Unassociated Document
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 June 30,
2010
OR
¨
|
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
|
04092
|
(Address
of principal executive offices)
|
(ZIP
Code)
|
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 ¨
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 x No ¨
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
|
¨
|
|
|
|
|
Non-accelerated
filer
|
¨ (Do not check if a smaller
reporting company)
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ 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 57,705,856 on July 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
|
Item
1.
|
|
Financial
Statements (unaudited)
|
|
|
|
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Condensed
Consolidated Balance Sheets as of June 30, 2010 and December 31,
2009
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3
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Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2010 and 2009
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4
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Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
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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19
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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33
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Item
4.
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Controls
and Procedures
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33
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PART
II—OTHER INFORMATION
|
Item
1A.
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Risk
Factors
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34
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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39
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Item
6.
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Exhibits
|
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41
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Signatures
|
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42
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Exhibit Index
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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)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
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|
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ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
117,975
|
|
|
$
|
106,728
|
|
Accounts
receivable, net of reserves of $2,253 in 2010 and $2,331 in
2009
|
|
|
127,138
|
|
|
|
115,107
|
|
Inventories,
net
|
|
|
122,032
|
|
|
|
110,425
|
|
Deferred
income tax assets
|
|
|
23,433
|
|
|
|
25,188
|
|
Other
current assets
|
|
|
19,974
|
|
|
|
18,890
|
|
Total
current assets
|
|
|
410,552
|
|
|
|
376,338
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
196,714
|
|
|
|
199,946
|
|
Goodwill
|
|
|
143,252
|
|
|
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148,705
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Intangible
assets, net
|
|
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57,873
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|
|
|
63,907
|
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Other
long-term assets, net
|
|
|
25,344
|
|
|
|
19,631
|
|
Total
long-term assets
|
|
|
423,183
|
|
|
|
432,189
|
|
TOTAL
ASSETS
|
|
$
|
833,735
|
|
|
$
|
808,527
|
|
|
|
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
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|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
23,190
|
|
|
$
|
19,133
|
|
Accrued
liabilities
|
|
|
99,629
|
|
|
|
104,959
|
|
Line
of credit
|
|
|
133,862
|
|
|
|
118,790
|
|
Current
portion of long-term debt
|
|
|
838
|
|
|
|
813
|
|
Current
portion of deferred revenue
|
|
|
13,681
|
|
|
|
12,610
|
|
Total
current liabilities
|
|
|
271,200
|
|
|
|
256,305
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities
|
|
|
17,940
|
|
|
|
18,283
|
|
Long-term
debt, net of current portion
|
|
|
3,856
|
|
|
|
4,281
|
|
Long-term
deferred revenue, net of current portion
|
|
|
4,740
|
|
|
|
3,813
|
|
Other
long-term liabilities
|
|
|
11,722
|
|
|
|
11,266
|
|
Total
long-term liabilities
|
|
|
38,258
|
|
|
|
37,643
|
|
Total
liabilities
|
|
|
309,458
|
|
|
|
293,948
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
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|
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Stockholders’
Equity:
|
|
|
|
|
|
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Common
stock, $0.10 par value: Authorized: 120,000 shares; Issued: 97,294 and
96,334 shares in 2010 and 2009, respectively
|
|
|
9,729
|
|
|
|
9,633
|
|
Additional
paid-in capital
|
|
|
613,416
|
|
|
|
580,797
|
|
Deferred
stock units: Outstanding: 128 and 117 units in 2010 and 2009,
respectively
|
|
|
4,798
|
|
|
|
4,301
|
|
Retained
earnings
|
|
|
894,475
|
|
|
|
824,256
|
|
Accumulated
other comprehensive income
|
|
|
2,924
|
|
|
|
10,341
|
|
Treasury
stock, at cost: 39,680 and 38,118 shares in 2010 and 2009,
respectively
|
|
|
(1,001,081
|
)
|
|
|
(914,759
|
)
|
Total
IDEXX Laboratories, Inc. stockholders’ equity
|
|
|
524,261
|
|
|
|
514,569
|
|
Noncontrolling
interest
|
|
|
16
|
|
|
|
10
|
|
Total
stockholders’ equity
|
|
|
524,277
|
|
|
|
514,579
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
833,735
|
|
|
$
|
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
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
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|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
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|
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|
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Revenue:
|
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|
|
|
|
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|
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|
|
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Product
revenue
|
|
$
|
179,813
|
|
|
$
|
176,066
|
|
|
$
|
356,574
|
|
|
$
|
331,961
|
|
Service
revenue
|
|
|
101,669
|
|
|
|
89,657
|
|
|
|
193,433
|
|
|
|
170,217
|
|
Total
revenue
|
|
|
281,482
|
|
|
|
265,723
|
|
|
|
550,007
|
|
|
|
502,178
|
|
Cost
of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product revenue
|
|
|
72,063
|
|
|
|
71,304
|
|
|
|
140,697
|
|
|
|
130,571
|
|
Cost
of service revenue
|
|
|
60,135
|
|
|
|
55,979
|
|
|
|
117,665
|
|
|
|
108,734
|
|
Total
cost of revenue
|
|
|
132,198
|
|
|
|
127,283
|
|
|
|
258,362
|
|
|
|
239,305
|
|
Gross
profit
|
|
|
149,284
|
|
|
|
138,440
|
|
|
|
291,645
|
|
|
|
262,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
44,167
|
|
|
|
41,876
|
|
|
|
88,583
|
|
|
|
82,861
|
|
General
and administrative
|
|
|
33,076
|
|
|
|
30,794
|
|
|
|
65,884
|
|
|
|
59,862
|
|
Research
and development
|
|
|
17,206
|
|
|
|
16,594
|
|
|
|
33,915
|
|
|
|
32,533
|
|
Income
from operations
|
|
|
54,835
|
|
|
|
49,176
|
|
|
|
103,263
|
|
|
|
87,617
|
|
Interest
expense
|
|
|
(689
|
)
|
|
|
(459
|
)
|
|
|
(1,054
|
)
|
|
|
(1,099
|
)
|
Interest
income
|
|
|
138
|
|
|
|
56
|
|
|
|
191
|
|
|
|
300
|
|
Income
before provision for income taxes
|
|
|
54,284
|
|
|
|
48,773
|
|
|
|
102,400
|
|
|
|
86,818
|
|
Provision
for income taxes
|
|
|
17,087
|
|
|
|
15,106
|
|
|
|
32,175
|
|
|
|
27,080
|
|
Net
income
|
|
|
37,197
|
|
|
|
33,667
|
|
|
|
70,225
|
|
|
|
59,738
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
4
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
$
|
37,193
|
|
|
$
|
33,667
|
|
|
$
|
70,219
|
|
|
$
|
59,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
0.57
|
|
|
$
|
1.21
|
|
|
$
|
1.01
|
|
Diluted
|
|
$
|
0.62
|
|
|
$
|
0.55
|
|
|
$
|
1.17
|
|
|
$
|
0.98
|
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,747
|
|
|
|
58,911
|
|
|
|
57,890
|
|
|
|
59,041
|
|
Diluted
|
|
|
59,646
|
|
|
|
60,697
|
|
|
|
59,875
|
|
|
|
60,688
|
|
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 Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
70,225
|
|
|
$
|
59,738
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
22,632
|
|
|
|
24,712
|
|
Loss
on disposal of property and equipment
|
|
|
1,442
|
|
|
|
2,177
|
|
Increase
(decrease) in deferred compensation liability
|
|
|
(71
|
)
|
|
|
159
|
|
Write-down
of marketable securities
|
|
|
-
|
|
|
|
150
|
|
Provision
for uncollectible accounts
|
|
|
596
|
|
|
|
654
|
|
Provision
for (benefit of) deferred income taxes
|
|
|
(112
|
)
|
|
|
1,239
|
|
Share-based
compensation expense
|
|
|
6,602
|
|
|
|
5,941
|
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
(9,372
|
)
|
|
|
(1,355
|
)
|
Changes
in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(16,544
|
)
|
|
|
(7,101
|
)
|
Inventories
|
|
|
(12,977
|
)
|
|
|
(6,876
|
)
|
Other
assets
|
|
|
(1,634
|
)
|
|
|
(2,768
|
)
|
Accounts
payable
|
|
|
4,308
|
|
|
|
(1,684
|
)
|
Accrued
liabilities
|
|
|
7,432
|
|
|
|
(3,423
|
)
|
Deferred
revenue
|
|
|
2,558
|
|
|
|
(682
|
)
|
Net
cash provided by operating activities
|
|
|
75,085
|
|
|
|
70,881
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(17,437
|
)
|
|
|
(21,360
|
)
|
Proceeds
from disposition of pharmaceutical product lines
|
|
|
-
|
|
|
|
1,377
|
|
Proceeds
from sale of property and equipment
|
|
|
64
|
|
|
|
1,076
|
|
Acquisitions
of intangible assets
|
|
|
(144
|
)
|
|
|
-
|
|
Net
cash used by investing activities
|
|
|
(17,517
|
)
|
|
|
(18,907
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
on revolving credit facilities, net
|
|
|
15,099
|
|
|
|
3,782
|
|
Payment
of other notes payable
|
|
|
(400
|
)
|
|
|
(436
|
)
|
Purchase
of treasury stock
|
|
|
(83,724
|
)
|
|
|
(39,725
|
)
|
Proceeds
from exercises of stock options and employee stock purchase
plans
|
|
|
16,446
|
|
|
|
6,888
|
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
9,372
|
|
|
|
1,355
|
|
Net
cash used by financing activities
|
|
|
(43,207
|
)
|
|
|
(28,136
|
)
|
Net
effect of changes in exchange rates on cash
|
|
|
(3,114
|
)
|
|
|
1,038
|
|
Net
increase in cash and cash equivalents
|
|
|
11,247
|
|
|
|
24,876
|
|
Cash
and cash equivalents at beginning of period
|
|
|
106,728
|
|
|
|
78,868
|
|
Cash
and cash equivalents at end of period
|
|
$
|
117,975
|
|
|
$
|
103,744
|
|
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 six months ended June
30, 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 quarter ended June 30, 2010, and our Annual Report on Form 10-K for the
year ended December 31, 2009 filed with the Securities and Exchange
Commission.
