UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
|
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
|
For the quarterly period ended
June 30, 2012
|
|
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: 000-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified
in its charter)
DELAWARE
|
01-0393723
|
(State or other jurisdiction of incorporation
or organization)
|
(IRS Employer Identification No.)
|
|
|
ONE IDEXX DRIVE, WESTBROOK, MAINE
|
04092
|
(Address of principal executive offices)
|
(ZIP Code)
|
207-556-0300
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
|
x
|
Accelerated filer
|
o
|
|
|
|
|
Non-accelerated filer
|
o
(Do
not check if a smaller reporting company)
|
Smaller reporting company
|
o
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of
the registrant’s Common Stock, $0.10 par value, was 56,866,885 on July 10, 2012.
IDEXX LABORATORIES, INC.
Quarterly Report on Form 10-Q
Table of Contents
Item No.
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Page
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PART I—FINANCIAL INFORMATION
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|
Item 1.
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Financial Statements (unaudited)
|
|
|
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011
|
3
|
|
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011
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4
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Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011
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5
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Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011
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6
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Notes to Condensed Consolidated Financial Statements
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7
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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17
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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31
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Item 4.
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Controls and Procedures
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32
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PART II—OTHER INFORMATION
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Item 1A.
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Risk Factors
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32
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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40
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Item 6.
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Exhibits
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41
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Signatures
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42
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Exhibit Index
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|
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)
|
|
June 30,
|
|
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December 31,
|
|
|
|
2012
|
|
|
2011
|
|
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|
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|
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ASSETS
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|
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Current Assets:
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|
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|
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Cash and cash equivalents
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$
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201,813
|
|
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$
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183,895
|
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Accounts receivable, net of reserves of $3,030 in 2012 and $3,239 in 2011
|
|
|
147,159
|
|
|
|
141,275
|
|
Inventories
|
|
|
143,703
|
|
|
|
133,099
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|
Deferred income tax assets
|
|
|
25,118
|
|
|
|
25,637
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|
Other current assets
|
|
|
37,514
|
|
|
|
40,321
|
|
Total current assets
|
|
|
555,307
|
|
|
|
524,227
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Long-Term Assets:
|
|
|
|
|
|
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Property and equipment, net
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|
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220,580
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|
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216,777
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Goodwill
|
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170,929
|
|
|
|
172,610
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|
Intangible assets, net
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|
|
64,627
|
|
|
|
69,209
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|
Other long-term assets, net
|
|
|
55,874
|
|
|
|
47,991
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Total long-term assets
|
|
|
512,010
|
|
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506,587
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Total Assets
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$
|
1,067,317
|
|
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$
|
1,030,814
|
|
|
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
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Current Liabilities:
|
|
|
|
|
|
|
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Accounts payable
|
|
$
|
29,706
|
|
|
$
|
36,551
|
|
Accrued liabilities
|
|
|
128,478
|
|
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141,383
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Line of credit
|
|
|
244,000
|
|
|
|
243,000
|
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Current portion of long-term debt
|
|
|
945
|
|
|
|
917
|
|
Current portion of deferred revenue
|
|
|
16,022
|
|
|
|
15,028
|
|
Total current liabilities
|
|
|
419,151
|
|
|
|
436,879
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
21,557
|
|
|
|
23,288
|
|
Long-term debt, net of current portion
|
|
|
2,021
|
|
|
|
2,501
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Long-term deferred revenue, net of current portion
|
|
|
13,387
|
|
|
|
10,823
|
|
Other long-term liabilities
|
|
|
21,260
|
|
|
|
17,730
|
|
Total long-term liabilities
|
|
|
58,225
|
|
|
|
54,342
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|
Total liabilities
|
|
|
477,376
|
|
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491,221
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|
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|
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Commitments and Contingencies (Note 13)
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Stockholders’ Equity:
|
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Common stock, $0.10 par value per share: Authorized: 120,000 shares;
Issued: 99,693 and 99,229 shares in 2012 and 2011, respectively
|
|
|
9,970
|
|
|
|
9,923
|
|
Additional paid-in capital
|
|
|
726,619
|
|
|
|
702,575
|
|
Deferred stock units: Outstanding: 122 and 119 units in 2012 and 2011, respectively
|
|
|
4,776
|
|
|
|
4,688
|
|
Retained earnings
|
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|
1,219,386
|
|
|
|
1,127,326
|
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Accumulated other comprehensive income
|
|
|
8,858
|
|
|
|
15,443
|
|
Treasury stock, at cost: 44,828 and 44,128 shares in 2012 and 2011, respectively
|
|
|
(1,379,676
|
)
|
|
|
(1,320,376
|
)
|
Total IDEXX Laboratories, Inc. stockholders’ equity
|
|
|
589,933
|
|
|
|
539,579
|
|
Noncontrolling interest
|
|
|
8
|
|
|
|
14
|
|
Total stockholders’ equity
|
|
|
589,941
|
|
|
|
539,593
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,067,317
|
|
|
$
|
1,030,814
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
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|
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Revenue:
|
|
|
|
|
|
|
|
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|
|
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Product revenue
|
|
$
|
212,221
|
|
|
$
|
203,502
|
|
|
$
|
416,388
|
|
|
$
|
391,887
|
|
Service revenue
|
|
|
123,428
|
|
|
|
114,360
|
|
|
|
241,937
|
|
|
|
218,647
|
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Total revenue
|
|
|
335,649
|
|
|
|
317,862
|
|
|
|
658,325
|
|
|
|
610,534
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
78,470
|
|
|
|
77,457
|
|
|
|
153,682
|
|
|
|
151,162
|
|
Cost of service revenue
|
|
|
72,490
|
|
|
|
66,372
|
|
|
|
145,180
|
|
|
|
130,414
|
|
Total cost of revenue
|
|
|
150,960
|
|
|
|
143,829
|
|
|
|
298,862
|
|
|
|
281,576
|
|
Gross profit
|
|
|
184,689
|
|
|
|
174,033
|
|
|
|
359,463
|
|
|
|
328,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
54,539
|
|
|
|
50,974
|
|
|
|
112,171
|
|
|
|
101,959
|
|
General and administrative
|
|
|
34,275
|
|
|
|
33,140
|
|
|
|
70,453
|
|
|
|
65,736
|
|
Research and development
|
|
|
20,058
|
|
|
|
18,621
|
|
|
|
40,615
|
|
|
|
36,433
|
|
Income from operations
|
|
|
75,817
|
|
|
|
71,298
|
|
|
|
136,224
|
|
|
|
124,830
|
|
Interest expense
|
|
|
(926
|
)
|
|
|
(782
|
)
|
|
|
(2,119
|
)
|
|
|
(1,510
|
)
|
Interest income
|
|
|
480
|
|
|
|
419
|
|
|
|
916
|
|
|
|
788
|
|
Income before provision for income taxes
|
|
|
75,371
|
|
|
|
70,935
|
|
|
|
135,021
|
|
|
|
124,108
|
|
Provision for income taxes
|
|
|
24,051
|
|
|
|
22,281
|
|
|
|
42,967
|
|
|
|
38,848
|
|
Net income
|
|
|
51,320
|
|
|
|
48,654
|
|
|
|
92,054
|
|
|
|
85,260
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
$
|
51,317
|
|
|
$
|
48,657
|
|
|
$
|
92,060
|
|
|
$
|
85,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.93
|
|
|
$
|
0.85
|
|
|
$
|
1.67
|
|
|
$
|
1.49
|
|
Diluted
|
|
$
|
0.91
|
|
|
$
|
0.83
|
|
|
$
|
1.63
|
|
|
$
|
1.45
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,079
|
|
|
|
57,276
|
|
|
|
55,143
|
|
|
|
57,366
|
|
Diluted
|
|
|
56,211
|
|
|
|
58,727
|
|
|
|
56,345
|
|
|
|
58,934
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51,320
|
|
|
$
|
48,654
|
|
|
$
|
92,054
|
|
|
$
|
85,260
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(10,301
|
)
|
|
|
5,438
|
|
|
|
(4,673
|
)
|
|
|
13,579
|
|
Unrealized (loss) gain on investments, net of tax (benefit) expense of ($32) and $33 in 2012 and ($7) and $26 in 2011
|
|
|
(56
|
)
|
|
|
(10
|
)
|
|
|
55
|
|
|
|
45
|
|
Unrealized (loss) gain on derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss), net of tax expense (benefit) of $493 and $59 in 2012 and ($164) and ($1,593) in 2011
|
|
|
1,261
|
|
|
|
(352
|
)
|
|
|
355
|
|
|
|
(3,534
|
)
|
Less: reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of ($698) and ($1,039) in 2012 and $840 and $1,365 in 2011
|
|
|
(1,527
|
)
|
|
|
1,805
|
|
|
|
(2,322
|
)
|
|
|
2,911
|
|
Unrealized (loss) gain on derivative instruments
|
|
|
(266
|
)
|
|
|
1,453
|
|
|
|
(1,967
|
)
|
|
|
(623
|
)
|
Other comprehensive (loss) income, net of tax
|
|
|
(10,623
|
)
|
|
|
6,881
|
|
|
|
(6,585
|
)
|
|
|
13,001
|
|
Comprehensive income
|
|
|
40,697
|
|
|
|
55,535
|
|
|
|
85,469
|
|
|
|
98,261
|
|
Less: comprehensive income (loss) attributable to noncontrolling interest
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Comprehensive income attributable to IDEXX Laboratories, Inc.
|
|
$
|
40,694
|
|
|
$
|
55,538
|
|
|
$
|
85,475
|
|
|
$
|
98,270
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in thousands)
(Unaudited)
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
92,054
|
|
|
$
|
85,260
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,691
|
|
|
|
23,343
|
|
Loss on disposal of property and equipment
|
|
|
145
|
|
|
|
326
|
|
Increase in deferred compensation liability
|
|
|
88
|
|
|
|
71
|
|
Provision for uncollectible accounts
|
|
|
195
|
|
|
|
683
|
|
(Benefit of) provision for deferred income taxes
|
|
|
(1,333
|
)
|
|
|
2,392
|
|
Share-based compensation expense
|
|
|
7,672
|
|
|
|
7,501
|
|
Tax benefit from share-based compensation arrangements
|
|
|
(5,946
|
)
|
|
|
(10,854
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,192
|
)
|
|
|
(24,213
|
)
|
Inventories
|
|
|
(12,896
|
)
|
|
|
(5,692
|
)
|
Other assets
|
|
|
(2,836
|
)
|
|
|
7,293
|
|
Accounts payable
|
|
|
(6,759
|
)
|
|
|
7,002
|
|
Accrued liabilities
|
|
|
(12,819
|
)
|
|
|
(5,171
|
)
|
Deferred revenue
|
|
|
3,736
|
|
|
|
369
|
|
Net cash provided by operating activities
|
|
|
78,800
|
|
|
|
88,310
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(24,301
|
)
|
|
|
(26,173
|
)
|
Proceeds from disposition of pharmaceutical product lines
|
|
|
3,000
|
|
|
|
3,000
|
|
Proceeds from sale of property and equipment
|
|
|
45
|
|
|
|
218
|
|
Acquisitions of intangible asset
|
|
|
(900
|
)
|
|
|
-
|
|
Net cash used by investing activities
|
|
|
(22,156
|
)
|
|
|
(22,955
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facilities, net
|
|
|
1,000
|
|
|
|
3,486
|
|
Payment of notes payable
|
|
|
(452
|
)
|
|
|
(425
|
)
|
Repurchases of common stock
|
|
|
(55,006
|
)
|
|
|
(98,419
|
)
|
Proceeds from exercises of stock options and employee stock purchase plans
|
|
|
10,247
|
|
|
|
19,367
|
|
Tax benefit from share-based compensation arrangements
|
|
|
5,946
|
|
|
|
10,854
|
|
Net cash used by financing activities
|
|
|
(38,265
|
)
|
|
|
(65,137
|
)
|
Net effect of changes in exchange rates on cash
|
|
|
(461
|
)
|
|
|
2,265
|
|
Net increase in cash and cash equivalents
|
|
|
17,918
|
|
|
|
2,483
|
|
Cash and cash equivalents at beginning of period
|
|
|
183,895
|
|
|
|
156,915
|
|
Cash and cash equivalents at end of period
|
|
$
|
201,813
|
|
|
$
|
159,398
|
|
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
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 statement of our financial
position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December
31, 2011 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results
of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for
the full year or any future period. These condensed consolidated financial statements should be read in conjunction with this Quarterly
Report on Form 10-Q for the quarter ended June 30, 2012 and our Annual Report on Form 10-K for the year ended December 31, 2011
filed with the Securities and Exchange Commission.
Note 2. ACCOUNTING
POLICIES
Significant Accounting Policies
The significant accounting policies used
in preparation of these condensed consolidated financial statements for the six months ended June 30, 2012 are consistent with
those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December
31, 2011, except for our significant accounting policies related to revenue recognition. Effective January 1, 2012, revenue from
substantially all U.S. distributors is recognized upon delivery to the distributor because title and risk of loss remains with
IDEXX until the product is delivered. Prior to January 1, 2012, we recognized revenue at the time of shipment to U.S. distributors
because title and risk of loss passed to the distributors on delivery to the common carrier. This change did not have a material
impact on our financial statements.
New Accounting Pronouncements Adopted
In September 2011, the Financial Accounting
Standards Board (“FASB”) issued an amendment to the accounting guidance for goodwill in order to simplify how companies
test goodwill for impairment. The amendment permits an entity to first assess the qualitative factors to determine whether it is
more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood
of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines it is not more likely
than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test
is unnecessary. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on our financial statements
and we do not expect it to have a material impact on our annual goodwill impairment assessment in the fourth quarter.
