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 June 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 57,705,856 on July 19, 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 June 30, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II—OTHER INFORMATION
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	41
Signatures		42
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)

	June 30,			December 31,
		2010			2009

ASSETS
Current Assets:
Cash and cash equivalents	$	117,975		$	106,728
Accounts receivable, net of reserves of $2,253 in 2010 and $2,331 in 2009		127,138			115,107
Inventories, net		122,032			110,425
Deferred income tax assets		23,433			25,188
Other current assets		19,974			18,890
Total current assets		410,552			376,338
Long-Term Assets:
Property and equipment, net		196,714			199,946
Goodwill		143,252			148,705
Intangible assets, net		57,873			63,907
Other long-term assets, net		25,344			19,631
Total long-term assets		423,183			432,189
TOTAL ASSETS	$	833,735		$	808,527

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	23,190		$	19,133
Accrued liabilities		99,629			104,959
Line of credit		133,862			118,790
Current portion of long-term debt		838			813
Current portion of deferred revenue		13,681			12,610
Total current liabilities		271,200			256,305
Long-Term Liabilities:
Deferred income tax liabilities		17,940			18,283
Long-term debt, net of current portion		3,856			4,281
Long-term deferred revenue, net of current portion		4,740			3,813
Other long-term liabilities		11,722			11,266
Total long-term liabilities		38,258			37,643
Total liabilities		309,458			293,948

Commitments and Contingencies (Note 12)

Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 97,294 and 96,334 shares in 2010 and 2009, respectively		9,729			9,633
Additional paid-in capital		613,416			580,797
Deferred stock units: Outstanding: 128 and 117 units in 2010 and 2009, respectively		4,798			4,301
Retained earnings		894,475			824,256
Accumulated other comprehensive income		2,924			10,341
Treasury stock, at cost: 39,680 and 38,118 shares in 2010 and 2009, respectively		(1,001,081	)		(914,759	)
Total IDEXX Laboratories, Inc. stockholders’ equity		524,261			514,569
Noncontrolling interest		16			10
Total stockholders’ equity		524,277			514,579
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	833,735		$	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 June 30,						For the Six Months Ended June 30,
		2010			2009			2010			2009

Revenue:
Product revenue	$	179,813		$	176,066		$	356,574		$	331,961
Service revenue		101,669			89,657			193,433			170,217
Total revenue		281,482			265,723			550,007			502,178
Cost of Revenue:
Cost of product revenue		72,063			71,304			140,697			130,571
Cost of service revenue		60,135			55,979			117,665			108,734
Total cost of revenue		132,198			127,283			258,362			239,305
Gross profit		149,284			138,440			291,645			262,873

Expenses:
Sales and marketing		44,167			41,876			88,583			82,861
General and administrative		33,076			30,794			65,884			59,862
Research and development		17,206			16,594			33,915			32,533
Income from operations		54,835			49,176			103,263			87,617
Interest expense		(689	)		(459	)		(1,054	)		(1,099	)
Interest income		138			56			191			300
Income before provision for income taxes		54,284			48,773			102,400			86,818
Provision for income taxes		17,087			15,106			32,175			27,080
Net income		37,197			33,667			70,225			59,738
Less: Net income attributable to noncontrolling interest		4			-			6			-
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	37,193		$	33,667		$	70,219		$	59,738

Earnings per Share:
Basic	$	0.64		$	0.57		$	1.21		$	1.01
Diluted	$	0.62		$	0.55		$	1.17		$	0.98
Weighted Average Shares Outstanding:
Basic		57,747			58,911			57,890			59,041
Diluted		59,646			60,697			59,875			60,688

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 Six Months Ended June 30,
		2010			2009

