e1532bb3a00842b

 

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, 2013 

 

OR 

 

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

For the transition period from _______________ to _______________. 

  

COMMISSION FILE NUMBER: 000-19271 

  

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 o   

  

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 o  

  

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

o

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

 

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 51,894,238 on October 11, 2013.

  


 

 

IDEXX LABORATORIES, INC. 

Quarterly Report on Form 10-Q 

Table of Contents 

 

 

 

 

Item No.

 

Page

 

 

 

 

PART IFINANCIAL INFORMATION

 

Item 1.

Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

 

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34 

Item 4.

Controls and Procedures

34 

 

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

34 

Item 1A.

Risk Factors

35 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42 

Item 5.

Other Information

43 

Item 6.

Exhibits

44 

Signatures

 

45 

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,

 

 

2013 

 

2012 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

$

264,811 

 

$

223,986 

 

Accounts receivable, net of reserves of $3,324 in 2013 and $2,632 in 2012

 

151,568 

 

 

138,324 

 

Inventories

 

145,987 

 

 

140,946 

 

Deferred income tax assets

 

27,304 

 

 

27,714 

 

Other current assets

 

35,553 

 

 

38,567 

 

Total current assets

 

625,223 

 

 

569,537 

 

Long-Term Assets:

 

 

 

 

 

 

Property and equipment, net

 

274,158 

 

 

245,177 

 

Goodwill

 

180,988 

 

 

174,994 

 

Intangible assets, net

 

61,387 

 

 

62,833 

 

Other long-term assets, net

 

53,482 

 

 

51,061 

 

Total long-term assets

 

570,015 

 

 

534,065 

 

TOTAL ASSETS

$

1,195,238 

 

$

1,103,602 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

$

38,131 

 

$

35,288 

 

Accrued liabilities

 

134,161 

 

 

137,746 

 

Line of credit

 

397,200 

 

 

212,000 

 

Current portion of long-term debt

 

1,019 

 

 

1,107 

 

Current portion of deferred revenue

 

22,441 

 

 

20,192 

 

Total current liabilities

 

592,952 

 

 

406,333 

 

Long-Term Liabilities:

 

 

 

 

 

 

Deferred income tax liabilities

 

22,863 

 

 

23,028 

 

Long-term debt, net of current portion

 

624 

 

 

1,394 

 

Long-term deferred revenue, net of current portion

 

15,129 

 

 

12,692 

 

Other long-term liabilities

 

28,775 

 

 

23,898 

 

Total long-term liabilities

 

67,391 

 

 

61,012 

 

Total liabilities

 

660,343 

 

 

467,345 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

Common stock, $0.10 par value: Authorized: 120,000 shares;  Issued: 100,805 and 100,160 shares in 2013 and 2012, respectively

 

10,081 

 

 

10,016 

 

Additional paid-in capital

 

798,332 

 

 

757,214 

 

Deferred stock units: Outstanding: 122 and 119 units in 2013 and 2012, respectively

 

5,055 

 

 

4,630 

 

Retained earnings

 

1,450,135 

 

 

1,305,593 

 

Accumulated other comprehensive income

 

15,562 

 

 

15,954 

 

Treasury stock, at cost: 48,835 and 45,652 shares in 2013 and 2012, respectively

 

(1,744,319)

 

 

(1,457,184)

 

Total IDEXX Laboratories, Inc. stockholders’ equity

 

534,846 

 

 

636,223 

 

Noncontrolling interest

 

49 

 

 

34 

 

Total stockholders’ equity

 

534,895 

 

 

636,257 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,195,238 

 

$

1,103,602 

 

 

 

 

 

 

 

 

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

 

  

 

 

3 

 


 

IDEXX LABORATORIES, INC. AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(in thousands, except per share amounts) 

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

 

2013 

 

 

2012 

 

 

 

2013 

 

 

2012 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

206,693 

 

$

196,900 

 

 

$

629,782 

 

$

613,288 

 

Service revenue

 

 

131,604 

 

 

118,575 

 

 

 

393,203 

 

 

360,512 

 

Total revenue

 

