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. and its subsidiaries 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 this Quarterly Report on For
m 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "IDEXX," the "Company," "we," "our" or "us" refer to IDEXX Laboratories, Inc. and its subsidiaries.
The accompanying condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. We do not have any variable interest entities for which we are the primary beneficiary. 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, 2013 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, 2014 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, 2014 and our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”) filed with the Securities and Exchange Commission.
Reclassifications and Revisions
Certain prior year amounts have been reclassified to conform with the current year presentation. Reclassifications had no material impact on previously reported results of operations, financial position or cash flows.
Revisions were made on the condensed consolidated statement of cash flows for the
six
months ende
d June
3
0
, 2013 to correctly reflect non-cash investing activities
impacting
accounts payable, accrued liabilities and inventory on the condensed consolidated balance sheet
s
at
June
3
0
, 2013
and December 31, 2012
. These revisions increased the operating cash flows related to the change in accounts payable, accrued liabilities and inventory for the six months ended
June
3
0
, 2013 by
$
2.5
million from the amounts previously reported, and decreased investing cash flows related to purchases of property and equipment by the same amount. The revisions to the condensed consolidated statements of cash flows noted above represent an error that is not deemed to be material, individually or in the aggregate, to the prior period condensed consolidated financial statement
s
.
Note 2. ACCOUNTING POLICIES
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2014 are consistent with those discussed in Note 2 to the consolidated financial statements in our 2013 Annual Report.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an amendment which will replace most of the existing revenue recognition guidance within U.S. GAAP. The core principle of this guidance is that an entity should recognize revenue for the transfer of goods or services to customers in an amount that it expects to be entitled to receive for those goods or services. In doing so, companies will be required to make certain judgments and estimates, including identifying contract performance obligations, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price among separate performance obligations. Additio
nally, the amendment
requires
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising fro
m customer contracts,
significant judgments
reached in the application of the guidance
and
assets recognized from the costs to obtain or fulfill a contract
.
Effective for the Company beginning on January 1, 2017, t
he
amendment
allows for two methods of adoption, a full retrospective method or a modified retrospective approach with the cumulative effect recognized at the date of in
i
tial application. Early adoption is not permitted. We
are in the process of determining the
method of adoption and
the impact of this
amendment on our consolidated 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, 2014
totaled
$2.5
million and
$22.8
million, respectively
, compared to
$2.0
million and
$18.6
million for the three and six months ended June 30, 2013, respectively
.
T
he total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensatio
n awards outst
anding at June 30, 2014 was
$46.6
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 expected 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 intention to pay such a dividend at this time; 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,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Expected stock price volatility
|
|
|
28
|
%
|
|
33
|
%
|
Expected term, in years
1
|
|
|
5.7
|
|
|
4.7
|
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted
|
|
$
|
36.14
|
|
$
|
26.36
|
|
1
Options granted after May 8, 2013 have a contractual term of
ten
years. Options granted between January 1, 2013 and May 8, 201
3
have a contractual term of
seven
years.
note 4.
disposition of strategic investment
In June 2014, we
divested our
investment
in
a company that owns and operates veterinary hospitals.
Upon the closing date, we received proceeds of
$5.4
million in exchange for
two
outstanding promissory notes of the company and its subsidiaries and our
11%
equity interest in the company.
This
investment has been
accounted for under the equit
y method of accounting since
acquisition in the fourth quarter of 2010.
Upon the disposition of this strategic investment, we realized a
$0.7
million gain, which has been reflected as a reduction to general and administrative expense.
Note 5.
Inventories
Inventories
, which are stated at the lower of cost (first-in, first-out) or market,
include material,
conversion costs and inbound freight charges.
The components of inventories were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
24,896
|
|
$
|
23,766
|
|
Work-in-process
|
|
|
14,908
|
|
|
14,359
|
|
Finished goods
|
|
|
105,596
|
|
|
95,302
|
|
|
|
$
|
145,400
|
|
$
|
133,427
|
|
Note
6
. Goodwill
and
Intangible Assets, NET
The
in
cre
ase in goodwill during the six months ended June 30
, 2014 resulted from changes in foreign currency exchange rates. The decrease in intangible assets other than goodwill dur
ing the six months ended June 30
, 2014 resulted primarily from the continued amortization of our intangible assets, partly offset by the impact of the acquisition of
an immaterial business
and certain intangible assets.
NOTE 7.
Other NONCURRENT ASSETS
Other noncurrent assets consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Investment in long-term product supply arrangements
|
|
$
|
11,762
|
|
$
|
13,075
|
|
Customer acquisition costs, net
|
|
|
23,009
|
|
|
21,199
|
|
Other assets
|
|
|
22,834
|
|
|
22,957
|
|
|
|
$
|
57,605
|
|
$
|
57,231
|
|
Note 8.
Accrued liabilities
Accrued liabilities consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
45,512
|
|
$
|
44,274
|
|
Accrued employee compensation and related expenses
|
|
|
54,632
|
|
|
62,474
|
|
Accrued taxes
|
|
|
15,766
|
|
|
16,508
|
|
Accrued customer programs
|
|
|
31,335
|
|
|
25,663
|
|
|
|
$
|
147,245
|
|
$
|
148,919
|
|
Note 9. DEBT
In June 2014, we refinanced our existing
$450
million unsecured revolving credit facility by entering into an amended and restated credit agreement relating to a five-year unsecured revolving credit facility in the principal amount of
$700
million with a syndicate of multinational banks, which matures on
June 18, 2019
(the new credit facility and the previous credit facility are referred to collectively as the “Credit Facility”) and requires no scheduled prepayments before that date. Although the Credit Facility does not mature until June 18, 2019, all amounts borrowed under the terms of the Credit Facility are reflected in the current liabilities section in the accompanying condensed consolidated balance sheets because the Credit Facility contains a subjective material adverse event clause, which allows the debt holders to call the loans under the Credit Facility if we fail to provide prompt written notice to the syndicate of such an event. At June 30, 2014 and December 31, 2013, we had
$384.0
million and
$277.0
million, respectively, outstanding under the Credit Facility with weighted average effective interest rates of
1.4%
and
1.6%
, respectively. The funds available under the Credit Facility at June 30, 2014 and December 31, 2013 reflect a further reduction due to the issuance of a letter of credit for
$1.0
million, which was issued in connection with our workers’ compensation policy.
Applicable interest rates on borrowings under the Credit Facility generally range from
0.875
to
1.375
percentage points (“Credit Spread”) above the London interbank offered rate or the Canadian Dollar-denominated bankers’ acceptance rate, based on our leverage ratio, or the prevailing prime rate plus a maximum spread of up to
0.375%
, based on our leverage ratio. We have entered into forward fixed interest rate swap agreements to manage the economic effect of the first
$80
million of variable interest rate borrowings. As such, we continue to designate the existing interest rate swaps as cash flow hedges. See Note 17 for a discussion of our derivative instruments and hedging activities. Under the Credit Facility, we pay quarterly commitment fees of
0.15%
to
0.35%
, based on our leverage ratio, on any unused commitment.
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, payment defaults, defaults in the performance of the affirmative, negative and financial 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, amortization and share-based compensation, defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed
3.5
-to-1. At June 30, 2014, we were in compliance with the covenants of the Credit Facility.
In December 2013, we issued and sold through a private placement an aggregate principal amount of
$150
million of senior notes consisting of
$75
million of
3.94%
Series A Senior Notes due December 11, 2023 (the “2023 Notes”) and
$75
million of
4.04%
Series B Senior Notes due December 11, 2025 (the “2025 Notes”
and together with the 2023 Notes, the “December Notes”
) under a Note Purchase Agreement among the Company and the accredited institutional purchasers named therein (the “December 2013 Note Agreement”).
In July 2014, we issued and sold through a private placement an aggregate principal amount of
$125
million of senior notes consisting of
$75
million of
3.76%
Series B Senior Notes due July 21, 2024 (the “2024 Notes”) and
$50
million of
3.32%
Series A Senior Notes due July 21, 2021 (
the “2021 Notes” and together with the 2024 Notes, the “Prudential Notes”; the Prudential Notes together with the December Notes, the “Senior Notes”) under a Note Purchase and Private Shelf Agreement among the Company, Prudential Investment Management, Inc, and the accredited institutional purchasers named therein (the “July 2014 Note Agreement” and together with the “December 2013 Note Agreement”, the “Senior Note Agreements”).
We may prepay the December
Notes in an amount not less than
5.0%
of the aggregat
e principal amount of the December
Notes then outstanding at the principal amount so prepaid, plus the applicable make-whole amount (as set forth in the
December 2013
Note Agreement) upon no more than 60 or less than 10 days written notice to the holders of the
December
Notes.
We may also prepay any series of the Prudential Notes in an amount not less than $1,000,000 (and otherwise in multiples of $100,000) of such series of Prudential Notes then outstanding at 100% of the principal amount so repaid, plus the applicable make-whole amount (as set forth in the July 2014 Note Agreement) upon no more than 60 or less than 10 days’ written notice to the holders of the Prudential Notes.
In addition, in the event of a change in control of the Company (as defined in the Senior Note Agreements) or upon the disposition of certain assets of the Company the proceeds of which are not reinvested (as set forth in the Senior Note Agreements), at the option of the holders of the Senior Notes, we may be required to prepay all or a portion of the Senior Notes at a price equal to the principal amount thereof, plus accrued and unpaid interest.
The Senior Note Agreements contain affirmative, negative and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization and share-based compensation, as defined in the Senior Note Agreements, not to exceed
3.5
-to-1. At June 30, 2014, we were in compliance with the covenants of the December 2013 Note Agreement.
The obligations under the Senior Notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreement, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial 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 and the failure to pay specified indebtedness.
In June 2014, we paid off the remaining outstanding principal balance on the mortgage related to our worldwide headquarters in Westbrook, Maine.
Note 10.
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, 2014 and 2013
(in thousands, except per share amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
973
|
|
|
1,651
|
|
|
1,549
|
|
|
2,338
|
Total cost of shares repurchased
|
|
$
|
126,347
|
|
$
|
142,557
|
|
$
|
196,626
|
|
$
|
206,335
|
Average cost per share
|
|
$
|
129.77
|
|
$
|
86.37
|
|
$
|
126.90
|
|
$
|
88.27
|
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, otherwise referred to herein as employee surrenders. The number of shares acquired through employee surrenders during both the three months ended June 30, 2014 and 2013 was not material. We acquired
41,884
shares having a total cost of
$5.2
million in connection with such employee surrenders during the six months ended June 30, 2014 compared to
46,745
shares having a total cost of $
4.3
million during the six months ended June 30, 2013.
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, 2014 and 2013
was not material.
