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 September 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)
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|
(IRS
Employer Identification No.)
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|
|
ONE
IDEXX DRIVE, WESTBROOK, MAINE
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04092
|
(Address
of principal executive offices)
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|
(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
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|
Accelerated
filer
|
¨
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|
|
|
|
|
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 57,503,819 on October 18,
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.
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Financial
Statements (unaudited)
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|
Condensed
Consolidated Balance Sheets as of September 30, 2010 and December 31,
2009
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3
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Condensed
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2010 and 2009
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4
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Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
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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20
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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35
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Item
4.
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Controls
and Procedures
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35
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PART
II—OTHER INFORMATION |
Item
1A.
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Risk
Factors
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35
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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41
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Item
6.
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Exhibits
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42
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Signatures
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43
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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)
|
|
September 30,
|
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|
December 31,
|
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2010
|
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2009
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ASSETS
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Current
Assets:
|
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|
|
|
|
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Cash
and cash equivalents
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|
$
|
133,512
|
|
|
$
|
106,728
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Accounts
receivable, net of reserves of $3,089 in 2010 and $2,331 in
2009
|
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|
120,454
|
|
|
|
115,107
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|
Inventories,
net
|
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|
131,555
|
|
|
|
110,425
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|
Deferred
income tax assets
|
|
|
24,902
|
|
|
|
25,188
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Other
current assets
|
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19,488
|
|
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|
18,890
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|
Total
current assets
|
|
|
429,911
|
|
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|
376,338
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Long-Term
Assets:
|
|
|
|
|
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Property
and equipment, net
|
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|
200,610
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|
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199,946
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|
Goodwill
|
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148,597
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148,705
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Intangible
assets, net
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57,554
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63,907
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Other
long-term assets, net
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25,625
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19,631
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Total
long-term assets
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432,386
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|
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432,189
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TOTAL
ASSETS
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$
|
862,297
|
|
|
$
|
808,527
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|
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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|
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Current
Liabilities:
|
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|
|
|
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Accounts
payable
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$
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25,273
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|
|
$
|
19,133
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|
Accrued
liabilities
|
|
|
108,184
|
|
|
|
104,959
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|
Line
of credit
|
|
|
125,912
|
|
|
|
118,790
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|
Current
portion of long-term debt
|
|
|
850
|
|
|
|
813
|
|
Current
portion of deferred revenue
|
|
|
10,714
|
|
|
|
12,610
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|
Total
current liabilities
|
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|
270,933
|
|
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256,305
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
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Deferred
income tax liabilities
|
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20,491
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18,283
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Long-term
debt, net of current portion
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3,639
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|
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|
4,281
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|
Long-term
deferred revenue, net of current portion
|
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|
8,156
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|
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3,813
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Other
long-term liabilities
|
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12,426
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|
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11,266
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Total
long-term liabilities
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44,712
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37,643
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|
Total
liabilities
|
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315,645
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293,948
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|
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|
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Commitments
and Contingencies (Note 12)
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Stockholders’
Equity:
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Common
stock, $0.10 par value: Authorized: 120,000 shares;
Issued:
97,618 and 96,334 shares in 2010 and 2009, respectively
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9,762
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|
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9,633
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Additional
paid-in capital
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626,521
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580,797
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Deferred
stock units: Outstanding: 117 units in 2010 and 2009
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4,391
|
|
|
|
4,301
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|
Retained
earnings
|
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|
929,169
|
|
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824,256
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Accumulated
other comprehensive income
|
|
|
11,429
|
|
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10,341
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|
Treasury
stock, at cost: 40,249 and 38,118 shares in 2010 and 2009,
respectively
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(1,034,658)
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(914,759
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)
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Total
IDEXX Laboratories, Inc. stockholders’ equity
|
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546,614
|
|
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514,569
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Noncontrolling
interest
|
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|
38
|
|
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|
10
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Total
stockholders’ equity
|
|
|
546,652
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|
|
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514,579
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
$
|
862,297
|
|
|
$
|
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)
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|
For the Three Months Ended
September 30,
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For the Nine Months Ended
September 30,
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2010
|
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|
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2009
|
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|
2010
|
|
|
|
2009
|
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Revenue:
|
|
|
|
|
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Product
revenue
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$
|
173,297
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|
$
|
171,527
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|
$
|
529,871
|
|
|
$
|
503,488
|
|
Service
revenue
|
|
|
96,331
|
|
|
|
87,593
|
|
|
|
289,764
|
|
|
|
257,810
|
|
Total
revenue
|
|
|
269,628
|
|
|
|
259,120
|
|
|
|
819,635
|
|
|
|
761,298
|
|
Cost
of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cost
of product revenue
|
|
|
67,076
|
|
|
|
71,543
|
|
|
|
207,773
|
|
|
|
202,114
|
|
Cost
of service revenue
|
|
|
60,345
|
|
|
|
57,100
|
|
|
|
178,010
|
|
|
|
165,834
|
|
Total
cost of revenue
|
|
|
127,421
|
|
|
|
128,643
|
|
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|
385,783
|
|
|
|
367,948
|
|
Gross
profit
|
|
|
142,207
|
|
|
|
130,477
|
|
|
|
433,852
|
|
|
|
393,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Sales
and marketing
|
|
|
44,486
|
|
|
|
41,504
|
|
|
|
133,069
|
|
|
|
124,365
|
|
General
and administrative
|
|
|
30,704
|
|
|
|
28,185
|
|
|
|
96,588
|
|
|
|
88,047
|
|
Research
and development
|
|
|
17,203
|
|
|
|
16,583
|
|
|
|
51,118
|
|
|
|
49,116
|
|
Income
from operations
|
|
|
49,814
|
|
|
|
44,205
|
|
|
|
153,077
|
|
|
|
131,822
|
|
Interest
expense
|
|
|
(687
|
)
|
|
|
(436
|
)
|
|
|
(1,741
|
)
|
|
|
(1,535
|
)
|
Interest
income
|
|
|
136
|
|
|
|
48
|
|
|
|
327
|
|
|
|
348
|
|
Income
before provision for income taxes
|
|
|
49,263
|
|
|
|
43,817
|
|
|
|
151,663
|
|
|
|
130,635
|
|
Provision
for income taxes
|
|
|
14,548
|
|
|
|
12,281
|
|
|
|
46,723
|
|
|
|
39,361
|
|
Net
income
|
|
|
34,715
|
|
|
|
31,536
|
|
|
|
104,940
|
|
|
|
91,274
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
21
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
$
|
34,694
|
|
|
$
|
31,536
|
|
|
$
|
104,913
|
|
|
$
|
91,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.60
|
|
|
$
|
0.54
|
|
|
$
|
1.82
|
|
|
$
|
1.55
|
|
Diluted
|
|
$
|
0.59
|
|
|
$
|
0.52
|
|
|
$
|
1.76
|
|
|
$
|
1.50
|
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,620
|
|
|
|
58,656
|
|
|
|
57,799
|
|
|
|
58,911
|
|
Diluted
|
|
|
59,276
|
|
|
|
60,668
|
|
|
|
59,691
|
|
|
|
60,718
|
|
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 Nine Months Ended
September
30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
104,940
|
|
|
$
|
91,274
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
34,117
|
|
|
|
37,218
|
|
Loss
on disposal of property and equipment
|
|
|
1,500
|
|
|
|
2,324
|
|
Increase
in deferred compensation liability
|
|
|
135
|
|
|
|
370
|
|
Write-down
of marketable securities
|
|
|
-
|
|
|
|
150
|
|
Provision
for uncollectible accounts
|
|
|
1,506
|
|
|
|
674
|
|
Provision
for deferred income taxes
|
|
|
1,379
|
|
|
|
3,705
|
|
Share-based
compensation expense
|
|
|
9,787
|
|
|
|
8,849
|
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
(13,293
|
)
|
|
|
(3,851
|
)
|
Changes
in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(6,916
|
)
|
|
|
(1,132
|
)
|
Inventories
|
|
|
(22,460
|
)
|
|
|
(8,145
|
)
|
Other
assets
|
|
|
(5,836
|
)
|
|
|
(3,126
|
)
|
Accounts
payable
|
|
|
6,107
|
|
|
|
(6,868
|
)
|
Accrued
liabilities
|
|
|
16,447
|
|
|
|
(5,241
|
)
|
Deferred
revenue
|
|
|
2,570
|
|
|
|
(698
|
)
|
Net
cash provided by operating activities
|
|
|
129,983
|
|
|
|
115,503
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(28,646
|
)
|
|
|
(36,362
|
)
|
Proceeds
from disposition of pharmaceutical product lines
|
|
|
-
|
|
|
|
1,377
|
|
Proceeds
from sale of property and equipment
|
|
|
86
|
|
|
|
2,056
|
|
Acquisitions
of intangible assets
|
|
|
(244
|
)
|
|
|
-
|
|
Acquisitions
of businesses, net of cash acquired
|
|
|
-
|
|
|
|
(6,680
|
)
|
Net
cash used by investing activities
|
|
|
(28,804
|
)
|
|
|
(39,609
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings
(payments) on revolving credit facilities, net
|
|
|
7,135
|
|
|
|
(8,798
|
)
|
Payment
of other notes payable
|
|
|
(605
|
)
|
|
|
(731
|
)
|
Purchase
of treasury stock
|
|
|
(117,157
|
)
|
|
|
(57,966
|
)
|
Proceeds
from exercises of stock options and employee stock purchase
plans
|
|
|
22,055
|
|
|
|
13,104
|
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
13,293
|
|
|
|
3,851
|
|
Net
cash used by financing activities
|
|
|
(75,279
|
)
|
|
|
(50,540
|
)
|
Net
effect of changes in exchange rates on cash
|
|
|
884
|
|
|
|
2,506
|
|
Net
increase in cash and cash equivalents
|
|
|
26,784
|
|
|
|
27,860
|
|
Cash
and cash equivalents at beginning of period
|
|
|
106,728
|
|
|
|
78,868
|
|
Cash
and cash equivalents at end of period
|
|
$
|
133,512
|
|
|
$
|
106,728
|
|
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 nine months ended
September 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 September 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 nine months ended September 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 nine months
ended September 30, 2010 as discussed below.
