10-Q 1 0001.txt IDEXX LABORATORIES, INC. 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. 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. 3 PART I -- FINANCIAL INFORMATION Item 1. -- FINANCIAL STATEMENTS IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands, Except Per Share Amounts) (Unaudited)
ASSETS SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ 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 ======== ========
See accompanying notes to consolidated financial statements. 4 IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 30, 30, 30, 2000 1999 2000 1999 --------- --------- --------- --------- 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 ======= ======= ======== ========
See accompanying notes to consolidated financial statements. 5 IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
NINE MONTHS ENDED ----------------- SEPTEMBER 30 SEPTEMBER 30 2000 1999 ------------- ------------- 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 ======= =======
See accompanying notes to consolidated financial statements. 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
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 2000 30, 1999 30, 2000 30, 1999 --------- --------- --------- --------- 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 ====== ====== ======= ======= 7 5. Earnings per share The following is a reconciliation of shares outstanding for basic and diluted earnings per share (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 2000 30, 1999 30, 2000 30, 1999 --------- --------- --------- --------- 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 ====== ====== ====== ======
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. 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. 9 The following is the segment information in accordance with this statement (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 2000 30, 1999 30, 2000 30, 1999 --------- --------- --------- --------- 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 ======= ======= ======== ========
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. 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. 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. 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 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 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. 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 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. 15 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)