Note 11. Income Taxes
Our effective income tax rates were
29.1%
and
30.1%
for the three and six months ended June 30, 2014, respectively, compared to
30.8
% and
28.8
% for the three and six months ended June 30, 2013, respectively.
The decrease in our effective income tax rate for the three months ended June 30, 2014, as compared to the same period of the prior year, was related to the resolution of domestic and international tax audits, which resulted in a net reduction in our provision for uncertain tax positions, and higher relative earnings subject to international tax rates that are lower than domestic tax rates. These favorable factors were partly offset by the U.S. research and development (“R&D”) tax credit which was not available during the three months ended June 30, 2014 because the legislation expired as of January 1, 2014.
The increase in our effective income tax rate for the six months ended June 30, 2014, as compared to the same period of the prior year, was related to the R&D tax credit which expired as of January 1, 2014. During the three months ended March 31, 2013, legislation in the U.S. retroactively allowed the R&D tax credit for all of 2012 and extended the R&D tax credit through the year ended December 31, 2013. Because this legislation was enacted during the three months ended March 31, 2013, the full benefit of the credit related to the prior years’ activities was recognized within that quarter. The net unfavorable impact resulting from the absence of the R&D credit during the six months ended June 30, 2014 was partly offset by the resolution of domestic and international tax audits, which resulted in a net reduction in our provision for uncertain tax positions, and higher relative earnings subject to international tax rates that are lower than domestic tax rates.
Note 12. ACCUMULATED OTHER Comprehensive Income
The changes in accumulated other comprehensive income (“AOCI”), net of tax, for the six months ended June 30, 2014 consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2014
|
|
|
Unrealized Gain on Investments, Net of Tax
|
|
|
Unrealized Loss on Derivative Instruments, Net of Tax
|
|
|
Cumulative Translation Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
108
|
|
$
|
(179)
|
|
$
|
13,693
|
|
$
|
13,622
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
5
|
|
|
(2,177)
|
|
|
3,479
|
|
|
1,307
|
|
Losses reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
102
|
|
|
-
|
|
|
102
|
|
Balance as of June 30, 2014
|
|
$
|
113
|
|
$
|
(2,254)
|
|
$
|
17,172
|
|
$
|
15,031
|
|
The following is a summary of reclassifications out of
AOCI
for the three and six months ended June 30, 2014 and 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components
|
|
Affected Line Item in the Statement Where Net Income is Presented
|
|
|
Amounts Reclassified from AOCI For the Three Months Ended June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Gains (losses) on derivative instruments classified as cash flow hedges included in net income:
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Cost of revenue
|
|
$
|
(124)
|
|
$
|
1,256
|
|
Interest rate swaps
|
|
Interest expense
|
|
|
(265)
|
|
|
(394)
|
|
|
|
Total (losses) gains before tax
|
|
|
(389)
|
|
|
862
|
|
|
|
Tax (benefit) expense
|
|
|
(138)
|
|
|
221
|
|
|
|
(Losses) gains, net of tax
|
|
$
|
(251)
|
|
$
|
641
|
|
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components
|
|
Affected Line Item in the Statement Where Net Income is Presented
|
|
|
Amounts Reclassified from AOCI For the Six Months Ended June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Gains (losses) on derivative instruments classified as cash flow hedges included in net income:
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Cost of revenue
|
|
$
|
334
|
|
$
|
1,365
|
|
Interest rate swaps
|
|
Interest expense
|
|
|
(527)
|
|
|
(501)
|
|
|
|
Total (losses) gains before tax
|
|
|
(193)
|
|
|
864
|
|
|
|
Tax (benefit) expense
|
|
|
(91)
|
|
|
213
|
|
|
|
(Losses) gains, net of tax
|
|
$
|
(102)
|
|
$
|
651
|
|
Note 13.
Earnings
per
Share
Basic earnings per share is computed by dividing net income attributa
ble to IDEXX Laboratories, Inc.
stockholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive.
The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options, the
total unrecognized compensation expense for unvested share-based compensation awards
and the excess tax benefits resulting from share-based compensation tax deductions in excess of the related expense recognized for financial reporting purposes, would be used to purchase our common stock at the average market price during the period.
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 sha
res of our common stock to be issued is fixed and issuance is not contingent. See Note
4
to the consolidated financial statements in our
2013
Annual Report for additional information regarding deferred stock units.
The following is a reconciliation of shares outstanding for basic and diluted earnings per share for the three
and six
months ended June 30, 2014 and 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
51,125
|
|
53,670
|
|
51,369
|
|
54,125
|
|
|
|
|
|
|
|
|
|
Shares outstanding for diluted earnings per share:
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
51,125
|
|
53,670
|
|
51,369
|
|
54,125
|
Dilutive effect of share-based payment awards
|
|
670
|
|
716
|
|
711
|
|
830
|
|
|
51,795
|
|
54,386
|
|
52,080
|
|
54,955
|
Certain options to acquire sh
ares
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, 2014 and 2013
(in thousan
ds):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares underlying anti-dilutive options
|
|
351
|
|
652
|
|
284
|
|
556
|
Note 14.
Commitments, Contingencies
and
Guarantees
Significant commitments, contingencies and guarantees at June 30, 2014
are consistent with those discussed
in Note 14 to the consolidated financial statements in our 2013 Annual Report.
Note 15.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operat
ing decision-maker, or decision-
making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-maker is our Chief Executive Officer. Our reportable segments include diagnostic and information technology-based products and services for the veterinary market, w
hich we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic tests for livestock and poultry health and to ensure the quality and safety of milk and food, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our
Other operating segment include
s products for the human point-of-care medical diagno
stics market
, which is combined a
nd presented with our
pharmaceutical product line and our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable
segments.
Items that are not allocated to our operating segments are as follows: a portion of corporate support function and personnel-related expenses; certain manufacturing costs; corporate research and development expenses that do not align with one of our existing business or service categories; the difference between estimated and actual share-based compensation expense; and certain foreign currency exchange gains and losses. These amounts are shown under the caption “Unallocated Amounts.”
We estimate our share-based compensation expense, corporate support function expenses and certain personnel-related costs and allocate the estimated expense
s
to the operating segments. T
his allocation differs from
actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.”
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 capita
lization and subsequent
recognition is reported within the caption “Unallocated Amounts.”
Additionally, in certain geographies where we maintain inventories in currencies other than the U.S. dollar, the product costs reported in our operating segments include our standard cost for products sold, which is stated at the budgeted currency exchange rate from the beginning of the fiscal year. In these geographies, the variances from standard cost for products sold related to changes in currency exchange rates are reported within the caption “Unallocated Amounts.”
The following is a summary of segment performance for the three
and six
months ended
June 30, 2014 and 2013
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
|
|
CAG
|
|
Water
|
|
LPD
|
|
Other
|
|
Unallocated Amounts
|
|
Consolidated Total
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
326,697
|
|
$
|
24,487
|
|
$
|
32,739
|
|
$
|
6,199
|
|
$
|
-
|
|
$
|
390,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
70,348
|
|
$
|
10,064
|
|
$
|
7,323
|
|
$
|
(249)
|
|
$
|
(4,267)
|
|
$
|
83,219
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,477)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,742
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,498
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,244
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
295,834
|
|
$
|
22,384
|
|
$
|
28,278
|
|
$
|
6,087
|
|
$
|
-
|
|
$
|
352,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
63,358
|
|
$
|
9,913
|
|
$
|
3,215
|
|
$
|
841
|
|
$
|
1,436
|
|
$
|
78,763
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(735)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,028
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,029
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,999
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
CAG
|
|
Water
|
|
LPD
|
|
Other
|
|
Unallocated Amounts
|
|
Consolidated Total
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
628,285
|
|
$
|
45,908
|
|
$
|
64,090
|
|
$
|
12,042
|
|
$
|
-
|
|
$
|
750,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
126,212
|
|
$
|
18,180
|
|
$
|
13,783
|
|
$
|
340
|
|
$
|
(5,250)
|
|
$
|
153,265
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,780)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,485
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,648
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,837
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
572,774
|
|
$
|
43,050
|
|
$
|
56,317
|
|
$
|
12,547
|
|
$
|
-
|
|
$
|
684,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
114,666
|
|
$
|
18,268
|
|
$
|
8,051
|
|
$
|
1,276
|
|
$
|
(2,312)
|
|
$
|
139,949
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,125)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,824
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,959
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,865
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,854
|
|
The following is a summary of revenue by product and service category for the three
and six
months ended
June 30, 2014 and 2013
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
CAG segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics recurring revenue:
|
|
$
|
281,596
|
|
$
|
253,256
|
|
$
|
540,370
|
|
$
|
492,826
|
IDEXX VetLab
®
consumables
|
|
|
89,113
|
|
|
78,776
|
|
|
173,434
|
|
|
154,561
|
VetLab service and accessories
|
|
|
13,512
|
|
|
12,506
|
|
|
26,616
|
|
|
24,559
|
Rapid assay products
|
|
|
49,493
|
|
|
46,057
|
|
|
92,552
|
|
|
90,140
|
Reference laboratory diagnostic and consulting services
|
|
|
129,478
|
|
|
115,917
|
|
|
247,768
|
|
|
223,566
|
CAG Diagnostics capital - instruments
|
|
|
18,914
|
|
|
20,755
|
|
|
37,468
|
|
|
36,587
|
Customer information management and digital imaging systems
|
|
|
26,187
|
|
|
21,823
|
|
|
50,447
|
|
|
43,361
|
CAG segment revenue
|
|
|
326,697
|
|
|
295,834
|
|
|
628,285
|
|
|
572,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water segment revenue
|
|
|
24,487
|
|
|
22,384
|
|
|
45,908
|
|
|
43,050
|
LPD segment revenue
|
|
|
32,739
|
|
|
28,278
|
|
|
64,090
|
|
|
56,317
|
Other segment revenue
|
|
|
6,199
|
|
|
6,087
|
|
|
12,042
|
|
|
12,547
|
Total revenue
|
|
$
|
390,122
|
|
$
|
352,583
|
|
$
|
750,325
|
|
$
|
684,688
|
Note 16.
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 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 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, 2014
.
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
Credit Facility, notes receivable and long-term debt are
measured at carrying value
in our accompanying condensed consolidated balance sheets
though we disclose the fair value of these financial instruments
. 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 l
ong-term debt are valued using L
evel 2 inputs
.
The results of these calculations yield fair values that
approximate carrying values.
During the six months ended June 30, 2014, we disposed of notes receivable representing a strategic investment in a privately held company. As of December 31, 2013, these
notes receivable had
a carrying value
that approximated fair value
of
$5.1
million and
were
valued using
L
evel 3 inputs.
