10-Q 1 form10q_june302004.htm FORM 10-Q JUNE 30, 2004 IDEXX Laboratories, Inc. Form 10-Q June 30, 2004

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, 2004.

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

          For The Transiton 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)
  (IRS 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 30, 2004, 34,256,246 shares of the registrant’s Common Stock, $.10 par value, were outstanding.

1


IDEXX LABORATORIES, INC. AND SUBSIDIARIES

INDEX

PART I       FINANCIAL INFORMATION   Page  
               
   Item 1.  Financial Statements     
               
      Consolidated Balance Sheets as of June 30, 2004 and     
          December 31, 2003  3  
               
      Consolidated Statements of Operations for the three and six months     
          ended June 30, 2004 and 2003  4  
               
      Consolidated Statements of Cash Flows for the six months     
          ended June 30, 2004 and 2003  5  
               
      Notes to Consolidated Financial Statements  6  
               
   Item 2.  Management's Discussion and Analysis of Financial Condition     
          and Results of Operations  12  
               
   Item 3.  Quantitative and Qualitative Disclosures About Market Risk  24  
               
   Item 4.  Controls and Procedures  24  
               
PART II      OTHER INFORMATION  
               
               
   Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  25  
               
   Item 4.  Submission of Matters to a Vote of Security Holders  25  
               
   Item 6.  Exhibits and Reports on Form 8-K  26  
               
SIGNATURES         27  
               
 

2


PART I FINANCIAL INFORMATION
Item 1. Financial Statements

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)

June 30, December 31,
2004
2003
        ASSETS                
Current Assets:            
     Cash and cash equivalents   $ 164,659   $ 186,717  
     Short-term investments    48,057    33,988  
     Accounts receivable, less reserves of $1,555 and $1,950 in 2004 and 2003,            
          respectively    59,288    53,976  
     Inventories    78,905    75,333  
     Deferred income taxes    14,544    13,775  
     Other current assets    5,788    6,800  


        Total current assets    371,241    370,589  


Long-term Investments    21,148    35,082  


Property and Equipment, at cost:            
     Land    1,937    1,202  
     Buildings    5,231    5,213  
     Leasehold improvements    24,540    23,139  
     Machinery and equipment    49,401    44,843  
     Office furniture and equipment    35,619    34,802  
     Construction in progress    11,694    2,824  


     128,422    112,023  
     Less accumulated depreciation and amortization    71,913    66,799  


     56,509    45,224  


Other Long-term Assets:            
     Goodwill and other intangible assets, net of accumulated amortization of  
          $35,766 and $35,451 for 2004 and 2003, respectively    68,057    61,766  
     Other noncurrent assets, net    6,246    9,214  


     74,303    70,980  


        TOTAL ASSETS   $ 523,201   $ 521,875  


        LIABILITIES AND STOCKHOLDERS' EQUITY            
Current Liabilities:            
     Accounts payable   $ 19,467   $ 19,160  
     Accrued expenses    17,044    21,521  
     Accrued employee compensation and related expenses    16,320    20,792  
     Accrued taxes    14,582    21,091  
     Accrued marketing and customer programs    9,663    6,762  
     Warranty and extended maintenance agreement reserves    3,091    2,250  
     Notes payable    715    494  
     Deferred revenue    8,167    8,275  


        Total current liabilities    89,049    100,345  


Long-term Liabilities:            
     Deferred tax liabilities    965    236  
     Notes payable    500    --  
     Warranty and extended maintenance agreement reserves    2,113    1,444  
     Deferred revenue    5,937    5,772  


        Total long-term liabilities    9,515    7,452  


Commitments and Contingencies (Note 7):            
Partner's Interest in Consolidated Subsidiary    580    786  


Stockholders' Equity:            
     Common stock, $0.10 par value; Authorized: 60,000 shares; Issued: 45,131  
          and 44,390 shares in 2004 and 2003, respectively    4,513    4,439  
     Additional paid-in capital    407,626    383,249  
     Deferred equity-based compensation; Issued: 12 and 3 units in 2004 and  
          2003, respectively    576    138  
     Retained earnings    282,051    240,350  
     Accumulated other comprehensive income    6,497    4,565  
     Treasury stock (10,720 and 9,711 shares in 2004 and 2003, respectively),            
          at cost    (277,206 )  (219,449 )


        Total stockholders' equity    424,057    413,292  


        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 523,201   $ 521,875  


  

The accompanying notes are an integral part of these consolidated financial statements.

3


IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Revenue:                            
    Product revenue   $ 104,318   $ 93,248   $ 206,030   $ 175,319  
    Service revenue    33,061    28,598    64,766    55,774  




     137,379    121,846    270,796    231,093  
Cost of Revenue:                      
    Cost of product revenue    43,527    42,560    88,279    80,831  
    Cost of service revenue    21,850    19,615    43,469    39,129  




     65,377    62,175    131,748    119,960  




     Gross profit    72,002    59,671    139,048    111,133  




Expenses:                      
    Sales and marketing    20,679    17,198    41,662    33,521  
    General and administrative    11,583    9,835    23,825    20,190  
    Research and development    8,685    8,304    17,205    15,641  




      Income from operations    31,055    24,334    56,356    41,781  
Interest income    756    764    1,485    1,454  




      Income before provision for income taxes  
          and partner's interest    31,811    25,098    57,841    43,235  
Provision for income taxes    7,974    8,408    16,346    14,483  
Partner's interest in loss of subsidiary    73    --    206    --  




      Net income   $ 23,910   $ 16,690   $ 41,701   $ 28,752  




Earnings per Share:                      
    Basic   $ 0.69   $ 0.49   $ 1.20   $ 0.85  




    Diluted   $ 0.66   $ 0.47   $ 1.14   $ 0.81  




Weighted Average Shares Outstanding:                      
    Basic    34,584    34,100    34,679    33,956  




    Diluted    36,423    35,531    36,447    35,526  




The accompanying notes are an integral part of these consolidated financial statements.

4


IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

For the Six Months Ended
June 30,

2004
2003
Cash Flows from Operating Activities:                
     Net income   $ 41,701   $ 28,752  
     Adjustments to reconcile net income to net cash provided (used) by operating  
           activities:  
        Depreciation and amortization    8,062    9,845  
        Partner's interest in loss of subsidiary    (207 )  --  
        Provision for (recovery of) uncollectible accounts    (116 )  189  
        Provision for deferred income taxes    1,782    920  
        Tax benefit on exercise of nonqualified stock options and disqualifying            
              dispositions    7,476    7,836  
        Provision for deferred equity-based compensation    46    --  
     Changes in assets and liabilities, net of acquisitions:            
        Accounts receivable    (4,872 )  (4,183 )
        Inventories    (3,591 )  5,355  
        Other assets    408    838  
        Accounts payable    316    11,432  
        Accrued liabilities    (7,140 )  3,654  
        Deferred revenue    31    952  


             Net cash provided by operating activities    43,896    65,590  


Cash Flows from Investing Activities:            
     Purchase of short- and long-term investments    (22,180 )  (27,056 )
     Sales and maturities of short- and long-term investments    21,912    16,864  
     Purchase of property and equipment    (17,676 )  (9,162 )
     Acquisition of equipment leased to customers    (1,230 )  (1,004 )
     Acquisition of intangible assets and business, net of cash acquired    (5,392 )  (50 )


             Net cash used in investing activities    (24,566 )  (20,408 )


Cash Flows from Financing Activities:            
     Payment of notes payable    (304 )  (509 )
     Purchase of treasury stock    (58,070 )  (23,505 )
     Proceeds from exercise of stock options    16,910    15,118  


             Net cash used in financing activities    (41,464 )  (8,896 )


Net effect of exchange rates on cash    76    1,360  


Net increase (decrease) in cash and cash equivalents    (22,058 )  37,646  
Cash and cash equivalents at beginning of period    186,717    113,788  


Cash and cash equivalents at end of period   $ 164,659   $ 151,434  


Supplemental Disclosure of Cash Flow Information:            
     Interest paid   $ 32   $ 10  
     Income taxes paid   $ 12,066   $ 1,426  
Supplemental Disclosure of Non-Cash Information:            
     Value of mature shares exchanged in stock option exercises   $ 64   $ 4,897  

The accompanying notes are an integral part of these consolidated financial statements.

