<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 June 30, 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 offices) (Zip Code)
(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 July 31, 2000, 34,636,275 shares of the registrant's Common Stock, $.10
par value, were outstanding.
<PAGE> 2
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Three and Six Months Ended
June 30, 2000 and June 30, 1999 4
Consolidated Statements of Cash Flows
Six Months Ended
June 30, 2000 and June 30, 1999 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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 JUNE 30, DECEMBER 31,
2000 1999
<S> -------- ------------
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 73,654 $ 58,576
Short-term investments 50,763 46,835
Accounts receivable, less reserves of $4,542
and $4,828 in 2000 and 1999, respectively 63,294 58,353
Inventories 56,747 47,488
Deferred income taxes 14,594 14,679
Other current assets 6,696 6,484
-------- --------
Total current assets 265,748 232,415
LONG-TERM INVESTMENTS 13,980 25,517
PROPERTY AND EQUIPMENT, AT COST:
Land 1,191 1,196
Buildings and improvements 4,554 4,528
Leasehold improvements 18,634 18,522
Machinery and equipment 35,195 34,630
Office furniture and equipment 31,256 28,630
Construction-in-progress 2,662 1,152
-------- --------
93,492 88,658
Less - Accumulated depreciation and amortization 53,988 49,108
-------- --------
39,504 39,550
OTHER ASSETS, Net 56,857 60,500
-------- --------
$376,089 $357,982
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $18,908 $21,819
Accrued expenses 55,043 38,011
Notes Payable 3,376 3,543
Deferred revenue 9,712 10,268
-------- --------
Total current liabilities 87,039 73,641
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 40,007 shares in 2000
and 39,584 shares in 1999 4,001 3,958
Additional paid-in capital 291,792 284,459
Retained earnings 81,181 63,619
Accumulated other comprehensive income (loss) (4,351) (3,473)
Treasury Stock (4,939 shares in 2000 and 3,899
shares in 1999), at cost (83,573) (64,222)
-------- --------
Total stockholders' equity 289,050 284,341
-------- --------
$376,089 $357,982
======== ========
</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 SIX MONTHS ENDED
-------------------- ------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $93,552 $91,524 $184,430 $181,172
Cost of revenue 46,852 46,910 93,127 91,684
-------- ------- -------- --------
Gross Profit 46,700 44,614 91,303 89,488
Expenses:
Sales and marketing 15,369 14,411 31,093 29,564
General and administrative 10,259 11,084 20,837 23,201
Research and development 7,193 7,509 13,987 14,680
-------- -------- -------- --------
Income from operations 13,879 11,610 25,386 22,043
Interest income, net 1,366 1,334 2,713 2,644
-------- -------- -------- --------
Income before provision for
income taxes 15,245 12,944 28,099 24,687
Provision for income taxes 5,717 4,919 10,537 9,381
-------- -------- -------- --------
Net income $9,528 $8,025 $17,562 $15,306
======== ======== ======== ========
Net income per common share: Basic $0.27 $0.20 $0.50 $0.39
======== ======== ======== ========
Net income per common share: Diluted $0.26 $0.20 $0.48 $0.37
======== ======== ======== ========
</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>
SIX MONTHS ENDED
----------------------
JUNE 30, JUNE 30,
2000 1999
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $17,562 $15,306
Adjustments to reconcile net income to net cash
Provided by operating activities, net of acquisitions:
Depreciation and amortization 9,375 8,456
Provision for (benefit of) deferred income taxes 240 (1,996)
Changes in assets and liabilities:
Accounts receivable (5,849) (9,973)
Inventories (14,983) 7,529
Other current assets (133) 2,604
Accounts payable (739) (13,127)
Accrued expenses 4,390 13,675
Deferred revenue (556) (154)
-------- ---------
Net cash provided by operating activities 9,307 22,320
-------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (6,632) (4,398)
Decrease (increase) in investments, net 7,609 (22,816)
Increase in other assets (1,033) (241)
Acquisition of businesses, net of cash acquired (178) (1,257)
Disposition of businesses 10,400 --
-------- --------
Net cash provided by (used in) investing activities 10,166 (28,712)
-------- ---------
Cash Flows from Financing Activities:
Payment of notes payable (129) (413)
Proceeds from the exercise of stock options 6,203 5,822
Purchase of treasury stock (9,561) --
--------- --------
Net cash provided by (used in) financing activities (3,487) 5,409
--------- --------
Net effect of Exchange Rate Changes (908) (1,004)
--------- ---------
Net increase (decrease) in Cash and Cash Equivalents 15,078 (1,987)
Cash and Cash Equivalents, beginning of period 58,576 109,063
-------- --------
Cash and Cash Equivalents, end of period $73,654 $107,076
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $-- $39
======== ========
Income taxes paid during the period $2,979 $3,171
======== ========
</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 accompanying unaudited, consolidated financial statements of IDEXX
Laboratories, Inc. ("IDEXX" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the requirements of Form 10-Q.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the financial position and results of operations. The
results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
1999 Annual Report to the Shareholders, as filed on Form 10-K with the
Securities and Exchange Commission.
2. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instrument
and Hedging Activities" ("Statement No. 133"), which establishes accounting
and reporting standards for hedging activities. Statement No. 133
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures.
This statement is effective for fiscal years beginning after June 15, 2000.
The Company does not believe that implementation of this statement will have
a material impact on the financial statements.
3. Inventories
Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The components of inventories
are as follows (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
Raw materials $11,526 $6,385
Work-in-process 3,317 4,190
Finished goods 41,904 36,913
-------- --------
$56,747 $47,488
======== ========
4. Comprehensive income
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $9,528 $8,025 $17,562 $15,306
Other comprehensive income(loss):
Foreign currency translation adjustments (246) (369) (878) (1,041)
-------- -------- -------- --------
Comprehensive income $9,282 $7,656 $16,684 $14,265
======== ======== ======== ========
</TABLE>
<PAGE> 7
5. Earnings per share
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share (in thousands):
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S>
Basic: <C> <C> <C> <C>
Weighted average shares outstanding 35,408 39,321 35,349 39,115
======== ======== ======== ========
Diluted:
Weighted average shares outstanding 35,408 39,321 35,349 39,115
Dilutive effect of stock options
issued to employees 1,549 1,548 1,398 1,711
Shares assumed issued for the acquisition
of Blue Ridge Pharmaceuticals,Inc. 115 115 115 115
-------- -------- -------- --------
37,072 40,984 36,862 40,941
======== ======== ======== ========
6. 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, although 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 purported to
represent a class of purchasers of the common stock of the Company from
July 19, 1996 through March 24, 1997. The complaint claimed 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 claimed that the individual defendants were
liable as "control persons" under Section 20(a) of that Act. In addition,
the complaint claimed 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 agreed to settle the
suit. Pursuant to the MOU, the Company and the plaintiffs filed a
Stipulation of Settlement (the "Stipulation") with the U.S. District Court.
The Stipulation was approved by the District Court on June 20, 2000 and the
complaint was dismissed with prejudice. The settlement (in excess of the
portion reimbursed through insurance) will not affect results of operations
in 2000.
In December 1997, SA Scientific, Inc. ("SAS") filed suit against the
Company in the State of Texas District Court. SAS alleged breach of a
development and supply agreement between SAS and the Company, negligent
misrepresentation, fraud and conversion of SAS's intellectual property, and
sought $8,000,000 in actual damages, $24,000,000 in punitive damages,
further unspecified damages and attorneys' fees. The Company filed an
answer to the complaint denying SAS's allegations and asserted
counterclaims against SAS for breach of contract, fraud and conversion of
the Company's property. On May 23, 2000, SAS and the Company entered into
an agreement (the "Settlement Agreement") settling the lawsuit and on June
12, 2000, the Court dismissed the suit with prejudice. Under the
Settlement Agreement the Company made a payment to SAS that was not
material to the Company's financial position or results of operations.
<PAGE> 8
7. Acquisitions and Divestitures
Acquisitions
Sierra Laboratories
On March 9, 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.
Divestitures
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. As a result of these
transactions, the Company recorded an immaterial loss in 1999 and an
immaterial gain in 2000. Pro forma information has not been presented
because of immateriality.
