<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0393723
(State of incorporation) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive (Zip Code)
offices)
(207) 856-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 28, 2000, 35,460,107 shares of the registrant's Common Stock,
$.10 par value, were outstanding.
<PAGE> 2
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
PAGE
-----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Three Months Ended
March 31, 2000 and March 31, 1999 4
Consolidated Statements of Cash Flows
Three Months Ended
March 31, 2000 and March 31, 1999 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes certain forward-looking statements
about the business of IDEXX Laboratories, Inc. and its subsidiaries (the
"Company") including, without limitation, the belief that the Company's current
cash and short-term investments will be sufficient to fund its on-going
operations for the foreseeable future, and that the Company has meritorious
defenses in certain of its litigation matters. Such forward-looking statements
are subject to risks and uncertainties that could cause the Company's actual
results to vary materially from those indicated in such forward-looking
statements. These risks and uncertainties are discussed in more detail in the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 2 of Part I of this report.
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. -- FINANCIAL STATEMENTS
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
2000 1999
<S> --------- ------------
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $68,369 $58,576
Short-term investments 41,981 46,835
Accounts receivable, less reserves of
$5,117 and $4,828 in 2000 and 1999,
respectively 62,686 58,353
Inventories 47,187 47,488
Deferred income taxes 14,363 14,679
Other current assets 7,259 6,484
------- ------
Total current assets 241,845 232,415
LONG-TERM INVESTMENTS 21,865 25,517
PROPERTY AND EQUIPMENT, AT COST:
Land 1,195 1,196
Buildings and improvements 4,550 4,528
Leasehold improvements 18,170 18,522
Machinery and equipment 34,145 34,630
Office furniture and equipment 30,144 28,630
Construction-in-progress 2,226 1,152
------ ------
90,430 88,658
Less - Accumulated depreciation and
amortization 51,108 49,108
------ ------
39,322 39,550
OTHER ASSETS, Net 58,770 62,676
-------- --------
$361,802 $360,158
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $16,399 $19,647
Accrued expenses 41,708 40,183
Notes payable 3,519 3,543
Deferred revenue 11,363 12,444
------- -------
Total current liabilities 72,989 75,817
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 39,860 shares in
2000 and 39,584 shares in 1999 3,986 3,958
Additional paid-in capital 289,526 284,459
Retained earnings 71,653 63,619
Accumulated other comprehensive income(loss) (4,105) (3,473)
Treasury stock (4,424 shares in 2000 and
3,899 shares in 1999), at cost (72,247) (64,222)
--------- --------
Total stockholders' equity 288,813 284,341
--------- ---------
$361,802 $360,158
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Revenue $90,878 $89,648
Cost of revenue 46,274 44,774
------ ------
Gross Profit 44,604 44,874
Expenses:
Sales and marketing 15,724 15,153
General and administrative 10,578 12,117
Research and development 6,794 7,171
------ ------
Income from operations 11,508 10,433
Interest income, net 1,346 1,310
------ ------
Income before provision for
income taxes 12,854 11,743
Provision for income taxes 4,820 4,462
------ ------
Net income $8,034 $7,281
====== ======
Net income per common share: Basic $0.23 $0.19
===== =====
Net income per common share: Diluted $0.22 $0.18
===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
MARCH 31, MARCH 31,
2000 1999
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $8,034 $7,281
Adjustments to reconcile net income to
net cash used in operating activities,
net of acquisitions:
Depreciation and amortization 4,530 4,346
Provision for (benefit of) deferred
income taxes (364) 147
Changes in assets and liabilities:
Accounts receivable (5,242) (10,008)
Inventories (4,538) 8,187
Other current assets (465) (679)
Accounts payable (3,248) (14,790)
Accrued expenses 1,137 3,149
Deferred revenue (6) 644
------ -----
Net cash used in operating activities (162) (1,723)
------ -------
Cash Flows from Investing Activities:
Purchases of property and equipment (3,393) (2,418)
Decrease (increase) in short-term
investments 4,853 (3,729)
Decrease (increase) in long-term
investments 3,652 (10,495)
(Increase) decrease in other assets (835) 19
Acquisitions of business, net of cash
acquired (178) (1,257)
Sale of businesses 10,400 --
------ ------
Net cash provided by (used in)
investing activities 14,499 (17,880)
------ --------
Cash Flows from Financing Activities:
Payment of notes payable -- (144)
Proceeds from the exercise of stock options 4,135 2,623
Purchase of treasury stock (8,024) --
------- -----
Net cash (used in) provided by
financing activities (3,889) 2,479
Net effect of Exchange Rate Changes (655) (648)
------ ------
Net increase (decrease) in Cash and Cash
Equivalents 9,793 (17,772)