5


IDEXX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

        The accompanying unaudited, consolidated financial statements of IDEXX Laboratories, Inc. (“IDEXX” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year or any future period. These financial statements should be read in conjunction with this Form 10-Q for the three and six months ended June 30, 2004 and the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

        Stock-Based Compensation

        The Company measures costs related to employee stock-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and elects to disclose the pro forma impact of accounting for stock-based compensation plans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB No. 123” (collectively, “SFAS No. 123, as Amended”). Accordingly, no employee compensation cost has been recognized for these plans based on SFAS No. 123, as Amended.

        Had compensation cost for the Company’s stock-based compensation and employee stock purchase plans been determined consistent with the provisions of SFAS No. 123, as Amended, the Company’s net income and net income per common and common equivalent share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Net income:                         
  As reported   23,910   $ 16,690   41,701   28,752  
  Pro forma stock-based employee compensation,                      
       net of tax    (2,011 )  (2,081 )  (3,775 )  (4,128 )




     Pro forma net income    21,899    14,609    37,926    24,624  




Earnings per share:                      
  Basic: as reported   $ 0.69   $ 0.49   $ 1.20   $ 0.85  
  Basic: pro forma    0.63    0.43    1.09    0.73  
  Diluted: as reported    0.66    0.47    1.14    0.81  
  Diluted: pro forma    0.60    0.41    1.05    0.70  

        In order to determine the pro forma impact under SFAS No. 123, as Amended, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Dividend yield   None   None   None   None  
Expected volatility  40.0 % 54.8 % 40.0 % 54.8 %
Risk-free interest rate  3.9 % 2.7 % 3.9 % 2.7 %
Expected life from vesting date to exercise 
     date, in years  2.8   3.1   2.8   3.1  

6


        Options granted to Directors vest fully on the first anniversary of the date of grant. Options granted to employees during the six months ended June 30, 2004 and the year ended December 31, 2003 vest over five years at a rate of 20% per year on each anniversary of the date of grant.

        In order to determine the pro forma impact under SFAS No. 123, as Amended, the fair value of the purchase rights under the employee stock purchase plans is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Dividend yield   None   None   None   None  
Expected volatility  33.0 % 40.0 % 33.0 % 40.0 %
Risk-free interest rate  2.0 % 1.0 % 2.0 % 1.0 %
Expected life in years  0.5   0.5   0.5   0.5  

        The weighted average fair value of options and purchase rights granted were as follows:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Weighted average fair value per underlying share:                        
    Options granted   $24.33   $17.80   $21.60   $18.53  
    Purchase rights under employee stock purchase plans    11.51    8.79    11.51    8.79  

        During 2003, the Company adopted new compensation policies for Directors who are not officers or employees. Under these policies, nonemployee Directors are required to defer a portion of their director compensation in the form of unissued shares of the Company’s common stock (“Deferred Stock Units”) pursuant to the Company’s Director Deferred Compensation Plan. The Deferred Stock Units are valued at the closing sale price of the common stock on the date of grant and exchanged for a fixed number of shares of common stock by the Company one year following a Director’s resignation or retirement. The Company also has adopted an Executive Deferred Compensation Plan (the “Executive Plan”) under which certain members of the Company’s management may elect to defer a portion of their earned cash compensation, beginning with 2003 incentive compensation paid in the first quarter of 2004, in Deferred Stock Units. These Deferred Stock Units will be exchanged for a fixed number of shares of common stock on dates determined by the employee, subject to the limitations of the Executive Plan. The Deferred Stock Units are presented in the stockholders’ equity section of the balance sheet as deferred equity-based compensation. During the three months ended June 30, 2004, no Deferred Stock Units were issued. During the six months ended June 30, 2004, 9,000 Deferred Stock Units valued at $0.4 million were issued. No Deferred Stock Units were issued during the three months and six months ended June 30, 2003.

        Reclassifications

        Reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.

Note 2. 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,
2004
2003
              Raw materials     $ 20,144   $ 16,732  
              Work-in-process    9,226    7,615  
              Finished goods    49,535    50,986  


    $ 78,905   $ 75,333  


  

7


Note 3. Warranty and Extended Maintenance Agreement Reserves

        The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company’s actual warranty obligation is affected by product service rates and costs incurred in repairing units brought in for service. Should actual product service rates or costs differ from management’s estimates, which are based on historical data, revisions to the estimated warranty liability would be required. Below is a summary of changes in accrued warranty reserve for products sold to customers (in thousands):

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Balance, beginning of period     $ 4,988   $ 585   $ 3,303   $ 343  
    Provision for warranty expense    1,105    639    2,290    1,025  
    Provision for change in estimate of prior                      
         warranty expense    (480 )  430    888    430  
    Settlement of warranty liability    (940 )  (118 )  (1,808 )  (262 )




Balance, end of period    4,673    1,536    4,673    1,536  
    Long-term portion    1,597    1,196    1,597    1,196  




 Current portion of warranty reserves   $ 3,076   $ 340   $ 3,076   $ 340  




        The Company sells extended maintenance agreements covering IDEXX instruments and recognizes associated revenue over the life of the contracts. The Company anticipates that losses will be incurred for certain of these contracts and has recognized provisions for the estimated losses. The anticipated loss reserves were $0.5 million and $0.4 million as of June 30, 2004 and December 31, 2003, respectively.

Note 4. Income Taxes

         The effective income tax rates for the three months and six months ended June 30, 2004 were 25.0% and 28.2%, respectively, compared with 33.5% for the three and six months ended June 30, 2003. The majority of this rate reduction resulted from the resolution, during the three months ended June 30, 2004, of an IRS income tax audit through the year 2001. As a result of completing this audit, the Company reduced previously accrued taxes. Other rate reductions resulted from the release of a valuation allowance on international deferred tax assets as a result of a foreign subsidiary demonstrating consistent sustained profitability and changes in certain state and international tax estimates. For the three months ended June 30, 2004, these reductions were partly offset by an increase in the underlying estimated effective tax rate for 2004 from 32.0% to 33.25% due to changes in the estimated geographic mix of profits and losses.

Note 5. Comprehensive Income (in thousands):

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Net income     $ 23,910   $ 16,690   $ 41,701   $ 28,752  
Other comprehensive income (loss):                      
  Foreign currency translation adjustments    (681 )  3,524    35    3,539  
  Change in fair value of foreign currency                      
       contracts classified as hedges, net of tax    1,007    (541 )  1,977    (542 )
  Change in fair market value of                      
       investments, net of tax    (109 )  (43 )  (80 )  (75 )




Comprehensive income   $ 24,127   $ 19,630   $ 43,633   $ 31,674  




8


Note 6. Earnings per Share

        The following is a reconciliation of shares outstanding for basic and diluted earnings per share (in thousands):

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Shares Outstanding for Basic Earnings per Share:                        
  Weighted average shares outstanding    34,572    34,100    34,669    33,956  
  Weighted average deferred stock units outstanding    12    --    10    --  




     34,584    34,100    34,679    33,956  




Shares Outstanding for Diluted Earnings per Share:                      
  Shares outstanding for basic earnings per share    34,584    34,100    34,679    33,956  
  Dilutive effect of options issued to employees    1,839    1,393    1,768    1,524  
  Dilutive effect of warrants    --    38    --    46  




     36,423    35,531    36,447    35,526  




        Deferred Stock Units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of the Company’s common stock are issuable for no cash consideration, the number of shares of the Company’s common stock to be issued is fixed and issuance is not contingent. See Note 1.

        The warrants outstanding as of January 1, 2003 were exercised or expired as of September 30, 2003. No warrants were outstanding during the six months ended June 30, 2004.

        Certain options to acquire shares have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. The weighted average number of anti-dilutive options, the weighted average exercise prices of such anti-dilutive options and the weighted average market value of shares used to calculate the dilutive effect were as follows (in thousands, except per share amounts):

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2004
2003
2004
2003
Weighted average number of shares underlying anti-dilutive                        
     options    --    13    9    9  
Weighted average exercise price per underlying share of                      
     anti-dilutive options    N/A   $ 36.43   $ 60.93   $ 36.43  
Weighted average market value per share   $62.35   $ 35.49   $ 56.54   $ 35.26  

Note 7. Commitments and Contingencies

        The Company is subject to claims that arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can reasonably be estimated. However, the Company’s actual losses with respect to these contingencies could exceed the Company’s accruals. During the six months ended June 30, 2004, there was no significant change in the Company’s material commitments and contingencies, described in Notes 8 and 14 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission, except as follows. In May 2004, the Company agreed to aggregate minimum annual purchases of approximately $4.1 million of electrolyte instruments, components and consumables in 2004, 2005 and 2006, of which the Company has purchased $2.7 million as of June 30, 2004.