Certain
reclassifications have been made to the prior year condensed consolidated
financial statements to conform to the current year presentation.
Reclassifications had no material impact on previously reported results of
operations, financial position or cash flows.
NOTE
2. ACCOUNTING
POLICIES
Significant
Accounting Policies
The
significant accounting policies used in preparation of these condensed
consolidated financial statements for the six months ended June 30, 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 six months
ended June 30, 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 six months ended June 30, 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, or cash
flows for the six months ended June 30, 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: EMAs; 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 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
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
following is a summary of the fair value of options, restricted stock units,
deferred stock units with vesting conditions and employee stock purchase rights
awarded, and share-based compensation expense incurred, during the three and six
months ended June 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of share-based compensation awards
|
|
$
|
354
|
|
|
$
|
116
|
|
|
$
|
15,355
|
|
|
$
|
15,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense
|
|
|
3,168
|
|
|
|
2,944
|
|
|
|
6,512
|
|
|
|
5,806
|
|
The total
unrecognized compensation expense for unvested awards outstanding at June 30,
2010 was $32.4 million, net of approximately $2.6 million related to estimated
forfeitures. The weighted average remaining expense recognition period at June
30, 2010 was approximately 2.1 years.
Options
We
determine the assumptions used in the valuation of option awards as of the date
of grant. Differences in the stock price volatility, terms of options granted to
different segments of recipients, or risk-free interest rates may necessitate
distinct valuation assumptions at those grant dates. As such, we may use
different assumptions for options granted throughout the year. Option awards are
granted 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 award on the date of grant and the
weighted average estimated fair values were as follows:
|
|
For the Six Months Ended
June 30,
|
|
|
|
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
|
|
$ |
16.56 |
|
|
$ |
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):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
29,999
|
|
|
$
|
28,426
|
|
Work-in-process
|
|
|
14,706
|
|
|
|
17,761
|
|
Finished
goods
|
|
|
77,327
|
|
|
|
64,238
|
|
|
|
$
|
122,032
|
|
|
$
|
110,425
|
|
NOTE
5. GOODWILL AND OTHER INTANGIBLE
ASSETS
The
changes in goodwill and intangible assets other than goodwill during the six
months ended June 30, 2010 resulted primarily from changes in foreign currency
exchange rates and, to a lesser extent, continued amortization of our intangible
asset base.
NOTE
6. ACCRUED
LIABILITIES
Accrued
liabilities consisted of the following (in thousands):
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
31,548
|
|
|
$
|
33,094
|
|
Accrued
employee compensation and related expenses
|
|
|
40,864
|
|
|
|
44,497
|
|
Accrued
taxes
|
|
|
5,082
|
|
|
|
9,980
|
|
Accrued
customer programs
|
|
|
22,135
|
|
|
|
17,388
|
|
|
|
$
|
99,629
|
|
|
$
|
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 product 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’ environments
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
and six months ended June 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
2,614
|
|
|
$
|
3,106
|
|
|
$
|
3,086
|
|
|
$
|
2,837
|
|
Provision
for warranty expense
|
|
|
1,020
|
|
|
|
1,328
|
|
|
|
1,941
|
|
|
|
2,317
|
|
Change
in estimate
|
|
|
(90
|
)
|
|
|
(425
|
)
|
|
|
(570
|
)
|
|
|
(420
|
)
|
Settlement
of warranty liability
|
|
|
(947
|
)
|
|
|
(910
|
)
|
|
|
(1,860
|
)
|
|
|
(1,635
|
)
|
Balance,
end of period
|
|
$
|
2,597
|
|
|
$
|
3,099
|
|
|
$
|
2,597
|
|
|
$
|
3,099
|
|
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.
The
following is a summary of our treasury stock purchases and other receipts for
the three and six months ended June 30, 2010 and 2009 (in thousands, except per share
amounts):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
acquired
|
|
|
422 |
|
|
|
593 |
|
|
|
1,562 |
|
|
|
1,092 |
|
Total
cost of shares acquired
|
|
$ |
26,020 |
|
|
$ |
24,758 |
|
|
$ |
86,322 |
|
|
$ |
40,816 |
|
Average
cost per share
|
|
$ |
61.66 |
|
|
$ |
41.72 |
|
|
$ |
55.26 |
|
|
$ |
37.37 |
|
NOTE
9. INCOME TAXES
The
following is a summary of our effective income tax rates for the three and six
months ended June 30, 2010 and 2009:
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
31.5
|
%
|
|
|
31.0
|
%
|
|
|
31.4
|
%
|
|
|
31.2
|
%
|
The
increases in our effective income tax rate for the three and six months ended
June 30, 2010 compared to the same periods of the prior year were due primarily
to the expiration of federal research and development tax incentives that were
available during the three and six months ended June 30, 2009, partly offset by
tax benefits related
to U.S. manufacturing activities that were fully phased in effective January 1,
2010.
NOTE
10. COMPREHENSIVE INCOME
The
following is a summary of comprehensive income for the three and six months
ended June 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
37,197
|
|
|
$
|
33,667
|
|
|
$
|
70,225
|
|
|
$
|
59,738
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
4
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
37,193
|
|
|
|
33,667
|
|
|
|
70,219
|
|
|
|
59,738
|
|
Other
comprehensive income (loss) attributable to IDEXX Laboratories, Inc.
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(7,339
|
)
|
|
|
14,063
|
|
|
|
(12,887
|
)
|
|
|
6,971
|
|
Change
in fair value of foreign currency contracts classified as hedges, net of
tax
|
|
|
4,020
|
|
|
|
(7,170
|
)
|
|
|
6,295
|
|
|
|
(8,457
|
)
|
Change
in fair value of interest rate swaps classified as hedges, net of
tax
|
|
|
(191
|
)
|
|
|
549
|
|
|
|
(773
|
)
|
|
|
335
|
|
Change
in fair market value of investments, net of tax
|
|
|
(109
|
)
|
|
|
305
|
|
|
|
(52
|
)
|
|
|
242
|
|
Comprehensive
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
$
|
33,574
|
|
|
$
|
41,414
|
|
|
$
|
62,802
|
|
|
$
|
58,829
|
|
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 period. 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 for the three and
six months ended June 30, 2010 and 2009 (in
thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding for Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
57,619
|
|
|
|
58,797
|
|
|
|
57,765
|
|
|
|
58,930
|
|
Weighted
average vested deferred stock units outstanding
|
|
|
128
|
|
|
|
114
|
|
|
|
125
|
|
|
|
111
|
|
|
|
|
57,747
|
|
|
|
58,911
|
|
|
|
57,890
|
|
|
|
59,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding for Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding for basic earnings per share
|
|
|
57,747
|
|
|
|
58,911
|
|
|
|
57,890
|
|
|
|
59,041
|
|
Dilutive
effect of options issued
|
|
|
1,764
|
|
|
|
1,711
|
|
|
|
1,801
|
|
|
|
1,569
|
|
Dilutive
effect of restricted stock units issued
|
|
|
134
|
|
|
|
67
|
|
|
|
182
|
|
|
|
71
|
|
Dilutive
effect of unvested deferred stock units issued
|
|
|
1
|
|
|
|
8
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
59,646
|
|
|
|
60,697
|
|
|
|
59,875
|
|
|
|
60,688
|
|
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 diluted earnings per share because they
were anti-dilutive. The following table presents information concerning those
anti-dilutive options and restricted stock units for the three and six months
ended June 30, 2010 and 2009
(in thousands, except per share amounts):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares underlying anti-dilutive options
|
|
|
547
|
|
|
|
1,442
|
|
|
|
624
|
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average exercise price per underlying share of anti-dilutive
options
|
|
$
|
54.19
|
|
|
$
|
44.18
|
|
|
$
|
55.11
|
|
|
$
|
44.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares underlying anti-dilutive restricted stock
units
|
|
|
-
|
|
|
|
127
|
|
|
|
-
|
|
|
|
17
|
|
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):
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Closing
price per share of our common stock
|
|
$
|
60.90
|
|
|
$
|
46.20
|
|
|
|
|
|
|
|
|
|
|
Number
of shares underlying options with exercise prices below the closing
price
|
|
|
4,378
|
|
|
|
4,714
|
|
Number
of shares underlying options with exercise prices equal to or above the
closing price
|
|
|
4
|
|
|
|
571
|
|
Total
number of shares underlying outstanding options
|
|
|
4,382
|
|
|
|
5,285
|
|
NOTE
12. COMMITMENTS, CONTINGENCIES AND
GUARANTEES
Significant
commitments, contingencies and guarantees at June 30, 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
During the second quarter of 2010, we
changed the name of our Production Animal Segment to Livestock and Poultry
Diagnostics (“LPD”). The primary reason for this change was to provide a name
that more accurately reflects the products and services and customer groups to
which this segment caters.
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 and six months
ended June 30, 2010 and 2009.
