On April 30, 2020 IDEXX Laboratories, Inc. (NASDAQ: IDXX), a global leader in veterinary diagnostics, veterinary practice software and water microbiology testing, reported first quarter results and business updates related to the 2019 novel coronavirus (COVID-19) pandemic and its impact on market conditions (Press release, IDEXX Laboratories, APR 30, 2020, View Source [SID1234556883]).
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First Quarter Results
The Company reports revenues of $626 million for the first quarter of 2020, an increase of 9% on a reported and organic basis. First quarter results were driven by CAG Diagnostics recurring revenue growth of 10% reported and organic, supported by double-digit organic gains in both U.S. and International markets. Results were also supported by strong reported and organic revenue gains in the Company’s Water and Livestock, Poultry and Dairy ("LPD") businesses, aided in part by an estimated $5 million in accelerated stocking orders in these businesses related to the COVID-19 pandemic.
Earnings per diluted share ("EPS") was $1.29 for the first quarter, reflecting benefits from strong CAG Diagnostics recurring revenue gains and controlled operating expense growth, which supported relatively flat operating margins on a reported basis compared to prior year levels and 30 basis points of improvement on a constant currency basis.
"We are pleased to report excellent first quarter financial results, supported by continued double-digit organic gains in CAG Diagnostics recurring revenues, despite late-quarter impacts from the expansion of COVID-19-related stay-at-home policies and social distancing procedures. These results reflect continued strong underlying demand globally for companion animal healthcare," said Jay Mazelsky, the Company’s President and Chief Executive Officer. "We have seen near-term impacts on veterinary practices related to the COVID-19 pandemic and have been closely monitoring the effect of social distancing policies and industry care guidelines on our customers. IDEXX has continued to provide high levels of service delivery and product support for its customers during this time, while advancing key steps to protect the safety and health of its employees, ensure business continuity and mitigate the near-term impacts on demand for IDEXX products and services. The pet-owner bond is stronger than ever, and IDEXX’s strategy, opportunity and fundamentals remain intact, supported by our innovative product portfolio and talented global team. We are very well-positioned for a strong recovery in the highly attractive and resilient companion animal healthcare market. I am extremely proud of the way our team is working together to respond during this time and thank them for their extraordinary commitment to our Purpose."
COVID-19 Pandemic Update
The primary impacts of the COVID-19 pandemic have been seen in IDEXX’s CAG business. While veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continue to deliver essential medical care for sick and injured pets, stay-at-home and social distancing policies being deployed to combat the spread of COVID-19, and prioritization of sick and emergency testing at veterinary clinics, have resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits.
As an example, tracking of weekly U.S. companion animal practice data, available in the Q1 2020 Earnings Snapshot accessible on the IDEXX website, www.idexx.com/investors, indicates year-over-year declines of 15% – 30% in per practice clinical visits from the week ended March 27, 2020 through the week ended April 24, 2020, with lower levels of decline in non-wellness visits and higher levels of decline in wellness visits. These types of trends have contributed to year-over-year declines in demand for IDEXX’s products and services during this period, with varying impacts by region and diagnostic testing modality. These impacts are dynamic, and we have seen meaningful improvement in clinical visit and diagnostic testing trends over the most recent two-week period ended April 24, driven by U.S. and International regions where COVID-19 case management efforts have progressed further and where stay-at-home and social distancing policies have been moderated.
Protecting Employee Health and Safety
In an effort to protect the health and safety of our workforce and their families and communities, the majority of IDEXX employees have been enabled to work remotely during this time. The Company has also implemented other measures, such as restricting travel where possible, to protect the health and safety of our customers, their patients and our employees.
Maintaining Operations and Customer Service
Major IDEXX operations, such as global manufacturing, distribution and our network of reference laboratories, are operating efficiently under enhanced health and safety precautionary measures, and the Company is continuing to serve its customers globally. For Company employees involved in these essential operations, we have implemented recommended best practices to protect the health and safety of our workforce.
Operating Cost and Liquidity Management
The Company has taken proactive steps to prudently control costs in response to the COVID-19 pandemic, while ensuring the Company is well-positioned for a recovery in market conditions. We have advanced actions to reduce quarterly operating expenses by approximately $25 million compared to original plan levels. These actions include the temporary reduction of the salaries of our chief executive officer by 30%, officers and senior executives by 20% and the majority of other salaried employees by 10%, which we intend to stop as market conditions improve, as well as the suspension of cash compensation for IDEXX’s Board of Directors. These savings will mitigate near-term financial impacts from potential revenue declines related to COVID-19 stay-at-home policies and social distancing procedures, which we estimate will flow through at high incremental gross margin rates associated with CAG Diagnostics recurring revenues.
The Company is confident in its working capital and liquidity levels, supported by its high-return recurring revenue business model with relatively low capital intensity. In April, the Company further enhanced its liquidity and financial flexibility by issuing $200 million in 10-year, 2.5% fixed-rate financing and securing an expanded $1 billion credit facility extended through 2023. We also have suspended share repurchase activity.
Product Updates
In April, the Company made IDEXX SARS-CoV-2 (COVID-19) RealPCR Test for pets available to veterinarians in response to customer demand and growing evidence that in rare cases pets living with COVID-19 positive humans can be at risk for infection.