See Note
4
for further information regarding the
disposition of the notes receivable during June 2014.
The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis at
June 30, 2014
and at December 31, 201
3
by level within the fair value hierarchy
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
|
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
Balance at
|
As of June 30, 2014
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
173,122
|
|
$
|
-
|
|
$
|
-
|
|
$
|
173,122
|
Equity mutual funds
(2)
|
|
|
2,796
|
|
|
-
|
|
|
-
|
|
|
2,796
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
1,317
|
|
|
-
|
|
|
1,317
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
3,220
|
|
|
-
|
|
|
3,220
|
Deferred compensation
(4)
|
|
|
2,796
|
|
|
-
|
|
|
-
|
|
|
2,796
|
Interest rate swaps
(5)
|
|
|
-
|
|
|
1,598
|
|
|
-
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
Balance at
|
As of December 31, 2013
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
153,109
|
|
$
|
-
|
|
$
|
-
|
|
$
|
153,109
|
Equity mutual funds
(2)
|
|
|
2,847
|
|
|
-
|
|
|
-
|
|
|
2,847
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
4,044
|
|
|
-
|
|
|
4,044
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
(3)
|
|
|
-
|
|
|
3,096
|
|
|
-
|
|
|
3,096
|
Deferred compensation
(4)
|
|
|
2,847
|
|
|
-
|
|
|
-
|
|
|
2,847
|
Interest rate swaps
(5)
|
|
|
-
|
|
|
1,821
|
|
|
-
|
|
|
1,821
|
_____________
|
(1)
|
|
Money market funds are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of
June 30
,
2014
and December 31, 20
13 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)
|
|
A d
eferred compensation plan
assumed as part of a previous business combination
is
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 17.
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 associ
ated with our variable-rate Credit Facility
.
The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions
, including transactions denominated in euro, British pound, Japanese yen, Canadian dollar, Australian dollar and Swiss franc
.
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. To qualify for hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. If a derivative instrument qualif
ies
for hedge accounting, c
hanges in the fair value of the derivative instrument from the effective portion of the hedge are
deferred
in
A
OCI, net of tax,
and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. 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
AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See Note 12 for further information regarding the effect of derivative instruments designated as cash flow hedges on the condensed consolidated statements of operations for the
three and
six months ended June 30, 2014 and 2013.
We enter into master netting arrangements with the counterparties to our derivative transactions which permit outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the accompanying condensed consolidated balance sheets 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, 2014
or 201
3
. Gains or losses related to hedge ineffectiveness recog
nized in earnings during the
three
and six
months ended
June 30
, 2014 and 201
3
were not material
.
At
June 30
, 2014, the estimated amount of
net losses, net of income tax benefit, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is
$1.9
million if exchange and interest rates do not fluct
uate from the levels at June 30
, 2014.
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
inte
rcompany 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. 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.
The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. T
he notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled
$182.2
million
and
$168.3
million
at
June 30, 2014 and December 31, 2013, respectively.
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
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 beca
me effectively fixed at
1.64%
plus the Credit
Spread through
June
30, 2016.
The fair values of derivative instruments and their respective classification on the condensed consolidated balance sheets
and amounts subject to offset under master netting arrangements
consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
$
|
1,271
|
|
$
|
4,044
|
Foreign currency exchange contracts
|
|
Other long-term assets, net
|
|
|
46
|
|
|
-
|
Total derivative instruments presented on the balance sheet
|
|
|
1,317
|
|
|
4,044
|
Gross amounts subject to master netting arrangements not offset on the balance sheet
|
|
|
1,317
|
|
|
2,965
|
Net amount
|
|
|
|
$
|
-
|
|
$
|
1,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
Balance Sheet Classification
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Accrued liabilities
|
|
$
|
2,690
|
|
$
|
3,096
|
Foreign currency exchange contracts
|
|
Other long-term liabilities
|
|
|
530
|
|
|
-
|
Interest rate swaps
|
|
Accrued liabilities
|
|
|
1,598
|
|
|
1,821
|
Total derivative instruments presented on the balance sheet
|
|
|
4,818
|
|
|
4,917
|
Gross amounts subject to master netting arrangements not offset on the balance sheet
|
|
|
1,317
|
|
|
2,965
|
Net amount
|
|
|
|
$
|
3,501
|
|
$
|
1,952
|
The effect of derivative instruments designated as cash flow hedges on the condensed consolidated balance sheets consisted of the following
(in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in AOCI on Derivative Instruments (Effective Portion)
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
June 30,
|
|
Derivative instruments
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts, net of tax
|
|
|
$
|
(1,698)
|
|
$
|
1,436
|
|
$
|
(2,215)
|
|
$
|
5,497
|
|
Interest rate swaps, net of tax
|
|
|
|
25
|
|
|
472
|
|
|
140
|
|
|
519
|
|
Total derivative instruments, net of tax
|
|
|
$
|
(1,673)
|
|
$
|
1,908
|
|
$
|
(2,075)
|
|
$
|
6,016
|
|
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 measu
res 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 expectation
s or forecasts of future events,
are based on current estimates, projections, beliefs, and a
ssumptions,
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 described in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Annual Report”) and this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with the Securities and Exchange Commission (“SEC”).
A
ny forward-looking statements represent our estimates only as of the day this Quarterly Report
on Form 10-Q
was fi
rst filed with the
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.
You should read the following discussion and analysis in conjunction with our 2013 Annual Report that includes additional information about us, our results of operations, our financial position and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
|
§
|
|
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, w
hich we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic tests for livestock and poultry health and to ensure the quality and safety of milk and food, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our O
ther operating segment includes
products for the human point-of-care medical diagnostics market (“
OPTI
Medical”), which is combined and presented with our pharmaceutical product line and our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
CAG develops, designs, manufactures and distributes products and performs services for veterinarians and the bioresearch market, primarily related to diagnostics and information management. 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 monitor the health status in livestock and poultry, as well as products that ensure the quality and safety of milk and food. 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.
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 in a given period may not be directly related to underlying end-user demand for our products. Consequently, reported results may reflect fluctuations in inventory levels held at distributors and may not necessarily reflect changes in underlying end-user demand. Therefore, we believe it is important to track distributor sales to end users by our significant distributors and to distinguish between the impact of end-user demand and the impact of distributor purchasing dynamics on reported revenue. We are unable to obtain data for sales to end users from certain less significant third party distributors internationally. We do not believe the impact of changes in these distributors’ inventories would have a material impact on our growth rates.
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 an unfavorable 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 favorable impact on our reported sales growth in the current period.
We believe that our U.S. CAG distributors typically hold inventory equivalent to approximately three to four w
eeks of the anticipated end-user demand for
VetLab
consumables and rapid assay products
at the end of a quarter
.
Effective January 1, 2015, we plan to transition to an all-direct product distribution model in the U.S., upon completion and expiration of our current annual contracts with
our U.S. distribution partners.
Under this approach, we intend to take orders, ship product, invoice and receive payment for all rapid assay test kits and instrument consumables in the U.S., aligning with our direct model for instruments, reference lab
oratory
services, and other CAG products and services.
We will incur transition costs to implement this all-direct product dis
tribution approach in the U.S.
For the remainder of 2014, we anticipate incurring approximately $8 million in incremental expense as we ramp up sales and operating resources ahead of the planned January 1, 2015 introduction of the new model. We also expect to incur $10 million to $12 million in non-recurring expenses in the second half of 2014 associated with project management and other one-time costs required to implement this new model.
In 2015, further transitional impacts will be primarily related to the drawdown of i
nventory held by distributors.
We expect our distributors will hold approximately 3.5 weeks of inventory on December 31, 2014,
consistent with prior trends.
We estimate that the drawdown of this inventory will occur primarily in the first quarter of 2015 and will result in a one-time reduction in
projected
revenue and operating profit of $30 million to $35 million, and $23 million
to $27 million, respectively.
Additionally, the Company expects to incur $2 million to $3 million in remaining project management expenses in early 2015.
On January 1, 2015, we will begin recognizing revenue on rapid assay kits and instrument consumables upon delivery to end users in the U.S., in
stead of at distribution.
We expect to capture an additional $50 million to $55 million in annual revenue on these direct sales. The Company estimates that annual operating profit associated with this incremental revenue stream will increase approximately $5 million
to $8 million
in 2015, before transitional impacts, and will continue to provide accretive benefits that will scale over time based on our expected future growth rates.
Also as a result of the transition to an all-direct product distribution model in the U.S., we anticipate increased working capital demands of approximately $15
million
to $20 million, including inventory costs previously held by our distributors and incremental accounts receivable resulting from a potentially longer elapsed time to collect of our receivables.
C
urrency Impact
. For both the three and six months ended June 30, 2014,
a
pproximately 27% of our consolidated 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, 2013
. 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. Additionally, o
ur designated hedges of
intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. denominated revenues.
The impact on revenue resulting from changes in foreign currency exchange rates is not a measure defined by U.S. GAAP, otherwise referred to herein as a non-GAAP financial measure.
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results normalized for changes in currency in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods.
E
ffective January 1, 2014
,
we calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year period and the comparable previous year period to foreign currency denominated revenues for the prior year period.
Prior to January 1, 2014,
we calculated this impact by applying the difference between the weighted average exchange rates during the current year period and the
comparable previous year period to foreign currency denominated revenues for the current year period.
This change in methodology
, which
was implemented to achieve operational efficiencies,
does not have a material impact on organic revenue growth.
See the subsection below titled “Results of Operations” for the definition of and other information regarding organic revenue growth.
During the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, changes in foreign currency exchange rates increased total company revenue by approximately
$
2.1 million, due primarily to the weakening
of the U.S. dollar against the e
uro
and British pound
, partly offset by
the
strengthening of the U.S. dollar against the Canadian and Australian dollars.
During the six
months ended June 30, 2014, as compared to the
six
months ended June 30, 2013, changes in foreign currency exchange rates increased total company revenue by approximately
$
1.4
million, due primarily to the weakening of the U.S. dollar against the euro and British pound, partly offset by the strengthening of the U.S. dollar against the Canadian
dollar, Australian dollar
and
Japanese yen
.
Effects of Economic Conditions
. Demand for our products and services is vulnerable to changes in the economic environment, including slow economic growth, high unemployment and credit availability. Negative or cautious consumer sentiment can lead to reduced or delayed consumer spending, resulting in a decreased number of patient visits to veterinary clinics. Unfavorable economic conditions can impact sales of instruments, digital radiography and practice management systems, which are larger capital purchases for veterinarians. Additionally, economic turmoil can cause our customers to remain sensitive to the pricing of our products and services. We monitor patient visits and clinic revenue data provided by a subset of our CAG customers.