In June 2011, the FASB issued an amendment
to the accounting guidance for presentation of comprehensive income. Under the amended guidance, an entity may present the total
of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In either case, an entity is required to present
each component of net income along with total net income, each component of other comprehensive income along with a total for other
comprehensive income, and a total amount for comprehensive income. For public companies, the amendment is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. Other than
a change in presentation, the implementation of this accounting pronouncement did not have a material impact on our financial statements.
In May 2011, the FASB issued an amendment
to the accounting guidance for fair value measurement and disclosure. Among other things, the guidance expands the disclosure
requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level
in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair
value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial
assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim
and annual periods beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material
impact on our financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2011, the FASB issued an amendment
to the accounting guidance for disclosure of offsetting assets and liabilities and related arrangements. The amendment expands
the disclosure requirements in that entities will be required to disclose both gross information and net information about both
instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject
to an agreement similar to a master netting arrangement. The amendment is effective for fiscal years, and interim periods within
those years, beginning on or after January 1, 2013, and shall be applied retrospectively. We do not expect the adoption of this
accounting pronouncement to have a material impact on our financial statements.
NOTE 3. SHARE-BASED COMPENSATION
The fair value of
options, restricted stock units, deferred stock units and employee stock purchase rights awarded
during the three and six
months ended June 30, 2012 totaled $1.1 million and $16.8 million, respectively, compared to $2.4 million and $23.6 million for
the three and six months ended June 30, 2011, respectively.
T
he total
unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at June
30, 2012 was $38.8
million, which will be recognized over a weighted average period of approximately
2.0 years.
We determine the assumptions used in the
valuation of option awards as of the date of grant. Differences in the stock price volatility, expected term or risk-free interest
rate may necessitate distinct valuation assumptions at each grant date. As such, we may use different assumptions for options granted
throughout the year.
Option awards are granted with an exercise price equal to the closing market price
of our common stock at the date of grant.
We have never paid any cash dividends on our common
stock and we have no present intention to pay a dividend; therefore, we assume that no dividends will be paid over the expected
terms of option awards.
The weighted averages of the valuation assumptions used to determine the fair value of each option
award on the date of grant and the weighted average estimated fair values were as follows:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
34
|
%
|
|
|
33
|
%
|
Expected term, in years
|
|
|
4.6
|
|
|
|
4.8
|
|
Risk-free interest rate
|
|
|
0.8
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted
|
|
$
|
26.32
|
|
|
$
|
24.87
|
|
Note 4. Inventories
Inventories include material, labor and
overhead, and are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows
(in
thousands)
:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
30,385
|
|
|
$
|
28,338
|
|
Work-in-process
|
|
|
15,402
|
|
|
|
14,892
|
|
Finished goods
|
|
|
97,916
|
|
|
|
89,869
|
|
|
|
$
|
143,703
|
|
|
$
|
133,099
|
|
Note 5. Goodwill
and Intangible Assets, NET
The decrease in goodwill during the six
months ended June 30, 2012 resulted from changes in foreign currency exchange rates. The decrease in intangible assets other than
goodwill during the six months ended June 30, 2012 resulted from the continued amortization of our intangible assets and, to a
lesser extent, changes in foreign currency exchange rates. This decrease was partly offset by the acquisition of a product right
during the six months ended June 30, 2012.
NOTE 6. Other
NONCURRENT ASSETS
Other noncurrent assets consisted of the
following
(in thousands)
:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Investment in long-term product supply arrangements
|
|
$
|
11,849
|
|
|
$
|
12,091
|
|
Customer acquisition costs, net
|
|
|
23,897
|
|
|
|
21,075
|
|
Other assets
|
|
|
20,128
|
|
|
|
14,825
|
|
|
|
$
|
55,874
|
|
|
$
|
47,991
|
|
Note 7. Accrued
liabilities
Accrued liabilities consisted of the following
(in thousands)
:
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
36,692
|
|
|
$
|
40,472
|
|
Accrued employee compensation and related expenses
|
|
|
40,270
|
|
|
|
51,373
|
|
Accrued taxes
|
|
|
20,019
|
|
|
|
17,654
|
|
Accrued customer programs
|
|
|
31,497
|
|
|
|
31,884
|
|
|
|
$
|
128,478
|
|
|
$
|
141,383
|
|
Note 8. Warranty
Reserves
We provide a
standard twelve month warranty on all instruments sold. We recognize the 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. Cost of
product revenue reflects not only estimated warranty expense for instruments sold in the current period, but also any changes in
estimated warranty expense for the portion of the aggregate installed base that is under warranty. Estimated warranty expense is
based on a variety of inputs, including historical instrument performance in the customers’ environment, historical costs
incurred in servicing instruments and projected instrument reliability and service costs. Should actual service rates or costs
differ from our estimates, revisions to the estimated warranty liability would be required. The liability for warranties is included
in accrued liabilities in the accompanying condensed consolidated balance sheets.
The following is a summary of changes in
accrued warranty reserves for the three and six months ended June 30, 2012 and 2011
(in thousands)
:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,573
|
|
|
$
|
1,763
|
|
|
$
|
1,693
|
|
|
$
|
2,196
|
|
Provision for warranty expense
|
|
|
576
|
|
|
|
711
|
|
|
|
1,112
|
|
|
|
1,233
|
|
Change in estimate, balance beginning of period
|
|
|
(37
|
)
|
|
|
(146
|
)
|
|
|
(99
|
)
|
|
|
(237
|
)
|
Settlement of warranty liability
|
|
|
(613
|
)
|
|
|
(653
|
)
|
|
|
(1,207
|
)
|
|
|
(1,517
|
)
|
Balance, end of period
|
|
$
|
1,499
|
|
|
$
|
1,675
|
|
|
$
|
1,499
|
|
|
$
|
1,675
|
|
Note 9. Repurchases
of common STOCK
The following is a summary of our open market
common stock repurchases for the three and six months ended June 30, 2012 and 2011
(in thousands, except per share amounts)
:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
319
|
|
|
|
759
|
|
|
|
652
|
|
|
|
1,297
|
|
Total cost of shares repurchased
|
|
$
|
27,376
|
|
|
$
|
58,479
|
|
|
$
|
55,006
|
|
|
$
|
98,419
|
|
Average cost per share
|
|
$
|
85.84
|
|
|
$
|
77.08
|
|
|
$
|
84.32
|
|
|
$
|
75.89
|
|
We primarily acquire shares by means of
repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required
withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units. The number of shares
acquired through employee surrenders during both the three months ended June 30, 2012 and 2011 was not material. We acquired 50,172
shares at a total cost of $4.4 million in connection with such employee surrenders during the six months ended June 30, 2012 compared
to 53,015 shares at a total cost of $4.1 million during the six months ended June 30, 2011.
We issue shares of treasury stock upon the
vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock
issued during both the six months ended June 30, 2012 and 2011 was not material.
Note 10. Income
Taxes
Our effective income tax rates were 31.9%
and 31.8% for the three and six months ended June 30, 2012 compared to 31.4% and 31.3% for the three and six months ended June
30, 2011. The increase in our effective income tax rate was due primarily to federal research and development tax incentives that
were not available during the three and six months ended June 30, 2012 but were available during the same periods of the prior
year, partly offset by a decrease in the effective income tax rates in international jurisdictions in which we operate.
Note 11. ACCUMULATED
OTHER Comprehensive Income
Accumulated other comprehensive income consisted
of the following
(in thousands)
:
|
|
For the Six Months Ended June 30, 2012
|
|
|
|
Unrealized loss on investments, net of tax
|
|
|
Unrealized gain on derivative instruments, net of tax
|
|
|
Cumulative translation adjustment
|
|
Beginning balance
|
|
$
|
(287
|
)
|
|
$
|
3,206
|
|
|
$
|
12,524
|
|
Current-period other comprehensive income (loss)
|
|
|
55
|
|
|
|
(1,967
|
)
|
|
|
(4,673
|
)
|
Ending balance
|
|
$
|
(232
|
)
|
|
$
|
1,239
|
|
|
$
|
7,851
|
|
Note 12. Earnings
per Share
Basic earnings per share is computed by
dividing net income attributable to IDEXX Laboratories, Inc. stockholders by the weighted average number of shares of common stock
and vested deferred stock units outstanding during the year. 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. See Note 4 to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31, 2011 for additional information regarding deferred
stock units. 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 assumed issuance of unvested restricted stock units
and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive.
The following is a reconciliation of shares
outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2012 and 2011
(in thousands)
:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
|
55,079
|
|
|
|
57,276
|
|
|
|
55,143
|
|
|
|
57,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
|
55,079
|
|
|
|
57,276
|
|
|
|
55,143
|
|
|
|
57,366
|
|
Dilutive effect of share-based payment awards
|
|
|
1,132
|
|
|
|
1,451
|
|
|
|
1,202
|
|
|
|
1,568
|
|
|
|
|
56,211
|
|
|
|
58,727
|
|
|
|
56,345
|
|
|
|
58,934
|
|
Certain options to acquire shares 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 for the three and six months ended June 30, 2012 and 2011
(in thousands
):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares underlying anti-dilutive options
|
|
|
757
|
|
|
|
617
|
|
|
|
689
|
|
|
|
513
|
|
Note 13. Commitments,
Contingencies and Guarantees
As discussed in our Annual Report on Form
10-K for the year ended December 31, 2011, in January 2010, we received a letter from the U.S. Federal Trade Commission (“FTC”),
stating that it was conducting an investigation to determine whether IDEXX or others have engaged in, or are engaging in, unfair
methods of competition in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”), through pricing or
marketing policies for companion animal veterinary products and services, including but not limited to exclusive dealing or tying
arrangements with distributors or end-users of those products or services. The letter requested that we preserve all materials
potentially relevant to this investigation. The letter stated that the FTC had not concluded that IDEXX or anyone else had violated
Section 5 of the FTC Act. We received subpoenas from the FTC, on April 15, 2010 and August 8, 2011, requesting that we provide
the FTC with documents and information relevant to this investigation and we have cooperated fully with the FTC in its investigation.
We now understand that the FTC staff is
focused in particular on whether our relationships with the three largest U.S. distributors of companion animal products, referred
to as the national distributors, limit access by our competitors to companion animal veterinary practices. If the FTC determines
to file a complaint against IDEXX in the administrative law court within the FTC, it would have the power to seek prospective remedies
but not financial penalties.
Based on discussion with the FTC staff,
we believe that their concerns could be addressed if one of these three national distributors was free to carry competitive products.
In response to these concerns, we have determined to seek to modify our agreement with one of these distributors to eliminate our
competitive products policy, which permits us to discontinue sale of our products in a particular product category to the distributor
if the distributor sells competitive products in that product category. Under such a modified agreement, the distributor would
be able to carry any competitive products without restriction or potential negative consequence, thereby addressing the FTC’s
concerns as we understand them. While we cannot predict when such a modified agreement would go into effect, since our distributor
agreements renew annually as of January 1 of each year, we expect that a modified agreement with one of these distributors would
be effective no later than January 1, 2013. While we cannot ensure that a distributor will enter into a modified agreement with
us, we believe that a distributor who is released from the competitive products policy will wish to maintain access to our product
lines under a modified agreement.
Under a modified agreement, the distributor
would receive less compensation on sales of our products as we would no longer receive the benefits of the distributor’s
exclusive focus on our products. We expect to reinvest savings from this lower rate of compensation in other sales and marketing
resources and the selling efforts of our other distributors. We believe that the reallocation of these sales resources will help
mitigate the potential effects of the loss of exclusive focus of the national distributor with which we enter into a modified agreement.
We believe that the FTC has put on hold
its internal process to determine whether to file a complaint against IDEXX in the administrative law court within the FTC in order
to permit us to conduct the process described above. Following execution of a modified agreement that addresses the FTC’s
concerns as we understand them, we anticipate the FTC will seek to formalize the modified agreement in the form of a consent order.
However, we cannot provide any assurances that the FTC will be satisfied with the steps we take to eliminate any restrictions on
the ability of one of the national distributors to sell competitive products.
We also cannot provide any assurances that
the FTC will not determine to litigate against IDEXX at some point in the future or whether we would be successful defending ourselves
in such a proceeding. Were the FTC to choose to bring an enforcement proceeding, we would defend ourselves vigorously. Were we
to be unsuccessful in defending this proceeding and any applicable appeals, we could be subject to restrictions on certain of our
marketing and sales practices, including on the terms included in our agreements with certain of our U.S. distributors. While we
cannot be certain about what prospective remedies would be sought by the FTC in any such proceeding, we believe that any required
changes in our marketing or sales practices would not have a material adverse effect on our financial statements.
We continue to believe that our marketing
and sales practices for companion animal veterinary products and services do not violate applicable antitrust laws. We are choosing
to attempt to make the modification described above because we believe it will help us avoid long and costly litigation, and that
our business will not be materially adversely affected.
Other significant commitments, contingencies
and guarantees at June 30, 2012 are consistent with those discussed in Note 14 to the consolidated financial statements in our
Annual Report on Form 10-K for the year ended December 31, 2011.
Note 14. Segment
Reporting
We operate primarily through three business
segments: diagnostic and information technology-based products and services for the veterinary market, which we refer to as the
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”). We also operate two smaller operating segments
that comprise products for milk quality and safety (“Dairy”) and products for the human point-of-care medical diagnostics
market (“OPTI Medical”). Financial information about our Dairy and OPTI Medical operating segments is combined and
presented with one of our remaining pharmaceutical product lines and our out-licensing arrangements in an “Other” category
because they do not meet the quantitative or qualitative thresholds for reportable segments.