IDEXX Food Safety Net Services, Inc.
On December 21, 1999, the Company sold substantially all the assets in the
business of IDEXX Food Safety Net Services, Inc. to Food Safety Net
Services, Ltd. for $350,000 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.
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
$10,400,000 in cash, a $450,000 note payable, and the assumption of certain
liabilities. The Company also will receive up to an additional $1,000,000
based on revenue realized from the Acumedia business between the sale date
and February 17, 2001. The note bears interest at 7% and is due on
February 17, 2001. In addition, the company entered into non-compete
agreements for up to five years.
8. Segment Reporting
The Company conducts business principally in three major operating
segments. The Company's operating segments include the Companion Animal
Group ("CAG"), the Food and Environmental Division ("FED") and other. The
separate financial information of each segment is presented consistent with
the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
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 and performs services to detect disease and contaminants in food
animals, food 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.
<PAGE> 9
The following is the segment information in accordance with this statement (in
thousands):
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S>
Revenue: <C> <C> <C> <C>
CAG $76,344 $71,007 $150,284 $142,970
FED 17,208 20,517 34,146 38,202
Other -- -- -- --
-------- -------- -------- --------
Total revenue $93,552 $91,524 $184,430 $181,172
======== ======== ======== ========
Net income:
CAG $5,385 $4,859 $10,398 $11,193
FED 3,199 2,142 5,402 2,258
Other 944 1,024 1,762 1,855
-------- -------- -------- --------
Total net income $9,528 $8,025 $17,562 $15,306
======== ======== ======== ========
</TABLE>
9. Stock Repurchase Program
On July 21, 2000, the Company's Board of Directors approved an increase in
the number of shares of its Common Stock that the Company was authorized to
repurchase from 6.0 million shares to 10.0 million shares. The Company may
make such purchases in the open market or in negotiated transactions.
During the six months ended June 30, 2000, the Company repurchased
approximately 1.0 million shares for $19.4 million. Between August 19, 1999
and June 30, 2000, approximately 4.9 million shares had been repurchased
under this program for an aggregate of $83.6 million.
10. Subsequent Events
Veterinary Professional Services
On July 1, 2000, the Company, through its wholly-owned subsidiary, IDEXX
Laboratories Pty. Ltd., acquired Veterinary Pathology Services Pty. Ltd.,
a veterinary laboratory business with locations in Adelaide, Brisbane and
Sydney, Australia for approximately Australian Dollars 6.1 million (US $3.7
million) in cash. The Company will account for this acquisition under the
purchase method of accounting.
Genera Technologies Limited
On August 11, 2000, the Company acquired Genera Technologies Limited, a U.K.
based provider of products that test for Cryptosporidium in water, for
approximatley $15.5 million in cash and notes. The Company also agreed to
make additional payments based upon performance of the business after the
acquisition. The Company will account for this acquisition under the
purchase method of accounting.
<PAGE> 10
Item 2.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
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 the 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 products and services for food animal, food and
water 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 diagnostic animal
services business.
COMPANION ANIMAL GROUP
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
Revenue for CAG increased $5.3 million, or 8% to $76.3 million during the
second quarter of 2000 from $71.0 million in the same periodof the prior
year. The increase is primarily attributable to an increase in sales of
consumables used in the Company's veterinary instruments, veterinary
reference laboratory services and canine test kits. The increase in consumables
was attributable primarily to an increase in instrument placements, including
through the Company's rental program, and to a lesser degree to increased
customer utilization per instrument. The increase in veterinary reference
laboratory services was partially attributable to incremental revenues from
laboratories acquired after June 1999, including the laboratory business of
Tufts University School of Veterinary Medicine acquired on December 1, 1999.
These increases were partially offset by a decrease in sales of veterinary
practice information management systems.
International revenue increased $.4 million, or 2% compared to the same quarter
of 1999. This increase is attributable primarily to increased sales of
veterinary consumables and veterinary reference laboratory services partially
offset by lower unit prices oninstruments and unfavorable foreign exchange
rates. International sales declined to 21% of total CAG sales compared to 25%
in the second quarter of 1999.
