UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the quarterly period ended March 31,
2010
|
|
OR
|
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the transition period from _______________ to
_______________.
|
COMMISSION
FILE NUMBER: 0-19271
IDEXX
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
01-0393723
|
(State
or other jurisdiction of incorporation
or
organization)
|
(IRS
Employer Identification No.)
|
|
|
ONE
IDEXX DRIVE, WESTBROOK, MAINE
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04092
|
(Address
of principal executive offices)
|
(ZIP
Code)
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|
207-556-0300
|
(Registrant’s
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x
|
|
Accelerated
filer
|
o
|
Non-accelerated
filer o
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. The number of shares outstanding of
the registrant’s Common Stock, $0.10 par value, was 57,652,045 on April 19,
2010.
IDEXX
LABORATORIES, INC.
Quarterly
Report on Form 10-Q
Table of
Contents
Item
No.
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Page
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PART
I—FINANCIAL INFORMATION
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|
Item
1.
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Financial
Statements (unaudited)
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|
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Condensed
Consolidated Balance Sheets as of March 31, 2010 and December 31,
2009
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3
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Condensed
Consolidated Statements of Operations for the Three Months Ended March 31,
2010 and 2009
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4
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2010 and 2009
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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26
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Item
4.
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Controls
and Procedures
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27
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PART
II—OTHER INFORMATION
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|
Item
1A.
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Risk
Factors
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28
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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34
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Item
6.
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Exhibits
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35
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Signatures
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36
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Exhibit
Index
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37
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PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements.
IDEXX
LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except per share amounts)
(Unaudited)
|
|
March
31,
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|
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December
31,
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|
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2010
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2009
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ASSETS
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Current
Assets:
|
|
|
|
|
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Cash
and cash equivalents
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$
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106,354
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|
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$
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106,728
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Accounts
receivable, net of reserves of $2,384 in 2010 and $2,331 in
2009
|
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130,519
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|
|
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115,107
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|
Inventories,
net
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|
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122,384
|
|
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110,425
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Deferred
income tax assets
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22,872
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|
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25,188
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Other
current assets
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16,240
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18,890
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Total
current assets
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398,369
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|
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376,338
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Long-Term
Assets:
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|
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Property
and equipment, net
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197,063
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199,946
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Goodwill
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146,534
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148,705
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Intangible
assets, net
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61,304
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63,907
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Other
long-term assets, net
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21,014
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19,631
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Total
long-term assets
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425,915
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432,189
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TOTAL
ASSETS
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$
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824,284
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$
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808,527
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
Liabilities:
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Accounts
payable, principally trade accounts
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$
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24,104
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$
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19,133
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Accrued
liabilities
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|
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94,616
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|
|
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104,959
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Line
of credit
|
|
|
157,388
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|
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118,790
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Current
portion of long-term debt
|
|
|
825
|
|
|
|
813
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Current
portion of deferred revenue
|
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12,234
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|
|
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12,610
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Total
current liabilities
|
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289,167
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256,305
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Long-Term
Liabilities:
|
|
|
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Deferred
income tax liabilities
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17,795
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18,283
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Long-term
debt, net of current portion
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4,070
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4,281
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Long-term
deferred revenue, net of current portion
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4,421
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|
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3,813
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Other
long-term liabilities
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11,699
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11,266
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Total
long-term liabilities
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37,985
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37,643
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Total
liabilities
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327,152
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293,948
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Commitments
and Contingencies (Note 12)
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Stockholders’
Equity:
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Common
stock, $0.10 par value: Authorized: 120,000 shares;
Issued:
96,794 and 96,334 shares in 2010 and 2009, respectively
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9,679
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9,633
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Additional
paid-in capital
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593,924
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580,797
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Deferred
stock units: Outstanding: 127 and 117 units in 2010 and 2009,
respectively
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4,753
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|
|
|
4,301
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Retained
earnings
|
|
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857,282
|
|
|
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824,256
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Accumulated
other comprehensive income
|
|
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6,543
|
|
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10,341
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Treasury
stock, at cost: 39,258 and 38,118 shares in 2010 and 2009,
respectively
|
|
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(975,061
|
)
|
|
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(914,759
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)
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Total
IDEXX Laboratories, Inc. stockholders’ equity
|
|
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497,120
|
|
|
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514,569
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Noncontrolling
interest
|
|
|
12
|
|
|
|
10
|
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Total
stockholders’ equity
|
|
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497,132
|
|
|
|
514,579
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
824,284
|
|
|
$
|
808,527
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
IDEXX
LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(Unaudited)
|
|
For
the Three Months Ended
March
31,
|
|
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2010
|
|
|
|
2009
|
|
|
|
|
|
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Revenue:
|
|
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|
|
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Product
revenue
|
|
$
|
176,761
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|
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$
|
155,895
|
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Service
revenue
|
|
|
91,764
|
|
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80,560
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Total
revenue
|
|
|
268,525
|
|
|
|
236,455
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|
Cost
of Revenue:
|
|
|
|
|
|
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Cost
of product revenue
|
|
|
68,634
|
|
|
|
59,267
|
|
Cost
of service revenue
|
|
|
57,530
|
|
|
|
52,755
|
|
Total
cost of revenue
|
|
|
126,164
|
|
|
|
112,022
|
|
Gross
profit
|
|
|
142,361
|
|
|
|
124,433
|
|
|
|
|
|
|
|
|
|
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Expenses:
|
|
|
|
|
|
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Sales
and marketing
|
|
|
44,416
|
|
|
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40,985
|
|
General
and administrative
|
|
|
32,808
|
|
|
|
29,068
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Research
and development
|
|
|
16,709
|
|
|
|
15,939
|
|
Income
from operations
|
|
|
48,428
|
|
|
|
38,441
|
|
Interest
expense
|
|
|
(365
|
)
|
|
|
(640
|
)
|
Interest
income
|
|
|
53
|
|
|
|
244
|
|
Income
before provision for income taxes
|
|
|
48,116
|
|
|
|
38,045
|
|
Provision
for income taxes
|
|
|
15,088
|
|
|
|
11,974
|
|
Net
income
|
|
|
33,028
|
|
|
|
26,071
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
2
|
|
|
|
-
|
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
$
|
33,026
|
|
|
$
|
26,071
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.57
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.43
|
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,033
|
|
|
|
59,172
|
|
Diluted
|
|
|
60,029
|
|
|
|
60,606
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
IDEXX
LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(Unaudited)
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
33,028
|
|
|
$
|
26,071
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,246
|
|
|
|
12,556
|
|
Loss
on disposal of property and equipment
|
|
|
1,092
|
|
|
|
491
|
|
Increase
(decrease) in deferred compensation liability
|
|
|
101
|
|
|
|
(100
|
)
|
Provision
for uncollectible accounts
|
|
|
385
|
|
|
|
246
|
|
Provision
for deferred income taxes
|
|
|
769
|
|
|
|
1,465
|
|
Share-based
compensation expense
|
|
|
3,344
|
|
|
|
2,930
|
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
(3,318
|
)
|
|
|
(161
|
)
|
Changes
in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(17,393
|
)
|
|
|
(6,072
|
)
|
Inventories
|
|
|
(12,179
|
)
|
|
|
(8,067
|
)
|
Other
assets
|
|
|
1,441
|
|
|
|
179
|
|
Accounts
payable
|
|
|
5,081
|
|
|
|
(4,315
|
)
|
Accrued
liabilities
|
|
|
(4,916
|
)
|
|
|
(12,394
|
)
|
Deferred
revenue
|
|
|
524
|
|
|
|
(205
|
)
|
Net
cash provided by operating activities
|
|
|
19,205
|
|
|
|
12,624
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(7,789
|
)
|
|
|
(9,114
|
)
|
Proceeds
from disposition of pharmaceutical product lines
|
|
|
-
|
|
|
|
1,377
|
|
Proceeds
from sale of property and equipment
|
|
|
27
|
|
|
|
1,046
|
|
Acquisitions
of equipment leased to customers
|
|
|
(684
|
)
|
|
|
(188
|
)
|
Acquisitions
of intangible assets
|
|
|
(144
|
)
|
|
|
-
|
|
Net
cash used by investing activities
|
|
|
(8,590
|
)
|
|
|
(6,879
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
on revolving credit facilities, net
|
|
|
38,523
|
|
|
|
15,019
|
|
Payment
of other notes payable
|
|
|
(200
|
)
|
|
|
(190
|
)
|
Purchase
of treasury stock
|
|
|
(57,728
|
)
|
|
|
(14,986
|
)
|
Proceeds
from exercises of stock options and employee stock purchase
plans
|
|
|
6,483
|
|
|
|
3,281
|
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
3,318
|
|
|
|
161
|
|
Net
cash provided (used) by financing activities
|
|
|
(9,604
|
)
|
|
|
3,285
|
|
Net
effect of changes in exchange rates on cash
|
|
|
(1,385
|
)
|
|
|
(1,603
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(374
|
)
|
|
|
7,427
|
|
Cash
and cash equivalents at beginning of period
|
|
|
106,728
|
|
|
|
78,868
|
|
Cash
and cash equivalents at end of period
|
|
$
|
106,354
|
|
|
$
|
86,295
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
373
|
|
|
$
|
1,105
|
|
Income
taxes paid
|
|
$
|
3,790
|
|
|
$
|
3,337
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
IDEXX
LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1. BASIS OF PRESENTATION
AND PRINCIPLES OF CONSOLIDATION
The
accompanying condensed consolidated financial statements of IDEXX Laboratories,
Inc. (“IDEXX,” the “Company,” “we” or “our”) have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information and with the requirements of
Regulation S-X, Rule 10-01 for financial statements required to be filed as a
part of Form 10-Q.
The
accompanying condensed consolidated financial statements include the accounts of
IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries.
All material intercompany transactions and balances have been eliminated in
consolidation.
The
accompanying condensed consolidated financial statements reflect, in the opinion
of our management, all adjustments necessary for a fair presentation of our
financial position and results of operations. All such adjustments are of a
recurring nature. The consolidated balance sheet data at December 31, 2009 was
derived from audited financial statements, but does not include all disclosures
required by U.S. GAAP. The results of operations for the three months ended
March 31, 2010 are not necessarily indicative of the results to be expected for
the full year or any future period. These condensed consolidated financial
statements should be read in conjunction with this Quarterly Report on Form 10-Q
for the three months ended March 31, 2010, and our Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the Securities and Exchange
Commission.
NOTE
2. ACCOUNTING
POLICIES
Significant
Accounting Policies
The
significant accounting policies used in preparation of these condensed
consolidated financial statements for the three months ended March 31, 2010 are
consistent with those discussed in Note 3 to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31,
2009, except for the adoption of new accounting standards during the three
months ended March 31, 2010 as discussed below.
Recent
Accounting Pronouncements
On
January 1, 2010, we adopted amendments to authoritative literature that
modifies the revenue recognition guidance for establishing separate units
of accounting in a multiple element arrangement and requires the allocation of
arrangement consideration to each deliverable in the arrangement based on
relative selling price of the elements. The selling price for each deliverable
is based on vendor-specific objective evidence ("VSOE") if available,
third-party evidence ("TPE") if VSOE is not available, or best estimate of
selling price ("BESP") if neither VSOE nor TPE is available. BESP must be
determined in a manner that is consistent with that used to determine the price
to sell the specific elements on a standalone basis. The authoritative
literature permits prospective or retrospective adoption, and we elected
prospective adoption. The adoption of these amendments did not have a
significant impact on our financial position, results of operations, or cash
flows for the three months ended March 31, 2010, nor do we anticipate a
significant impact for the year ended December 31, 2010.
On
January 1, 2010, we adopted amendments to authoritative literature that
modifies the revenue recognition guidance for the sale of tangible products that
contain software that is more than incidental to the functionality of the
product as a whole. More specifically, the revised accounting guidance indicates
that when a product has tangible and software components that function together
to deliver the essential functionality of the product as a whole, that product
should be excluded from the scope of software revenue accounting guidance, as
opposed to the previous accounting guidance where such an instrument would be
subject to the rules detailed in the software revenue guidance. The
authoritative literature permits prospective or retrospective adoption, and we
elected prospective adoption. Certain sales of our instruments are subject to
these amendments. However, the adoption of these amendments did not have a
significant impact on our financial position, results of operations, and cash
flows for the three months ended March 31, 2010, nor do we anticipate a
significant impact for the year ended December 31, 2010.
Our
updated revenue recognition policy in its entirety reflecting the adoption of
these amendments is provided in the following discussion.
Revenue
Recognition
We
recognize revenue when four criteria are met: (i) persuasive evidence that an
arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the sales price is fixed or determinable; and (iv) collectability is
reasonably assured. Revenue-generating transactions generally fall into one of
the following categories of revenue recognition:
|
·
|
We
recognize revenue at the time of shipment to U.S. distributors for
substantially all products sold through distributors because title and
risk of loss pass to the distributors on delivery to the common carrier.
