On August 1, 2019 IDEXX Laboratories, Inc. (NASDAQ: IDXX), a global leader in veterinary diagnostics, veterinary practice software and water microbiology testing, reported revenues of $620 million for the second quarter of 2019, an increase of 7% compared to the prior year period on a reported basis, and 9% on an organic basis (Press release, IDEXX Laboratories, AUG 1, 2019, View Source [SID1234538056]).
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Second quarter results were driven by CAG Diagnostics recurring revenue growth of 9% reported and 11% organic, net of an estimated 0.5% growth headwind related to Brexit order timing and equivalent day effects. Global results reflected 10% reported and 13% organic growth in IDEXX VetLab consumables, continued strong double-digit gains in U.S. reference laboratory diagnostic and consulting services revenues, and 8% reported and 9% organic revenue growth in rapid assay products revenues. High IDEXX VetLab consumables revenue growth was supported by a 21% year-over-year increase in Catalyst chemistry analyzer installed base, benefiting from 761 placements at new and competitive accounts in international markets, a 39% year-over-year increase, and 486 Catalyst placements in North America, an 8% year-over-year increase. Overall organic revenue growth results in the second quarter were moderated by comparisons to very strong prior year period instrument placement levels, and flat organic growth in livestock, poultry and dairy ("LPD") revenue, including declines in swine diagnostic testing related to the African swine fever epidemic in China.
Earnings per diluted share ("EPS") was $1.43 for the second quarter, representing reported EPS growth of 16% and comparable constant currency EPS growth of 19%. These results reflected continued strong CAG Diagnostics recurring revenue gains, which supported a higher than projected 140 basis point improvement in operating margins on a reported basis and 120 basis points on a constant currency basis.
The Company is refining its full year 2019 revenue growth outlook to 7.5% – 9% on a reported basis and 9.5% – 10.5% on an organic basis. This reflects adjustments to our reported revenue growth outlook related to updated projections for foreign exchange rate impacts, and a 0.5% reduction to the high end of previous organic growth guidance, incorporating second quarter results. The Company is refining its full year reported revenue growth guidance for CAG Diagnostics recurring revenues to 9% – 10.5% and reinforcing its organic revenue growth guidance of 11% – 12%, consistent with strong year-to-date trends. The Company is raising its 2019 EPS guidance range by $0.05 per share at mid-point to $4.82 – $4.92, reflecting $0.04 per share in benefit from a lower projected effective tax rate from higher share-based compensation tax benefits and $0.02 per share in operational improvement from raised expectations for full year operating margin improvement of 100 – 125 basis points on a constant currency basis and lower interest expense projections. These benefits are partially offset by a $0.01 per share negative impact related to updated foreign exchange rate assumptions. Our updated EPS guidance is for 13% – 15% in reported EPS growth, or 17% – 20% on a comparable constant currency basis, aligned with our long-term performance goals.
"IDEXX business momentum remained strong in the second quarter driven by high organic growth in CAG Diagnostics recurring revenues. The solid performance we continue to deliver is the result of a deep and talented global team, an unrelenting commitment to innovation, a unique multi-modal strategy and our durable recurring revenue business model. We’re well positioned to build on this foundation through the expansion of key initiatives like IDEXX Preventive Care, which is building momentum as a driver of increased diagnostic testing, supporting faster growth for engaged IDEXX customers," said Jay Mazelsky, the Company’s Interim President and Chief Executive Officer.
Second Quarter Performance Highlights
Companion Animal Group
The Companion Animal Group generated 8% reported and 10% organic revenue growth for the quarter, supported by CAG Diagnostics recurring revenue growth of 9% reported and 11% organic.
IDEXX VetLab consumables generated 10% reported and 13% organic revenue growth, net of a combined 1% negative growth impact related to Brexit related stocking orders which benefited the first quarter and reversed in the second quarter, and equivalent day impacts from international holiday timing. IDEXX VetLab consumables growth was supported by ongoing expansion of our global premium instrument installed base, as well as continued strong customer retention, increases in testing utilization and moderate price gains.
Reference laboratory diagnostic and consulting services generated 8% reported and 10% 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 moderated by consistent mid single-digit revenue gains in international markets.
Rapid assay products generated 8% reported and 9% organic revenue growth, driven by continued volume gains in SNAP 4Dx Plus Tests, supported by planned promotional programs, increasing customer retention rates and moderate net price gains.