Recent
Accounting Pronouncements
On
January 1, 2010, we adopted amendments to authoritative literature that
modify 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 nine months ended September 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
modify 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 nine months ended September 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 upon 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
post-contract 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 a separately-priced EMA,
we recognize revenue related to the EMA at the stated contractual price on a
straight-line basis over the life of the agreement. If there is no stated
contractual price for an EMA, we recognize revenue according to the MEA policy
stated above.
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, certain instrument
consumables 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 nine
months ended September 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of share-based compensation awards
|
|
$
|
451
|
|
|
$
|
437
|
|
|
$
|
15,806
|
|
|
$
|
15,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense
|
|
|
3,129
|
|
|
|
2,852
|
|
|
|
9,641
|
|
|
|
8,658
|
|
The total
unrecognized compensation expense for unvested awards outstanding at September
30, 2010 was $28.1 million, net of approximately $2.7 million related to
estimated forfeitures. The weighted average remaining expense recognition period
at September 30, 2010 was approximately 1.9 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 Nine Months Ended
September 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):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
26,972
|
|
|
$
|
28,426
|
|
Work-in-process
|
|
|
15,760
|
|
|
|
17,761
|
|
Finished
goods
|
|
|
88,823
|
|
|
|
64,238
|
|
|
|
$
|
131,555
|
|
|
$
|
110,425
|
|
NOTE
5. GOODWILL AND OTHER INTANGIBLE
ASSETS
The
changes in goodwill and intangible assets other than goodwill during the nine
months ended September 30, 2010 resulted primarily from continued amortization
of our intangible assets.
NOTE
6. ACCRUED LIABILITIES
Accrued
liabilities consisted of the following (in thousands):
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
35,099
|
|
|
$
|
33,094
|
|
Accrued
employee compensation and related expenses
|
|
|
44,692
|
|
|
|
44,497
|
|
Accrued
taxes
|
|
|
5,146
|
|
|
|
9,980
|
|
Accrued
customer programs
|
|
|
23,247
|
|
|
|
17,388
|
|
|
|
$
|
108,184
|
|
|
$
|
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 nine months ended September 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
2,597
|
|
|
$
|
3,099
|
|
|
$
|
3,086
|
|
|
$
|
2,837
|
|
Provision
for warranty expense
|
|
|
740
|
|
|
|
1,225
|
|
|
|
2,314
|
|
|
|
3,357
|
|
Change
in estimate
|
|
|
(463
|
)
|
|
|
(225
|
)
|
|
|
(1,021
|
)
|
|
|
(573
|
)
|
Settlement
of warranty liability
|
|
|
(760
|
)
|
|
|
(1,139
|
)
|
|
|
(2,265
|
)
|
|
|
(2,661
|
)
|
Balance,
end of period
|
|
$
|
2,114
|
|
|
$
|
2,960
|
|
|
$
|
2,114
|
|
|
$
|
2,960
|
|
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 nine months ended September 30, 2010 and 2009 (in thousands, except per share
amounts):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
acquired
|
|
|
569 |
|
|
|
375 |
|
|
|
2,131 |
|
|
|
1,467 |
|
Total
cost of shares acquired
|
|
$ |
33,577 |
|
|
$ |
18,375 |
|
|
$ |
119,899 |
|
|
$ |
59,191 |
|
Average
cost per share
|
|
$ |
58.98 |
|
|
$ |
48.99 |
|
|
$ |
56.25 |
|
|
$ |
40.34 |
|
NOTE
9. INCOME TAXES
The
following is a summary of our effective income tax rates for the three and nine
months ended September 30, 2010 and 2009:
|
|
For the Three Months Ended
September
30,
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
29.5
|
%
|
|
|
28.0
|
%
|
|
|
30.8
|
%
|
|
|
30.1
|
%
|
The
increases in our effective income tax rate for the three and nine months ended
September 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 nine months ended September 30, 2009,
partly offset by tax benefits related to U.S. manufacturing activities that were
fully phased in effective January 1, 2010. During the three months ended
September 30, 2010 and 2009, we recognized tax benefits of similar amounts
resulting from the expiration of certain statutes of limitation. The recognition
of these benefits did not impact the comparability of our effective income tax
rate between the three months ended September 30, 2010 and 2009, but did result
in the reduction of our effective income tax rates for the three months ended
September 30, 2010 and 2009 as compared to the nine months ended September 30,
2010 and 2009, respectively.
NOTE
10. COMPREHENSIVE INCOME
The
following is a summary of comprehensive income for the three and nine months
ended September 30, 2010 and 2009 (in thousands):
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
34,715
|
|
|
$
|
31,536
|
|
|
$
|
104,940
|
|
|
$
|
91,274
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
21
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
34,694
|
|
|
|
31,536
|
|
|
|
104,913
|
|
|
|
91,274
|
|
Other
comprehensive income (loss) attributable to IDEXX Laboratories, Inc.
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
14,113
|
|
|
|
7,053
|
|
|
|
1,226
|
|
|
|
14,024
|
|
Change
in fair value of foreign currency contracts classified as hedges, net of
tax
|
|
|
(5,655
|
)
|
|
|
(2,975
|
)
|
|
|
640
|
|
|
|
(11,433
|
)
|
Change
in fair value of interest rate swaps classified as hedges, net of
tax
|
|
|
(83
|
)
|
|
|
(537
|
)
|
|
|
(856
|
)
|
|
|
(201
|
)
|
Change
in fair market value of investments, net of tax
|
|
|
130
|
|
|
|
133
|
|
|
|
78
|
|
|
|
375
|
|
Comprehensive
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
$
|
43,199
|
|
|
$
|
35,210
|
|
|
$
|
106,001
|
|
|
$
|
94,039
|
|
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
nine months ended September 30, 2010 and 2009 (in
thousands):
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding for Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
57,500
|
|
|
|
58,540
|
|
|
|
57,676
|
|
|
|
58,799
|
|
Weighted
average vested deferred stock units outstanding
|
|
|
120
|
|
|
|
116
|
|
|
|
123
|
|
|
|
112
|
|
|
|
|
57,620
|
|
|
|
58,656
|
|
|
|
57,799
|
|
|
|
58,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding for Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding for basic earnings per share
|
|
|
57,620
|
|
|
|
58,656
|
|
|
|
57,799
|
|
|
|
58,911
|
|
Dilutive
effect of options issued
|
|
|
1,506
|
|
|
|
1,876
|
|
|
|
1,702
|
|
|
|
1,685
|
|
Dilutive
effect of restricted stock units issued
|
|
|
148
|
|
|
|
128
|
|
|
|
188
|
|
|
|
115
|
|
Dilutive
effect of unvested deferred stock units issued
|
|
|
2
|
|
|
|
8
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
59,276
|
|
|
|
60,668
|
|
|
|
59,691
|
|
|
|
60,718
|
|
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 nine months
ended September 30, 2010 and 2009 (in thousands, except per share
amounts):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares underlying anti-dilutive options
|
|
|
598
|
|
|
|
647
|
|
|
|
654
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average exercise price per underlying share of anti-dilutive
options
|
|
$
|
54.67
|
|
|
$
|
52.91
|
|
|
$
|
55.03
|
|
|
$
|
44.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares underlying anti-dilutive restricted stock
units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
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):
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Closing
price per share of our common stock
|
|
$
|
61.72
|
|
|
$
|
50.00
|
|
|
|
|
|
|
|
|
|
|
Number
of shares underlying options with exercise prices below the closing
price
|
|
|
4,083
|
|
|
|
4,390
|
|
Number
of shares underlying options with exercise prices equal to or above the
closing price
|
|
|
4
|
|
|
|
568
|
|
Total
number of shares underlying outstanding options
|
|
|
4,087
|
|
|
|
4,958
|
|
NOTE
12. COMMITMENTS, CONTINGENCIES AND
GUARANTEES
Significant
commitments, contingencies and guarantees at September 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 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. There is no change in the products and services offered or in
the results of operations for this segment.
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 nine months
ended September 30, 2010 and 2009.
The
following is a summary of segment performance for the three and nine months
ended September 30, 2010 and 2009 (in thousands):
|
|
For
the Three Months Ended September 30,
|
|
|
|
CAG
|
|
|
Water
|
|
|
LPD
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
222,909 |
|
|
$ |
20,044 |
|
|
$ |
17,476 |
|
|
$ |
9,199 |
|
|
$ |
- |
|
|
$ |
269,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
38,831 |
|
|
$ |
8,698 |
|
|
$ |
3,042 |
|
|
$ |
1,376 |
|
|
$ |
(2,133 |
) |
|
$ |
49,814 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,263 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,548 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,715 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
214,461 |
|
|
$ |
19,691 |
|
|
$ |
15,943 |
|
|
$ |
9,025 |
|
|
$ |
- |
|
|
$ |
259,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
38,002 |
|
|
$ |
8,416 |
|
|
$ |
944 |
|
|
$ |
(244 |
) |
|
$ |
(2,913 |
) |
|
$ |
44,205 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,817 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,281 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,536 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,536 |
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
CAG
|
|
|
Water
|
|
|
LPD
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
676,646 |
|
|
$ |
57,356 |
|
|
$ |
56,577 |
|
|
$ |
29,056 |
|
|
$ |
- |
|
|
$ |
819,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
123,477 |
|
|
$ |
23,738 |
|
|
$ |
11,964 |
|
|
$ |
1,838 |
|
|
$ |
(7,940 |
) |
|
$ |
153,077 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,414 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,663 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,723 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,940 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
104,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
625,442 |
|
|
$ |
54,707 |
|
|
$ |
53,848 |
|
|
$ |
27,301 |
|
|
$ |
- |
|
|
$ |
761,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
$ |
106,993 |
|
|
$ |
24,336 |
|
|
$ |
11,002 |
|
|
$ |
(145 |
) |
|
$ |
(10,364 |
) |
|
$ |
131,822 |
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,187 |
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,635 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,361 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,274 |
|
Net
income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
income attributable to IDEXX Laboratories, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
91,274 |
|
The
following is a summary of revenue by product and service category for the three
and nine months ended September 30, 2010 and 2009 (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
CAG
segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$
|
88,481
|
|
|
$
|
83,922
|
|
|
$
|
258,318
|
|
|
$
|
239,889
|
|
Rapid
assay products
|
|
|
35,576
|
|
|
|
37,753
|
|
|
|
115,500
|
|
|
|
116,997
|
|
Laboratory
diagnostic and consulting services
|
|
|
82,534
|
|
|
|
76,419
|
|
|
|
248,422
|
|
|
|
222,987
|
|
Practice
information systems and digital radiography
|
|
|
16,318
|
|
|
|
16,367
|
|
|
|
54,406
|
|
|
|
45,515
|
|
Pharmaceutical
products
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
CAG
segment revenue
|
|
|
222,909
|
|
|
|
214,461
|
|
|
|
676,646
|
|
|
|
625,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
segment revenue
|
|
|
20,044
|
|
|
|
19,691
|
|
|
|
57,356
|
|
|
|
54,707
|
|
LPD
segment revenue
|
|
|
17,476
|
|
|
|
15,943
|
|
|
|
56,577
|
|
|
|
53,848
|
|
Other
segment revenue
|
|
|
9,199
|
|
|
|
9,025
|
|
|
|
29,056
|
|
|
|
27,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
269,628
|
|
|
$
|
259,120
|
|
|
$
|
819,635
|
|
|
$
|
761,298
|
|
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. The product of this calculation is
then adjusted for counterparty risk. 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,
and adjusted for counterparty risk.
|
|
|
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 September
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 nine months
ended September 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 nine
months ended September 30, 2010.