The
following is a summary of segment performance for the three and six months ended
June 30, 2010 and 2009 (in
thousands):
|
|
For the Three Months Ended June 30,
|
|
|
|
CAG
|
|
|
Water
|
|
|
LPD
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
232,320 |
|
|
$ |
19,448 |
|
|
$ |
19,160 |
|
|
$ |
10,554 |
|
|
$ |
- |
|
|
$ |
281,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
44,879 |
|
|
$ |
7,917 |
|
|
$ |
4,188 |
|
|
$ |
202 |
|
|
$ |
(2,351 |
) |
|
$ |
54,835 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,284 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,087 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,197 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
217,289 |
|
|
$ |
19,165 |
|
|
$ |
19,639 |
|
|
$ |
9,630 |
|
|
$ |
- |
|
|
$ |
265,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
39,912 |
|
|
$ |
8,608 |
|
|
$ |
5,108 |
|
|
$ |
(30 |
) |
|
$ |
(4,422 |
) |
|
$ |
49,176 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,773 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,106 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,667 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,667 |
|
|
|
For the Six Months Ended June 30,
|
|
|
|
CAG
|
|
|
Water
|
|
|
LPD
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
453,737 |
|
|
$ |
37,312 |
|
|
$ |
39,101 |
|
|
$ |
19,857 |
|
|
$ |
- |
|
|
$ |
550,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
84,646 |
|
|
$ |
15,040 |
|
|
$ |
8,922 |
|
|
$ |
462 |
|
|
$ |
(5,807 |
) |
|
$ |
103,263 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
863 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,400 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,175 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,225 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
410,981 |
|
|
$ |
35,016 |
|
|
$ |
37,905 |
|
|
$ |
18,276 |
|
|
$ |
- |
|
|
$ |
502,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
68,991 |
|
|
$ |
15,920 |
|
|
$ |
10,058 |
|
|
$ |
99 |
|
|
$ |
(7,451 |
) |
|
$ |
87,617 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,818 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,080 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,738 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
59,738 |
|
The
following is a summary of revenue by product and service category for the three
and six months ended June 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
CAG
segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$
|
86,455
|
|
|
$
|
83,732
|
|
|
$
|
169,837
|
|
|
$
|
155,967
|
|
Rapid
assay products
|
|
|
40,481
|
|
|
|
41,567
|
|
|
|
79,924
|
|
|
|
79,244
|
|
Laboratory
diagnostic and consulting services
|
|
|
86,048
|
|
|
|
77,876
|
|
|
|
165,888
|
|
|
|
146,568
|
|
Practice
information systems and digital radiography
|
|
|
19,336
|
|
|
|
14,114
|
|
|
|
38,088
|
|
|
|
29,148
|
|
Pharmaceutical
products
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
CAG
segment revenue
|
|
|
232,320
|
|
|
|
217,289
|
|
|
|
453,737
|
|
|
|
410,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
segment revenue
|
|
|
19,448
|
|
|
|
19,165
|
|
|
|
37,312
|
|
|
|
35,016
|
|
LPD
segment revenue
|
|
|
19,160
|
|
|
|
19,639
|
|
|
|
39,101
|
|
|
|
37,905
|
|
Other
segment revenue
|
|
|
10,554
|
|
|
|
9,630
|
|
|
|
19,857
|
|
|
|
18,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
281,482
|
|
|
$
|
265,723
|
|
|
$
|
550,007
|
|
|
$
|
502,178
|
|
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 classified as derivative instruments are
valued based on the present value of the forward rate less the contract
rate multiplied by the notional amount. Interest rate swaps classified as
derivative instruments are valued utilizing a discounted cash flow
analysis based on the terms of the contract and the interest rate
curve.
|
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 June 30,
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 six months
ended June 30, 2010 or during the year ended December 31, 2009. We did not have
any transfers between Level 1 and Level 2 measurements during the six months
ended June 30, 2010.
The
following tables set forth our assets and liabilities that were measured at fair
value on a recurring basis at June 30, 2010 and at December 31, 2009 by level
within the fair value hierarchy (in thousands):
As
of June 30, 2010
|
|
Quoted
Prices
in
Active
Markets
for
Identical Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance
at
June
30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds(1)
|
|
$ |
32,027 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
32,027 |
|
Equity
mutual funds(2)
|
|
|
1,823 |
|
|
|
- |
|
|
|
- |
|
|
|
1,823 |
|
Foreign
currency exchange contracts(3)
|
|
|
- |
|
|
|
4,903 |
|
|
|
- |
|
|
|
4,903 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation(4)
|
|
|
1,823 |
|
|
|
- |
|
|
|
- |
|
|
|
1,823 |
|
Interest
rate swaps(5)
|
|
|
- |
|
|
|
1,817 |
|
|
|
- |
|
|
|
1,817 |
|
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 footnote 4 below for a discussion of the
related deferred compensation
liability.
|
(3)
|
Foreign
currency exchange contracts are included within Other current assets and
Other long-term assets, net as of June 30, 2010 and within Accrued
liabilities as of December 31,
2009.
|
(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 footnote 2
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, 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 the amounts they owe us and, as a consequence, we 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 OCI 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 and six months
ended June 30, 2010. The loss recognized in earnings related to de-designated
instruments during the three and six months ended June 30, 2009 was less than
$0.1 million. 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 and six months ended June 30, 2010 and 2009 were not material. At June
30, 2010, the estimated net amount of gains that are expected to be reclassified
out of accumulated OCI and into earnings within the next 12 months is $2.5
million if exchange rates do not fluctuate from the levels at June 30,
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 became effectively 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
|
|
|
|
|
June
30,
|
|
|
December 31,
|
|
|
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
46,988
|
|
$
|
53,091
|
|
$
|
40,922
|
|
British
Pound
|
|
|
22,546
|
|
|
19,238
|
|
|
20,200
|
|
Canadian
Dollar
|
|
|
20,096
|
|
|
18,849
|
|
|
21,515
|
|
Australian
Dollar
|
|
|
6,620
|
|
|
7,086
|
|
|
5,676
|
|
Japanese
Yen
|
|
|
10,169
|
|
|
9,795
|
|
|
6,799
|
|
|
|
$
|
106,419
|
|
$
|
108,059
|
|
$
|
95,112
|
|
Currency
Purchased
|
|
U.S.
Dollar Equivalent
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Swiss
Franc
|
|
$
|
9,754
|
|
$
|
8,808
|
|
$
|
6,391
|
|
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
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
|
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):
|
|
Asset
Derivatives
|
|
|
|
June
30, 2010
|
|
December
31, 2009
|
|
|
|
Balance
Sheet
Classification
|
|
Fair
Value
|
|
Balance
Sheet
Classification
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts
|
|
Other
current assets
|
|
$
|
3,575
|
|
Other
current assets
|
|
$
|
-
|
|
Foreign
currency exchange contracts
|
|
Other
long-term assets, net
|
|
|
1,328
|
|
Other
long-term assets, net
|
|
|
-
|
|
|
|
|
|
$
|
4,903
|
|
|
|
$
|
-
|
|
|
|
Liability
Derivatives
|
|
|
|
June
30, 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
|
|
$
|
-
|
|
Accrued
expenses
|
|
$
|
4,221
|
|
Interest
rate swaps
|
|
Accrued
expenses
|
|
|
1,817
|
|
Accrued
expenses
|
|
|
595
|
|
Total
derivative instruments
|
|
|
|
$
|
1,817
|
|
|
|
$
|
4,816
|
|
The
effect of derivative instruments designated as cash flow hedges on the condensed
consolidated balance sheet for the three and six months ended June 30, 2010 and
2009 consisted of the following (in thousands):
|
|
Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
|
|
|
|
For
the Three Months Ended
June
30,
|
|
|
For
the Six Months Ended
June
30,
|
|
Derivative
instruments
|
|
2010
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts, net of tax
|
$ |
4,020
|
|
$ |
(7,170
|
)
|
|
$
|
6,295
|
|
|
$
|
(8,457
|
)
|
Interest
rate swaps, net of tax
|
|
(191
|
)
|
|
549
|
|
|
|
(773
|
)
|
|
|
335
|
|
Total
loss, net of tax
|
$ |
3,829
|
|
$ |
(6,621
|
)
|
|
$
|
5,522
|
|
|
$
|
(8,122
|
)
|
The
effect of derivative instruments designated as cash flow hedges on the condensed
consolidated statement of operations for the three and six months ended June 30,
2010 and 2009 consisted of the following (in thousands):
|
|
Classification
of
|
|
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
|
Gain
(Loss)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
Reclassified
from
|
|
June
30,
|
|
|
June
30,
|
|
|
|
OCI
into Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
(Effective
Portion)
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Cost
of revenue
|
|
$
|
846
|
|
|
$
|
2,134
|
|
|
$
|
435
|
|
|
$
|
6,952
|
|
The
effect of derivative instruments that have been de-designated from cash flow
hedge treatment on the condensed consolidated statement of operations for the
three and six months ended June 30, 2010 and 2009 consisted of the following
(in
thousands):
|
|
|
|
|
Gain (Loss) Recognized in Income Related to De-designated Cash Flow Hedges
|
|
|
|
Classification
of
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
Gain
(Loss)
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
Reclassified
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
De-designated derivative instruments
|
|
OCI into Income
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
General
and administrative expense
|
|
$
|
-
|
|
|
$
|
(42
|
)
|
|
$
|
-
|
|
|
$
|
(42
|
)
|
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 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 and Trends
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 livestock and poultry health, which we refer to as Livestock and
Poultry Diagnostics (“LPD”). During the second quarter of 2010, we changed the
name of our Production Animal Segment to LPD. 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 and the section entitled “Description
of Business by Segment” under the heading “Item 1. Business” in our Annual
Report on Form 10-K for the year ended December 31, 2009 for additional
description of 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. LPD develops, designs, manufactures and distributes
products to detect disease in livestock and poultry. 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.