Cash and Cash Equivalents, beginning of period 58,576 109,063
------- --------
Cash and Cash Equivalents, end of period $68,369 $91,291
======= =======
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ -- $ 21
======== =======
Income taxes paid during the period $ 2,055 $ 704
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by IDEXX
Laboratories, Inc. and subsidiaries (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments which the Company considers necessary
for a fair presentation of such information. The December 31, 1999 Balance
Sheet was derived from the audited Consolidated Balance Sheets contained in
the Company's latest stockholders' annual report. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These statements should be
read in conjunction with the Company's audited consolidated financial
statements and notes thereto which are contained in the Company's latest
stockholders' annual report. The results for the interim periods presented are
not necessarily indicative of results to be expected for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to the
consolidated financial statements.
a. Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.
b. Certain reclassifications have been made in the 1999 consolidated financial
statements to conform with the current year's presentation.
c. The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities". Except for preferred stock, the Company has
the intent and ability to hold short-term and long-term investments to
maturity and records these investments at amortized cost which approximates
market value. The Company classifies its investment in preferred stock as
available-for-sale and values it at fair market value.
Cash Equivalents and Short-term Investments: Cash equivalents are short-
term, highly liquid investments with original maturities of less than three
months. Short-term investments are investment securities with original
maturities of greater than three months but less than one year and consist
of the following (in thousands):
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
Municipal bonds $21,037 $24,785
Preferred stock 10,262 9,120
U.S. Governmental
obligations 5,000 8,000
Certificates
of deposit 5,682 4,930
------- -------
$41,981 $46,835
======= =======
Long-term investments are investment securities with original maturities of
greater than one year and consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2000 1999
-------- -----------
Municipal bonds $19,865 $23,517
U.S. Government
obligations 2,000 2,000
-------- --------
$21,865 $25,517
======== ========
<PAGE> 7
d. Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The components of inventories
are as follows (in thousands):
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
Raw materials $7,498 $6,385
Work-in-process 4,193 4,190
Finished goods 35,496 36,913
------- -------
$47,187 $47,488
======= =======
e. The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share." Basic earnings
per common share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the quarter. The
computation of diluted earnings per common share is similar to the
computation of basic earnings per common share except that the denominator
is increased for the assumed exercise of dilutive options using the treasury
stock method unless the effect is anti-dilutive and for the addition of
shares to be issued in connection with the acquisition of Blue Ridge
Pharmaceuticals, Inc.
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Shares outstanding for basic earnings per share:
Weighted average shares outstanding 35,288 38,907
====== ======
Shares outstanding for diluted earnings per share:
Weighted average shares outstanding 35,288 38,907
Dilutive effect of options issued to
employees 1,218 1,880
Shares to be issued for the acquisition of
Blue Ridge Pharmaceuticals, Inc. 115 115
------ ------
36,621 40,902
====== ======
</TABLE>
3. COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." Other
comprehensive income for the Company consists of foreign currency translation
adjustments resulting from the translation of the financial statements of the
Company's foreign subsidiaries. The Company considers the foreign currency
cumulative translation adjustment to be permanently invested and therefore has
not provided income tax on those amounts. Accordingly, below is a summary of
comprehensive income in accordance with this statement (in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Net income $8,034 $7,281
Other comprehensive income (loss):
Foreign currency translation adjustments (632) (672)
------- ------
Comprehensive income $7,402 $6,609
======= =======
</TABLE>
<PAGE> 8
4. NOTES PAYABLE
In connection with the acquisition of the business of Consolidated Veterinary
Diagnostics, Inc., the Company issued an unsecured note payable for $3.0
million, of which $2.0 million and $1.0 million was outstanding at March 31,
1998 and 1999, respectively. The note bore interest at 8% and was due in three
equal installments in July 1997, 1998 and 1999. The final installment was
paid in July 1999.