 

338,297 

 

 

315,475 

 

 

 

1,022,985 

 

 

973,800 

 

Cost of Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

 

76,521 

 

 

72,738 

 

 

 

230,514 

 

 

226,420 

 

Cost of service revenue

 

 

75,993 

 

 

72,102 

 

 

 

225,018 

 

 

217,282 

 

Total cost of revenue

 

 

152,514 

 

 

144,840 

 

 

 

455,532 

 

 

443,702 

 

Gross profit

 

 

185,783 

 

 

170,635 

 

 

 

567,453 

 

 

530,098 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

60,079 

 

 

52,067 

 

 

 

179,641 

 

 

164,238 

 

General and administrative

 

 

38,651 

 

 

35,307 

 

 

 

116,871 

 

 

105,760 

 

Research and development

 

 

21,568 

 

 

20,349 

 

 

 

65,507 

 

 

60,964 

 

Income from operations

 

 

65,485 

 

 

62,912 

 

 

 

205,434 

 

 

199,136 

 

Interest expense

 

 

(1,463)

 

 

(873)

 

 

 

(3,477)

 

 

(2,992)

 

Interest income

 

 

456 

 

 

473 

 

 

 

1,345 

 

 

1,389 

 

Income before provision for income taxes

 

 

64,478 

 

 

62,512 

 

 

 

203,302 

 

 

197,533 

 

Provision for income taxes

 

 

18,786 

 

 

19,639 

 

 

 

58,745 

 

 

62,606 

 

Net income

 

 

45,692 

 

 

42,873 

 

 

 

144,557 

 

 

134,927 

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

20 

 

 

 

15 

 

 

14 

 

Net income attributable to IDEXX Laboratories, Inc. stockholders

 

$

45,688 

 

$

42,853 

 

 

$

144,542 

 

$

134,913 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.87 

 

$

0.78 

 

 

$

2.70 

 

$

2.45 

 

Diluted

 

$

0.86 

 

$

0.76 

 

 

$

2.66 

 

$

2.40 

 

Weighted Average Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

52,450 

 

 

54,938 

 

 

 

53,562 

 

 

55,074 

 

Diluted

 

 

53,242 

 

 

56,088 

 

 

 

54,391 

 

 

56,270 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

  

 

4 

 


 

 

IDEXX LABORATORIES, INC. AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(in thousands) 

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

 

2013 

 

 

 

2012 

 

 

 

2013 

 

 

 

2012 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

45,692 

 

 

$

42,873 

 

 

$

144,557 

 

 

$

134,927 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

9,418 

 

 

 

9,221 

 

 

 

(2,115)

 

 

 

4,548 

 

Unrealized gain on investments, net of tax expense of $51 and $84 in 2013 and $33 and $66 in 2012

 

 

86 

 

 

 

56 

 

 

 

142 

 

 

 

111 

 

Unrealized (loss) gain on derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain, net of tax (benefit) expense of ($1,512) and $1,278 in 2013 and ($1,294) and ($1,235) in 2012

 

 

(3,601)

 

 

 

(2,684)

 

 

 

3,066 

 

 

 

(2,329)

 

Less: reclassification adjustment for gains included in net income, net of tax expense of $329 and $542 in 2013 and $395 and $1,434 in 2012

 

 

(834)

 

 

 

(872)

 

 

 

(1,485)

 

 

 

(3,194)

 

Unrealized (loss) gain on derivative instruments

 

 

(4,435)

 

 

 

(3,556)

 

 

 

1,581 

 

 

 

(5,523)

 

Other comprehensive income (loss), net of tax

 

 

5,069 

 

 

 

5,721 

 

 

 

(392)

 

 

 

(864)

 

Comprehensive income

 

 

50,761 

 

 

 

48,594 

 

 

 

144,165 

 

 

 

134,063 

 

Less: comprehensive income attributable to noncontrolling interest

 

 

 

 

 

20 

 

 

 

15 

 

 

 

14 

 

Comprehensive income attributable to IDEXX Laboratories, Inc.

