Edgar Filing: IDEXX LABORATORIES INC /DE

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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

For the transition period from _______________ to _______________.

COMMISSION FILE NUMBER: 0-19271

IDEXX LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		01-0393723
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

ONE IDEXX DRIVE, WESTBROOK, MAINE		04092
(Address of principal executive offices)		(ZIP Code)

207-556-0300

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x		Accelerated filer	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, was 57,503,819 on October 18, 2010.

IDEXX LABORATORIES, INC.

Quarterly Report on Form 10-Q

Table of Contents

Item No.		Page

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II—OTHER INFORMATION
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
Signatures		43
Exhibit Index

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)

	September 30,		December 31,
		2010		2009

ASSETS
Current Assets:
Cash and cash equivalents	$	133,512	$	106,728
Accounts receivable, net of reserves of $3,089 in 2010 and $2,331 in 2009		120,454		115,107
Inventories, net		131,555		110,425
Deferred income tax assets		24,902		25,188
Other current assets		19,488		18,890
Total current assets		429,911		376,338
Long-Term Assets:
Property and equipment, net		200,610		199,946
Goodwill		148,597		148,705
Intangible assets, net		57,554		63,907
Other long-term assets, net		25,625		19,631
Total long-term assets		432,386		432,189
TOTAL ASSETS	$	862,297	$	808,527

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	25,273	$	19,133
Accrued liabilities		108,184		104,959
Line of credit		125,912		118,790
Current portion of long-term debt		850		813
Current portion of deferred revenue		10,714		12,610
Total current liabilities		270,933		256,305
Long-Term Liabilities:
Deferred income tax liabilities		20,491		18,283
Long-term debt, net of current portion		3,639		4,281
Long-term deferred revenue, net of current portion		8,156		3,813
Other long-term liabilities		12,426		11,266
Total long-term liabilities		44,712		37,643
Total liabilities		315,645		293,948

Commitments and Contingencies (Note 12)

Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 97,618 and 96,334 shares in 2010 and 2009, respectively		9,762		9,633
Additional paid-in capital		626,521		580,797
Deferred stock units: Outstanding: 117 units in 2010 and 2009		4,391		4,301
Retained earnings		929,169		824,256
Accumulated other comprehensive income		11,429		10,341
Treasury stock, at cost: 40,249 and 38,118 shares in 2010 and 2009, respectively		(1,034,658)		(914,759	)
Total IDEXX Laboratories, Inc. stockholders’ equity		546,614		514,569
Noncontrolling interest		38		10
Total stockholders’ equity		546,652		514,579
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	862,297	$	808,527

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2010			2009			2010			2009

Revenue:
Product revenue	$	173,297		$	171,527		$	529,871		$	503,488
Service revenue		96,331			87,593			289,764			257,810
Total revenue		269,628			259,120			819,635			761,298
Cost of Revenue:
Cost of product revenue		67,076			71,543			207,773			202,114
Cost of service revenue		60,345			57,100			178,010			165,834
Total cost of revenue		127,421			128,643			385,783			367,948
Gross profit		142,207			130,477			433,852			393,350

Expenses:
Sales and marketing		44,486			41,504			133,069			124,365
General and administrative		30,704			28,185			96,588			88,047
Research and development		17,203			16,583			51,118			49,116
Income from operations		49,814			44,205			153,077			131,822
Interest expense		(687	)		(436	)		(1,741	)		(1,535	)
Interest income		136			48			327			348
Income before provision for income taxes		49,263			43,817			151,663			130,635
Provision for income taxes		14,548			12,281			46,723			39,361
Net income		34,715			31,536			104,940			91,274
Less: Net income attributable to noncontrolling interest		21			-			27			-
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	34,694		$	31,536		$	104,913		$	91,274

Earnings per Share:
Basic	$	0.60		$	0.54		$	1.82		$	1.55
Diluted	$	0.59		$	0.52		$	1.76		$	1.50
Weighted Average Shares Outstanding:
Basic		57,620			58,656			57,799			58,911
Diluted		59,276			60,668			59,691			60,718

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Nine Months Ended September 30,
		2010			2009