Our distributors do not have the right to return products. We recognize
revenue for the remainder of our customers when the product is delivered
to the customer, except as noted
below.
|
|
·
|
We
recognize revenue from the sales of instruments, non-cancelable software
licenses and hardware systems upon installation (and completion of
training if applicable) and the customer’s acceptance of the instrument or
system as we have no significant further obligations after this point in
time.
|
|
·
|
We
recognize service revenue at the time the service is
performed.
|
|
·
|
We
recognize revenue associated with extended maintenance agreements (“EMAs”)
over the life of the contracts using the straight-line method, which
approximates the expected timing in which applicable services are
performed. Amounts collected in advance of revenue recognition are
recorded as a current or long-term liability based on the time from the
balance sheet date to the future date of revenue
recognition.
|
|
·
|
We
recognize revenue on certain instrument systems under rental programs over
the life of the rental agreement using the straight-line method. Amounts
collected in advance of revenue recognition are recorded as a current or
long-term liability based on the time from the balance sheet date to the
future date of revenue recognition.
|
|
·
|
We
recognize revenue on practice information management systems sales either
by allocating the revenue to each element of the sale based on relative
fair values of the elements, including post-contract support when fair
value for all elements is available, or by use of the residual method when
only the fair value of the post-contract support is available. We
recognize revenue for the system on installation and customer acceptance
and recognize revenue equal to the fair value of the post-contract support
over the support period.
|
|
·
|
Shipping
costs reimbursed by the customer are included in
revenue.
|
Multiple element
arrangements (“MEAs”). Arrangements to sell products to customers
frequently include multiple deliverables. Our most significant MEAs include the
sale of one or more of the instruments from the IDEXX VetLab® suite of
analyzers or digital radiography systems, combined with one or more of the
following products: extended maintenance agreements; consumables; laboratory
diagnostic and consulting services; and practice
management software. Practice management software is frequently sold with
postcontract customer support and implementation services. Delivery of the
various products or performance of services within the arrangement may or may
not coincide. Delivery of our IDEXX VetLab®
instruments, digital radiography systems, and practice management software
generally occurs at the onset of the arrangement. EMAs, consumables, and
laboratory diagnostic and consulting services generally are
delivered over a period of one to five years. In certain arrangements revenue
recognized is limited to the amount invoiced or received that is not contingent
on the delivery of future products and services.
When
arrangements outside of the scope of software revenue recognition guidance
include multiple elements, we allocate revenue to each element based on the
relative selling price and recognize revenue when the elements have standalone
value and the four criteria for revenue recognition have been met for each
element. We establish the selling price of each element based on VSOE if
available, TPE if VSOE is not available, or BESP if neither VSOE nor TPE is
available. We generally determine selling price based on amounts charged
separately for the delivered and undelivered elements to similar customers in
standalone sales of the specific elements. When arrangements outside of the
scope of software revenue recognition guidance include an EMA, we recognize
revenue related to the EMA at the stated contractual price on a straight-line
basis over the life of the agreement.
When
arrangements within the scope of software revenue recognition guidance include
multiple elements, we allocate revenue to each element based on relative fair
value when VSOE exists for all elements or residual fair value when there is
VSOE for the undelivered elements but no such evidence for the delivered
elements. When allocating revenue based on residual fair value, the fair value
of the undelivered elements is deferred and the residual revenue is allocated to
the delivered elements. Revenue is recognized on any delivered elements when the
four criteria for revenue recognition have been met for each element. If
sufficient VSOE does not exist for the allocation of revenue to the various
elements of the arrangement, all revenue from the arrangement is deferred until
the earlier of the point at which such sufficient VSOE does exist or all
elements of the arrangement have been delivered. We generally determine fair
value based on amounts charged separately for the delivered and undelivered
elements to similar customers in standalone sales of the specific
elements.
Customer programs. We
record estimated reductions to revenue in connection with customer marketing
programs and incentive offerings that may give customers rebates or award
points, or provide other incentives. Award points granted under our IDEXX Points
customer programs may be applied to trade receivables owed to us and/or toward
future purchases of our products or services. We establish accruals for
estimated revenue reductions attributable to customer programs and incentive
offerings for each program. Revenue reductions are recorded quarterly based on
issuance of credits, points earned but not yet issued, and estimates of credits
and points to be earned in the future based on current revenue. As points are
redeemed we recognize the benefit of points expected to expire, or breakage,
using historical forfeiture rates. On November 30 of each year, unused points
granted before January 1 of the prior year expire and any variance from the
breakage estimate is accounted for as a change in estimate.
Within
our overall IDEXX Points program, our two most significant customer programs are
Practice Developer® and
SNAP® up the
Savings™
(“SUTS”), both of which are offered only to North American customers. Our
Practice Developer® program
is a Companion Animal Group (“CAG”) awards program that permits customers to
earn points by purchasing quarterly minimums in certain product and service
categories, including IDEXX Reference Laboratories services, Catalyst Dx® and
VetTest® slides,
SNAPShot Dx® Analyzer
and VetTest®
SNAP® Reader
reagents, LaserCyte® and
VetAutoread™ tubes,
and service and maintenance agreements. For the Practice Developer® program,
the accrued revenue reduction is calculated each quarter based on sales to end
users during the quarter by either us or our distributors and on our estimate of
future points to be issued upon sale of applicable product inventories held by
distributors at the end of the quarter. SUTS is our volume incentive program for
selected SNAP® tests
that provides customers with benefits in the form of (1) discounts off invoice
at the time of purchase and (2) points under the IDEXX Points program awarded
and paid out quarterly throughout the SUTS program year (which ends on August
31) based on total purchase volume of qualified SNAP® products
during the given quarter.
Doubtful accounts
receivable. We recognize revenue only in those situations where
collection from the customer is reasonably assured. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. We base our estimates on a detailed
analysis of specific customer situations and a percentage of our accounts
receivable by aging category. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required. Account balances are charged off
against the allowance when we believe the receivable will not be
recovered.
NOTE
3. SHARE-BASED
COMPENSATION
The fair
value of options, restricted stock units, deferred stock units with vesting
conditions, and employee stock purchase rights awarded during the three months
ended March 31, 2010 and 2009 totaled $15.0 million and $15.1 million,
respectively. Share-based compensation expense for the three months ended March
31, 2010 and 2009 was $3.3 million and $2.9 million, respectively. The total
unrecognized compensation expense for unvested awards outstanding at March 31,
2010 was $36.5 million, net of approximately $2.8 million related to estimated
forfeitures. The weighted average remaining expense recognition period at March
31, 2010 was approximately 2.3 years.
Options
We
determine the assumptions used in the valuation of option grants as of the date
of grant. Differences in the stock price volatility, terms of options granted to
different segments of employees, or risk-free interest rates may necessitate
distinct valuation assumptions at those grant dates. As such, we may use
different assumptions during the fiscal year if we grant options at different
dates or with varying terms. Option awards are granted to employees with an
exercise price equal to not less than the closing market price of our common
stock at the date of grant. We have never paid any cash dividends on our common
stock and we have no present intention to pay a dividend; therefore, we assume
that no dividends will be paid over the expected terms of option awards. The
weighted averages of the valuation assumptions used to determine the fair value
of each option grant on the date of grant and the weighted average estimated
fair values were as follows:
|
|
For
the Three Months Ended
March
31,
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Expected
stock price volatility
|
|
|
31
|
% |
|
|
30
|
% |
Expected
term, in years
|
|
|
4.9 |
|
|
|
4.8 |
|
Risk-free
interest rate
|
|
|
2.3
|
% |
|
|
1.6
|
% |
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted
|
|
$ |
16.53 |
|
|
$ |
9.97 |
|
NOTE
4. INVENTORIES
Inventories
include material, labor and overhead, and are stated at the lower of cost
(first-in, first-out) or market. The components of inventories were as follows
(in
thousands):
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
28,331
|
|
|
$
|
28,426
|
|
Work-in-process
|
|
|
15,448
|
|
|
|
17,761
|
|
Finished
goods
|
|
|
78,605
|
|
|
|
64,238
|
|
|
|
$
|
122,384
|
|
|
$
|
110,425
|
|
NOTE
5. GOODWILL AND OTHER
INTANGIBLE ASSETS
The
changes in goodwill and the cost of intangible assets other than goodwill during
the three months ended March 31, 2010 resulted primarily from changes in foreign
currency exchange rates.
NOTE
6. ACCRUED
LIABILITIES
Accrued
liabilities consisted of the following (in thousands):
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
28,387
|
|
|
$
|
33,094
|
|
Accrued
employee compensation and related expenses
|
|
|
31,790
|
|
|
|
44,497
|
|
Accrued
taxes
|
|
|
15,702
|
|
|
|
9,980
|
|
Accrued
customer programs
|
|
|
18,737
|
|
|
|
17,388
|
|
|
|
$
|
94,616
|
|
|
$
|
104,959
|
|
NOTE
7. WARRANTY
RESERVES
We
provide for the estimated cost of instrument warranties in cost of product
revenue at the time revenue is recognized based on the estimated cost to repair
the instrument over its warranty period. As we develop and sell new instruments,
our provision for warranty expense increases. Cost of revenue reflects not only
estimated warranty expense for the systems sold in the current period, but also
any changes in estimated warranty expense for the installed base that results
from our quarterly evaluation of service experience. Our actual warranty
obligation is affected by instrument performance in the customers’ environment
and costs incurred in servicing instruments. Should actual service rates or
costs differ from our estimates, which are based on historical data and
projections of future costs, revisions to our estimated warranty liability would
be required.
The
following is a summary of changes in accrued warranty reserves during the three
months ended March 31, 2010 and 2009 (in thousands):
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
3,086
|
|
|
$
|
2,837
|
|
Provision
for warranty expense
|
|
|
1,082
|
|
|
|
1,264
|
|
Change
in estimate
|
|
|
(478
|
)
|
|
|
(69
|
)
|
Settlement
of warranty liability
|
|
|
(1,076
|
)
|
|
|
(926
|
)
|
Balance,
end of period
|
|
$
|
2,614
|
|
|
$
|
3,106
|
|
NOTE
8. TREASURY
STOCK
We
primarily acquire shares by means of repurchases in the open market. We also
acquire shares that are surrendered by employees in payment for the minimum
required withholding taxes due on the exercise of stock options, the vesting of
restricted stock units and the settlement of deferred stock units, and in
payment for the exercise price of stock options.
Information
about our treasury stock purchases and other receipts for the three months ended
March 31, 2010 and 2009 (in
thousands, except per share amounts):
|
|
For
the Three Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Shares
acquired
|
|
|
1,140 |
|
|
|
499 |
|
Total
cost of shares acquired
|
|
$ |
60,302 |
|
|
$ |
16,058 |
|
Average
cost per share
|
|
$ |
52.89 |
|
|
$ |
32.20 |
|
NOTE
9. INCOME
TAXES
Our
effective income tax rates were 31.4% and 31.5% for the three months ended March
31, 2010 and 2009, respectively. The decrease in the effective tax rate was due
primarily to tax benefits related to U.S. manufacturing activities that were
fully phased-in effective January 1, 2010, partly offset by the expiration of
federal research and development tax incentives that were available during the
three months ended March 31, 2009.
NOTE
10. COMPREHENSIVE INCOME
The
following is a summary of comprehensive income for the three months ended March
31, 2010 and 2009 (in
thousands):
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
33,028
|
|
|
$
|
26,071
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
2
|
|
|
|
-
|
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
33,026
|
|
|
|
26,071
|
|
Other
comprehensive income (loss) attributable to IDEXX Laboratories, Inc.
stockholders:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(5,548
|
)
|
|
|
(7,093
|
)
|
Change
in fair value of foreign currency contracts classified as hedges, net of
tax
|
|
|
2,275
|
|
|
|
(1,287
|
)
|
Change
in fair value of interest rate swaps classified as hedges, net of
tax
|
|
|
(582
|
)
|
|
|
(213
|
)
|
Change
in fair market value of investments, net of tax
|
|
|
57
|
|
|
|
(63
|
)
|
Comprehensive
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
$
|
29,228
|
|
|
$
|
17,415
|
|
NOTE
11. EARNINGS PER SHARE
Basic
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock and vested deferred stock units outstanding
during the year. The computation of diluted earnings per share is similar to the
computation of basic earnings per share, except that the denominator is
increased for the assumed exercise of dilutive options and other potentially
dilutive securities using the treasury stock method, unless the effect is
anti-dilutive.
The following is a reconciliation of
shares outstanding for basic and diluted earnings per share (in
thousands):
|
|
For
the Three Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Shares
Outstanding for Basic Earnings per Share:
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
57,911
|
|
|
59,064
|
|
Weighted
average vested deferred stock units outstanding
|
|
122
|
|
|
108
|
|
|
|
58,033
|
|
|
59,172
|
|
|
|
|
|
|
|
|
Shares
Outstanding for Diluted Earnings per Share:
|
|
|
|
|
|
|
Shares
outstanding for basic earnings per share
|
|
58,033
|
|
|
59,172
|
|
Dilutive
effect of options issued to employees and directors
|
|
1,821
|
|
|
1,386
|
|
Dilutive
effect of restricted stock units issued to employees and
directors
|
|
170
|
|
|
41
|
|
Dilutive
effect of unvested deferred stock units issued to
directors
|
|
5
|
|
|
7
|
|
|
|
60,029
|
|
|
60,606
|
|
Vested
deferred stock units outstanding are included in shares outstanding for basic
and diluted earnings per share because the associated shares of our common stock
are issuable for no cash consideration, the number of shares of our common stock
to be issued is fixed and issuance is not contingent.