In connection with the Central Veterinary Diagnostic Laboratory acquisition,
the Company issued an unsecured note payable for Australian Dollars 900,000
(US $587,000) of which Australian Dollars 450,000 (US $277,000) was
outstanding at March 31, 2000. The note bears interest at 6% and is
due in four equal annual installments beginning in December 1998.
In connection with the Blue Ridge Pharmaceuticals, Inc. acquisition, the
Company issued unsecured notes payable for $7,830,000. The notes bear interest
at 5.5% and are due in two installments on October 1, 1999 and 2000. As of
March 31, 2000, $3.1 million was outstanding.
In connection with the acquisition of a veterinary laboratory business in
Phoenix, Arizona (see Note 6(a)), the Company issued a non-interest bearing
note payable for $539,000 which was outstanding at March 31, 1999. The note
was due in five monthly installments beginning in April 1999 and was repaid in
full during 1999.
5. COMMITMENTS AND CONTINGENCIES
From time to time the Company has received notices alleging that the Company's
products infringe third-party proprietary rights. In particular, the Company
has received notices claiming that certain of the Company's immunoassay
products infringe third-party patents. The Company is not aware of any pending
litigation with respect to such claims. Patent litigation frequently is
complex and expensive, and the outcome of patent litigation can be difficult
to predict. There can be no assurance that the Company will prevail in any
infringement proceedings that have been or may be commenced against the
Company.
In January 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE, et.al. v. DAVID E. SHAW, ERWIN F.
WORKMAN, JR. and IDEXX LABORATORIES, INC. The plaintiffs purport to represent
a class of purchasers of the common stock of the Company from July 19, 1996
through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and
Exchange Commission Rule 10b-5 promulgated pursuant thereto, by virtue of
false or misleading statements made during the class period. The complaint
also claims that the individual defendants are liable as "control persons"
under Section 20(a) of that Act. In addition, the complaint claims that the
individual defendants sold some of their own common stock of the Company,
during the class period, at times when the market price for the stock
allegedly was inflated. In July 1999, the U.S. District Court granted the
Company's motion to dismiss the case for failure to state a claim. However in
August 1999, the plaintiffs appealed that ruling to the U.S. Court of Appeals
for the First Circuit. In February 2000, the Company entered into a Memorandum
of Understanding (the "MOU") with the plaintiffs pursuant to which the parties
have agreed to settle the suit. Pursuant to the MOU, the Company and the
plaintiffs have filed a Stipulation of Settlement (the "Stipulation") with the
U.S. District Court. Subject to certain conditions, the Stipulation will
become effective following approval by the District Court and expiration of
the time for any appeal. No assurance can be given that the District Court
will approve the Stipulation or otherwise that the suit will be finally
settled on the terms contained in the MOU. The proposed settlement (in excess
of the portion reimbursed through insurance) will not affect results of
operations in 2000. In the event that the suit is not settled, the Company is
unable to assess the likelihood of an adverse result or estimate the amount of
damages which the Company may be required to pay. Any adverse outcome
resulting in the payment of damages, in excess of the amount agreed to in the
MOU, would adversely affect the Company's results of operations.
In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company
in the State of Texas District Court. SAS has alleged breach of a development
and supply agreement between SAS and the Company, negligent misrepresentation,
fraud and conversion of SAS's intellectual property, and is seeking $8,000,000
in actual damages, $24,000,000 in punitive damages, further unspecified
damages and attorneys' fees. The Company has filed an answer to the complaint
denying SAS's allegations and has asserted counterclaims against SAS for
breach of contract, fraud and conversion of the Company's property. The trial
is scheduled for July 2000. The Company believes that it has meritorious
defenses to SAS's claims and is contesting the matter vigorously. However, the
Company is unable to assess the likelihood of an adverse result or estimate
the amount of damages the Company might be required to pay. Any adverse
outcome resulting in payment of damages would adversely affect the Company's
results of operations.