The following is a summary of segment performance
for the three and six months ended June 30, 2012 and 2011
(in thousands)
:
|
|
For
the Three Months Ended June 30,
|
|
|
|
CAG
|
|
|
Water
|
|
|
LPD
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
278,294
|
|
|
$
|
21,983
|
|
|
$
|
23,060
|
|
|
$
|
12,312
|
|
|
$
|
-
|
|
|
$
|
335,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
59,768
|
|
|
$
|
10,196
|
|
|
$
|
5,810
|
|
|
$
|
250
|
|
|
$
|
(207
|
)
|
|
$
|
75,817
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,371
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,051
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,320
|
|
Less:
Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Net
income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
259,734
|
|
|
$
|
21,510
|
|
|
$
|
25,367
|
|
|
$
|
11,251
|
|
|
$
|
-
|
|
|
$
|
317,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
58,270
|
|
|
$
|
8,401
|
|
|
$
|
7,176
|
|
|
$
|
309
|
|
|
$
|
(2,858
|
)
|
|
$
|
71,298
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,935
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,281
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,654
|
|
Less:
Net loss attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Net
income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,657
|
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
CAG
|
|
|
Water
|
|
|
LPD
|
|
|
Other
|
|
|
Unallocated
Amounts
|
|
|
Consolidated
Total
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
546,367
|
|
|
$
|
41,565
|
|
|
$
|
45,242
|
|
|
$
|
25,151
|
|
|
$
|
-
|
|
|
$
|
658,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
106,686
|
|
|
$
|
18,491
|
|
|
$
|
11,076
|
|
|
$
|
788
|
|
|
$
|
(817
|
)
|
|
$
|
136,224
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,203
|
)
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,021
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,967
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,054
|
|
Less: Net loss attributable
to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Net income attributable
to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
500,323
|
|
|
$
|
40,475
|
|
|
$
|
49,306
|
|
|
$
|
20,430
|
|
|
$
|
-
|
|
|
$
|
610,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
101,242
|
|
|
$
|
15,348
|
|
|
$
|
14,326
|
|
|
$
|
(241
|
)
|
|
$
|
(5,845
|
)
|
|
$
|
124,830
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(722
|
)
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,108
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,848
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,260
|
|
Less: Net loss attributable
to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Net income attributable
to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,269
|
|
The following is a summary of revenue by
product and service category for the three and six months ended June 30, 2012 and 2011 (
in thousands
):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
CAG segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments and consumables
|
|
$
|
104,243
|
|
|
$
|
98,603
|
|
|
$
|
206,240
|
|
|
$
|
192,490
|
|
Rapid assay products
|
|
|
45,577
|
|
|
|
44,193
|
|
|
|
89,241
|
|
|
|
82,810
|
|
Reference laboratory diagnostic and consulting services
|
|
|
106,385
|
|
|
|
99,087
|
|
|
|
208,247
|
|
|
|
188,215
|
|
Practice management and digital imaging systems
|
|
|
22,089
|
|
|
|
17,851
|
|
|
|
42,639
|
|
|
|
36,808
|
|
CAG segment revenue
|
|
|
278,294
|
|
|
|
259,734
|
|
|
|
546,367
|
|
|
|
500,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water segment revenue
|
|
|
21,983
|
|
|
|
21,510
|
|
|
|
41,565
|
|
|
|
40,475
|
|
LPD segment revenue
|
|
|
23,060
|
|
|
|
25,367
|
|
|
|
45,242
|
|
|
|
49,306
|
|
Other segment revenue
|
|
|
12,312
|
|
|
|
11,251
|
|
|
|
25,151
|
|
|
|
20,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
335,649
|
|
|
$
|
317,862
|
|
|
$
|
658,325
|
|
|
$
|
610,534
|
|
Note 15. FAIR
VALUE MEASUREMENTS
U.S. GAAP
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
U.S. GAAP
requires an entity to maximize
the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
The Company has
certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and
liabilities that may be measured at fair value on a nonrecurring basis and certain financial assets and liabilities that are not
measured at fair value in our condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures
of these assets and liabilities are based on a three-level hierarchy, which is defined as follows
:
Level 1
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
|
|
|
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.
|
|
|
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.
|
Assets and liabilities measured at fair
value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability. We did not have any significant nonfinancial assets or nonfinancial liabilities which
required remeasurement during the six months ended June 30, 2012. We did not have any transfers between Level 1 and Level 2 or
transfers in or out of Level 3 of the fair value hierarchy during the six months ended June 30, 2012.
Our foreign currency exchange contracts
and interest rate swap agreements are measured at fair value on a recurring basis in our accompanying condensed consolidated balance
sheets. We measure the fair value of our foreign currency exchange contracts classified as derivative instruments using an income
approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this
calculation is then adjusted for counterparty risk. We measure the fair value of our interest rate swaps classified as derivative
instruments using an income approach, utilizing a discounted cash flow analysis based on the terms of the contract and the interest
rate curve adjusted for counterparty risk.
The amount outstanding under our unsecured
revolving credit facility (“Credit Facility”), notes receivable and long-term debt are not measured at fair value in
our accompanying condensed consolidated balance sheets. We determine the fair value of the amount outstanding under our Credit
Facility, notes receivable and long-term debt using an income approach, utilizing a discounted cash flow analysis based on current
market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk. Our Credit
Facility and long-term debt are valued using level 2 inputs, while our notes receivable, representing a strategic investment in
a privately held company with a carrying value of $4.4 million as of June 30, 2012, is valued using level 3 inputs. The results
of these calculations yield fair values that approximate carrying values.
The following tables set forth our assets
and liabilities that were measured at fair value on a recurring basis at June 30, 2012 and at December 31, 2011 by level within
the fair value hierarchy
(in thousands)
:
As of June 30, 2012
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
127,285
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
127,285
|
|
Equity mutual funds
(2)
|
|
|
2,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,155
|
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
|
5,640
|
|
|
|
-
|
|
|
|
5,640
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
|
1,227
|
|
|
|
-
|
|
|
|
1,227
|
|
Deferred compensation
(4)
|
|
|
2,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,155
|
|
Interest rate swaps
(5)
|
|
|
-
|
|
|
|
2,275
|
|
|
|
-
|
|
|
|
2,275
|
|
As of December 31, 2011
|
|
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, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
88,525
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
88,525
|
|
Equity mutual funds
(2)
|
|
|
2,056
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,056
|
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
|
6,841
|
|
|
|
-
|
|
|
|
6,841
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
|
1,753
|
|
|
|
-
|
|
|
|
1,753
|
|
Deferred compensation
(4)
|
|
|
2,056
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,056
|
|
Interest rate swaps
(5)
|
|
|
-
|
|
|
|
1,417
|
|
|
|
-
|
|
|
|
1,417
|
|
|
(1)
|
Money market funds are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of
June 30, 2012 and December 31, 2011 consisted of demand deposits.
|
|
(2)
|
Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This
amount is included within other long-term assets, net. See number (4) below for a discussion of the related deferred compensation
liability.
|
|
(3)
|
Foreign currency exchange contracts are included within other current assets; other long-term assets, net; accrued liabilities;
or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.
|
|
(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 number (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 and accounts payable, approximate carrying value due to their
short maturity.
Note 16. 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.
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.
We enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with 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 foreign currency exchange contracts with large multinational financial institutions and we do not hold or engage
in transactions involving derivative instruments for purposes other than risk management.
We recognize all derivative instruments,
including our foreign currency exchange contracts and interest rate swap agreements, on the balance sheet at fair value at the
balance sheet date. Derivative instruments that do not qualify for hedge accounting treatment must be recorded at fair value through
earnings. If a derivative instrument does qualify for hedge accounting, depending on the nature of the hedging instrument, changes
in the fair value of derivative instrument are either recognized in earnings or deferred in other comprehensive income (“OCI”),
net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
To qualify for hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash
flows on hedged transactions. We immediately record in earnings the extent to which a hedge instrument is not effective in achieving
offsetting changes in fair value. We de-designate derivative instruments from hedge accounting when the likelihood of the hedged
transaction occurring becomes less than probable. 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 enter into master netting
arrangements with the counterparties to our derivative transactions which permit outstanding receivables and payables with the
counterparties to our derivative transactions to be offset in the event of default. We present our derivative assets and liabilities
on a gross basis. All cash flows related to our foreign currency exchange contracts and interest rate swaps are classified as operating
cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.
Cash Flow Hedges
We have designated our foreign currency
exchange contracts and variable-to-fixed interest rate swaps as cash flow hedges as these derivative instruments mitigate the exposure
to variability in the cash flows of forecasted transactions attributable to foreign currency exchange and interest rates. Unless
noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.
We did not de-designate any instruments
from hedge accounting treatment during the three and six months ended June 30, 2012 or 2011. Gains or losses related to hedge ineffectiveness
recognized in earnings during the three and six months ended June 30, 2012 and 2011 were not material. At June 30, 2012, the estimated
amount of net gains that are expected to be reclassified out of accumulated OCI and into earnings within the next 12 months is
$1.2 million if exchange and interest rates do not fluctuate from the levels at June 30, 2012.
We enter into foreign currency exchange
contracts for amounts that are less than the full value of forecasted intercompany inventory purchases and sales. Our hedging strategy
related to intercompany inventory purchases and sales 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. We primarily utilize foreign
currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge incremental portions
of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign
currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year.
We have entered into 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. Beginning on March 30, 2012, the variable interest rate associated with $40 million of borrowings outstanding
under the Credit Facility became effectively fixed at 1.36% plus the range of applicable interest rates (“Credit Spread”)
through June 30, 2016. Beginning on March 28, 2013, the variable interest rate associated with an additional $40 million of borrowings
outstanding under the Credit Facility will become effectively fixed at 1.64% plus the Credit Spread through June 30, 2016. Also
on March 30, 2012, two of our forward fixed interest rate swap agreements expired. Under these agreements, the variable interest
rate associated with $80 million of borrowings outstanding under the Credit Facility had been effectively fixed at 2% plus the
Credit Spread above the London interbank rate.
The notional amount of foreign currency
exchange contracts to hedge forecasted intercompany inventory purchases and sales consisted of the following
(in thousands)
:
Currency Sold
|
|
U.S. Dollar Equivalent
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Euro
|
|
$
|
63,358
|
|
|
$
|
68,275
|
|
British pound
|
|
|
24,433
|
|
|
|
25,260
|
|
Canadian dollar
|
|
|
20,482
|
|
|
|
19,902
|
|
Australian dollar
|
|
|
12,359
|
|
|
|
12,417
|
|
Japanese yen
|
|
|
17,634
|
|
|
|
18,005
|
|
|
|
$
|
138,266
|
|
|
$
|
143,859
|
|
Currency Purchased
|
|
U.S. Dollar Equivalent
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Swiss franc
|
|
$
|
14,648
|
|
|
$
|
17,909
|
|
The notional amount of forward fixed interest
rate swap agreements to manage variable interest obligations consisted of the following
(in thousands)
:
|
|
U.S. Dollar Equivalent
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Interest rate swaps commencing March 31, 2010 and expiring March 30, 2012
|
|
$
|
-
|
|
|
$
|
80,000
|
|
Interest rate swap commencing March 30, 2012 and expiring June 30, 2016
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
Interest rate swap commencing March 28, 2013 and expiring June 30, 2016
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
The fair values of derivative instruments
and their respective classification in the condensed consolidated balance sheet consisted of the following
(in thousands)
:
|
|
|
|
Asset Derivatives
|
|
|
|
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
Derivatives designated as hedging instruments
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
$
|
4,855
|
|
|
$
|
6,841
|
|
Foreign currency exchange contracts
|
|
Other long-term assets, net
|
|
|
785
|
|
|
|
-
|
|
Total derivative instruments
|
|
|
|
$
|
5,640
|
|
|
$
|
6,841
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
Derivatives designated as hedging instruments
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Accrued expenses
|
|
$
|
1,056
|
|
|
$
|
1,753
|
|
Foreign currency exchange contracts
|
|
Other long-term liabilities
|
|
|
171
|
|
|
|
-
|
|
Interest rate swaps
|
|
Accrued expenses
|
|
|
2,275
|
|
|
|
1,417
|
|
Total derivative instruments
|
|
|
|
$
|
3,502
|
|
|
$
|
3,170
|
|
The effect of derivative instruments designated
as cash flow hedges on the condensed consolidated balance sheet for the three and six months ended June 30, 2012 and 2011 consisted
of the following
(in thousands)
:
|
|
Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
Derivative instruments
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts, net of tax
|
|
$
|
383
|
|
|
$
|
1,276
|
|
|
$
|
(1,428
|
)
|
|
$
|
(976
|
)
|
Interest rate swaps, net of tax
|
|
|
(649
|
)
|
|
|
177
|
|
|
|
(539
|
)
|
|
|
353
|
|
Total derivative instruments, net of tax
|
|
$
|
(266
|
)
|
|
$
|
1,453
|
|
|
$
|
(1,967
|
)
|
|
$
|
(623
|
)
|
The effect of derivative instruments designated
as cash flow hedges on the condensed consolidated statement of operations for the three and six months ended June 30, 2012 and
2011 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
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
Derivative instruments
|
|
(Effective Portion)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Foreign currency exchange contracts
|
|
Cost of revenue
|
|
$
|
2,337
|
|
|
$
|
(2,286
|
)
|
|
$
|
3,823
|
|
|
$
|
(3,577
|
)
|
Interest rate swaps
|
|
Interest expense
|
|
|
(112
|
)
|
|
|
(358
|
)
|
|
|
(462
|
)
|
|
|
(699
|
)
|
Total derivative instruments
|
|
|
|
$
|
2,225
|
|
|
$
|
(2,644
|
)
|
|
$
|
3,361
|
|
|
$
|
(4,276
|
)
|
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 conditions 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-based products and services for the veterinary market, which
we refer to as the 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”). We also operate two smaller operating
segments that comprise products for testing milk quality and safety (“Dairy”) and products for the human point-of-care
medical diagnostics market (“OPTI Medical”). Financial information about our Dairy and OPTI Medical operating segments
is combined and presented with one of our remaining pharmaceutical product lines and our out-licensing arrangements in an “Other”
category because they do not meet the quantitative or qualitative thresholds for reportable segments. See Note 14 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, 2011 for additional description of our segments.
