<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 September 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 (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 October 31, 2000, 33,207,321 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
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Three and Nine Months Ended
September 30, 2000 and September 30, 1999 4
Consolidated Statements of Cash Flows
Nine Months Ended
September 30, 2000 and September 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 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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"). 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 SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, $6,991 of which is
restricted as of September 30, 2000 $ 38,726 $ 58,576
Short-term investments 47,278 46,835
Accounts receivable, less reserves of $4,791
and $4,828 in 2000 and 1999, respectively 62,361 58,353
Inventories 62,870 47,488
Deferred income taxes 14,946 14,679
Other current assets 7,986 6,484
-------- --------
Total current assets 234,167 232,415
LONG-TERM INVESTMENTS 3,045 25,517
PROPERTY AND EQUIPMENT, AT COST:
Land 1,189 1,196
Buildings and improvements 4,550 4,528
Leasehold improvements 18,566 18,522
Machinery and equipment 37,223 34,630
Office furniture and equipment 32,319 28,630
Construction-in-progress 3,644 1,152
-------- --------
97,491 88,658
Less-Accumulated depreciation and amortization 55,738 49,108
-------- --------
41,753 39,550
OTHER ASSETS, Net 75,395 60,500
-------- --------
$354,360 $357,982
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,914 $ 21,819
Accrued expenses 50,631 38,011
Notes Payable 8,525 3,543
Deferred revenue 10,886 10,268
-------- --------
Total current liabilities 87,956 73,641
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 40,158 shares in 2000
and 39,584 shares in 1999 4,016 3,958
Additional paid-in capital 294,339 284,459
Retained earnings 90,450 63,619
Accumulated other comprehensive income (loss) (5,334) (3,473)
Treasury Stock (6,314 shares in 2000 and 3,899
shares in 1999), at cost (117,067) (64,222)
-------- --------
Total stockholders' equity 266,404 284,341
-------- --------
$354,360 $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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $90,384 $86,422 $274,813 $267,593
Cost of revenue 47,431 44,935 140,557 136,598
------- ------- -------- --------
Gross Profit 42,953 41,487 134,256 130,995
Expenses:
Sales and marketing 13,585 13,732 44,678 43,322
General and administrative 9,104 9,502 29,941 32,696
Research and development 6,750 6,302 20,736 20,983
------- ------- -------- --------
Income from operations 13,514 11,951 38,901 33,994
Interest income, net 1,199 1,643 3,911 4,288
------- ------- -------- --------
Income before provision for
income taxes 14,713 13,594 42,812 38,282
Provision for income taxes 5,444 5,166 15,981 14,547
------- ------- -------- --------
Net income $9,269 $8,428 $26,831 $23,735
======= ======= ======== ========
Net income per common share:
Basic: $0.27 $0.22 $0.77 $0.61
======= ======= ======== ========
Net income per common share:
Diluted: $0.26 $0.21 $0.73 $0.58
======= ======= ======== ========
</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>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30 SEPTEMBER 30
2000 1999
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $26,831 $23,735
Adjustments to reconcile net income to net
cash provided by operating activities,
net of acquisitions:
Depreciation and amortization 14,102 12,849
Provision for (benefit of) deferred income
taxes 1,075 (2,214)
Changes in assets and liabilities:
Accounts receivable (4,017) (7,923)
Inventories (22,390) 6,567
Other current assets (333) 2,188
Accounts payable (2,162) (15,597)
Accrued expenses 5,310 14,307
Deferred revenue 618 (1,015)
------- --------
Net cash provided by operating activities 19,034 32,897
------- -------
Cash Flows from Investing Activities:
Purchases of property and equipment (11,697) (6,093)
Decrease (increase) in investments, net 22,028 (35,399)
Increase in other assets (769) (1,433)
Acquisition of businesses, net of cash
acquired (11,945) (1,257)
Disposition of businesses 10,400 --
------- -------
Net cash provided by (used in) investing
activities 8,017 (44,182)
------- --------
Cash Flows from Financing Activities:
Payment of notes payable (3,231) (1,593)
Proceeds from the exercise of stock options 8,299 5,990
Purchase of treasury stock (50,367) (27,256)
-------- --------
Net cash used in financing activities (45,299) (22,859)
-------- --------
Net effect of Exchange Rate Changes (1,602) (242)
-------- --------
Net decrease in Cash and Cash Equivalents (19,850) (34,386)
Cash and Cash Equivalents, beginning of period 58,576 109,063
------- -------
Cash and Cash Equivalents, end of period $38,726 $74,677
======= =======
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 351 $ 133
======= =======
Income taxes paid during the period $ 9,527 $ 5,261
======= =======
</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 nine months ended September 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 FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133 was issued in June 1999 and deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000 and is applicable on both an interim
and annual basis. Companies are not required to apply this statement
retroactively to prior periods. The Company does not believe that
implementation of this statement will have a material impact on the financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"), which provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in financial statements. The Company has implemented those guidelines with no
material impact on earnings.