Cash Flows from Operating Activities:
Net income	$	104,940		$	91,274
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		34,117			37,218
Loss on disposal of property and equipment		1,500			2,324
Increase in deferred compensation liability		135			370
Write-down of marketable securities		-			150
Provision for uncollectible accounts		1,506			674
Provision for deferred income taxes		1,379			3,705
Share-based compensation expense		9,787			8,849
Tax benefit from exercises of stock options and vesting of restricted stock units		(13,293	)		(3,851	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(6,916	)		(1,132	)
Inventories		(22,460	)		(8,145	)
Other assets		(5,836	)		(3,126	)
Accounts payable		6,107			(6,868	)
Accrued liabilities		16,447			(5,241	)
Deferred revenue		2,570			(698	)
Net cash provided by operating activities		129,983			115,503
Cash Flows from Investing Activities:
Purchases of property and equipment		(28,646	)		(36,362	)
Proceeds from disposition of pharmaceutical product lines		-			1,377
Proceeds from sale of property and equipment		86			2,056
Acquisitions of intangible assets		(244	)		-
Acquisitions of businesses, net of cash acquired		-			(6,680	)
Net cash used by investing activities		(28,804	)		(39,609	)
Cash Flows from Financing Activities:
Borrowings (payments) on revolving credit facilities, net		7,135			(8,798	)
Payment of other notes payable		(605	)		(731	)
Purchase of treasury stock		(117,157	)		(57,966	)
Proceeds from exercises of stock options and employee stock purchase plans		22,055			13,104
Tax benefit from exercises of stock options and vesting of restricted stock units		13,293			3,851
Net cash used by financing activities		(75,279	)		(50,540	)
Net effect of changes in exchange rates on cash		884			2,506
Net increase in cash and cash equivalents		26,784			27,860
Cash and cash equivalents at beginning of period		106,728			78,868
Cash and cash equivalents at end of period	$	133,512		$	106,728

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying condensed consolidated financial statements of IDEXX Laboratories, Inc. (“IDEXX,” the “Company,” “we” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of Form 10-Q.

The accompanying condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair presentation of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, 2009 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year or any future period. These condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, and our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission.

Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to the current year presentation. Reclassifications had no material impact on previously reported results of operations, financial position or cash flows.

NOTE 2. ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the nine months ended September 30, 2010 are consistent with those discussed in Note 3 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009, except for the adoption of new accounting standards during the nine months ended September 30, 2010 as discussed below.

Recent Accounting Pronouncements

On January 1, 2010, we adopted amendments to authoritative literature that modify the revenue recognition guidance for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable in the arrangement based on relative selling price of the elements. The selling price for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE nor TPE is available. BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis. The authoritative literature permits prospective or retrospective adoption, and we elected prospective adoption. The adoption of these amendments did not have a significant impact on our financial position, results of operations, or cash flows for the nine months ended September 30, 2010, nor do we anticipate a significant impact for the year ended December 31, 2010.

On January 1, 2010, we adopted amendments to authoritative literature that modify the revenue recognition guidance for the sale of tangible products that contain software that is more than incidental to the functionality of the product as a whole. More specifically, the revised accounting guidance indicates that when a product has tangible and software components that function together to deliver the essential functionality of the product as a whole, that product should be excluded from the scope of software revenue accounting guidance, as opposed to the previous accounting guidance where such an instrument would be subject to the rules detailed in the software revenue guidance. The authoritative literature permits prospective or retrospective adoption, and we elected prospective adoption. Certain sales of our instruments are subject to these amendments. However, the adoption of these amendments did not have a significant impact on our financial position, results of operations, or cash flows for the nine months ended September 30, 2010, nor do we anticipate a significant impact for the year ended December 31, 2010.

Our updated revenue recognition policy in its entirety reflecting the adoption of these amendments is provided in the following discussion.

Revenue Recognition

We recognize revenue when four criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue-generating transactions generally fall into one of the following categories of revenue recognition:

We recognize revenue at the time of shipment to U.S. distributors for substantially all products sold through distributors because title and risk of loss pass to the distributors on delivery to the common carrier. Our distributors do not have the right to return products. We recognize revenue for the remainder of our customers when the product is delivered to the customer, except as noted below.