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 current year, distributors’ inventories
grew by less than those inventories grew in the comparable period of the prior
year, then changes in distributors’ inventories have a negative impact on our
reported sales growth in the current period. Conversely, if during the current
year, distributors’ inventories grew by more than those inventories grew in the
comparable period of the prior year, then changes in distributors’ inventories
have a positive impact on our reported sales growth in the current
period.
At the
end of a quarter, we believe that our U.S. CAG distributors typically hold
inventory equivalent to approximately three to four weeks of our anticipated
end-user demand for instrument consumables and rapid assay
products.
Currency Impact. For
the three and six months ended June 30, 2010, 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,
with a weakening of the U.S. dollar having the opposite effect. 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 and foreign currency denominated supply contracts partly
offset this exposure.
During
the three months ended June 30, 2010, as compared to the three months ended June
30, 2009, the U.S. dollar strengthened against the Euro significantly, causing
our European revenues to be negatively impacted. This impact was offset by the
weakening of the U.S. dollar against the Canadian dollar and Australian dollar.
Because of these offsetting changes, on a company-wide basis we experienced no
significant impact from changes in foreign currency exchange rates on revenue
during the three months ended June 30, 2010 as compared to the same period of
the prior year. However, our individual operating segments did experience
impacts to revenue from changes in foreign currency exchange rates between these
two periods. Our LPD segment, where the largest portion of sales outside of the
U.S. are generated in Europe, experienced significant decreases in revenue due
to the changing value of the Euro against the U.S. dollar. These negative
impacts were offset by our CAG and Water segments, where proportionally higher
sales outside of the U.S. are generated in Canada and Australia as compared to
Europe.
Effect of Economic
Conditions. Demand for our CAG products and services is affected by
consumer sentiment, as many pet owners may regard spending on pet healthcare to
be at least partially discretionary. Therefore, we believe that the continuing
weak economy has caused patient visits to U.S. and European veterinary clinics
for routine screening, preventive care and elective procedures to remain
depressed, which has negatively affected the growth rate of sales of rapid assay
tests, instrument consumables, and laboratory diagnostic and consulting services
in our CAG segment. 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 continued caution among veterinarians regarding
economic prospects. Weaker economic conditions have also caused our
customers to remain sensitive to the pricing of our products and services,
resulting in lower growth from price increases for certain products over the
course of the first six months of 2010 relative to the comparable period for the
prior year.
Beyond
our companion animal business, we are also seeing the weak economy impact
certain customer groups in our Water and LPD 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 LPD 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 and improve.
■
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.
(“U.S. GAAP”). 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 and six months ended
June 30, 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 and six months ended June 30, 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 June 30, 2010 Compared to Three Months Ended June 30,
2009
Revenue
Total Company. The following
table presents revenue by operating segment:
For
the Three Months Ended June 30,
|
|
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
|
|
$ |
232,320 |
|
|
$ |
217,289 |
|
|
$ |
15,031 |
|
|
|
6.9
|
% |
|
|
0.3
|
% |
|
|
0.7
|
% |
|
|
5.9
|
% |
Water
|
|
|
19,448 |
|
|
|
19,165 |
|
|
|
283 |
|
|
|
1.5
|
% |
|
|
0.3
|
% |
|
|
- |
|
|
|
1.2
|
% |
LPD
|
|
|
19,160 |
|
|
|
19,639 |
|
|
|
(479
|
) |
|
|
(2.4
|
)% |
|
|
(2.8
|
)% |
|
|
- |
|
|
|
0.4
|
% |
Other
|
|
|
10,554 |
|
|
|
9,630 |
|
|
|
924 |
|
|
|
9.6
|
% |
|
|
(0.4
|
)% |
|
|
- |
|
|
|
10.0
|
% |
Total
|
|
$ |
281,482 |
|
|
$ |
265,723 |
|
|
$ |
15,759 |
|
|
|
5.9
|
% |
|
|
0.0
|
% |
|
|
0.6
|
% |
|
|
5.3
|
% |
(1)
|
The
percentage change from currency is a non-U.S. GAAP measure. It represents
the percentage change in revenue resulting from the difference between the
average exchange rates during the three months ended June 30, 2010 and the
same period of the prior year applied against foreign currency denominated
revenues for the three months ended June 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the three months ended June 30,
2010 compared to the three months ended June 30, 2009 attributed to
incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to March 31,
2009.
|
The
following revenue analysis and discussion focuses on organic revenue, which
reflects the results of operations net of the impact of changes in foreign
currency exchange rates on sales outside the U.S. and net of incremental
revenues from businesses acquired or revenues lost from businesses divested or
discontinued subsequent to March 31, 2009.
Companion Animal Group. The
following table presents revenue by product and service category for
CAG:
For
the Three Months Ended June 30,
|
|
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
|
|
$ |
86,455 |
|
|
$ |
83,732 |
|
|
$ |
2,723 |
|
|
|
3.3
|
% |
|
|
(0.6
|
)% |
|
|
- |
|
|
|
3.9
|
% |
Rapid
assay products
|
|
|
40,481 |
|
|
|
41,567 |
|
|
|
(1,086
|
) |
|
|
(2.6
|
)% |
|
|
0.4
|
% |
|
|
- |
|
|
|
(3.0
|
)% |
Laboratory
diagnostic and consulting services
|
|
|
86,048 |
|
|
|
77,876 |
|
|
|
8,172 |
|
|
|
10.5
|
% |
|
|
0.9
|
% |
|
|
1.8
|
% |
|
|
7.8
|
% |
Practice
information management systems and digital radiography
|
|
|
19,336 |
|
|
|
14,114 |
|
|
|
5,222 |
|
|
|
37.0
|
% |
|
|
1.5
|
% |
|
|
1.0
|
% |
|
|
34.5
|
% |
Net
CAG revenue
|
|
$ |
232,320 |
|
|
$ |
217,289 |
|
|
$ |
15,031 |
|
|
|
6.9
|
% |
|
|
0.3
|
% |
|
|
0.7
|
% |
|
|
5.9
|
% |
(1)
|
The
percentage change from currency is a non-U.S. GAAP measure. It represents
the percentage change in revenue resulting from the difference between the
average exchange rates during the three months ended June 30, 2010 and the
same period of the prior year applied against foreign currency denominated
revenues for the three months ended June 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the three months ended June 30,
2010 compared to the three months ended June 30, 2009 attributed to
incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to March 31,
2009.
|
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 used with our Catalyst Dx®
instrument, partly offset by lower sales of consumables used with our
VetTest®
instrument as certain customers have replaced VetTest®
instruments with Catalyst Dx®
instruments. Higher sales volumes were also attributable to sales of our
Catalyst 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 sales prices resulting
from economic and competitive conditions. The impact from changes in
distributors’ inventory levels was not significant to reported instruments and
consumables revenue.
The
decrease in rapid assay revenue was due in part to lower average unit sales
prices for our canine heartworm-only SNAP® tests
resulting from competitive conditions. The decrease in rapid assay revenue was
also attributable to the unfavorable impact from changes in distributors’
inventory levels, which resulted in a decrease in reported rapid assay revenue
growth of 2%.
The
increase in laboratory diagnostic and consulting services revenue resulted
primarily from the impact of higher testing volume and, to a lesser extent,
price increases. Higher testing volume was driven by the acquisition of new
customers.
The
increase in practice information management systems and digital radiography
revenue resulted primarily from higher sales volumes of companion animal
radiography systems as this market is in the early stages of transition from
older film-based systems to digital as the standard of care. An increase in
service and support revenue also contributed to revenue
growth.
Water. The increase in Water
revenue resulted primarily from higher Colilert® product
sales volume. This favorable impact was partly offset by higher relative sales
of Colilert® products
in geographies where products are sold at lower average unit sales
prices.
Livestock and Poultry
Diagnostics. The slight increase in LPD revenue resulted from higher
sales volumes of certain bovine tests, substantially offset by lower average
unit sales prices for certain bovine tests resulting from competitive conditions
and lower sales volumes of certain swine tests.
Other. The increase in Other
revenue was primarily attributable to higher sales volumes of out-licensed
products, higher sales volumes of our Dairy SNAP® Beta
Lactam test used for the detection of penicillin, and higher sales volumes of
consumables used with our OPTI Medical instruments.
Gross
Profit
Total Company. The following
table presents gross profit and gross profit percentages by operating
segment:
For
the Three Months Ended June 30,
|
|
Gross
Profit
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
119,632 |
|
|
|
51.5
|
% |
|
$ |
108,334 |
|
|
|
49.9
|
% |
|
$ |
11,298 |
|
|
|
10.4
|
% |
Water
|
|
|
12,229 |
|
|
|
62.9
|
% |
|
|
12,554 |
|
|
|
65.5
|
% |
|
|
(325
|
) |
|
|
(2.6
|
)% |
LPD
|
|
|
13,105 |
|
|
|
68.4
|
% |
|
|
13,299 |
|
|
|
67.7
|
% |
|
|
(194
|
) |
|
|
(1.5
|
)% |
Other
|
|
|
4,248 |
|
|
|
40.3
|
% |
|
|
4,193 |
|
|
|
43.5
|
% |
|
|
55 |
|
|
|
1.3
|
% |
Unallocated
amounts
|
|
|
70 |
|
|
|
N/A |
|
|
|
60 |
|
|
|
N/A |
|
|
|
10 |
|
|
|
16.7
|
% |
Total
Company
|
|
$ |
149,284 |
|
|
|
53.0
|
% |
|
$ |
138,440 |
|
|
|
52.1
|
% |
|
$ |
10,844 |
|
|
|
7.8
|
% |
Companion Animal Group. Gross
profit for CAG increased due to higher sales and an increase in the gross profit
percentage to 52% from 50%. The increase in gross profit percentage was
primarily attributable to reduced overall manufacturing costs associated with
our IDEXX VetLab®
instruments and lower depreciation on 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 and
transferred to the lessee. The gross profit percentage was also favorably
impacted by lower costs of service and higher selling prices in our laboratory
diagnostic and consulting services business. These favorable impacts were partly
offset by lower average unit sales prices of instruments and consumables and
SNAP® tests
and the net unfavorable impact of changes in foreign currency exchange rates,
which was due primarily to lower hedging gains.