        Contingency matters are summarized below:

        In connection with an acquisition in 1998, the Company agreed to issue up to 1,241,000 shares of its common stock to the sellers based on the achievement by the Company’s pharmaceutical business of net sales and operating profit targets through 2004. However, based on the performance of that business, the Company does not anticipate that it will issue any of such shares in connection with this agreement.

9


        Under the Company’s workers’ compensation insurance policy for the year ending December 31, 2004, the Company retains the first $0.25 million in claim liability per incident and approximately $2.0 million in aggregate claim liability based on payroll. For the year ended December 31, 2003, the Company retained the first $0.25 million in claim liability per incident and $1.4 million in aggregate claim liability. The Company estimates claim liability based on claims incurred and the estimated ultimate cost to settle the claims. Accordingly, the Company has recognized cumulative expenses toward the aggregate limits of $0.3 million for claims incurred during the six months ended June 30, 2004 and $1.1 million for claims incurred during the year ended December 31, 2003.

        Under the Company’s employee health care insurance policy, the Company retains claims liability risk up to $0.1 million per incident and an aggregate claim limit based on monthly participation levels in the employee health care plan. The Company estimates its provision for the uninsured portion of employee health care obligations based on costs of claims incurred. Should actual employee health care claims liability exceed estimates, the Company is liable for up to an additional $1.6 million for potential uninsured obligations as of June 30, 2004. The Company has insurance coverage of $1.0 million for claims above the aggregate limit. Should employee health insurance claims exceed this coverage, the Company would have further obligations for the amount in excess of such coverage.

        The Company currently purchases certain products and materials from single sources or a limited number of sources. Some of the products that the Company purchases from these sources are proprietary, and, therefore, may not be available from other sources. If the Company is unable to obtain adequate quantities of these products in the future, then it could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on its results of operations.

        From time to time, the Company has received notices alleging that the Company’s products infringe third party proprietary rights, although the Company is not aware of any pending litigation with respect to such claims.

Note 8. Treasury Stock

        The Company’s Board of Directors has approved the repurchase of up to 12,000,000 shares of the Company’s common stock. The Company may make such purchases in the open market or in negotiated transactions. During the three months and six months ended June 30, 2004, the Company repurchased 573,400 and 1,007,900 shares of common stock for $35.7 million and $57.7 million, respectively. During the three months and six months ended June 30, 2003, the Company repurchased 400,000 and 657,500 shares of common stock for $14.2 million and $23.5 million, respectively. From the inception of the program in August 1999 to June 30, 2004, the Company repurchased approximately 10,549,300 shares for $271.2 million. In addition, during the three and six months ended June 30, 2004, the Company received approximately 100 and 1,100 shares of stock, respectively, which were owned by the respective holders for greater than six months and had a combined market value of less than $0.1 million in payment for the exercise price of stock options. During the six months ended June 30, 2003, the Company received approximately 133,100 shares of stock, which were owned by the holder for greater than six months and had a market value of $4.9 million in payment for the exercise price of stock options.

Note 9. Business Acquisition

        In February 2004, the Company acquired certain assets and assumed certain liabilities of a veterinary reference laboratory located in Ohio. The Company paid cash of $5.3 million, issued a note for $1.0 million and assumed liabilities of $0.5 million, for a total purchase price of $6.8 million. Goodwill and other intangible assets of $5.8 million were assigned to the Companion Animal Group segment. The results of operations of the acquired business have been included with those of the Company since the acquisition date. Pro forma information has not been presented because such information is not material to the financial statements of the Company taken as a whole.

Note 10. Segment Reporting

        The Company discloses information regarding its segments in accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 requires disclosures about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also requires related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer.

10


        The Company is organized into business units by market and customer group. The Company’s reportable segments are the Companion Animal Group (“CAG”), the Water testing business (“Water”), and the Food Diagnostics Group (“FDG”). CAG develops, designs, manufactures and distributes products, and performs services for veterinarians. Water develops, designs, manufactures and distributes products to detect contaminants in water, primarily microbial contamination in drinking water. FDG develops, designs, manufactures and distributes products to detect disease and contaminants in production animals and food. Other items that are not included in the Company’s reportable segments are comprised primarily of corporate research and development expense and interest income. The Company has conformed the financial information about segments for the three months and six months ended June 30, 2003 to its presentation of reportable segments for the three months and six months ended June 30, 2004. Previously the Company had two reportable segments.

        The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 in Notes 2 and 17.

        The following is the segment information (in thousands):

For the Three Months Ended June 30,
CAG
Water
FDG
Other
Consolidated
Total

2004                                  
Revenues   $ 112,731   $ 13,004   $ 11,644   $ --   $ 137,379  





Income (loss) from operations   $ 23,461   $ 5,972   $ 2,397   $ (775 ) $ 31,055  
Interest income    --    --    --    756    756  





Income (loss) before provisions for (benefit of)                           
   income taxes and partner's interest    23,461    5,972    2,397    (19 )  31,811  
Provision for (benefit of) income taxes    5,867    1,494    618    (5 )  7,974  
Partner's interest in loss of subsidiary    --    --    73    --    73  





    Net income (loss)   $ 17,594   $ 4,478   $ 1,852   $ (14 ) $ 23,910  





2003                                
Revenues   $ 98,794   $ 11,292   $ 11,760   $ --   $ 121,846  





Income (loss) from operations   $ 18,525   $ 4,648   $ 1,904   $ (743 ) $ 24,334  
Interest income    --    --    --    764    764  





Income (loss) before provisions for                           
    (benefit of) income taxes    18,525    4,648    1,904    21    25,908  
Provision for (benefit of) income taxes    6,206    1,557    638    7    8,408  





    Net income (loss)   $ 12,319   $ 3,091   $ 1,266   $ 14   $ 16,690  






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For the Six Months Ended June 30,
CAG
Water
FDG
Other
Consolidated
Total

2004                                  
Revenues   $ 222,561   $ 24,858   $ 23,377   $ --   $ 270,796  





Income (loss) from operations   $ 41,709   $ 11,027   $ 5,320   $ (1,700 ) $ 56,356  
Interest income    --    --    --    1,485    1,485  





Income (loss) before provisions for (benefit of)                           
   income taxes and partner's interest    41,709    11,027    5,320    (215 )  57,841  
Provision for (benefit of) income taxes    11,746    3,105    1,556    (61 )  16,346  
Partner's interest in loss of subsidiary    --    --    206    --    206  





    Net income (loss)   $ 29,963   $ 7,922   $ 3,970   $ (154 ) $ 41,701  





2003                                
Revenues   $ 186,982   $ 21,360   $ 22,751   $ --   $ 231,093  





Income (loss) from operations   $ 31,212   $ 8,761   $ 3,349   $ (1,541 ) $ 41,781  
Interest income    --    --    --    1,454    1,454  





Income (loss) before provisions for                           
    (benefit of) income taxes    31,212    8,761    3,349    (87 )  43,235  
Provision for (benefit of) income taxes    10,455    2,935    1,122    (29 )  14,483  





    Net income (loss)   $ 20,757   $ 5,826   $ 2,227   $ (58 ) $ 28,752  






Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This quarterly report on Form 10-Q includes or incorporates forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to future revenue growth rates, demand for our products, realizability of assets, warranty expense, and competition. You can generally identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” and similar words and expressions are intended to help you identify forward-looking statements. These statements give our current expectations or forecasts of future events, are based on current estimates, projections, beliefs, and assumptions of IDEXX and its management, and are not guarantees of future performance. Actual results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties as more fully described under the heading “Future Operating Results” in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003. The risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2003 do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Quarterly Report was first filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

        In addition to the discussion below under “Critical Accounting Policies and Estimates,” refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2003 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” for a discussion of significant judgments and estimates used in the preparation of our consolidated financial statements.

BUSINESS OVERVIEW

        We operate primarily through three business segments: the Companion Animal Group (“CAG”), Water testing business (“Water”) and the Food Diagnostics Group (“FDG”). CAG comprises our veterinary diagnostic products and services (rapid assays, instruments, instrument consumables, and laboratory and consulting services), veterinary pharmaceuticals, and veterinary information products and services. Water develops, designs, manufactures and distributes products to detect contaminants in water. FDG develops, designs, manufactures and distributes products to detect disease and contaminants in production animals and food. Other items that are not included in our reportable segments are comprised primarily of corporate research and development and interest income.

