit is not renewed for 2015 or 2016.

Outlook for 2015

The Company is adjusting its previous 2015 financial guidance as summarized below:

As noted, we have adjusted our revenue range to the lower end of our prior guidance. This outlook reflects moderated market growth trends in Europe and recent macroeconomic impacts, including effects from foreign currency erosion, constraining targeted emerging market gains. Our Adjusted EPS outlook also incorporates an approximate $0.03 combined negative impact from updated foreign exchange rate projections and a higher effective tax rate.

At current foreign exchange rates, we estimate that the effect of the stronger US dollar will adversely impact 2015 revenue and Adjusted EPS growth by 6% and 9%, respectively. Our full year financial outlook includes the benefit of hedge contracts which we expect will favorably impact EPS by approximately $0.15 per share.

The favorable deferred revenue impact of our Catalyst One introductory offer is expected to increase revenue growth for the full year 2015 by approximately 0.5%.

We expect an effective tax rate of 30.5%, an increase of approximately 50 basis points over our previous guidance due to updated estimates of regional profit mix. This outlook has not assumed that the Federal R&D tax credit, which benefited EPS by $0.03 per share in 2014, will be renewed in 2015.

We are projecting a reduction in weighted average shares outstanding of approximately 7.5%, and interest expense, net of interest income, of approximately $27 million reflecting current and projected borrowings.

Adjustments to 2015 used for calculating Adjusted EPS and Adjusted EPS growth are summarized below:

Adjustments to EPS for 2014 used for calculating Adjusted EPS growth are summarized below:

Outlook for 2016

The Company provides the following guidance for 2016:

Our 2016 profit outlook reflects expectations for a 50 basis point increase in operating margins compared to 2015, excluding exchange impacts and the 2015 software impairment charge.

Excluding foreign currency change impacts, our guidance aligns with constant currency Adjusted EPS growth of 13% to 16%. In 2016, impacts of prior changes in foreign exchange rates will have a significant impact on our reported results. At foreign exchange rates outlined in this press release, we expect foreign exchange will reduce 2016 revenue growth by ~1%, 2016 operating margins by ~150 basis points and negatively impact EPS by ~$0.21 per share. The operating profit impacts reflect the expiration of hedging contracts that provided ~$20 million ($0.15 per share) of benefit in 2015. We also expect that year-over-year changes in foreign exchange rates, including recent erosion in emerging market currencies, will reduce operating profits by ~$6 million ($0.04 per share). In addition, given negative impacts of these changes on our regional profit mix, we estimate that our effective tax rate will be 31% impacted by ~50 basis points negatively ($0.02 per share) related to foreign exchange movements, net of benefits from tax planning initiatives.

We are projecting a reduction in weighted average shares outstanding of approximately 3.5% and interest expense, net of interest income, of $31.5 million to $32.5 million reflecting current and projected borrowings.

Statement Regarding Non-GAAP Financial Measures

The following provides information regarding certain measures used in this earnings release that are not required by, or presented in accordance with, generally accepted accounting principles in the United States of America ( GAAP ), otherwise referred to herein 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 are useful for period-over-period comparisons of the performance of the Company's business. 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. See the notes to this earnings release for information regarding these non-GAAP financial measures and the reconciliations included in the notes and elsewhere in this earnings release for a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Conference Call and Webcast Information

IDEXX Laboratories, Inc. will be hosting a conference call today at 8:00 a.m. (Eastern) to discuss its third quarter results and management's outlook. To participate in the conference call, dial 1-800-230-1085 or 1-612-288-0329 and reference confirmation code 369419. An audio replay will be available through Wednesday, November 4, 2015 by dialing 1-320-365-3844 and referencing replay code 369419.

The call will also be available via live or archived webcast on the IDEXX Laboratories' website at www.idexx.com and will be available for one year.

About IDEXX Laboratories, Inc.

IDEXX Laboratories, Inc. 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 6,000 people and offers products to customers in over 175 countries.