Water. Gross profit for Water
decreased as higher sales were offset by a decrease in the gross profit
percentage to 63% from 66%. The decrease in the gross profit percentage was due
to higher overall manufacturing costs, the net unfavorable impact of changes in
foreign currency exchange rates, due primarily to lower hedging gains, and lower
average unit sales prices. These unfavorable impacts were partly offset by
higher relative sales of higher margin Colilert®
products. The gross profit percentage of 63% is relatively consistent
with full year 2008 and 2009 results.
Livestock and Poultry
Diagnostics. Gross profit for LPD decreased as lower sales were partly
offset by a slight increase in the gross profit percentage. The slight increase
in the gross profit percentage was due to lower overall manufacturing costs and
higher relative sales of higher margin products, partly offset by lower average
unit sales prices and the net unfavorable impact of changes in foreign currency
exchange rates. The net unfavorable impact of changes in foreign currency
exchange rates was due primarily to the unfavorable impact of the strengthening
of the U.S. dollar against the Euro, as LPD sales outside of the U.S. are
primarily denominated in Euros.
Other. Gross profit for Other
operating units increased due to higher sales, partly offset by a decrease in
the gross profit percentage. The decrease in the gross profit percentage was
attributable to an increase in overall manufacturing costs in our OPTI Medical
business and lower average unit sales prices in our Dairy business.
Operating
Expenses and Operating Income
Total Company. The following
tables present operating expenses and operating income by operating
segment:
For
the Three Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
74,753 |
|
|
|
32.2 |
% |
|
$ |
68,422 |
|
|
|
31.5 |
% |
|
$ |
6,331 |
|
|
|
9.3 |
% |
Water
|
|
|
4,312 |
|
|
|
22.2 |
% |
|
|
3,946 |
|
|
|
20.6 |
% |
|
|
366 |
|
|
|
9.3 |
% |
LPD
|
|
|
8,917 |
|
|
|
46.5 |
% |
|
|
8,191 |
|
|
|
41.7 |
% |
|
|
726 |
|
|
|
8.9 |
% |
Other
|
|
|
4,046 |
|
|
|
38.3 |
% |
|
|
4,223 |
|
|
|
43.9 |
% |
|
|
(177 |
) |
|
|
(4.2 |
)% |
Unallocated
amounts
|
|
|
2,421 |
|
|
|
N/A |
|
|
|
4,482 |
|
|
|
N/A |
|
|
|
(2,061 |
) |
|
|
(46.0 |
)% |
Total
Company
|
|
$ |
94,449 |
|
|
|
33.6 |
% |
|
$ |
89,264 |
|
|
|
33.6 |
% |
|
$ |
5,185 |
|
|
|
5.8 |
% |
Operating
Income
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
44,879 |
|
|
|
19.3 |
% |
|
$ |
39,912 |
|
|
|
18.4 |
% |
|
$ |
4,967 |
|
|
|
12.4 |
% |
Water
|
|
|
7,917 |
|
|
|
40.7 |
% |
|
|
8,608 |
|
|
|
44.9 |
% |
|
|
(691 |
) |
|
|
(8.0 |
)% |
LPD
|
|
|
4,188 |
|
|
|
21.9 |
% |
|
|
5,108 |
|
|
|
26.0 |
% |
|
|
(920 |
) |
|
|
(18.0 |
)% |
Other
|
|
|
202 |
|
|
|
1.9 |
% |
|
|
(30 |
) |
|
|
(0.3 |
)% |
|
|
232 |
|
|
|
774.7 |
% |
Unallocated
amounts
|
|
|
(2,351 |
) |
|
|
N/A |
|
|
|
(4,422 |
) |
|
|
N/A |
|
|
|
2,071 |
|
|
|
46.8 |
% |
Total
Company
|
|
$ |
54,835 |
|
|
|
19.5 |
% |
|
$ |
49,176 |
|
|
|
18.5 |
% |
|
$ |
5,659 |
|
|
|
11.5 |
% |
Companion Animal Group. The
following table presents CAG operating expenses by functional area:
For
the Three Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
37,076 |
|
|
|
16.0 |
% |
|
$ |
35,371 |
|
|
|
16.3 |
% |
|
$ |
1,705 |
|
|
|
4.8 |
% |
General
and administrative
|
|
|
26,497 |
|
|
|
11.4 |
% |
|
|
22,609 |
|
|
|
10.4 |
% |
|
|
3,888 |
|
|
|
17.2 |
% |
Research
and development
|
|
|
11,180 |
|
|
|
4.8 |
% |
|
|
10,442 |
|
|
|
4.8 |
% |
|
|
738 |
|
|
|
7.1 |
% |
Total
operating expenses
|
|
$ |
74,753 |
|
|
|
32.2 |
% |
|
$ |
68,422 |
|
|
|
31.5 |
% |
|
$ |
6,331 |
|
|
|
9.3 |
% |
The
increase in sales and marketing expense resulted primarily from the addition of
headcount and increased personnel-related costs. The increase in general and
administrative expense resulted primarily from the unfavorable impact of changes
in foreign currency exchange rates, higher headcount and increased compensation
and benefits, and an increase in costs attributable to information technology
investments. The increase in research and development expense resulted primarily
from additional headcount and increased personnel-related
costs.
Water. The following table
presents Water expenses by functional area:
For
the Three Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
1,991 |
|
|
|
10.2 |
% |
|
$ |
1,869 |
|
|
|
9.8 |
% |
|
$ |
122 |
|
|
|
6.5 |
% |
General
and administrative
|
|
|
1,717 |
|
|
|
8.8 |
% |
|
|
1,402 |
|
|
|
7.3 |
% |
|
|
315 |
|
|
|
22.5 |
% |
Research
and development
|
|
|
604 |
|
|
|
3.1 |
% |
|
|
675 |
|
|
|
3.5 |
% |
|
|
(71 |
) |
|
|
(10.5 |
)% |
Total
operating expenses
|
|
$ |
4,312 |
|
|
|
22.2 |
% |
|
$ |
3,946 |
|
|
|
20.6 |
% |
|
$ |
366 |
|
|
|
9.3 |
% |
The
increase in sales and marketing expense resulted from higher headcount and
personnel-related costs, partly offset by lower spending on consultants and
market research. The increase in general and administrative expense resulted
primarily from the unfavorable impact of changes in foreign currency exchange
rates and an increase in costs attributable to information technology
investments. The decrease in research and development expense resulted primarily
from a reduction in personnel-related costs.
Livestock and Poultry
Diagnostics. The following table presents LPD operating expenses by
functional area:
For
the Three Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
3,430 |
|
|
|
17.9 |
% |
|
$ |
3,112 |
|
|
|
15.8 |
% |
|
$ |
318 |
|
|
|
10.2 |
% |
General
and administrative
|
|
|
3,264 |
|
|
|
17.0 |
% |
|
|
2,924 |
|
|
|
14.9 |
% |
|
|
340 |
|
|
|
11.6 |
% |
Research
and development
|
|
|
2,223 |
|
|
|
11.6 |
% |
|
|
2,155 |
|
|
|
11.0 |
% |
|
|
68 |
|
|
|
3.2 |
% |
Total
operating expenses
|
|
$ |
8,917 |
|
|
|
46.5 |
% |
|
$ |
8,191 |
|
|
|
41.7 |
% |
|
$ |
726 |
|
|
|
8.9 |
% |
The
increase in sales and marketing expense resulted primarily from increased
personnel-related costs and higher marketing headcount. The increase in general
and administrative expense resulted from higher personnel-related costs, the
unfavorable impact of changes in foreign currency exchange rates, and an
increase in costs attributable to information technology investments. These
increases were partly offset by a decrease in headcount. The increase in
research and development expense resulted primarily from an increase in
personnel-related costs.
Other. Operating expenses for
Other operating units decreased $0.2 million to $4.0 million for the three
months ended June 30, 2010 due primarily to a decrease in deferred compensation
expense associated with an employee plan assumed in our acquisition of OPTI
Medical, due to changes in the market value of the underlying investments of the
plan, and a decrease in professional fees. These decreases were partly offset by
an increase in headcount and personnel-related costs.
Unallocated Amounts. Operating
expenses that are not allocated to our operating segments decreased $2.0 million
to $2.4 million for the three months ended June 30, 2010 due primarily to the
write-off in 2009 of software to manage the various aspects of product
development and product lifecycles.
Interest
Income and Interest Expense
Interest
income was $0.1 million for the three months ended June 30, 2010 and
2009.
Interest
expense was $0.7 million for the three months ended June 30, 2010, compared to
$0.5 million for the same period in 2009. 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 unsecured short-term revolving credit
facility (“Credit Facility”). Under these agreements, we 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 applicable
interest rates on funds borrowed under the Credit Facility. The increase in
interest expense during the three months ended June 30, 2010 compared to the
same period of the prior year was due to higher effective interest rates on
outstanding debt balances due to the commencement of these interest rate swap
agreements. As the fixed rate under the interest rate swap agreements is higher
than the weighted average interest rate of debt outstanding during 2009, we
expect that interest expense may continue to increase during the remainder of
2010 as compared to 2009.