12


        In the U.S., we sell instrument consumables, rapid assays and pharmaceuticals through distributors, and, therefore, our reported sales of these products are sales made to distributors, rather than sales to veterinarians, the end-users. Because distributor inventory levels and purchasing patterns may fluctuate, sales of a particular product line in a particular period may not always be representative of the underlying customer demand for the product. Therefore, we closely track sales of these products by our distributors to the clinics (“clinic-level sales”), which we think provides a more accurate picture of the real growth rate for these products. In the discussion of results below, we note certain instances where we believe reported sales have been influenced, positively or negatively, by changes in distributor inventories.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The critical accounting policies utilized during the six months ended June 30, 2004 are consistent with those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” Except as described below, the significant judgments and estimates used in the preparation of our consolidated financial statements for the six months ended June 30, 2004 are also consistent with those used to prepare the consolidated financial statements as of and for the year ended December 31, 2003.

        As of June 30, 2004 and December 31, 2003, our net inventories included $12.3 million and $7.2 million, respectively, of component parts and finished goods associated with our LaserCyte® hematology instrument. In addition, we had firm purchase commitments for an additional $3.0 million of component parts as of June 30, 2004. As of June 30, 2004 and December 31, 2003, $3.4 million and $1.5 million of this inventory, respectively, required rework before it could be used to manufacture finished goods. As of June 30, 2004, the inventory was net of a $0.3 million reserve for inventory estimated to be unusable. No amounts were reserved against this inventory as of December 31, 2003 for unusable inventory. We expect to fully realize our investment in inventory and purchase commitments. However, if we alter the design of this product, we may be required to write off some or all of the remaining associated inventory.

        We provide for the estimated cost of product warranties at the time revenue is recognized. Our actual warranty obligation is affected by product service rates and costs incurred in repairing units brought in for service. We evaluate our warranty obligation on a quarterly basis based on historical data. Should actual product service rates or costs differ from our estimates, revisions to the estimated warranty liability would be required. As of June 30, 2004 and December 31, 2003, we had accrued $4.7 million and $3.3 million, respectively, for estimated warranty expense including warranty reserves of $4.4 million and $3.0 million, respectively, for LaserCyte® systems.

        The increase in warranty expense during the six months ended June 30, 2004 compared to the same period of the prior year was due to the growing installed base of LaserCyte® systems and the continued development of service experience for these instruments. We charge warranty expense to the cost of LaserCyte® revenue at the time revenue is recognized on the system based on the estimated cost to repair the instrument over its two-year warranty period. Cost of revenue reflects not only estimated warranty expense for the systems sold in the current period, but also any changes in estimated warranty expense for the installed base that results from our quarterly evaluation of service experience.

        NAVIGATOR® is our pharmaceutical product for the treatment of equine protozoal myeloencephalitis (“EPM”) that we launched during the fourth quarter of 2003. Our inventories as of June 30, 2004 included $8.8 million of inventory associated with NAVIGATOR®, consisting of $0.5 million of finished goods and $8.3 million of active ingredient and other raw materials. We evaluate this inventory on a quarterly basis for realizability based upon the active ingredient and finished goods expiration dates and assumptions regarding sales volumes that we expect to achieve. During the six months ended June 30, 2004, we incurred no write-downs of inventory based upon these evaluations.

        The active ingredient included in this inventory will expire at various dates beginning in the second quarter of 2005 through the first quarter of 2007. However, under the inventory exchange agreement described in Note 2 to the Consolidated Financial Statements of the Company contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, approximately 66% of the active ingredient inventory will be replaced by our supplier with active ingredient that will expire in 2008 or later. Active ingredient may be converted to finished goods at any time prior to expiration of the active ingredient, and the resulting finished goods will have a shelf-life of four years.

13


        We believe that the annual worldwide market for EPM treatments is approximately 30,000 treatments and that we will capture 20% to 25% of that market over a six-year period. Over these six years, we anticipate that annual sales of NAVIGATOR® will grow to approximately $5.0 million to $5.5 million before leveling off. NAVIGATOR® sales have fallen short of our expectations since launch; however, we have sold NAVIGATOR® for only two full quarters and therefore it is difficult to forecast sales of this product over the eight-year period during which we expect our inventory to expire. If our estimates of growth are reduced in the future based on further actual sales experience or other factors, we may be required to write off some portion of inventory due to its expected expiration prior to sale. For example, if NAVIGATOR® sales over the next six years are 20% less than currently estimated, we expect that approximately $1.4 million of inventory would need to be written off.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Revenue

        Total Company. Revenue for the total company increased $15.5 million, or 13%, to $137.4 million from $121.8 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:

For the Three Months Ended June 30,
Net Revenue (in thousands)
2004
2003
Dollar Change
Percentage Change
Percentage Change from Currency (1)
CAG     $ 112,731   $ 98,794   $ 13,937    14%    2%  
Water    13,004    11,292    1,712    15%    4%  
FDG    11,644    11,760    (116 )  (1% )  4%  



  Total Company   $ 137,379   $ 121,846   $ 15,533    13%    2%  





(1)     Represents the percentage change in revenue attributed to the effect of changes in currency rates from 2003 to 2004.

        Companion Animal Group. Revenue for CAG increased $13.9 million, or 14%, to $112.7 million from $98.8 million in the same period of the prior year. This increase resulted from increased sales of laboratory services, instrument consumables, instruments, rapid assay products, and pharmaceutical products. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $2.1 million, or 2%, to the increase in CAG revenue.

        The increase in sales of laboratory services (an increase of $4.5 million, or 19%) resulted primarily from higher testing volume at existing laboratories; the inclusion of sales from laboratories acquired in 2004 and 2003; the favorable impact of currency exchange rates on sales at our laboratories outside the U.S; and favorable pricing.

        The increase in sales of instrument consumables (an increase of $3.3 million, or 11%) was due mainly to increased domestic clinic-level sales and higher unit volume outside the U.S. of VetTest® slides and, to a lesser extent, LaserCyte® tubes. The favorable impact of currency exchange rates on sales outside the U.S. and the impact of changes in distributors’ inventory levels also contributed to increased sales, but were partly offset by higher relative sales in geographies where products are sold at lower unit prices. Shipments to distributors during the three months ended June 30, 2003 were reduced as a result of the Company’s continuing efforts to improve efficiency in the distribution channel. The reduced shipments during the three months ended June 30, 2003 had a favorable impact on sales growth in the 2004 period. The collective impact of favorable currency exchange and favorable distributor inventory comparisons caused reported growth for the period to be higher than our estimates of the underlying clinic-level growth of instrument consumable products.

        The increase in sales of instruments (an increase of $2.3 million, or 30%) was due primarily to increased sales of the LaserCyte® hematology system and computed radiography systems.

14


        The increase in sales of rapid assay products (an increase of $1.9 million, or 8%) was due primarily to increased domestic clinic-level sales of both canine and feline products and, to a lesser extent, the favorable impact of currency exchange rates on sales outside the U.S., partly offset by the impact of changes in distributors’ inventory levels. The increase in domestic clinic-level sales was attributable to demand for both established products sold during the prior year and for our new SNAP® test to screen dogs and cats for Giardia infection, which was launched during the first quarter of 2004. Distributors’ inventory levels decreased during the three months ended June 30, 2004 compared to an increase during the same period of the prior year, which had an unfavorable impact on sales growth in the 2004 period. We expect more competition with certain of our products in the rapid assay market, which could negatively affect growth in rapid assay sales.

        The increase in sales of pharmaceutical products (an increase of $1.3 million, or 71%) resulted primarily from sales of new products launched in 2003 and 2004, particularly initial sales to distributors in connection with the launch of SURPASS™, and, to a lesser extent, from increased clinic-level demand for existing products.

        Water. Revenue for Water increased $1.7 million, or 15%, to $13.0 million from $11.3 million for the same period of the prior year. The increase resulted primarily from higher sales volume outside the U.S. and the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates contributed an aggregate of $0.4 million, or 4%, to the increase in Water revenue.

        Food Diagnostics Group. Revenue for FDG decreased $0.1 million, or 1%, to $11.6 million from $11.8 million for the same period of the prior year. Excluding the impact of currency exchange rates, production animal diagnostics sales and dairy testing product sales decreased due to lower unit volumes and lower average unit prices. The decline in production animal diagnostics sales is primarily due to lower market demand in the poultry and porcine livestock testing markets. The favorable impact of currency exchange rates on sales outside the U.S. substantially offset these decreases, and contributed an aggregate of $0.4 million, or 4%, to FDG revenue.