Certain
options to acquire shares and restricted stock units have been excluded from the
calculation of shares outstanding for dilutive earnings per share because they
were anti-dilutive. The following table presents information concerning those
anti-dilutive options and restricted stock units (in thousands, except per share
amounts):
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares underlying anti-dilutive options
|
|
|
605
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
Weighted
average exercise price per underlying share of anti-dilutive
options
|
|
$
|
54.85
|
|
$
|
44.60
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares underlying anti-dilutive restricted stock
units
|
|
|
-
|
|
|
302
|
|
The
following table presents additional information concerning the exercise prices
of vested and unvested options outstanding at the end of the period (in thousands, except per share
amounts):
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Closing
price per share of our common stock
|
|
$
|
57.55
|
|
|
$
|
34.58
|
|
|
|
|
|
|
|
|
|
|
Number
of shares underlying options with exercise prices below the closing
price
|
|
|
4,882
|
|
|
|
4,382
|
|
Number
of shares underlying options with exercise prices equal to or above the
closing price
|
|
|
-
|
|
|
|
1,104
|
|
Total
number of shares underlying outstanding options
|
|
|
4,882
|
|
|
|
5,486
|
|
NOTE
12. COMMITMENTS, CONTINGENCIES AND
GUARANTEES
Significant
commitments, contingencies and guarantees at March 31, 2010 are consistent with
those discussed in Note 12 to the consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2009.
NOTE
13. SEGMENT REPORTING
The
accounting policies of the segments are consistent with those discussed in Notes
1 and 13 to the consolidated financial statements in our Annual Report on Form
10-K for the year ended December 31, 2009. Intersegment revenues, which are not
included in the table below, were not significant for the three months ended
March 31, 2010 and 2009.
Segment
performance for the three months ended March 31, 2010 and 2009 is as follows
(in
thousands):
|
|
For
the Three Months Ended March 31,
|
|
|
|
CAG
|
|
|
Water
|
|
|
Production
Animal
Segment
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
221,417 |
|
|
$ |
17,864 |
|
|
$ |
19,941 |
|
|
$ |
9,303 |
|
|
$ |
- |
|
|
$ |
268,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
39,767 |
|
|
$ |
7,123 |
|
|
$ |
4,734 |
|
|
$ |
260 |
|
|
$ |
(3,456 |
) |
|
$ |
48,428 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,116 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,088 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,028 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Net
income attributable to IDEXX Laboratories,
Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
193,692 |
|
|
$ |
15,851 |
|
|
$ |
18,266 |
|
|
$ |
8,646 |
|
|
$ |
- |
|
|
$ |
236,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
29,079 |
|
|
$ |
7,312 |
|
|
$ |
4,950 |
|
|
$ |
129 |
|
|
$ |
(3,029 |
) |
|
$ |
38,441 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,045 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,974 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,071 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
income attributable to IDEXX Laboratories,
Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,071 |
|
Revenue
by product and service category was as follows (in thousands):
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
CAG
segment revenue:
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$
|
83,382
|
|
$
|
72,235
|
|
Rapid
assay products
|
|
|
39,443
|
|
|
37,677
|
|
Laboratory
diagnostic and consulting services
|
|
|
79,840
|
|
|
68,692
|
|
Practice
information systems and digital radiography
|
|
|
18,752
|
|
|
15,034
|
|
Pharmaceutical
products
|
|
|
-
|
|
|
54
|
|
CAG
segment revenue
|
|
|
221,417
|
|
|
193,692
|
|
|
|
|
|
|
|
|
|
Water
segment revenue
|
|
|
17,864
|
|
|
15,851
|
|
Production
animal segment revenue
|
|
|
19,941
|
|
|
18,266
|
|
Other
segment revenue
|
|
|
9,303
|
|
|
8,646
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
268,525
|
|
$
|
236,455
|
|
NOTE
14. FAIR VALUE
MEASUREMENTS
U.S. GAAP
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. U.S. GAAP also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs, where available, and minimize the use of unobservable inputs when
measuring fair value.
There are
three levels of inputs that may be used to measure fair value:
Level
1
|
Quoted
prices in active markets for identical assets or
liabilities.
|
|
|
Level
2
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Foreign
currency exchange contracts and interest rate swaps classified as
derivative instruments are valued utilizing third-party pricing
services.
|
|
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. At March 31,
2010 and December 31, 2009, we had no Level 3 assets or
liabilities.
|
Assets
and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
the asset or liability. We did not have any significant nonfinancial assets or
nonfinancial liabilities which required remeasurement during the three months
ended March 31, 2010 or during the year ended December 31, 2009. We did not have
any transfers between Level 1 and Level 2 measurements during the three months
ended March 31, 2010.
The
following tables set forth our assets and liabilities that were measured at fair
value on a recurring basis at March 31, 2010 and at December 31, 2009 by level
within the fair value hierarchy (in thousands):
As
of March 31, 2010
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
at
March
31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds(1)
|
|
$ |
59,014 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
59,014 |
|
Equity
mutual funds(2)
|
|
|
1,993 |
|
|
|
- |
|
|
|
- |
|
|
|
1,993 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts(3)
|
|
|
- |
|
|
|
926 |
|
|
|
- |
|
|
|
926 |
|
Deferred
compensation(4)
|
|
|
1,993 |
|
|
|
- |
|
|
|
- |
|
|
|
1,993 |
|
Interest
rate swaps(5)
|
|
|
- |
|
|
|
1,515 |
|
|
|
- |
|
|
|
1,515 |
|
As
of December 31, 2009
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
at
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds(1)
|
|
$ |
47,021 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
47,021 |
|
Equity
mutual funds(2)
|
|
|
1,891 |
|
|
|
- |
|
|
|
- |
|
|
|
1,891 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts(3)
|
|
|
- |
|
|
|
4,221 |
|
|
|
- |
|
|
|
4,221 |
|
Deferred
compensation(4)
|
|
|
1,891 |
|
|
|
- |
|
|
|
- |
|
|
|
1,891 |
|
Interest
rate swaps(5)
|
|
|
- |
|
|
|
595 |
|
|
|
- |
|
|
|
595 |
|
(1)
|
Money
market funds are included within Cash and cash
equivalents.
|
(2)
|
Equity
mutual funds relate to a deferred compensation plan that was assumed as
part of a previous business combination. This amount is included within
Other long-term assets, net. See item 4 below for a discussion of the
related deferred compensation
liability.
|
(3)
|
Foreign
currency exchange contracts are included within Accrued
liabilities.
|
(4)
|
Deferred
compensation plans are included within Other long-term liabilities. The
fair value of our deferred compensation plan is indexed to the performance
of the underlying equity mutual funds discussed in item 1
above.
|
(5)
|
Interest
rate swaps are included within Accrued
liabilities.
|
The
estimated fair value of certain financial instruments, including cash and cash
equivalents, investments, accounts receivable, derivative instruments, interest
rate swap agreements, accounts payable, lines of credit, and notes payable
approximate carrying value due to their short maturity. The estimated fair value
of long-term debt approximates the carrying value based on current market prices
for similar debt issues with similar remaining maturities.
Financial
instruments that potentially subject us to concentrations of credit risk are
principally cash and cash equivalents, investments and accounts receivable. To
mitigate such risk, we place our cash and cash equivalents and investments in
highly-rated financial institutions and money market funds invested in
government securities. Concentration of credit risk with respect to accounts
receivable is limited to certain customers to whom we make substantial sales. To
reduce risk, we routinely assess the financial strength of our customers and
closely monitor their amounts due to us and, as a consequence, believe that our
accounts receivable credit risk exposure is limited. We maintain an allowance
for doubtful accounts, but historically have not experienced any significant
losses related to an individual customer or group of customers in any particular
industry or geographic area.
NOTE
15. DERIVATIVE INSTRUMENTS AND
HEDGING
Disclosure
within this footnote is presented to provide transparency about how and why we
use derivative instruments, how the instruments and related hedged items are
accounted for, and how the instruments and related hedged items affect our
financial position, results of operations, and cash flows. Derivative
instruments are recognized on the balance sheet as either assets or liabilities
at fair value with a corresponding offset to other comprehensive income (“OCI”),
which is net of tax.
We are
exposed to certain risks related to our ongoing business operations. The primary
risks that we manage by using derivative instruments are foreign currency
exchange risk and interest rate risk. Our subsidiaries enter into foreign
currency exchange contracts to manage the exchange risk associated with their
forecasted intercompany inventory purchases for the next year. From time to
time, we may also enter into foreign currency exchange contracts to minimize the
impact of foreign currency fluctuations associated with specific, significant
transactions. Interest rate swaps are entered into to manage interest rate risk
associated with $80 million of our variable-rate debt.
The
primary purpose of our foreign currency hedging activities is to protect against
the volatility associated with foreign currency transactions. We also utilize
natural hedges to mitigate our transaction and commitment exposures. Our
corporate policy prescribes the range of allowable hedging activity. We enter
into exchange contracts with large multinational financial institutions, and we
do not hold or engage in transactions involving derivative instruments for
purposes other than risk management. Our accounting policies for these contracts
are based on our designation of such instruments as hedging transactions. Market
gains and losses are deferred in OCI until the contract matures, which is the
period when the related obligation is settled. We primarily utilize forward
exchange contracts with durations of less than 24 months.
Cash
Flow Hedges
We have
designated our forward currency exchange contracts and variable-to-fixed
interest rate swaps as cash flow hedges. For derivative instruments that are
designated as hedges, changes in the fair value of the derivative are recognized
in OCI and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. We de-designate derivative instruments
from hedge accounting when the probability of the hedged transaction occurring
becomes less than probable, but remains reasonably possible. For de-designated
instruments, the gain or loss from the time of de-designation through maturity
of the instrument is recognized in earnings. Any gain or loss in other
comprehensive income at the time of de-designation is reclassified into earnings
in the same period or periods during which the hedged transaction affects
earnings. We did not de-designate any instruments from hedge accounting
treatment during the three months ended March 31, 2010 or 2009. We immediately
record in earnings the extent to which a hedge is not effective in achieving
offsetting changes in fair value of the hedged item. Gains or losses related to
hedge ineffectiveness recognized in earnings during the three months ended March
31, 2010 and 2009 were not material. At March 31, 2010, the estimated net amount
of losses that are expected to be reclassified out of accumulated other
comprehensive income and into earnings within the next 12 months is $0.6 million
if exchange rates do not fluctuate from the levels at March 31,
2010.
We enter
into currency exchange contracts for amounts that are less than the full value
of forecasted intercompany sales. Our hedging strategy related to intercompany
inventory purchases is to employ the full amount of our hedges for the
succeeding year at the conclusion of our budgeting process for that year, which
is complete by the end of the preceding year. Quarterly, we enter into contracts
to hedge incremental portions of anticipated foreign currency transactions for
the current and following year. Accordingly, our risk with respect to foreign
currency exchange rate fluctuations may vary throughout each annual
cycle.
Under our
current credit facility agreement, the applicable interest rates on our
unsecured short-term revolving credit facility (“Credit Facility”) generally
range from 0.375 to 0.875 percentage points (“Credit Spread”) above the London
interbank offered rate or the Canadian Dollar-denominated bankers’ acceptance
rate, dependent on our consolidated leverage ratio. In March 2009, we entered
into two forward fixed interest rate swap agreements to manage the economic
effect of variable interest obligations on amounts borrowed under the terms of
our Credit Facility. Under these agreements, beginning on March 31, 2010 the
variable interest rate associated with $80 million of borrowings outstanding
under the Credit Facility has effectively become fixed at 2% plus the Credit
Spread through March 30, 2012. The critical terms of the interest rate swap
agreements match the critical terms of the underlying borrowings, including
notional amounts, underlying market indices, interest rate reset dates and
maturity dates.