Provision
for Income Taxes
Our
effective income tax rates were 31.5% and 31.0% for the three months ended June
30, 2010 and 2009, respectively. The increase in our effective income tax rate
for the three months ended June 30, 2010 compared to the same period of the
prior year was due primarily to the expiration of federal research and
development tax incentives that were available during the three months ended
June 30, 2009, partly offset by tax benefits related to
U.S. manufacturing activities that were fully phased in effective January 1,
2010.
Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009
Revenue
Total Company. The following
table presents revenue by operating segment:
For
the Six Months Ended June 30,
|
|
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
|
|
$ |
453,737 |
|
|
$ |
410,981 |
|
|
$ |
42,756 |
|
|
|
10.4
|
% |
|
|
1.8
|
% |
|
|
0.8
|
% |
|
|
7.8
|
% |
Water
|
|
|
37,312 |
|
|
|
35,016 |
|
|
|
2,296 |
|
|
|
6.6
|
% |
|
|
2.3
|
% |
|
|
- |
|
|
|
4.3
|
% |
LPD
|
|
|
39,101 |
|
|
|
37,905 |
|
|
|
1,196 |
|
|
|
3.2
|
% |
|
|
0.8
|
% |
|
|
- |
|
|
|
2.4
|
% |
Other
|
|
|
19,857 |
|
|
|
18,276 |
|
|
|
1,581 |
|
|
|
8.7
|
% |
|
|
0.6
|
% |
|
|
- |
|
|
|
8.1
|
% |
Total
|
|
$ |
550,007 |
|
|
$ |
502,178 |
|
|
$ |
47,829 |
|
|
|
9.5
|
% |
|
|
1.7
|
% |
|
|
0.6
|
% |
|
|
7.2
|
% |
(1)
|
The
percentage change from currency is a non-U.S. GAAP measure. It represents
the percentage change resulting from the difference between the average
exchange rates during the six months ended June 30, 2010 and the same
period of the prior year applied against foreign currency denominated
revenues for the six months ended June 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the six months ended June 30, 2010
compared to the six months ended June 30, 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 focuses on organic revenue, which
reflects the results of operations net of the impact of changes in foreign
currency exchange rates on sales outside the U.S. and net of incremental
revenues from businesses acquired or revenues lost from businesses divested or
discontinued subsequent to December 31, 2008.
Companion Animal Group. The
following table presents revenue by product and service category for
CAG:
For
the Six Months Ended June 30,
|
|
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
|
|
$ |
169,837 |
|
|
$ |
155,967 |
|
|
$ |
13,870 |
|
|
|
8.9
|
% |
|
|
1.4
|
% |
|
|
- |
|
|
|
7.5
|
% |
Rapid
assay products
|
|
|
79,924 |
|
|
|
79,244 |
|
|
|
680 |
|
|
|
0.9
|
% |
|
|
0.9
|
% |
|
|
- |
|
|
|
0.0 |
% |
Laboratory
diagnostic and consulting services
|
|
|
165,888 |
|
|
|
146,568 |
|
|
|
19,320 |
|
|
|
13.2
|
% |
|
|
2.9
|
% |
|
|
1.9
|
% |
|
|
8.4
|
% |
Practice
information management
systems and
digital radiography
|
|
38,088 |
|
|
|
29,148 |
|
|
|
8,940 |
|
|
|
30.7
|
% |
|
|
1.8
|
% |
|
|
0.8
|
% |
|
|
28.1
|
% |
Pharmaceutical
products
|
|
|
- |
|
|
|
54 |
|
|
|
(54
|
) |
|
|
(100.0
|
)% |
|
|
- |
|
|
|
(100.0
|
)% |
|
|
- |
|
Net
CAG revenue
|
|
$ |
453,737 |
|
|
$ |
410,981 |
|
|
$ |
42,756 |
|
|
|
10.4
|
% |
|
|
1.8
|
% |
|
|
0.8
|
% |
|
|
7.8
|
% |
(1)
|
The
percentage change from currency is a non-U.S. GAAP measure. It represents
the percentage change resulting from the difference between the average
exchange rates during the six months ended June 30, 2010 and the same
period of the prior year applied against foreign currency denominated
revenues for the six months ended June 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the six months ended June 30, 2010
compared to the six months ended June 30, 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 used with our Catalyst Dx®
instrument, partly offset by lower sales of consumables used with our
VetTest®
instrument as certain customers have replaced VetTest®
instruments with Catalyst Dx®
instruments. The impact from changes in distributors’ inventory levels increased
reported instruments and consumables revenue growth by 2%. Higher sales volumes
were also attributable to sales of our Catalyst 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 sales prices resulting from
economic and competitive conditions.
Rapid
assay revenue remained steady as lower U.S. practice-level sales were offset by
the favorable impact from changes in distributors’ inventory levels, which
increased reported rapid assay revenue growth by 3%. The decrease in
practice-level sales was due primarily to lower sales volumes of canine
heartworm and combination tests and, to a lesser extent, lower sales volumes of
feline combination test products.
The
increase in laboratory diagnostic and consulting services revenue resulted
primarily from the impact of higher testing volume and, to a lesser extent,
price increases. Higher testing volume was driven by the acquisition of new
customers.
The
increase in practice information management systems and digital radiography
revenue resulted primarily from higher sales volumes of companion animal
radiography systems as this market is in the early stages of transition from
older film-based systems to digital as the standard of care. An increase in
service and support revenue also contributed to revenue
growth.
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.
Livestock and Poultry
Diagnostics. The increase in LPD revenue resulted primarily from higher
sales volumes of certain bovine tests. This favorable impact was partly offset
by lower average unit sales prices for certain bovine tests resulting from
competitive conditions and lower sales volumes of certain swine
tests.
Other. The increase in Other
revenue was primarily attributable to higher sales volumes of consumables used
with our OPTI Medical instruments, higher sales volumes of our Dairy SNAP® residue
test for the detection of melamine, and higher sales volumes of out-licensed
products.
Gross
Profit
Total Company. The following
table presents gross profit and gross profit percentages by operating
segment:
For
the Six Months Ended June 30,
|
|
Gross Profit (dollars in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
232,962 |
|
|
|
51.3
|
% |
|
$ |
204,776 |
|
|
|
49.8
|
% |
|
$ |
28,186 |
|
|
|
13.8
|
% |
Water
|
|
|
23,443 |
|
|
|
62.8
|
% |
|
|
23,710 |
|
|
|
67.7
|
% |
|
|
(267
|
) |
|
|
(1.1
|
)% |
LPD
|
|
|
26,579 |
|
|
|
68.0
|
% |
|
|
26,407 |
|
|
|
69.7
|
% |
|
|
172 |
|
|
|
0.7
|
% |
Other
|
|
|
8,401 |
|
|
|
42.3
|
% |
|
|
7,741 |
|
|
|
42.4
|
% |
|
|
660 |
|
|
|
8.5
|
% |
Unallocated
amounts
|
|
|
260 |
|
|
|
N/A |
|
|
|
239 |
|
|
|
N/A |
|
|
|
21 |
|
|
|
8.6
|
% |
Total
Company
|
|
$ |
291,645 |
|
|
|
53.0
|
% |
|
$ |
262,873 |
|
|
|
52.3
|
% |
|
$ |
28,772 |
|
|
|
10.9
|
% |
Companion Animal Group. Gross
profit for CAG increased due to higher sales and an increase in the gross profit
percentage to 51% from 50%. The increase in gross profit percentage was
primarily attributable to reduced overall service and manufacturing costs
associated with our IDEXX VetLab®
instruments and lower depreciation on 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 and
transferred to the lessee. The 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 net unfavorable impact of changes in foreign currency exchange rates and
lower average unit sales prices of instruments and consumables. The net
unfavorable impact of changes in foreign currency exchange rates was due
primarily to lower hedging gains partly offset by the weakening of the U.S.
dollar against our basket of currencies.
Water. Gross profit for Water
decreased slightly as higher sales were predominantly offset by a decrease in
the gross profit percentage to 63% from 68%. The decrease in the gross profit
percentage was due to higher overall manufacturing costs, the net unfavorable
impact of changes in foreign currency exchange rates and lower average unit
sales prices. The net unfavorable impact of changes in foreign currency exchange
rates was due primarily to lower hedging gains partly offset by the weakening of
the U.S. dollar against our basket of currencies. These unfavorable impacts were
partly offset by higher relative sales of higher margin products. The gross
profit percentage of 63% is relatively consistent with full year 2008 and 2009
results.
Livestock and Poultry
Diagnostics. Gross profit for LPD increased slightly due to higher sales,
partly offset by a decrease in the gross profit percentage. The decrease in the
gross profit percentage resulted from the net unfavorable impact of changes in
foreign currency exchange rates and lower average unit sales prices, partly
offset by higher relative sales of higher margin products. The net unfavorable
impact of changes in foreign currency exchange rates was due primarily to lower
hedging gains partly offset by the weakening of the U.S. dollar against our
basket of currencies.
Other. Gross profit for Other
operating units increased due to higher sales. The gross profit percentage
remained consistent between the two periods.