Cash Flows from Operating Activities:
Net income	$	70,225		$	59,738
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		22,632			24,712
Loss on disposal of property and equipment		1,442			2,177
Increase (decrease) in deferred compensation liability		(71	)		159
Write-down of marketable securities		-			150
Provision for uncollectible accounts		596			654
Provision for (benefit of) deferred income taxes		(112	)		1,239
Share-based compensation expense		6,602			5,941
Tax benefit from exercises of stock options and vesting of restricted stock units		(9,372	)		(1,355	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(16,544	)		(7,101	)
Inventories		(12,977	)		(6,876	)
Other assets		(1,634	)		(2,768	)
Accounts payable		4,308			(1,684	)
Accrued liabilities		7,432			(3,423	)
Deferred revenue		2,558			(682	)
Net cash provided by operating activities		75,085			70,881
Cash Flows from Investing Activities:
Purchases of property and equipment		(17,437	)		(21,360	)
Proceeds from disposition of pharmaceutical product lines		-			1,377
Proceeds from sale of property and equipment		64			1,076
Acquisitions of intangible assets		(144	)		-
Net cash used by investing activities		(17,517	)		(18,907	)
Cash Flows from Financing Activities:
Borrowings on revolving credit facilities, net		15,099			3,782
Payment of other notes payable		(400	)		(436	)
Purchase of treasury stock		(83,724	)		(39,725	)
Proceeds from exercises of stock options and employee stock purchase plans		16,446			6,888
Tax benefit from exercises of stock options and vesting of restricted stock units		9,372			1,355
Net cash used by financing activities		(43,207	)		(28,136	)
Net effect of changes in exchange rates on cash		(3,114	)		1,038
Net increase in cash and cash equivalents		11,247			24,876
Cash and cash equivalents at beginning of period		106,728			78,868
Cash and cash equivalents at end of period	$	117,975		$	103,744

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 six months ended June 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 June 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 six months ended June 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 six months ended June 30, 2010 as discussed below.

Recent Accounting Pronouncements

On January 1, 2010, we adopted amendments to authoritative literature that modifies 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 six months ended June 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 modifies 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 six months ended June 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 on 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 postcontract 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 an EMA, we recognize revenue related to the EMA at the stated contractual price on a straight-line basis over the life of the agreement.

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, Catalyst Dx® and VetTest® slides, SNAPShot Dx® Analyzer and VetTest® SNAP® Reader reagents, LaserCyte® and VetAutoread™ tubes, 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 six months ended June 30, 2010 and 2009 (in thousands):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2010		2009		2010		2009

Fair value of share-based compensation awards	$	354	$	116	$	15,355	$	15,255

Share-based compensation expense		3,168		2,944		6,512		5,806

The total unrecognized compensation expense for unvested awards outstanding at June 30, 2010 was $32.4 million, net of approximately $2.6 million related to estimated forfeitures. The weighted average remaining expense recognition period at June 30, 2010 was approximately 2.1 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 Six Months Ended June 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):

	June 30,		December 31,
		2010		2009

Raw materials	$	29,999	$	28,426
Work-in-process		14,706		17,761
Finished goods		77,327		64,238
	$	122,032	$	110,425

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in goodwill and intangible assets other than goodwill during the six months ended June 30, 2010 resulted primarily from changes in foreign currency exchange rates and, to a lesser extent, continued amortization of our intangible asset base.

NOTE 6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	June 30, 2010		December 31, 2009

Accrued expenses	$	31,548	$	33,094
Accrued employee compensation and related expenses		40,864		44,497
Accrued taxes		5,082		9,980
Accrued customer programs		22,135		17,388
	$	99,629	$	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 six months ended June 30, 2010 and 2009 (in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2010			2009			2010			2009

Balance, beginning of period	$	2,614		$	3,106		$	3,086		$	2,837
Provision for warranty expense		1,020			1,328			1,941			2,317
Change in estimate		(90	)		(425	)		(570	)		(420	)
Settlement of warranty liability		(947	)		(910	)		(1,860	)		(1,635	)
Balance, end of period	$	2,597		$	3,099		$	2,597		$	3,099

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 six months ended June 30, 2010 and 2009 (in thousands, except per share amounts):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2010		2009		2010		2009

Shares acquired		422		593		1,562		1,092
Total cost of shares acquired	$	26,020	$	24,758	$	86,322	$	40,816
Average cost per share	$	61.66	$	41.72	$	55.26	$	37.37

NOTE 9. INCOME TAXES

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

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
		2010		2009			2010		2009

Effective income tax rate		31.5	%	31.0	%		31.4	%	31.2	%

The increases in our effective income tax rate for the three and six months ended June 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 six months ended June 30, 2009, partly offset by tax benefits related to U.S. manufacturing activities that were fully phased in effective January 1, 2010.