Gross Profit

        Total Company. Gross profit for the total company increased $12.3 million, or 21%, to $72.0 million from $59.7 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased to 52% from 49% in the same period of the prior year. The following table presents gross profit and gross profit percentage for the Company and its operating segments:

For the Three Months Ended June 30,
Gross Profit (in thousands)
2004
Percent of
Sales

2003
Percent of
Sales

Dollar
Change

Percentage
Change

CAG     $ 56,109    50%   $ 46,242    47%   $ 9,867    21%  
Water    8,748    67%    7,463    66%    1,285    17%  
FDG    7,145    61%    5,966    51%    1,179    20%  



Total Company   $ 72,002    52%   $ 59,671    49%   $ 12,331    21%  




        Companion Animal Group. Gross profit for CAG increased $9.9 million, or 21%, to $56.1 million from $46.2 million in the same period of the prior year due to increased sales volume across the CAG product lines and to an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 50% from 47% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to productivity improvements related to our LaserCyte® hematology instrument, including both manufacturing and service efficiencies. The service cost improvements during the quarter generated a favorable change in our estimated cost of product warranties and extended maintenance agreements for all placed instruments for which we have such future obligations. Gross profit percentage improvements also resulted from the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses; other productivity improvements, partly due to fixed costs spread over a higher revenue base; and the lower cost of VetTest® slides sold in 2004. These improvements were partially offset by a lower gross margin percentage recognized from a laboratory acquired in 2004 and the impact of marketing program accruals.

        Water. Gross profit for Water increased $1.3 million, or 17%, to $8.7 million from $7.5 million for the same period in the prior year, primarily due to increased sales volume and, to a lesser extent, to an increase in the gross profit percentage. As a percentage of Water revenue, gross profit increased to 67% from 66% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses.

15


        Food Diagnostics Group. Gross profit for FDG increased $1.2 million, or 20%, to $7.1 million from $6.0 million for the same period in the prior year, primarily due to an increase in the gross profit percentage. As a percentage of FDG revenue, gross profit increased to 61% from 51% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to a reduction in estimated liability for a third party claim and, to a lesser extent, the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses. These increases were partially offset by lower average unit sales prices, partly due to unfavorable geographic mix, and unfavorable product sales mix.

Operating Expenses and Operating Income

        Total Company. Total company operating expenses increased $5.6 million to $40.9 million from $35.3 million for the same period of the prior year. As a percentage of revenue, operating expenses increased slightly to 30% from 29% for the same period in the prior year. The following tables present operating expenses and operating income for the Company and its operating segments:

For the Three Months Ended June 30,
Operating Expenses
(in thousands)

2004
Percent of
Sales

2003
Percent of
Sales

Dollar
Change

Percentage
Change

CAG     $ 32,648    29%   $ 27,717    28%   $ 4,931    18%  
Water    2,776    21%    2,815    25%    (39 )  (1% )
FDG    4,748    41%    4,062    35%    686    17%  
Other    775    N/A    743    N/A    32    4%  



     Total Company   $ 40,947    30%   $ 35,337    29%   $ 5,610    16%  





Operating Income
(in thousands)

2004
Percent of
Sales

2003
Percent of
Sales

Dollar
Change

Percentage
Change

CAG     $ 23,461    21%   $ 18,525    19%   $ 4,936    27%  
Water    5,972    46%    4,648    41%    1,324    28%  
FDG    2,397    21%    1,904    16%    493    26%  
Other    (775 )  N/A    (743 )  N/A    (32 )  (4% )



     Total Company   $ 31,055    23%   $ 24,334    20%   $ 6,721    28%  




        Companion Animal Group. Operating expenses for CAG increased $4.9 million, or 18%, to $32.6 million from $27.7 million in the same period of the prior year. The increase was attributable to a 25% ($3.5 million) increase in sales and marketing expense, an 18% ($1.4 million) increase in general and administrative expense, and a 1% ($0.1 million) increase in research and development expense. The increase in sales and marketing expense resulted primarily from increased sales and sales support personnel and marketing program costs and the unfavorable impact of foreign currency denominated expenses. The increase in general and administrative expense primarily reflects higher spending on information technology and other corporate functions, and the unfavorable impact of foreign currency denominated expenses, partially offset by the effect of a payment received to settle certain litigation. The increase in research and development expense resulted primarily from increased staffing and higher spending to support diagnostic development programs, substantially offset by miscellaneous cost reductions.

        Water. Operating expenses for Water remained constant at $2.8 million. As a percentage of revenue, operating expenses decreased to 21% from 25% in the same period of the prior year. Sales and marketing expense reductions, due primarily to lower personnel costs in the U.S., were substantially offset by increased consulting and European personnel costs. There were no significant fluctuations in the nature or amounts of research and development expense and general and administrative expenses.

        Food Diagnostics Group. Operating expenses for FDG increased $0.7 million, or 17%, to $4.7 million from $4.1 million in the same period of the prior year. The net increase resulted primarily from a 37% ($0.4 million) increase in general and administrative expense, a 21% ($0.2 million) increase in research and development expense, and a 4% ($0.1 million) increase in sales and marketing expense. The increase in general and administrative expense reflects recurring expenses associated with the China joint venture formed in 2003 and higher spending on information technology and other corporate functions. The increase in research and development expense was due primarily to increased compensation costs and other spending to support product development, and higher patent-related legal expenses. The increase in sales and marketing expense resulted primarily from increased spending in support of our HerdChek® BSE Antigen Test Kit, a rapid test for detection of bovine spongiform encephalopathy (“BSE”), substantially offset by the nonrecurrence in 2004 of expenses incurred in 2003 in connection with the formation of the China joint venture.

16


        Other. Operating expenses, consisting primarily of corporate research and development, increased slightly to $0.8 million from $0.7 million for the same period of the prior year.

Interest Income

        Net interest income was $0.8 million for the three months ended June 30, 2004 and 2003. The impact on interest income of higher invested cash balances was offset by lower effective interest rates.

Provision for Income Taxes

         Our effective income tax rate for the three months ended June 30, 2004 was 25.0% compared with 33.5% for the same period of the prior year. The majority of this rate reduction resulted from the resolution, during the three months ended June 30, 2004, of an IRS income tax audit through the year 2001. As a result of completing this audit, the Company reduced previously accrued taxes. Other rate reductions resulted from the release of a valuation allowance on international deferred tax assets as a result of a foreign subsidiary demonstrating consistent sustained profitability and changes in certain state and international tax estimates. These reductions were partly offset by an increase in the underlying estimated effective tax rate for 2004 from 32.0% to 33.25% due to changes in the estimated geographic mix of profits and losses.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Revenue

        Total Company. Revenue for the total company increased $39.7 million, or 17%, to $270.8 million from $231.1 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:

For the Six Months Ended June 30,
Net Revenue (in thousands)
2004
2003
Dollar Change
Percentage Change
Percentage Change from Currency (1)
CAG     $ 222,561   $ 186,982   $ 35,579    19%    3%  
Water    24,858    21,360    3,498    16%    5%  
FDG    23,377    22,751    626    3%    6%  



  Total Company   $ 270,796   $ 231,093   $ 39,703    17%    4%  





(1)     Represents the percentage change in revenue attributed to the effect of changes in currency rates from 2003 to 2004.

        Companion Animal Group. Revenue for CAG increased $35.6 million, or 19%, to $222.6 million from $187.0 million in the same period of the prior year. This increase resulted from increased sales of laboratory services, instrument consumables, rapid assay products, instruments, pharmaceutical products, and veterinary practice management software and services. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $6.1 million, or 3%, to the increase in CAG revenue.

        The increase in sales of laboratory services (an increase of $9.4 million, or 21%) resulted primarily from higher testing volume at existing laboratories; the inclusion of sales from laboratories acquired in 2004 and late 2003; the favorable impact of currency exchange rates on sales at our laboratories outside the U.S.; and favorable pricing.

        The increase in sales of instrument consumables (an increase of $8.4 million, or 14%) was due mainly to increased domestic clinic-level sales of VetTest® slides and, to a lesser extent, LaserCyte® tubes, as well as higher unit volume outside the U.S.; the favorable impact of currency exchange rates on sales outside the U.S.; and the impact of changes in distributors’ inventory levels. Shipments to distributors during the six months ended June 30, 2003 were reduced as a result of the Company’s continuing efforts to improve efficiency in the distribution channel. The reduced shipments during the six months ended June 30, 2003 had a positive impact on sales growth in the 2004 period. The collective impact of favorable currency exchange and favorable distributor inventory comparisons caused reported growth for the period to be higher than our estimates of the underlying clinic-level growth of instrument consumable products.