Although limited and susceptible to short
-
term impacts such as weather, we believe that this data provides a fair and meaningful long
-
term representation of the trend in patient visit activity in the U.S., providing us insight regarding demand for our products and services. We believe the overall trends in patient visits and capital investments since the beginning of the economic downturn in 2008 have h
ad a slightly negative impact on our CAG segment revenue growth rates. Although the rate of growth has not been steady, we have seen an improvement in growth of patient visits since 2012.
Economic conditions can also affect the purchasing decisions of our Water and LPD business customers. In the past, water testing volumes have been susceptible to declines in discretionary testing and in mandated testing as a result of decreases in home and commercial construction. Fiscal difficulties can also reduce government funding for water and livestock testing programs.
We believe that the diversity of our products and services and the geographic diversity of our markets partially mitigate the effects of the economic environment and negative consumer sentiment on our revenue growth rates.
Effects of Patent Expiration
.
Some of our patents and licenses of patents and technologies from third parties expired in the first half of 2014, and we expect other patents and licenses to expire in the remainder of 2014 and in 2015. However, the expiration of these patents and licenses, individually or in the aggregate, is not expected to have a material effect on our financial position or future operations due to a range of factors, including
our brand strength and reputation in the marketplace; the breadth, quality and integration of our product offerings; our existing customer relationships and our customer support; our sales force; the applicable regulatory approval status for certain products; our continued investments in innovative product improvements that often result in new technologies and/or additional patents; and
our
significant know-how, scale and investments related to manufacturing processes of associated product offerings.
|
§
|
|
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.
W
e evaluate our estimates
on an ongoing basis
. 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
,
2014
are consistent with those discussed in Note 2 to the consolidated financial statements in our
2013
Annual Report. T
he 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
,
2014
are consistent with those discussed in our
2013
Annual Report in the section under the heading “Part
II
, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”
The following revenu
e analysis and discussion focuse
s on organic revenue growth.
Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three and six months ended June 30, 2014, compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates and acquisitions.
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
foreign
currenc
y exchange rates and acquisitions are non-
GAAP
financial
measures. See the subsection above titled “
Effects of Certain Factors on Results of Operations
– Currency Impact
” 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 En
ded June 30, 2014 Compared to Three Months Ended June 30, 2013
Revenue
Total Company.
The following table presents revenue by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
326,697
|
|
$
|
295,834
|
|
$
|
30,863
|
|
10.4%
|
|
0.4%
|
|
0.1%
|
|
9.9%
|
Water
|
|
|
24,487
|
|
|
22,384
|
|
|
2,103
|
|
9.4%
|
|
0.8%
|
|
1.3%
|
|
7.3%
|
LPD
|
|
|
32,739
|
|
|
28,278
|
|
|
4,461
|
|
15.8%
|
|
2.2%
|
|
7.5%
|
|
6.1%
|
Other
|
|
|
6,199
|
|
|
6,087
|
|
|
112
|
|
1.8%
|
|
0.3%
|
|
-
|
|
|
1.5%
|
Total
|
|
$
|
390,122
|
|
$
|
352,583
|
|
$
|
37,539
|
|
10.6%
|
|
0.5%
|
|
0.8%
|
|
9.3%
|
U.S. and International Revenue.
The following table provides further analysis of total company revenue by domestic and international markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
225,336
|
|
$
|
205,350
|
|
$
|
19,986
|
|
9.7%
|
|
-
|
|
|
-
|
|
|
9.7%
|
International
|
|
|
164,786
|
|
|
147,233
|
|
|
17,553
|
|
11.9%
|
|
1.4%
|
|
1.9%
|
|
8.6%
|
Total
|
|
$
|
390,122
|
|
$
|
352,583
|
|
$
|
37,539
|
|
10.6%
|
|
0.5%
|
|
0.8%
|
|
9.3%
|
The increase in both U.S. and International revenues was driven by CAG Diagnostics recurring revenue. The increase in international revenues was driven by strong growth in Europe and Asia-Pacific markets, most significantly from the United Kingdom, Germany, France, China and Australia. The impact of changes in distributors’ inventory levels reduced reported U.S. revenue growth by 1% and increased international revenue growth by less than 1%.
Companion Animal Group.
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
For the Three
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
281,596
|
|
$
|
253,256
|
|
$
|
28,340
|
|
11.2%
|
|
0.5%
|
|
0.1%
|
|
10.6%
|
VetLab consumables
|
|
|
89,113
|
|
|
78,776
|
|
|
10,337
|
|
13.1%
|
|
0.7%
|
|
-
|
|
|
12.4%
|
VetLab service and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accessories
|
|
|
13,512
|
|
|
12,506
|
|
|
1,006
|
|
8.0%
|
|
0.8%
|
|
-
|
|
|
7.2%
|
Rapid assay products
|
|
|
49,493
|
|
|
46,057
|
|
|
3,436
|
|
7.5%
|
|
0.1%
|
|
-
|
|
|
7.4%
|
Reference laboratory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
129,478
|
|
|
115,917
|
|
|
13,561
|
|
11.7%
|
|
0.3%
|
|
0.3%
|
|
11.1%
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital - instruments
|
|
|
18,914
|
|
|
20,755
|
|
|
(1,841)
|
|
(8.9%)
|
|
1.1%
|
|
-
|
|
|
(10.0%)
|
Customer information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
management and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
digital imaging systems
|
|
|
26,187
|
|
|
21,823
|
|
|
4,364
|
|
20.0%
|
|
(0.5%)
|
|
-
|
|
|
20.5%
|
Net CAG revenue
|
|
$
|
326,697
|
|
$
|
295,834
|
|
$
|
30,863
|
|
10.4%
|
|
0.4%
|
|
0.1%
|
|
9.9%
|
The increase in CAG Diagnostics recurring revenue was d
ue primarily to increased volumes and higher realized prices in both our reference laboratory diagnostic services and our VetLab consumables. The impact of changes in distributors’ inventory levels reduced reported CAG Diagnostics recurring revenue growth by 1%.
VetLab consumables revenue growth was due primarily to higher unit volumes. The increase in unit volumes resulted primarily from growth of our installed base of Catalyst Dx
®
and ProCyte Dx
®
instruments as a result of customer acquisitions, as well as an increase in testing from existing customers who upgraded to these instruments. These favorable impacts were partly offset by lower consumables volumes from our VetTest
®
chemistry instrument as customers continue to upgrade from our VetTest instrument to our Catalyst instruments. Additionally, VetLab consumables revenue benefited from higher average unit sales prices
resulting from price increases. The impact of changes in distributors’ inventory levels reduced reported consumables revenue growth by 1%.
VetLab
service and accessories revenue growth was primarily a result of the increase in our installed base of instruments.
The increase in rapid assay revenue was due primarily to higher sales of our canine testing products, resulting from both higher average unit sales prices and an increase in U.S. practice-level sales volumes. These favorable factors were partly offset by the impact of changes in distributors’ inventory levels, which reduced reported rapid assay revenue growth by 3%.
The increase in reference laboratory diagnostic and consulting services revenue was due primarily to the impact of higher volumes throughout our worldwide network of laboratories resulting from increased testing from existing customers, the acquisition of new customers and improved customer retention. Additionally, the increase in revenue was the result of higher average unit sales prices due to price increases.
The decrease in CAG Diagnostics capital instruments revenue was due primarily to lower overall revenue from our Catalyst analyzer placements. The unfavorable impact of deferred revenue associated with preorders for our upcoming Catalyst One
TM
analyzer was partly offset by increased volumes of our Catalyst Dx instrument in Europe and the Asia Pacific region and, to a lesser extent, placements of our SNAP Pro
®
Mobile Device, which launched during the first quarter of 2014. Under our Catalyst One introductory offer, customers are provided with the right to use a Catalyst Dx instrument through the Catalyst One release date. As a result, we do not recognize instrument revenue for preorders relating to the Catalyst One introductory offer until the Catalyst One is delivered. For the three months ended June 30, 2014, the majority of SNAP Pro Mobile Device placements were made under a reagent rental program for which revenue will be allocated to the instrument concurrent with the future sale of consumables.
The increase in customer information management and digital imaging systems revenue was due primarily to an increase in digital system placements, higher revenue from hardware upgrades as a result of Microsoft ending support for Windows XP, a growing Pet Health Network
®
Pro subscriber base and higher support revenue resulting from an increase in our installed base of
practice management and digital imaging systems. These favorable factors were partly offset by an increase in placements of digital radiography systems under up-front customer loyalty programs for which the related revenue is recognized over future periods.
Water.
The increase in Water revenue resulted from higher sales of our Colilert
®
products and related accessories, due primarily to higher sales volumes in North America and the Asia Pacific region resulting from the acquisition of new customers.
Livestock, Poultry and Dairy.
The increase in LPD revenue was due primarily to higher sales volumes across all product lines in China and for certain bovine tests in New Zealand. We continue to anticipate lower sales volumes of bovine test products in Europe resulting from the success of certain eradication programs and changes in Bovine Spongiform Encephalopathy (“BSE”) testing requirements, though we expect that these revenue declines will begin later in 2014 than previously anticipated. The acquisition of a Brazilian distributor of our LPD products in the third quarter of 2013 added 8% to reported revenue growth for the three months ended June 30, 2014 as compared to the same period of the prior year.
Other.
Other revenue was generally consistent with the prior year, as higher sales volumes associated with our pharmaceutical product line were mostly offset by lower sales of our OPTI Medical instruments and associated consumables in Latin America.
Gross Profit
Total Company.
The following table presents gross profit and gross profit percentages by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Gross Profit
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
181,343
|
|
55.5%
|
|
$
|
161,704
|
|
54.7%
|
|
$
|
19,639
|
|
12.1%
|
Water
|
|
|
16,107
|
|
65.8%
|
|
|
15,044
|
|
67.2%
|
|
|
1,063
|
|
7.1%
|
LPD
|
|
|
20,801
|
|
63.5%
|
|
|
15,254
|
|
53.9%
|
|
|
5,547
|
|
36.4%
|
Other
|
|
|
2,743
|
|
44.2%
|
|
|
3,069
|
|
50.4%
|
|
|
(326)
|
|
(10.6%)
|
Unallocated amounts
|
|
|
(2,476)
|
|
N/A
|
|
|
2,627
|
|
N/A
|
|
|
(5,103)
|
|
(194.3%)
|
Total Company
|
|
$
|
218,518
|
|
56.0%
|
|
$
|
197,698
|
|
56.1%
|
|
$
|
20,820
|
|
10.5%
|
Companion Animal Group.