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):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Raw materials $14,945 $ 6,385
Work-in-process 3,615 4,190
Finished goods 44,310 36,913
------- -------
$62,870 $47,488
======= =======
4. Comprehensive income
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $9,269 $8,428 $26,831 $23,735
Other comprehensive income(loss):
Foreign currency translation
adjustments (983) 765 (1,861) (276)
------ ------ ------- -------
Comprehensive income $8,286 $9,193 $24,970 $23,459
====== ====== ======= =======
<PAGE> 7
5. Earnings per share
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share (in thousands):
</TABLE>
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic:
Weighted average shares
outstanding 34,396 39,096 35,028 39,109
====== ====== ====== ======
Diluted:
Weighted average shares
outstanding 34,396 39,096 35,028 39,109
Dilutive effect of stock options
issued to employees 1,537 770 1,449 1,410
Shares assumed issued for the
acquisition of Blue Ridge
Pharmaceuticals, Inc. 115 115 115 115
------ ------ ------ ------
36,048 39,981 36,592 40,634
====== ====== ====== ======
</TABLE>
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.
<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. Pro forma
information has not been presented because of immateriality.
Veterinary Pathology 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 Australian Dollars 5.6 million (US $3.1 million) in cash. 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. Pro forma information has not been
presented because of immateriality.
Genera Technologies Limited
On August 11, 2000, the Company acquired Genera Technologies Limited, a U.K.
based manufacturer of test kits for cryptosporidium in water, for $8.7 million
in cash and $8.3 million in notes payable to the former principal shareholder of
which $7.0 million is secured by cash in escrow. The Company also agreed to make
additional payments to the shareholder of up to $2.5 million based upon
performance of the business after the acquisition. 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.
Pro forma information has not been presented because of immateriality.
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
and income taxes are provided on each segment using the overall effective tax
rate.
<PAGE> 9
The following is the segment information in accordance with this statement (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2000 30, 1999 30, 2000 30, 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
CAG $72,735 $66,770 $223,018 $209,580
FED 17,649 19,652 51,795 58,013
Other -- -- -- --
------- ------- -------- --------
Total revenue $90,384 $86,422 $274,813 $267,593
======= ======= ======== ========
Net income:
CAG $ 5,755 $ 4,702 $ 16,725 $ 16,508
FED 3,062 2,778 8,550 5,130
Other 452 948 1,556 2,097
------- ------- -------- --------
Total net income $ 9,269 $ 8,428 $ 26,831 $ 23,735
======= ======= ======== ========
</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 nine
months ended September 30, 2000, the Company repurchased approximately 2.4
million shares for $52.8 million. Between August 19, 1999 and September 30,
2000, the Company repurchased approximately 6.3 million shares under this
program for $117.1 million.
<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 animal diagnostic
services business.
COMPANION ANIMAL GROUP
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Revenue for CAG increased $6.0 million, or 9% to $72.7 million during the third
quarter of 2000 from $66.8 million in the same period of the prior year. The
increase is primarily attributable to an increase in sales of veterinary
reference laboratory services, consumables used in the Company's veterinary
instruments and feline and canine test kits. The increase in veterinary
reference laboratory services sales is partially attributable to incremental
revenues from laboratories acquired after June 1999, including the laboratory
businesses of Tufts University School of Veterinary Medicine acquired on
December 1, 1999 and Veterinary Pathology Services Pty. Ltd ("VPS") acquired on
July 1, 2000. The increase in consumables sales is 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. These increases are partially offset by a decrease in sales of
veterinary practice information management systems.
International revenue increased $.4 million, or 3% compared to the same quarter
of 1999. This increase is attributable primarily to increased sales of
veterinary reference laboratory services resulting from the purchase of VPS,
partially offset by unfavorable foreign exchange rates. International sales
declined to 22% of total CAG sales compared to 23% in the third quarter of 1999.
CAG's gross margin decreased from 46% to 45% due primarily to unfavorable
exchange rates and to increased sales of lower margin veterinary reference
laboratory services and unabsorbed fixed costs associated with decreased sales
of practice information management systems. These decreases are partially offset
by increased sales of higher gross margin consumables.
<PAGE> 11
Operating expenses during the third quarter increased $.8 million, or 3% over
the same period in 1999. The increase is attributable primarily to research and
development expenses related to the development of new diagnostic platforms and
to an increase in sales and marketing programs related to veterinary
consumables. These increases are partially offset by settlement gains on
foreign currency contracts designated as hedges.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenue for CAG increased $13.3 million, or 6% to $223.0 million during the
first nine months of 2000 from $209.6 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 sales of veterinary reference laboratory
services is attributable partially to incremental revenues generated from
acquisitions discussed above. These increases are partially offset by a
decrease in sales of veterinary practice information management systems.