17


        The increase in sales of rapid assay products (an increase of $8.0 million, or 18%) was due primarily to increased domestic clinic-level sales of both existing canine and feline products as well as demand for our new SNAP® test to screen dogs and cats for Giardia infection, which was launched during the first quarter of 2004; the impact of changes in distributors’ inventory levels; and, to a lesser extent, the favorable impact of currency exchange rates on sales outside the U.S. Shipments to distributors during the six months ended June 30, 2003 were reduced as a result of the Company’s continuing efforts to improve efficiency in the distribution channel. The reduced shipments during the six months ended June 30, 2003 had a positive impact on sales growth in the 2004 period, which reflected customary seasonal increases. The collective impact of favorable distributor inventory comparisons and favorable currency exchange caused reported growth for the period to be higher than our estimates of the underlying clinic-level growth of rapid assay products. We expect more competition with certain of our products in the rapid assay market, which could negatively affect growth in rapid assay sales.

        The increase in sales of instruments (an increase of $5.8 million, or 42%) was due primarily to increased sales of the LaserCyte® hematology system and, to a lesser extent, computed radiography systems.

        The increase in sales of pharmaceutical products (an increase of $1.9 million, or 55%) resulted primarily from sales of new products launched in 2003 and 2004 and from increased clinic-level demand for existing products.

        The increase in sales of veterinary practice management software and services (an increase of $1.5 million, or 15%) resulted primarily from higher volume of complete system sales.

        Water. Revenue for Water increased $3.5 million, or 16%, to $24.9 million from $21.4 million for the same period of the prior year. The increase resulted primarily from higher unit sales volume and the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates contributed an aggregate of $1.0 million, or 5%, to the increase in Water revenue.

        Food Diagnostics Group. Revenue for FDG increased $0.6 million, or 3%, to $23.4 million from $22.8 million for the same period of the prior year. The increase was due primarily to the favorable impact of currency exchange rates on sales outside the U.S., which contributed an aggregate of $1.4 million, or 6%, to the increase in FDG revenue. Excluding the impact of currency exchange rates, production animal diagnostics sales decreased due primarily to lower average unit prices, partly offset by higher volumes, and sales of dairy testing products decreased due primarily to lower volume and lower average unit prices.

Gross Profit

        Total Company. Gross profit for the total company increased $27.9 million, or 25%, to $139.0 million from $111.1 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased to 51% from 48% in the same period of the prior year. The following table presents gross profit and gross profit percentage for the Company and its operating segments:

For the Six Months Ended June 30,
Gross Profit (in thousands)
2004
Percent of
Sales

2003
Percent of
Sales

Dollar
Change

Percentage
Change

CAG     $ 108,185    49%   $ 85,649    46%   $ 22,536    26%  
Water    16,741    67%    14,027    66%    2,714    19%  
FDG    14,122    60%    11,457    50%    2,665    23%  



Total Company   $ 139,048    51%   $ 111,133    48%   $ 27,915    25%  




        Companion Animal Group. Gross profit for CAG increased $22.5 million, or 26%, to $108.2 million from $85.6 million in the same period of the prior year due primarily to increased sales volume across the CAG product lines and, to a lesser extent, to an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 49% from 46% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to productivity improvements across several CAG product lines and services, partly due to fixed costs spread over a higher revenue base; the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses; the lower cost of VetTest® slides sold in 2004; and favorable product mix resulting from higher relative sales of rapid assay products. These improvements were partially offset by a lower gross margin percentage recognized on our LaserCyte® hematology instrument, partly due to increased actual service costs and higher estimated service obligations for instruments placed from inception through the end of the period, and, to a lesser extent, a lower gross margin recognized from a laboratory acquired in 2004.

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        Water. Gross profit for Water increased $2.7 million, or 19%, to $16.7 million from $14.0 million for the same period in the prior year, primarily due to increased unit volume and, to a lesser extent, an increase in the gross profit percentage. As a percentage of Water revenue, gross profit increased to 67% from 66% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses, and, to a lesser extent, productivity improvements, partly due to fixed costs spread over a higher revenue base, partially offset by lower average unit prices.

        Food Diagnostics Group. Gross profit for FDG increased $2.7 million, or 23%, to $14.1 million from $11.5 million for the same period in the prior year, primarily due to an increase in the gross profit percentage. As a percentage of FDG revenue, gross profit increased to 60% from 50% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to a reduction in estimated liability for a third party claim and, to a lesser extent, the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses, and increased manufacturing efficiencies, partially offset by lower average unit sales prices. Manufacturing efficiencies increased compared to the same period in the prior year due, in part, to the concentration of production of certain products into the first quarter of 2004 compared to production levels spread throughout the year in 2003, and to the recovery and sale of inventory that had been written down in a prior period.

Operating Expenses and Operating Income

        Total Company. Total company operating expenses increased $13.3 million to $82.7 million from $69.4 million for the same period of the prior year. As a percentage of revenue, operating expenses increased slightly to 31% from 30% in the same period of the prior year. The following tables present operating expenses and operating income for the Company and its operating segments:

For the Six Months Ended June 30,
Operating Expenses
(in thousands)

2004
Percent of
Sales

2003
Percent of
Sales

Dollar
Change

Percentage
Change

CAG     $ 66,476    30%   $ 54,437    29%   $ 12,039    22%  
Water    5,714    23%    5,266    25%    448    9%  
FDG    8,802    38%    8,108    36%    694    9%  
Other    1,700    N/A    1,541    N/A    159    10%  



     Total Company   $ 82,692    31%   $ 69,352    30%   $ 13,340    19%  





Operating Income
(in thousands)

2004
Percent of
Sales

2003
Percent of
Sales

Dollar
Change

Percentage
Change

CAG     $ 41,709    19%   $ 31,212    17%   $ 10,497    34%  
Water    11,027    44%    8,761    41%    2,266    26%  
FDG    5,320    23%    3,349    15%    1,971    59%  
Other    (1,700 )  N/A    (1,541 )  N/A    (159 )  (10% )



     Total Company   $ 56,356    21%   $ 41,781    18%   $ 14,575    35%  




        Companion Animal Group. Operating expenses for CAG increased $12.0 million, or 22%, to $66.5 million from $54.4 million in the same period of the prior year. The increase was attributable to a 30% ($8.2 million) increase in sales and marketing expense, an 18% ($2.9 million) increase in general and administrative expense, and an 8% ($0.9 million) increase in research and development expense. The increase in sales and marketing expense resulted primarily from increased personnel and marketing program costs and the unfavorable impact of foreign currency denominated expenses. The increase in general and administrative expense reflects higher spending on information technology and other corporate functions, the unfavorable impact of foreign currency denominated expenses, and higher personnel costs, partially offset by the effect of a payment received during the second quarter to settle certain litigation. The increase in research and development expense results primarily from increased staffing and higher spending to support instrument and pharmaceutical product development.

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        Water. Operating expenses for Water increased $0.4 million, or 9%, to $5.7 million from $5.3 million in the same period of the prior year. The increase was primarily attributable to a 20% ($0.3 million) increase in general and administrative expense. The increase in general and administrative expense reflects higher spending on information technology and other corporate functions, the impact of a gain from a legal settlement in 2003 recorded as a reduction to general and administrative expense, and the unfavorable impact of foreign currency denominated expenses. There were no significant fluctuations in the nature or amounts of research and development expense and sales and marketing expenses.

        Food Diagnostics Group. Operating expenses for FDG increased $0.7 million, or 9%, to $8.8 million from $8.1 million in the same period of the prior year. The net increase resulted primarily from a 22% ($0.5 million) increase in general and administrative expense and a 12% ($0.3 million) increase in research and development expense, partly offset by a decrease in sales and marketing expense of 1% (less than $0.1 million). The increase in general and administrative expense resulted primarily from recurring expenses associated with the China joint venture formed in 2003, higher spending on information technology and other corporate functions, and the unfavorable impact of foreign currency denominated expenses. The increase in research and development expense was due primarily to increased compensation costs and higher patent-related legal expenses. The decrease in sales and marketing expense resulted primarily from the nonrecurrence in 2004 of expenses incurred in 2003 in connection with the formation of the China joint venture, substantially offset by higher spending on compensation and marketing program costs, and increased spending in support of our HerdChek® BSE Antigen Test Kit, a rapid test for detection of BSE.