We recognize revenue from the sales of instruments, non-cancelable software licenses and hardware systems upon installation (and completion of training if applicable) and the customer’s acceptance of the instrument or system as we have no significant further obligations after this point in time.

We recognize service revenue at the time the service is performed.

We recognize revenue associated with extended maintenance agreements (“EMAs”) over the life of the contracts using the straight-line method, which approximates the expected timing in which applicable services are performed. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

We recognize revenue on certain instrument systems under rental programs over the life of the rental agreement using the straight-line method. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

We recognize revenue on practice information management systems sales either by allocating the revenue to each element of the sale based on relative fair values of the elements, including post-contract support when fair value for all elements is available, or by use of the residual method when only the fair value of the post-contract support is available. We recognize revenue for the system upon installation and customer acceptance and recognize revenue equal to the fair value of the post-contract support over the support period.

Shipping costs reimbursed by the customer are included in revenue.

Multiple element arrangements (“MEAs”). Arrangements to sell products to customers frequently include multiple deliverables. Our most significant MEAs include the sale of one or more of the instruments from the IDEXX VetLab® suite of analyzers or digital radiography systems, combined with one or more of the following products: EMAs; consumables; laboratory diagnostic and consulting services; and practice management software. Practice management software is frequently sold with post-contract customer support and implementation services. Delivery of the various products or performance of services within the arrangement may or may not coincide. Delivery of our IDEXX VetLab® instruments, digital radiography systems, and practice management software generally occurs at the onset of the arrangement. EMAs, consumables, and laboratory diagnostic and consulting services generally are delivered over a period of one to five years. In certain arrangements revenue recognized is limited to the amount invoiced or received that is not contingent on the delivery of future products and services.

When arrangements outside of the scope of software revenue recognition guidance include multiple elements, we allocate revenue to each element based on the relative selling price and recognize revenue when the elements have standalone value and the four criteria for revenue recognition have been met for each element. We establish the selling price of each element based on VSOE if available, TPE if VSOE is not available, or BESP if neither VSOE nor TPE is available. We generally determine selling price based on amounts charged separately for the delivered and undelivered elements to similar customers in standalone sales of the specific elements. When arrangements outside of the scope of software revenue recognition guidance include a separately-priced EMA, we recognize revenue related to the EMA at the stated contractual price on a straight-line basis over the life of the agreement. If there is no stated contractual price for an EMA, we recognize revenue according to the MEA policy stated above.

When arrangements within the scope of software revenue recognition guidance include multiple elements, we allocate revenue to each element based on relative fair value when VSOE exists for all elements or residual fair value when there is VSOE for the undelivered elements but no such evidence for the delivered elements. When allocating revenue based on residual fair value, the fair value of the undelivered elements is deferred and the residual revenue is allocated to the delivered elements. Revenue is recognized on any delivered elements when the four criteria for revenue recognition have been met for each element. If VSOE does not exist for the allocation of revenue to the various elements of the arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered. We generally determine fair value based on amounts charged separately for the delivered and undelivered elements to similar customers in standalone sales of the specific elements.

Customer programs. We record estimated reductions to revenue in connection with customer marketing programs and incentive offerings that may give customers rebates or award points, or provide other incentives. Award points granted under our IDEXX Points programs may be applied to trade receivables owed to us and/or toward future purchases of our products or services. We establish accruals for estimated revenue reductions attributable to customer programs and incentive offerings for each program. Revenue reductions are recorded quarterly based on issuance of credits, points earned but not yet issued, and estimates of credits and points to be earned in the future based on current revenue. As points are redeemed we recognize the benefit of points expected to expire, or breakage, using historical forfeiture rates. On November 30 of each year, unused points granted before January 1 of the prior year expire and any variance from the breakage estimate is accounted for as a change in estimate.