NOTE 10. COMPREHENSIVE INCOME

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2010			2009			2010			2009

Net income	$	37,197		$	33,667		$	70,225		$	59,738
Less: Net income attributable to noncontrolling interest		4			-			6			-
Net income attributable to IDEXX Laboratories, Inc. stockholders		37,193			33,667			70,219			59,738
Other comprehensive income (loss) attributable to IDEXX Laboratories, Inc. stockholders:
Foreign currency translation adjustments		(7,339	)		14,063			(12,887	)		6,971
Change in fair value of foreign currency contracts classified as hedges, net of tax		4,020			(7,170	)		6,295			(8,457	)
Change in fair value of interest rate swaps classified as hedges, net of tax		(191	)		549			(773	)		335
Change in fair market value of investments, net of tax		(109	)		305			(52	)		242
Comprehensive income attributable to IDEXX Laboratories, Inc. stockholders	$	33,574		$	41,414		$	62,802		$	58,829

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 six months ended June 30, 2010 and 2009 (in thousands):

	For the Three Months Ended June 30,			For the Six Months Ended June 30,
		2010	2009		2010	2009

Shares Outstanding for Basic Earnings per Share:
Weighted average shares outstanding		57,619	58,797		57,765	58,930
Weighted average vested deferred stock units outstanding		128	114		125	111
		57,747	58,911		57,890	59,041

Shares Outstanding for Diluted Earnings per Share:
Shares outstanding for basic earnings per share		57,747	58,911		57,890	59,041
Dilutive effect of options issued		1,764	1,711		1,801	1,569
Dilutive effect of restricted stock units issued		134	67		182	71
Dilutive effect of unvested deferred stock units issued		1	8		2	7
		59,646	60,697		59,875	60,688

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 six months ended June 30, 2010 and 2009 (in thousands, except per share amounts):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2010		2009		2010		2009

Weighted average number of shares underlying anti-dilutive options		547		1,442		624		1,526

Weighted average exercise price per underlying share of anti-dilutive options	$	54.19	$	44.18	$	55.11	$	44.00

Weighted average number of shares underlying anti-dilutive restricted stock units		-		127		-		17

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):

	June 30,
	2010		2009

Closing price per share of our common stock	$	60.90	$	46.20

Number of shares underlying options with exercise prices below the closing price		4,378		4,714
Number of shares underlying options with exercise prices equal to or above the closing price		4		571
Total number of shares underlying outstanding options		4,382		5,285

NOTE 12. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Significant commitments, contingencies and guarantees at June 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 primary 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.

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 six months ended June 30, 2010 and 2009.

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

	For the Three Months Ended June 30,
	CAG		Water		LPD		Other			Unallocated Amounts			Consolidated Total
2010
Revenue	$	232,320	$	19,448	$	19,160	$	10,554		$	-		$	281,482

Income (loss) from operations	$	44,879	$	7,917	$	4,188	$	202		$	(2,351	)	$	54,835
Interest expense, net														551
Income before provision for income taxes														54,284
Provision for income taxes														17,087
Net income														37,197
Net income attributable to noncontrolling interest														4
Net income attributable to IDEXX Laboratories, Inc. stockholders													$	37,193

2009
Revenue	$	217,289	$	19,165	$	19,639	$	9,630		$	-		$	265,723

Income (loss) from operations	$	39,912	$	8,608	$	5,108	$	(30	)	$	(4,422	)	$	49,176
Interest expense, net														403
Income before provision for income taxes														48,773
Provision for income taxes														15,106
Net income														33,667
Net income attributable to noncontrolling interest														-
Net income attributable to IDEXX Laboratories, Inc. stockholders													$	33,667