 

$

50,757 

 

 

$

48,574 

 

 

$

144,150 

 

 

$

134,049 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

  

 

 

 

 

5 

 


 

IDEXX LABORATORIES, INC. AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(in thousands) 

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

 

2013 

 

 

 

2012 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

144,557 

 

 

$

134,927 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41,130 

 

 

 

38,490 

 

Loss on disposal of property and equipment

 

 

220 

 

 

 

194 

 

Increase in deferred compensation liability

 

 

226 

 

 

 

176 

 

Provision for uncollectible accounts

 

 

1,226 

 

 

 

837 

 

Benefit from deferred income taxes

 

 

(984)

 

 

 

(1,861)

 

Share-based compensation expense

 

 

12,265 

 

 

 

11,684 

 

Tax benefit from share-based compensation arrangements

 

 

(7,438)

 

 

 

(10,182)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(12,795)

 

 

 

255 

 

Inventories

 

 

(6,360)

 

 

 

(18,078)

 

Other assets

 

 

4,717 

 

 

 

539 

 

Accounts payable

 

 

2,184 

 

 

 

(4,893)

 

Accrued liabilities

 

 

(3,269)

 

 

 

(3,751)

 

Deferred revenue

 

 

4,050 

 

 

 

5,151 

 

Net cash provided by operating activities

 

 

179,729 

 

 

 

153,488 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(60,607)

 

 

 

(43,230)

 

Proceeds from disposition of pharmaceutical product lines

 

 

3,500 

 

 

 

3,000 

 

Proceeds from sale of property and equipment

 

 

 -

 

 

 

45 

 

Acquisition of intangible assets

 

 

(1,024)

 

 

 

(900)

 

Acquisition of a business, net of cash acquired

 

 

(10,101)

 

 

 

 -

 

Net cash used by investing activities

 

 

(68,232)

 

 

 

(41,085)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Borrowings (payments) on revolving credit facilities, net

 

 

185,200 

 

 

 

(11,000)

 

Payment of notes payable

 

 

(858)

 

 

 

(682)

 

Repurchases of common stock

 

 

(282,910)

 

 

 

(91,152)

 

Proceeds from exercises of stock options and employee stock purchase plans

 

 

21,734 

 

 

 

17,156 

 

Tax benefit from share-based compensation arrangements

 

 

7,438 

 

 

 

10,182 

 

Net cash used by financing activities

 

 

(69,396)

 

 

 

(75,496)

 

Net effect of changes in exchange rates on cash

 

 

(1,276)

 

 

 

639 

 

Net increase in cash and cash equivalents

 

 

40,825 

 

 

 

37,546 

 

Cash and cash equivalents at beginning of period

 

 

223,986 

 

 

 

183,895 

 

Cash and cash equivalents at end of period

 

$

264,811 

 

 

$

221,441 

 

 

 

 

 

 

 

 

 

 

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

 

2

  

6 

 


 

 

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. 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 (“IDEXX,” the “Company,” “we” or “our”). We do not have any variable interest entities for which we are the primary beneficiary. All 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 statement of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, 2012 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2013 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, 2013 and our Annual Report on Form 10-K for the year ended December 31, 2012 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 three and nine months ended September 30, 2013 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012. 

 

New Accounting Pronouncements Adopted 

 

 In December 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance for disclosure of offsetting assets and liabilities and related arrangements. The amendment expands the disclosure requirements so that entities are now required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendment is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013, and shall be applied retrospectively. The adoption of this accounting pronouncement did not have a material impact on our financial statement disclosures. See Note 18 for additional information regarding derivative instruments subject to master netting arrangements.

 

7 

 


 

In February 2013, the FASB issued an amendment to the accounting guidance for the reporting of amounts reclassified out of accumulated other comprehensive income (“AOCI”). The amendment expands the existing disclosure by requiring entities to present information about significant items reclassified out of AOCI by component. In addition, an entity is required to provide information about the effects on net income of significant amounts reclassified out of each component of AOCI to net income either on the face of the statement where net income is presented or as a separate disclosure in the notes of the financial statements. The amendment is effective prospectively for annual or interim reporting periods beginning after December 15, 2012. The adoption of this accounting pronouncement did not have a material impact on our financial statement disclosures. See Note 13 for additional information regarding AOCI.