<PAGE> 9
6. ACQUISITIONS
1999 ACQUISITIONS
(a) Phoenix Veterinary Laboratory Business
On March 31, 1999, the Company, through its wholly-owned subsidiary, IDEXX
Veterinary Services, Inc., acquired the veterinary laboratory business of
Sonora Quest Laboratories, LLC ("Sonora"), based in Phoenix, Arizona, for $1.3
million in cash and a $539,000 promissory note. In connection with the
acquisition, Sonora and its parent companies agreed not to compete in the
veterinary reference laboratory business in Arizona and New Mexico for a
period of five years. The note was non-interest bearing and was paid in five
monthly installments beginning in April 1999. The Company has accounted for
this acquisition under the purchase method of accounting and has included the
results of operations in its consolidated results since the acquisition date.
(b) Tufts University Laboratory Business
On December 1, 1999, the Company, through its wholly-owned subsidiary, IDEXX
Veterinary Services, Inc., acquired the veterinary laboratory business of
Tufts University School of Veterinary Medicine ("Tufts"), based in
Massachusetts, for $2.8 million in cash. In connection with the acquisition,
Tufts agreed not to compete in the veterinary reference laboratory business
for a period of ten years. The Company has accounted for this acquisition
under the purchase method of accounting and has included the results of
operations in its consolidated results since the acquisition date.
2000 ACQUISITIONS
(c) Sierra Laboratories
On March 10, 2000 the Company, through its wholly-owned subsidiary, IDEXX
Veterinary Services, Inc., acquired the veterinary laboratory business of
Sierra Veterinary Laboratory LLC ("Sierra"), based in Los Angeles, California,
for $178,000 in cash. In addition, the Company agreed to make future payments
in each of the next four years based on the results of operations, which will
be treated as additional purchase price. The Company has accounted for this
acquisition under the purchase method of accounting and has included the
results of operations in its consolidated results since the acquisition date.
7. DIVESTITURES
Through a series of transactions in December 1999 and February 2000 the
Company sold certain assets and subsidiaries of its Food and Environmental
Division. As a result of these transactions, the Company recorded an
immaterial loss in 1999 and an immaterial gain in 2000. The results of
operations of these businesses have been included in the consolidated results
of operations through the respective sale dates. Pro forma information has not
been presented because of immateriality.
(a) IDEXX Food Safety Net Services, Inc.
On December 21, 1999, the Company sold substantially all the assets and the
business of IDEXX Food Safety Net Services, Inc. to Food Safety Net Services
Ltd. for $350,000 in cash, a $195,000 note payable and the assumption of
certain liabilities. The note bears interest at 6% and is due in twelve
quarterly installments. In addition, the Company entered into a non-compete
agreement for five years.
(b) Food Products and Acumedia Manufacturers, Inc.
During February 2000, the Company sold certain assets and the rights to its
Lightning(R), Simplate(R) and Bind(R) product lines and its subsidiary
Acumedia Manufacturers, Inc. ("Acumedia") for aggregate consideration of
$10.4 million in cash, a $450,000 note payable, and the assumption of
certain liabilities. The Company also will receive up to an additional $1.0
million based on revenue of the Acumedia business between the sale date and
February 16, 2001. The note bears interest at 7% and is due on February 16,
2001. In addition, the Company entered into non-compete agreements for up
to five years.
<PAGE> 10
8. SEGMENT REPORTING
The Company reports segment information in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise" ("SFAS 131"). SFAS 131 requires disclosures about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial statements. It also requires
related disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is the chief executive officer.