CAG develops, designs, manufactures and
distributes products and performs services, primarily related to diagnostic and information management, for veterinarians. Water
develops, designs, manufactures and distributes a range of products used in the detection of various microbiological parameters
in water. LPD develops, designs, manufactures and distributes diagnostic tests and related instrumentation that are used to detect
a wide range of diseases and to monitor health status in livestock and poultry. Dairy develops, designs, manufactures and distributes
products to detect contaminants in milk. 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. Further, OPTI Medical manufactures
our VetStat
®
Electrolyte and Blood Gas Analyzer, a component of our Catalyst Dx
®
Analyzer and electrolyte
consumables used with our Catalyst Dx
®
Analyzer.
Effects of Certain Factors on Results of Operations
Distributor Purchasing and Inventories
.
The instrument consumables and rapid assay products in our CAG segment are sold in the U.S. and certain other geographies by third
party distributors, who purchase products from us and sell them to veterinary practices, which are the end users. As a result,
distributor purchasing dynamics have an impact on our reported sales of these products. Distributor purchasing dynamics may be
affected by many factors and may be unrelated to underlying end-user demand for our products. Consequently, reported results may
reflect fluctuations in distributors’ inventories and not necessarily reflect changes in 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 this as the impact of practice-level sales on growth. Where growth rates are affected by distributor
purchasing dynamics, we refer to this as the impact of changes in distributors’ inventories on growth. 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 four weeks of our anticipated end-user demand for
instrument consumables and rapid assay products.
Currency Impact
. For both the three
and six months ended June 30, 2012, approximately 25% of our revenue was derived from products manufactured in the U.S. and sold
internationally in local currencies compared to 26% for both the three and six months ended June 30, 2011. 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, and a weakening of the U.S.
dollar has the opposite effect. Similarly, 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.
The impact on revenue resulting from changes
in foreign currency exchange rates is not a measure defined by generally accepted accounting principles in the United States of
America (“U.S. GAAP”), otherwise referred to herein as a non-U.S. GAAP measure. We calculate the impact on revenue
resulting from changes in foreign currency exchange rates by applying the difference between the average exchange rates during
the current year period and the comparable previous year period to foreign currency denominated revenues for the current year period.
During the three months ended June 30, 2012,
as compared to the three months ended June 30, 2011, changes in foreign currency exchange rates decreased total company revenue
by approximately $8.2 million, due primarily to the strengthening of the U.S. dollar against the Euro and, to a lesser extent,
the Canadian dollar, Australian dollar and British pound.
During the six months ended June 30, 2012,
as compared to the six months ended June 30, 2011, changes in foreign currency exchange rates decreased total company revenue by
approximately $9.8 million, due primarily to the strengthening of the U.S. dollar against the Euro and, to a lesser extent, the
Canadian dollar and British pound.
Effects of Economic Conditions
.
Demand for many of our products and services has been negatively affected by economic conditions since mid-2008. In our CAG
segment, we believe that low economic growth and relatively high unemployment have led to negative or cautious consumer
sentiment, which has affected the number of patient visits with their respective owners to veterinary clinics. Based on data
provided by a subset of our U.S. customers that use our practice management systems, we observed a slight improvement in the
growth of patient visits in the fourth quarter of 2011 and in the first and second quarters of 2012 over the previous year
periods, although the rate of improvement has not been steady. We believe that this data, though limited, provides a fair and
meaningful representation of patient visit activity in the U.S. that may be indicative of a gradual but inconsistent
improvement in the U.S. economic environment. In contrast, economic conditions in certain European countries remain
challenging, which continues to negatively impact our CAG segment in particular.
We believe that the overall trend in
patient visits since the beginning of the economic downturn has had a slightly negative impact on the growth rate of sales of
rapid assay tests, instrument consumables and reference laboratory diagnostic and consulting services. In addition, we
believe the rate of growth of sales of our instruments and digital radiography systems, which are larger capital purchases
for veterinarians, has also been affected by continued caution among veterinarians regarding economic conditions.
Weaker economic conditions since mid-2008 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 of our Water and LPD business customers. Lower water testing volumes have resulted from a decline
in discretionary testing and a decline in mandated testing as a result of lower home and commercial construction. Fiscal difficulties
in certain European countries have also reduced government funding for some water and livestock testing programs.
We believe that the diversity of our products
and services, and the geographic diversity of our markets, has partially mitigated the effects of the economic environment and
negative consumer sentiment on our revenue growth rates. Looking forward, we are cautiously optimistic that the improvements we
began to see in the U.S. in the fourth quarter of 2011 are reflective of a gradual improvement in the macroeconomic environment
that over time will further reduce these effects.
■ 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 U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various assumptions that
we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and
six months ended June 30, 2012 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual
Report on Form 10-K for the year ended December 31, 2011, except for our significant accounting policies related to revenue recognition.
Effective January 1, 2012, revenue from substantially all U.S. distributors is recognized upon delivery to the distributor because
title and risk of loss remains with IDEXX until the product is delivered. Prior to January 1, 2012, we recognized revenue at the
time of shipment to U.S. distributors because title and risk of loss passed to the distributors on delivery to the common carrier.
This change did not have a material impact on our financial statements. The critical accounting policies and the significant judgments
and estimates used in the preparation of our condensed consolidated financial statements for the three and six months ended June
30, 2012 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 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
The following revenue analysis and discussion
reports on organic revenue growth. Organic revenue growth should be considered in addition to, and not as a replacement for or
as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures
reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors
by facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. We exclude the effect
of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under management’s
control, are subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions because the
nature, size and number of acquisitions can vary dramatically from period to period and therefore can also obscure underlying business
trends.
Organic revenue growth and the percentage
changes in revenue from currency and acquisitions are non-U.S. GAAP measures. See the subsection above titled “Business Overview
and Trends” for a description of the calculation of the percentage change in revenue resulting from changes in foreign currency
exchange rates. The percentage change in revenue resulting from acquisitions represents incremental revenues attributable to acquisitions
that have occurred since the beginning of the prior year period.
Three Months Ended June 30, 2012 Compared to Three Months
Ended June 30, 2011
Revenue
Total Company.
The following table
presents revenue by operating segment:
Net
Revenue
(dollars in thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Percentage
Change from
Currency
|
|
|
Percentage
Change from
Acquisitions
|
|
|
Organic
Revenue Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
278,294
|
|
|
$
|
259,734
|
|
|
$
|
18,560
|
|
|
|
7.1
|
%
|
|
|
(2.5
|
%)
|
|
|
1.4
|
%
|
|
|
8.2
|
%
|
Water
|
|
|
21,983
|
|
|
|
21,510
|
|
|
|
473
|
|
|
|
2.2
|
%
|
|
|
(2.5
|
%)
|
|
|
-
|
|
|
|
4.7
|
%
|
LPD
|
|
|
23,060
|
|
|
|
25,367
|
|
|
|
(2,307
|
)
|
|
|
(9.1
|
%)
|
|
|
(5.3
|
%)
|
|
|
-
|
|
|
|
(3.8
|
%)
|
Other
|
|
|
12,312
|
|
|
|
11,251
|
|
|
|
1,061
|
|
|
|
9.4
|
%
|
|
|
(1.5
|
%)
|
|
|
-
|
|
|
|
10.9
|
%
|
Total Company
|
|
$
|
335,649
|
|
|
$
|
317,862
|
|
|
$
|
17,787
|
|
|
|
5.6
|
%
|
|
|
(2.6
|
%)
|
|
|
1.1
|
%
|
|
|
7.1
|
%
|
Companion Animal Group.
The following
table presents revenue by product and service category for CAG:
Net
Revenue
(dollars in thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Percentage
Change from
Currency
|
|
|
Percentage
Change from
Acquisitions
|
|
|
Organic
Revenue Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$
|
104,243
|
|
|
$
|
98,603
|
|
|
$
|
5,640
|
|
|
|
5.7
|
%
|
|
|
(2.8
|
%)
|
|
|
-
|
|
|
|
8.5
|
%
|
Rapid assay products
|
|
|
45,577
|
|
|
|
44,193
|
|
|
|
1,384
|
|
|
|
3.1
|
%
|
|
|
(1.1
|
%)
|
|
|
-
|
|
|
|
4.2
|
%
|
Reference laboratory diagnostic and consulting
services
|
|
|
106,385
|
|
|
|
99,087
|
|
|
|
7,298
|
|
|
|
7.4
|
%
|
|
|
(3.0
|
%)
|
|
|
3.6
|
%
|
|
|
6.8
|
%
|
Practice management and
digital imaging systems
|
|
|
22,089
|
|
|
|
17,851
|
|
|
|
4,238
|
|
|
|
23.7
|
%
|
|
|
(0.4
|
%)
|
|
|
-
|
|
|
|
24.1
|
%
|
Net CAG revenue
|
|
$
|
278,294
|
|
|
$
|
259,734
|
|
|
$
|
18,560
|
|
|
|
7.1
|
%
|
|
|
(2.5
|
%)
|
|
|
1.4
|
%
|
|
|
8.2
|
%
|
Instruments revenue was $23.3 million and
$21.1 million for the three months ended June 30, 2012 and 2011, respectively. Consumables revenue was $68.9 million and $66.2
million for the three months ended June 30, 2012 and 2011, respectively. Instrument service and accessories revenue was $11.6 million
and $11.0 million for the three months ended June 30, 2012 and 2011, respectively. The remaining sources of revenue are not significant
to overall instruments and consumables revenue. Instruments revenue growth was due primarily to increased sales of our ProCyte
Dx
®
and Catalyst Dx
®
instruments. Consumables revenue growth 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
®
chemistry instrument as customers continue to upgrade from our VetTest
®
instrument to our
Catalyst Dx
®
instrument. Higher sales volumes of consumables used with our ProCyte Dx
®
instrument
also contributed to the increase in consumables revenue. These favorable factors were partly offset by lower sales volumes of consumables
used with our LaserCyte
®
instrument. Service and accessories revenue growth was primarily a result of the increase
in our active installed base of instruments. The impact of changes in distributors’ inventory levels reduced instruments
and consumables revenue growth by 2%.
The increase in rapid assay revenue was
due primarily to higher average unit sales prices of our canine combination test products, partly offset by the unfavorable impact
of changes in distributors’ inventory levels, which reduced revenue growth by 1%.
The increase in reference laboratory diagnostic
and consulting services revenue resulted primarily from the impact of higher testing volumes. Higher testing volumes were driven
by the acquisition of new customers due, in part, to geographic expansion and our customer loyalty programs in which customers
are provided incentives in exchange for agreements to purchase services in future periods.
The increase in practice management and
digital imaging systems revenue resulted primarily from an increase in placements of our digital imaging and practice management
systems and higher support revenue.
Water.
The increase in Water revenue
resulted primarily from higher Colilert
®
product sales volumes.
Livestock and Poultry Diagnostics.
The decrease in LPD revenue resulted primarily from lower sales of Bovine Spongiform Encephalopathy (“BSE” or “mad
cow disease”) tests resulting from the changes in European Union BSE testing requirements. Effective July 1, 2011, the age
at which healthy cattle to be slaughtered are required to be tested for BSE in the European Union was increased from 48 months
to 72 months, which is reducing the population of cattle tested for this disease.
Other.
The increase in Other revenue
was attributable primarily to higher sales volumes of our Dairy SNAP
®
tests used for the detection of antibiotic
residue and, to a lesser extent, higher sales volumes of our Dairy SNAP
®
tests used for detection of the contaminant
Aflatoxin M1 in milk.
Gross Profit
Total Company.
The following table
presents gross profit and gross profit percentages by operating segment:
Gross
Profit
(dollars
in
thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
Percent
of
Revenue
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
147,908
|
|
|
|
53.1
|
%
|
|
$
|
138,332
|
|
|
|
53.3
|
%
|
|
$
|
9,576
|
|
|
|
6.9
|
%
|
Water
|
|
|
14,794
|
|
|
|
67.3
|
%
|
|
|
12,968
|
|
|
|
60.3
|
%
|
|
|
1,826
|
|
|
|
14.1
|
%
|
LPD
|
|
|
15,671
|
|
|
|
68.0
|
%
|
|
|
17,335
|
|
|
|
68.3
|
%
|
|
|
(1,664
|
)
|
|
|
(9.6
|
%)
|
Other
|
|
|
4,575
|
|
|
|
37.2
|
%
|
|
|
4,742
|
|
|
|
42.2
|
%
|
|
|
(167
|
)
|
|
|
(3.5
|
%)
|
Unallocated Amounts
|
|
|
1,741
|
|
|
|
N/A
|
|
|
|
656
|
|
|
|
N/A
|
|
|
|
1,085
|
|
|
|
N/A
|
|
Total
Company
|
|
$
|
184,689
|
|
|
|
55.0
|
%
|
|
$
|
174,033
|
|
|
|
54.8
|
%
|
|
$
|
10,656
|
|
|
|
6.1
|
%
|
Companion Animal Group.
Gross profit
for CAG increased due to higher sales, partly offset by a slight decrease in the gross profit percentage to 53%. The decrease in
the gross profit percentage was due primarily to lower relative sales of higher margin products and higher costs of service, partly
offset by higher average unit sales prices driven by our canine combination rapid assay tests and the favorable impact of currency.
The net effect of currency was positive because the net unfavorable impact of changes in foreign currency exchange rates was more
than offset by hedging gains during the three months ended June 30, 2012 compared to hedging losses during the same period of the
prior year.
Water.
Gross profit for Water increased
due to higher sales and an increase in the gross profit percentage to 67% from 60%. The increase in the gross profit percentage
was due primarily to the timing of certain manufacturing costs during the three months ended June 30, 2011. Lower freight and distribution
costs and the favorable impact of currency also contributed to the increase in the gross profit percentage. The net effect of currency
was positive because the net unfavorable impact of changes in foreign currency exchange rates was more than offset by hedging gains
during the three months ended June 30, 2012 compared to hedging losses during the same period of the prior year.