The
following tables set forth our assets and liabilities that were measured at fair
value on a recurring basis at September 30, 2010 and at December 31, 2009 by
level within the fair value hierarchy (in thousands):
As
of September 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
September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds(1)
|
|
$ |
32,020 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
32,020 |
|
Equity
mutual funds(2)
|
|
|
2,030 |
|
|
|
- |
|
|
|
- |
|
|
|
2,030 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency exchange contracts(3)
|
|
|
- |
|
|
|
3,301 |
|
|
|
- |
|
|
|
3,301 |
|
Deferred
compensation(4)
|
|
|
2,030 |
|
|
|
- |
|
|
|
- |
|
|
|
2,030 |
|
Interest
rate swaps(5)
|
|
|
- |
|
|
|
1,959 |
|
|
|
- |
|
|
|
1,959 |
|
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. See footnote 4 below for a discussion of the
related deferred compensation
liability.
|
(3)
|
Foreign
currency exchange contracts are included within accrued liabilities and
other long-term liabilities as of September 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, accounts receivable, accounts payable, and the current portion of
notes payable approximate carrying value due to their short
maturity.
Based on current market conditions, we
believe that we could obtain an unsecured short-term revolving credit facility
similar to our current unsecured short-term revolving credit facility (“Credit
Facility”). Applicable interest rates on borrowings under the Credit Facility
generally range from 0.375 to 0.875 percentage points (“Credit Spread”) above
the London interbank rate or the Canadian Dollar-denominated bankers’ acceptance
rate, dependent on our leverage ratio. We believe that the Credit Spread on a
new facility would most likely be approximately 1.25 percentage points higher
than the Credit Spread on our current Credit Facility. Despite a presumed
increase in the Credit Spread, the estimated fair value of the outstanding
borrowings against the Credit Facility would approximate carrying value due to
the short maturity of the individual borrowings. 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 monitor the amounts owed to us by our customers and
take appropriate action when necessary and, as a result, we believe that
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 and sales 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 nine months
ended September 30, 2010. The loss recognized in earnings related to
de-designated instruments during the three and nine months ended September 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 nine months ended September 30, 2010 and 2009 were
not material. At September 30, 2010, the estimated net amount of losses that are
expected to be reclassified out of accumulated OCI and into earnings within the
next 12 months is $2.3 million if exchange and interest rates do not fluctuate
from the levels at September 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.
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
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
$ |
56,506 |
|
|
$ |
53,091 |
|
|
$ |
42,849 |
|
British
Pound
|
|
|
21,782 |
|
|
|
19,238 |
|
|
|
22,853 |
|
Canadian
Dollar
|
|
|
19,166 |
|
|
|
18,849 |
|
|
|
22,907 |
|
Australian
Dollar
|
|
|
8,428 |
|
|
|
7,086 |
|
|
|
6,384 |
|
Japanese
Yen
|
|
|
10,409 |
|
|
|
9,795 |
|
|
|
8,168 |
|
|
|
$ |
116,291 |
|
|
$ |
108,059 |
|
|
$ |
103,161 |
|
Currency
Purchased
|
|
U.S. Dollar Equivalent
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Swiss
Franc
|
|
$ |
9,990 |
|
|
$ |
8,808 |
|
|
$ |
7,603 |
|
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
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 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):
|
|
Liability
Derivatives
|
|
|
|
September
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
|
|
$
|
2,636
|
|
Accrued
expenses
|
|
$
|
4,221
|
|
Foreign
currency exchange contracts
|
|
Other
long-term liabilities
|
|
|
665
|
|
Other
long-term liabilities
|
|
|
-
|
|
Interest
rate swaps
|
|
Accrued
expenses
|
|
|
1,959
|
|
Accrued
expenses
|
|
|
595
|
|
Total
derivative instruments
|
|
|
|
$
|
5,260
|
|
|
|
$
|
4,816
|
|
The
effect of derivative instruments designated as cash flow hedges on the condensed
consolidated balance sheet for the three and nine months ended September 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
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
Derivative
instruments
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts, net of tax
|
|
$
|
(5,655
|
)
|
|
$
|
(2,975
|
)
|
|
$
|
640
|
|
|
$
|
(11,433
|
)
|
Interest
rate swaps, net of tax
|
|
|
(83
|
)
|
|
|
(537
|
)
|
|
|
(856
|
)
|
|
|
(201
|
)
|
Total
loss, net of tax
|
|
$
|
(5,738
|
)
|
|
$
|
(3,512
|
)
|
|
$
|
(216
|
)
|
|
$
|
(11,634
|
)
|
The
effect of derivative instruments designated as cash flow hedges on the condensed
consolidated statement of operations for the three and nine months ended
September 30, 2010 and 2009 consisted of the following (in thousands):
|
|
Classification of
Gain (Loss)
|
|
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
|
Reclassified from
OCI into Income
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
Derivative
instruments
|
|
(Effective
Portion)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Cost
of revenue
|
|
$ |
(199 |
) |
|
$ |
4 |
|
|
$ |
236 |
|
|
$ |
6,956 |
|
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 nine months ended September 30, 2010 and 2009 consisted of the
following (in
thousands):
|
|
Classification of
|
|
Gain (Loss) Recognized in Income Related to De-designated Cash Flow Hedges
|
|
De-designated derivative
|
|
Reclassified from
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
instruments
|
|
OCI into Income
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
General
and administrative expense
|
|
$ |
- |
|
|
$ |
(31 |
) |
|
$ |
- |
|
|
$ |
(73 |
) |
NOTE
16. MILESTONE PAYMENTS
In the
fourth quarter of 2008, we sold our Acarexx® and
SURPASS®
veterinary pharmaceutical products and a product under development, which were a
part of our CAG segment, for cash of $7.0 million, a short-term receivable of
$1.4 million, which was received in January 2009, and up to $11.5 million of
future payments based on the achievement of certain development and sales
milestones by the acquirer of those products. In the fourth quarter of 2009, we
received a milestone payment of $2.0 million in connection with the achievement
of certain development milestones by the acquirer. The acquirer has since
commercialized the development product and in connection with the achievement of
certain sales milestones by the acquirer in the third quarter of 2010 we
recorded the earning of a milestone payment of $1.0 million, which is reflected
as a reduction to general and administrative expenses. We are now eligible to
receive up to $8.5 million in additional milestone payments based on further
sales related to the product. Future sales-based milestone payments will be
included in our results of operations upon achievement of the applicable
milestone.
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, interest
expense, 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”). Until the second quarter of 2010, LPD was referred
to as our Production Animal Segment. 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, both of which are 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 attributable
to one of our existing business or service categories are reported under the
caption “Unallocated Amounts.”
Use of Distributors.
The instrument consumables and rapid assay products in our CAG segment are sold
in the U.S. and certain other geographies by distributors. As a result,
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 nine months ended September 30, 2010, approximately 24% and 25% of
our revenue, respectively, was 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 revenues derived in currencies other than the U.S. dollar 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 current or 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 September 30, 2010, as compared to the three months ended
September 30, 2009, changes in foreign currency exchange rates reduced total
company revenue by approximately $3.2 million, due primarily to the
strengthening of the U.S. dollar against the Euro and, to a lesser extent, the
British pound. The impact on revenue resulting from changes in foreign currency
exchange rates is a non-U.S. GAAP measure. It represents the change resulting
from the difference between the average exchange rates during the current
period and the same period of the prior year applied to foreign currency
denominated revenues for the current period. These unfavorable impacts were
partly offset by the weakening of the U.S. dollar against the Australian dollar,
Canadian dollar and Japanese yen. These changes in foreign currency exchange
rates impacted the revenues generated by each of our individual operating
segments in a manner similar to the impact on the company as a
whole.
During
the nine months ended September 30, 2010, as compared to the nine months ended
September 30, 2009, changes in foreign currency exchange rates increased total
company revenue by approximately $5.7 million, due primarily to the weakening of
the U.S. dollar against the Canadian dollar, Australian dollar and Japanese yen.
These favorable impacts were partly offset by the strengthening of the U.S.
dollar against the Euro. Although the changes in foreign currency exchange rates
had a net favorable impact on total company revenues for the nine months ended
September 30, 2010, our LPD segment was negatively impacted since the U.S.
dollar strengthened against the Euro and, compared to our other segments, a
larger portion of LPD sales are generated in countries where the Euro is the
local currency.
Effect of Economic
Conditions. Demand for many of our products and services has been
negatively affected by economic conditions that have existed over the past two
years. In our CAG segment, we believe that negative consumer sentiment resulting
from economic conditions has led to essentially flat patient visits to
veterinary clinics, which we continued to observe for the three and nine months
ended September 30, 2010 relative to the same periods in 2009. We also
believe that essentially flat patient visits have negatively
affected the growth rate of sales of rapid assay tests, instrument consumables,
and laboratory diagnostic and consulting services. In addition, we believe that
the rate of growth of sales of our instruments and digital radiography systems,
which are larger capital purchases for veterinarians, has been negatively
affected by continued caution among veterinarians regarding economic conditions.