The
notional amount of foreign currency exchange contracts to hedge forecasted
intercompany sales consisted of the following (in thousands):
Currency Sold
|
|
U.S. Dollar Equivalent
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$ |
49,882 |
|
|
$ |
53,091 |
|
|
$ |
48,843 |
British
Pound
|
|
|
19,017 |
|
|
|
19,238 |
|
|
|
23,541 |
Canadian
Dollar
|
|
|
18,095 |
|
|
|
18,849 |
|
|
|
24,740 |
Australian
Dollar
|
|
|
6,863 |
|
|
|
7,086 |
|
|
|
6,414 |
Japanese
Yen
|
|
|
9,040 |
|
|
|
9,795 |
|
|
|
7,253 |
|
|
$ |
102,897 |
|
|
$ |
108,059 |
|
|
$ |
110,791 |
Currency Purchased
|
|
U.S. Dollar Equivalent
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Swiss
Franc
|
|
$ |
8,425 |
|
|
$ |
8,808 |
|
|
$ |
7,306 |
The
notional amount of forward fixed interest rate swap agreements to manage
variable interest obligations consisted of the following (in thousands):
|
|
U.S. Dollar Equivalent
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$ |
80,000 |
|
|
$ |
80,000 |
|
|
$ |
80,000 |
The fair
values of derivative instruments and their respective classification in the
condensed consolidated balance sheet consisted of the following (in thousands):
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
Balance Sheet
Classification
|
|
|
Fair Value
|
|
|
Balance Sheet
Classification
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts
|
|
Accrued
expenses
|
|
|
$
|
926
|
|
|
Accrued
expenses
|
|
|
$
|
4,221
|
Interest
rate swaps
|
|
Accrued
expenses
|
|
|
|
1,515
|
|
|
Accrued
expenses
|
|
|
|
595
|
Total
derivative instruments
|
|
|
|
|
$
|
2,441
|
|
|
|
|
|
$
|
4,816
|
The
effect of derivative instruments designated as cash flow hedges on the condensed
consolidated balance sheet for the three months ended March 31, 2010 and 2009
consisted of the following (in
thousands):
|
|
|
Gain (Loss) Recognized in OCI on
Derivative Instruments (Effective Portion)
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
Derivative instruments
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts, net of tax
|
|
|
$
|
2,275
|
|
|
$
|
(1,287
|
)
|
Interest
rate swaps, net of tax
|
|
|
|
(582
|
)
|
|
|
(213
|
)
|
Total
loss, net of tax
|
|
|
$
|
1,693
|
|
|
$
|
(1,500
|
)
|
The
effect of derivative instruments designated as cash flow hedges on the condensed
consolidated statement of operations for the three months ended March 31, 2010
and 2009 consisted of the following (in thousands):
|
|
|
|
Gain (Loss) Reclassified from Accumulated
OCI into Income (Effective Portion)
|
|
|
|
Classification of Gain (Loss)
Reclassified from OCI into
|
|
For the Three Months Ended
March 31,
|
|
Derivative instruments
|
|
Income (Effective Portion)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Cost
of revenue
|
|
$ |
(411 |
) |
|
$ |
4,818 |
|
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
This
Quarterly Report on Form 10-Q contains statements which, to the extent they are
not statements of historical or present fact, constitute “forward-looking
statements.” Such forward-looking statements about our business and expectations
within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, include statements relating to
future revenue growth rates, earnings and other measures of financial
performance, the effect of economic downturns on our business performance,
demand for our products, realizability of assets, future cash flow and uses of
cash, future repurchases of common stock, future levels of indebtedness and
capital spending, warranty expense, share-based compensation expense, and
competition. Forward-looking statements can be identified by the use of words
such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,”
“believes,” “estimates,” “should,” and similar words and expressions. These
forward-looking statements are intended to provide our current expectations or
forecasts of future events; are based on current estimates, projections,
beliefs, and assumptions; and are not guarantees of future performance. Actual
events or results may differ materially from those described in the
forward-looking statements. These forward-looking statements involve a number of
risks and uncertainties as more fully described under the heading “Part II, Item
1A. Risk Factors” in this Quarterly Report on Form 10-Q. The risks and
uncertainties discussed herein do not reflect the potential impact of any
mergers, acquisitions or dispositions. In addition, any forward-looking
statements represent our estimates only as of the day this Quarterly Report was
first filed with the Securities and Exchange Commission (“SEC”) and should not
be relied upon as representing our estimates as of any subsequent date. From
time to time, oral or written forward-looking statements may also be included in
other materials released to the public. While we may elect to update
forward-looking statements at some point in the future, we specifically disclaim
any obligation to do so, even if our estimates or expectations
change.
■
Business Overview
Operating segments.
We operate primarily through three business segments: diagnostic and information
technology products and services for the veterinary market, which we refer to as
our Companion Animal Group (“CAG”), water quality products (“Water”) and
products for production animal health, which we refer to as our Production
Animal Segment (“PAS”). We also operate two smaller operating segments that
comprise products for dairy quality (“Dairy”) and products for the human
point-of-care medical diagnostics market (“OPTI Medical”). Financial information
about the Dairy and OPTI Medical operating segments and other licensing
arrangements are combined and presented in an “Other” category because they do
not meet the quantitative or qualitative thresholds for reportable segments. See
Note 13 to the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for financial information about our
segments.
CAG
develops, designs, manufactures and distributes products and performs services
for veterinarians, primarily related to diagnostics and information management.
Water develops, designs, manufactures and distributes products to detect
contaminants in water. PAS develops, designs, manufactures and distributes
products to detect disease in production animals. Dairy develops, designs,
manufactures and distributes products to detect contaminants in dairy products.
OPTI Medical develops, designs, manufactures and distributes point-of-care
electrolyte and blood gas analyzers and related consumable products for the
human medical diagnostics market and also manufactures our VetStat®
electrolyte and blood gas analyzer and electrolyte consumables used with our
Catalyst Dx® analyzer
sold in the veterinary market.
Items
that are not allocated to our operating segments are comprised primarily of
corporate research and development expenses that do not align with one of our
existing business or service categories, a portion of share-based compensation
expense, interest income and expense, and income taxes. We estimate our
share-based compensation expense for the year and allocate the estimated expense
to the operating segments. This allocation differs from the actual expense and
consequently yields a difference between the total allocated share-based
compensation expense and the actual expense for the total company, resulting in
an unallocated amount reported under the caption “Unallocated Amounts.” We
maintain active research and development programs, some of which may materialize
into the development and introduction of new technology, products or services.
Research and development costs incurred that are not specifically allocated to
one of our existing business or service categories are reported under the
caption “Unallocated Amounts.”
Use of Distributors.
Because the instrument consumables and rapid assay products in our CAG segment
are sold in the U.S. and certain other geographies by distributors, distributor
purchasing dynamics have an impact on our reported sales of these products.
Distributors purchase products from us and sell them to veterinary practices,
who are the end users. Distributor purchasing dynamics may be affected by many
factors and may be unrelated to underlying end-user demand for our products. As
a result, fluctuations in distributors’ inventories may cause reported results
in a period not to be representative of underlying end-user demand. Therefore,
we believe it is important to track distributor sales to end users and to
distinguish between the impact of end-user demand and the impact of distributor
purchasing dynamics on reported revenue growth.
Where
growth rates are affected by changes in end-user demand, we refer to the impact
of practice-level sales on growth. Where growth rates are affected by
distributor purchasing dynamics, we refer to the impact of changes in
distributors’ inventories. If during the comparable period of the prior year,
distributors’ inventories grew by more than those inventories grew in the
current year, then changes in distributors’ inventories have a negative impact
on our reported sales growth in the current period. Conversely, if during the
comparable period of the prior year, distributors’ inventories grew by less than
those inventories grew in the current year, then changes in distributors’
inventories have a positive impact on our reported sales growth in the current
period.
Currency Impact.
Approximately 25% of our revenue is derived from products manufactured in the
U.S. and sold internationally in local currencies. Strengthening of the rate of
exchange for the U.S. dollar relative to other currencies has a negative impact
on our international revenues and on profits of products manufactured in the
U.S. and sold internationally. In addition, to the extent that the U.S. dollar
is stronger in future periods relative to the exchange rates in effect in the
corresponding prior periods, our growth rate will be negatively affected. The
impact of foreign currency denominated operating expenses, foreign currency
denominated supply contracts and the impact of foreign currency hedge contracts
in place partly offset this exposure. See also the section of this Quarterly
Report on Form 10-Q under the heading “Part 1, Item 3. Quantitative and
Qualitative Disclosures About Market Risk.”
Effect of Economic
Conditions. We believe that our financial results in the first quarter of
2010 continued to be negatively impacted by weakened economic conditions. We
believe that a weak economy has caused patient visits to U.S. and European
veterinary clinics for routine screening, preventive care and elective
procedures to remain depressed. As a result, the growth rate of sales of rapid
assay tests, instrument consumables, and laboratory diagnostic and consulting
services in our CAG segment has been negatively affected. In addition, we
believe that the rate of growth of sales of our instruments, which are larger
capital purchases for veterinarians, has been negatively affected by increased
caution among veterinarians regarding economic prospects. Weaker economic
conditions also increased the sensitivity of our customers to the pricing of our
products and services, resulting in lower growth from price increases for
certain products over the course of the first quarter of 2010 relative to the
comparable period for the prior year.
Beyond
our companion animal business, we are also seeing the weaker economy impact
certain customer groups in our Water and PAS businesses. Lower water testing
volumes in the non-regulated segments of the business have been driven by a
decline in new home construction and reduced consumer willingness to spend on
certain luxury items, such as vacation cruises. Lower PAS testing volumes have
been driven by a reduction in non-regulated producer and laboratory testing, as
a measure to reduce operating costs, and by a reduction in testing associated
with some government mandated eradication programs, due to lower government
funding.
While we
expect these trends to continue in the near term, we believe the fundamental
drivers of demand in the markets we serve will remain intact and that growth
rates will improve as major world economies stabilize.
■
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates. The significant
accounting policies used in preparation of these condensed consolidated
financial statements for the three months ended March 31, 2010 are consistent
with those discussed in Note 3 to the consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2009, except
as discussed in Note 2 to the condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q. The critical accounting policies
and the significant judgments and estimates used in the preparation of our
condensed consolidated financial statements for the three months ended March 31,
2010 are consistent with those discussed in our Annual Report on Form 10-K for
the year ended December 31, 2009 in the section under the heading “Part 2, Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates.”
■ Results of
Operations
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
Revenue
Total Company. The following
table presents revenue by operating segment:
For the Three Months Ended March 31,
|
Net Revenue
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Percentage
Change from
Currency (1)
|
|
|
Percentage
Change from
Acquisitions/
Divestitures (2)
|
|
|
Percentage
Change Net of
Acquisitions/
Divestitures
and Currency
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
221,417 |
|
|
$ |
193,692 |
|
|
$ |
27,725 |
|
|
|
14.3%
|
|
|
|
3.6%
|
|
|
|
0.8%
|
|
|
|
9.9%
|
Water
|
|
|
17,864 |
|
|
|
15,851 |
|
|
|
2,013 |
|
|
|
12.7%
|
|
|
|
5.2%
|
|
|
|
-
|
|
|
|
7.5%
|
PAS
|
|
|
19,941 |
|
|
|
18,266 |
|
|
|
1,675 |
|
|
|
9.2%
|
|
|
|
4.7%
|
|
|
|
-
|
|
|
|
4.5%
|
Other
|
|
|
9,303 |
|
|
|
8,646 |
|
|
|
657 |
|
|
|
7.6%
|
|
|
|
1.5%
|
|
|
|
-
|
|
|
|
6.1%
|
Total
|
|
$ |
268,525 |
|
|
$ |
236,455 |
|
|
$ |
32,070 |
|
|
|
13.6%
|
|
|
|
3.8%
|
|
|
|
0.6% |
|
|
|
9.2%
|
(1)
|
Represents
the percentage change in revenue attributed to the effect of changes in
currency rates from the three months ended March 31, 2009 compared to the
three months ended March 31, 2010.
|
(2)
|
Represents
the percentage change in revenue during the three months ended March 31,
2010 compared to the three months ended March 31, 2009 attributed to
incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to December 31,
2008.
|
The
following revenue analysis and discussion reflects the results of operations net
of the impact of currency exchange rates on sales outside the U.S. and net of
incremental sales from businesses acquired or revenues lost from divisions
divested subsequent to December 31, 2008.
Companion Animal Group. The
following table presents revenue by product and service category for
CAG:
For the Three Months Ended March 31,
|
|
Net Revenue
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Percentage
Change from
Currency (1)
|
|
Percentage
Change from
Acquisitions/
Divestitures (2)
|
|
Percentage
Change Net of
Acquisitions/
Divestitures
and Currency
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$ |
83,382 |
|
|
$ |
72,235 |
|
|
$ |
11,147 |
|
|
|
15.4
|
% |
|
|
3.8
|
% |
|
|
- |
|
|
|
11.6
|
% |
Rapid
assay products
|
|
|
39,443 |
|
|
|
37,677 |
|
|
|
1,766 |
|
|
|
4.7
|
% |
|
|
1.3
|
% |
|
|
- |
|
|
|
3.4
|
% |
Laboratory
diagnostic and consulting services
|
|
|
79,840 |
|
|
|
68,692 |
|
|
|
11,148 |
|
|
|
16.2
|
% |
|
|
5.1
|
% |
|
|
2.1
|
% |
|
|
9.0
|
% |
Practice
information management systems and digital radiography
|
|
|
18,752 |
|
|
|
15,034 |
|
|
|
3,718 |
|
|
|
24.7
|
% |
|
|
1.9
|
% |
|
|
0.6
|
% |
|
|
22.2
|
% |
Pharmaceutical
products
|
|
|
- |
|
|
|
54 |
|
|
|
(54
|
) |
|
|
(100.0
|
%) |
|
|
- |
|
|
|
(100.0
|
%) |
|
|
- |
|
Net
CAG revenue
|
|
$ |
221,417 |
|
|
$ |
193,692 |
|
|
$ |
27,725 |
|
|
|
14.3
|
% |
|
|
3.6
|
% |
|
|
0.8
|
% |
|
|
9.9
|
% |
(1)
|
Represents
the percentage change in revenue attributed to the effect of changes in
currency rates from the three months ended March 31, 2009 compared to the
three months ended March 31, 2010.
|
(2)
|
Represents
the percentage change in revenue during the three months ended March 31,
2010 compared to the three months ended March 31, 2009 attributed to
incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to December 31,
2008.
|
The
increase in instruments and consumables revenue was due to higher sales volumes,
partly offset by lower average unit sales prices. Higher sales volumes were
driven primarily by sales of consumables that are sold for use in our chemistry
analyzers. The impact from changes in distributors’ inventory levels increased
reported instruments and consumables revenue growth by 5%. Higher sales volumes
were also attributable to sales of our Catalyst Dx® Analyzer
and, to a lesser extent, our SNAPShot Dx® Analyzer
and our IDEXX VetLab® Station.
