On January 31, 2020 IDEXX Laboratories, Inc. (NASDAQ: IDXX), reported revenues of $605 million for the fourth quarter of 2019, an increase of 10% compared to the prior year period on a reported and organic basis (Press release, IDEXX Laboratories, JAN 31, 2020, View Source [SID1234553746]). Fourth quarter results were driven by continued high gains in Companion Animal Group ("CAG") Diagnostics recurring revenue globally, as well as strong growth in the Company’s Water and Livestock, Poultry and Dairy ("LPD") businesses. Earnings per diluted share ("EPS") were $1.04 on a reported basis for the fourth quarter, representing EPS growth of 6% and comparable constant currency EPS growth of 17%, which excludes the impact of CEO transition charges of $0.14 per share. Comparable constant currency growth measures are non-GAAP financial measures and have been modified to exclude operating expense impact of $13 million or $0.14 per share of CEO transition charges as described in our footnotes. Fourth quarter EPS results included $0.05 per share from better than projected share-based compensation tax benefits, $0.04 from lower than projected after-tax CEO transition charges and $0.04 in combined upsides from better than expected effective tax rate and interest expense.
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Revenue for the full year of $2,407 million increased 9% on a reported and 10% on an organic basis, driven by 11% reported and 12% organic growth in CAG Diagnostics recurring revenue. For the full year 2019, EPS of $4.89 increased 15% on a reported basis and 21% on a comparable constant currency basis, supported by a reported 80 basis points of operating margin improvement, or 120 basis points on a comparable constant currency basis.
The Company is maintaining its full year 2020 revenue growth outlook of 9% – 10.5% on a reported and organic basis. The Company is increasing its EPS guidance range to $5.42 – $5.58, an increase of $0.12 per share, reflecting consistent expectations for 50 – 100 basis points of comparable constant currency operating margin improvement. The EPS guidance range improvement reflects approximately $0.05 in combined benefit from favorable updates to expectations for interest expense, shares outstanding and flow through of 2019 operating profit performance, approximately $0.05 per share in incremental benefits from projected share-based compensation tax benefits reflecting recent share prices, and $0.02 in benefit from updated projections for foreign exchange rates impacts.
"IDEXX fourth quarter results provided a strong finish to 2019, enabling us to deliver revenue and comparable constant currency EPS gains aligned with our long-term goals. Our full year results were driven by continued strong 12% organic growth in CAG Diagnostics recurring revenues, which now represent 76% of total IDEXX revenue. We are well positioned to build on this progress in 2020, leveraging our expanded global commercial capability and unique innovations which support continued strong diagnostics market growth driven by the adoption of higher standards of care for pets globally," said Jay Mazelsky, the Company’s President and Chief Executive Officer.
Fourth Quarter Performance Highlights
Companion Animal Group
The Companion Animal Group generated 11% reported and organic revenue growth for the quarter. CAG Diagnostics recurring revenue growth remained strong at 11% reported and organic, net of a modest headwind from fewer equivalent days.
IDEXX VetLab consumables generated 11% reported and 12% organic revenue growth, net of a 1.5% growth headwind from fewer equivalent days. IDEXX VetLab consumable growth was supported by our expanding premium instrument installed base and benefits from diagnostics utilization growth. IDEXX Catalyst instrument placements grew 23% to a record number of 2,517, with the majority of placements at new and competitive accounts.
Reference laboratory diagnostic and consulting services generated 13% reported and 11% organic revenue growth, including nearly 1% of equivalent days benefit. These results were driven by continued low to mid-teen organic growth in the U.S. and consistent high-single-digit international reference lab organic revenue gains.
Rapid assay products generated revenue growth of 4% on a reported and organic basis, net of a 1.5% growth headwind from fewer equivalent days. Rapid assay products growth was supported by continued gains in SNAP 4Dx Plus Tests, specialty and first generation rapid assay test volumes.
Veterinary software services and diagnostic imaging systems revenue growth increased 9% on a reported and organic basis, supported by double-digit growth in veterinary software and services.