Weaker economic conditions have also caused our customers to remain sensitive to
the pricing of our products and services resulting in lower growth due to
limited price increases for certain products.
We also
believe that current economic conditions have affected purchasing decisions by
certain customer groups in our Water and LPD businesses. Lower water testing
volumes in the regulated and non-regulated segments of our Water business have
resulted from a decline in municipal studies and new home construction,
respectively. Lower LPD testing volumes have resulted from 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 as a result of lower government funding.
We
believe that the diversity of our products and services and the geographic
diversity of our markets will partially mitigate the effects of the continuing
slow economic growth and negative consumer sentiment. However, until we see
improvements in broad factors that measure the economic climate both in the
United States and Europe, we expect our growth rates will continue to be
negatively affected.
■
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates. The significant
accounting policies used in preparation of these condensed consolidated
financial statements for the three and nine months ended September 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 nine months ended September 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 September 30, 2010 Compared to Three Months Ended September 30,
2009
Revenue
Total Company. The following
table presents revenue by operating segment:
For
the Three Months Ended September 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 (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
222,909 |
|
|
$ |
214,461 |
|
|
$ |
8,448 |
|
|
|
3.9
|
% |
|
|
(0.9
|
)% |
|
|
0.4
|
% |
|
|
4.4
|
% |
Water
|
|
|
20,044 |
|
|
|
19,691 |
|
|
|
353 |
|
|
|
1.8
|
% |
|
|
(1.0
|
)% |
|
|
- |
|
|
|
2.8
|
% |
LPD
|
|
|
17,476 |
|
|
|
15,943 |
|
|
|
1,533 |
|
|
|
9.6
|
% |
|
|
(5.8
|
)% |
|
|
- |
|
|
|
15.4
|
% |
Other
|
|
|
9,199 |
|
|
|
9,025 |
|
|
|
174 |
|
|
|
1.9
|
% |
|
|
(0.7
|
)% |
|
|
- |
|
|
|
2.6
|
% |
Total
|
|
$ |
269,628 |
|
|
$ |
259,120 |
|
|
$ |
10,508
|
|
|
|
4.1
|
% |
|
|
(1.2
|
)% |
|
|
0.4
|
% |
|
|
4.9
|
% |
(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 September 30, 2010
and the same period of the prior year applied to foreign currency
denominated revenues for the three months ended September 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the three months ended September
30, 2010 compared to the three months ended September 30, 2009 attributed
to incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to June 30,
2009.
|
(3)
|
We
refer to this change as the change in organic
revenue.
|
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 June 30, 2009.
Companion Animal Group. The
following table presents revenue by product and service category for
CAG:
For
the Three Months Ended September 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 (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$ |
88,481 |
|
|
$ |
83,922 |
|
|
$ |
4,559 |
|
|
|
5.4
|
% |
|
|
(1.2
|
)% |
|
|
- |
|
|
|
6.6
|
% |
Rapid
assay products
|
|
|
35,576 |
|
|
|
37,753 |
|
|
|
(2,177
|
) |
|
|
(5.8
|
)% |
|
|
(0.4
|
)% |
|
|
- |
|
|
|
(5.4
|
)% |
Laboratory
diagnostic and consulting services
|
|
|
82,534 |
|
|
|
76,419 |
|
|
|
6,115 |
|
|
|
8.0
|
% |
|
|
(1.1
|
)% |
|
|
1.1
|
% |
|
|
8.0
|
% |
Practice
information management
systems and
digital radiography
|
|
|
16,318 |
|
|
|
16,367 |
|
|
|
(49
|
) |
|
|
(0.3
|
)% |
|
|
0.0
|
% |
|
|
0.7
|
% |
|
|
(1.0
|
)% |
Net
CAG revenue
|
|
$ |
222,909 |
|
|
$ |
214,461 |
|
|
$ |
8,448 |
|
|
|
3.9
|
% |
|
|
(0.9
|
)% |
|
|
0.4
|
% |
|
|
4.4
|
% |
(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 September 30, 2010
and the same period of the prior year applied to foreign currency
denominated revenues for the three months ended September 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the three months ended September
30, 2010 compared to the three months ended September 30, 2009 attributed
to incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to June 30,
2009.
|
(3)
|
We
refer to this change as the change in organic
revenue.
|
Instruments
revenue was $21.1 million and $18.7 million for the three months ended September
30, 2010 and 2009, respectively. Consumables revenue was $57.0 million and $55.9
million for the three months ended September 30, 2010 and 2009, respectively.
Instrument service and accessories revenue was $10.2 million and $9.1 million
for the three months ended September 30, 2010 and 2009, respectively. The
remaining sources of revenue are not significant to overall instruments and
consumables revenue. The $2.4 million increase in instruments revenue was due
primarily to sales of our ProCyte DxTM
instrument, our new hematology analyzer that we began shipping during the third
quarter of 2010, and increased sales of our Catalyst Dx®
instrument. The revenue generated from sales of our ProCyte DxTM
instrument was partly offset by lower sales volumes of our LaserCyte®
instrument as some of our sales focus has shifted from LaserCyte® to
ProCyte DxTM. The
$1.1 million increase in consumables revenue was due primarily to higher sales
volumes 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 $1.1 million increase in instrument service and accessories
revenue was primarily a result of the increase in our active installed base of
instruments. The impact from changes in distributors’ inventory levels decreased
reported instruments and consumables revenue growth by 1%.
The
decrease in rapid assay revenue was due primarily to the unfavorable impact from
changes in distributors’ inventory levels, which reduced revenue growth by 5%.
Lower average unit sales prices of our SNAP® tests,
resulting from discounts associated with customer purchase programs, and lower
sales volumes of our Feline SNAP® tests
also contributed to the decrease in rapid assay revenue.
These factors were partly offset by the
favorable impact of changes in significant marketing programs and higher
sales volumes of our SNAP® tests in
our Europe region.
The
increase in laboratory diagnostic and consulting services revenue resulted
primarily from the impact of higher testing volumes, which were driven largely
by the acquisition of new customers.
Practice
information management systems and digital radiography revenue decreased
slightly as an increase in service and support revenue was more than offset by
lower average unit sales prices for our companion animal digital radiography
systems and lower sales volumes of our equine digital radiography
systems.
Water. The increase in Water
revenue resulted primarily from higher Quanti-Tray® and
Colilert® product
sales volume and the impact of higher relative sales of Colilert® products
in geographies where these products are sold at higher average unit sales
prices.
Livestock and Poultry
Diagnostics. The increase in LPD revenue resulted primarily from higher
sales volumes of certain swine tests and higher sales volumes of certain bovine
tests in Germany, where we have won several government tenders for testing in
connection with a country-wide eradication program for a virus impacting beef
and dairy production yields. The growth rate was also driven by lower revenue
for the three months ended September 30, 2009 in comparison to the three months
ended September 30, 2010 due to the timing of sales orders. These increases were
partly offset by lower average unit sales prices due to competitive
pressures.
Other. The increase in Other
revenue was primarily attributable to higher sales volumes of our Dairy
SNAP®
residue test for the detection of melamine and higher sales volumes of
consumables used with our OPTI Medical instruments. These increases were partly
offset by unfavorable sales volumes of our Dairy SNAP® Beta
Lactam test used for the detection of antibiotic residue in milk.
Gross
Profit
Total Company. The following
table presents gross profit and gross profit percentages by operating
segment:
For
the Three Months Ended September 30,
|
|
Gross
Profit
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
113,561 |
|
|
|
50.9
|
% |
|
$ |
105,234 |
|
|
|
49.1
|
% |
|
$ |
8,327 |
|
|
|
7.9
|
% |
Water
|
|
|
12,628 |
|
|
|
63.0
|
% |
|
|
12,251 |
|
|
|
62.2
|
% |
|
|
377 |
|
|
|
3.1
|
% |
LPD
|
|
|
11,446 |
|
|
|
65.5
|
% |
|
|
9,257 |
|
|
|
58.1
|
% |
|
|
2,189 |
|
|
|
23.6
|
% |
Other
|
|
|
4,579 |
|
|
|
49.8
|
% |
|
|
3,721 |
|
|
|
41.2
|
% |
|
|
858 |
|
|
|
23.0
|
% |
Unallocated
amounts
|
|
|
(7
|
) |
|
|
N/A |
|
|
|
14 |
|
|
|
N/A |
|
|
|
(21
|
) |
|
|
(150.0
|
)% |
Total
Company
|
|
$ |
142,207 |
|
|
|
52.7
|
% |
|
$ |
130,477 |
|
|
|
50.4
|
% |
|
$ |
11,730 |
|
|
|
9.0
|
% |
Companion Animal Group. Gross
profit for CAG increased due to higher sales and an increase in the gross profit
percentage to 51% from 49%. The increase in gross profit percentage was
attributable primarily to reduced overall manufacturing costs associated with
our IDEXX VetLab®
instruments and SNAP® tests.
The gross profit percentage was also favorably impacted by lower costs of
service in our laboratory and consulting services business and lower
depreciation on our IDEXX VetLab®
instruments placed at customer sites under usage agreements, as we have
reduced this type of placement activity and an increasing number of prior
placements have become fully depreciated. These favorable impacts were partly
offset by the net unfavorable impact of changes in foreign currency exchange
rates and higher relative sales of lower margin products. The net unfavorable
impact of changes in foreign currency exchange rates was due primarily to the
strengthening of the U.S. dollar against the Euro and, to a lesser extent,
against the British pound, as a substantial portion of CAG sales outside of the
U.S. are denominated in the Euro and the British pound.
Water. Gross profit for Water
increased due to higher sales and an increase in the gross profit percentage to
63% from 62%. The increase in the gross profit percentage was due to lower
overall manufacturing costs, partly offset by the net unfavorable impact of
changes in foreign currency exchange rates and greater hedging
losses.