Livestock and Poultry Diagnostics.
Gross profit for LPD decreased due to lower sales and a slight decrease in the gross profit percentage to 68%. The decrease in
the gross profit percentage was due primarily to higher overall manufacturing costs driven by lower production volumes. This unfavorable
impact was partly offset by the favorable impact of currency and higher relative sales of products that yield higher gross margins.
The net effect of currency was positive because the net unfavorable impact of changes in foreign currency exchange rates was more
than offset by hedging gains during the three months ended June 30, 2012 compared to hedging losses during the same period of the
prior year.
Other.
Gross profit for Other decreased
as higher sales were more than offset by a decrease in the gross profit percentage to 37% from 42%. The decrease in the gross profit
percentage was due to lower average unit sales prices in our OPTI Medical line of business and increased manufacturing, freight
and distribution costs in our Dairy line of business.
Unallocated Amounts.
Gross profit
for Unallocated Amounts increased due primarily to a decrease in certain manufacturing and personnel-related costs. With respect
to manufacturing costs, the costs reported in our operating segments include our standard cost for products sold and any variances
from standard cost for products purchased or manufactured within the period. We capitalize these variances for inventory on hand
at the end of the period to record inventory in accordance with U.S. GAAP. We then record these variances as cost of product revenue
as that inventory is sold. The impact to cost of product revenue resulting from this variance capitalization and subsequent recognition
is reported within the caption “Unallocated Amounts.” The decrease in certain manufacturing costs was due primarily
to the recognition of previously favorable production volume and purchase price variances incurred by our LPD business. With respect
to personnel-related costs, we estimate certain personnel-related costs and allocate the estimated expenses to the operating segments.
This allocation differs from actual expense and consequently yields a difference that is reported under the caption “Unallocated
Amounts.” The decrease in certain personnel-related costs for Unallocated Amounts is due primarily to lower self-insured
health care costs during the three months ended June 30, 2012 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:
Operating
Expenses
(dollars
in thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
88,140
|
|
|
|
31.7
|
%
|
|
$
|
80,062
|
|
|
|
30.8
|
%
|
|
$
|
8,078
|
|
|
|
10.1
|
%
|
Water
|
|
|
4,598
|
|
|
|
20.9
|
%
|
|
|
4,567
|
|
|
|
21.2
|
%
|
|
|
31
|
|
|
|
0.7
|
%
|
LPD
|
|
|
9,861
|
|
|
|
42.8
|
%
|
|
|
10,159
|
|
|
|
40.1
|
%
|
|
|
(298
|
)
|
|
|
(2.9
|
%)
|
Other
|
|
|
4,325
|
|
|
|
35.1
|
%
|
|
|
4,433
|
|
|
|
39.4
|
%
|
|
|
(108
|
)
|
|
|
(2.4
|
%)
|
Unallocated Amounts
|
|
|
1,948
|
|
|
|
N/A
|
|
|
|
3,514
|
|
|
|
N/A
|
|
|
|
(1,566
|
)
|
|
|
(44.6
|
%)
|
Total
Company
|
|
$
|
108,872
|
|
|
|
32.4
|
%
|
|
$
|
102,735
|
|
|
|
32.3
|
%
|
|
$
|
6,137
|
|
|
|
6.0
|
%
|
Operating
Income
(dollars
in thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
59,768
|
|
|
|
21.5
|
%
|
|
$
|
58,270
|
|
|
|
22.4
|
%
|
|
$
|
1,498
|
|
|
|
2.6
|
%
|
Water
|
|
|
10,196
|
|
|
|
46.4
|
%
|
|
|
8,401
|
|
|
|
39.1
|
%
|
|
|
1,795
|
|
|
|
21.4
|
%
|
LPD
|
|
|
5,810
|
|
|
|
25.2
|
%
|
|
|
7,176
|
|
|
|
28.3
|
%
|
|
|
(1,366
|
)
|
|
|
(19.0
|
%)
|
Other
|
|
|
250
|
|
|
|
2.0
|
%
|
|
|
309
|
|
|
|
2.8
|
%
|
|
|
(59
|
)
|
|
|
(19.1
|
%)
|
Unallocated Amounts
|
|
|
(207
|
)
|
|
|
N/A
|
|
|
|
(2,858
|
)
|
|
|
N/A
|
|
|
|
2,651
|
|
|
|
92.8
|
%
|
Total
Company
|
|
$
|
75,817
|
|
|
|
22.6
|
%
|
|
$
|
71,298
|
|
|
|
22.4
|
%
|
|
$
|
4,519
|
|
|
|
6.3
|
%
|
Companion Animal Group.
The following
table presents CAG operating expenses by functional area:
Operating
Expenses
(dollars
in thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
46,141
|
|
|
|
16.6
|
%
|
|
$
|
42,424
|
|
|
|
16.3
|
%
|
|
$
|
3,717
|
|
|
|
8.8
|
%
|
General and administrative
|
|
|
28,346
|
|
|
|
10.2
|
%
|
|
|
25,829
|
|
|
|
9.9
|
%
|
|
|
2,517
|
|
|
|
9.7
|
%
|
Research and development
|
|
|
13,653
|
|
|
|
4.9
|
%
|
|
|
11,809
|
|
|
|
4.6
|
%
|
|
|
1,844
|
|
|
|
15.6
|
%
|
Total
operating expenses
|
|
$
|
88,140
|
|
|
|
31.7
|
%
|
|
$
|
80,062
|
|
|
|
30.8
|
%
|
|
$
|
8,078
|
|
|
|
10.1
|
%
|
The increase in sales and marketing expense
resulted primarily from higher personnel-related costs, partly offset by the favorable impact of changes in foreign currency exchange
rates. The increase in general and administrative expense resulted primarily from higher personnel-related costs, an increase in
costs attributable to investments in information technology and higher amortization expense of our intangible assets. These unfavorable
impacts were partly offset by the favorable impact of changes in foreign currency exchange rates. The increase in research and
development expense resulted primarily from increased personnel-related costs and higher external consulting and development costs.
Water.
The following table presents
Water operating expenses by functional area:
Operating
Expenses
(dollars
in
thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
2,449
|
|
|
|
11.1
|
%
|
|
$
|
2,351
|
|
|
|
10.9
|
%
|
|
$
|
98
|
|
|
|
4.2
|
%
|
General and administrative
|
|
|
1,505
|
|
|
|
6.8
|
%
|
|
|
1,577
|
|
|
|
7.3
|
%
|
|
|
(72
|
)
|
|
|
(4.6
|
%)
|
Research and development
|
|
|
644
|
|
|
|
2.9
|
%
|
|
|
639
|
|
|
|
3.0
|
%
|
|
|
5
|
|
|
|
0.8
|
%
|
Total operating expenses
|
|
$
|
4,598
|
|
|
|
20.9
|
%
|
|
$
|
4,567
|
|
|
|
21.2
|
%
|
|
$
|
31
|
|
|
|
0.7
|
%
|
The increase in sales and marketing expense
resulted primarily from higher personnel-related costs. The decrease in general and administrative expense was due primarily to
lower personnel-related costs.
Livestock and Poultry Diagnostics.
The following table presents LPD operating expenses by functional area:
Operating
Expenses
(dollars
in
thousands)
|
|
For
the Three Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Three Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
4,179
|
|
|
|
18.1
|
%
|
|
$
|
4,102
|
|
|
|
16.2
|
%
|
|
$
|
77
|
|
|
|
1.9
|
%
|
General and administrative
|
|
|
2,834
|
|
|
|
12.3
|
%
|
|
|
3,131
|
|
|
|
12.3
|
%
|
|
|
(297
|
)
|
|
|
(9.5
|
%)
|
Research and development
|
|
|
2,848
|
|
|
|
12.4
|
%
|
|
|
2,926
|
|
|
|
11.5
|
%
|
|
|
(78
|
)
|
|
|
(2.7
|
%)
|
Total operating expenses
|
|
$
|
9,861
|
|
|
|
42.8
|
%
|
|
$
|
10,159
|
|
|
|
40.1
|
%
|
|
$
|
(298
|
)
|
|
|
(2.9
|
%)
|
The increase in sales and marketing expense
resulted primarily from increased spending on promotional activities and higher personnel-related costs, partly offset by the favorable
impact of changes in foreign currency exchange rates. The decrease in general and administrative expense resulted primarily from
a decrease in intangible asset amortization. These favorable impacts were partly offset by higher personnel related costs and an
increase in costs attributable to investments in information technology. The decrease in research and development expense was due
primarily to a decrease in personnel-related costs.
Other.
Operating expenses for Other
decreased $0.1 million to $4.3 million for the three months ended June 30, 2012 due primarily to lower research and development
costs in our OPTI Medical and Dairy lines of business, partly offset by higher personnel-related costs in our OPTI Medical line
of business.
Unallocated Amounts.
Operating expenses
that are not allocated to our operating segments decreased $1.6 million to $1.9 million for the three months ended June 30, 2012
due primarily to lower legal and other professional fees incurred in connection with the U.S. Federal Trade Commission (“FTC”)
investigation, a decrease in corporate support function expenses, lower personnel-related costs and the absence of legal and other
fees incurred in connection with the United Kingdom Office of Fair Trading (“OFT”) investigation as this investigation
concluded in November 2011. These favorable factors were partly offset by certain foreign exchange losses during the three months
ended June 30, 2012 compared to gains during the same period of the prior year. We estimate corporate support function expenses
and certain personnel-related costs and allocate the estimated expense to the operating segments. This allocation differs from
the actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.” The
decrease in certain personnel-related costs for Unallocated Amounts is due primarily to lower self-insured health care costs during
the three months ended June 30, 2012 compared to the same period of the prior year. The FTC investigation is discussed in more
detail under the heading “Part II. Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q.
Interest Income and Interest Expense
Interest income was $0.5 million for the
three months ended June 30, 2012 compared to $0.4 million for the same period of the prior year.
Interest expense was $0.9 million for the
three months ended June 30, 2012 compared to $0.8 million for the same period of the prior year.
Provision for Income Taxes
Our effective income tax rate was 31.9%
for the three months ended June 30, 2012 compared to 31.4% for the three months ended June 30, 2011. The increase in our effective
income tax rate was due primarily to federal research and development tax incentives that were not available during the three months
ended June 30, 2012 but were available during the same period of the prior year, partly offset by a decrease in the effective income
tax rates in international jurisdictions in which we operate.
Six Months Ended June 30, 2012 Compared to Six Months Ended
June 30, 2011
The following revenue analysis and discussion
reports on organic revenue growth. Organic revenue growth should be considered in addition to, and not as a replacement for or
as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures
reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors
by facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. We exclude the effect
of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under management’s
control, are subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions because the
nature, size and number of acquisitions can vary dramatically from period to period and therefore can also obscure underlying business
trends.
Organic revenue growth and the percentage
changes in revenue from currency and acquisitions are non-U.S. GAAP measures. See the subsection above titled “Business Overview
and Trends” for a description of the calculation of the percentage change in revenue resulting from changes in foreign currency
exchange rates. The percentage change in revenue resulting from acquisitions represents incremental revenues attributable to acquisitions
that have occurred since the beginning of the prior year period.
Revenue
Total Company.
The following table
presents revenue by operating segment:
Net
Revenue
(dollars in thousands)
|
|
For
the Six Months Ended June 30, 2012
|
|
|
For
the Six Months Ended June 30, 2011
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Percentage
Change from
Currency
|
|
|
Percentage
Change from
Acquisitions
|
|
|
Organic
Revenue Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
546,367
|
|
|
$
|
500,323
|
|
|
$
|
46,044
|
|
|
|
9.2
|
%
|
|
|
(1.5
|
%)
|
|
|
1.4
|
%
|
|
|
9.3
|
%
|
Water
|
|
|
41,565
|
|
|
|
40,475
|
|
|
|
1,090
|
|
|
|
2.7
|
%
|
|
|
(1.5
|
%)
|
|
|
-
|
|
|
|
4.2
|
%
|
LPD
|
|
|
45,242
|
|
|
|
49,306
|
|
|
|
(4,064
|
)
|
|
|
(8.2
|
%)
|
|
|
(3.5
|
%)
|
|
|
-
|
|
|
|
(4.7
|
%)
|
Other
|
|
|
25,151
|
|
|
|
20,430
|
|
|
|
4,721
|
|
|
|
23.1
|
%
|
|
|
(0.5
|
%)
|
|
|
-
|
|
|
|
23.6
|
%
|
Total
Company
|
|
$
|
658,325
|
|
|
$
|
610,534
|
|
|
$
|
47,791
|
|
|
|
7.8
|
%
|
|
|
(1.7
|
%)
|
|
|
1.2
|
%
|
|
|
8.3
|
%
|
Companion Animal Group.