Instrument service and accessories revenue also contributed to revenue growth as
our active installed base of instruments continued to increase. These favorable
impacts were partly offset by lower average unit prices for our LaserCyte®
instruments, resulting from discounts associated with customer purchase
programs.
The
increase in rapid assay revenue was due to the favorable impact from changes in
distributors’ inventory levels, which increased reported rapid assay revenue
growth by 12%. This favorable impact was partly offset by lower practice-level
sales. The decrease in practice-level sales was due primarily to lower volumes
of canine combination test products purchased in connection with customer
programs as a result of changes in program design from the prior year, and to a
lesser extent, lower sales volumes of feline combination test products in the
U.S.
The
increase in laboratory diagnostic and consulting services revenue resulted
primarily from the impact of higher testing volume and price increases. Higher
testing volume was the result of growth in our customer base.
The
increase in practice information management systems and digital radiography
revenue resulted primarily from higher sales volumes of companion animal
radiography systems. Increased service revenue also contributed to revenue
growth as our active installed base of systems continued to
increase.
Water. The increase in Water
revenue resulted primarily from higher Colilert® product
sales volume. This favorable impact was partly offset by higher relative sales
in geographies where products are sold at lower average unit sales
prices.
Production Animal Segment. The
increase in PAS revenue resulted primarily from higher sales volume of certain
bovine tests. This favorable impact was partly offset by lower average unit
sales prices.
Other. The increase in Other
revenue was due primarily to higher sales volumes of OPTI Medical and Dairy
products. Higher OPTI Medical sales volume was primarily attributable to sales
of consumables used with our OPTI Medical instruments. Higher Dairy volume was
primarily attributable to sales of our Dairy SNAP® residue
test for detection of melamine.
Gross
Profit
Total Company. The following
table presents gross profit and gross profit percentages by operating
segment:
For the Three Months Ended March 31,
|
|
Gross Profit (dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
2009
|
|
|
Percent of
Revenue
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
113,330 |
|
|
|
51.2
|
% |
|
$ |
96,442 |
|
|
|
49.8
|
% |
|
$ |
16,888 |
|
|
|
17.5
|
% |
Water
|
|
|
11,214 |
|
|
|
62.8
|
% |
|
|
11,156 |
|
|
|
70.4
|
% |
|
|
58 |
|
|
|
0.5
|
% |
PAS
|
|
|
13,474 |
|
|
|
67.6
|
% |
|
|
13,108 |
|
|
|
71.8
|
% |
|
|
366 |
|
|
|
2.8
|
% |
Other
|
|
|
4,153 |
|
|
|
44.6
|
% |
|
|
3,548 |
|
|
|
41.0
|
% |
|
|
605 |
|
|
|
17.0
|
% |
Unallocated
amounts
|
|
|
190 |
|
|
|
N/A |
|
|
|
179 |
|
|
|
N/A |
|
|
|
11 |
|
|
|
6.4
|
% |
Total
Company
|
|
$ |
142,361 |
|
|
|
53.0
|
% |
|
$ |
124,433 |
|
|
|
52.6
|
% |
|
$ |
17,928 |
|
|
|
14.4
|
% |
Companion Animal Group. Gross
profit for CAG increased due to higher sales volumes in all CAG product and
service lines and an increase in the gross profit percentage to 51% from 50%.
The increase in gross profit percentage was attributable to reduced overall
spending on service and manufacturing and lower depreciation on our VetLab®
instruments placed at customer sites under usage agreements, as we have reduced
this type of placement activity and an increasing number of prior placements
have become fully depreciated. Gross profit percentage was also favorably
impacted by lower costs of service and higher selling prices in our laboratory
and consulting services business. These favorable impacts were partly offset by
the unfavorable impact of foreign currency hedge contracts and the unfavorable
impact of exchange rates on foreign currency denominated expenses, net of the
favorable impact that weakening of the U.S. dollar had on sales denominated in
foreign currencies. Gross profit percentage also was negatively affected by
higher relative sales of lower margin instruments and reference laboratory
services.
Water. Gross profit for Water
increased slightly as higher sales volumes were predominantly offset by a
decrease in the gross profit percentage to 63% from 70%. The decrease in the
gross profit percentage was due to higher overall manufacturing costs; the
unfavorable impact of foreign currency hedge contracts and the unfavorable
impact of exchange rates on foreign currency denominated expenses, net of the
favorable impact that weakening of the U.S. dollar had on sales denominated in
foreign currencies; and lower average unit sales prices. The gross profit
percentage of 63% is relatively consistent with full year 2008 and 2009
results.
Production Animal Segment.
Gross profit for PAS increased due to higher sales volumes, partly offset by a
decrease in the gross profit percentage to 68% from 72%. The decrease in the
gross profit percentage was due to the unfavorable impact of foreign currency
hedge contracts and the unfavorable impact of exchange rates on foreign currency
denominated expenses, net of the favorable impact that weakening of the U.S.
dollar had on sales denominated in foreign currencies. To a lesser extent, gross
profit percentage was unfavorably impacted by higher overall manufacturing costs
and lower average unit sales prices. These unfavorable impacts were partly
offset by higher relative sales of higher margin products.
Other. Gross profit for Other
operating units increased due to higher sales volume and an increase in the
gross profit percentage to 45% from 41%. The increase in the gross profit
percentage was due to lower overall manufacturing costs and higher relative
sales of higher margin products.
Operating
Expenses and Operating Income
Total Company. The following
tables present operating expenses and operating income by operating
segment:
For the Three Months Ended March 31,
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
Percent of
Revenue
|
|
2009
|
|
Percent of
Revenue
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
73,563
|
|
33.2
|
%
|
|
$
|
67,363
|
|
34.8
|
%
|
|
$
|
6,200
|
|
9.2
|
%
|
Water
|
|
|
4,091
|
|
22.9
|
%
|
|
|
3,844
|
|
24.3
|
%
|
|
|
247
|
|
6.4
|
%
|
PAS
|
|
|
8,740
|
|
43.8
|
%
|
|
|
8,158
|
|
44.7
|
%
|
|
|
582
|
|
7.1
|
%
|
Other
|
|
|
3,893
|
|
41.8
|
%
|
|
|
3,419
|
|
39.5
|
%
|
|
|
474
|
|
13.9
|
%
|
Unallocated
amounts
|
|
|
3,646
|
|
N/A
|
|
|
|
3,208
|
|
N/A
|
|
|
|
438
|
|
13.7
|
%
|
Total
Company
|
|
$
|
93,933
|
|
35.0
|
%
|
|
$
|
85,992
|
|
36.4
|
%
|
|
$
|
7,941
|
|
9.2
|
%
|
Operating Income
(dollars in thousands)
|
|
2010
|
|
Percent of
Revenue
|
|
2009
|
|
Percent of
Revenue
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
39,767
|
|
18.0
|
%
|
|
$
|
29,079
|
|
15.0
|
%
|
|
$
|
10,688
|
|
36.8
|
%
|
Water
|
|
|
7,123
|
|
39.9
|
%
|
|
|
7,312
|
|
46.1
|
%
|
|
|
(189
|
)
|
(2.6
|
%)
|
PAS
|
|
|
4,734
|
|
23.7
|
%
|
|
|
4,950
|
|
27.1
|
%
|
|
|
(216
|
)
|
(4.4
|
%)
|
Other
|
|
|
260
|
|
2.8
|
%
|
|
|
129
|
|
1.5
|
%
|
|
|
131
|
|
101.3
|
%
|
Unallocated
amounts
|
|
|
(3,456
|
)
|
N/A
|
|
|
|
(3,029
|
)
|
N/A
|
|
|
|
(427
|
)
|
(14.1
|
%)
|
Total
Company
|
|
$
|
48,428
|
|
18.0
|
%
|
|
$
|
38,441
|
|
16.3
|
%
|
|
$
|
9,987
|
|
26.0
|
%
|
Companion Animal Group. The
following table presents CAG operating expenses by functional area:
For the Three Months Ended March 31,
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
Percent of
Revenue
|
|
2009
|
|
Percent of
Revenue
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$
|
37,759
|
|
17.1
|
%
|
|
$
|
34,844
|
|
18.0
|
%
|
|
$
|
2,915
|
|
8.4
|
%
|
General
and administrative
|
|
|
24,905
|
|
11.2
|
%
|
|
|
22,822
|
|
11.8
|
%
|
|
|
2,083
|
|
9.1
|
%
|
Research
and development
|
|
|
10,899
|
|
4.9
|
%
|
|
|
9,697
|
|
5.0
|
%
|
|
|
1,202
|
|
12.4
|
%
|
Total
operating expenses
|
|
$
|
73,563
|
|
33.2
|
%
|
|
$
|
67,363
|
|
34.8
|
%
|
|
$
|
6,200
|
|
9.2
|
%
|
The
increase in sales and marketing expense resulted primarily from higher personnel
and personnel-related costs due, in part, to the addition of customer support
and sales personnel, and the unfavorable impact of exchange rates on foreign
currency denominated expenses. The increase in general and administrative
expense resulted primarily from the unfavorable impact of exchange rates on
foreign currency denominated expenses, higher spending on employee benefits, and
an increase in spending related to corporate support functions. The increase in
research and development expense resulted primarily from increased personnel
costs and increased spending related to product development.
Water. The following table
presents Water expenses by functional area:
For the Three Months Ended March 31,
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
Percent of
Revenue
|
|
2009
|
|
Percent of
Revenue
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$
|
1,860
|
|
10.4
|
%
|
|
$
|
1,746
|
|
11.0
|
%
|
|
$
|
114
|
|
6.5
|
%
|
General
and administrative
|
|
|
1,623
|
|
9.1
|
%
|
|
|
1,477
|
|
9.3
|
%
|
|
|
146
|
|
9.9
|
%
|
Research
and development
|
|
|
608
|
|
3.4
|
%
|
|
|
621
|
|
3.9
|
%
|
|
|
(13
|
)
|
(2.1
|
%)
|
Total
operating expenses
|
|
$
|
4,091
|
|
22.9
|
%
|
|
$
|
3,844
|
|
24.3
|
%
|
|
$
|
247
|
|
6.4
|
%
|
The
increase in sales and marketing expense resulted from the unfavorable impact of
exchange rates on foreign currency denominated expenses and from higher
personnel and personnel-related costs. The increase in general and
administrative expense resulted from the unfavorable impact of exchange rates on
foreign currency denominated expenses and an increase in spending related to
support functions.
Production Animal Segment. The
following table presents PAS operating expenses by functional area:
For the Three Months Ended March 31,
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
Percent of
Revenue
|
|
2009
|
|
Percent of
Revenue
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$
|
3,403
|
|
17.1
|
%
|
|
$
|
2,936
|
|
16.1
|
%
|
|
$
|
467
|
|
15.9
|
%
|
General
and administrative
|
|
|
3,206
|
|
16.1
|
%
|
|
|
3,189
|
|
17.5
|
%
|
|
|
17
|
|
0.5
|
%
|
Research
and development
|
|
|
2,131
|
|
10.7
|
%
|
|
|
2,033
|
|
11.1
|
%
|
|
|
98
|
|
4.8
|
%
|
Total
operating expenses
|
|
$
|
8,740
|
|
43.8
|
%
|
|
$
|
8,158
|
|
44.7
|
%
|
|
$
|
582
|
|
7.1
|
%
|
The
increase in sales and marketing expense resulted primarily from higher personnel
and personnel-related costs and the unfavorable impact of exchange rates on
foreign currency denominated expenses.
Other. Operating expenses for
Other operating units increased $0.5 million to $3.9 million for the three
months ended March 31, 2010 due primarily to higher personnel costs and an
increase in deferred compensation expense associated with an employee plan
assumed in the acquisition of OPTI Medical. The increase in deferred
compensation expense was due to changes to the market value of the underlying
investments of the plan.
Unallocated Amounts. Operating
expenses that are not allocated to our operating segments increased $0.4 million
to $3.6 million for the three months ended March 31, 2010 due primarily to the
write-off of certain design costs related to a facilities project that has
changed in scope. This increase was partly offset by lower research and
development expense resulting from reduced personnel costs.