        Other. Operating expenses for 2004, consisting primarily of corporate research and development, increased $0.2 million, or 10%, to $1.7 million from $1.5 million for the same period of the prior year.

Interest Income

        Net interest income was $1.5 million for the six months ended June 30, 2004 and 2003. The impact on interest income of higher invested cash balances was offset by lower effective interest rates.

Provision for Income Taxes

         Our effective income tax rate for the six months ended June 30, 2004 was 28.2% compared with 33.5% for the same period of the prior year. The majority of this rate reduction resulted from the resolution, during the three months ended June 30, 2004, of an IRS income tax audit through the year 2001. As a result of completing this audit, the Company reduced previously accrued taxes. Other rate reductions resulted from the release of a valuation allowance on international deferred tax assets as a result of a foreign subsidiary demonstrating consistent sustained profitability and changes in certain state and international tax estimates.

LIQUIDITY AND CAPITAL RESOURCES

        We fund the capital needs of our business through cash generated from operations. We had $212.7 million and $220.7 million of cash, cash equivalents and short-term investments as of June 30, 2004 and December 31, 2003, respectively, and working capital of $282.2 million and $270.2 million, respectively. As of June 30, 2004 and December 31, 2003, we also had long-term investments, primarily in municipal bonds, of $21.1 million and $35.1 million, respectively. As of June 30, 2004 and December 31, 2003, we had total cash, short-term investments and long-term investments of $233.9 million and $255.8 million, respectively.

        Cash provided by operating activities was $43.9 million for the six months ended June 30, 2004. Cash of $7.5 million was generated from the income tax benefit obtained from the exercise of nonqualified stock options and disqualifying dispositions of incentive stock options by employees. Cash of $7.1 million was used by a decrease in accrued liabilities (defined as accrued expenses, accrued employee compensation and related expenses, accrued taxes, accrued marketing and customer programs, and accrued warranty and extended maintenance reserves) attributable primarily to tax and compensation payments. Cash of $4.9 million was used by an increase in accounts receivable due primarily to increased sales volume. Cash of $3.6 million was used by an increase in inventories.

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        Cash used for investing activities was $24.6 million for the six months ended June 30, 2004. We purchased approximately $17.7 million of fixed assets and $1.2 million of equipment for lease to customers during the six months ended June 30, 2004. We used $5.3 million to acquire certain assets of a veterinary reference laboratory located in Ohio and other intangibles. The net use of cash for purchases and sales of investment instruments was $0.3 million. We expect our total spending for capital expenditures in 2004 to be approximately $35.0 million.

        Cash used for financing activities was $41.5 million for the six months ended June 30, 2004. We used cash of $58.1 million to repurchase 1,007,900 shares of our common stock and to pay for shares purchased at the end of 2003. As of June 30, 2004, approximately 10,549,300 shares of our common stock had been repurchased under the stock repurchase plan. The repurchase plan was originally authorized by the Board of Directors in 1999 and subsequently amended to encompass total purchases of up to 12,000,000 shares of our common stock in the open market or in negotiated transactions. Employees’ exercises of options yielded cash proceeds of $16.9 million during the six months ended June 30, 2004. We used cash of $0.3 million for payment on notes.

        The slides sold for use in our VetTest® instruments are purchased under an agreement with a supplier at fixed prices. Under this agreement we are required to make additional slide purchases in 2004 of approximately $24.1 million.

        The Company purchases electrolyte instruments, components and consumables under an agreement, as amended, with a supplier at fixed prices. Under this agreement, as amended, we are required to make additional purchases in 2004 of approximately $1.4 million.

        In evaluating liquidity, we consider cash and investments collectively. We believe that current cash, short-term investments, long-term investments and funds generated from operations will be sufficient to fund our operations and capital purchase requirements.

FUTURE OPERATING RESULTS

        The future operating results of IDEXX involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below, as well as those discussed elsewhere in this report.

        IDEXX’s Future Growth and Profitability Depends on Several Factors

        The future success of our business depends upon our ability to successfully implement various strategies, including:

Developing, manufacturing and marketing new products with new features and capabilities, including pharmaceutical products and a new clinical chemistry instrument, and improving and enhancing existing products, including the LaserCyte®system;

Expanding our market by increasing use of our products by our customers;

Strengthening our sales and marketing activities both within the U.S. and in geographies outside of the U.S.;

Developing and implementing new technology development and licensing strategies; and identifying and completing acquisitions that enhance our existing businesses or create new business areas for us; and

Reducing the costs of manufacturing our products through operating efficiencies.

        However, we may not be able to successfully implement some or all of these strategies and increase or sustain our rate of growth or profitability.

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  IDEXX’s Markets are Competitive and Subject to Rapid and Substantial Technological Change

        We face intense competition within the markets in which we sell our products and services. We expect that future competition will become even more intense, and that we will have to compete with changing and improving technologies. Some of our competitors and potential competitors, including large pharmaceutical companies, have substantially greater capital, manufacturing, marketing and research and development resources than we do.

  IDEXX’s Products and Services are Subject to Various Government Regulations

        In the U.S., the manufacture and sale of our products are regulated by agencies such as the U.S. Department of Agriculture (“USDA”), U.S. Food and Drug Administration (“FDA”) and the U.S. Environmental Protection Agency (“EPA”). Most diagnostic tests for animal health applications, including our canine, feline, poultry and livestock tests, must be approved by the USDA prior to sale. Our water testing products must be approved by the EPA before they may be used by customers in the U.S. as a part of a water quality monitoring program required by the EPA. Our pharmaceutical and dairy testing products require approval by the FDA. The manufacture and sale of our products are subject to similar laws in many foreign countries. Any failure to comply with legal and regulatory requirements relating to the manufacture and sale of our products in the U.S. or in other countries could result in fines and sanctions against us or removals of our products from the market, which could have a material adverse effect on our results of operations.

        We have entered into an agreement with the FDA under which we have agreed, among other things, to perform specified lot release and stability testing of our SNAP® beta-lactam dairy testing products and to provide related data to the FDA. If the FDA were to determine that one or more lots of product failed to meet applicable criteria for product performance or stability, the FDA could take various actions, including requiring us to recall products or restricting our ability to sell these products. Sales of dairy antibiotic residue testing products were $7.9 million for the six months ended June 30, 2004.

        Commercialization of animal health pharmaceuticals in the U.S. requires prior approval by the FDA. To obtain such approvals, we are required to submit substantial clinical, manufacturing and other data to the FDA. Regulatory approval for products submitted to the FDA may take several years and following approval, the FDA continues to regulate all aspects of the manufacture, labeling, storage, record keeping and promotion of pharmaceutical products. Failure to obtain, or delays in obtaining, FDA approval for new pharmaceutical products would have a negative impact on our future growth.

  Changes in Veterinary Medical Practices Could Negatively Affect Operating Results

        We believe that more than half of all veterinary diagnostic testing occurs in laboratories. Although we have a significant laboratory business, our in-clinic testing business is more material to our results of operations. If testing by companion animal veterinarians generally were to shift toward increased laboratory testing and away from in-clinic testing, this shift could have a material adverse effect on our results of operations.

        The market for diagnostic tests could be negatively impacted by the introduction or broad market acceptance of vaccines or preventatives for the diseases and conditions for which we sell diagnostic tests and services. Eradication or substantial declines in the prevalence of certain diseases also could lead to a decline in diagnostic testing for such diseases. Such a decline could have a material adverse effect on our results of operations.

  IDEXX’s Success is Heavily Dependent Upon its Proprietary Technologies

        We rely on a combination of patent, trade secret, trademark and copyright law to protect our proprietary rights. If we do not have adequate protection of our proprietary rights, our business may be affected by competitors who develop substantially equivalent technologies that compete with us.

        We cannot assure that we will obtain issued patents, that any patents issued or licensed to us will remain valid, or that any patents owned or licensed by us will provide protection against competitors with similar technologies. Even if our patents cover products sold by our competitors, the time and expense of litigating to enforce our patent rights could be substantial, and could have a material adverse effect on our results of operations. In addition, expiration of patent rights could result in substantial new competition in the markets for products previously covered by those patent rights.

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        In the past, we have received notices claiming that our products infringe third-party patents and we may receive such notices in the future. Patent litigation is complex and expensive and the outcome of patent litigation can be difficult to predict. We cannot assure that we will win a patent litigation case or negotiate an acceptable resolution of such a case. If we lose, we may be stopped from selling certain products and/or we may be required to pay damages and/or ongoing royalties as a result of the lawsuit. Any such adverse result could have a material adverse effect on our results of operations.