The following
table presents revenue by product and service category for CAG:
Net
Revenue
(dollars in thousands)
|
|
For
the Six Months Ended June 30, 2012
|
|
|
For
the Six Months Ended June 30, 2011
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Percentage
Change
from
Currency
|
|
|
Percentage
Change
from
Acquisitions
|
|
|
Organic
Revenue Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments
and consumables
|
|
$
|
206,240
|
|
|
$
|
192,490
|
|
|
$
|
13,750
|
|
|
|
7.1
|
%
|
|
|
(1.7
|
%)
|
|
|
-
|
|
|
|
8.8
|
%
|
Rapid assay products
|
|
|
89,241
|
|
|
|
82,810
|
|
|
|
6,431
|
|
|
|
7.8
|
%
|
|
|
(0.6
|
%)
|
|
|
-
|
|
|
|
8.4
|
%
|
Reference
laboratory diagnostic and consulting services
|
|
|
208,247
|
|
|
|
188,215
|
|
|
|
20,032
|
|
|
|
10.6
|
%
|
|
|
(1.9
|
%)
|
|
|
3.8
|
%
|
|
|
8.7
|
%
|
Practice
management and digital imaging systems
|
|
|
42,639
|
|
|
|
36,808
|
|
|
|
5,831
|
|
|
|
15.8
|
%
|
|
|
(0.2
|
%)
|
|
|
-
|
|
|
|
16.0
|
%
|
Net CAG
revenue
|
|
$
|
546,367
|
|
|
$
|
500,323
|
|
|
$
|
46,044
|
|
|
|
9.2
|
%
|
|
|
(1.5
|
%)
|
|
|
1.4
|
%
|
|
|
9.3
|
%
|
Instruments revenue was $43.8 million and
$40.1 million for the six months ended June 30, 2012 and 2011, respectively. Consumables revenue was $138.7 million and $130.2
million for the six months ended June 30, 2012 and 2011, respectively. Instrument service and accessories revenue was $22.7 million
and $21.6 million for the six months ended June 30, 2012 and 2011, respectively. The remaining sources of revenue are not significant
to overall instruments and consumables revenue. Instruments revenue growth was due primarily to increased sales of our ProCyte
Dx
®
and Catalyst Dx
®
instruments. Consumables revenue growth 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
®
chemistry instrument as customers continue to upgrade from our VetTest
®
instrument to our
Catalyst Dx
®
instrument. Higher sales volumes of consumables used with our ProCyte Dx
®
instrument
also contributed to the increase in consumables revenue. These favorable factors were partly offset by lower sales volumes of consumables
used with our LaserCyte
®
instrument. Service and accessories revenue growth was primarily a result of the increase
in our active installed base of instruments. The impact of changes in distributors’ inventory levels reduced instruments
and consumables revenue growth by 1%.
The increase in rapid assay revenue was
due primarily to higher sales of our canine combination test products and the favorable impact of changes in distributors’
inventory levels worldwide, which contributed 1% to revenue growth. Higher sales of our canine combination test products were driven
primarily by higher average unit sales prices.
The increase in reference laboratory diagnostic
and consulting services revenue resulted primarily from the impact of higher testing volumes. Higher testing volumes were driven
by the acquisition of new customers due, in part, to geographic expansion and our customer loyalty programs in which customers
are provided incentives in exchange for agreements to purchase services in future periods.
The increase in practice management and
digital imaging systems revenue resulted primarily from an increase in placements of our practice management and digital imaging
systems and an increase in support and service revenue.
Water.
The increase in Water revenue
resulted primarily from higher Colilert
®
product sales volumes.
Livestock and Poultry Diagnostics.
The decrease in LPD revenue resulted primarily from lower sales of BSE tests resulting from the changes in European Union BSE testing
requirements and, to a lesser extent, lower relative sales in geographies where products are sold at higher average unit sales
prices. Effective July 1, 2011, the age at which healthy cattle to be slaughtered are required to be tested for BSE in the European
Union was increased from 48 months to 72 months, which is reducing the population of cattle tested for this disease.
Other.
The increase in Other revenue
was attributable primarily to higher sales volumes of our Dairy SNAP
®
tests used for the detection of antibiotic
residue and the contaminant Aflatoxin M1 in milk. Higher revenue associated with our remaining pharmaceutical out-licensing arrangements
and higher sales of our OPTI Medical consumables and instruments also contributed to the increase in revenue.
Gross Profit
Total Company.
The following table
presents gross profit and gross profit percentages by operating segment:
Gross Profit
(dollars in
thousands)
|
|
For
the Six Months Ended June 30, 2012
|
|
|
Percent
of
Revenue
|
|
|
For
the Six Months Ended June 30, 2011
|
|
|
Percent
of
Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
287,309
|
|
|
|
52.6
|
%
|
|
$
|
261,683
|
|
|
|
52.3
|
%
|
|
$
|
25,626
|
|
|
|
9.8
|
%
|
Water
|
|
|
27,761
|
|
|
|
66.8
|
%
|
|
|
24,359
|
|
|
|
60.2
|
%
|
|
|
3,402
|
|
|
|
14.0
|
%
|
LPD
|
|
|
30,853
|
|
|
|
68.2
|
%
|
|
|
33,882
|
|
|
|
68.7
|
%
|
|
|
(3,029
|
)
|
|
|
(8.9
|
%)
|
Other
|
|
|
9,892
|
|
|
|
39.3
|
%
|
|
|
8,484
|
|
|
|
41.5
|
%
|
|
|
1,408
|
|
|
|
16.6
|
%
|
Unallocated Amounts
|
|
|
3,648
|
|
|
|
N/A
|
|
|
|
550
|
|
|
|
N/A
|
|
|
|
3,098
|
|
|
|
N/A
|
|
Total
Company
|
|
$
|
359,463
|
|
|
|
54.6
|
%
|
|
$
|
328,958
|
|
|
|
53.9
|
%
|
|
$
|
30,505
|
|
|
|
9.3
|
%
|
Companion Animal Group.
Gross profit
for CAG increased due to higher sales and a slight increase in the gross profit percentage to 53%. The increase in the gross profit
percentage was due primarily to the favorable impact of currency, higher average unit sales prices of our canine combination rapid
assay tests and lower overall manufacturing costs driven by the production of our instruments and consumables. The net effect of
currency was positive because the net unfavorable impact of changes in foreign currency exchange rates was more than offset by
hedging gains during the six months ended June 30, 2012 compared to hedging losses during the same period of the prior year. These
favorable factors were partly offset by lower relative sales of higher margin products and increased costs of service.
Water.
Gross profit for Water increased
due to higher sales and an increase in the gross profit percentage to 67% from 60%. The increase in the gross profit percentage
was due primarily to the timing of certain manufacturing costs during the six months ended June 30, 2011. Lower freight and distribution
costs and the favorable impact of currency also contributed to the increase in the gross profit percentage. The net effect of currency
was positive because the net unfavorable impact of changes in foreign currency exchange rates was more than offset by hedging gains
during the six months ended June 30, 2012 compared to hedging losses during the same period of the prior year.
Livestock and Poultry Diagnostics.
Gross profit for LPD decreased due to lower sales and a slight decrease in the gross profit percentage to 68%. The decrease in
the gross profit percentage was due primarily to higher overall manufacturing costs driven by lower production volumes. This unfavorable
impact was partly offset by the favorable impact of currency and higher relative sales of products that yield higher gross margins.
The net effect of currency was positive because the net unfavorable impact of changes in foreign currency exchange rates was more
than offset by hedging gains during the six months ended June 30, 2012 compared to hedging losses during the same period of the
prior year.
Other.
Gross profit for Other increased
due to higher sales, partly offset by a decrease in the gross profit percentage to 39% from 42%. The decrease in the gross profit
percentage was due to lower average unit sales prices, driven by our OPTI Medical line of business, and higher distribution and
freight costs in our OPTI Medical and Dairy lines of business. These unfavorable factors were partly offset by lower overall manufacturing
costs in our Dairy line of business driven by increased production volumes of our SNAP
®
tests.
Unallocated Amounts.
Gross profit
for Unallocated Amounts increased due primarily to a decrease in certain manufacturing and personnel-related costs. With respect
to manufacturing costs, the costs reported in our operating segments include our standard cost for products sold and any variances
from standard cost for products purchased or manufactured within the period. We capitalize these variances for inventory on hand
at the end of the period to record inventory in accordance with U.S. GAAP. We then record these variances as cost of product revenue
as that inventory is sold. The impact to cost of product revenue resulting from this variance capitalization and subsequent recognition
is reported within the caption “Unallocated Amounts.” The decrease in certain manufacturing costs was due primarily
to the recognition of previously favorable production volume and purchase price variances incurred by our LPD business.
Operating Expenses and Operating Income
Total Company.
The following tables
present operating expenses and operating income by operating segment:
Operating
Expenses
(dollars
in
thousands)
|
|
For
the Six Months
Ended June 30,
2012
|
|
|
Percent
of Revenue
|
|
|
For
the Six Months
Ended June 30,
2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
180,623
|
|
|
|
33.1
|
%
|
|
$
|
160,441
|
|
|
|
32.1
|
%
|
|
$
|
20,182
|
|
|
|
12.6
|
%
|
Water
|
|
|
9,270
|
|
|
|
22.3
|
%
|
|
|
9,011
|
|
|
|
22.3
|
%
|
|
|
259
|
|
|
|
2.9
|
%
|
LPD
|
|
|
19,777
|
|
|
|
43.7
|
%
|
|
|
19,556
|
|
|
|
39.7
|
%
|
|
|
221
|
|
|
|
1.1
|
%
|
Other
|
|
|
9,104
|
|
|
|
36.2
|
%
|
|
|
8,725
|
|
|
|
42.7
|
%
|
|
|
379
|
|
|
|
4.3
|
%
|
Unallocated Amounts
|
|
|
4,465
|
|
|
|
N/A
|
|
|
|
6,395
|
|
|
|
N/A
|
|
|
|
(1,930
|
)
|
|
|
(30.2
|
%)
|
Total Company
|
|
$
|
223,239
|
|
|
|
33.9
|
%
|
|
$
|
204,128
|
|
|
|
33.4
|
%
|
|
$
|
19,111
|
|
|
|
9.4
|
%
|
Operating
Income
(dollars
in
thousands)
|
|
For
the Six Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Six Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
106,686
|
|
|
|
19.5
|
%
|
|
$
|
101,242
|
|
|
|
20.2
|
%
|
|
$
|
5,444
|
|
|
|
5.4
|
%
|
Water
|
|
|
18,491
|
|
|
|
44.5
|
%
|
|
|
15,348
|
|
|
|
37.9
|
%
|
|
|
3,143
|
|
|
|
20.5
|
%
|
LPD
|
|
|
11,076
|
|
|
|
24.5
|
%
|
|
|
14,326
|
|
|
|
29.1
|
%
|
|
|
(3,250
|
)
|
|
|
(22.7
|
%)
|
Other
|
|
|
788
|
|
|
|
3.1
|
%
|
|
|
(241
|
)
|
|
|
(1.2
|
%)
|
|
|
1,029
|
|
|
|
427.0
|
%
|
Unallocated Amounts
|
|
|
(817
|
)
|
|
|
N/A
|
|
|
|
(5,845
|
)
|
|
|
N/A
|
|
|
|
5,028
|
|
|
|
86.0
|
%
|
Total Company
|
|
$
|
136,224
|
|
|
|
20.7
|
%
|
|
$
|
124,830
|
|
|
|
20.5
|
%
|
|
$
|
11,394
|
|
|
|
9.1
|
%
|
Companion Animal Group.
The following
table presents CAG operating expenses by functional area:
Operating
Expenses
(dollars
in
thousands)
|
|
For
the Six Months
Ended June 30,
2012
|
|
|
Percent
of Revenue
|
|
|
For
the Six Months
Ended June 30,
2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
95,603
|
|
|
|
17.5
|
%
|
|
$
|
85,758
|
|
|
|
17.1
|
%
|
|
$
|
9,845
|
|
|
|
11.5
|
%
|
General and administrative
|
|
|
57,270
|
|
|
|
10.5
|
%
|
|
|
51,217
|
|
|
|
10.2
|
%
|
|
|
6,053
|
|
|
|
11.8
|
%
|
Research and development
|
|
|
27,750
|
|
|
|
5.1
|
%
|
|
|
23,466
|
|
|
|
4.7
|
%
|
|
|
4,284
|
|
|
|
18.3
|
%
|
Total operating expenses
|
|
$
|
180,623
|
|
|
|
33.1
|
%
|
|
$
|
160,441
|
|
|
|
32.1
|
%
|
|
$
|
20,182
|
|
|
|
12.6
|
%
|
The increase in sales and marketing expense
resulted primarily from higher personnel-related costs, partly offset by the favorable impact from changes in foreign currency
exchange rates. The increase in general and administrative expense was due primarily to higher personnel-related costs, an increase
in costs attributable to investments in information technology and higher amortization expense of our intangible assets. These
unfavorable impacts were partly offset by the favorable impact of changes in foreign currency exchange rates. The increase in research
and development expense resulted primarily from higher external consulting and development costs and increased personnel-related
costs.
Water.
The following table presents
Water operating expenses by functional area:
Operating
Expenses
(dollars
in
thousands)
|
|
For
the Six Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Six Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
4,883
|
|
|
|
11.7
|
%
|
|
$
|
4,666
|
|
|
|
11.5
|
%
|
|
$
|
217
|
|
|
|
4.7
|
%
|
General and administrative
|
|
|
3,106
|
|
|
|
7.5
|
%
|
|
|
3,183
|
|
|
|
7.9
|
%
|
|
|
(77
|
)
|
|
|
(2.4
|
%)
|
Research and development
|
|
|
1,281
|
|
|
|
3.1
|
%
|
|
|
1,162
|
|
|
|
2.9
|
%
|
|
|
119
|
|
|
|
10.2
|
%
|
Total
operating expenses
|
|
$
|
9,270
|
|
|
|
22.3
|
%
|
|
$
|
9,011
|
|
|
|
22.3
|
%
|
|
$
|
259
|
|
|
|
2.9
|
%
|
The increase in sales and marketing expense
resulted primarily from higher personnel-related costs. The decrease in general and administrative expense was due primarily to
lower personnel-related costs. The increase in research and development expense was due primarily to higher personnel-related costs.
Livestock and Poultry Diagnostics.