CAG's gross margin increased from 47% to 48% due to increased sales of higher
margin veterinary consumables, which were partially offset by increased sales of
lower margin veterinary reference laboratory services and unabsorbed fixed costs
associated with decreased sales of practice information management systems.
Operating expenses during the second quarter increased $1.8 million, or 7% over
the same period in 1999. The increase is attributable primarily to an increase
in sales and marketing expenses associated with the pharmaceutical product line,
increased marketing programs related to veterinary consumables and research and
development expenses related to the Company's Internet portal/application
service provider for animal health professionals.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenue for CAG increased $7.3 million, or 5% to $150.3 million during the
first six months of 2000 from $143.0 million in the same period of the prior
year. The increase is attributable primarily to an increase in sales of
veterinary reference laboratory services, veterinary consumables and feline
diagnostic kits. The increase in veterinary reference laboratory services is
attributable partially to incremental revenues generated from acquisitions
discussed above. These increases were partially offset by a decrease in sales
of veterinary practice information management systems.
International revenue increased $1.9 million, or 6% compared to the same period
of 1999. The increase is attributable to increased sales of veterinary
consumables, veterinary reference laboratory services and canine test kits.
CAG's gross margin decreased from 48% to 47%. The reduction in the gross margin
percentage is due primarily to increased sales of lower gross margin veterinary
reference laboratory services, higher cost of veterinary instrument service and
unabsorbed fixed costs associated with decreased sales of veterinary practice
information management systems, partially offset by increased sales of higher
margin veterinary consumables.
<PAGE> 11
Operating expenses during the six months ended June 30, 2000 increased $3.5
million, or 7% over the same period in 1999. The increase is attributable
primarily to an increase in sales and marketing expenses associated with the
pharmaceutical product line, increased marketing programs related to veterinary
consumables and research and development expenses related to the Company's
Internet portal/application service provider for animal health professionals.
FOOD AND ENVIRONMENTAL DIVISION
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
Revenue for FED decreased $3.3 million, or 16% to $17.2 million during the
second quarter of 2000 from $20.5 million for the same period in the prior
year. The decrease is primarily attributable to the divestiture of the
food microbiology testing product lines discussed above, partially offset
by an increase in sales of water testing products.
International revenue decreased $1.4 million, or 16% compared to the same
quarter of 1999. The decrease is attributable primarily to the divestiture of
the food microbiology testing product lines discussed above, partially offset by
increased sales of dairy residue testing products and water testing products in
the European market.
FED gross margin increased to 59% from 53% due to the divestiture of lower gross
margin food microbiology testing product lines and increased sales of higher
gross margin water testing products.
Operating expenses during the second quarter decreased $2.1 million, or 28% over
the same period in 1999 primarily due to the elimination of operating expenses
associated with the divested food microbiology testing products business.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenue for FED decreased $4.1 million, or 11% to $34.1 million during the
second quarter of 2000 from the same period in the prior year. The
decrease is attributable primarily to the divestiture of the food microbiology
testing product lines, which was partially offset by an increase in sales
of water testing products.
International revenue decreased $1.6 million, or 10% from the same period in
1999. The decrease is attributable primarily to the divestiture of the food
microbiology testing product lines and lower sales of livestock products,
partially offset by increases in dairy residue testing products and water
testing products.
FED's gross margin increased to 59% from 53% due to the divestiture of the lower
gross margin food microbiology testing product lines and increased sales of
higher gross margin water testing products.
Operating expenses during the first six months of 2000 decreased $5.1 million,
or 31% from the same period in the prior year, due primarily to the elimination
of operating expenses associated with the food microbiology testing products
business and to an immaterial gain on the sale.
INTEREST INCOME, NET
Net interest income was $1.4 million for the quarter ended June 30, 2000
compared with $1.3 million for the same period in the prior year. The increase
in interest income was principally the result of higher effective interest
rates, partially offset by lower invested cash balances due to the use of cash
for the Company's share repurchase program.
Net interest income was $2.7 million for the six months ended June 30, 2000
compared with $2.6 million for the same period in the prior year. The increase
in interest income was principally the result of higher effective interest
rates, partially offset by lower invested cash balances due to the use of cash
for the Company's share repurchase program.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 37.5% for the three- and six-month periods
ended June 30, 2000 compared with 38% for the same periods in 1999. The
reduction in the effective tax rate is the result of continued realization of
tax benefit resulting from business operations in jurisdictions with lower
effective income tax rates.
