On October 31, 2019 IDEXX Laboratories, Inc. (NASDAQ: IDXX), a global leader in veterinary diagnostics, veterinary practice software and water microbiology testing, reported revenues of $605 million for the third quarter of 2019, an increase of 11% on a reported basis, and 12% on an organic basis, including over 1% in growth benefit related to equivalent business day effects (Press release, IDEXX Laboratories, OCT 31, 2019, View Source [SID1234550163]).

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Third quarter results were driven by CAG Diagnostics recurring revenue growth of 13% reported and 14% organic, including a nearly 2% growth benefit related to equivalent business day effects. CAG Diagnostics recurring revenue results reflected strong 13% reported and organic revenue growth in the U.S. and international revenue growth of 12% reported and 16% organic. Global results reflected strong double-digit growth in IDEXX VetLab consumables, reference laboratory diagnostic and consulting services revenues, and high single-digit growth in rapid assay products revenues. IDEXX VetLab consumables revenue growth was supported by an 18% year-over-year increase in the Catalyst chemistry analyzer installed base, benefiting from 1,270 placements at new and competitive accounts globally, a 23% year-over-year increase. Overall organic revenue growth results in the third quarter were also supported by high single-digit organic growth in Water and livestock, poultry and dairy ("LPD") revenues.

Earnings per diluted share ("EPS") was $1.24 for the third quarter, representing reported EPS growth of 18% and comparable constant currency EPS growth of 21%. These results reflected benefits from strong CAG Diagnostics recurring revenue gains, which supported a higher than projected 160 basis point improvement in operating margins on a reported basis and 130 basis points on a constant currency basis.

The Company is updating its full year 2019 revenue growth outlook to 8% – 8.5% on a reported basis and 10% – 10.5% on an organic basis. This results in an increase of $5 million at midpoint, reflecting expectations for overall organic growth and CAG Diagnostics recurring organic revenue growth at the high end of previous estimates, incorporating strong third quarter results. This outlook is supported by expectations for CAG Diagnostics recurring reported revenue growth of 9.5% – 10% and organic revenue growth of 11.5% – 12%, consistent with strong year-to-date trends. The Company is lowering its 2019 EPS guidance range by $0.12 per share at mid-point to $4.72 – $4.78, as benefits from strong operating performance are offset by a projected $0.18 negative impact from CEO transition charges in the fourth quarter of 2019. Our updated 2019 EPS guidance is for 11% – 12% in reported EPS growth, or 15% – 16% on a comparable constant currency basis. Our EPS outlook reflects expectations for full year operating margin improvement of 55 – 70 basis points on a constant currency basis, including 55 basis points of unfavorable impact related to CEO transition charges in the fourth quarter of 2019.

The Company is providing preliminary 2020 guidance for reported and organic revenue growth of 9% – 10.5%, supported by sustained high growth CAG Diagnostics recurring revenues, and EPS of $5.30 – $5.46, supported by expectations of 100 – 150 basis points of constant currency operating margin expansion, including 50 basis points of benefit related to favorable comparisons to 2019 CEO transition charges. Reported 2020 EPS growth of 12% – 15% incorporates $0.11 of negative projected year-over-year impact from foreign exchange effects and a $0.12 year-over-year reduction in projected benefits from share-based compensation tax benefits. Adjusting for these impacts, the 2020 EPS guidance reflects projected year-over-year EPS growth of 17% – 20% on a comparable constant currency basis.

"IDEXX delivered outstanding operating results in the third quarter, supported by continued strong growth in CAG Diagnostics recurring revenues. Our high-return investments in our global commercial capability are driving the global adoption of our innovative products and services, including the rapid expansion of our Catalyst installed base and increased utilization of IDEXX’s proprietary Fecal Dx Antigen Panel and IDEXX SDMA test," said Jay Mazelsky, the Company’s President and Chief Executive Officer. Mazelsky continued," It is clear that our customers are benefiting from increased interaction and support from IDEXX engagement as we work together to advance the standard of companion animal healthcare. We are building on this momentum with an eight percent expansion of our U.S. field commercial capability in the fourth quarter of this year, which will position us well to continue delivering strong financial results aligned with our long-term goals."

Third Quarter Performance Highlights

Companion Animal Group

The Companion Animal Group generated 12% reported and 13% organic revenue growth for the quarter, supported by CAG Diagnostics recurring revenue growth of 13% reported and 14% organic, which included nearly 2% of growth benefit related to equivalent business day effects.

IDEXX VetLab consumables generated 16% reported and 18% organic revenue growth, including an estimated 3% of growth benefit related to equivalent business day effects. IDEXX VetLab consumables growth was 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 11% reported and 12% organic revenue growth. These results were driven by continued strong double-digit organic growth in the U.S., reflecting volume gains with existing customers, moderate net price realization and benefits from net customer additions. Global organic revenue growth rates were supported by improved high single-digit revenue gains in international markets.
Rapid assay products generated 9% reported and 10% organic revenue growth, including an estimated 3% of growth benefit related to equivalent business day effects. Rapid assay revenue growth was supported by volume gains across our SNAP portfolio of products, including 4Dx Plus, high customer retention rates and moderate net price gains.
Veterinary software, services and diagnostic imaging systems revenue grew 6% on a reported and organic basis, driven by growth in subscription-based service revenues, including continued expansion of our practice management platforms. Overall segment growth was constrained by comparisons to very strong prior year digital imaging system placement levels.

Water

Water achieved revenue growth of 5% on a reported basis and 7% on an organic basis in the third quarter, supported by solid volume growth across all regions.