The following table presents LPD operating expenses by functional area:
Operating
Expenses
(dollars
in
thousands)
|
|
For
the Six Months Ended June 30, 2012
|
|
|
Percent
of Revenue
|
|
|
For
the Six Months Ended June 30, 2011
|
|
|
Percent
of Revenue
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
8,067
|
|
|
|
17.8
|
%
|
|
$
|
7,804
|
|
|
|
15.8
|
%
|
|
$
|
263
|
|
|
|
3.4
|
%
|
General and administrative
|
|
|
6,032
|
|
|
|
13.3
|
%
|
|
|
6,126
|
|
|
|
12.4
|
%
|
|
|
(94
|
)
|
|
|
(1.5
|
%)
|
Research and development
|
|
|
5,678
|
|
|
|
12.6
|
%
|
|
|
5,626
|
|
|
|
11.4
|
%
|
|
|
52
|
|
|
|
0.9
|
%
|
Total
operating expenses
|
|
$
|
19,777
|
|
|
|
43.7
|
%
|
|
$
|
19,556
|
|
|
|
39.7
|
%
|
|
$
|
221
|
|
|
|
1.1
|
%
|
The increase in sales and marketing expense
resulted primarily from an increase in personnel-related costs, partly offset by the favorable impact of changes in foreign currency
exchange rates. The decrease in general and administrative expense resulted primarily from a decrease in intangible asset amortization.
These favorable impacts were partly offset by an increase in costs attributable to investments in information technology and an
increase in personnel-related costs.
Other.
Operating expenses for Other
increased $0.4 million to $9.1 million for the six months ended June 30, 2012 due primarily to higher 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 $1.9 million to $4.5 million for the six months ended June 30, 2012
due primarily to lower personnel-related costs, the absence of legal and other fees incurred in connection with the OFT investigation
as this investigation concluded in November 2011 and lower legal and other professional fees incurred in connection with the U.S.
FTC investigation, which is discussed in more detail under the heading “Part II. Item 1A. Risk Factors” in this Quarterly
Report on Form 10-Q. We estimate certain personnel-related costs and allocate the estimated expense to the operating segments.
This allocation differs from the actual expense and consequently yields a difference that is reported under the caption “Unallocated
Amounts.” The decrease in certain personnel-related costs for Unallocated Amounts is due primarily to lower self-insured
health care costs during the six months ended June 30, 2012 compared to the same period of the prior year. These favorable factors
were partly offset by certain foreign exchange losses during the six months ended June 30, 2012 compared to gains during the same
period of the prior year.
Interest Income and Interest Expense
Interest income was $0.9 million for the
six months ended June 30, 2012 compared to $0.8 million for the same period of the prior year.
Interest expense was $2.1 million for
the six months ended June 30, 2012 compared to $1.5 million for the same period of the prior year. The increase in interest
expense was due primarily to higher average balances outstanding on our unsecured revolving credit facility
(“Credit Facility”), partly offset by lower effective interest rates.
Provision for Income Taxes
Our effective income tax rate was 31.8%
for the six months ended June 30, 2012, compared to 31.3% for the six months ended June 30, 2011. The increase in our effective
income tax rate was due primarily to federal research and development tax incentives that were not available during the six months
ended June 30, 2012 but were available during the same period of the prior year, partly offset by a decrease in the effective income
tax rates in international jurisdictions in which we operate.
■ Recent Accounting Pronouncements
A discussion of recent accounting pronouncements
is included 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 our Credit Facility. At June 30,
2012 and December 31, 2011, we had $201.8 million and $183.9 million, respectively, of cash and cash equivalents, and working
capital of $136.2 million and $87.3 million, respectively. Additionally, at June 30, 2012, we had remaining borrowing
availability of $55.0 million under our $300 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 conducted.
We
consider the majority of 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.
Of our total cash and cash equivalents at June 30, 2012, approximately $196 million was held by our foreign
subsidiaries and was subject to material repatriation tax effects. The amount of cash and cash equivalents held by foreign
subsidiaries subject to other restrictions on the free flow of funds (primarily securing various obligations) was approximately
$1.1 million. As of June 30, 2012, 41% of the cash and cash equivalents held by our foreign subsidiaries was invested in money
market funds restricted to U.S. government and agency securities, 35% was held as bank deposits, 21% was invested in money market
funds having investments in highly liquid investment-grade fixed-income securities, and 3% was invested in money market funds restricted
to non-U.S. government securities corresponding to the investment currency. As of June 30, 2012, approximately 66% of the
cash and cash equivalents held by our foreign subsidiaries was held in U.S. dollars.
Should we require more capital in the U.S.
than is generated by our operations domestically, for example to fund significant discretionary activities, we could elect to repatriate
future earnings from foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. These alternatives could
result in higher effective tax rates, increased interest expense, or other dilution of our earnings. We have borrowed funds domestically
and continue to have the ability to borrow funds domestically at reasonable interest rates.
The following table presents additional
key information concerning working capital:
|
|
For the Three Months Ended
|
|
|
|
June 30,
2012
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
September 30,
2011
|
|
|
June 30,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days sales outstanding
(1)
|
|
|
41.9
|
|
|
|
42.7
|
|
|
|
41.0
|
|
|
|
43.1
|
|
|
|
41.2
|
|
Inventory turns
(2)
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
1.7
|
|
(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 revenue 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 Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
78,800
|
|
|
$
|
88,310
|
|
|
$
|
(9,510
|
)
|
Net cash used by investing activities
|
|
|
(22,156
|
)
|
|
|
(22,955
|
)
|
|
|
799
|
|
Net cash used by financing activities
|
|
|
(38,265
|
)
|
|
|
(65,137
|
)
|
|
|
26,872
|
|
Net effect of changes in exchange rates on cash
|
|
|
(461
|
)
|
|
|
2,265
|
|
|
|
(2,726
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
17,918
|
|
|
$
|
2,483
|
|
|
$
|
15,435
|
|
Operating Activities.
Cash provided
by operating activities was $78.8 million for the six months ended June 30, 2012 as compared to $88.3 million for the same period
of the prior year. The total of net income and net non-cash charges, excluding the impact of reclassifying the tax benefit from
share based compensation arrangements to a financing activity, was $124.5 million for the six months ended June 30, 2012 as compared
to $119.6 million for the same period in 2011, resulting in incremental operating cash flows of $4.9 million driven primarily by
the increase in net income. The total of changes in operating assets and liabilities and the tax benefit from share-based compensation
arrangements decreased cash by $45.7 million and $31.3 million for the six months ended June 30, 2012 and 2011, respectively, resulting
in an incremental decrease in cash of $14.4 million.
The following table presents cash flows
from changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements:
|
|
For the Six Months Ended June 30,
|
|
(dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(8,192
|
)
|
|
$
|
(24,213
|
)
|
|
$
|
16,021
|
|
Inventories
|
|
|
(12,896
|
)
|
|
|
(5,692
|
)
|
|
|
(7,204
|
)
|
Other assets
|
|
|
(2,836
|
)
|
|
|
7,293
|
|
|
|
(10,129
|
)
|
Accounts payable
|
|
|
(6,759
|
)
|
|
|
7,002
|
|
|
|
(13,761
|
)
|
Accrued liabilities
|
|
|
(12,819
|
)
|
|
|
(5,171
|
)
|
|
|
(7,648
|
)
|
Deferred revenue
|
|
|
3,736
|
|
|
|
369
|
|
|
|
3,367
|
|
Tax benefit from share-based compensation arrangements
|
|
|
(5,946
|
)
|
|
|
(10,854
|
)
|
|
|
4,908
|
|
Total change in cash due to changes in operating assets and liabilities and the tax benefit from share-based compensation arrangements
|
|
$
|
(45,712
|
)
|
|
$
|
(31,266
|
)
|
|
$
|
(14,446
|
)
|
Incremental cash used by accounts
payable was due primarily to the timing of payments during the six months ended June 30, 2012 compared to the same period of
the prior year. Incremental cash used by other assets was due primarily to a $6.3 million royalty prepayment during the first
quarter of 2012. The decrease in accrued liabilities during the six months ended June 30, 2012 was more than the decrease
during the same period of the prior year due primarily to a higher payout of annual bonuses during the first quarter of 2012
compared to the first quarter of 2011 in connection with employee incentive programs. The increase in inventory during the
six months ended June 30, 2012 was more than the increase during the same period of the prior year due primarily to the
timing of inventory receipts. The increase in accounts receivable during the six months ended June 30, 2012 was less than the
increase during the same period of the prior year due primarily to the amount and timing of revenues and customer payments
within the quarter.
We historically have experienced proportionally
lower net cash flows from operating activities during the first quarter and proportionally higher cash flows from operating activities
for the remainder of the year and for the annual period driven primarily by the payment of annual bonuses in connection with employee incentive programs in the first quarter following the year for which the bonuses were earned.
Investing
Activities.
Cash used by investing activities was $22.2 million for the six months ended June 30, 2012 compared to $23.0
million for the same period of the prior year. The decrease in cash used by investing activities was due primarily to the
substantial completion in 2011 of investments in our Memphis, Tennessee facility and a decrease in investments in
manufacturing equipment during the six months ended June 30, 2012 compared to the same period of the prior year.
These decreases were partly offset by incremental investments in our suite of business software applications and related
hardware during the six months ended June 30, 2012.
Our total capital expenditure plan
for 2012 is approximately $60 million, which includes approximately $13 million for the expansion of our headquarters
facility in Westbrook, Maine, approximately $16 million for investments in our suite of business software applications and
related hardware and approximately $13 million for investments in our reference laboratory equipment and facilities.
Financing Activities.
Cash used
by financing activities was $38.3 million for the six months ended June 30, 2012 compared to cash used of $65.1 million for
the same period in 2011. The decrease in cash used by financing activities was due primarily to a decrease in cash used to
repurchase common stock, partly offset by less cash received from the exercise of stock options and employee stock purchase
plans and related tax benefits.
At June 30, 2012, we had $244.0 million
outstanding under the Credit Facility. The general availability of funds under the Credit Facility was further reduced by $1.0
million for a letter of credit issued related to our worker’s compensation policy covering claims for the years ending 2009
through 2012. The obligations under the Credit Facility may be accelerated upon the occurrence of an event of default under the
Credit Facility, which includes customary events of default including, without limitation, payment defaults, defaults in the performance
of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults,
defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security
Act of 1974, the failure to pay specified indebtedness, and a change of control default. The Credit Facility contains affirmative,
negative and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness
of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates and certain restrictive agreements.
The financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes,
depreciation and amortization, defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed
3-to-1. At June 30, 2012, we were in compliance with the covenants of the Credit Facility
.
Cash used to repurchase shares of our common
stock in the open market decreased by $43.4 million during the six months ended June 30, 2012 compared to the same period of the
prior year. From the inception of our share repurchase program in August 1999 to June 30, 2012, we have repurchased 44.3 million
shares. During the six months ended June 30, 2012, we purchased 0.7 million shares for an aggregate cost of $55.0 million compared
to purchases of 1.3 million shares for an aggregate cost of $98.4 million during the six months ended June 30, 2011. 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. See Note 9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional
information about our share repurchases.
Cash proceeds from the exercise of stock
options and employee stock purchase plans and the related tax benefits decreased by $14.0 million during the six months ended June
30, 2012 compared to the same period in 2011 due primarily to a decrease in the number of stock options exercised.
Other Commitments, Contingencies and Guarantees
Significant commitments, contingencies and
guarantees at June 30, 2012 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
14 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011, except for
the FTC investigation as described in Note 13 to the condensed consolidated financial statements included in this Quarterly Report
on Form 10-Q.
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, 2011. 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, 2011.
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 Securities and Exchange Commission (“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 an issuer that are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of
our disclosure controls and procedures at June 30, 2012, our chief executive officer and chief financial officer have concluded
that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial
Reporting
There were no changes in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June
30, 2012 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
five revised risk factors (“Our Biologic Products Are Complex and Difficult to Manufacture, Which Could Negatively
Affect Our Ability to Supply the Market,” “Strengthening of the Rate of Exchange for the U.S. Dollar Has a
Negative Effect on Our Business,” “The Duration and Resolution of the FTC Investigation into Our Marketing and
Sales Practices for Companion Animal Veterinary Products and Services are Unpredictable,” “Increase in Corporate
Hospital Ownership and Prevalence of Buying Consortiums Could Negatively Affect Our Business” and “Risks
Associated with Doing Business Internationally Could Negatively Affect Our Operating Results”) 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, 2011. Further, we have added one risk factor (“The Impact of a Change in the Status of One of
Our Distributors on Our Results of Operations is Uncertain”) that was not included in our Annual Report on Form 10-K
for the year ended December 31, 2011.
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 increasing levels of 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 or improved in-clinic laboratory analyzers that drive sales of IDEXX
VetLab
®
instruments, grow our installed base of instruments, and increase demand for related 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 the management of diagnostic information derived from our products;
|
|
·
|
Providing our veterinary customers with the medical and business tools, information and resources that enable them to grow
their practices through increased pet visits and enhanced practice of real-time care;
|
|
·
|
Achieving cost improvements in our worldwide network of laboratories by implementing global best practices including lean processing
techniques, incorporating technological enhancements including laboratory automation and a global laboratory information management
system, employing purchasing strategies to maximize leverage of our global scale, increasing the leverage of existing infrastructure
and consolidating testing in high volume laboratory hubs;
|
|
·
|
Achieving cost improvements in the manufacture and service of our in-clinic laboratory analyzers by employing the benefits
of economies of scale in both negotiating supply contracts and leveraging manufacturing overhead, and by improving reliability
of our instruments;
|
|
·
|
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.;
|
|
·
|
Identifying, completing and integrating acquisitions that enhance our existing businesses or create new business or geographic
areas for us; and
|
|
·
|
Developing and implementing new technology and licensing strategies.
|
If we are unsuccessful in implementing and
executing on 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 Catalyst Dx
®
and VetTest
®
consumables; 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; and certain components and raw materials used in
our SNAP
®
rapid assay devices, water testing products, livestock and poultry diagnostic tests, dairy testing products
and LaserCyte
®
hematology analyzers. To mitigate risks associated with sole and single source suppliers, we seek
when 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 could 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, livestock and poultry
diagnostic, water and dairy products are biologic products, which are products that include materials from living organisms, such
as antibodies, cells and sera. Manufacturing biologic products is highly complex due to the inherent variability of biological
input materials and to the difficulty of controlling the interactions of these materials with other components of the products,
with samples and with the environment. There can be no assurance that we will be able to maintain adequate sources of biological
materials or that we will be able to consistently manufacture biologic products that satisfy applicable product release criteria.