Operating
Expenses and Operating Income
Total Company. The following
tables present operating expenses and operating income by operating
segment:
For
the Six Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
148,316 |
|
|
|
32.7 |
% |
|
$ |
135,785 |
|
|
|
33.0 |
% |
|
$ |
12,531 |
|
|
|
9.2 |
% |
Water
|
|
|
8,403 |
|
|
|
22.5 |
% |
|
|
7,790 |
|
|
|
22.2 |
% |
|
|
613 |
|
|
|
7.9 |
% |
LPD
|
|
|
17,657 |
|
|
|
45.2 |
% |
|
|
16,349 |
|
|
|
43.1 |
% |
|
|
1,308 |
|
|
|
8.0 |
% |
Other
|
|
|
7,939 |
|
|
|
40.0 |
% |
|
|
7,642 |
|
|
|
41.8 |
% |
|
|
297 |
|
|
|
3.9 |
% |
Unallocated
amounts
|
|
|
6,067 |
|
|
|
N/A |
|
|
|
7,690 |
|
|
|
N/A |
|
|
|
(1,623
|
) |
|
|
(21.1 |
)% |
Total
Company
|
|
$ |
188,382 |
|
|
|
34.3 |
% |
|
$ |
175,256 |
|
|
|
34.9 |
% |
|
$ |
13,126 |
|
|
|
7.5 |
% |
Operating Income
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
84,646 |
|
|
|
18.7 |
% |
|
$ |
68,991 |
|
|
|
16.8 |
% |
|
$ |
15,655 |
|
|
|
22.7 |
% |
Water
|
|
|
15,040 |
|
|
|
40.3 |
% |
|
|
15,920 |
|
|
|
45.5 |
% |
|
|
(880 |
) |
|
|
(5.5 |
)% |
LPD
|
|
|
8,922 |
|
|
|
22.8 |
% |
|
|
10,058 |
|
|
|
26.5 |
% |
|
|
(1,136 |
) |
|
|
(11.3 |
)% |
Other
|
|
|
462 |
|
|
|
2.3 |
% |
|
|
99 |
|
|
|
0.5 |
% |
|
|
363 |
|
|
|
366.7 |
% |
Unallocated
amounts
|
|
|
(5,807 |
) |
|
|
N/A |
|
|
|
(7,451 |
) |
|
|
N/A |
|
|
|
1,644 |
|
|
|
22.1 |
% |
Total
Company
|
|
$ |
103,263 |
|
|
|
18.8 |
% |
|
$ |
87,617 |
|
|
|
17.4 |
% |
|
$ |
15,646 |
|
|
|
17.9 |
% |
Companion Animal Group. The
following table presents CAG operating expenses by functional area:
For
the Six Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
74,835 |
|
|
|
16.5 |
% |
|
$ |
70,215 |
|
|
|
17.1 |
% |
|
$ |
4,620 |
|
|
|
6.6 |
% |
General
and administrative
|
|
|
51,402 |
|
|
|
11.3 |
% |
|
|
45,431 |
|
|
|
11.1 |
% |
|
|
5,971 |
|
|
|
13.1 |
% |
Research
and development
|
|
|
22,079 |
|
|
|
4.9 |
% |
|
|
20,139 |
|
|
|
4.9 |
% |
|
|
1,940 |
|
|
|
9.6 |
% |
Total
operating expenses
|
|
$ |
148,316 |
|
|
|
32.7 |
% |
|
$ |
135,785 |
|
|
|
33.0 |
% |
|
$ |
12,531 |
|
|
|
9.2 |
% |
The
increase in sales and marketing expense resulted primarily from increased sales
personnel compensation and benefits, the unfavorable impact of changes in
foreign currency exchange rates, and the addition of customer support
headcount. The
increase in general and administrative expense resulted primarily from the
unfavorable impact of changes in foreign currency exchange rates, higher
headcount and increased compensation and benefits, and an increase in costs
attributable to information technology investments. The increase in research and
development expense resulted primarily from an increase in headcount and
increased compensation and benefits.
Water. The following table
presents Water expenses by functional area:
For
the Six Months Ended June 30,
|
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
3,851 |
|
|
|
10.3 |
% |
|
$ |
3,615 |
|
|
|
10.3 |
% |
|
$ |
236 |
|
|
|
6.5 |
% |
General
and administrative
|
|
|
3,340 |
|
|
|
9.0 |
% |
|
|
2,879 |
|
|
|
8.2 |
% |
|
|
461 |
|
|
|
16.0 |
% |
Research
and development
|
|
|
1,212 |
|
|
|
3.2 |
% |
|
|
1,296 |
|
|
|
3.7 |
% |
|
|
(84 |
) |
|
|
(6.5 |
)% |
Total
operating expenses
|
|
$ |
8,403 |
|
|
|
22.5 |
% |
|
$ |
7,790 |
|
|
|
22.2 |
% |
|
$ |
613 |
|
|
|
7.9 |
% |
The
increase in sales and marketing expense resulted primarily from increased
personnel-related expenses and higher marketing headcount. These increases were
partly offset by lower spending on market research. The increase in general and
administrative expense resulted from the unfavorable impact of changes in
foreign currency exchange rates, an increase in costs attributable to
information technology investments and, to a lesser extent, an increase in
personnel-related costs. The decrease in research and development expense
resulted primarily from a reduction in personnel-related costs.
Livestock and Poultry
Diagnostics. The following table presents LPD operating expenses by
functional area:
For the Six Months Ended June 30,
|
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
6,833 |
|
|
|
17.5
|
% |
|
$ |
6,048 |
|
|
|
16.0
|
% |
|
$ |
785 |
|
|
|
13.0
|
% |
General
and administrative
|
|
|
6,470 |
|
|
|
16.5
|
% |
|
|
6,113 |
|
|
|
16.1
|
% |
|
|
357 |
|
|
|
5.8
|
% |
Research
and development
|
|
|
4,354 |
|
|
|
11.1
|
% |
|
|
4,188 |
|
|
|
11.0
|
% |
|
|
166 |
|
|
|
4.0
|
% |
Total
operating expenses
|
|
$ |
17,657 |
|
|
|
45.2
|
% |
|
$ |
16,349 |
|
|
|
43.1
|
% |
|
$ |
1,308 |
|
|
|
8.0
|
% |
The
increase in sales and marketing expense resulted primarily from an increase in
personnel-related costs. The increase in general and administrative expense
resulted from the unfavorable impact of changes in foreign currency exchange
rates, an increase in personnel-related costs and an increase in costs
attributable to information technology investments. These increases were partly
offset by a decrease in headcount. The increase in research and development
expense resulted primarily from an increase in personnel-related
costs.
Other. Operating expenses for
Other operating units increased $0.3 million to $7.9 million for the six months
ended June 30, 2010 due primarily to higher headcount and personnel-related
costs in our Dairy and OPTI Medical businesses. These increases were partly
offset by a decrease in deferred compensation expense associated with an
employee plan assumed in our acquisition of OPTI Medical, due to changes in the
market value of the underlying investments in the plan, a decrease in
professional fees, and a decrease in materials and supplies utilized in research
and development.
Unallocated Amounts. Operating
expenses that are not allocated to our operating segments decreased $1.6 million
to $6.1 million for the six months ended June 30, 2010 due primarily to a
reduction in research and development costs and the write-off in 2009 of
software to manage the various aspects of product development and product
lifecycles. These decreases were partly offset by the write-off of certain
design costs related to a facilities project that has changed in
scope.
Interest
Income and Interest Expense
Interest
income was $0.2 million for the six months ended June 30, 2010 compared to $0.3
million for the same period of the prior year. The decrease in interest income
was due primarily to lower interest rates, partly offset by higher invested cash
balances.
Interest
expense was $1.1 million for the six months ended June 30, 2010 and 2009 as
higher effective interest rates were offset by lower average borrowings under
the Credit Facility. With the commencement of our interest rate swap agreements
on March 31, 2010, we effectively fixed our interest rate at 2% plus applicable
interest rates on $80 million of funds borrowed under the Credit Facility
through March 31, 2012. As the fixed rate under
the interest rate swap agreements is higher than the weighted average interest
rate of debt outstanding during 2009, we expect that interest expense may
increase during the remainder of 2010 as compared to 2009.
Provision
for Income Taxes
Our
effective income tax rates were 31.4% and 31.2% for the six months ended June
30, 2010 and 2009, respectively. The increase in our effective income tax rate
was due primarily to the expiration of federal research and development tax
incentives that were available during the six months ended June 30, 2009, partly
offset by tax
benefits related to U.S. manufacturing activities that were fully phased in
effective January 1, 2010.
■ 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 June 30, 2010
and December 31, 2009, we had $118.0 million and $106.7 million, respectively,
of cash and cash equivalents, and working capital of $139.4 million and $120.0
million, respectively. Additionally, at June 30, 2010, we had remaining
borrowing availability of $65.1 million under our $200 million Credit Facility.
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 and for the foreseeable future. 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-U.S. 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
|
|
|
|
June 30,
2010
|
|
March 31,
2010
|
|
December 31,
2009
|
|
September 30,
2009
|
|
June 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
sales outstanding
|
|
|
41.8
|
|
41.7
|
|
|
38.9
|
|
41.2
|
|
40.2
|
|
Inventory
turns
|
|
|
1.9
|
|
2.0
|
|
|
1.9
|
|
1.8
|
|
1.8
|
|
Sources
and Uses of Cash
The
following table presents cash provided (used):
|
|
For the Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
75,085 |
|
|
$ |
70,881 |
|
|
$ |
4,204 |
|
Net
cash used by investing activities
|
|
|
(17,517
|
) |
|
|
(18,907
|
) |
|
|
1,390 |
|
Net
cash used by financing activities
|
|
|
(43,207
|
) |
|
|
(28,136
|
) |
|
|
(15,071
|
) |
Net
effect of changes in exchange rates on cash
|
|
|
(3,114
|
) |
|
|
1,038 |
|
|
|
(4,152
|
) |
Net
increase in cash and cash equivalents
|
|
$ |
11,247 |
|
|
$ |
24,876 |
|
|
$ |
(13,629 |
) |
Operating Activities. Cash
provided by operating activities was $75.1 million for the six months ended June
30, 2010, compared to $70.9 million for the same period in 2009. The total of
net income and net non-cash charges, excluding the impact of reclassifying the
tax benefit from exercises of stock options and vesting of restricted stock
units to a financing activity, was $101.3 million for the six months ended June
30, 2010, compared to $94.8 million for the same period in 2009, resulting in
incremental operating cash flows of $6.5 million. The total of changes in
operating assets and liabilities and the tax benefit from exercises of stock
options and vesting of restricted stock units decreased cash by $26.2 million
and $23.9 million for the six months ended June 30, 2010 and 2009, respectively,
resulting in an incremental decrease in cash of $2.3 million.