Livestock, Poultry and Dairy ("LPD")

LPD generated revenue growth of 7% on a reported basis and 10% on an organic basis for the third quarter. These results reflected revenue gains across the product portfolio including increases in diagnostic testing in Asia from new testing programs and from testing associated with alternative food sources, such as poultry. Third quarter results also benefited from favorable comparisons to soft prior year revenue levels in the Asia region. These gains were partially offset by moderate declines in herd health screening, compared to strong prior year levels, and continued impacts on swine testing from the prolonged outbreak of African swine fever in China.

Gross Profit and Operating Profit

Gross profits increased 13% year-over-year, and gross margin was 57%, an increase of 100 basis points compared to prior year period results on a reported basis and 60 basis points on a constant currency basis. Gross margin improvement was supported by mix benefits from strong growth in IDEXX VetLab consumables revenue, reference laboratory productivity gains and continued moderate CAG Diagnostics recurring revenue net price gains.

Operating margin was 23.1% in the quarter, 160 basis points higher than the prior year period results on a reported basis and 130 basis points on a constant currency basis, supported by gross margin gains and operating expense leverage on high revenue growth. Operating expenses increased 9% on a reported basis and 10% on a constant currency basis, driven by increases in our CAG segment’s sales and marketing costs and research and development spending.

2019 and 2020 Financial Outlook

The following guidance for 2019 and 2020 reflects the assumptions that for the remainder of 2019 and the full year 2020, the value of foreign currencies will remain at the following rates in U.S. dollars:

the euro at $1.09;
the British pound at $1.26;
the Canadian dollar at $0.75; and
the Australian dollar at $0.67;
and relative to the U.S. dollar:

the Japanese yen at ¥110.00;
the Chinese renminbi at RMB 7.22; and
the Brazilian real at R$4.21.
Outlook for 2019

We are updating our 2019 revenue outlook to $2,395 million – $2,405 million, reflecting expectations for reported revenue growth of 8% – 8.5% and organic revenue growth of 10% – 10.5%. At mid-point, the updated revenue outlook is $5 million above our previous guidance reflecting projected organic revenue growth at the higher end of our previous guidance range. Our outlook now reflects expectations for CAG Diagnostics recurring reported revenue growth of 9.5% – 10% and organic revenue growth of 11.5% – 12%. Modest benefits from a recently completed acquisition are offset by refinements to our foreign exchange rate assumptions. At the foreign exchange rate assumptions in 2019 noted above, we estimate that the effect of the stronger U.S. dollar will reduce full year 2019 reported revenue growth by approximately 2%.

We are updating our 2019 EPS outlook to $4.72 – $4.78 per share, reflecting a decrease of $0.12 per share at mid-point, incorporating a projected $0.18 negative impact from CEO transition charges in the fourth quarter of 2019 and a negative $0.02 per share impact related to updated foreign exchange assumptions. These impacts are partially offset by $0.06 in operational improvement related to strong third quarter performance and lower projections for net interest costs, as well as $0.02 per share of improvement related to updated estimates for share-based compensation tax benefits. For the full year, we now expect a foreign exchange headwind of $0.06 per share, net of projected hedge gains of approximately $11.5 million in 2019. The updated outlook represents EPS growth of 11% – 12% on a reported basis, and 15% – 16% on a comparable constant currency growth basis.

The Company continues to project free cash flow at approximately 60% – 65% of net income in 2019 and capital spending of approximately $160 million – $175 million, including an estimated $70 million of capital spending related to the completion of our Westbrook, Maine headquarters expansion and the relocation and expansion of our core laboratory in Germany.

The Company provides the following updated guidance for 2019:

We now expect an effective tax rate of approximately 20%, including approximately 1% of impact related to CEO transition charges. The effective tax rate outlook incorporates expectations for share-based compensation tax benefits of $15 million or approximately 300 basis points, resulting in EPS benefits of $0.17 per share. We continue to project a reduction in weighted average shares outstanding of approximately 1%, and now expect interest expense, net of interest income, of approximately $31.5 million reflecting current and projected borrowings.

Preliminary Outlook for 2020

The Company provides the following preliminary guidance for 2020:

Amounts in millions except per share data and percentage

The Company’s 2020 outlook is for continued strong overall organic revenue growth, supported by sustained high growth in CAG Diagnostics recurring revenues.

At the foreign exchange rates assumed in this earnings release, we estimate that foreign exchange impacts will decrease 2020 reported revenue growth by approximately 0.5%, and EPS by approximately $0.11 per share, including impacts from comparisons to approximately $11.5 million of projected foreign exchange hedge gains in 2019.

Our 2020 EPS outlook includes approximately $0.04 – $0.06 per share of projected benefit from share-based compensation tax benefits, $0.12 per share below higher than expected 2019 levels at midpoint. Our preliminary outlook for our effective tax rate is 21% – 22% and for a reduction in weighted average shares outstanding from continued stock repurchases of approximately 1%. We are projecting interest expense, net of interest income, of approximately $36 million, reflecting current and projected borrowings and the assumed continuation of current floating interest rate costs.

Conference Call and Webcast Information

IDEXX Laboratories, Inc. will be hosting a conference call today at 8:30 a.m. (Eastern) to discuss its third quarter 2019 results and management’s outlook. To participate in the conference call, dial 1-800-230-1096 or 1-612-332-0335 and reference confirmation code 472946. Replay of the conference call will be available through Thursday, November 7, 2019 by dialing 1-800-475-6701 or 1-320-365-3844 and referencing replay code 472946. 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.