Interest
Income and Interest Expense
Interest
income was $0.1 million for the three months ended March 31, 2010, compared to
$0.2 million for the same period in 2009. The decrease in interest income was
due to lower effective
interest rates, partly offset by higher average invested cash
balances.
Interest
expense was $0.4 million for the three months ended March 31, 2010, compared to
$0.6 million for the same period in 2009. The decrease in interest expense was
due to lower
effective interest rates on outstanding debt balances and, to a lesser extent,
lower average borrowings under our unsecured short-term revolving credit
facility (“Credit Facility”).
Provision
for Income Taxes
Our
effective income tax rates were 31.4% and 31.5% for the three months ended March
31, 2010 and 2009, respectively. The decrease in the effective tax rate was due
primarily to tax benefits related to U.S. manufacturing activities that were
fully phased-in effective January 1, 2010, partly offset by the expiration of
federal research and development tax incentives that were available during the
three months ended March 31, 2009.
■ Recent Accounting
Pronouncements
A
discussion of recent accounting pronouncements is included in Note 3(p) to the
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2009 and in Note 2 to the condensed consolidated
financial statements included in this quarterly report on Form
10-Q.
■
Liquidity and Capital Resources
Liquidity
We fund
the capital needs of our business through cash on hand, funds generated from
operations, and amounts available under the Credit Facility. At March 31, 2010
and December 31, 2009, we had $106.4 million and $106.7 million, respectively,
of cash and cash equivalents, and working capital of $109.2 million and $120.0
million, respectively. Additionally, at March 31, 2010, we had remaining
borrowing availability under our $200 million Credit Facility of $41.6 million.
We believe that current cash and cash equivalents, funds generated from
operations, and amounts available under our Credit Facility will be sufficient
to fund our operations, capital purchase requirements, and strategic growth
needs for the next twelve months. We further believe that, if necessary, we
could obtain additional borrowings at prevailing market interest rates to fund
our growth objectives. However, based on the current credit market, we believe
that the interest rates, financial covenants and other terms of such borrowings
would be less favorable than those applicable to our current Credit Facility and
those that otherwise would have been available historically.
We
consider the operating earnings of certain non-United States subsidiaries to be
indefinitely invested outside the U.S. Changes to this position could have
adverse tax consequences. As such, we manage our worldwide cash requirements
considering available funds among all of our subsidiaries. Our foreign cash
balances are generally available without restrictions to fund ordinary business
operations outside the U.S.
The
following table presents additional key information concerning working
capital:
|
|
For the Three Months Ended
|
|
|
March 31,
2010
|
|
December 31,
2009
|
|
September 30,
2009
|
|
June 30,
2009
|
|
March 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
sales outstanding
|
|
|
41.7
|
|
38.9
|
|
41.2
|
|
40.2
|
|
43.8
|
Inventory
turns
|
|
|
2.0
|
|
1.9
|
|
1.8
|
|
1.8
|
|
1.8
|
Sources
and Uses of Cash
The
following table presents cash provided (used):
|
|
For the Three Months Ended March 31,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
19,205 |
|
|
$ |
12,624 |
|
|
$ |
6,581 |
|
Net
cash used by investing activities
|
|
|
(8,590
|
) |
|
|
(6,879
|
) |
|
|
(1,711
|
) |
Net
cash provided (used) by financing activities
|
|
|
(9,604
|
) |
|
|
3,285 |
|
|
|
(12,889
|
) |
Net
effect of changes in exchange rates on cash
|
|
|
(1,385
|
) |
|
|
(1,603 |
) |
|
|
218 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
(374 |
) |
|
$ |
7,427 |
|
|
$ |
(7,801 |
) |
Operating Activities. Cash
provided by operating activities was $19.2 million for the three months ended
March 31, 2010, compared to $12.6 million for the same period in 2009. We
historically have experienced proportionally lower or net negative cash flows
from operating activities during the first quarter and proportionally higher or
net positive cash flows from operating activities for the remainder of the year
and for the annual period. Several factors contribute to the seasonal
fluctuations in cash flows generated by operating activities, including the
following:
|
·
|
Accounts
receivable are historically higher in the first quarter of the year due to
seasonality of certain products.
|
|
·
|
We
have management and non-management employee incentive programs that
provide for the payment of annual bonuses in the first quarter following
the year in which the bonuses were
earned.
|
|
·
|
We
have agreements with certain suppliers that require us to make minimum
annual inventory purchases, in some cases in order to retain exclusive
distribution rights, and we have other agreements with suppliers that
provide for lower pricing based on annual purchase volumes. We may place a
higher volume of purchase orders for inventory during the fourth quarter
in order to meet our minimum commitments or realize volume pricing
discounts and we receive that inventory in the fourth or first quarters
and pay in the first quarter. The specific facts and circumstances that we
consider in determining the timing and level of inventory purchases
throughout the year related to these agreements may yield inconsistent
cash flows from operations, most typically in the first and fourth
quarters.
|
The total
of net income and net non-cash charges was $46.6 million for the three months
ended March 31, 2010, compared to $43.5 million for the same period in 2009.
During the three months ended March 31, 2010, cash decreased by $27.4 million
due to changes in operating assets and liabilities, compared to a decrease in
the same period of 2009 of $30.9 million, resulting in a year-to-year increase
in cash of $3.5 million.
The
following table presents cash flows from changes in operating assets and
liabilities:
|
|
For the Three Months Ended March 31,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
(17,393 |
) |
|
$ |
(6,072 |
) |
|
$ |
(11,321 |
) |
Inventories
|
|
|
(12,179
|
) |
|
|
(8,067 |
) |
|
|
(4,112
|
) |
Other
assets
|
|
|
1,441 |
|
|
|
179 |
|
|
|
1,262 |
|
Accounts
payable
|
|
|
5,081 |
|
|
|
(4,315 |
) |
|
|
9,396 |
|
Accrued
liabilities
|
|
|
(4,916
|
) |
|
|
(12,394 |
) |
|
|
7,478 |
|
Deferred
revenue
|
|
|
524 |
|
|
|
(205 |
) |
|
|
729 |
|
Decrease
in cash due to changes in operating assets and liabilities
|
|
$ |
(27,442 |
) |
|
$ |
(30,874 |
) |
|
$ |
3,432 |
|
During
the three months ended March 31, 2010, as compared to the same period of the
prior year, the decrease in cash used by changes in operating assets and
liabilities was attributable to an increase in accounts payable resulting from
incremental purchases of slide inventory to be sold for use in our chemistry
analyzers and a smaller reduction in accrued liabilities resulting from
increased income tax accruals. This increase in cash was partly offset by
increased sales growth during the three months ended March 31, 2010, as compared
to the same period of 2009, driving an incremental use of cash by accounts
receivable, combined with the increase in inventories in connection with the
purchase of chemistry analyzer slides.
Investing Activities. Cash
used by investing activities was $8.6 million for the three months ended March
31, 2010, compared to cash used of $6.9 million for the same period of 2009. The
increase in cash used by investing activities was primarily due to lower
proceeds received in connection with dispositions of assets in 2010 in
comparison to 2009. During the three months ended March 31, 2009, we received
net proceeds of $2.4 million from the sale of our pharmaceutical product lines
and from the sale of property and equipment.
The
decrease in purchases of property and equipment was primarily attributable to
lower spending on manufacturing equipment during the three months ended March
31, 2010 compared to the same period in 2009. We paid $7.8 million to purchase
fixed assets during the three months ended March 31, 2010. Our total capital
expenditure plan for 2010 is approximately $45 million, which includes
approximately $12 million for the renovation and expansion of our headquarters
facility.
Financing Activities. At March
31, 2010, we had $157.4 million outstanding under the Credit Facility, of which
$5.4 million was borrowed by our Canadian subsidiary and denominated in Canadian
dollars. Our
general availability under the Credit Facility is reduced by $1.0 million for a
letter of credit issued related to our workers’ compensation policy covering
claims for the years ended December 31, 2009 and 2010. The applicable
interest rates on funds borrowed under the Credit Facility generally range from
0.375 to 0.875 percentage points (“Credit Spread”) above the London interbank
offered rate (“LIBOR”) or the Canadian Dollar-denominated bankers’ acceptance
rate (“CDOR”), dependent on our consolidated leverage ratio. Under the Credit
Facility, we pay quarterly commitment fees of 0.08% to 0.20%, dependent on our
consolidated leverage ratio, on any unused commitment. The Credit Facility
contains financial and other affirmative and negative covenants, as well as
customary events of default, which provide for the acceleration of amounts
outstanding under the Credit Facility, or restrict our ability to borrow
thereunder, in the event of noncompliance. One of the financial covenants
requires our ratio of debt to earnings before interest, taxes, depreciation and
amortization, defined as the consolidated leverage ratio under the terms of the
Credit Facility, not to exceed 3-to-1. At March 31, 2010, we were in compliance
with the covenants of the Credit Facility.
Our board
of directors has authorized the repurchase of up to 44,000,000 shares of our
common stock in the open market or in negotiated transactions. From the
inception of the program in August 1999 to March 31, 2010, we have repurchased
38,798,000 shares. Cash used to repurchase shares during the three months ended
March 31, 2010 and 2009 was $57.7 million and $15.0 million, respectively. We
believe that the repurchase of our common stock is a favorable investment, and
we also repurchase to offset the dilutive effect of our share-based compensation
programs. Repurchases of our common stock may vary depending upon the level of
other investing activities and the share price.
Other
Commitments, Contingencies and Guarantees
Significant
commitments, contingencies and guarantees at March 31, 2010 are consistent with
those discussed in the section under the heading “Part 2, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources,” and in Note 12 to the consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2009.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Our
financial market risk consists primarily of foreign currency exchange risk and
interest rate risk. Our functional currency is the U.S. dollar and our primary
manufacturing operations are in the U.S., but we distribute our products
worldwide both through direct export and through our foreign subsidiaries. Our
primary foreign currency transaction risk consists of intercompany sales of
products and we attempt to mitigate this risk through our hedging program
described below. For the three months ended March 31, 2010, approximately 25% of
our revenues were derived from products manufactured in the U.S. and sold
internationally in local currencies. The functional currency of most of our
subsidiaries is their local currency. For one of our subsidiaries located in the
Netherlands, the functional currency is the U.S. dollar.
The
primary purpose of our foreign currency hedging activities is to protect against
the volatility associated with foreign currency transactions. We also utilize
natural hedges to mitigate our transaction exposure. Our corporate policy
prescribes the range of allowable hedging activity. We enter into foreign
currency exchange contracts with large multinational financial institutions and
we do not hold or engage in transactions involving derivative instruments for
purposes other than risk management. Our accounting policies for these contracts
are based on our designation of such instruments as hedging transactions. Market
gains and losses are deferred in other comprehensive income (“OCI”), net of tax,
until the contract matures, which is the period when the related obligation is
settled. We primarily utilize forward exchange contracts with durations of less
than 24 months.
Our
subsidiaries enter into foreign currency exchange contracts to manage the
exchange risk associated with their forecasted intercompany inventory purchases
for the next year. From time to time, we may also enter into foreign currency
exchange contracts to minimize the impact of foreign currency fluctuations
associated with specific, significant transactions.
We
identify foreign currency exchange risk by regularly monitoring our transactions
denominated in foreign currencies. We attempt to mitigate currency risk by
hedging the majority of our cash flow on intercompany sales. Currency exposure
on large purchases of foreign currency denominated products are evaluated in our
hedging program and used as natural hedges to reduce the need for financial
hedges.
Our
foreign currency hedging strategy is consistent with prior periods and there
were no material changes in our market risk exposure during the three months
ended March 31, 2010. We enter into forward currency exchange contracts
designated as cash flow hedges for amounts that are less than the full value of
forecasted intercompany sales and for amounts that are equivalent to, or less
than, other specific, significant transactions, thus no significant
ineffectiveness has resulted or been recorded through the statements of
operations. Our hedging strategy related to intercompany inventory purchases
provides that we employ the full amount of our hedges for the succeeding year at
the conclusion of our budgeting process for that year, which is complete by the
end of the preceding year. Quarterly, we enter into contracts to hedge
incremental portions of anticipated foreign currency transactions for the
current and following year that are in excess of amounts previously hedged.
Accordingly, our risk with respect to foreign currency exchange rate
fluctuations may vary throughout each annual cycle.
We enter
into hedge agreements where we believe we have meaningful exposure to foreign
currency exchange risk. The notional amount of foreign currency contracts to
hedge forecasted intercompany sales outstanding at March 31, 2010 and 2009 was
$111.3 million and $118.1 million, respectively. At March 31, 2010, we had $0.6
million in net unrealized losses on foreign exchange contracts designated as
hedges recorded in OCI, which is net of $0.3 million in taxes.