Veterinary software, services and diagnostic imaging systems revenue growth increased 9% on a reported basis and 7% on an organic basis, driven by growth in subscription-based service revenues, including continued expansion of our practice management platforms.
Water
Water achieved revenue growth of 6% on a reported basis and 10% on an organic basis in the second quarter, supported by continued strong growth in international markets and mid single-digit gains in the U.S.
Livestock, Poultry and Dairy ("LPD")
LPD revenue declined 5% on a reported basis and was flat on an organic basis for the second quarter, supported by growth in herd health screening and solid increases in pregnancy and poultry testing. These gains were offset by significant declines in swine diagnostic testing related to African swine fever outbreaks in China, and moderate declines in European disease eradication programs.
Gross Profit and Operating Profit
Gross profits increased 8% year-over-year, and gross margin was 57.7%, an increase of 50 basis points compared to prior year period results on a reported basis and 30 basis points on a constant currency basis. Gross margin improvement was driven by mix benefits from strong growth in IDEXX VetLab consumable and rapid assay revenues and lower relative IDEXX VetLab instrument revenue growth, and continued moderate CAG Diagnostics recurring revenue net price gains. Gains in these areas were partially offset by increased investments in reference laboratory capacity and systems, and expanded field software support resources.
Operating margin was 26.5% in the quarter, 140 basis points higher than the prior year period results on a reported basis and 120 basis points on a constant currency basis, supported by gross margin gains and operating expense leverage on high revenue growth. Operating expenses increased 4% on a reported basis and 6% on a constant currency basis, driven by increases in our CAG segment’s sales and marketing costs and research and development spending, with overall expense increases moderated by low constant currency growth in general and administrative costs.
2019 Financial Outlook
The following guidance for 2019 reflects the assumptions that for the remainder of 2019, the value of foreign currencies will remain at the following rates in U.S. dollars:
the euro at $1.11;
the British pound at $1.23;
the Canadian dollar at $0.75; and
the Australian dollar at $0.68;
and relative to the U.S. dollar:
the Japanese yen at ¥110.00;
the Chinese renminbi at RMB 6.97; and
the Brazilian real at R$3.85.
Outlook for 2019
We are refining our 2019 revenue outlook to $2,380 million – $2,410 million, reflecting expectations for reported revenue growth of 7.5% – 9% and organic revenue growth of 9.5% – 10.5%. At mid-point, the updated revenue outlook is $10 million below our previous guidance, including $5 million of impact related to updated foreign exchange estimates and $5 million in operational refinements related to our second quarter results, resulting in a 0.5% reduction to the high end of our earlier organic revenue growth guidance. Our outlook reflects expectations for CAG Diagnostics recurring reported revenue growth of 9% – 10.5% and consistent expectations for organic revenue growth of 11% – 12%. 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 1.5% to 2%.
We are updating our 2019 EPS outlook to $4.82 – $4.92 per share, reflecting an increase of $0.05 per share at mid-point, reflecting $0.04 per share of improvement related to updated estimates for share-based compensation tax benefits and $0.02 per share of benefit from improved expectations for full year operating performance supported by higher projected operating margin gains of 100 – 125 basis points on a constant currency basis and lower projected interest expense. For the full year, we now expect a foreign exchange headwind of $0.04 per share, a $0.01 higher impact compared to previously projected impact, net of projected hedge gains of approximately $11.5 million in 2019. The updated outlook represents EPS growth of 13% – 15% on a reported basis, and 17% – 20% on a comparable constant currency growth basis.
The Company continues to project free cash flow at approximately 60% – 65% of net income in 2019, 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. For 2019, the Company projects capital spending of approximately $160 million – $175 million.
We now expect an effective tax rate of approximately 19.5% – 20%, incorporating expectations for a benefit from share-based compensation accounting of $12 million – $14 million or approximately 250 basis points. We are now projecting a reduction in weighted average shares outstanding of approximately 1%, and interest expense, net of interest income, of approximately $34 million reflecting current and projected borrowings.
Conference Call and Webcast Information
IDEXX Laboratories, Inc. will be hosting a conference call today at 8:30 a.m. (Eastern) to discuss its second quarter 2019 results and management’s outlook. To participate in the conference call, dial 1-800-230-1093 or 1-612-288-0337 and reference confirmation code 470018. Replay of the conference call will be available through Thursday, August 8, 2019 by dialing 1-800-475-6701 or 1-320-365-3844 and referencing replay code 470018. 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.