Water
Water achieved revenue growth of 9% on a reported basis and 10% on an organic basis, including a 1% growth benefit from greater equivalent days. Water growth was supported by solid gains in the U.S. and strong growth in international markets.
Livestock, Poultry and Dairy ("LPD")
LPD revenue increased 8% on a reported basis and 10% on an organic basis, reflecting favorable comparisons related to year-end government and distributor order timing, gains from African Swine Fever diagnostic testing programs in China and growth in diagnostic testing associated with alternate food sources, such as poultry.
Gross Profit and Operating Profit
Gross profits increased 10%, and gross margins were flat year-over-year at 54.7%. On a constant currency basis, gross margin was slightly lower than fourth quarter 2018, reflecting increased investment in our reference lab business related to day lab capacity, courier route expansion, technology investments and acquisition integration, partially offset by continued solid net price gains and strong growth in consumable revenues.
Operating margin was 19.1% in the quarter, 190 basis points lower than the prior year period results on a reported basis and relatively flat on a comparable constant currency basis. Operating expenses increased 16% on a reported basis, reflecting the impact of the CEO transition charges, and 10% on a comparable constant currency basis, driven by increases in our CAG segment’s sales and marketing costs and research and development spending.
2020 Financial Outlook
The following guidance for 2020 reflects the assumptions that for the remainder of 2020, the value of foreign currencies will remain at the following rates in U.S. dollars:
the euro at $1.10;
the British pound at $1.29;
the Canadian dollar at $0.76; and
the Australian dollar at $0.68;
and relative to the U.S. dollar:
the Japanese yen at ¥110;
the Chinese renminbi at RMB 7.10; and
the Brazilian real at R$4.14.
Outlook for 2020
The Company is raising its 2020 revenue outlook to $2,620 million – $2,655 million, supported by consistent outlook for reported and organic revenue growth of 9% – 10.5%, reflecting expectations for CAG Diagnostics recurring reported and organic revenue growth of 11% – 12%. Updated foreign exchange rate assumptions increased revenue guidance by approximately $5 million. At the foreign exchange rate assumptions in 2020 noted above, we estimate that the effect of the stronger U.S. dollar will reduce full year 2020 reported revenue growth by approximately 0.5%, EPS growth by approximately 2%, and EPS by an estimated $0.09 per share, including the net impact of lower projected hedge gains of approximately $5 million in 2020.
The Company is increasing its 2020 EPS outlook to $5.42 – $5.58 per share, an increase of $0.12 per share, or targeted growth of 11% – 14% on a reported basis and 13% – 16% on a comparable constant currency basis, which excludes a 3% growth rate benefit from comparisons to the 2019 CEO transition charges. The Company is projecting free cash flow at approximately 75% – 80% of net income in 2020, including approximately 7% impact related to $35 million of major facility capital spending for the completion of our Westbrook, Maine headquarters expansion, the relocation and expansion of our core laboratory in Germany, and the acquisition of real estate associated with a leased U.S. reference lab facility. Spending for major facility projects was $58 million in 2019, lower than earlier estimates driven by later timing of cash deployment. For 2020, the Company projects total capital spending, including major projects, of approximately $140 million – $155 million.
The Company provides the following updated guidance for 2020:
Amounts in millions except per share data and percentages
We expect an effective tax rate of 20% – 21%, including expectations for share-based compensation tax benefits of $7.5 million – $9.5 million or approximately 150 basis points. We are now projecting a reduction in weighted average shares outstanding of approximately 1% – 1.5%, and interest expense, net of interest income, of approximately $35 million, reflecting current and projected borrowings.
Conference Call and Webcast Information
IDEXX Laboratories, Inc. will host a conference call today at 8:30 a.m. (Eastern) to discuss its fourth quarter and full year 2019 results and management’s outlook. To participate in the conference call, dial 1-844-767-5679 or 1-409-207-6967 and reference access code 176532. Replay of the conference call will be available through Friday, February 7, 2020 by dialing 1-866-207-1041 or 1-402-970-0847 and referencing replay code 8036553. 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.