We are
subject to interest rate risk based on the terms of our Credit Facility to the
extent that the LIBOR or the CDOR increases. Borrowings under our Credit
Facility bear interest in the range from 0.375 to 0.875 percentage points above
the LIBOR or the CDOR, dependent on our consolidated leverage ratio, and the
interest period terms for the outstanding borrowings, which range from one to
six months. As discussed below, we have entered into forward fixed interest rate
swaps to mitigate interest rate risk in future periods commencing March 31,
2010. Borrowings outstanding at March 31, 2010 were $157.4 million at a
weighted-average interest rate of 0.8%. On March 31, 2010, our forward fixed
interest rate swaps commenced and based on amounts outstanding at March 31, 2010
for which we are not hedged, interest expense would increase $0.8 million on an
annualized basis with an increase in LIBOR or CDOR of 1%.
In March
2009, we entered into two forward fixed interest rate swap agreements for an
aggregate notional amount of $80 million to manage the economic effect of
variable interest obligations on amounts borrowed under the terms of our Credit
Facility. Under these agreements, we have effectively fixed our interest
exposure on $80 million of our outstanding borrowings for the period commencing
March 31, 2010 through March 30, 2012 by converting our variable interest rate
payments to fixed interest rate payments at 2% plus the Credit Spread. As this
fixed rate is higher than the weighted average rate of debt outstanding during
the three months ended March 31, 2010, we expect that interest expense will
increase during the remainder of the year as compared to the first three months
of 2010. The critical terms of the fixed interest rate swap agreements match the
critical terms of the underlying borrowings, including notional amounts,
underlying market indices, interest rate reset dates and maturity dates.
Accordingly, we have designated these swaps as qualifying instruments to be
accounted for as cash flow hedges. See Note 15 to the condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q for a
discussion of our derivative instruments and hedging activities.
For
quantitative and qualitative disclosures about market risk affecting IDEXX, see
the section under the heading “Part II, Item 7A. Quantitative and Qualitative
Disclosures About Market Risk” of our Annual Report on Form 10-K for the year
ended December 31, 2009. As of the date of this report, there have been no
material changes to the market risks described in our Annual Report on Form 10-K
for December 31, 2009.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
Our
management is responsible for establishing and maintaining disclosure controls
and procedures, as defined by the SEC in its Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 as amended (the “Exchange Act”). The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures at March 31, 2010, our
chief executive officer and chief financial officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures are effective to achieve their stated purpose.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months
ended March 31, 2010 that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
PART
II — OTHER INFORMATION
Item
1A. Risk Factors
Our
future operating results involve a number of risks and uncertainties. Actual
events or results may differ materially from those discussed in this report.
Factors that could cause or contribute to such differences include, but are not
limited to, the factors discussed below, as well as those discussed elsewhere in
this report.
The
following discussion includes one revised risk factor (“Various Government
Regulations and Enforcement Activities Could Limit or Delay Our Ability to
Market and Sell Our Products”) that reflects
developments subsequent to the discussion of that risk factor included in our
most recent Annual Report on Form 10-K.
Our
Failure to Successfully Execute Certain Strategies Could Have a Negative Impact
on Our Growth and Profitability
The
companion animal health care industry is highly competitive and we anticipate
increased competition from both existing competitors and new market entrants.
Our ability to maintain or enhance our historical growth rates and our
profitability depends on our successful execution of many elements of our
strategy, which include:
|
·
|
Developing,
manufacturing and marketing innovative new in-clinic laboratory analyzers
that drive sales of IDEXX VetLab®
instruments, grow our installed base of instruments, and create a
recurring revenue stream from consumable
products;
|
|
·
|
Developing
and introducing new proprietary diagnostic tests and services that provide
valuable medical information to our customers and effectively
differentiate our products and services from those of our
competitors;
|
|
·
|
Achieving
the benefits of economies of scale in our worldwide network of
laboratories;
|
|
·
|
Increasing
the value to our customers of our companion animal products and services
by enhancing the integration of these products and managing the diagnostic
information derived from our
products;
|
|
·
|
Growing
our market share by strengthening our sales and marketing activities both
within the U.S. and in geographies outside of the
U.S.;
|
|
·
|
Developing
and implementing new technology and licensing strategies;
and
|
|
·
|
Identifying,
completing and integrating acquisitions that enhance our existing
businesses or create new business or geographic areas for
us.
|
If we are
unsuccessful in implementing some or all of these strategies, our rate of growth
or profitability may be negatively impacted.
Our
Dependence on a Limited Number of Suppliers Could Limit Our Ability to Sell
Certain Products or Reduce Our Profitability
We
currently purchase many products and materials from sole or single sources. Some
of the products that we purchase from these sources are proprietary and,
therefore, cannot be readily or easily replaced by alternative sources. These
products include our VetAutoread™
hematology, VetLyte®
electrolyte, IDEXX VetLab® UA™
urinalysis, VetTest®
chemistry, and Coag Dx™ blood
coagulation analyzers and related consumables and accessories; image capture
plates used in our digital radiography systems; Catalyst Dx®
consumables; and certain components and raw materials used in our SNAP® rapid
assay devices, water testing products, dairy testing products and LaserCyte®
hematology analyzers. To mitigate risks associated with sole and single source
suppliers we seek where possible to enter into long-term contracts that ensure
an uninterrupted supply of products at predictable prices. However, some
suppliers decline to enter into long-term contracts and we are required to
purchase products on a purchase order basis. There can be no assurance that
suppliers with which we do not have contracts will continue to supply our
requirements for products, that suppliers with which we do have contracts will
always fulfill their obligations under these contracts, or that any of our
suppliers will not experience disruptions in their ability to supply our
requirements for products. In cases where we purchase sole and single source
products or components under purchase orders, we are more susceptible to
unanticipated cost increases or changes in other terms of supply. In addition,
under some contracts with suppliers we have minimum purchase obligations and our
failure to satisfy those obligations may result in loss of some or all of our
rights under these contracts or require us to compensate the supplier. If we are
unable to obtain adequate quantities of sole and single source products in the
future, we may be unable to supply the market, which would have a material
adverse effect on our results of operations.
Our
Biologic Products Are Complex and Difficult to Manufacture, Which Could
Negatively Affect Our Ability to Supply the Market
Many of
our rapid assay and production animal diagnostic products are biologics, which
are products that are comprised of materials from living organisms, such as
antibodies, cells and sera. Manufacturing biologic products is highly complex.
Unlike products that rely on chemicals for efficacy (such as most
pharmaceuticals), biologics are difficult to characterize due to the inherent
variability of biological input materials. Difficulty in characterizing
biological materials or their interactions creates greater risk in the
manufacturing process. There can be no assurance that we will be able to
maintain adequate sources of biological materials or that biological materials
that we maintain in inventory will yield finished products that satisfy
applicable product release criteria. Our inability to produce or obtain
necessary biological materials or to successfully manufacture biologic products
that incorporate such materials could result in our inability to supply the
market with these products, which could have a material adverse effect on our
results of operations.
A
Weak Economy Could Result in Reduced Demand for Our Products and
Services
A
substantial percentage of our sales are made worldwide to the companion animal
veterinary market. Demand for our companion animal diagnostic products and
services is driven in part by the number of pet visits to veterinary hospitals
and the practices of veterinarians with respect to diagnostic testing. Economic
weakness in our significant markets has caused and could continue to cause pet
owners to skip or defer visits to veterinary hospitals or could affect their
willingness to treat certain pet health conditions, approve certain diagnostic
tests, or continue to own a pet. In addition, concerns about the financial
resources of pet owners could cause veterinarians to be less likely to recommend
certain diagnostic tests and concerns about the economy may cause veterinarians
to defer purchasing capital items such as our instruments. A decline in pet
visits to the hospital, in the willingness of pet owners to treat certain health
conditions or approve certain tests, in pet ownership, or in the inclination of
veterinarians to recommend certain tests or make capital purchases could result
in a decrease in sales of diagnostic products and services.
Disruption
in Financial and Currency Markets Could Have a Negative Effect on Our
Business
Global
financial markets in which we operate have experienced extreme disruption over
the past few years, including, among other things, volatility in exchange rates
and security prices, diminished liquidity and credit availability, rating
downgrades of certain investments and declining valuations of others. These
economic developments affect businesses such as ours in a number of ways. The
current tightening of credit in financial markets may adversely affect the
ability of customers to obtain financing for significant purchases and
operations and could result in a decrease in orders for our products and
services. The inability of pet owners to obtain consumer credit could lead to a
decline in pet visits to the veterinarian, which could result in a decrease in
diagnostic testing. Likewise, a decrease in pet visits and patient procedures
could negatively impact the financial condition of the veterinary practices that
are our customers, which may inhibit their ability to pay us amounts owed for
products delivered or services provided. In addition, although current economic
conditions have not impacted our ability to access credit markets and finance
our operations, further deterioration in financial markets could adversely
affect our access to capital. We are unable to predict the likely duration and
severity of the current disruption in financial markets and adverse economic
conditions in the U.S. and other countries.
Strengthening
of the Rate of Exchange for the U.S. Dollar Has a Negative Effect on Our
Business
Strengthening
of the rate of exchange for the U.S. dollar against the Euro, the British Pound,
the Canadian Dollar, the Japanese Yen and the Australian Dollar adversely
affects our results, as it reduces the dollar value of sales that are made in
those currencies and reduces the profits on products manufactured in the U.S.
and exported to international markets. For the three months ended March 31,
2010, approximately 25% of IDEXX sales were derived from products manufactured
in the U.S. and sold internationally in local currencies.
Various
Government Regulations and Enforcement Activities Could Limit or Delay Our
Ability to Market and Sell Our Products
In the
U.S., the manufacture and sale of our products are regulated by agencies such as
the United States Department of Agriculture (“USDA”), the U.S. Food and Drug
Administration (“FDA”) and the U.S. Environmental Protection Agency (“EPA”).
Most diagnostic tests for animal health applications, including our canine,
feline, poultry and livestock tests, must be approved by the USDA prior to sale
in the U.S. Our water testing products must be approved by the EPA before they
can be used by customers in the U.S. as a part of a water quality monitoring
program required by the EPA. Our dairy testing products require approval by the
FDA. The manufacture and sale of our OPTI® line of
human point-of-care electrolytes and blood gas analyzers are regulated by the
FDA and these products require approval by the FDA before they may be sold
commercially in the U.S. The manufacture and sale of our products are subject to
similar laws in many foreign countries. Any failure to comply with legal and
regulatory requirements relating to the manufacture and sale of our products in
the U.S. or in other countries could result in fines and sanctions against us or
suspensions or discontinuations of our ability to manufacture or sell our
products, which could have a material adverse effect on our results of
operations. In addition, delays in obtaining regulatory approvals for new
products or product upgrades could have a negative impact on our growth and
profitability.
In
January 2010, we received a letter from the U.S. Federal Trade Commission
(“FTC”), stating that it was conducting an investigation to determine whether
IDEXX or others have engaged in, or are engaging in, unfair methods of
competition in violation of Section 5 of the Federal Trade Commission Act (“FTC
Act”), through pricing or marketing policies for companion animal veterinary
products and services, including but not limited to exclusive dealing or tying
arrangements with distributors or end-users of those products or services. The
letter requests that we preserve all materials potentially relevant to this
investigation. The letter states that the FTC has not concluded that IDEXX or
anyone else has violated Section 5 of the FTC Act.
We
received a subpoena from the FTC on April 15, 2010 requesting that we provide
the FTC with documents and information relevant to this investigation and we
intend to cooperate fully with the FTC in its investigation. We cannot predict
how long any investigation might be ongoing.
We
believe that our marketing and sales practices for companion animal veterinary
products and services do not violate Section 5 of the FTC Act or any other
antitrust law. However, it is possible that the FTC could reach a different
conclusion at the end of its investigation and elect to commence an enforcement
action in an administrative law court within the FTC. If the FTC were to
commence an enforcement action we would expect to defend ourselves vigorously.
Were the FTC to prevail in the action and through all subsequent appeals, we
believe that any remedies likely to be sought by the FTC under Section 5 would
not have a material adverse effect on our business.
Our
Success Is Heavily Dependent Upon Our Proprietary Technologies
We rely
on a combination of patent, trade secret, trademark and copyright laws to
protect our proprietary rights. If we do not have adequate protection of our
proprietary rights, our business may be affected by competitors who utilize
substantially equivalent technologies that compete with us.
We cannot
ensure that we will obtain issued patents, that any patents issued or licensed
to us will remain valid, or that any patents owned or licensed by us will
provide protection against competitors with similar technologies. Even if our
patents cover products sold by our competitors, the time and expense of
litigating to enforce our patent rights could be substantial, and could have a
material adverse effect on our results of operations. In addition, expiration of
patent rights could result in substantial new competition in the markets for
products previously covered by those patent rights. In June 2009, one of the
U.S. patents covering our SNAP® FIV/FeLV
Combo and SNAP® Feline
Triple tests expired. We had licensed this broad patent exclusively from the
University of California. Expiration of this patent could result in increased
competition in the U.S. market for feline immunodeficiency virus tests and if
this competition arises, we expect that revenues and profit margins associated
with sales of our SNAP® FIV/FeLV
Combo and SNAP® Feline
Triple tests will likely decline.