1 All references to growth and organic growth refer to growth compared to the equivalent prior year period.

2 Normalized organic revenue growth and organic revenue growth are non-GAAP financial measures. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers. Organic revenue growth for the third quarter of 2015 excludes the impact of changes in foreign currency exchange rates, which had a 6.2% unfavorable impact on revenue growth, and revenue from business acquisitions, which contributed 0.7% to revenue growth. See the supplementary analysis of results below for a reconciliation of reported revenue growth to organic revenue growth for the three months ended September 30, 2015. Management also believes that reporting normalized organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue growth performance with prior and future periods. Normalized organic revenue growth excludes the impact of changes in our significant distributors' inventory levels on organic revenue growth. When selling our products through distributors, changes in distributors' inventory levels can impact our reported sales, and these changes may be affected by many factors, which may not be directly related to underlying end-user demand for our products. Effective January 1, 2015, we fully transitioned to an all-direct sales strategy in the US, however changes in prior year US distributors' inventory levels can still impact current year reported growth results. In certain countries internationally, we continue to sell our products through third party distributors. Although we are unable to obtain data for sales to end users from certain less significant non-US third party distributors, we do not believe the impact of changes in these distributors' inventories had or would have a material impact on our growth rates in the relevant periods. Reconciliation of organic revenue growth to normalized organic revenue growth for the third quarter of 2015 includes the following positive/(negative) impacts to organic revenue growth from changes in our significant distributors' inventory levels; Total Company (0.4%), US (0.8%), International 0.3%, CAG (0.4%), CAG Diagnostics Recurring (0.5%), VetLab consumables (0.3%), VetLab service and accessories (0.3%), and Rapid Assay (2.6%).

3 Adjusted EPS and Adjusted EPS growth are non-GAAP financial measures. Management believes that reporting Adjusted EPS provides useful information to investors by facilitating easier comparisons of our EPS performance with prior and future periods. For total year projected comparisons to prior years, 2015 excludes impacts in the third quarter of 2015 related to the software impairment charge, and 2014 excludes impacts in the second half of 2014 related to the all-direct transition and a non-recurring income tax benefit related to the deferral of intercompany profits recorded in the third quarter of 2014. See table above for a reconciliation of 2014 and 2015 EPS adjustments.

4 Constant currency references are non-GAAP financial measures and exclude the impact of changes in foreign currency exchange rates. Management believes that providing constant currency information provides valuable supplemental information regarding our operating margin and EPS performance because it is consistent with how management evaluates our performance and facilitates comparisons with prior and future periods. We estimated the net impacts of currency on our projected operating margin and Adjusted 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 projected 2016 operating margin by ~150 basis points, and projected 2015 and 2016 Adjusted EPS growth by 9% and 11%, respectively.

5 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, excluding tax benefits attributable to share-based compensation arrangements, reduced by the Company's investments in fixed assets. 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 fixed assets that are required to operate the business. See the supplementary analysis of results below for our calculation of free cash flow for the three months ended September 30, 2015 and 2014. With respect to this particular forward-looking projected non-GAAP financial measure, the Company is unable to provide a quantitative reconciliation as the inputs to the measurement are difficult to predict and estimate and are primarily dependent on future events.

1 Amounts presented may not recalculate due to rounding.

1 Amounts presented may not recalculate due to rounding.

1 The percentage change from currency is a non-GAAP financial measure. This measure represents the percentage change in revenue resulting from the difference between the average exchange rates during the three months ended September 30, 2015 and the same period of the prior year applied to foreign currency-denominated revenues for the three months ended September 30, 2014.

2 The percentage change from acquisitions is a non-GAAP financial measure. This measure represents the percentage change in revenue during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 attributed to acquisitions subsequent to June 30, 2014.

3 Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 net of acquisitions and the effect of changes in foreign currency exchange rates.

1 The percentage change from currency is a non-GAAP financial measure. This measure represents the percentage change in revenue resulting from the difference between the average exchange rates during the nine months ended September 30, 2015 and the same period of the prior year applied to foreign currency-denominated revenues for the nine months ended September 30, 2014.

2 The percentage change from acquisitions is a non-GAAP financial measure. This measure represents the percentage change in revenue during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 attributed to acquisitions subsequent to December 31, 2013.

3 Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 net of acquisitions and the effect of changes in foreign currency exchange rates.

1 Free cash flow is a non-GAAP financial measure and is calculated from cash generated from operations, excluding tax benefits attributable to share-based compensation arrangements, reduced by the Company's investments in fixed assets. 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 fixed assets that are required to operate the business. Management also believes this is a common financial measure useful to further evaluate the results of operations.

Contact: Ed Garber, Director, Investor Relations, 1-207-556-8155

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