  IDEXX Purchases Materials for its Products from a Limited Number of Sources

        We currently purchase certain products and materials from single sources or a limited number of sources. Some of the products that we purchase from these sources are proprietary, and, therefore, may not be available from other sources. These products include our VetTest® chemistry and QBC® VetAutoread™ hematology analyzers and related consumables, computed radiography systems, active ingredients for pharmaceutical products, including NAVIGATOR® paste, and certain components of our SNAP® rapid assay devices, water testing products and LaserCyte® systems. If we are unable to obtain adequate quantities of these products in the future, we could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on our results of operations.

        The slides sold for use in our VetTest® instruments are purchased under an agreement with Ortho-Clinical Diagnostics, Inc. at fixed prices. Under this agreement we are required to purchase a minimum of $148 million of slides through 2010. To the extent that slides purchased under the contract exceed demand for the slides, we may incur losses in the future under this agreement. To the extent that we are unable to maintain current pricing levels on sales of slides to our customers, our profits on slide sales could decline because we purchase slides at fixed prices.

  IDEXX’s Biologic Products are Complex and Difficult to Manufacture

        Many of our products are biologics, which are products that are comprised of materials from living organisms, such as antibodies, cells and sera. Manufacturing biologic products is highly complex. Unlike products that rely on chemicals for efficacy (such as most pharmaceuticals), biologics are difficult to characterize due to the inherent variability of biological materials. Difficulty in characterizing biological materials limits the precision of specifications for these materials, which creates greater risk in the manufacturing process. We attempt to mitigate risk associated with the manufacture of biologics by utilizing multiple vendors, manufacturing some of these materials ourselves and maintaining substantial inventories of materials that have demonstrated the appropriate characteristics. However, there can be no assurance that we will be able to maintain adequate sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy applicable product release criteria. Our inability to obtain necessary biological materials or to manufacture successfully biologic products that incorporate such materials could have a material adverse effect on our results of operations.

  IDEXX’s Sales are Dependent on Distributor Purchasing Patterns

        We sell many of our products, including substantially all of the rapid assays and instrument consumables sold in the U.S., through distributors. Because significant product sales are made to a limited number of customers, unanticipated changes in the timing and size of distributor purchases can have a negative effect on quarterly results. Our financial performance, therefore, is subject to an unexpected downturn in product demand and may be unpredictable.

  International Revenue Accounts for a Significant Portion of IDEXX’s Total Revenue

        Various risks associated with foreign operations may impact our international sales. Possible risks include fluctuations in the value of foreign currencies, disruptions in transportation of our products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. Prices that we charge to foreign customers may be different than the prices we charge for the same products in the U.S. due to competitive, market or other factors. As a result, the mix of domestic and international sales in a particular period could have a material impact on our results for that period. In addition, many of the products for which our selling price may be denominated in foreign currencies are manufactured, sourced, or both, in the U.S. and our costs are incurred in U.S. dollars. We utilize non-speculative forward currency exchange contracts to mitigate foreign currency exposure, however, an appreciation of the U.S. dollar relative to the foreign currencies in which we sell these products would reduce our gross margins.

23


  The Loss of our President, Chief Executive Officer and Chairman Could Adversely Affect our Business

        We rely on the management and leadership of Mr. Jonathan W. Ayers, our President, Chief Executive Officer and Chairman. We do not maintain key man life insurance coverage for Mr. Ayers. The loss of Mr. Ayers could have a material impact on our business.

  We Could be Subject to Class Action Litigation Due to Stock Price Volatility, Which, if it Occurs, Could Result in Substantial Costs or Large Judgments Against Us

        The market for our common stock may experience extreme price and volume fluctuations, which may be unrelated or disproportionate to our operating performance or prospects. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could have a negative effect on our business, operating results and financial condition.

  If our Quarterly Results of Operations Fluctuate, This Fluctuation May Cause our Stock Price to Decline, Resulting in Losses to You

        Our prior operating results have fluctuated due to a number of factors, including seasonality of certain product lines; changes in our accounting estimates; the impact of acquisitions; timing of distributor purchases, product launches, research and development expenditures, litigation and claim-related expenditures; changes in competitors’ product offerings; and other matters. Similarly, our future operating results may vary significantly from quarter to quarter due to these and other factors, many of which are beyond our control. If our operating results do not meet the expectations of market analysts or investors in future periods, our stock price may fall.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        Our financial market risk consists primarily of foreign currency exchange rate risk. We operate subsidiaries in 13 foreign countries and transact business in local currencies. We attempt to hedge the majority of our cash flow on intercompany sales to minimize foreign currency exposure.

        The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. Corporate policy prescribes the range of allowable hedging activity. We primarily utilize forward exchange contracts with a duration of less than 15 months. Gains and losses related to qualifying hedges of foreign currency from commitments or anticipated transactions are deferred in prepaid expenses or accruals and are included in the basis of the underlying transaction. Our hedging strategy is consistent with prior periods. Our hedging strategy provides that we employ the full amount of our hedges for the succeeding year at the conclusion of our budgeting process for that year, which is complete by the end of the preceding year. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the following twelve months. Accordingly, our risk with respect to foreign currency exchange rate fluctuations may vary throughout each annual cycle. As of June 30, 2004, the Company had $1.1 million in unrealized losses on foreign exchange contracts designated as hedges recorded in other comprehensive income, which is net of $0.5 million in taxes.

Item 4. Controls and Procedures

    (a)        Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2004. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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    (b)        Changes in Internal Controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Period
Total Number of
Shares Purchased
(a)

Average
Price Paid
per Share
(b)

Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
(c)

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
(d)

April 1, 2004 to April 30, 2004      78,500   $ 60.44    78,500    1,945,630  
May 1, 2004 to May 31, 2004    413,000    61.99    413,000    1,532,630  
June 1, 2004 to June 30, 2004    81,900    64.77    81,900    1,450,730  


Total    573,400   $ 62.18    573,400    1,450,730  


        The Company’s Board of Directors has approved the repurchase of up to 12,000,000 shares of the Company’s common stock in the open market or in negotiated transactions. The plan was approved and announced on August 13, 1999 and subsequently amended on October 4, 1999, July 21, 2000 and October 20, 2003, and does not have a specified expiration date. The repurchases made during the six months ended June 30, 2004 were made in open market transactions. There were no other repurchase plans outstanding during the six months ended June 30, 2004 and no repurchase plans expired during the period.

Item 4. Submission of Matters to a Vote of Security Holders

        The 2004 Annual Meeting of Stockholders of the Company was held on May 19, 2004.

        Nominees Jonathan W. Ayers and James L. Moody, Jr. were elected to serve as Class III Directors for three-year terms expiring in 2007. The following Class II Directors of the Company were not up for reelection in 2004 and have three-year terms that expire in 2005: Thomas Craig, Errol B. De Souza, PhD and Rebecca M. Henderson, PhD. The following Class I Directors were not up for reelection and have three-year terms that expire in 2006: William T. End, Mary L. Good, PhD and Brian P. McKeon.

        The results of the voting at the 2004 Annual Meeting of Stockholders (pursuant to a record date of March 22, 2004) were as follows:

  (1) Election of Directors: 30,593,664 shares were voted to elect nominee Jonathan W. Ayers as a Class III Director of the Company for a three-year term expiring in 2007 and 342,217 shares were voted to withhold authority; and 30,593,997 shares were voted to elect nominee James L. Moody, Jr. as a Class III Director of the Company for a three-year term expiring in 2007 and 341,884 shares were voted to withhold authority. There were no broker non-votes on this proposal.

  (2) Ratification of PricewaterhouseCoopers LLP as Independent Public Accountants for the year ending December 31, 2004. For: 30,468,453; Against: 458,311; Abstain: 9,117; Broker non-votes: 0.

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Item 6. Exhibits and Reports on Form 8-K

(a)     Exhibits

  31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

  31.2 Certification by Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

  32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  32.2 Certification by Vice President, Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)     Reports on Form 8-K

    On April 19, 2004, the Company filed a Current Report on Form 8-K, under Item 12 (Results of Operations and Financial Condition), furnishing a copy of its earnings release for the quarter ended March 31, 2004.

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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.
         
/s/Merilee Raines
Date: August 9, 2004 Merilee Raines
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)

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Exhibit Index

Exhibit No.          Description

31.1   Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2   Certification by Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1   Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2   Certification by Vice President, Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.