Within our overall IDEXX Points program, our two most significant customer programs are Practice Developer® and SNAP® up the Savings™ (“SUTS”), both of which are offered only to North American customers. Our Practice Developer® program is a Companion Animal Group (“CAG”) awards program that permits customers to earn points by purchasing quarterly minimums in certain product and service categories, including IDEXX Reference Laboratories services, certain instrument consumables and service and maintenance agreements. For the Practice Developer® program, the accrued revenue reduction is calculated each quarter based on sales to end users during the quarter by either us or our distributors and on our estimate of future points to be issued upon sale of applicable product inventories held by distributors at the end of the quarter. SUTS is our volume incentive program for selected SNAP® tests that provides customers with benefits in the form of (1) discounts off invoice at the time of purchase and (2) points under the IDEXX Points program awarded and paid out quarterly throughout the SUTS program year (which ends on August 31) based on total purchase volume of qualified SNAP® products during the given quarter.

Doubtful accounts receivable. We recognize revenue only in those situations where collection from the customer is reasonably assured. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Account balances are charged off against the allowance when we believe the receivable will not be recovered.

NOTE 3. SHARE-BASED COMPENSATION

The following is a summary of the fair value of options, restricted stock units, deferred stock units with vesting conditions and employee stock purchase rights awarded, and share-based compensation expense incurred during the three and nine months ended September 30, 2010 and 2009 (in thousands):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2010		2009		2010		2009

Fair value of share-based compensation awards	$	451	$	437	$	15,806	$	15,692

Share-based compensation expense		3,129		2,852		9,641		8,658

The total unrecognized compensation expense for unvested awards outstanding at September 30, 2010 was $28.1 million, net of approximately $2.7 million related to estimated forfeitures. The weighted average remaining expense recognition period at September 30, 2010 was approximately 1.9 years.

Options

We determine the assumptions used in the valuation of option awards as of the date of grant. Differences in the stock price volatility, terms of options granted to different segments of recipients, or risk-free interest rates may necessitate distinct valuation assumptions at those grant dates. As such, we may use different assumptions for options granted throughout the year. Option awards are granted with an exercise price equal to not less than the closing market price of our common stock at the date of grant. We have never paid any cash dividends on our common stock and we have no present intention to pay a dividend; therefore, we assume that no dividends will be paid over the expected terms of option awards. The weighted averages of the valuation assumptions used to determine the fair value of each option award on the date of grant and the weighted average estimated fair values were as follows:

	For the Nine Months Ended September 30,
	2010			2009

Expected stock price volatility		31	%		30	%
Expected term, in years		4.9			4.8
Risk-free interest rate		2.3	%		1.6	%

Weighted average fair value of options granted	$	16.56		$	9.97

NOTE 4. 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 were as follows (in thousands):

	September 30,		December 31,
		2010		2009

Raw materials	$	26,972	$	28,426
Work-in-process		15,760		17,761
Finished goods		88,823		64,238
	$	131,555	$	110,425

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in goodwill and intangible assets other than goodwill during the nine months ended September 30, 2010 resulted primarily from continued amortization of our intangible assets.

NOTE 6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	September 30, 2010		December 31, 2009

Accrued expenses	$	35,099	$	33,094
Accrued employee compensation and related expenses		44,692		44,497
Accrued taxes		5,146		9,980
Accrued customer programs		23,247		17,388
	$	108,184	$	104,959

NOTE 7. WARRANTY RESERVES

We provide for the estimated cost of instrument warranties in cost of product revenue at the time revenue is recognized based on the estimated cost to repair the instrument over its warranty period. As we develop and sell new instruments, our provision for warranty expense increases. Cost of product 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. Our actual warranty obligation is affected by instrument performance in the customers’ environments and costs incurred in servicing instruments. Should actual service rates or costs differ from our estimates, which are based on historical data and projections of future costs, revisions to our estimated warranty liability would be required.