The Company’s human health business, OPTI Medical Systems, has advanced efforts in supporting human COVID-19 testing with the development of a PCR test kit, enabled by IDEXX’s expertise in livestock PCR test development and manufacturing. OPTI Medical Systems has applied for U.S. Food and Drug Administration (FDA) Emergency Use Authorization (EUA) for OPTI SARS-CoV-2 RNA RT-PCR laboratory test kit for the detection of SARS-CoV-2, the virus that causes COVID-19. The test kit provides results in approximately 2 to 3.5 hours following RNA extraction and has been validated on commonly available PCR instruments and extraction methods.
First Quarter Performance Highlights
Companion Animal Group
The Companion Animal Group generated 8% reported and 9% organic revenue growth for the quarter, supported by CAG Diagnostics recurring revenue growth of 10% on a reported and organic basis. Global CAG Diagnostics recurring revenues were trending above our full year goals for 11% to 12% organic growth through early March, with overall first quarter CAG Diagnostics recurring revenue gains constrained by late quarter impacts associated with the COVID-19 pandemic, including stay-at-home policies, social distancing procedures and changes to industry guidelines to emphasize sick patient and emergency procedures, which reduced clinical visits to veterinary practices and related diagnostic testing volumes. While IDEXX’s premium instrument installed base expanded 15% compared to prior year first quarter installed base levels and instrument placement trends were very strong through early March, restrictions on access to veterinary practices also constrained instrument placements late in the first quarter, contributing to declines in reported instrument revenues.
IDEXX VetLab consumables generated 13% reported and 14% organic revenue growth, supported by ongoing expansion of our global premium instrument installed base, continued strong customer retention, increases in testing utilization and moderate net price gains.
Reference laboratory diagnostic and consulting services generated 9% reported and 8% organic revenue growth, supported by volume gains with existing customers, moderate net price realization and benefits from net customer additions.
Rapid assay products generated reported and organic revenue growth of 6%, supported by volume gains across our SNAP portfolio of products, including SNAP 4Dx Plus Test, high customer retention rates and moderate net price gains.
Veterinary software, services and diagnostic imaging systems revenue grew 11% on a reported and organic basis, driven by growth in subscription-based service revenues, supported by continued expansion of our practice management platforms.
Water
Water achieved revenue growth of 13% on a reported basis and 15% on an organic basis in the first quarter, including over $2 million or 8% of year-over-year estimated revenue growth benefit related to timing of orders, including accelerated customer stocking orders related to the COVID-19 pandemic.
Livestock, Poultry and Dairy ("LPD")
LPD generated revenue growth of 8% on a reported basis and 12% on an organic basis for the first quarter, including approximately $3 million or 9% of year-over-year estimated revenue growth benefit related to timing of orders, including accelerated customer stocking orders related to the COVID-19 pandemic. These results also reflect benefits from increases in African Swine Fever diagnostic testing programs in Asia and poultry testing. These gains were constrained by lower herd health screening levels, compared to strong prior year results.
Gross Profit and Operating Profit
Gross profits increased 8% on a reported basis and 10% on a constant currency basis. Gross margin of 57.4% was down slightly compared to prior year period results on a reported basis and was flat compared to prior year period levels on a constant currency basis. Gross margin results reflected favorable mix from strong consumable revenue growth, high Water revenue growth and lower CAG Diagnostics instrument revenues, as well as benefits from moderate net price gains. These favorable factors were offset by relatively lower reference lab margins associated with pressure on reference laboratory revenues late in the quarter related to COVID-19 stay-at-home and social distancing policies, as well as increased reference lab capacity investments advanced in 2019 and effects from the integration of the Marshfield acquisition.
Operating margin was 23.0% in the quarter, 10 basis points lower than the prior year period results on a reported basis and 30 basis points higher on a constant currency basis, supported by operating expense leverage on high revenue growth. Operating expenses increased 9% on a reported and constant currency basis, driven by increases in our CAG segment’s sales and marketing costs and higher general and administrative costs.
2020 Financial Outlook
The Company is withdrawing its previously announced full year 2020 guidance due to the unpredictability of the duration and the magnitude of impacts from the COVID-19 pandemic on veterinary service providers.
Conference Call and Webcast Information
IDEXX Laboratories, Inc. will be hosting a conference call today at 8:30 a.m. (EDT) to discuss its first quarter 2020 results and management’s outlook. To participate in the conference call, dial 1-877-336-4441 or 1-409-207-6985 and reference confirmation code 1103408. 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. (EDT) on that day via the same link and will remain available for one year.
2020 Annual Meeting of Shareholders
IDEXX Laboratories, Inc. will hold its 2020 Annual Meeting of Shareholders (the "2020 Annual Meeting") on Wednesday, May 6, 2020 at 10:00 a.m. (EDT). The 2020 Annual Meeting will be a virtual meeting via an audio webcast at www.virtualshareholdermeeting.com/IDXX2020. The online pre-meeting forum can be accessed before the 2020 Annual Meeting at www.proxyvote.com for beneficial owners and www.proxyvote.com/idxx for registered shareholders. At this online pre-meeting forum, you can submit questions in writing in advance of the 2020 Annual Meeting, vote, view the Rules of Conduct and Procedures relating to the 2020 Annual Meeting and access copies of the Company’s proxy materials and annual report.
Shareholders as of the close of business on March 9, 2020 are entitled to attend the 2020 Annual Meeting, vote their shares electronically and submit questions before and during the audio webcast. The Company will publish the answer to each question submitted by our shareholders on the Company’s Investor Relations website as soon as practicable after the meeting. An archived replay will also be available at www.virtualshareholdermeeting.com/IDXX2020 after the conclusion of the 2020 Annual Meeting and will remain available for one year. Further information on the 2020 Annual Meeting can be found in the Company’s proxy materials.