 

  

NOTE 3.      SHARE-BASED COMPENSATION 

 

The fair value of options, restricted stock units, deferred stock units and employee stock purchase rights awarded during the three and nine months ended September 30, 2013 totaled $0.3 million and $18.9 million, respectively, compared to $1.1 million and $17.9 million for the three and nine months ended September 30, 2012, respectively. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at September 30, 2013 was $36.2 million, which will be recognized over a weighted average period of approximately 1.8 years. 

 

We determine the assumptions used in the valuation of option awards as of the date of grant. Differences in the stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at each grant date. As such, we may use different assumptions for options granted throughout the year. Option awards are granted with an exercise price equal to 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,

 

 

 

2013 

 

 

2012 

 

 

 

 

 

 

 

 

 

Expected stock price volatility

 

 

33 

%

 

34 

%

Expected term, in years

 

 

4.7 

 

 

4.6 

 

Risk-free interest rate

 

 

0.9 

%

 

0.8 

%

 

 

 

 

 

 

 

 

Weighted average fair value of options granted

 

$

26.36 

 

$

26.37 

 

 

 

Note 4.      ACQUISITION OF BUSINESS AND OTHER ASSETS

 

During the three months ended September 30, 2013, we paid an aggregate of $10.1 million in cash to acquire all outstanding shares of a distributor of our bovine and dairy test products, as well as other food safety testing products, in Brazil. We recorded provisional amounts for all of the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the business acquisition. These provisional amounts are subject to revision as valuation work and other analyses are still being conducted. We may adjust our recorded provisional amounts as necessary, up to one year after the acquisition closing date, as we obtain more information regarding asset values and liabilities assumed as a result of the business acquisition. 

 

As part of this business acquisition, we recorded $4.8 million in amortizable intangible assets other than goodwill and $6.2 million in goodwill. The amortizable assets acquired consisted of a customer list, non-compete agreement and a trademark, which were assigned useful lives of 10,  5, and 15 years, respectively. Additionally, we have recorded $2.0 million in working capital, $0.4 million of fixed assets and $2.6 million of other liabilities. The weighted average useful life of all recognized amortizable intangible assets was 9.9 years. Goodwill is calculated as the consideration in excess of net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill and amortizable intangible assets recorded from this business acquisition are not deductible for income tax purposes. All assets acquired in connection with this business acquisition were assigned to our Livestock, Poultry and Dairy segment. Pro forma information has not been presented for this business acquisition because such information is not material to the financial statements. 

8 

 


 

We acquired a customer list in February 2013 for a purchase price of $1.0 million, which was recorded entirely to intangible assets other than goodwill. The asset acquired was assigned to our Companion Animal Group segment.

 

 

Note 5.      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,

 

 

 

 

2013 

 

 

2012 

 

 

 

 

 

 

 

 

 

Raw materials

 

$

24,916 

 

$

26,986 

 

Work-in-process

 

 

15,499 

 

 

16,031 

 

Finished goods

 

 

105,572 

 

 

97,929 

 

 

 

$

145,987 

 

$

140,946 

 

 

 

Note 6.       Goodwill and Intangible Assets, NET 

 

The increase in goodwill during the nine months ended September 30, 2013 resulted from the impact of goodwill recorded in connection with a business combination, partly offset by changes in foreign currency exchange rates. The decrease in intangible assets other than goodwill during the nine months ended September 30, 2013 resulted from the continued amortization of our intangible assets, partly offset by the impact of the acquisition of intangible assets. See Note 4 for a discussion of goodwill and amortizable intangible assets acquired during the nine months ended September 30, 2013.