The following is a summary of changes in accrued warranty reserves during the three and nine months ended September 30, 2010 and 2009 (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2010			2009			2010			2009

Balance, beginning of period	$	2,597		$	3,099		$	3,086		$	2,837
Provision for warranty expense		740			1,225			2,314			3,357
Change in estimate		(463	)		(225	)		(1,021	)		(573	)
Settlement of warranty liability		(760	)		(1,139	)		(2,265	)		(2,661	)
Balance, end of period	$	2,114		$	2,960		$	2,114		$	2,960

NOTE 8. TREASURY STOCK

We primarily acquire shares by means of repurchases in the open market. We also acquire shares that are surrendered by employees in payment for the minimum required withholding taxes due on the exercise of stock options, the vesting of restricted stock units and the settlement of deferred stock units, and in payment for the exercise price of stock options.

The following is a summary of our treasury stock purchases and other receipts for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009

Shares acquired		569		375		2,131		1,467
Total cost of shares acquired	$	33,577	$	18,375	$	119,899	$	59,191
Average cost per share	$	58.98	$	48.99	$	56.25	$	40.34

NOTE 9. INCOME TAXES

The following is a summary of our effective income tax rates for the three and nine months ended September 30, 2010 and 2009:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
		2010		2009			2010		2009

Effective income tax rate		29.5	%	28.0	%		30.8	%	30.1	%

The increases in our effective income tax rate for the three and nine months ended September 30, 2010 compared to the same periods of the prior year were due primarily to the expiration of federal research and development tax incentives that were available during the three and nine months ended September 30, 2009, partly offset by tax benefits related to U.S. manufacturing activities that were fully phased in effective January 1, 2010. During the three months ended September 30, 2010 and 2009, we recognized tax benefits of similar amounts resulting from the expiration of certain statutes of limitation. The recognition of these benefits did not impact the comparability of our effective income tax rate between the three months ended September 30, 2010 and 2009, but did result in the reduction of our effective income tax rates for the three months ended September 30, 2010 and 2009 as compared to the nine months ended September 30, 2010 and 2009, respectively.

NOTE 10. COMPREHENSIVE INCOME

The following is a summary of comprehensive income for the three and nine months ended September 30, 2010 and 2009 (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2010			2009			2010			2009

Net income	$	34,715		$	31,536		$	104,940		$	91,274
Less: Net income attributable to noncontrolling interest		21			-			27			-
Net income attributable to IDEXX Laboratories, Inc. stockholders		34,694			31,536			104,913			91,274
Other comprehensive income (loss) attributable to IDEXX Laboratories, Inc. stockholders:
Foreign currency translation adjustments		14,113			7,053			1,226			14,024
Change in fair value of foreign currency contracts classified as hedges, net of tax		(5,655	)		(2,975	)		640			(11,433	)
Change in fair value of interest rate swaps classified as hedges, net of tax		(83	)		(537	)		(856	)		(201	)
Change in fair market value of investments, net of tax		130			133			78			375
Comprehensive income attributable to IDEXX Laboratories, Inc. stockholders	$	43,199		$	35,210		$	106,001		$	94,039

NOTE 11. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock and vested deferred stock units outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities using the treasury stock method, unless the effect is anti-dilutive.

The following is a reconciliation of shares outstanding for basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 (in thousands):

	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
		2010	2009		2010	2009

Shares Outstanding for Basic Earnings per Share:
Weighted average shares outstanding		57,500	58,540		57,676	58,799
Weighted average vested deferred stock units outstanding		120	116		123	112
		57,620	58,656		57,799	58,911

Shares Outstanding for Diluted Earnings per Share:
Shares outstanding for basic earnings per share		57,620	58,656		57,799	58,911
Dilutive effect of options issued		1,506	1,876		1,702	1,685
Dilutive effect of restricted stock units issued		148	128		188	115
Dilutive effect of unvested deferred stock units issued		2	8		2	7
		59,276	60,668		59,691	60,718

Vested deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed and issuance is not contingent.