The Company is organized into business units by market and customer group. The
Company's reportable operating segments include the Companion Animal Group
("CAG"), the Food and Environmental Division ("FED") and other. The CAG
develops, designs and distributes products and performs services for
veterinarians. The CAG also manufactures certain biology based test kits for
veterinarians. FED develops, designs, manufactures and distributes products to
detect disease and contaminants in food animals, dairy products and water.
Both the CAG and FED distribute products and services worldwide. Other is
primarily comprised of corporate research and development and interest income.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that most
interest income and expense are not allocated to individual operating
segments.
The following is the segment information for the period ended March 31 (in
thousands):
<TABLE>
<CAPTION>
CAG FED OTHER TOTAL
----- ----- ----- ------
<S> <C> <C> <C> <C>
2000
Revenue $73,940 $16,938 $-- $90,878
Net income 5,074 2,368 592 8,034
1999
Revenue 71,615 18,033 -- 89,648
Net income 6,493 273 515 7,281
</TABLE>
9. STOCK REPURCHASE PROGRAM
During 1999, the Board of Directors authorized the purchase of up to six
million shares of the Company's Common Stock in the open market or in
negotiated transactions. During the three months ended March 31, 2000, the
Company repurchased 525,000 shares for $8.0 million. As of March 31, 2000,
approximately 4.4 million shares of Common Stock were repurchased under this
program for an aggregate of $72.2 million.
<PAGE> 11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company operates primarily through two business units: the Companion Animal
Group ("CAG") and Food and Environmental Division ("FED"). CAG comprises the
Company's veterinary diagnostic products and services, its animal health
pharmaceuticals business, and its veterinary informatics and internet business.
FED comprises the Company's services and products for food and environmental
testing. Through a series of transactions completed in late 1999 and the first
quarter of 2000, the Company disposed of substantially all of its businesses
related to food microbiology testing. FED now comprises the Company's water and
dairy testing business and its production animal services business.
COMPANION ANIMAL GROUP
Revenue for the Companion Animal Group ("CAG") for the first quarter of 2000
increased 3% to $73.9 million from $71.6 million for the first quarter of 1999.
The increase in revenue in 2000 compared to 1999 is primarily attributable to
increased sales of veterinary reference laboratory services, pharmaceutical
products, and feline test kits. Increased sales of laboratory services were
partially as a result of the acquisition of the veterinary reference laboratory
business of Tufts University School of Veterinary Medicine and other smaller
acquisitions. These increases were offset in part by decreased sales of
veterinary practice information management products and services and canine test
kits.
International revenue for CAG increased 10% to $16.4 million, or 22% of total
CAG revenue, in the first quarter of 2000, compared to $14.9 million, or 21% of
total CAG revenue, in the same period for 1999. The increase in revenue in 2000
compared to 1999 is primarily attributable to higher sales of consumables used
in the Company's veterinary instruments and veterinary reference laboratory
services.
Gross profit as a percentage of CAG revenue was 47% for the first quarter of
2000 compared to 49% for the same period in 1999. The reduction in the gross
margin percentage was due primarily to increased sales of lower gross margin
veterinary reference laboratory services, higher cost of veterinary instrument
service, unabsorbed fixed costs associated with decreased sales of practice
information management products and services and lower average unit prices on
certain canine test kits.
FOOD AND ENVIRONMENTAL DIVISION
Revenue for the Food and Environmental Division ("FED") for the first quarter of
2000 decreased 6% to $16.9 million from $18.0 million for the first quarter of
1999. The decrease in revenue in 2000 compared to 1999 is the result of a
decline of $2.6 million attributable to divestiture of the food microbiology
testing product lines discussed above, partially offset by higher sales of the
Company's water testing products.
International revenue for FED decreased 8% to $7.0 million, or 41% of total FED
revenue, in the first quarter of 2000, compared to $7.6 million, or 42% of total
FED revenue, for the same period in 1999. The decrease in revenue in 2000
compared to 1999 is attributable to the divestiture of the food microbiology
testing product lines discussed above and lower sales of the Company's livestock
products. These decreases were partially offset by higher sales of the
Company's dairy residue test products.