In the
past, we have received notices claiming that our products infringe third-party
patents and we may receive such notices in the future. Patent litigation is
complex and expensive, and the outcome of patent litigation can be difficult to
predict. We cannot ensure that we will win a patent litigation case or negotiate
an acceptable resolution of such a case. If we lose, we may be stopped from
selling certain products and/or we may be required to pay damages and/or ongoing
royalties as a result of the lawsuit. Any such adverse result could have a
material adverse effect on our results of operations.
Distributor
Purchasing Patterns Could Negatively Affect Our Operating Results
We sell
many of our products, including substantially all of the rapid assays and
instrument consumables sold in the U.S., through distributors. Distributor
purchasing patterns can be unpredictable and may be influenced by factors
unrelated to the end-user demand for our products. In addition, our agreements
with distributors may generally be terminated by the distributors for any reason
on 60 days notice. Because significant product sales are made to a limited
number of distributors, the unanticipated loss of a distributor or unanticipated
changes in the frequency, timing or size of distributor purchases, could have a
negative effect on our results of operations.
Distributors
of veterinary products have entered into business combinations resulting in
fewer distribution companies. Consolidation within distribution channels
increases our customer concentration level, which could increase the risks
described in the preceding paragraph. See the section under the heading “Part 1.
Item 1 Business – Marketing and Distribution” in our Annual Report on Form 10-K
for the year ended December 31, 2009.
Increased
Competition and Technological Advances by Our Competitors Could Negatively
Affect Our Operating Results
We face
intense competition within the markets in which we sell our products and
services and we expect that future competition will become even more intense.
The introduction by competitors of new and competitive products and services
could result in a decline in sales and/or profitability of our products and
services. In addition, competitors may develop products or services that are
superior to our products and services, which could cause us to lose existing
customers and market share. Some of our competitors and potential competitors,
including large diagnostic companies, have substantially greater financial
resources than us, and greater experience in manufacturing, marketing, research
and development and obtaining regulatory approvals than we do.
Changes
in Testing Patterns Could Negatively Affect Our Operating Results
The
market for our companion and production animal diagnostic tests and our dairy
and water testing products could be negatively impacted by a number of factors.
The introduction or broad market acceptance of vaccines or preventatives for the
diseases and conditions for which we sell diagnostic tests and services could
result in a decline in testing. Changes in accepted medical protocols regarding
the diagnosis of certain diseases and conditions could have a similar effect.
Eradication or substantial declines in the prevalence of certain diseases also
could lead to a decline in diagnostic testing for such diseases. Our production
animal products business in particular is subject to fluctuations resulting from
changes in disease prevalence. In addition, changes in government regulations
could negatively affect sales of our products that are driven by compliance
testing, such as our production animal, dairy and water products. Declines in
testing for any of the reasons described could have a material adverse effect on
our results of operations.
Effective
January 1, 2009, the age at which healthy cattle to be slaughtered are required
to be tested for BSE in the European Union was increased from 30 months to 48
months, which has been estimated to reduce the population of cattle tested by
approximately 30%. As a result, we believe that we are likely to lose a portion
of our sales of post-mortem tests for BSE.
Consolidation
of Veterinary Hospitals Could Negatively Affect Our Business
An
increasing percentage of veterinary hospitals in the U.S. is owned by
corporations that are in the business of acquiring veterinary hospitals and/or
opening new veterinary hospitals nationally or regionally. Major corporate
hospital owners in the U.S. include VCA Antech, Inc., National Veterinary
Associates, and Banfield, The Pet Hospital, each of which is currently a
customer of IDEXX. A similar trend exists in the U.K. and may in the future also
develop in other countries. Corporate owners of veterinary hospitals could
attempt to improve profitability by leveraging the buying power they derive from
their scale to obtain favorable pricing from suppliers, which could have a
negative impact on our results. In addition, certain corporate owners, most
notably VCA Antech, our primary competitor in the U.S. and Canadian markets for
veterinary laboratory diagnostic services, also operate reference laboratories
that serve both their hospitals and unaffiliated hospitals. Any hospitals
acquired by these companies generally use their laboratory services almost
exclusively and shift a large portion of their testing from in-clinic testing to
their reference laboratories. In addition, because these companies compete with
us in the laboratory services marketplace, hospitals acquired by these companies
may cease to be customers or potential customers of our other companion animal
products and services, which would cause our sales of these products and
services to decline.
Our
Inexperience in the Human Point-of-Care Market Could Inhibit Our Success in this
Market
Upon
acquiring the Critical Care Division of Osmetech plc in January 2007, we entered
the human point-of-care medical diagnostics market for the first time with the
sale of the OPTI® line of
electrolyte and blood gas analyzers. The human point-of-care medical diagnostics
market differs in many respects from the veterinary medical market. Significant
differences include the impact of third party reimbursement on diagnostic
testing, more extensive regulation, greater product liability risks, larger
competitors, a more segmented customer base, and more rapid technological
innovation. Our inexperience in the human point-of-care medical diagnostics
market could negatively affect our ability to successfully manage the risks and
features of this market that differ from the veterinary medical market. There
can be no assurance that we will be successful in achieving growth and
profitability in the human point-of-care medical diagnostics market comparable
to the results we have achieved in the veterinary medical market.
Risks
Associated with Doing Business Internationally Could Negatively Affect Our
Operating Results
For the
three months ended March 31, 2010, 40% of our revenue was attributable to sales
of products and services to customers outside the U.S. Various risks associated
with foreign operations may impact our international sales. Possible risks
include fluctuations in the value of foreign currencies relative to the U.S.
dollar, inability of our customers to obtain U.S. dollars to pay our invoices,
disruptions in transportation of our products, the differing product and service
needs of foreign customers, difficulties in building and managing foreign
operations, import/export duties and licensing requirements, and unexpected
regulatory, economic or political changes in foreign markets. Prices that we
charge to foreign customers may be different than the prices we charge for the
same products in the U.S. due to competitive, market or other factors. As a
result, the mix of domestic and international sales in a particular period could
have a material impact on our results for that period. In addition, many of the
products for which our selling price may be denominated in foreign currencies
are manufactured, sourced, or both, in the U.S. and our costs are incurred in
U.S. dollars. We utilize non-speculative forward currency exchange contracts and
natural hedges to mitigate foreign currency exposure. However, an appreciation
of the U.S. dollar relative to the foreign currencies in which we sell these
products would reduce our operating profits. Additionally, a strengthening U.S.
dollar could negatively impact the ability of customers outside the U.S. to pay
for purchases denominated in U.S. dollars.
Our
Operations are Vulnerable to Interruption as a Result of Natural Disasters or
System Failures
The
operation of all of our facilities is vulnerable to interruption as a result of
natural and man-made disasters, interruptions in power supply, or other system
failures. While we maintain plans to continue business under such circumstances,
there can be no assurance that such plans will be successful in fully or
partially mitigating the effects of such events.
We
manufacture many of our significant products, including our rapid assay devices,
certain instruments, and most Water, Dairy, and PAS testing products, at a
single facility in Westbrook, Maine. Therefore, interruption of operations at
this facility would have a material adverse effect on our results of
operations.
We
maintain property and business interruption insurance to insure against the
financial impact of certain events of this nature. However, this insurance may
be insufficient to compensate us for the full amount of any losses that we may
incur. In addition, such insurance will not compensate us for the long-term
competitive effects of being off the market for the period of any interruption
in operations.
The
Loss of Our President, Chief Executive Officer and Chairman Could Adversely
Affect Our Business
We rely
on the management and leadership of Jonathan W. Ayers, our President, Chief
Executive Officer and Chairman. We do not maintain key man life insurance
coverage for Mr. Ayers. The loss of Mr. Ayers could have a material adverse
impact on our business.
We
Could Be Subject to Class Action Litigation Due to Stock Price Volatility,
which, if it Occurs, Could Result in Substantial Costs or Large Judgments
Against Us
The market for our common stock may
experience extreme price and volume fluctuations, which may be unrelated or
disproportionate to our operating performance or prospects. In the past,
securities class action litigation has often been brought against companies
following periods of volatility in the market prices of their securities. We may
be the target of similar litigation in the future. Securities litigation could
result in substantial costs and divert our management’s attention and resources,
which could have a negative effect on our business, operating results and
financial condition.
If
Our Quarterly or Annual Results of Operations Fluctuate, This Fluctuation May
Cause Our Stock Price to Decline, Resulting in Losses to You
Our prior
operating results have fluctuated due to a number of factors, including
seasonality of certain product lines; changes in our accounting estimates; the
impact of acquisitions; timing of distributor purchases, product launches,
operating expenditures, litigation and claim-related expenditures; changes in
competitors’ product offerings; changes in the economy affecting consumer
spending; and other matters. Similarly, our future operating results may vary
significantly from quarter to quarter or year to year due to these and other
factors, many of which are beyond our control. If our operating results or
projections of future operating results do not meet the expectations of market
analysts or investors in future periods, our stock price may fall.
Future
Operating Results Could Be Negatively Affected by the Resolution of Various
Uncertain Tax Positions and by Potential Changes to Tax Incentives
In the
ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Significant judgment is
required in determining our worldwide provision for income taxes. We
periodically assess our exposures related to our worldwide provision for income
taxes and believe that we have appropriately accrued taxes for contingencies.
Any reduction of these contingent liabilities or additional assessment would
increase or decrease income, respectively, in the period such determination was
made. Our income tax filings are regularly under audit by tax authorities and
the final determination of tax audits could be materially different than that
which is reflected in historical income tax provisions and accruals.
Additionally, we benefit from certain tax incentives offered by various
jurisdictions. If we are unable to meet the requirements of such incentives, our
inability to use these benefits could have a material negative effect on future
earnings.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31,
2010, we repurchased common shares as described below:
Period
|
|
Total Number of Shares Purchased
(a)
|
|
Average Price Paid per Share
(b)
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(c)
|
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (d)
|
|
|
|
|
|
|
|
|
|
|
January
1 to January 31, 2010
|
|
74,000
|
|
$
|
55.54
|
|
74,000
|
|
2,219,561
|
February
1 to February 28, 2010
|
|
726,275
|
|
|
51.75
|
|
678,000
|
|
5,541,561
|
March
1 to March 31, 2010
|
|
339,762
|
|
|
54.77
|
|
339,762
|
|
5,201,799
|
Total
|
|
1,140,037
|
|
$
|
52.89
|
|
1,091,762
|
|
5,201,799
|
Our board
of directors has approved the repurchase of up to 44,000,000 shares of our
common stock in the open market or in negotiated transactions. The plan was
approved and announced on August 13, 1999, and subsequently amended on October
4, 1999, November 16, 1999, July 21, 2000, October 20, 2003, October 12, 2004,
October 12, 2005, February 14, 2007, February 13, 2008 and February 10, 2010 and
does not have a specified expiration date. There were no other repurchase plans
outstanding during the three months ended March 31, 2010, and no repurchase
plans expired during the period. Repurchases of 1,091,762 shares were made
during the three months ended March 31, 2010 in transactions made pursuant to
our repurchase plan.
During
the three months ended March 31, 2010, we received 48,275 shares of our common
stock that were surrendered by employees in payment for the minimum required
withholding taxes due on the vesting of restricted stock units and settlement of
deferred stock units. In the above table, these shares are included in columns
(a) and (b), but excluded from columns (c) and (d). These shares do not reduce
the number of shares that may be purchased under the repurchase
plan.
Item
6. Exhibits
Exhibits
|
|
|
|
|
|
10.1*
|
|
Form
of Director Stock Option Agreement, as amended pursuant to the 2009 Stock
Incentive Plan.
|
|
|
|
10.2*
|
|
Form
of Employee Stock Option Agreement, as amended pursuant to the 2009 Stock
Incentive Plan.
|
|
|
|
31.1
|
|
Certification
by Chief Executive Officer.
|
|
|
|
31.2
|
|
Certification
by Corporate Vice President, Chief Financial Officer and
Treasurer.
|
|
|
|
32.1
|
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification
by Corporate Vice President, Chief Financial Officer and Treasurer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Management
contract or compensatory arrangement required to be filed as an exhibit
pursuant to Item 6 of Form
10-Q.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
IDEXX
LABORATORIES, INC.
|
|
|
|
/s/
Merilee Raines
|
|
Date:
April 23, 2010
|
Merilee
Raines
|
|
|
Corporate
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial Officer)
|
|
Exhibit
Index
Exhibit No.
|
|
Description
|
|
|
|
10.1*
|
|
Form
of Director Stock Option Agreement, as amended pursuant to the 2009 Stock
Incentive Plan.
|
|
|
|
10.2*
|
|
Form
of Employee Stock Option Agreement, as amended pursuant to the 2009 Stock
Incentive Plan.
|
|
|
|
31.1
|
|
Certification
by Chief Executive Officer.
|
|
|
|
31.2
|
|
Certification
by Corporate Vice President, Chief Financial Officer and
Treasurer.
|
|
|
|
32.1
|
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification
by Corporate Vice President, Chief Financial Officer and Treasurer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Management
contract or compensatory arrangement required to be filed as an exhibit
pursuant to Item 6 of Form
10-Q.
|