International revenue increased $2.3 million, or 5% compared to the same period
of 1999. The increase is attributable to increased sales of veterinary
reference laboratory services and canine diagnostic test kits partially offset
by unfavorable foreign exchange rates. The increase in sales of veterinary
reference laboratory services resulted mainly from the purchase of VPS in
Australia described above.
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.
Operating expenses during the nine months ended September 30, 2000 increased
$4.3 million, or 6% 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 and research and development expenses related to the
Company's Internet portal/application service provider for animal health
professionals and to development of new diagnostic platforms. The increases are
partially offset by decreased pharmaceutical research and development expenses
and settlement gains on foreign currency contracts designated as hedges.
FOOD AND ENVIRONMENTAL DIVISION
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Revenue for FED decreased $2.0 million, or 10% to $17.6 million during the third
quarter of 2000 from $19.7 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 and decreased sales of dairy test
products. These decreases are partially offset by an increase in sales of water
testing products, including incremental sales from the acquisition of Genera
Technologies Limited ("Genera") in July 2000, and by additional sales of
livestock test kits.
International revenue decreased $.5 million, or 7% compared to the same quarter
of 1999. The decrease is attributable primarily to the divestiture of the food
microbiology testing product lines discussed above and unfavorable foreign
exchange rates, partially offset by increased sales of livestock test kits and
water testing products, including incremental sales from the acquisition of
Genera.
FED's gross margin increased to 57% from 55% due to the divestiture of the lower
gross margin food microbiology testing product lines and increased sales of
higher gross margin water testing products, partially offset by unfavorable
foreign exchange rates.
Operating expenses during the third quarter decreased $1.1 million, or 17% over
the same period in 1999 primarily due to the elimination of operating expenses
associated with the divested food microbiology testing products business.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenue for FED decreased $6.1 million, or 10% to $51.8 million during the first
nine months 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 and decreased sales of dairy test products. These decreases are
partially offset by an increase in sales of water testing products and livestock
test kits.
International revenue decreased $.7 million, or 3% from the same period in 1999.
The decrease is attributable primarily to the divestiture of the food
microbiology testing product lines and unfavorable foreign exchange rates,
partially offset by increased sales of dairy, livestock, and water testing
products, including incremental sales from the purchase of Genera discussed
above.
FED's gross margin increased to 58% from 54% due to the divestiture of the lower
gross margin food microbiology testing product lines and increased sales of
higher gross margin water testing products, partially offset by unfavorable
foreign exchange rates.
Operating expenses during the first nine months of 2000 decreased $6.2 million,
or 27% 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 is $1.2 million for the quarter ended September 30, 2000
compared with $1.6 million for the same period in the prior year. The decrease
in interest income is principally the result of lower invested cash balances due
to the use of cash for the Company's share repurchase program and the purchase
of VPS and Genera, partially offset by higher effective interest rates.
Net interest income declined to $3.9 million for the nine months ended September
30, 2000 from $4.3 million for the same period in the prior year for the reasons
described above.
PROVISION FOR INCOME TAXES
The Company's effective tax rate is 37.0% and 37.3% for the three- and nine-
month periods ended September 30, 2000, respectively, 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 September 30, 2000, the Company has cash, cash equivalents, and short-term
investments of $86.0 million and working capital of $146.2 million. As of
September 30, 2000, $7.0 million in cash is in escrow as security for the
Company's obligations and promissory notes in an equivalent aggregate principal
amount issued in connection with the acquisition of Genera. During the quarter
ended September 30, 2000 the Company repurchased 1.4 million shares of its
common stock for $33.5 million, of which transactions representing 100,000
shares have not settled as of September 30, 2000 and the $2.5 million purchase
price is reflected as a current liability. For the nine months ended September
30, 2000 the Company repurchased approximately 2.4 million shares for $52.8
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
three acquisitions during the first nine 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 its analyzers and 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
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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 nine months ended September 30, 2000, international revenue was $70.8
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.
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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 September 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.
PART II -- OTHER INFORMATION
Item 1. -- LEGAL PROCEEDINGS
Item 6. -- Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Amended and Restated By-Laws of the Company
10.1 European Supply Agreement, effective as of January 1, 1999,
between the Company and Ortho-Clinical Diagnostics, Inc.
10.2 U.S. Supply Agreement, effective as of January 1, 1999, between
the Company and Ortho-Clinical Diagnostics, Inc.
27 Financial Data Schedule for the Quarterly Report on Form 10-Q for
the nine-month period ended September 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.
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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: November 13, 2000
/s/ Merilee Raines
-------------------------
Merilee Raines
Vice President, Finance and Treasurer
(Principal Financial Officer)