Further, products that meet release criteria at the time of manufacture may fall out of specification while in customer inventory,
which could necessitate field actions that would require us to incur expenses associated with recalling products and providing
customers with new products, and could damage customer relations. Our inability to produce or obtain necessary biological materials
or to successfully manufacture biologic products that incorporate such materials could result in our inability to supply the market
with these products, which could have a material adverse effect on our results of operations.
A Weak Economy Could Result in Reduced Demand for
Our Products and Services or Increased Customer Credit Risk
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 patient visits with their respective owners to veterinary hospitals and the
practices of veterinarians with respect to the recommendations for diagnostic testing, as well as the pet owner compliance
with these recommendations. Economic weakness in our significant markets in recent years has caused and could continue to
cause pet owners to skip or defer visits to veterinary hospitals or could affect their willingness to approve certain
diagnostic tests, comply with a treatment plan or, even more fundamentally, 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 and systems.
A decline in patient visits to the hospital, in the willingness of pet owners to treat certain health conditions or
approve certain tests, in pet ownership in general, 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, which could have a material
adverse effect on our results of operations.
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, and by users of our human point-of-care diagnostic instruments. Economic
weakness in our markets has caused and could continue to cause our customers to reduce their investment in such testing, which
could have a material adverse effect on our results of operations.
In all of our markets, a weak economy may
also 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 in a timely fashion or at all.
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 non-U.S. currencies, and in particular the Euro, British pound, Canadian dollar, Japanese yen
and 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 or sourced in U.S. dollars and exported to international markets. For both the
three and six months ended June 30, 2012, approximately 25% of our revenue was derived from products manufactured in the U.S. and
sold internationally in local currencies compared to 26% for both the three and six months ended June 30, 2011. To mitigate such
foreign currency exposure, we utilize non-speculative forward currency exchange contracts. A strengthening U.S. dollar could also
negatively impact the ability of customers outside the U.S. to pay for purchases denominated in U.S. dollars.
Various Government Regulations 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”). Our infectious disease
diagnostic tests for animal health applications, including most rapid assay canine and feline SNAP
®
tests and livestock
and poultry diagnostic 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 prior to sale in the U.S. 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 and sometimes
more stringent 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.
The Duration and Resolution of the FTC Investigation
into Our Marketing and Sales Practices for Companion Animal Veterinary Products and Services are Unpredictable
As discussed in our Annual Report on Form
10-K for the year ended December 31, 2011, in January 2010, we received a letter from the U.S. Federal Trade Commission (“FTC”),
stating that it was conducting an investigation to determine whether IDEXX or others have engaged in, or are engaging in, unfair
methods of competition in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”), through pricing or
marketing policies for companion animal veterinary products and services, including but not limited to exclusive dealing or tying
arrangements with distributors or end-users of those products or services. The letter requested that we preserve all materials
potentially relevant to this investigation. The letter stated that the FTC had not concluded that IDEXX or anyone else had violated
Section 5 of the FTC Act. We received subpoenas from the FTC, on April 15, 2010 and August 8, 2011, requesting that we provide
the FTC with documents and information relevant to this investigation and we have cooperated fully with the FTC in its investigation.
We now understand that the FTC staff is
focused in particular on whether our relationships with the three largest U.S. distributors of companion animal products, referred
to as the national distributors, limit access by our competitors to companion animal veterinary practices. If the FTC determines
to file a complaint against IDEXX in the administrative law court within the FTC, it would have the power to seek prospective remedies
but not financial penalties.
Based on discussion with the FTC staff,
we believe that their concerns could be addressed if one of these three national distributors was free to carry competitive products.
In response to these concerns, we have determined to seek to modify our agreement with one of these distributors to eliminate our
competitive products policy, which permits us to discontinue sale of our products in a particular product category to the distributor
if the distributor sells competitive products in that product category. Under such a modified agreement, the distributor would
be able to carry any competitive products without restriction or potential negative consequence, thereby addressing the FTC’s
concerns as we understand them. While we cannot predict when such a modified agreement would go into effect, since our distributor
agreements renew annually as of January 1 of each year, we expect that a modified agreement with one of these distributors would
be effective no later than January 1, 2013. While we cannot ensure that a distributor will enter into a modified agreement with
us, we believe that a distributor who is released from the competitive products policy will wish to maintain access to our product
lines under a modified agreement.
We believe that the FTC has put on hold
its internal process to determine whether to file a complaint against IDEXX in the administrative law court within the FTC in order
to permit us to conduct the process described above. Following execution of a modified agreement that addresses the FTC’s
concerns as we understand them, we anticipate the FTC will seek to formalize the modified agreement in the form of a consent order.
However, we cannot provide any assurances that the FTC will be satisfied with the steps we take to eliminate any restrictions on
the ability of one of the national distributors to sell competitive products.
We also cannot provide any assurances that
the FTC will not determine to litigate against IDEXX at some point in the future or whether we would be successful defending ourselves
in such a proceeding. Were the FTC to choose to bring an enforcement proceeding, we would defend ourselves vigorously. Were we
to be unsuccessful in defending this proceeding and any applicable appeals, we could be subject to restrictions on certain of our
marketing and sales practices, including on the terms included in our agreements with certain of our U.S. distributors. While we
cannot be certain about what prospective remedies would be sought by the FTC in any such proceeding, we believe that any required
changes in our marketing or sales practices would not have a material adverse effect on our financial statements.
We continue to believe that our marketing
and sales practices for companion animal veterinary products and services do not violate applicable antitrust laws. We are choosing
to attempt to make the modification described above because we believe it will help us avoid long and costly litigation, and that
our business will not be materially adversely affected.
The Impact of a Change in the Status of One of
Our Distributors on Our Results of Operations is Uncertain
The release of one of our distributors from
our competitive products policy, as described in the risk factor above, likely will result in one or more of our competitors selling
products through that distributor, which we expect will increase the field sales resources used by those competitors to sell their
products. Under a modified agreement with that distributor, we expect to provide lower compensation to the distributor on sales
of our products since we would no longer receive the benefits of the distributor’s exclusive focus on our products. We expect
to reinvest savings from this lower rate of compensation in other sales and marketing resources and the selling efforts of our
other distributors. We believe that the reallocation of these sales resources will help mitigate the potential effects of the loss
of exclusive focus of the distributor and the additional field sales resources used by our competitors. However, there can be no
assurances that we will be able to fully mitigate the competitive effects of the changes in the nature of our agreement with this
distributor. Any reduction in the relative effectiveness of our selling efforts could have an adverse effect on our results of
operations.
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 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 U.S. 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 “Part I. Item
1 Business – Marketing and Distribution” in our Annual Report on Form 10-K for the year ended December 31, 2011 for
additional information.
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 may become even more intense. Competition could
negatively affect our sales and profitability in a number of ways. New competitors may enter our markets and new or existing competitors
may introduce new and competitive products and services, which could be superior to our products and services. Some of our competitors
and potential competitors may choose to differentiate themselves by offering similar products and services to ours at lower sales
prices, which could have a material adverse effect on our results of operations through loss of market share or a decision to lower
our own sales prices to remain competitive. In addition, multiple competitors could bundle product and service offerings through
co-marketing or other arrangements, which could enhance their ability to compete with our broad product and service offering. Some
of our competitors and potential competitors, including large diagnostic and pharmaceutical 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
impacting testing practices. 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, along with lost opportunities associated with a reduction in veterinary visits, 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” or “mad
cow disease”) in the European Union was increased from 30 months to 48 months, which reduced the population of cattle tested
by approximately 30%. In February 2011, the European Union’s Standing Committee on the Food Chain and Animal Health agreed
to allow its member states to further raise the recommended testing age to 72 months, effective July 1, 2011, which is further
reducing the population of cattle tested. The demand for our BSE testing products has been negatively impacted as a result of these
regulatory changes, and could be further impacted by further changes that could be made in the future.
Increase in Corporate Hospital Ownership and Prevalence
of Buying Consortiums 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 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. Furthermore, an increasing percentage of individually owned veterinary hospitals in the U.S. are
participating in buying consortiums. Corporate owners of veterinary hospitals and buying consortiums often seek 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 of operations. While we have strong supplier relationships with several corporate hospital groups and buying
consortiums that we believe are positive for our business, decisions by larger corporate owners and buying consortiums, in particular
Banfield Pet Hospital, to shift their purchasing of products and services away from us and to a competitor would have a negative
impact on our results of operations, which could be material. In addition, certain corporate owners, most notably VCA Antech, our
primary competitor in the U.S. and Canadian markets for veterinary reference laboratory diagnostic services, also operate reference
laboratories that serve both their hospitals and unaffiliated hospitals. Any hospitals acquired by these companies generally use
their reference 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 reference 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 Limited Experience and Small Scale in the Human
Point-of-Care Market Could Inhibit Our Success in this Market
We have limited experience in the human
point-of-care medical diagnostics market and we operate at a small scale in this market. This market differs in many respects from
the veterinary diagnostic 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 limited experience and small scale 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 diagnostic 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 diagnostic market.
Risks Associated with Doing Business
Internationally Could Negatively Affect Our Operating Results
For both the three months and six months
ended June 30, 2012, approximately 41% our revenue was attributable to sales of products and services to customers outside the
U.S., compared to 43% for both the three and six months ended June 30, 2011. Various possible risks associated with foreign operations
may impact our international sales, including 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,
natural disasters and unexpected regulatory and economic or political changes in foreign markets. Further, 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. Our results of operations are also susceptible to changes in foreign currency exchange rates. As a result, the mix
of domestic and international sales in a particular period could have a material impact on our results of operations for that period.
Our Operations are Vulnerable
to Interruption as a Result of Natural and Man-Made Disasters or System Failures
The operation of all of our facilities may
be 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
livestock and poultry testing products, at a single facility in Westbrook, Maine. Certain of our companion animal products, as
well as our human point-of-care products, are manufactured in Roswell, Georgia. We also manufacture certain of our livestock and
poultry testing products in Bern, Switzerland and Montpellier, France. In addition, we maintain major distribution facilities in
North America and in the Netherlands and major reference laboratories in Memphis, Tennessee; Ludwigsburg, Germany; Sacramento,
California; Elmhurst, Illinois; North Grafton, Massachusetts; East Brisbane, Australia; Markham, Ontario; and Wetherby, the United
Kingdom. Therefore, interruption of operations at any of these facilities could have a material adverse effect on our results of
operations.
We rely on several information systems throughout
our company to keep financial records, process customer orders, manage inventory, process shipments to customers and operate other
critical functions. If we were to experience a system disruption that impacts any of our critical functions, it could result in
the loss of sales and customers, financial misstatement and significant incremental costs, which could adversely affect our business.
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 out of the market for the period of any interruption in operations.
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. 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, changes in foreign currency exchange rates,
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 assessments 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, or if they expire or are renewed
at less favorable terms, our inability to realize these benefits could have a material negative effect on future earnings.
Restrictions in Our Credit Facility or Our Inability
to Obtain Financing on Favorable Terms May Limit Our Activities
Our ability to satisfy our obligations under
our unsecured revolving credit facility (“Credit Facility”) depends on our future operating performance and on economic,
financial, competitive and other factors beyond our control. Our business may not generate sufficient cash flows to meet these
obligations or generate sufficient levels of earnings to satisfy the applicable
affirmative,
negative and financial covenants
. Our failure to comply with these covenants and the other terms of the Credit Facility
could result in an event of default and acceleration of our obligations under the Credit Facility, which may require us to seek
additional financing or restructure existing debt and possibly on terms not deemed favorable.
We fund our operations, capital purchase
requirements and strategic growth needs through cash on hand, funds generated from operations and amounts available under our Credit
Facility. If we were unable to obtain financing on favorable terms, we could face restrictions that would limit our ability to
execute certain strategies, which could have an adverse effect on our revenue growth and profitability.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
During the three months ended June 30, 2012,
we repurchased shares of common stock as described below:
Period
|
|
Total Number of Shares Purchased
(a)
|
|
|
Average Price Paid per Share
(b)
|
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(c)
|
|
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1 to April 30, 2012
|
|
|
100,900
|
|
|
$
|
86.15
|
|
|
|
100,900
|
|
|
|
3,953,326
|
|
May 1 to May 31, 2012
|
|
|
126,300
|
|
|
|
86.33
|
|
|
|
126,300
|
|
|
|
3,827,026
|
|
June 1 to June 30, 2012
|
|
|
93,298
|
|
|
|
84.78
|
|
|
|
91,700
|
|
|
|
3,735,326
|
|
Total
|
|
|
320,498
|
|
|
$
|
85.82
|
|
|
|
318,900
|
|
|
|
3,735,326
|
|
Our board of directors has approved the
repurchase of up to 48 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, February 10, 2010 and October 12, 2011 and does not have
a specified expiration date. There were no other repurchase plans outstanding during the three months ended June 30, 2012, and
no repurchase plans expired during the period. Repurchases of 318,900 shares were made during the three months ended June 30, 2012
in transactions made pursuant to our repurchase plan.
During the three months ended June 30, 2012,
we received 1,598 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
|
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of 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 of Chief Financial Officer 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.
|
|
|
†
|
In accordance with Rule 406T of Regulation S-T, these interactive data files are deemed “not filed” for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under that section.
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
IDEXX LABORATORIES, INC.
|
|
|
|
|
/s/ Merilee Raines
|
|
Date: July 20, 2012
|
Merilee Raines
|
|
|
Executive Vice President, Chief Financial Officer
and Treasurer
|
|
|
(Principal Financial Officer)
|
|
|
|
|
Exhibit Index
Exhibit No.
|
Description
|
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of 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 of Chief Financial Officer 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.
|
|
|
†
|
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.
|
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