Gross profit as a percentage of FED revenue was 59% for the first quarter of
2000 compared to 54% for the same period in 1999. The increase in the gross
margin percentage was primarily due to decreased sales of lower gross margin
food microbiology products and services and increased sales of higher gross
margin water test products.
<PAGE> 12
OPERATING EXPENSES
Sales and marketing expenses were 17% of revenue for the three-month period
ended March 31, 2000 and 1999. The increase of $0.6 million was principally
attributable to additional expenses associated with the Company's
pharmaceutical product line, partially offset by lower expenses
associated with the divestiture of the food microbiology testing product lines
discussed above.
Research and development expenses were 7% of revenue for the three-month period
ended March 31, 2000 compared to 8% in the first quarter of 1999. The decrease
results from the divestiture of the food microbiology testing product lines
discussed above, partially offset by increased development costs associated with
VetConnect(TM), the Company's Internet portal/application service provider for
animal health professionals.
General and administrative expenses were 12% of revenue for the three-month
period ended March 31, 2000 compared to 14% in the first quarter of 1999. The
$1.5 million decrease was primarily attributable to lower expenses as a result
of the divestiture of the food microbiology testing product lines discussed
above, a gain on the sale of the food microbiology assets and lower amortization
expense due to the complete amortization of certain intangible assets associated
with the acquisitions of the veterinary practice information management
business. These decreases were partially offset by increased expenses
associated with the acquisition and business expansion of veterinary reference
laboratory businesses and increased expenses associated with the establishment
of VetConnect.
Net interest income was $1.3 million for the three-month periods ended March 31,
2000 and 1999. Higher effective interest rates in 2000 were offset by lower
invested cash balances due to the use of cash for the Company's share repurchase
program.
The Company's effective tax rate was 37.5% for the three-month period ended
March 31, 2000 compared to 38.0% for the same period in 1999. The decrease in
the effective tax rate was principally attributable to a reduction in the
foreign tax rates and utilization of previously reserved foreign net
operating loss carryforwards.
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash, cash equivalents, and short-term
investments of $110.4 million and $168.9 million of working capital. During the
quarter ended March 31, 2000 the Company repurchased 525,000 shares of the
Company's common stock for $8.0 million. The Company has repurchased 4.4 million
shares for $72.2 million since August 13, 1999.
The Company believes that current cash and short-term investments and funds
expected to be generated from operations will be sufficient to fund the
Company's operations for the foreseeable future.
FUTURE OPERATING RESULTS
The future operating results of the Company are subject to a number of factors,
including without limitation the following:
The Company's business has grown significantly over the past several years as a
result of both internal growth and acquisitions of products and businesses. The
Company has consummated a number of acquisitions since 1992, including five
acquisitions in 1997, two acquisitions in 1998, two acquisitions in 1999 and one
in the first quarter of 2000, and plans to make additional acquisitions.
Identifying and pursuing acquisition opportunities, integrating acquired
products and businesses, and managing growth require a significant amount of
management time and skill. There can be no assurance that the Company will be
effective in identifying and effecting attractive acquisitions, assimilating
acquisitions or managing future growth.
The Company's future success will depend in part on its ability to continue to
develop new products and services both for its existing markets and for any new
markets the Company may enter in the future. In recent years sales of the
Company's chemistry and hematology analyzers have declined as the Company has
achieved increasing market penetration. Future growth in sales of the Company's
analyzers and associated consumables will depend in part on the Company's
ability to introduce new systems with new features and capabilities. The Company
is currently devoting significant resources to the development of such systems.
The Company also plans to devote significant resources to the growth of many of
its other businesses, including its animal health pharmaceuticals business and
VetConnect, an Internet portal/application services provider for the provision
of animal health-care information and services to veterinarians. There can be no
assurance that the Company will successfully complete the development and
commercialization of products and services for existing and new businesses or
that such products and services, if commercialized, will meet revenue and profit
expectations.