Gross profit for
CAG
increased due to higher sales and an increase in the gross profit percentage to 56% from 55%. The increase in gross profit percentage was due primarily to lower overall VetLab product costs and price increases
across our CAG Diagnostics recurring revenue portfolio
. These favorable factors were partly offset by higher personnel-related costs in our
reference laboratories, lower relative sales growth of rapid assay test products that are sold at higher margins,
the unfavorable impact of currency resulting from the absence of hedging gains realized during the three months ended June 30, 2013 and higher freight and distribution costs, due in part to the success of the Catalyst One introductory offer.
Water.
Gross profit for Water increased due primarily to higher sales, partly offset by a decrease in the gross profit percentage to 66% from 67%. The decrease in the gross profit percentage was due primarily to an increase in overall manufacturing costs resulting from higher materials costs and the unfavorable impact of currency resulting from hedging losses during the three months ended June 30, 2014 as compared to hedging gains during the same period of the prior year. These unfavorable factors were partly offset by the impact of higher average unit sales prices.
Livestock, Poultry and Dairy.
Gross profit for LPD increased due to an improvement in the gross profit percentage to 64% from 54% and higher sales. The increase in the gross profit percentage was due primarily to lower overall manufacturing costs driven by higher production volumes. To a lesser extent, a decrease in royalty expense resulting from the expiration of patents related to the sale of certain swine tests and higher realized prices resulting from the acquisition of our distributor in Brazil also improved our gross margin percentage.
Other.
Gross profit for Other decreased due primarily to a reduction in the gross profit percentage to 44% from 50%. The decrease in the gross profit percentage was due primarily to lower relative royalty revenue from our pharmaceutical out-licensing arrangements which yields higher margins, higher overall manufacturing costs in our OPTI Medical business and lower relative sales of our OPTI Medical instruments and consumables in Latin America, where these products are sold at higher average unit sales prices.
Unallocated Amounts.
Gross profit for Unallocated Amounts decreased due primarily to an increase in certain manufacturing costs and changes in certain currency exchange rates.
The manufacturing 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 net unfavorable impact to gross profit as a result of increased manufacturing costs was due to the capitalization of favorable manufacturing variances during the three months ended June 30, 2014.
In certain geographies where we maintain inventories in currencies other than the U.S. dollar, the product costs reported in our operating segments
include our standard cost for products sold, which is stated at the budgeted currency exchange rate from the beginning of the fiscal year. In these geographies, the variances from standard cost for products sold related to changes in currency exchange rates are reported within the caption “Unallocated
Amounts.” The U.S
.
dollar strengthened significantly against the Japanese yen during the three months ended June 30, 2013.
There was no significant change in the value of the U.S. dollar relative to the Japanese yen duri
ng the three months ended June 3
0, 2014, resulting in a lower favorable variance within Unallocated Amounts relating to the cost of products sold in Japanese yen.
Operating Expenses and Operating Income
Total Company.
The following tables present operating expenses and operating income by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
110,995
|
|
34.0%
|
|
$
|
98,346
|
|
33.2%
|
|
$
|
12,649
|
|
12.9%
|
Water
|
|
|
6,043
|
|
24.7%
|
|
|
5,131
|
|
22.9%
|
|
|
912
|
|
17.8%
|
LPD
|
|
|
13,478
|
|
41.2%
|
|
|
12,039
|
|
42.6%
|
|
|
1,439
|
|
12.0%
|
Other
|
|
|
2,992
|
|
48.3%
|
|
|
2,228
|
|
36.6%
|
|
|
764
|
|
34.3%
|
Unallocated amounts
|
|
|
1,791
|
|
N/A
|
|
|
1,191
|
|
N/A
|
|
|
600
|
|
50.4%
|
Total Company
|
|
$
|
135,299
|
|
34.7%
|
|
$
|
118,935
|
|
33.7%
|
|
$
|
16,364
|
|
13.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Income
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
70,348
|
|
21.5%
|
|
$
|
63,358
|
|
21.4%
|
|
$
|
6,990
|
|
11.0%
|
Water
|
|
|
10,064
|
|
41.1%
|
|
|
9,913
|
|
44.3%
|
|
|
151
|
|
1.5%
|
LPD
|
|
|
7,323
|
|
22.4%
|
|
|
3,215
|
|
11.4%
|
|
|
4,108
|
|
127.8%
|
Other
|
|
|
(249)
|
|
(4.0%)
|
|
|
841
|
|
13.8%
|
|
|
(1,090)
|
|
(129.6%)
|
Unallocated amounts
|
|
|
(4,267)
|
|
N/A
|
|
|
1,436
|
|
N/A
|
|
|
(5,703)
|
|
(397.1%)
|
Total Company
|
|
$
|
83,219
|
|
21.3%
|
|
$
|
78,763
|
|
22.3%
|
|
$
|
4,456
|
|
5.7%
|
Companion Animal Group.
The following table presents
CAG
operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
58,457
|
|
17.9%
|
|
$
|
49,570
|
|
16.8%
|
|
$
|
8,887
|
|
17.9%
|
General and administrative
|
|
|
34,283
|
|
10.5%
|
|
|
32,836
|
|
11.1%
|
|
|
1,447
|
|
4.4%
|
Research and development
|
|
|
18,255
|
|
5.6%
|
|
|
15,940
|
|
5.4%
|
|
|
2,315
|
|
14.5%
|
Total operating expenses
|
|
$
|
110,995
|
|
34.0%
|
|
$
|
98,346
|
|
33.2%
|
|
$
|
12,649
|
|
12.9%
|
The increase in sales and marketing expense resulted from higher personnel-related costs
across
all major regions, including our Nort
h American sales force transformation
, which was completed in the second half of 2013, and increased commissions resulting from improved sales performance. The increase in general and administrative expense resulted primarily from higher personnel-related costs and, to a lesser extent, the unfavorable impact of changes in foreign currency exchange rates, partly offset by
lower consulting costs
. The increase in research and development expense resulted primarily from higher personnel-related costs
and costs to discontinue certain development programs
.
See the subsection above titled “Effects of Certain Factors on Results of Operations – Distributor Purchasing and Inventories” for details regarding anticipated transitional costs related to moving to an all-direct product distribution model for VetLab consumables and rapid assay products and services in the U.S.
Water.
The following table presents Water operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
2,840
|
|
11.6%
|
|
$
|
2,402
|
|
10.7%
|
|
$
|
438
|
|
18.2%
|
General and administrative
|
|
|
2,306
|
|
9.4%
|
|
|
2,103
|
|
9.4%
|
|
|
203
|
|
9.7%
|
Research and development
|
|
|
897
|
|
3.7%
|
|
|
626
|
|
2.8%
|
|
|
271
|
|
43.3%
|
Total operating expenses
|
|
$
|
6,043
|
|
24.7%
|
|
$
|
5,131
|
|
22.9%
|
|
$
|
912
|
|
17.8%
|
The increase in sales and marketing expense was due primarily to
higher
personnel-related costs
, including commissions
related to improved sales performance and
incremental
costs associated with the acquisition of our distributor in South Africa
in the fourth quarter of 2013
. The increase in general and administrative expense resulted primarily f
rom higher personnel-related costs. The increase in research and development expense was due primarily to
higher
materials
costs
.
Livestock,
Poultry and Dairy
.
The following table presents LPD operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
6,039
|
|
18.4%
|
|
$
|
5,216
|
|
18.4%
|
|
$
|
823
|
|
15.8%
|
General and administrative
|
|
|
4,037
|
|
12.3%
|
|
|
3,477
|
|
12.3%
|
|
|
560
|
|
16.1%
|
Research and development
|
|
|
3,402
|
|
10.4%
|
|
|
3,346
|
|
11.8%
|
|
|
56
|
|
1.7%
|
Total operating expenses
|
|
$
|
13,478
|
|
41.2%
|
|
$
|
12,039
|
|
42.6%
|
|
$
|
1,439
|
|
12.0%
|
The increase in sales and marketing expense resulted from higher personnel-related costs, including
incremental
costs asso
ciated with the acquisition of a
Brazilian distributor
in the third quarter of 2013
and commercial team investments in our Asia Pacific region. The increase in general and administrative expense resulted from
incremental
costs a
ssociated with the acquisition of the Brazilian distributor, primarily
incremental
personnel-related costs and the amortization of intangible assets and, to a lesser extent, the unfavorable impact of changes in foreign currency exchange rates. Research and development expe
nse for the three months ended June 30, 2014 was generally consistent with the same period of the prior year.
Other.
Operating expenses for Other increased $0.8 million to $3.0 million for the three months ended June 30, 2014
as compared to the same period of the prior year
due primarily to higher external development and consulting costs.
Unallocated Amounts.
Operating expenses that are not allocated to our operating segments increased $0.6 million to $1.8 million for the three months ended June 30, 2014 due primarily to
an increase in certain personnel-related costs, partly offset by a gain realized on the disposition of an equity investment during the three months ended June 30, 2014.
See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about our disposition of this strategic investment.
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.”
Interest Income and Interest Expense
Interest income was $0.5 million and $0.4 million for the three months ended
June 30
, 2014 and 2013, respectively.
For the remainder of 2014, we anticipate a significant reduction in interest income as result of our disposition of a debt investment and repayment of the related notes receivable.
See Note
4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q
for additional information regarding
the disposition of this strategic investment.
Interest expense was
$3.0
million for the three months end
ed June 30, 2014 compared to $1.2
million for the same period of the prior year. The increase in interest expense was due primarily to senior notes that we issued and sold through a private placement in an aggregate
principal
amount of $150 million in December 2013. The senior notes consist of $75 million of 3.94% Series A Senior Notes due December 11, 2023 and $75 million of 4.04% Series B Senior Notes due December 11, 2025. See Note
9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q
for additional information regarding our senior notes.
Provision for Income Taxes
Our effective income tax rate was 29.1% and 30.
8
% for the three months ended June 30, 2014 and 2013, respectively.
The decrease in our effective income tax rate for the three months ended June 30, 2014, as compared to the same period of the prior year, was related to the resolution of domestic and international tax audits, which resulted in a net reduction in our provision for uncertain tax positions, and higher relative earnings subject to international tax rates that are lower than domestic tax rates. These favorable factors were partly offset by the U.S. research and development (“R&D”) tax credit which was not available during the three months ended June 30, 2014 because the legislation expired as of January 1, 2014.
Six
Months En
ded June 30, 2014 Compared to Six Months Ended June 30, 2013
Revenue
Total Company.