 

  

NOTE 7.      Other NONCURRENT ASSETS 

 

Other noncurrent assets consisted of the following (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2013 

 

 

2012 

 

 

 

 

 

 

 

 

 

Investment in long-term product supply arrangements

 

$

10,825 

 

$

10,324 

 

Customer acquisition costs, net

 

 

20,531 

 

 

21,795 

 

Other assets

 

 

22,126 

 

 

18,942 

 

 

 

$

53,482 

 

$

51,061 

 

 

  

Note 8.      Accrued liabilities 

 

Accrued liabilities consisted of the following (in thousands)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2013 

 

2012 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

40,617 

 

$

43,026 

 

Accrued employee compensation and related expenses

 

 

57,001 

 

 

53,408 

 

Accrued taxes

 

 

9,887 

 

 

14,945 

 

Accrued customer programs

 

 

26,656 

 

 

26,367 

 

 

 

$

134,161 

 

$

137,746 

 

 

 

  

 

NOTE 9.      WARRANTY RESERVES

 

We provide a standard twelve month warranty on all instruments sold. We recognize the 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. Cost of product revenue reflects not only estimated warranty expense for instruments sold in the current period, but also any changes in estimated warranty expense for the portion of the aggregate installed base that is under warranty. Estimated warranty expense is based on a variety of inputs, including historical instrument performance in the customers’ environment, historical costs incurred in servicing instruments and projected instrument reliability. Should actual service rates or costs differ

9 

 


 

from our estimates, revisions to the estimated warranty liability would be required. The liability for warranties is included in accrued liabilities in the accompanying condensed consolidated balance sheets.  

 

The following is a summary of changes in accrued warranty reserves for the three and nine months ended September 30, 2013 and 2012 (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

 

2013 

 

 

 

2012 

 

 

 

2013 

 

 

 

2012 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,308 

 

 

$

1,499 

 

 

$

1,583 

 

 

$

1,693 

 

Provision for warranty expense

 

 

441 

 

 

 

539 

 

 

 

1,350 

 

 

 

1,655 

 

Change in estimate, balance beginning of period

 

 

 -

 

 

 

 

 

 

(133)

 

 

 

(92)

 

Settlement of warranty liability

 

 

(540)

 

 

 

(613)

 

 

 

(1,591)

 

 

 

(1,824)

 

Balance, end of period

 

$

1,209 

 

 

$

1,432 

 

 

$

1,209 

 

 

$

1,432 

 

 

 

Note 10.      DEBT

 

In May 2013, we refinanced our existing $300 million unsecured revolving credit facility by entering into an amended and restated credit agreement relating to a five-year unsecured revolving credit facility in the principal amount of $450 million with a syndicate of multinational banks, which matures on May 8, 2018 (the new credit facility and the previous credit facility are referred to collectively as the “Credit Facility”) and requires no scheduled prepayments before that date. Though the Credit Facility does not mature until May 8, 2018, all amounts borrowed under the terms of the Credit Facility are reflected in the current liabilities section in the accompanying condensed consolidated balance sheets because the Credit Facility contains a subjective material adverse event clause, which allows the debt holders to call the loans under the Credit Facility if we fail to notify the syndicate of such an event. The funds available under the Credit Facility at September 30, 2013 and December 31, 2012 reflect a further reduction due to the issuance of a letter of credit for $1.0 million, which was issued in connection with our workers’ compensation policy covering claims for the years 2009 through 2013.

 

Applicable interest rates on borrowings under the Credit Facility generally range from 0.875 to 1.25 percentage points (“Credit Spread”) above the London interbank offered rate or the Canadian Dollar-denominated bankers’ acceptance rate,  based on our leverage ratio, or the prevailing prime rate plus a maximum spread of up to 0.25%, based on our leverage ratio. We have entered into forward fixed interest rate swap agreements to manage the economic effect of the first $80 million of variable interest rate borrowings. As such, we continue to designate the existing interest rate swaps as cash flow hedges. See Note 18 for a discussion of our derivative instruments and hedging activities. Under the Credit Facility, we pay quarterly commitment fees of 0.15% to 0.30%,  based on our leverage ratio, on any unused commitment.

 

The obligations under the Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness, and a change of control default. The Credit Facility contains affirmative, negative and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates and certain restrictive agreements. The financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization, defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed 3-to-1. At September 30, 2013, we were in compliance with the covenants of the Credit Facility.