	For the Six Months Ended June 30,
	CAG		Water		LPD		Other		Unallocated Amounts			Consolidated Total
2010
Revenue	$	453,737	$	37,312	$	39,101	$	19,857	$	-		$	550,007

Income (loss) from operations	$	84,646	$	15,040	$	8,922	$	462	$	(5,807	)	$	103,263
Interest expense, net													863
Income before provision for income taxes													102,400
Provision for income taxes													32,175
Net income													70,225
Net income attributable to noncontrolling interest													6
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	70,219

2009
Revenue	$	410,981	$	35,016	$	37,905	$	18,276	$	-		$	502,178

Income (loss) from operations	$	68,991	$	15,920	$	10,058	$	99	$	(7,451	)	$	87,617
Interest expense, net													799
Income before provision for income taxes													86,818
Provision for income taxes													27,080
Net income													59,738
Net income attributable to noncontrolling interest													-
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	59,738

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2010		2009		2010		2009
CAG segment revenue:
Instruments and consumables	$	86,455	$	83,732	$	169,837	$	155,967
Rapid assay products		40,481		41,567		79,924		79,244
Laboratory diagnostic and consulting services		86,048		77,876		165,888		146,568
Practice information systems and digital radiography		19,336		14,114		38,088		29,148
Pharmaceutical products		-		-		-		54
CAG segment revenue		232,320		217,289		453,737		410,981

Water segment revenue		19,448		19,165		37,312		35,016
LPD segment revenue		19,160		19,639		39,101		37,905
Other segment revenue		10,554		9,630		19,857		18,276

Total revenue	$	281,482	$	265,723	$	550,007	$	502,178

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. 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.

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 June 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 six months ended June 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 six months ended June 30, 2010.

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

As of June 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 June 30, 2010

Assets
Money market funds(1)	$	32,027	$	-	$	-	$	32,027
Equity mutual funds(2)		1,823		-		-		1,823
Foreign currency exchange contracts(3)		-		4,903		-		4,903
Liabilities
Deferred compensation(4)		1,823		-		-		1,823
Interest rate swaps(5)		-		1,817		-		1,817

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, net. See footnote 4 below for a discussion of the related deferred compensation liability.

(3)	Foreign currency exchange contracts are included within Other current assets and Other long-term assets, net as of June 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, investments, accounts receivable, accounts payable, lines of credit, and notes payable approximate carrying value due to their short maturity. 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 assess the financial strength of our customers and closely monitor the amounts they owe us and, as a consequence, we believe that our 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 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 six months ended June 30, 2010. The loss recognized in earnings related to de-designated instruments during the three and six months ended June 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 six months ended June 30, 2010 and 2009 were not material. At June 30, 2010, the estimated net amount of gains that are expected to be reclassified out of accumulated OCI and into earnings within the next 12 months is $2.5 million if exchange rates do not fluctuate from the levels at June 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.

Under our current credit facility agreement, the applicable interest rates on our unsecured short-term revolving credit facility (“Credit Facility”) generally range from 0.375 to 0.875 percentage points (“Credit Spread”) above the London interbank offered rate or the Canadian Dollar-denominated bankers’ acceptance rate, dependent on our consolidated leverage ratio. 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
		June 30,		December 31,		June 30,
		2010		2009		2009

Euro	$	46,988	$	53,091	$	40,922
British Pound		22,546		19,238		20,200
Canadian Dollar		20,096		18,849		21,515
Australian Dollar		6,620		7,086		5,676
Japanese Yen		10,169		9,795		6,799
	$	106,419	$	108,059	$	95,112

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

Swiss Franc	$	9,754	$	8,808	$	6,391

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
		June 30,		December 31,		June 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):

	Asset Derivatives
	June 30, 2010		December 31, 2009
	Balance Sheet Classification	Fair Value	Balance Sheet Classification	Fair Value

Derivatives designated as hedging instruments