Livestock and Poultry
Diagnostics. Gross profit for LPD increased due to higher sales and an
increase in the gross profit percentage to 65% from 58%. The increase in the
gross profit percentage was due to lower overall manufacturing costs, due
primarily to greater volume leverage, and higher relative sales of higher margin
products. The gross profit percentage of 65% is relatively consistent with full
year 2008 and 2009 results. The gross profit percentage of 58% for the three
months ended September 30, 2009 as compared to the same period in 2010 was
depressed due primarily to the impact of increased manufacturing costs and to
lower revenue recognized related to a customer where revenue is recognized on
the cash basis of accounting due to uncertain collectability.
Other. Gross profit for Other
operating units increased due to higher sales and an increase in the gross
profit percentage to 50% from 41%. The increase in the gross profit percentage
was attributable to lower overall manufacturing costs in our OPTI Medical and
Dairy lines of business and higher royalty revenue for the three months ended
September 30, 2010 as compared to the same period of the prior
year.
Operating
Expenses and Operating Income
Total Company. The following
tables present operating expenses and operating income by operating
segment:
For
the Three Months Ended September 30, |
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
74,730 |
|
|
|
33.5 |
% |
|
$ |
67,232 |
|
|
|
31.3 |
% |
|
$ |
7,498 |
|
|
|
11.2 |
% |
Water
|
|
|
3,930 |
|
|
|
19.6 |
% |
|
|
3,835 |
|
|
|
19.5 |
% |
|
|
95 |
|
|
|
2.5 |
% |
LPD
|
|
|
8,404
|
|
|
|
48.1 |
% |
|
|
8,313
|
|
|
|
52.1 |
% |
|
|
91
|
|
|
|
1.1 |
% |
Other
|
|
|
3,203 |
|
|
|
34.8 |
% |
|
|
3,965 |
|
|
|
43.9 |
% |
|
|
(762 |
) |
|
|
(19.2 |
)% |
Unallocated
amounts
|
|
|
2,126
|
|
|
|
N/A |
|
|
|
2,927
|
|
|
|
N/A |
|
|
|
(801 |
) |
|
|
(27.4 |
)% |
Total
Company
|
|
$ |
92,393 |
|
|
|
34.3 |
% |
|
$ |
86,272 |
|
|
|
33.3 |
% |
|
$ |
6,121 |
|
|
|
7.1 |
% |
Operating
Income
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
38,831 |
|
|
|
17.4 |
% |
|
$ |
38,002 |
|
|
|
17.7 |
% |
|
$ |
829 |
|
|
|
2.2 |
% |
Water
|
|
|
8,698 |
|
|
|
43.4 |
% |
|
|
8,416 |
|
|
|
42.7 |
% |
|
|
282 |
|
|
|
3.3 |
% |
LPD
|
|
|
3,042
|
|
|
|
17.4 |
% |
|
|
944 |
|
|
|
5.9 |
% |
|
|
2,098 |
|
|
|
222.2 |
% |
Other
|
|
|
1,376 |
|
|
|
15.0 |
% |
|
|
(244 |
) |
|
|
(2.7 |
)% |
|
|
1,620 |
|
|
|
664.0 |
% |
Unallocated
amounts
|
|
|
(2,133 |
) |
|
|
N/A |
|
|
|
(2,913 |
) |
|
|
N/A |
|
|
|
780 |
|
|
|
26.8 |
% |
Total
Company
|
|
$ |
49,814 |
|
|
|
18.5 |
% |
|
$ |
44,205 |
|
|
|
17.1 |
% |
|
$ |
5,609 |
|
|
|
12.7 |
% |
Companion Animal Group. The
following table presents CAG operating expenses by functional area:
For
the Three Months Ended September 30, |
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
37,821 |
|
|
|
17.0 |
% |
|
$ |
35,082 |
|
|
|
16.4 |
% |
|
$ |
2,739 |
|
|
|
7.8 |
% |
General
and administrative
|
|
|
25,907 |
|
|
|
11.6 |
% |
|
|
21,982 |
|
|
|
10.2 |
% |
|
|
3,925 |
|
|
|
17.9 |
% |
Research
and development
|
|
|
11,002
|
|
|
|
4.9 |
% |
|
|
10,168 |
|
|
|
4.7 |
% |
|
|
834 |
|
|
|
8.2 |
% |
Total
operating expenses
|
|
$ |
74,730 |
|
|
|
33.5 |
% |
|
$ |
67,232 |
|
|
|
31.3 |
% |
|
$ |
7,498 |
|
|
|
11.2 |
% |
The
increase in sales and marketing expense resulted primarily from increased
personnel-related costs, including an investment in field sales technical
support personnel, partly offset by the favorable impact from changes in foreign
currency exchange rates. The increase in general and administrative expense
resulted primarily from increased legal fees incurred in connection with our
response to the U.S. Federal Trade Commission (“FTC”) subpoena discussed in more
detail under the heading “Part II, Item 1A. Risk Factors” in this Quarterly
Report on Form 10-Q; an increase in bad debt expense in connection with the
bankruptcy of one of our U.S. distributors, Professional Veterinary Products,
Inc (“PVP”); and, to a lesser extent, increased personnel-related costs. These
increases were partly offset by the favorable impact from changes in foreign
currency exchange rates. The increase in research and development expense
resulted primarily from increased personnel-related costs.
Water. The following table
presents Water expenses by functional area:
For
the Three Months Ended September 30, |
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
1,860 |
|
|
|
9.3 |
% |
|
$ |
1,691 |
|
|
|
8.6 |
% |
|
$ |
169 |
|
|
|
10.0 |
% |
General
and administrative
|
|
|
1,451 |
|
|
|
7.2 |
% |
|
|
1,387 |
|
|
|
7.0 |
% |
|
|
64 |
|
|
|
4.6 |
% |
Research
and development
|
|
|
619 |
|
|
|
3.1 |
% |
|
|
757 |
|
|
|
3.8 |
% |
|
|
(138 |
) |
|
|
(18.2 |
)% |
Total
operating expenses
|
|
$ |
3,930 |
|
|
|
19.6 |
% |
|
$ |
3,835 |
|
|
|
19.5 |
% |
|
$ |
95 |
|
|
|
2.5 |
% |
The
increase in sales and marketing expense resulted primarily from higher
personnel-related costs and increased spending on sales promotions and
incentives, partly offset by the favorable impact of changes in foreign currency
exchange rates. The increase in general and administrative expense resulted
primarily from an increase in costs attributable to investments in information
technology and, to a lesser extent, an increase in personnel-related costs,
partly offset by the favorable impact of changes in foreign currency exchange
rates. The decrease in research and development expense resulted primarily from
decreased spending related to qualifying additional suppliers of certain raw
materials and 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 September
30, |
|
Operating
Expenses
(dollars
in thousands)
|
|
2010
|
|
|
Percent
of
Revenue
|
|
|
2009
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
3,118 |
|
|
|
17.8 |
% |
|
$ |
2,946 |
|
|
|
18.5 |
% |
|
$ |
172 |
|
|
|
5.8 |
% |
General
and administrative
|
|
|
2,608 |
|
|
|
14.9 |
% |
|
|
3,104 |
|
|
|
19.5 |
% |
|
|
(496 |
) |
|
|
(16.0 |
)% |
Research
and development
|
|
|
2,678 |
|
|
|
15.3 |
% |
|
|
2,263 |
|
|
|
14.2 |
% |
|
|
415 |
|
|
|
18.3 |
% |
Total
operating expenses
|
|
$ |
8,404 |
|
|
|
48.1 |
% |
|
$ |
8,313 |
|
|
|
52.1 |
% |
|
$ |
91 |
|
|
|
1.1 |
% |
The
increase in sales and marketing expense resulted primarily from increased
personnel-related costs and, to a lesser extent, marketing and branding expense
incurred as part of the renaming of our LPD segment in the second quarter of
2010. The decrease in general and administrative expense resulted from a
decrease in personnel-related costs and, to a lesser extent, the favorable
impact of changes in foreign currency exchange rates. These favorable items were
partly offset by an increase in costs attributable to investments in information
technology. The increase in research and development expense resulted primarily
from an increase in personnel-related costs.
Other. Operating expenses for
Other operating units decreased $0.8 million to $3.2 million for the three
months ended September 30, 2010 due primarily to a milestone payment earned
related to the sale of product rights previously included in our pharmaceutical
division. This payment was earned due to the achievement of certain sales
milestones by the third party that purchased the product rights. Because we have
no obligation to deliver product or services, or otherwise provide support to
the third party under this agreement, and because collectability is reasonably
assured, this milestone payment, and any other related milestone payments we
earn in the future, are included in results of operations when earned, but are
not classified as revenue because the transaction was accounted for as the sale
of a product line. See Note 16 to the condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q for additional
information regarding this milestone payment. This decrease was partly offset by
increased sales and marketing costs in China due to the development of our Dairy
business in that country.
Unallocated Amounts. Operating
expenses that are not allocated to our operating segments decreased $0.8 million
to $2.1 million for the three months ended September 30, 2010 due primarily to
lower corporate research and development personnel-related costs.
Interest
Income and Interest Expense
Interest
income was $0.1 million for the three months ended September 30, 2010 and less
than $0.1 million for the same period in the prior year. The slight increase was
due primarily to higher interest rates on invested cash balances.
Interest
expense was $0.7 million for the three months ended September 30, 2010, compared
to $0.4 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 rate 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, which
range from 0.375 to 0.875 percentage points (the “Credit Spread”). The increase
in interest expense during the three months ended September 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, partly offset by lower average balances outstanding on our Credit
Facility. 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 will continue to be higher during the remainder of
2010 as compared to 2009.
Provision
for Income Taxes
Our
effective income tax rates were 29.5% and 28.0% for the three months ended
September 30, 2010 and 2009, respectively. The increase in our effective income
tax rate for the three months ended September 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
September 30, 2009, partly offset by tax benefits related to
U.S. manufacturing activities that were fully phased in effective January 1,
2010. During the three months ended September 30, 2010 and 2009, we
recognized tax benefits of similar amounts resulting from the expiration of
certain statutes of limitation. The recognition of these benefits did not impact
the comparability of our effective income tax rate between the three months
ended September 30, 2010 and 2009, but did result in the reduction of our
effective income tax rates for the three months ended September 30, 2010 and
2009 as compared to the nine months ended September 30, 2010 and 2009,
respectively.
Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
Revenue
Total Company. The following
table presents revenue by operating segment:
For the Nine Months Ended September 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 (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
676,646 |
|
|
$ |
625,442 |
|
|
$ |
51,204 |
|
|
|
8.2 |
% |
|
|
1.0 |
% |
|
|
0.6 |
% |
|
|
6.6 |
% |
Water
|
|
|
57,356 |
|
|
|
54,707 |
|
|
|
2,649 |
|
|
|
4.8 |
% |
|
|
1.2 |
% |
|
|
- |
|
|
|
3.6 |
% |
LPD
|
|
|
56,577 |
|
|
|
53,848 |
|
|
|
2,729 |
|
|
|
5.1 |
% |
|
|
(1.2 |
)% |
|
|
- |
|
|
|
6.3 |
% |
Other
|
|
|
29,056 |
|
|
|
27,301 |
|
|
|
1,755 |
|
|
|
6.4 |
% |
|
|
0.1 |
% |
|
|
- |
|
|
|
6.3 |
% |
Total
|
|
$ |
819,635 |
|
|
$ |
761,298 |
|
|
$ |
58,337 |
|
|
|
7.7 |
% |
|
|
0.8 |
% |
|
|
0.5 |
% |
|
|
6.4 |
% |
(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 nine months ended September 30, 2010 and the
same period of the prior year applied to foreign currency denominated
revenues for the nine months ended September 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the nine months ended September
30, 2010 compared to the nine months ended September 30, 2009 attributed
to incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to December 31,
2008.
|
(3)
|
We
refer to this change as the change in organic
revenue.
|
The
following revenue analysis and discussion focuses on organic revenue, which
reflects the results of operations net of the impact of 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 Nine Months Ended September 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 (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments and consumables
|
|
$ |
258,318 |
|
|
$ |
239,889 |
|
|
$ |
18,429 |
|
|
|
7.7 |
% |
|
|
0.5 |
% |
|
|
- |
|
|
|
7.2 |
% |
Rapid
assay products
|
|
|
115,500 |
|
|
|
116,997 |
|
|
|
(1,497 |
) |
|
|
(1.3 |
)% |
|
|
0.4 |
% |
|
|
- |
|
|
|
(1.7 |
)% |
Laboratory
diagnostic and consulting services
|
|
|
248,422 |
|
|
|
222,987 |
|
|
|
25,435 |
|
|
|
11.4 |
% |
|
|
1.6 |
% |
|
|
1.6 |
% |
|
|
8.2 |
% |
Practice
information management systems and digital radiography
|
|
|
54,406 |
|
|
|
45,515 |
|
|
|
8,891 |
|
|
|
19.5 |
% |
|
|
1.1 |
% |
|
|
0.8 |
% |
|
|
17.6 |
% |
Pharmaceutical
products
|
|
|
- |
|
|
|
54 |
|
|
|
(54 |
) |
|
|
(100.0 |
)% |
|
|
- |
|
|
|
(100.0 |
)% |
|
|
- |
|
Net
CAG revenue
|
|
$ |
676,646 |
|
|
$ |
625,442 |
|
|
$ |
51,204 |
|
|
|
8.2 |
% |
|
|
1.0 |
% |
|
|
0.6 |
% |
|
|
6.6 |
% |
(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 nine months ended September 30, 2010 and the
same period of the prior year applied to foreign currency denominated
revenues for the nine months ended September 30,
2010.
|
(2)
|
Represents
the percentage change in revenue during the nine months ended September
30, 2010 compared to the nine months ended September 30, 2009 attributed
to incremental revenues from businesses acquired or revenues lost from
businesses divested or discontinued subsequent to December 31,
2008.
|
(3)
|
We
refer to this change as the change in organic
revenue.
|
Instruments revenue
was $57.5 million and $51.9 million for the nine months ended September 30, 2010
and 2009, respectively. Consumables revenue was $170.7 million and $161.2
million for the nine months ended September 30, 2010 and 2009, respectively.
Instrument service and accessories revenue was $29.4 million and $26.0 million
for the nine months ended September 30, 2010 and 2009, respectively. The
remaining sources of revenue are not significant to overall instruments and
consumables revenue. The $5.6 million increase in instruments revenue was due
primarily to higher sales volumes of our Catalyst Dx®
instrument, sales of our ProCyte DxTM
instrument, our new hematology analyzer that we began shipping during the third
quarter of 2010, and increased sales of our IDEXX VetLab Station®. The
increase in revenue attributable to sales of our ProCyte DxTM
instrument was partly offset by lower average unit sales prices and lower sales
volumes of our LaserCyte®
instrument as some of our sales focus has shifted from LaserCyte® to
ProCyte DxTM. The
$9.5 million increase in consumables revenue was due primarily to higher sales
volumes 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 $3.4 million increase in instrument service and accessories
revenue was primarily a result of the growth of our active installed base of
instruments. The impact from changes in distributors’ inventory levels increased
reported instruments and consumables revenue growth by 1%.
The
decrease in rapid assay revenue was due primarily to lower average unit sales
prices of our SNAP® tests,
resulting from discounts associated with customer purchase programs. Lower sales
volumes of our SNAP® tests,
attributable to a decline in U.S. practice-level sales, partly offset by higher
sales volume outside of the U.S., also contributed to the decrease in rapid
assay revenue. These unfavorable impacts were partly offset by changes in
distributors’ inventory levels, which resulted in an increase in reported rapid
assay revenue growth of 1%.
The
increase in laboratory diagnostic and consulting services revenue resulted
primarily from the impact of higher testing volumes, which were driven largely
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 transitioning 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 these 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 in Germany where we have won several
government tenders for testing in connection with a country-wide eradication
program for a virus impacting beef and dairy production yields, partly offset by
lower average unit sales prices due to competitive pressures. Higher sales
volumes of certain swine tests also contributed to revenue growth.
Other. The increase in Other
revenue was attributable primarily to higher sales volumes of our Dairy
SNAP®
residue test for the detection of melamine and higher sales volume of
consumables used with our OPTI Medical instruments. These increases were partly
offset by lower sales of our Dairy SNAP® Beta
Lactam test used for the detection of antibiotic residue in milk and lower Dairy
instrument sales volume.
Gross
Profit
Total Company. The following
table presents gross profit and gross profit percentages by operating
segment:
For the Nine Months Ended September 30,
|
|
Gross Profit (dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
346,523 |
|
|
|
51.2
|
% |
|
$ |
310,010 |
|
|
|
49.6
|
% |
|
$ |
36,513 |
|
|
|
11.8
|
% |
Water
|
|
|
36,071 |
|
|
|
62.9
|
% |
|
|
35,961 |
|
|
|
65.7
|
% |
|
|
110 |
|
|
|
0.3
|
% |
LPD
|
|
|
38,025 |
|
|
|
67.2
|
% |
|
|
35,664 |
|
|
|
66.2
|
% |
|
|
2,361 |
|
|
|
6.6
|
% |
Other
|
|
|
12,980 |
|
|
|
44.7
|
% |
|
|
11,462 |
|
|
|
42.0
|
% |
|
|
1,518 |
|
|
|
13.2
|
% |
Unallocated
amounts
|
|
|
253 |
|
|
|
N/A |
|
|
|
253 |
|
|
|
N/A |
|
|
|
- |
|
|
|
0.0
|
% |
Total
Company
|
|
$ |
433,852 |
|
|
|
52.9
|
% |
|
$ |
393,350 |
|
|
|
51.7
|
% |
|
$ |
40,502 |
|
|
|
10.3
|
% |
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
attributable primarily to lower overall manufacturing and service costs
associated with our IDEXX VetLab®
instruments and, to a lesser extent, 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. The gross profit percentage was also favorably impacted by lower
costs of service 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 higher relative sales of lower 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 the Canadian dollar and Australian dollar.
Water. The slight increase in
gross profit for Water was due to higher sales, largely offset by a decrease in
the gross profit percentage to 63% from 66%. The decrease in the gross profit
percentage was due to the net unfavorable impact of changes in foreign currency
exchange rates and higher overall manufacturing costs. The net unfavorable
impact of changes in foreign currency exchange rates was due to lower hedging
gains, partly offset by the impact of the weakening of the U.S. dollar against
the Australian dollar and the Canadian dollar. These unfavorable impacts were
partly offset by higher relative sales of higher margin products.
Livestock and Poultry
Diagnostics. Gross profit for LPD increased due to higher sales and an
increase in the gross profit percentage to 67% from 66%. The increase in the
gross profit percentage resulted from higher relative sales of higher margin
products and lower overall manufacturing costs, partly offset by the net
unfavorable impact of changes in foreign currency exchange rates and lower
overall average unit sales prices. The net unfavorable impact of changes in
foreign currency exchange rates was due to lower hedging gains and the impact of
the strengthening of the U.S. dollar against the Euro.
Other. Gross profit for Other
operating units increased due to higher sales and an increase in the gross
profit percentage to 45% from 42%. The increase in the gross profit percentage
was attributable to higher royalty revenues, lower overall manufacturing costs
in our Dairy line of business, and lower relative sales of lower margin Dairy
instruments. These increases were partly offset by the net unfavorable impact of
changes in foreign currency exchange rates, due primarily to lower hedging
gains.