 

At September 30, 2013, our long-term debt is consistent with that discussed in Note 11 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

10 

 


 

Note 11.      Repurchases of common STOCK 

 

The following is a summary of our open market common stock repurchases for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013 

 

2012 

 

2013 

 

2012 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased

 

 

801 

 

 

386 

 

 

3,139 

 

 

1,038 

Total cost of shares repurchased

 

$

76,575 

 

$

36,146 

 

$

282,910 

 

$

91,152 

Average cost per share

 

$

95.52 

 

$

93.76 

 

$

90.12 

 

$

87.82 

 

 

 

We primarily acquire shares by means of repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units. The number of shares acquired through employee surrenders during both the three months ended September 30, 2013 and 2012 was not material. We acquired 47,483 shares having a total cost of $4.3 million in connection with such employee surrenders during the nine months ended September 30, 2013 compared to 51,484 shares having a total cost of $4.5 million during the nine months ended September 30, 2012.

 

We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock issued during both the nine months ended September 30, 2013 and 2012 was not material.

 

Note 12.      Income Taxes 

 

Our effective income tax rates were 29.1% and 28.9% for the three and nine months ended September 30, 2013, respectively, compared to 31.4% and 31.7% for the three and nine months ended September 30, 2012, respectively.

 

On January 2, 2013, U.S. federal legislation was enacted that retroactively allowed a research and development (“R&D”) tax credit for all of 2012 and extended the R&D tax credit through the twelve months ending December 31, 2013.  For the three and nine months ended September 30, 2012, the U.S. legislation authorizing the R&D tax credit had expired and no associated tax benefit was recognized within these periods.

 

The decrease in our effective income tax rate for the three months ended September 30, 2013 as compared to the same period of the prior year was due primarily to tax benefits realized in the 2013 period resulting from the R&D tax credit and the resolution of an international audit, which resulted in a reduction in our provision for uncertain tax positions. The decrease in our effective income tax rate for the nine months ended September 30, 2013 as compared to the same period of the prior year was due primarily to the R&D tax credit. Because the related legislation was enacted in 2013, the full benefit of the R&D tax credit related to the prior year’s activities was recognized during the three months ended March 31, 2013. 

 

  

Note 13.    ACCUMULATED OTHER Comprehensive Income  

 

The changes in accumulated other comprehensive income, net of tax, for the nine months ended September 30, 2013 consisted of the following (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Loss on Investments, Net of Tax

 

 

Unrealized Loss on Derivative Instruments, Net of Tax

 

 

Cumulative Translation Adjustment

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

$

(171)

 

$

(2,070)

 

$

18,195 

 

$

15,954 

 

Other comprehensive income (loss) before reclassifications

 

 

142 

 

 

3,066 

 

 

(2,115)

 

 

1,093 

 

Gains reclassified from accumulated other comprehensive income

 

 

 -

 

 

(1,485)

 

 

 -

 

 

(1,485)

 

Balance as of September 30, 2013

 

$

(29)

 

$

(489)

 

$

16,080 

 

$

15,562 

 

 

 

 

 

 

 

 

 

11 

 


 

The following is a summary of reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Details about Accumulated Other Comprehensive Income Components

 

Affected Line Item in the Statement Where Net Income is Presented

 

 

Amounts Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended September 30,

 

 

 

 

 

 

2013 

 

 

2012 

 

Gains (losses) on derivative instruments included in net income:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Cost of revenue

 

$

1,294 

 

$

1,379 

 

Interest rate swaps

 

Interest expense

 

 

(131)

 

 

(112)

 

 

 

Total gains before tax

 

 

1,163 

 

 

1,267 

 

 

 

Tax expense

 

 

329 

 

 

395 

 

 

 

Gains, net of tax

 

$

834 

 

$

872 

 

 

 

 

 

 

 

 

 

 

 

Details about Accumulated Other Comprehensive Income Components

 

Affected Line Item in the Statement Where Net Income is Presented

 

 

Amounts Reclassified from Accumulated Other Comprehensive Income For the Nine Months Ended September 30,