The following table presents revenue by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
For the Six
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
628,285
|
|
$
|
572,774
|
|
$
|
55,511
|
|
9.7%
|
|
-
|
|
0.1%
|
|
9.6%
|
Water
|
|
|
45,908
|
|
|
43,050
|
|
|
2,858
|
|
6.6%
|
|
0.3%
|
|
1.3%
|
|
5.0%
|
LPD
|
|
|
64,090
|
|
|
56,317
|
|
|
7,773
|
|
13.8%
|
|
1.7%
|
|
6.5%
|
|
5.6%
|
Other
|
|
|
12,042
|
|
|
12,547
|
|
|
(505)
|
|
(4.0%)
|
|
0.3%
|
|
-
|
|
|
(4.3%)
|
Total
|
|
$
|
750,325
|
|
$
|
684,688
|
|
$
|
65,637
|
|
9.6%
|
|
0.2%
|
|
0.7%
|
|
8.7%
|
U.S. and International Revenue.
The following table provides further analysis of total company revenue by domestic and international markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
For the Six
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
432,930
|
|
$
|
401,924
|
|
$
|
31,006
|
|
7.7%
|
|
-
|
|
|
-
|
|
|
7.7%
|
International
|
|
|
317,395
|
|
|
282,764
|
|
|
34,631
|
|
12.2%
|
|
0.5%
|
|
1.7%
|
|
10.0%
|
Total
|
|
$
|
750,325
|
|
$
|
684,688
|
|
$
|
65,637
|
|
9.6%
|
|
0.2%
|
|
0.7%
|
|
8.7%
|
The increase in both U.S. and International revenues was driven by CAG Diagnostics recurring revenue. The increase in international revenues was driven by strong growth in Europe and Asia-Pacific markets, most significantly from the United Kingdom, Germany, France, China and Australia. The impact of changes in distributors’ inventory levels reduced reported U.S. revenue growth by 2% and reduced international revenue growth by less than 1%.
Companion Animal Group.
The following table presents revenue by product and service category for CAG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
For the Six
|
|
|
|
|
|
Percentage
|
|
Percentage
|
|
Organic
|
Net Revenue
|
|
Months Ended
|
|
Months Ended
|
|
Dollar
|
|
Percentage
|
|
Change from
|
|
Change from
|
|
Revenue
|
(dollars in thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Change
|
|
Change
|
|
Currency
|
|
Acquisitions
|
|
Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
recurring revenue:
|
|
$
|
540,370
|
|
$
|
492,826
|
|
$
|
47,544
|
|
9.6%
|
|
(0.1%)
|
|
0.2%
|
|
9.5%
|
VetLab consumables
|
|
|
173,434
|
|
|
154,561
|
|
|
18,873
|
|
12.2%
|
|
0.2%
|
|
-
|
|
|
12.0%
|
VetLab service and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accessories
|
|
|
26,616
|
|
|
24,559
|
|
|
2,057
|
|
8.4%
|
|
0.3%
|
|
-
|
|
|
8.1%
|
Rapid assay products
|
|
|
92,552
|
|
|
90,140
|
|
|
2,412
|
|
2.7%
|
|
(0.1%)
|
|
-
|
|
|
2.8%
|
Reference laboratory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diagnostic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting services
|
|
|
247,768
|
|
|
223,566
|
|
|
24,202
|
|
10.8%
|
|
(0.2%)
|
|
0.3%
|
|
10.7%
|
CAG Diagnostics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capital - instruments
|
|
|
37,468
|
|
|
36,587
|
|
|
881
|
|
2.4%
|
|
1.3%
|
|
-
|
|
|
1.1%
|
Customer information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
management and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
digital imaging systems
|
|
|
50,447
|
|
|
43,361
|
|
|
7,086
|
|
16.3%
|
|
(0.6%)
|
|
-
|
|
|
16.9%
|
Net CAG revenue
|
|
$
|
628,285
|
|
$
|
572,774
|
|
$
|
55,511
|
|
9.7%
|
|
-
|
|
0.1%
|
|
9.6%
|
The increase in CAG Diagnostics recurring revenue was du
e primarily to increased volumes and higher realized prices in both our reference laboratory diagnostic services and our VetLab consumables. The impact of changes in distributors’ inventory levels reduced reported CAG Diagnostics recur
ring revenue growth by 1
%.
VetLab consumables revenue growth was due primarily to higher unit volumes. The increase in unit volumes resulted primarily from growth of our installed base of Catalyst Dx and ProCyte Dx
instruments as a result of customer acquisitions, as well as an increase in testing from existing customers who upgraded to these instruments. These favorable impacts were partly offset by lower consumables volumes from our VetTest chemistry instrument as customers continue to upgrade from our VetTest instrument to our Catalyst instruments. Additionally, VetLab consumables revenue benefited from higher average unit sales prices resulting from price increases. The impact of changes in distributors’ inventory levels reduced reported consumables revenue growth by 2%.
VetLab
service and accessories revenue growth was primarily a result of the increase in our installed base of instruments.
The increase in rapid assay revenue was due primarily to higher sales of our canine testing products, resulting from both higher average unit sales prices and an increase in U.S. practice-level sales volumes. These favorable factors were partly offset by the impact of changes in distributors’ inventory levels, which reduced reported rapid assay revenue growth by 5%.
The increase in reference laboratory diagnostic and consulting services revenue was due primarily to the impact of higher volumes throughout our worldwide network of laboratories resulting from increased testing from existing customers, the acquisition of new customers and improved customer retention. Additionally, the increase in revenue was the result of higher average unit sales prices due to price increases.
The increase in CAG Diagnostics capital instruments revenue was due primarily to higher placements of our ProCyte Dx instrument in North America and Europe, increased sales of our Catalyst Dx instrument in Europe and the Asia Pacific region and placements of our SNAP Pro Mobile Device, which launched during the first quarter of 2014. These favorable factors were partly offset by the unfavorable impact of deferred revenue associated with preorders for our upcoming Catalyst One analyzer. Under our Catalyst One introductory offer, customers are provided with the right to use a Catalyst Dx instrument through the Catalyst One release date. As a result, we do not recognize instrument revenue for preorders relating to the Catalyst One introductory offer until the Catalyst One is delivered. For the six months ended June 30, 2014, slightly more than half of SNAP Pro Mobile Device placements were made under a reagent rental program for which revenue will be allocated to the instrument concurrent with the future sale of consumables.
The increase in customer information management and digital imaging systems revenue was due primarily to a growing Pet Health Network Pro subscriber base, higher revenue from hardware upgrades as a result of Microsoft ending support for
Windows XP and higher support revenue resulting from an increase in our installed base of practice management and digital imaging systems.
Water.
The increase in Water revenue resulted from higher sales of our Colilert products and related accessories, due primarily to higher sales volumes in North America resulting from the acquisition of new customers.
Livestock, Poultry and Dairy.
The increase in LPD revenue was due primarily to higher sales of certain bovine test products in the Asia Pacific region and Europe, higher volumes of our milk-based bovine pregnancy test and increased Asia Pacific region sales volumes of our Dairy SNAP tests used for the detection of antibiotic residues and the contaminant Aflatoxin M1 in milk. These favorable factors were partly offset by lower sales volumes of BSE tests resulting from changes in European Union testing requirements. We continue to anticipate lower sales volumes of bovine test products in Europe resulting from the success of certain eradication programs and changes in BSE testing requirements, though we expect that these revenue declines will begin later in 2014 than previously anticipated. The acquisition of a Brazilian distributor of our LPD products in the third quarter of 2013 added 6% to reported revenue growth for the six months ended June 30, 2014 as compared to the same period of the prior year.
Other.
The decrease in Other revenue was due primarily to lower sales of our OPTI Medical instruments and associated consumables in Latin America.
Gross Profit
Total Company.
The following table presents gross profit and gross profit percentages by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
Gross Profit
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
346,872
|
|
55.2%
|
|
$
|
311,942
|
|
54.5%
|
|
$
|
34,930
|
|
11.2%
|
Water
|
|
|
30,038
|
|
65.4%
|
|
|
28,538
|
|
66.3%
|
|
|
1,500
|
|
5.3%
|
LPD
|
|
|
40,642
|
|
63.4%
|
|
|
31,130
|
|
55.3%
|
|
|
9,512
|
|
30.6%
|
Other
|
|
|
6,144
|
|
51.0%
|
|
|
6,257
|
|
49.9%
|
|
|
(113)
|
|
(1.8%)
|
Unallocated amounts
|
|
|
(3,081)
|
|
N/A
|
|
|
3,803
|
|
N/A
|
|
|
(6,884)
|
|
(181.0%)
|
Total Company
|
|
$
|
420,615
|
|
56.1%
|
|
$
|
381,670
|
|
55.7%
|
|
$
|
38,945
|
|
10.2%
|
Companion Animal Group.
Gross profit for
CAG
increased due to higher sales and an increase in the gross profit
percentage to 55% from 54%. The increase in gross profit percentage was due primarily to lower overall VetLab product costs and price increases across our CAG Diagnostics recurring revenue portfolio. These favorable factors were partly offset by lower relative sales growth of rapid assay test products that are sold at higher margins.
Water.
Gross profit for Water increased due primarily to higher sales, partly offset by a decrease in the gross profit percentage to 65% from 66%. The decrease in gross profit percentage was due primarily to the unfavorable impact of currency resulting from
hedging losses during the six months ended June 30, 2014 as compared to hedging gains during the same period of the prior year, partly offset by
higher relative sales of Colilert products that yield higher relative margins.
Livestock, Poultry and Dairy.
Gross profit for LPD increased due to an improvement in the gross profit percentage to 63% from 55% and higher sales. The increase in the gross profit percentage resulted from lower overall manufacturing costs driven by higher production volumes and a decrease in royalty expense. The decrease in royalty expense was due primarily to an agreement executed in the first quarter of 2014 with a licensor of patents related to the sale of certain swine tests. A portion of the favorability resulting from this agreement will not recur.
Other.
Gross profit for Other decreased due to lower sales, partly offset by an increase in the gross profit percentage to 51% from 50%. The increase in the gross profit percentage resulted from lower overall OPTI Medical manufacturing costs, due primarily to higher production volumes of consumables, partly offset by lower relative sales of our OPTI Medical instruments and consumables in Latin America, where these products are sold at higher average unit sales prices.
Unallocated Amounts.
Gross profit for Unallocated Amounts decreased due primarily to an increase in certain manufacturing costs and changes in certain currency exchange rates.
The manufacturing 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 net unfavorable impact to gross profit as a result of increased manufacturing costs was due to the capitalization
of favorable manufact
uring variances during the six
months ended June 30, 2014.
In certain geographies where we maintain inventories in currencies other than the U.S. dollar, the product costs reported in our operating segments include our standard cost for products sold, which is stated at the budgeted currency exchange rate from the beginning of the fiscal year. In these geographies, the variances from standard cost for products sold related to changes in currency exchange rates are reported within the caption “Unallocated Amounts.” The U.S
.
dollar strengthened significantly against t
he Japanese yen during the six
months ended June 30, 2013. There was no significant change in the value of the U.S. dollar relative to t
he Japanese yen during the six
months ended June
3
0, 2014, resulting in a lower favorable variance within Unallocated Amounts relating to the cost of products sold in Japanese yen.