Operating
Expenses and Operating Income
Total Company. The following
tables present operating expenses and operating income by operating
segment:
For the Nine Months Ended September 30,
|
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
223,046 |
|
|
|
33.0
|
% |
|
$ |
203,017 |
|
|
|
32.5
|
% |
|
$ |
20,029 |
|
|
|
9.9
|
% |
Water
|
|
|
12,333 |
|
|
|
21.5
|
% |
|
|
11,625 |
|
|
|
21.2
|
% |
|
|
708 |
|
|
|
6.1
|
% |
LPD
|
|
|
26,061 |
|
|
|
46.1
|
% |
|
|
24,662 |
|
|
|
45.8
|
% |
|
|
1,399 |
|
|
|
5.7
|
% |
Other
|
|
|
11,142 |
|
|
|
38.3
|
% |
|
|
11,607 |
|
|
|
42.5
|
% |
|
|
(465
|
) |
|
|
(4.0
|
)% |
Unallocated
amounts
|
|
|
8,193 |
|
|
|
N/A |
|
|
|
10,617 |
|
|
|
N/A |
|
|
|
(2,424
|
) |
|
|
(22.8
|
)% |
Total
Company
|
|
$ |
280,775 |
|
|
|
34.3
|
% |
|
$ |
261,528 |
|
|
|
34.4
|
% |
|
$ |
19,247 |
|
|
|
7.4
|
% |
Operating Income
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$ |
123,477 |
|
|
|
18.2
|
% |
|
$ |
106,993 |
|
|
|
17.1
|
% |
|
$ |
16,484 |
|
|
|
15.4
|
% |
Water
|
|
|
23,738 |
|
|
|
41.4
|
% |
|
|
24,336 |
|
|
|
44.5
|
% |
|
|
(598
|
) |
|
|
(2.5
|
)% |
LPD
|
|
|
11,964 |
|
|
|
21.1
|
% |
|
|
11,002 |
|
|
|
20.4
|
% |
|
|
962 |
|
|
|
8.7
|
% |
Other
|
|
|
1,838 |
|
|
|
6.3
|
% |
|
|
(145
|
) |
|
|
(0.5
|
)% |
|
|
1,983 |
|
|
|
1367.6
|
% |
Unallocated
amounts
|
|
|
(7,940
|
) |
|
|
N/A |
|
|
|
(10,364
|
) |
|
|
N/A |
|
|
|
2,424 |
|
|
|
23.4
|
% |
Total
Company
|
|
$ |
153,077 |
|
|
|
18.7
|
% |
|
$ |
131,822 |
|
|
|
17.3
|
% |
|
$ |
21,255 |
|
|
|
16.1
|
% |
Companion Animal Group. The
following table presents CAG operating expenses by functional area:
For the Nine Months Ended September 30,
|
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
112,656 |
|
|
|
16.6
|
% |
|
$ |
105,297 |
|
|
|
16.8
|
% |
|
$ |
7,359 |
|
|
|
7.0
|
% |
General
and administrative
|
|
|
77,309 |
|
|
|
11.4
|
% |
|
|
67,413 |
|
|
|
10.8
|
% |
|
|
9,896 |
|
|
|
14.7
|
% |
Research
and development
|
|
|
33,081 |
|
|
|
4.9
|
% |
|
|
30,307 |
|
|
|
4.8
|
% |
|
|
2,774 |
|
|
|
9.2
|
% |
Total
operating expenses
|
|
$ |
223,046 |
|
|
|
33.0
|
% |
|
$ |
203,017 |
|
|
|
32.5
|
% |
|
$ |
20,029 |
|
|
|
9.9
|
% |
The
increase in sales and marketing expense resulted primarily from increased
personnel-related costs, including an investment in field sales technical
support personnel, and, to a lesser extent, the unfavorable impact from changes
in foreign currency exchange rates. The increase in general and administrative
expense resulted primarily from increased legal fees incurred in connection with
our response to the FTC subpoena discussed in more detail under the heading
“Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q; the
unfavorable impact from changes in foreign currency exchange rates; an increase
in costs attributable to information technology investments; increased
personnel-related costs; and an increase in bad debt expense in connection with
the bankruptcy of PVP. The increase in research and development expense resulted
primarily from increased personnel-related costs.
Water. The following table
presents Water expenses by functional area:
For the Nine Months Ended September 30,
|
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
5,711 |
|
|
|
10.0
|
% |
|
$ |
5,306 |
|
|
|
9.7
|
% |
|
$ |
405 |
|
|
|
7.6
|
% |
General
and administrative
|
|
|
4,791 |
|
|
|
8.4
|
% |
|
|
4,266 |
|
|
|
7.8
|
% |
|
|
525 |
|
|
|
12.3
|
% |
Research
and development
|
|
|
1,831 |
|
|
|
3.2
|
% |
|
|
2,053 |
|
|
|
3.8
|
% |
|
|
(222
|
) |
|
|
(10.8
|
)% |
Total
operating expenses
|
|
$ |
12,333 |
|
|
|
21.5
|
% |
|
$ |
11,625 |
|
|
|
21.2
|
% |
|
$ |
708 |
|
|
|
6.1
|
% |
The
increase in sales and marketing expense resulted primarily from increased
personnel-related costs, partly offset by lower spending on market research. The
increase in general and administrative expense resulted from an increase in
costs attributable to information technology investments and the net unfavorable
impact of changes in foreign currency exchange rates. The decrease in research
and development expense resulted primarily from a reduction in personnel-related
costs and, to a lesser extent, from decreased spending related to qualifying
additional suppliers of certain raw materials.
Livestock and Poultry
Diagnostics. The following table presents LPD operating expenses by
functional area:
For the Nine Months Ended September 30,
|
|
Operating Expenses
(dollars in thousands)
|
|
2010
|
|
|
Percent of
Revenue
|
|
|
2009
|
|
|
Percent of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
9,951 |
|
|
|
17.6
|
% |
|
$ |
8,994 |
|
|
|
16.7
|
% |
|
$ |
957 |
|
|
|
10.6
|
% |
General
and administrative
|
|
|
9,078 |
|
|
|
16.0
|
% |
|
|
9,217 |
|
|
|
17.1
|
% |
|
|
(139
|
) |
|
|
(1.5
|
)% |
Research
and development
|
|
|
7,032 |
|
|
|
12.4
|
% |
|
|
6,451 |
|
|
|
12.0
|
% |
|
|
581 |
|
|
|
9.0
|
% |
Total
operating expenses
|
|
$ |
26,061 |
|
|
|
46.1
|
% |
|
$ |
24,662 |
|
|
|
45.8
|
% |
|
$ |
1,399 |
|
|
|
5.7
|
% |
The
increase in sales and marketing expense resulted primarily from an increase in
personnel-related costs. The decrease in general and administrative expense
resulted from a decrease in personnel-related costs, partly offset by an
increase in costs attributable to information technology investments. The
increase in research and development expense resulted primarily from an increase
in personnel-related costs, partly offset by lower spending due to the timing of
certain projects.
Other. Operating expenses for
Other operating units decreased $0.5 million to $11.1 million for the nine
months ended September 30, 2010 due primarily to a milestone payment earned as
described in the results of operations discussion for the three months ended
September 30, 2010, and, to a lesser extent, 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. These decreases were partly offset by increased personnel-related costs in
our OPTI Medical and Dairy lines of business.
Unallocated Amounts. Operating
expenses that are not allocated to our operating segments decreased $2.4 million
to $8.2 million for the nine months ended September 30, 2010 due primarily to
lower corporate research and development personnel-related costs and the
write-off in 2009 of software to manage the various aspects of product
development and product life cycles.
Interest
Income and Interest Expense
Interest
income was $0.3 million for the nine months ended September 30, 2010 and 2009 as
a decrease in interest rates was offset by higher invested cash
balances.
Interest
expense was $1.7 million for the nine months ended September 30, 2010 and $1.5
million for the same period in 2009. The increase in interest expense was due to
higher effective interest rates, partly offset by lower average balances
outstanding on our Credit Facility. With the commencement of our interest rate
swap agreements on March 31, 2010, we effectively fixed our interest rate at 2%
plus the Credit Spread 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 will
continue to be higher during the remainder of 2010 as compared to
2009.
Provision
for Income Taxes
Our
effective income tax rates were 30.8% and 30.1% for the nine months ended
September 30, 2010 and 2009, respectively. The increase in our effective income
tax rate for the nine months ended September 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 nine months ended
September 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 September 30,
2010 and December 31, 2009, we had $133.5 million and $106.7 million,
respectively, of cash and cash equivalents, and working capital of $159.0
million and $120.0 million, respectively. Additionally, at September 30, 2010,
we had remaining borrowing availability of $73.1 million under our $200 million
Credit Facility. We believe that, if necessary, we could obtain additional
borrowings at prevailing market interest rates to fund our growth objectives. We
further believe that current cash and cash equivalents, funds generated from
operations, and available borrowings will be sufficient to fund our operations,
capital purchase requirements, and strategic growth needs for the next twelve
months, and that these resources will be sufficient in the long-term to fund our
business as currently being conducted.
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. 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. As the majority of our cash is invested outside of the U.S., we
expect to continue to utilize amounts available under our Credit Facility to
fund our operations in the U.S. As a result, we expect our cash balance to
continue to grow for the foreseeable future as sources of foreign cash flows are
expected to be greater than uses outside of the U.S.
The
following table presents additional key information concerning working
capital:
|
For the Three Months Ended
|
|
|
September 30,
2010
|
|
June 30,
2010
|
|
March 31,
2010
|
|
December 31,
2009
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
sales outstanding(1)
|
|
|
41.9 |
|
|
|
41.8 |
|
|
|
41.7 |
|
|
|
38.9 |
|
|
|
41.2 |
|
Inventory
turns(2)
|
|
|
1.7 |
|
|
|
1.9 |
|
|
|
2.0 |
|
|
|
1.9 |
|
|
|
1.8 |
|
(1) Days
sales outstanding represents the average of the accounts receivable balances at
the beginning and end of each quarter divided by revenue for that quarter, the
result of which is then multiplied by 91.25 days.
(2)
Inventory turns represents inventory-related cost of product sales for the 12
months preceding each quarter-end divided by the inventory balance at the end of
the quarter.