Certain options to acquire shares and restricted stock units have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. The following table presents information concerning those anti-dilutive options and restricted stock units for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2010		2009		2010		2009

Weighted average number of shares underlying anti-dilutive options		598		647		654		1,362

Weighted average exercise price per underlying share of anti-dilutive options	$	54.67	$	52.91	$	55.03	$	44.76

Weighted average number of shares underlying anti-dilutive restricted stock units		-		-		-		3

The following table presents additional information concerning the exercise prices of vested and unvested options outstanding at the end of the period (in thousands, except per share amounts):

	September 30,
	2010		2009

Closing price per share of our common stock	$	61.72	$	50.00

Number of shares underlying options with exercise prices below the closing price		4,083		4,390
Number of shares underlying options with exercise prices equal to or above the closing price		4		568
Total number of shares underlying outstanding options		4,087		4,958

NOTE 12. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Significant commitments, contingencies and guarantees at September 30, 2010 are consistent with those discussed in Note 12 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE 13. SEGMENT REPORTING

During the second quarter of 2010, we changed the name of our Production Animal Segment to Livestock and Poultry Diagnostics (“LPD”). The reason for this change was to provide a name that more accurately reflects the products and services and customer groups to which this segment caters. There is no change in the products and services offered or in the results of operations for this segment.

The accounting policies of the segments are consistent with those discussed in Notes 1 and 13 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009. Intersegment revenues, which are not included in the table below, were not significant for the three and nine months ended September 30, 2010 and 2009.

The following is a summary of segment performance for the three and nine months ended September 30, 2010 and 2009 (in thousands):

	For the Three Months Ended September 30,
	CAG		Water		LPD		Other			Unallocated Amounts			Consolidated Total
2010
Revenue	$	222,909	$	20,044	$	17,476	$	9,199		$	-		$	269,628

Income (loss) from operations	$	38,831	$	8,698	$	3,042	$	1,376		$	(2,133	)	$	49,814
Interest expense, net														551
Income before provision for income taxes														49,263
Provision for income taxes														14,548
Net income														34,715
Net income attributable to noncontrolling interest														21
Net income attributable to IDEXX Laboratories, Inc. stockholders													$	34,694

2009
Revenue	$	214,461	$	19,691	$	15,943	$	9,025		$	-		$	259,120

Income (loss) from operations	$	38,002	$	8,416	$	944	$	(244	)	$	(2,913	)	$	44,205
Interest expense, net														388
Income before provision for income taxes														43,817
Provision for income taxes														12,281
Net income														31,536
Net income attributable to noncontrolling interest														-
Net income attributable to IDEXX Laboratories, Inc. stockholders													$	31,536

	For the Nine Months Ended September 30,
	CAG		Water		LPD		Other			Unallocated Amounts			Consolidated Total
2010
Revenue	$	676,646	$	57,356	$	56,577	$	29,056		$	-		$	819,635

Income (loss) from operations	$	123,477	$	23,738	$	11,964	$	1,838		$	(7,940	)	$	153,077
Interest expense, net														1,414
Income before provision for income taxes														151,663
Provision for income taxes														46,723
Net income														104,940
Net income attributable to noncontrolling interest														27
Net income attributable to IDEXX Laboratories, Inc. stockholders													$	104,913

2009
Revenue	$	625,442	$	54,707	$	53,848	$	27,301		$	-		$	761,298

Income (loss) from operations	$	106,993	$	24,336	$	11,002	$	(145	)	$	(10,364	)	$	131,822
Interest expense, net														1,187
Income before provision for income taxes														130,635
Provision for income taxes														39,361
Net income														91,274
Net income attributable to noncontrolling interest														-
Net income attributable to IDEXX Laboratories, Inc. stockholders													$	91,274

The following is a summary of revenue by product and service category for the three and nine months ended September 30, 2010 and 2009 (in thousands):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2010		2009		2010		2009
CAG segment revenue:
Instruments and consumables	$	88,481	$	83,922	$	258,318	$	239,889
Rapid assay products		35,576		37,753		115,500		116,997
Laboratory diagnostic and consulting services		82,534		76,419		248,422		222,987
Practice information systems and digital radiography		16,318		16,367		54,406		45,515
Pharmaceutical products		-		-		-		54
CAG segment revenue		222,909		214,461		676,646		625,442

Water segment revenue		20,044		19,691		57,356		54,707
LPD segment revenue		17,476		15,943		56,577		53,848
Other segment revenue		9,199		9,025		29,056		27,301

Total revenue	$	269,628	$	259,120	$	819,635	$	761,298

NOTE 14. FAIR VALUE MEASUREMENTS

U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

There are three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities.

Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Foreign currency exchange contracts classified as derivative instruments are valued based on the present value of the forward rate less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk. Interest rate swaps classified as derivative instruments are valued utilizing a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and adjusted for counterparty risk.

Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. At September 30, 2010 and December 31, 2009, we had no Level 3 assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any significant nonfinancial assets or nonfinancial liabilities which required remeasurement during the nine months ended September 30, 2010 or during the year ended December 31, 2009. We did not have any transfers between Level 1 and Level 2 measurements during the nine months ended September 30, 2010.

The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis at September 30, 2010 and at December 31, 2009 by level within the fair value hierarchy (in thousands):

As of September 30, 2010	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2010

Assets
Money market funds(1)	$	32,020	$	-	$	-	$	32,020
Equity mutual funds(2)		2,030		-		-		2,030
Liabilities
Foreign currency exchange contracts(3)		-		3,301		-		3,301
Deferred compensation(4)		2,030		-		-		2,030
Interest rate swaps(5)		-		1,959		-		1,959

As of December 31, 2009	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2009

Assets
Money market funds(1)	$	47,021	$	-	$	-	$	47,021
Equity mutual funds(2)		1,891		-		-		1,891
Liabilities
Foreign currency exchange contracts(3)		-		4,221		-		4,221
Deferred compensation(4)		1,891		-		-		1,891
Interest rate swaps(5)		-		595		-		595

(1)	Money market funds are included within cash and cash equivalents.

(2)	Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount is included within other long-term assets. See footnote 4 below for a discussion of the related deferred compensation liability.

(3)	Foreign currency exchange contracts are included within accrued liabilities and other long-term liabilities as of September 30, 2010 and within accrued liabilities as of December 31, 2009.

(4)	Deferred compensation plans are included within other long-term liabilities. The fair value of our deferred compensation plan is indexed to the performance of the underlying equity mutual funds discussed in footnote 2 above.

(5)	Interest rate swaps are included within accrued liabilities.

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and the current portion of notes payable approximate carrying value due to their short maturity.

Based on current market conditions, we believe that we could obtain an unsecured short-term revolving credit facility similar to our current unsecured short-term revolving credit facility (“Credit Facility”). Applicable interest rates on borrowings under the Credit Facility generally range from 0.375 to 0.875 percentage points (“Credit Spread”) above the London interbank rate or the Canadian Dollar-denominated bankers’ acceptance rate, dependent on our leverage ratio. We believe that the Credit Spread on a new facility would most likely be approximately 1.25 percentage points higher than the Credit Spread on our current Credit Facility. Despite a presumed increase in the Credit Spread, the estimated fair value of the outstanding borrowings against the Credit Facility would approximate carrying value due to the short maturity of the individual borrowings. The estimated fair value of long-term debt approximates the carrying value based on current market prices for similar debt issues with similar remaining maturities.

Financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents, investments and accounts receivable. To mitigate such risk, we place our cash and cash equivalents and investments in highly-rated financial institutions and money market funds invested in government securities. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom we make substantial sales. To reduce risk, we routinely monitor the amounts owed to us by our customers and take appropriate action when necessary and, as a result, we believe that accounts receivable credit risk exposure is limited. We maintain an allowance for doubtful accounts, but historically have not experienced any significant losses related to an individual customer or group of customers in any particular industry or geographic area.

NOTE 15. DERIVATIVE INSTRUMENTS AND HEDGING

Disclosure within this footnote is presented to provide transparency about how and why we use derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations, and cash flows. Derivative instruments are recognized on the balance sheet as either assets or liabilities at fair value with a corresponding offset to other comprehensive income (“OCI”), which is net of tax.

We are exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using derivative instruments are foreign currency exchange risk and interest rate risk. Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into foreign currency exchange contracts to minimize the impact of foreign currency fluctuations associated with specific, significant transactions. Interest rate swaps are entered into to manage interest rate risk associated with $80 million of our variable-rate debt.