Operating Expenses and Operating Income
Total Company.
The following tables present operating expenses and operating income by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
220,660
|
|
35.1%
|
|
$
|
197,276
|
|
34.4%
|
|
$
|
23,384
|
|
11.9%
|
Water
|
|
|
11,858
|
|
25.8%
|
|
|
10,270
|
|
23.9%
|
|
|
1,588
|
|
15.5%
|
LPD
|
|
|
26,859
|
|
41.9%
|
|
|
23,079
|
|
41.0%
|
|
|
3,780
|
|
16.4%
|
Other
|
|
|
5,804
|
|
48.2%
|
|
|
4,981
|
|
39.7%
|
|
|
823
|
|
16.5%
|
Unallocated amounts
|
|
|
2,169
|
|
N/A
|
|
|
6,115
|
|
N/A
|
|
|
(3,946)
|
|
(64.5%)
|
Total Company
|
|
$
|
267,350
|
|
35.6%
|
|
$
|
241,721
|
|
35.3%
|
|
$
|
25,629
|
|
10.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
Operating Income
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAG
|
|
$
|
126,212
|
|
20.1%
|
|
$
|
114,666
|
|
20.0%
|
|
$
|
11,546
|
|
10.1%
|
Water
|
|
|
18,180
|
|
39.6%
|
|
|
18,268
|
|
42.4%
|
|
|
(88)
|
|
(0.5%)
|
LPD
|
|
|
13,783
|
|
21.5%
|
|
|
8,051
|
|
14.3%
|
|
|
5,732
|
|
71.2%
|
Other
|
|
|
340
|
|
2.8%
|
|
|
1,276
|
|
10.2%
|
|
|
(936)
|
|
(73.4%)
|
Unallocated amounts
|
|
|
(5,250)
|
|
N/A
|
|
|
(2,312)
|
|
N/A
|
|
|
(2,938)
|
|
(127.1%)
|
Total Company
|
|
$
|
153,265
|
|
20.4%
|
|
$
|
139,949
|
|
20.4%
|
|
$
|
13,316
|
|
9.5%
|
Companion Animal Group.
The following table presents
CAG
operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
116,705
|
|
18.6%
|
|
$
|
100,565
|
|
17.6%
|
|
$
|
16,140
|
|
16.0%
|
General and administrative
|
|
|
69,285
|
|
11.0%
|
|
|
65,059
|
|
11.4%
|
|
|
4,226
|
|
6.5%
|
Research and development
|
|
|
34,670
|
|
5.5%
|
|
|
31,652
|
|
5.5%
|
|
|
3,018
|
|
9.5%
|
Total operating expenses
|
|
$
|
220,660
|
|
35.1%
|
|
$
|
197,276
|
|
34.4%
|
|
$
|
23,384
|
|
11.9%
|
The increase in sales and marketing expense resulted from higher personnel-related costs across all major regions, including our North American sales force transformation, which was completed in the second half of 2013, and increased commissions resulting from improved sales performance. The increase in general and administrative expense resulted primarily from higher personnel-related costs, partly offset by lower consulting costs.
The increase in research and development expense resulted primarily from higher personnel-related costs and costs to discontinue certain development programs.
See the subsection above titled “Effects of Certain Factors on Results of Operations – Distributor Purchasing and Inventories” for details regarding anticipated transitional costs related to moving to an all-direct product distribution model for VetLab consumables and rapid assay products in the U.S.
Water.
The following table presents Water operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
5,676
|
|
12.4%
|
|
$
|
4,819
|
|
11.2%
|
|
$
|
857
|
|
17.8%
|
General and administrative
|
|
|
4,606
|
|
10.0%
|
|
|
4,184
|
|
9.7%
|
|
|
422
|
|
10.1%
|
Research and development
|
|
|
1,576
|
|
3.4%
|
|
|
1,267
|
|
2.9%
|
|
|
309
|
|
24.4%
|
Total operating expenses
|
|
$
|
11,858
|
|
25.8%
|
|
$
|
10,270
|
|
23.9%
|
|
$
|
1,588
|
|
15.5%
|
The increase in sales and marketing expense was due primarily to
higher
personnel-related costs
, including commissions
related to improved sales performance and
incremental
costs associated with the acquisition of our distributor in South Africa
in the fourth quarter of 2013.
The increase in general and administrative expense resulted prima
rily from higher personnel-related costs.
The increase in research and development expense was due primarily to
higher
materials cost
s
.
Livestock,
Poultry and Dairy
.
The following table presents LPD operating expenses by functional area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Six
|
|
|
|
|
|
|
|
Operating Expenses
|
|
Months Ended
|
|
Percent of
|
|
Months Ended
|
|
Percent of
|
|
|
Dollar
|
|
Percentage
|
(dollars in thousands)
|
|
June 30, 2014
|
|
Revenue
|
|
June 30, 2013
|
|
Revenue
|
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
12,033
|
|
18.8%
|
|
$
|
9,882
|
|
17.6%
|
|
$
|
2,151
|
|
21.8%
|
General and administrative
|
|
|
8,212
|
|
12.8%
|
|
|
6,910
|
|
12.3%
|
|
|
1,302
|
|
18.8%
|
Research and development
|
|
|
6,614
|
|
10.3%
|
|
|
6,287
|
|
11.2%
|
|
|
327
|
|
5.2%
|
Total operating expenses
|
|
$
|
26,859
|
|
41.9%
|
|
$
|
23,079
|
|
41.0%
|
|
$
|
3,780
|
|
16.4%
|
The increase in sales and marketing expense resulted from higher personnel-related costs, including
incremental
costs associated with the acquisition of a Brazilian distributor
in the third quarter of 2013
and commercial team investments in our Asia Pacific region. The increase in general and administrative expense resulted from
incremental
costs associated with the acquisition of the Brazilian distributor, primarily the amortization of intangible assets and personnel-related costs.
The increase in research and development expense was due primarily to higher personnel-related costs,
a nonrecurring research grant received during the six months ended June 30, 2013 and the
unfavorable impact of changes in foreign currency exchange rates, partly offset by lower external development and consulting costs.
Other.
Operating expenses for Other increased $0.8 million to $5.8 million for the six months ended June 30, 2014 as compared to the same period
of the prior year due primarily to higher external development and consulting costs.
Unallocated Amounts.
Operating expenses that are not allocated to our operating segments decreased $3.9 million to $2.2 million for the six months ended June 30, 2014 due primarily to a $4.1 million loss incurred during the six months ended June 30, 2013 resulting from the bankruptcy of a freight payment and audit service provider and a gain realized on the disposition of an equity investment during the six months ended June 30, 2014. See Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about our disposition of this strategic investment. These favorable factors were partly offset by proceeds received during the six months ended June 30, 2013 as a result of the demutualization of an insurance provider.
Interest Income and Interest Expense
Interest income was $1.0
millio
n and $0.9 million for the six months ended June 30, 2014 and 2013, respectively. For the remainder of 2014, we anticipate a significant reduction in interest income as result of our disposition of a debt investment and repayment of the related notes receivable.
See Note
4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q
for additional information regarding
the disposition of this strategic investment.
Interest expense was
$5.7
million for th
e six
months end
ed June 30, 2014 compared to $2.0
million for the same period of the prior year. The increase in interest expense was due primarily to senior notes that we issued and sold through a private placement in an aggregate
principal
amount of $150 million in December 2013. The senior notes consist of $75 million of 3.94% Series A Senior Notes due December 11, 2023 and $75 million of 4.04% Series B Senior Notes
due December 11, 2025.
See Note
9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q
for additional information regarding our senior notes.
Provision for Income Taxes
Our effective income tax rate was 30.1% and 28.8% for the six months ended June 30, 2014 and 2013, respectively.
The increase in our effective income tax rate for the six months ended June 30, 2014, as compared to the same period of the prior year, was related to the R&D tax credit which expired as of January 1, 2014. During the three months ended March 31, 2013, legislation in the U.S. retroactively allowed the R&D tax credit for all of 2012 and extended the R&D tax credit through the year ending December 31, 2013. Because this legislation was enacted during the three months ended March 31, 2013, the full benefit of the credit related to the prior years’ activities was recognized within that quarter. The net unfavorable impact resulting from the absence of the R&D credit during the six months ended June 30, 2014 was partly offset by the resolution of domestic and international tax audits, which resulted in a net reduction in our provision for uncertain tax positions, and higher relative earnings subject to international tax rates that are lower than domestic tax rates.
|
§
|
|
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 unsecured revolving credit facility, which we refinanced in June 2014 by entering into an amended and restated five-year unsecured revolving credit facility in the principal amount of $700 million (the amended and restated credit facility and the previous credit facility are referred to collectively as the “Credit Facility”). In addition, we issued $150
million
and $125 million of our senior notes in December 2013 and July 2014, respectively. At June 30, 2014 and December 31, 2013, we had $305.0 million and $279.1 million, respectively, of cash and cash equivalents, and working capital of $101.4 million and $174.4 million, respectively. Additionally, at June 30, 2014, we had remaining borrowing availability of $315.0 million under our 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. We believe that these resources, coupled with our ability, as needed, to obtain additional financing on favorable terms 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.
No provision has been made for the payment of U.S. federal and state or international taxes that may result from future remittances of these undistributed earnings of non-U.S. subsidiaries.
Changes to this position could have adverse tax consequences.
A determination of the related tax liability that would be paid on these undistributed earnings if repatriated is not practicable.
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, 2014, approximately $303.8 million was held by our foreign subsidiaries and was subject to material repatriation tax effects. As of June 30, 2014, 26% of the cash and cash equivalents held by our non-U.S. subsidiaries was invested in money market funds restricted to U.S. government and agency securities, 43% was held as bank deposits, and 31% was invested in money market funds having investments in highly liquid investment-grade fixed-income securities. As of June 30, 2014, approximately 59% 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 or increased interest expense and 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, 2014
|
|
March 31, 2014
|
|
December 3
1
, 2013
|
|
September 30, 2013
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days sales outstanding
(1)
|
|
|
40.8
|
|
|
42.8
|
|
|
39.9
|
|
|
41.9
|
|
|
41.2
|
Inventory turns
(2)
|
|
|
1.8
|
|
|
1.8
|
|
|
1.9
|
|
|
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 represent inventory-related co
st of product revenue for the twelve
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)
|
|
2014
|
|
2013
|
1
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
115,280
|
|
$
|
102,484
|
|
$
|
12,796
|
|
Net cash used by investing activities
|
|
|
(21,346
|
)
|
|
(43,340
|
)
|
|
21,994
|
|
Net used by financing activities
|
|
|
(69,509
|
)
|
|
(29,065
|
)
|
|
(40,444
|
)
|
Net effect of changes in exchange rates on cash
|
|
|
1,565
|
|
|
(3,052
|
)
|
|
4,617
|
|
Net increase in cash and cash equivalents
|
|
$
|
25,990
|
|
$
|
27,027
|
|
$
|
(1,037
|
)
|
1
Revisions were made on the condensed consolidated statement of cash flows for the six months ended June 30
, 2013 to correctly reflect $2.5
mi
llion of net non-cash
activities embedded in accounts payable, accrued liabilities and inventory on the condensed consolidated balance sheets at June
30, 2013 and December 31, 2012.