Sources
and Uses of Cash
The
following table presents cash provided (used):
|
|
For the Nine Months Ended September 30,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
129,983 |
|
|
$ |
115,503 |
|
|
$ |
14,480 |
|
Net
cash used by investing activities
|
|
|
(28,804
|
) |
|
|
(39,609
|
) |
|
|
10,805 |
|
Net
cash used by financing activities
|
|
|
(75,279
|
) |
|
|
(50,540
|
) |
|
|
(24,739
|
) |
Net
effect of changes in exchange rates on cash
|
|
|
884 |
|
|
|
2,506 |
|
|
|
(1,622
|
) |
Net
increase in cash and cash equivalents
|
|
$ |
26,784 |
|
|
$ |
27,860 |
|
|
$ |
(1,076 |
) |
Operating Activities. Cash
provided by operating activities was $130.0 million for the nine months ended
September 30, 2010, compared to $115.5 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 $153.4 million for the nine
months ended September 30, 2010, compared to $144.6 million for the same period
in 2009, resulting in incremental operating cash flows of $8.8 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 $23.4 million and $29.1 million for the nine months ended September 30, 2010
and 2009, respectively, resulting in an incremental increase in cash of $5.7
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 Nine Months Ended September 30,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
(6,916 |
) |
|
$ |
(1,132 |
) |
|
$ |
(5,784 |
) |
Inventories
|
|
|
(22,460
|
) |
|
|
(8,145
|
) |
|
|
(14,315
|
) |
Other
assets
|
|
|
(5,836
|
) |
|
|
(3,126
|
) |
|
|
(2,710
|
) |
Accounts
payable
|
|
|
6,107 |
|
|
|
(6,868
|
) |
|
|
12,975 |
|
Accrued
liabilities
|
|
|
16,447 |
|
|
|
(5,241
|
) |
|
|
21,688 |
|
Deferred
revenue
|
|
|
2,570 |
|
|
|
(698
|
) |
|
|
3,268 |
|
Tax
benefit from exercises of stock options and vesting of restricted stock
units
|
|
|
(13,293
|
) |
|
|
(3,851
|
) |
|
|
(9,442
|
) |
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
|
|
$ |
(23,381 |
) |
|
$ |
(29,061 |
) |
|
$ |
5,680 |
|
During
the nine months ended September 30, 2010, as compared to the same period of the
prior year, the increase in accrued liabilities resulted primarily from
increased income tax accruals. The timing of inventory receipts, most
significantly of slides used with our chemistry analyzers, contributed to a
decrease in cash flow, which was
partly offset by associated increases in cash flow from the timing of payments
for inventory.
Sales during the nine months ended September 30, 2010 were higher
compared to the same period of the prior year, driving increases in accounts
receivable.
We
historically have experienced proportionally lower or net negative cash flows
from operating activities during the first quarter and proportionally higher or
net positive cash flows from operating activities for the remainder of the year
and for the annual period. Several factors contribute to the seasonal
fluctuations in cash flows generated by operating activities, including the
following:
|
·
|
Accounts
receivable are historically higher in the first quarter of the year due to
seasonality of certain products.
|
|
·
|
We
have management and non-management employee incentive programs that
provide for the payment of annual bonuses in the first quarter following
the year in which the bonuses were
earned.
|
|
·
|
We
have agreements with certain suppliers that require us to make minimum
annual inventory purchases, in some cases in order to retain exclusive
distribution rights, and we have other agreements with suppliers that
provide for lower pricing based on annual purchase volumes. We may place a
higher volume of purchase orders for inventory during the fourth quarter
in order to meet our minimum commitments or realize volume pricing
discounts and we receive that inventory in the fourth or first quarters
and pay in the first quarter. The specific facts and circumstances that we
consider in determining the timing and level of inventory purchases
throughout the year related to these agreements may yield inconsistent
cash flows from operations, most typically in the first and fourth
quarters. The timing of inventory receipts also impacts our inventory
turnover metrics. To the extent we receive large inventory shipments at
the end of a quarter our inventory turnover will be negatively
affected.
|
Investing Activities. Cash
used by investing activities was $28.8 million for the nine months ended
September 30, 2010, compared to cash used of $39.6 million for the same period
of 2009. The decrease in cash used by investing activities was due primarily to
a decrease in cash used for fixed asset purchases due to lower spending on the
renovation of our headquarters facilities and information technology projects,
and, to a lesser extent, a decrease in cash used for acquisitions. These
decreases in cash used were partly offset by lower proceeds received in
connection with the disposition of assets during the nine months ended September
30, 2010. During the nine months ended September 30, 2009, we received net
proceeds of $3.4 million from the sale of our pharmaceutical product lines and
from the sale of property and equipment.
We paid
$28.6 million to purchase fixed assets during the nine months ended September
30, 2010. Our total capital expenditure plan for 2010 is approximately $45
million, which includes approximately $9 million for the renovation and
expansion of our headquarters facility.
Financing Activities. During
the nine months ended September 30, 2010 and 2009, we received $22.1 million and
$13.1 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 nine months of 2010 as
compared to the same period of the prior year partly due to the adoption by our
chief executive officer 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 $13.3 million for the nine
months ended September 30, 2010, compared to $3.9 million for the same period of
the prior year.
At
September 30, 2010, we had $125.9 million outstanding under the Credit Facility,
of which $2.9 million was borrowed by our Canadian subsidiary and denominated in
Canadian dollars. The general availability of funds 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 September 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 September 30, 2010, we have
repurchased 39.8 million shares. Cash used to repurchase shares during the nine
months ended September 30, 2010 and 2009 was $117.2 million and $58.0 million,
respectively. We believe that the repurchase of our common stock is a favorable
investment, and we also repurchase to offset the dilutive effect of our
share-based compensation programs. Repurchases of our common stock may vary
depending upon the level of other investing activities and the share
price.
Other
Commitments, Contingencies and Guarantees
Significant
commitments, contingencies and guarantees at September 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 September 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 September 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 reflect
developments subsequent to the discussion of those risk factors included in our
Annual Report on Form 10-K for the year ended December 31, 2009 and we have
eliminated one risk factor (“Disruptions in Financial and Currency Markets Could
Have a Negative Effect on Our Business”), which was 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 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, services and
accessories;
|
|
·
|
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, IDEXX VetAutoread™
hematology, VetLyte®
electrolyte, IDEXX VetLab® UA™
urinalysis, VetTest®
chemistry, and Coag Dx™ blood
coagulation analyzers and related consumables and accessories; image capture
plates used in our digital radiography systems; Catalyst Dx® and
VetTest®
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 Negatively Affects 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, and 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. This, in turn, may cause deterioration in the financial condition of
our distributors and customers, which could inhibit their ability to pay us
amounts owed for products delivered or services provided.
Demand
for our water products is driven in part by the availability of funds at the
government laboratories, water utilities and private certified laboratories that
utilize our products. Availability of funds also affects demand by
the government laboratories and cattle, swine and poultry producers that utilize
our livestock and poultry diagnostic products. Economic weakness in our
significant markets has caused and could continue to cause our consumers to
reduce their investment in such testing.
Strengthening
of the Rate of Exchange for the U.S. Dollar Has a Negative Effect on Our
Business
Any
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. Approximately
24% and 25% of IDEXX sales were derived from products manufactured in the U.S.
and sold internationally in local currencies for the three and nine months ended
September 30, 2010, respectively.
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 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 animal 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 bovine spongiform encephalopathy (“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. Decisions by larger corporate owners to shift their
purchasing of products and services away from us and to a competitor would 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. Furthermore, 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
nine months ended September 30, 2010, 25% 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 companion animal products, including our
rapid assay devices and certain instruments, many of our Water testing products
and certain of our LPD testing products at a single facility in Westbrook,
Maine. We also manufacture certain of our LPD testing products in Bern,
Switzerland and Montpellier, France. In addition, we maintain major distribution
facilities in North America and in the Netherlands, and a major reference
laboratory in Memphis, Tennessee. Therefore, interruption of operations at any
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 September
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1 to July 31, 2010
|
|
|
172,937 |
|
|
$ |
61.41 |
|
|
|
172,900 |
|
|
|
4,607,283 |
|
August
1 to August 31, 2010
|
|
|
206,996 |
|
|
|
57.80 |
|
|
|
206,996 |
|
|
|
4,400,287 |
|
September
1 to September 30, 2010
|
|
|
189,384 |
|
|
|
58.04 |
|
|
|
186,915 |
|
|
|
4,213,372 |
|
Total
|
|
|
569,317 |
|
|
$ |
58.98 |
|
|
|
566,811 |
|
|
|
4,213,372 |
|
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 September 30, 2010, and no repurchase
plans expired during the period. Repurchases of 566,811 shares were made during
the three months ended September 30, 2010 in transactions made pursuant to our
repurchase plan.
During
the three months ended September 30, 2010, we received 2,506 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*
|
|
Restated
Director Deferred Compensation Plan (filed herewith).
|
|
|
|
10.2*
|
|
Executive
Employment Agreement dated October 1, 2010, between the Company and
Jonathan W. Ayers (filed as Exhibit No. 10.1 to October 7, 2010 Form 8-K,
and incorporated herein by reference.)
|
|
|
|
10.3*
|
|
Executive
Employment Agreement dated October 1, 2010, between the Company and
Merilee Raines (filed as Exhibit No. 10.2 to October 7, 2010 Form 8-K, and
incorporated herein by reference.)
|
|
|
|
10.4*
|
|
Executive
Employment Agreement dated October 1, 2010, between the Company and each
of Thomas J. Dupree, Johnny D. Powers, PhD and Michael J. Williams, PhD
(filed as Exhibit No. 10.3 to October 7, 2010 Form 8-K, and incorporated
herein by reference.)
|
|
|
|
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.
|
|
|
|
*
|
|
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:
October 22, 2010
|
Merilee
Raines
|
|
Corporate
Vice President, Chief Financial Officer and
Treasurer
(Principal Financial
Officer)
|
Exhibit
Index
Exhibit No.
|
|
Description
|
|
|
|
10.1*
|
|
Restated
Director Deferred Compensation Plan (filed herewith).
|
|
|
|
10.2*
|
|
Executive
Employment Agreement dated October 1, 2010, between the Company and
Jonathan W. Ayers (filed as Exhibit No. 10.1 to October 7, 2010 Form 8-K,
and incorporated herein by reference.)
|
|
|
|
10.3*
|
|
Executive
Employment Agreement dated October 1, 2010, between the Company and
Merilee Raines (filed as Exhibit No. 10.2 to October 7, 2010 Form 8-K, and
incorporated herein by reference.)
|
|
|
|
10.4*
|
|
Executive
Employment Agreement dated October 1, 2010, between the Company and each
of Thomas J. Dupree, Johnny D. Powers, PhD and Michael J. Williams, PhD
(filed as Exhibit No. 10.3 to October 7, 2010 Form 8-K, and incorporated
herein by reference.)
|
|
|
|
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.
|
|
|
|
*
|
|
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.
|