The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into exchange contracts with large multinational financial institutions and we do not hold or engage in transactions involving derivative instruments for purposes other than risk management. Our accounting policies for these contracts are based on our designation of such instruments as hedging transactions. Market gains and losses are deferred in OCI until the contract matures, which is the period when the related obligation is settled. We primarily utilize forward exchange contracts with durations of less than 24 months.

Cash Flow Hedges

We have designated our forward currency exchange contracts and variable-to-fixed interest rate swaps as cash flow hedges. For derivative instruments that are designated as hedges, changes in the fair value of the derivative are recognized in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We de-designate derivative instruments from hedge accounting when the probability of the hedged transaction occurring becomes less than probable, but remains reasonably possible. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in OCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We did not de-designate any instruments from hedge accounting treatment during the three and nine months ended September 30, 2010. The loss recognized in earnings related to de-designated instruments during the three and nine months ended September 30, 2009 was less than $0.1 million. We immediately record in earnings the extent to which a hedge is not effective in achieving offsetting changes in fair value of the hedged item. Gains or losses related to hedge ineffectiveness recognized in earnings during the three and nine months ended September 30, 2010 and 2009 were not material. At September 30, 2010, the estimated net amount of losses that are expected to be reclassified out of accumulated OCI and into earnings within the next 12 months is $2.3 million if exchange and interest rates do not fluctuate from the levels at September 30, 2010.

We enter into currency exchange contracts for amounts that are less than the full value of forecasted intercompany sales. Our hedging strategy related to intercompany inventory purchases is to 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 current and following year. Accordingly, our risk with respect to foreign currency exchange rate fluctuations may vary throughout each annual cycle.

In March 2009, we entered into two forward fixed interest rate swap agreements to manage the economic effect of variable interest obligations on amounts borrowed under the terms of our Credit Facility. Under these agreements, beginning on March 31, 2010 the variable interest rate associated with $80 million of borrowings outstanding under the Credit Facility became effectively fixed at 2% plus the Credit Spread through March 30, 2012. The critical terms of the interest rate swap agreements match the critical terms of the underlying borrowings, including notional amounts, underlying market indices, interest rate reset dates and maturity dates.

The notional amount of foreign currency exchange contracts to hedge forecasted intercompany sales consisted of the following (in thousands):

Currency Sold	U.S. Dollar Equivalent
	September 30,		December 31,		September 30,
	2010		2009		2009

Euro	$	56,506	$	53,091	$	42,849
British Pound		21,782		19,238		22,853
Canadian Dollar		19,166		18,849		22,907
Australian Dollar		8,428		7,086		6,384
Japanese Yen		10,409		9,795		8,168
	$	116,291	$	108,059	$	103,161

Currency Purchased	U.S. Dollar Equivalent
	September 30,		December 31,		September 30,
	2010		2009		2009

Swiss Franc	$	9,990	$	8,808	$	7,603

The notional amount of forward fixed interest rate swap agreements to manage variable interest obligations consisted of the following (in thousands):

	U.S. Dollar Equivalent
	September 30,		December 31,		September 30,
	2010		2009		2009

Interest rate swap	$	80,000	$	80,000	$	80,000

The fair values of derivative instruments and their respective classification in the condensed consolidated balance sheet consisted of the following (in thousands):

	Liability Derivatives
	September 30, 2010			December 31, 2009
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value

Derivatives designated as hedging instruments
Foreign currency exchange contracts	Accrued expenses	$	2,636	Accrued expenses	$	4,221
Foreign currency exchange contracts	Other long-term liabilities		665	Other long-term liabilities		-
Interest rate swaps	Accrued expenses		1,959	Accrued expenses		595
Total derivative instruments		$	5,260		$	4,816

The effect of derivative instruments designated as cash flow hedges on the condensed consolidated balance sheet for the three and nine months ended September 30, 2010 and 2009 consisted of the following (in thousands):

	Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Derivative instruments		2010			2009			2010			2009

Foreign exchange contracts, net of tax	$	(5,655	)	$	(2,975	)	$	640		$	(11,433	)
Interest rate swaps, net of tax		(83	)		(537	)		(856	)		(201	)
Total loss, net of tax	$