The markets in which the Company competes are subject to rapid and substantial
technological change. The Company encounters, and expects to continue to
encounter, intense competition in the sale of its current and future products
and services. In particular, the Company has encountered increasing competition
in the market for canine heartworm diagnostics. Many of the Company's
competitors and potential competitors, including large pharmaceutical companies,
have substantially greater capital, manufacturing, marketing, and research and
development resources than the Company.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the mix of
products and services sold and the mix of domestic versus international revenue
could contribute to this quarterly variability. The Company operates with
relatively little backlog and has few long-term customer contracts and
substantially all of its product and service revenue in each quarter results
from orders received in that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and more
unpredictable. In addition, the Company's expense levels are based in part on
expectations of future revenue levels, and a shortfall in expected revenue could
therefore result in a disproportionate decrease in the Company's net income.
The Company's success is heavily dependent upon its proprietary technologies.
The Company relies on a combination of patent, trade secret, trademark and
copyright law to protect its proprietary rights. There can be no assurance that
patent applications filed by the Company will result in patents being issued,
that any patents owned or licensed by the Company will afford protection against
competitors with similar technologies, or that the Company's non-disclosure
agreements will provide meaningful protection for the Company's trade secrets
and other proprietary information. Moreover, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technologies. In addition, the
Company may be required to obtain licenses to additional technologies from third
parties in order to continue to sell certain products. There can be no assurance
that any technology licenses which the Company desires or is required to obtain
will be available on commercially reasonable terms.
From time to time the Company receives notices alleging that the Company's
products infringe third-party proprietary rights. In particular, the Company has
received notices claiming that certain of the Company's immunoassay products
infringe third-party patents. Patent litigation frequently is complex and
<PAGE> 14
expensive and the outcome of patent litigation can be difficult to predict.
There can be no assurance that the Company will prevail in any infringement
proceedings that may be commenced against the Company, and an adverse outcome
may preclude the Company from selling certain products or require the Company to
pay damages or make additional royalty or other payments with respect to such
sales. In addition, from time to time other types of lawsuits are brought
against the Company, wherein an adverse outcome could adversely affect the
Company's results of operations.
The development, manufacturing, distribution and marketing of certain of the
Company's products and provision of its services, both in the United States and
abroad, are subject to regulation by various domestic and foreign governmental
agencies, including the U.S. Department of Agriculture, U.S. Food and Drug
Administration ("FDA") and U.S. Environmental Protection Agency.
Commercialization of animal health pharmaceuticals requires submission of
substantial clinical, manufacturing and other data to the FDA and regulatory
approval can take several years. Delays in obtaining, or the failure to obtain,
any necessary regulatory approvals could have a material adverse effect on the
Company's future product and service sales and operations. Any acquisitions of
new products, services and technologies may subject the Company to additional
areas of government regulations.
Certain components used in the Company's products are currently available from
only one source and others are available from only a limited number of sources.
The Company's inability to develop alternative sources if and as required in the
future, or to obtain sufficient sole or limited source components as required,
could result in cost increases or reductions or delays in product shipments.
Certain technologies licensed by the Company and incorporated into its products
are also available only from a single source, and the Company's business may be
adversely affected by the expiration or termination of any such licenses or any
challenges to the technology rights underlying such licenses. In addition, the
Company currently purchases or is contractually required to purchase certain of
the products that it sells, including its chemistry and hematology analyzers and
associated consumables, from single sources. Failure of such sources to supply
product to the Company would have a material adverse effect on the Company's
business.
For the three months ended March 31, 2000, international revenue was $23.4
million and accounted for 26% of total revenue, and the Company expects that its
international business will continue to account for a significant portion of its
total revenue. Foreign regulatory bodies often establish product standards
different from those in the United States, and designing products in compliance
with such foreign standards may be difficult or expensive. Other risks
associated with foreign operations include possible disruptions in
transportation of the Company's products, the differing product and service
needs of foreign customers, difficulties in building and managing foreign
operations, fluctuations in the value of foreign currencies, import/export
duties and quotas, and unexpected regulatory, economic or political changes in
foreign markets.