See Note 1 to the
condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about this revision.
Operating Activities.
Cash provided by operating activities was $115.3 million for the six months ended June 30, 2014 as
compared to $102.5
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 $136.4
million for the six months ended June 30, 2014 as compared to $134.0 million for the same p
eriod in 2013, resulting in a in
crease
in operating cash flows of $2.4
million driven primarily by
an increase in net income, partly offset by
the impact of deferred income taxes. The total of changes in operating assets and liabilities and the tax benefit from share-based compensation ar
rangements decreased cash by $21.1 million and $31.5
million for the six months ended June 30, 2014 and 2013, respectively, resulting in an incremental increase in cash of $1
0.4
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)
|
|
2014
|
|
2013
|
1
|
Dollar Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(9,786
|
)
|
$
|
(24,161
|
)
|
$
|
14,375
|
|
Inventories
|
|
|
(5,575
|
)
|
|
(4,939
|
)
|
|
(636
|
)
|
Other assets
|
|
|
(2,950
|
)
|
|
4,407
|
|
|
(7,357
|
)
|
Accounts payable
|
|
|
337
|
|
|
6,466
|
|
|
(6,129
|
)
|
Accrued liabilities
|
|
|
(3,344
|
)
|
|
(9,837
|
)
|
|
6,493
|
|
Deferred revenue
|
|
|
8,139
|
|
|
2,364
|
|
|
5,775
|
|
Tax benefit from share-based compensation arrangements
|
|
|
(7,960
|
)
|
|
(5,830
|
)
|
|
(2,130
|
)
|
Total
|
|
$
|
(21,139
|
)
|
$
|
(31,530
|
)
|
$
|
10,391
|
|
1
Revisions were made on the condensed consolidated statement of cash flows for the six months ended June 3
0, 2013 to correctly reflect $2.5 million of non-cash
activities embedded in accounts payable, accrued liabilities and inventory on the condensed consolidated balance sheets at June 30, 2013
and December 31, 2012
.
See Note 1 to the
condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about this revision.
The decrease in cash used by accounts receivable during the six months ended June 30, 2014 resulted primarily from the impact of higher revenues in the last month of the quarter ended June 30, 2013 as compared to the last month of the quarter ended December 31, 2012.
The
decrease in the cash used by accrued liabilities was due primarily to higher personnel related accruals
at June 30, 2014
, including increased commissions resulting from improved sales performance and lower relative taxes paid relating to the 2013 tax year as compared to the 2012 tax year. The incremental cash provided by deferred revenue for the six months ended June 30, 2014 as compared to the same period of the prior year was due primarily to
sales under
our Catalyst One introductory offer launched in the first quarter of 2014.
Similarly, the incremental cash used by other assets during the six months ended June 30, 2014 as compared to the same period of the prior year was due to the deferred cost of Catalyst instrument placements under our Catalyst One introductory offer.
The decrease in cash provided by accounts payable during the six months ended June 30, 2014 as compared to the same period of the prior year was due primarily to the
timing
of
vendor payments
.
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 payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned and the seasonality of vector-borne disease testing, which has historically resulted in significant increases in accounts receivable balances during the first quarter of the year.
Investing Activities.
Cash used by investing activities was $2
1.3
million for the six months ended Ju
ne 30, 2014 as compared to $43.3
million for the same period of the prior year. The decrease in cash used by investing activities was due primarily to the completion of our headquarters facility expansion in August 2013.
Our total capital expenditure plan for 2014 is estimated to be approximately $80 million, which
includes investments in
information technology infrastructure and software for internal use, capital investments in manufacturing equipment and investments in
our reference laboratory equipment and facilities.
Financing Activities.
Cash used by financing activities
was $69.5 million for the six
months ended June 30, 2014 as compared to $29.1 million for the same period in 2013. The incremental cash used by financing activities
was due primarily to lower relative net borrowings under the Credit
Facility, partly offset by a de
crease in cash used to repurchase common stock.
Cash used to repurchase shares of our common stock decreased by $9.7 million during the six months ended June 30, 2014 as compared to the same period of the prior year. From the inception of our share repurchase program in August 1999 to June 30, 2014, we have repurchased 50.6 million shares. During the six months ended
June 30, 2014, we purchased 1.5
million shares
for an aggregate cost of $196.6
million compared to purchases of
2.3
million shares for an aggregate cost of $
206.3
million during the six months ended June 30, 2013.
On July 16, 2014, the Board of Directors of the Company authorized the repurchase by the Company of up to an additional five million shares of our common stock.
We believe that the repurchase of our common stock is a favorable means of returning value to our shareholders and we also repurchase our stock 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 10 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information about our share repurchases.
As noted above, in June 2014, we refinanced our existing $450 million Credit Facility and increased the principal amount there under to $700 million. The Credit Facility matures on June 18, 2019 and requires no scheduled prepayments before that date. Although the Credit Facility does not mature until June 18, 2019, all amounts borrowed under the terms of the Credit Facility are reflected in the current liabilities section in the accompanying condensed consolidated balance sheets because the Credit Facility contains a subjective material adverse event clause, which allows the debt holders to call the loans under the Credit Facility if we fail to notify the syndicate of such an event. Applicable interest rates on borrowings under the Credit Facility generally range from 0.875 to 1.375 percentage points above the London interbank offered rate or the Canadian Dollar-denominated bankers’ acceptance rate, based on our leverage ratio, or the prevailing prime rate plus a maximum spread of up to 0.375%, based on our leverage ratio.
Net borrowing and repayment activity under the Credit Facility resulted in incremental cash used, as compared to the same period of the prior year, of $48.5 million during the six months ended June 30, 2014. At June 30, 2014, we had $384.0 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 that was issued in connection with claims under our workers’ compensation policy.
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 in
terest, taxes, depreciation,
amortization
and share-based compensation
not to exceed 3
.5
-to-1. At June 30,
2014, we were in compliance with the covenants of the Credit Facility.
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 payment defaults, defaults in the performance of the affirmative, negative and financial 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 failur
e to pay specified indebtedness
and a change of control default.
In December 2013, we issued and sold through a private placement an aggregate principal amount of $150 million of senior notes consisting of $75 million of 3.94% Series A Senior Notes due December 11, 2023 (the “2023 Notes”) and $75 million of 4.04% Series B Senior Notes due December 11, 2025 (the “2025 Notes” and together with the 2023 Notes, the “December Notes”) under a Note Purchase Agreement among the Company and the accredited institutional purchasers named therein (the “December 2013 Note Agreement”).
In July 2014, we issued and sold through a private placement an aggregate principal amount of $125 million of senior notes consisting of $75 million of 3.76% Series B Senior Notes due July 21, 2024 (the “2024 Notes”) and $50 million of 3.32% Series A Senior Notes due July 21, 2021 (the “2021 Notes” and together with the December Notes and the 2024 Notes, the “Senior Notes”) under a Note Purchase and Private Shelf Agreement among the Company, Prudential Investment Management, Inc. and the accredited institutional purchasers named therein (the “July 2014 Note Agreement”). The July 2014 Note Agreement also provides for an uncommitted shelf facility by which we may request that Prudential Investment Management, Inc. purchase, over the next three years, up to $174 million of additional senior promissory notes at a fixed interest rate and with a maturity date not to exceed twelve years (the “Shelf Notes” and together with the 2021 Notes and the 2024 Notes, the “Prudential Notes”). Prudential Investment Management, Inc. is under no obligation to purchase any of the Shelf Notes. The interest rate of any series of Shelf Notes will be determined at the time of purchase. In addition, in July 2014, we entered into a Note Purchase Agreement with the accredited institutional purchasers named therein (this Note Purchase Agreement, collectively with the December 2013 Note Agreement and the July 2014 Note Agreement, the “Senior Note Agreements”) pursuant to which we agreed to issue and sell $75 million of 3.72% Senior Notes having a twelve-year term (the “2026 Notes”) to the accredited institutional purchasers named therein in exchange for a purchase price of 100% of the principal amount of the 2026 Notes. The issuance, sale and purchase of the 2026 Notes are subject to the satisfaction of standard closing conditions for private placement term note transactions, and we expect that the issuance, sale and purchase of the 2026 Notes will close in September 2014.
We may prepay the December Notes (and, if and when issued, the 2026 Notes) in an amount not less than 5.0% of the aggregate principal amount of the December Notes or the 2026 Notes, as the case may be, then outstanding at the principal amount so prepaid, plus the applicable make-whole amount (as set forth in the applicable Senior Note Agreement) upon no more than 60 or less than 10 days’ written notice to the holders of the December Notes or the 2026 Notes, as the case may be. We may also prepay any series of the Prudential Notes in an amount not less than $1,000,000 (and otherwise in multiples of $100,000) of such series of Prudential Notes then outstanding at 100% of the principal amount so repaid, plus the applicable make-whole amount (as set forth in the July 2014 Note Agreement) upon no more than 60 or less than 10 days’ written notice to the holders of the Prudential Notes.
In addition, in the event of a change in control of the Company (as defined in the Senior Note Agreements) or upon the disposition of certain assets of the Company the proceeds of which are not reinvested (as set forth in the Senior Note Agreements), at the option of the holders of the Senior Notes, we may be required to prepay all or a portion of the Senior Notes at a price equal to the principal amount thereof, plus accrued and unpaid interest.
The Senior Note Agreements contain affirmative, negative and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization and share-based compensation, as defined in the Senior Note Agreements, not to exceed 3.5-to-1. At June 30, 2014, we were in compliance with the covenants of the December 2013 Note Agreement.
The obligations under the Senior Notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreement, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial 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 and the failure to pay specified indebtedness.
Other Commitments, Contingencies and Guarantees
Significant commitments, contingencies and guarantees at
June 30
,
2014
are consistent with those discussed
in the section under the heading “Part
II
, 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
2013
Annual Report.