 

 

 

 

 

 

2013 

 

 

2012 

 

Gains (losses) on derivative instruments included in net income:

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Cost of revenue

 

$

2,659 

 

$

5,202 

 

Interest rate swaps

 

Interest expense

 

 

(632)

 

 

(574)

 

 

 

Total gains before tax

 

 

2,027 

 

 

4,628 

 

 

 

Tax expense

 

 

542 

 

 

1,434 

 

 

 

Gains, net of tax

 

$

1,485 

 

$

3,194 

 

 

 

  

 

 

Note 14.    Earnings per Share   

 

Basic earnings per share is computed by dividing net income attributable to IDEXX Laboratories, Inc. stockholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. 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 assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options, the total unrecognized compensation expense for unvested share-based compensation awards and the excess tax benefits resulting from share-based compensation tax deductions in excess of the related expense recognized for financial reporting purposes, would be used to purchase our common stock at the average market price during the period. 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. See Note 4 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 for additional information regarding deferred stock units.  

 

The following is a reconciliation of shares outstanding for basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 (in thousands):   

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013 

 

2012 

 

2013 

 

2012 

 

 

 

 

 

 

 

 

 

Shares outstanding for basic earnings per share:

 

52,450 

 

54,938 

 

53,562 

 

55,074 

 

 

 

 

 

 

 

 

 

Shares outstanding for diluted earnings per share:

 

 

 

 

 

 

 

 

Shares outstanding for basic earnings per share

 

52,450 

 

54,938 

 

53,562 

 

55,074 

Dilutive effect of share-based payment awards

 

792 

 

1,150 

 

829 

 

1,196 

 

 

53,242 

 

56,088 

 

54,391 

 

56,270 

 

 

12 

 


 

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 following table presents information concerning those anti-dilutive options for the three and nine months ended September 30, 2013 and 2012 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013 

 

2012 

 

2013 

 

2012 

 

 

 

 

 

 

 

 

 

Weighted average number of shares underlying anti-dilutive options

 

561 

 

380 

 

530 

 

713 

 

 

 

 

 

 

 

 

 

 

  

Note 15.    Commitments, Contingencies and Guarantees 

 

Significant commitments, contingencies and guarantees at September 30, 2013 are consistent with those discussed in Note 14 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

 

Note 16.     Segment Reporting 

  

Prior to January 1, 2013, we operated primarily through three business segments: diagnostic and information technology-based products and services for the veterinary market, which we continue to refer to as our Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic products for livestock and poultry health, which we referred to as Livestock and Poultry Diagnostics. We also operated two smaller operating segments that comprised products for milk quality and safety (“Dairy”) and products for the human point-of-care medical diagnostics market (“OPTI Medical”). Financial information about our Dairy and OPTI Medical operating segments was combined and presented with our remaining pharmaceutical product line and our out-licensing arrangements in an “Other” category because they did not meet the quantitative or qualitative thresholds for reportable segments. 

 

We have combined the management of our Livestock and Poultry Diagnostics, and Dairy lines of business to more effectively realize the market synergies between the product lines and to achieve operational efficiencies. We refer to this newly created segment as Livestock, Poultry and Dairy (“LPD”). Our OPTI Medical operating segment remains combined and presented with our remaining pharmaceutical product line and our out-licensing arrangements in an “Other” category because they do not meet the quantitative or qualitative thresholds for reportable segments.  The segment income (loss) from operations discussed within this report for the three and nine months ended September 30, 2012 has been retrospectively revised to reflect this change in the composition of our reportable segments.

 

13 

 


 

 

The following is a summary of segment performance for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

 

 

CAG

 

Water

 

LPD

 

Other

 

Unallocated Amounts

 

Consolidated Total

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

283,843 

 

$

23,247 

 

$

25,131 

 

$

6,076 

 

$

 -

 

$

338,297 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

$

52,711 

 

$

10,414 

 

$

1,125 

 

$

612 

 

$

623 

 

$

65,485 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,007)

 

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64,478 

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,786 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,692 

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to IDEXX  Laboratories, Inc. stockholders