The
following table presents cash flows from changes in operating assets and
liabilities and the tax benefit from exercises of stock options and vesting of
restricted stock units:
|
|
For the Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
(16,544 |
) |
|
$ |
(7,101 |
) |
|
$ |
(9,443 |
) |
Inventories
|
|
|
(12,977
|
) |
|
|
(6,876
|
) |
|
|
(6,101
|
) |
Other
assets
|
|
|
(1,634
|
) |
|
|
(2,768
|
) |
|
|
1,134 |
|
Accounts
payable
|
|
|
4,308 |
|
|
|
(1,684
|
) |
|
|
5,992 |
|
Accrued
liabilities
|
|
|
7,432 |
|
|
|
(3,423
|
) |
|
|
10,855 |
|
Deferred
revenue
|
|
|
2,558 |
|
|
|
(682
|
) |
|
|
3,240 |
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
(9,372
|
) |
|
|
(1,355
|
) |
|
|
(8,017
|
) |
Total
change in cash due to changes in operating assets and liabilities and the
tax benefit from exercises of stock options and vesting of restricted
stock units
|
|
$ |
(26,229 |
) |
|
$ |
(23,889 |
) |
|
$ |
(2,340 |
) |
During
the six months ended June 30, 2010, as compared to the same period of the prior
year, the increase in accrued liabilities resulted primarily from increased
income tax accruals. Sales during the six months ended June 30, 2010 improved
compared to the same period of the prior year, driving increases in accounts
receivable. The timing of inventory receipts, most significantly of slides used
with our chemistry analyzers, contributed to the decrease in cash flow, which was
partly offset by associated increases in cash flow from the timing of payments
for inventory. The
increase in deferred revenue was due to an increase in customer participation in
certain marketing and rental programs.
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.
|
Investing Activities. Cash
used by investing activities was $17.5 million for the six months ended June 30,
2010, compared to cash used of $18.9 million for the same period of 2009. The
decrease in cash used by investing activities was due primarily to a software
license purchase in 2009 to support our internally-developed applications,
partly offset by lower proceeds received in connection with the disposition of
assets during the six months ended June 30, 2010. During the six months ended
June 30, 2009, we received net proceeds of $2.5 million from the sale of our
pharmaceutical product lines and from the sale of property and
equipment.
We paid
$17.4 million to purchase fixed assets during the six months ended June 30,
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. During
the six months ended June 30, 2010 and 2009, we received $16.4 million and $6.9
million, respectively, on the exercise of stock options and participation in the
employee stock purchase plan, due to an increase in the number of options
exercised and, to a lesser extent, an increase in the weighted average exercise
price. Exercise activity increased during the first six months of 2010 as
compared to the same period of the prior year partly due to the adoption by one
of our executive officers of a securities trading plan designed to comply with
Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. As a function of the
increase in exercise activity, the tax benefit from exercises of stock options
and vesting of restricted stock units increased to $9.4 million for the six
months ended June 30, 2010, compared to $1.4 million for the same period of the
prior year.
At June
30, 2010, we had $133.9 million outstanding under the Credit Facility, of which
$3.9 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
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 June 30, 2010, we were in compliance
with the covenants of the Credit Facility.
Our board
of directors has authorized the repurchase of up to 44 million shares of our
common stock in the open market or in negotiated transactions. From the
inception of the program in August 1999 to June 30, 2010, we have repurchased
39.2 million shares. Cash used to repurchase shares during the six months ended
June 30, 2010 and 2009 was $83.7 million and $39.7 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 June 30, 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
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 the year ended 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 June 30, 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 June 30, 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 three revised risk factors (“Various Government
Regulations and Enforcement Activities Could Limit or Delay Our Ability to
Market and Sell Our Products,” “Changes in Testing Patterns Could Negatively
Affect Our Operating Results,” and “Our Operations are Vulnerable to
Interruption as a Result of Natural Disasters or System Failures”) that reflects
developments subsequent to the discussion of that risk factor included in our
Annual Report on Form 10-K for the year ended December 31,
2009.
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;
|
|
·
|
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;
|
|
·
|
Achieving
the benefits of economies of scale in our worldwide network of
laboratories;
|
|
·
|
Achieving
cost reductions in the manufacture and service of our in-clinic laboratory
analyzers;
|
|
·
|
Expanding
our served market and 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 ProCyte Dx™
hematology analyzer, IDEXX VetAutoread™
hematology analyzer, 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 livestock and poultry 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 and six months ended June
30, 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 livestock and poultry 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 livestock and poultry products business in particular is subject
to fluctuations resulting from changes in disease prevalence. In addition,
changes in government regulations or in the availability of government funds
available for monitoring programs could negatively affect sales of our products
that are driven by compliance testing, such as our livestock and poultry, 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%. The European Union is considering further increasing the age
requirement from 48 months to 60 months, which could be effective as early as
January 1, 2011. As a result, we believe that we are likely to continue 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
six months ended June 30, 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 LPD testing products, at a
single facility in Westbrook, Maine. We also maintain a major North American
distribution facility and reference laboratory in Memphis, Tennessee. Therefore,
interruption of operations at either of these facilities 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 June 30,
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1 to April 30, 2010
|
|
157,000
|
|
$
|
58.68
|
|
157,000
|
|
5,044,799
|
|
May
1 to May 31, 2010
|
|
99,616
|
|
|
63.48
|
|
99,616
|
|
4,945,183
|
|
June
1 to June 30, 2010
|
|
165,387
|
|
|
63.38
|
|
165,000
|
|
4,780,183
|
|
Total
|
|
422,003
|
|
$
|
61.66
|
|
421,616
|
|
4,780,183
|
|
Our board
of directors has approved the repurchase of up to 44 million 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 June 30, 2010, and no repurchase plans
expired during the period. Repurchases of 421,616 shares were made during the
three months ended June 30, 2010 in transactions made pursuant to our repurchase
plan.
During
the three months ended June 30, 2010, we received 387 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
Exhibit No.
|
|
Description
|
|
|
|
10.1*
|
|
Supply
Agreement, effective as of May 7, 2007 between the Company and Moss, Inc.
(filed herewith).
|
|
|
|
10.2**
|
|
Restated
Director Deferred Compensation Plan, as amended (filed
herewith).
|
|
|
|
10.3**
|
|
Restated
Executive Deferred Compensation Plan, as amended (filed
herewith).
|
|
|
|
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.
|
|
|
|
101.INS†
|
|
XBRL
Instance Document.
|
|
|
|
101.SCH†
|
|
XBRL
Taxonomy Extension Schema Document.
|
|
|
|
101.CAL†
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
101.DEF†
|
|
XBRL
Taxonomy Extension Definition Linkbase Document.
|
|
|
|
101.LAB†
|
|
XBRL
Taxonomy Extension Label Linkbase Document.
|
|
|
|
101.PRE†
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document.
|
|
|
|
*
|
|
Confidential
treatment requested as to certain portions, which portions have been filed
separately with the Securities and Exchange
Commission.
|
|
|
|
**
|
|
Management
contract or compensatory arrangement required to be filed as an exhibit
pursuant to Item 6 of Form 10-Q.
|
|
|
|
†
|
|
In
accordance with Rule 406T of Regulation S-T, these interactive data files
are deemed “not filed” for purposes of section 18 of the Exchange Act, and
otherwise are not subject to liability under that
section.
|
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:
July 23, 2010
|
Merilee
Raines
|
|
Corporate
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial
Officer)
|
Exhibit
Index
Exhibit No.
|
|
Description
|
|
|
|
10.1*
|
|
Supply
Agreement, effective as of May 7, 2007 between the Company and Moss, Inc.
(filed herewith).
|
|
|
|
10.2**
|
|
Restated
Director Deferred Compensation Plan, as amended (filed
herewith).
|
|
|
|
10.3**
|
|
Restated
Executive Deferred Compensation Plan, as amended (filed
herewith).
|
|
|
|
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.
|
|
|
|
101.INS†
|
|
XBRL
Instance Document.
|
|
|
|
101.SCH†
|
|
XBRL
Taxonomy Extension Schema Document.
|
|
|
|
101.CAL†
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
101.DEF†
|
|
XBRL
Taxonomy Extension Definition Linkbase Document.
|
|
|
|
101.LAB†
|
|
XBRL
Taxonomy Extension Label Linkbase Document.
|
|
|
|
101.PRE†
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document.
|
|
|
|
|
*
|
Confidential
treatment requested as to certain portions, which portions have been filed
separately with the Securities and Exchange
Commission.
|
|
|
|
|
**
|
Management
contract or compensatory arrangement required to be filed as an exhibit
pursuant to Item 6 of Form 10-Q.
|
|
|
|
|
|
In accordance with Rule 406T of Regulation
S-T, these interactive data files are deemed “not filed” for purposes of
section 18 of the Exchange Act, and otherwise are not subject to liability
under that
section.
|