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had cash, cash equivalents, and short-term
investments of $124.4 million and $178.7 million of working capital. During the
quarter ended June 30, 2000 the Company repurchased 515,000 shares of the
Company's common stock for $11.4 million, of which transactions representing
445,000 shares have not settled as of June 30, 2000 and the $9.8 million
purchase price is reflected as a current liability. For the six months ended
June 30, 2000 the Company repurchased approximately 1.0 million shares for $19.4
million.
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
acquisition during the first six months 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
the Company's Internet portal/application service provider for animal health
professionals. 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. In addition, because many of
the Company's products are sold through distributors, fluctuations may occur due
to distributor purchasing patterns, which may be beyond the Company's control.
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
<PAGE> 13
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
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 six months ended June 30, 2000, international revenue was $47.4 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.
<PAGE> 14
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 June 30, 2000,
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 purported to
represent a class of purchasers of the common stock of the Company from July
19, 1996 through March 24, 1997. The complaint claimed 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 claimed that the individual defendants were liable as "control persons"
under Section 20(a) of that Act. In addition, the complaint claimed 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
agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs
filed a Stipulation of Settlement (the "Stipulation") with the U.S. District
Court. The Stipulation was approved by the District Court on June 20, 2000
and the complaint was dismissed with prejudice. The settlement (in excess of
the portion reimbursed through insurance) will not affect results of
operations in 2000.
In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company
in the State of Texas District Court. SAS alleged breach of a development and
supply agreement between SAS and the Company, negligent misrepresentation,
fraud and conversion of SAS's intellectual property, and sought $8,000,000 in
actual damages, $24,000,000 in punitive damages, further unspecified damages
and attorneys' fees. The Company filed an answer to the complaint denying
SAS's allegations and asserted counterclaims against SAS for breach of
contract, fraud and conversion of the Company's property. On May 23, 2000,
SAS and the Company entered into an agreement (the "Settlement Agreement")
settling the lawsuit and on June 12, 2000 the Court dismissed the suit with
prejudice. Under the Settlement Agreement the Company made a payment to SAS
that was not material to the Company's financial position or results of
operations.
Item 4. --Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 17, 2000, the
following proposals were adopted by the votes specified below:
<TABLE>
<CAPTION>
Broker
Proposal For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
1. Election of three Class I Directors:
David E. Shaw 30,414,711 1,495,020 0 0
William F. Pounds 31,613,239 296,492 0 0
Mary L. Good 31,618,534 291,197 0 0
2. Approval of the Company's 2000
Director Option Plan covering 200,000
shares of the Company's Common Stock
authorized for issuance under the Plan. 26,008,499 5,817,736 83,496 0
3. Approval of an amendment to the
Company's 1998 Stock Incentive Plan
increasing from 2,500,000 to 3,500,000
the number of shares of the Company's
Common Stock authorized for issuance
under the Plan. 25,288,359 6,539,486 81,886 0
4. Ratification of Arthur Andersen LLP
as the Company's independent auditors
for the current year. 31,859,123 33,902 16,706 0
</TABLE>
<PAGE> 16
The following Class III Directors of the Company were not up for re-election in
2000 and have three-year terms that expire in 2001: James L. Moody, Jr.,
Gabriel Schmergel and Erwin F. Workman, Jr., Ph.D. The following Class II
Directors of the Company were not up for re-election in 2000 and have three-year
terms that expire in 2002: Thomas Craig, John R. Hesse and Kenneth Paigen,
Ph.D. William End was elected as a Class I Director in July 2000 and will stand
for re-election in 2003.
Item 6. -- Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 2000 Director Option Plan
10.2 1998 Stock Incentive Plan, as amended
27 Financial Data Schedule for the Quarterly Report on Form 10-Q for the
six-month period ended June 30, 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> 17
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: August 14, 2000
/s/ Merilee Raines
---------------------
Merilee Raines
Vice President, Finance and Treasurer
(Principal Financial Officer)