The development, manufacture, distribution and marketing of the Company's
products and provision of its services involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms or at all.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk consists primarily of foreign currency exchange risk.
The Company operates subsidiaries in 13 foreign countries and transacts business
in local currencies. The Company hedges its cash flows on intercompany sales to
minimize foreign currency exposure.
The primary purpose of the Company's foreign currency hedging activities is to
protect against the volatility associated with foreign currency transactions.
Corporate policy prescribes the range of allowable hedging activity. The Company
primarily utilizes forward exchange contracts and options with a duration of
less than 12 months. Gains and losses related to qualifying hedges of foreign
currency from commitments or anticipated transactions are deferred in prepaid
expenses and are included in the basis of the underlying transaction.
Based on the Company's overall currency rate exposure at December 31, 1999,
including derivative and other foreign currency sensitive instruments, the
effect of a 5% change in exchange rates on balances denominated in foreign
currencies that are not the functional currencies would not be material to the
results of operations. However, the effects of a 5% change in exchange rates,
if not offset by hedge contracts or related price adjustments, would have a
material impact on the results of operations.
<PAGE> 15
PART II -- OTHER INFORMATION
Item 1. -- LEGAL PROCEEDINGS
In January 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE, et.al. v. DAVID E. SHAW, ERWIN F.
WORKMAN, JR. and IDEXX LABORATORIES, INC. The plaintiffs purport to represent
a class of purchasers of the common stock of the Company from July 19, 1996
through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and
Exchange Commission Rule 10b-5 promulgated pursuant thereto, by virtue of
false or misleading statements made during the class period. The complaint
also claims that the individual defendants are liable as "control persons"
under Section 20(a) of that Act. In addition, the complaint claims that the
individual defendants sold some of their own common stock of the Company,
during the class period, at times when the market price for the stock
allegedly was inflated. In July 1999, the U.S. District Court granted the
Company's motion to dismiss the case for failure to state a claim. However in
August 1999, the plaintiffs appealed that ruling to the U.S. Court of Appeals
for the First Circuit. In February 2000, the Company entered into a Memorandum
of Understanding (the "MOU") with the plaintiffs pursuant to which the parties
have agreed to settle the suit. Pursuant to the MOU, the Company and the
plaintiffs have filed a Stipulation of Settlement (the "Stipulation") with the
U.S. District Court. Subject to certain conditions, the Stipulation will
become effective following approval by the District Court and expiration of
the time for any appeal. No assurance can be given that the District Court
will approve the Stipulation or otherwise that the suit will be finally
settled on the terms contained in the MOU. The proposed settlement (in excess
of the portion reimbursed through insurance) will not affect results of
operations in 2000. In the event that the suit is not settled, the Company is
unable to assess the likelihood of an adverse result or estimate the amount of
damages which the Company may be required to pay. Any adverse outcome
resulting in the payment of damages would adversely affect the Company's
results of operations.
In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company
in the State of Texas District Court. SAS has alleged breach of a development
and supply agreement between SAS and the Company, negligent misrepresentation,
fraud and conversion of SAS's intellectual property, and is seeking $8,000,000
in actual damages, $24,000,000 in punitive damages, further unspecified
damages and attorneys' fees. The Company has filed an answer to the complaint
denying SAS's allegations and has asserted counterclaims against SAS for
breach of contract, fraud and conversion of the Company's property. Trial is
scheduled for July 2000. The Company believes that it has meritorious
defenses to SAS's claims and is contesting the matter vigorously. However, the
Company is unable to assess the likelihood of an adverse result or estimate
the amount of damages the Company might be required to pay. Any adverse
outcome resulting in payment of damages would adversely affect the Company's
results of operations.
Item 6. -- Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule for the Quarterly Report on Form 10-Q for the
three-month period ended March 31, 2000.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fiscal quarter for which
this report is filed.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEXX LABORATORIES, INC.
Date: May 12, 2000
/s/ MERILEE RAINES
------------------
Merilee Raines
Vice President, Finance and Treasurer
(Principal Financial Officer)
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LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE
MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
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