UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2003.
For The Transiton Period From __________To __________.
COMMISSION FILE NUMBER 0-19271
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 8, 2003, 34,375,131 shares of the registrant’s Common Stock, $.10 par value, were outstanding.
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CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)(unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(Unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
The accompanying unaudited, consolidated financial statements of IDEXX have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the requirements of Form 10-Q.
The accompanying interim consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments necessary for a fair presentation of the financial position and results of operations. The results of operations for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year or any future period. These financial statements should be read in conjunction with this Form 10-Q and the Company’s 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Stock-Based Compensation
The Company measures compensation related to employee stock-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and elects to disclose the pro forma impact of accounting for stock-based compensation plans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Accordingly, no SFAS No. 123-based employee compensation cost has been recognized for these plans. Had compensation cost for the Company’s employee stock-based compensation and employee stock purchase plans been determined consistent with the provisions of SFAS No. 123, the Company’s net income and net income per common and common equivalent share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):
In order to determine the pro forma impact under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
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In order to determine the pro forma impact under SFAS No. 123, the fair value of the purchase rights issued under the employee stock purchase plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
The weighted average fair value of options and purchase rights granted were as follows:
Reclassifications
Reclassifications have been made in the consolidated financial statements to conform to the current year’s presentation.
New Accounting Standards
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN No. 46”). FIN No. 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and on the determination of when such entities are required to be included in the consolidated financial statements of the business enterprise that holds an interest in the variable interest entity. This new model for consolidation applies to an entity in which either (1) the equity investors do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires additional related disclosures. Certain disclosure provisions of FIN No. 46 apply to all financial statements issued after January 31, 2003, the consolidation provisions apply to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date, and the remaining provisions apply at the beginning of the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN No. 46 had no material impact on the consolidated financial statements.
Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. The components of inventories are as follows (in thousands):
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Intangible assets consist of the following (in thousands):
Amortization of intangible assets was $0.2 million for the three months ended June 30, 2002 and 2003 and $0.3 million for the six months ended June 30, 2002 and 2003.
Goodwill consists of the following (in thousands):
The change in goodwill above is the result of changes in foreign currency exchange rates. The Company did not acquire any goodwill or recognize any impairment losses during the six months ended June 30, 2003.
Note 4. Comprehensive Income (in thousands):
The following is a reconciliation of shares outstanding for basic and diluted earnings per share (in thousands):
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Certain options and warrants to acquire shares have been excluded from the calculation of shares outstanding for dilutive earnings per share because they were anti-dilutive. The weighted average number of anti-dilutive rights (options and warrants) to acquire shares, the weighted average exercise prices of such anti-dilutive rights and the weighted average market value of shares used to calculate the dilutive effect of options and warrants were as follows:
The Company has certain contingent liabilities that arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. The Company had accruals of $4.2 million at June 30, 2003 for these contingencies. However, the Company’s actual losses with respect to these contingent liabilities could exceed the Company’s accruals. The Company also has certain commitments associated with a joint venture (see Note 11).
The Company discloses information regarding its segments in accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 requires disclosures about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer.
The Company is organized into business units by market and customer group. The Company’s reportable operating segments are the Companion Animal Group (“CAG”), the Food and Environmental Group (“FEG”) and other. The CAG develops, designs, and distributes products and performs services for veterinarians. CAG also manufactures certain biology-based test kits for veterinarians and develops products for therapeutic applications in companion animals. FEG develops, designs, manufactures and distributes products and performs services to detect disease and contaminants in food animals, food and water. Other is primarily comprised of corporate research and development, CEO succession charge and interest income.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K in Note 10.
The following is the segment information (in thousands):
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The Company’s Board of Directors has approved the repurchase of up to 10,000,000 shares of the Company’s common stock. The Company may make such purchases in the open market or in negotiated transactions. During the three months and six months ended June 30, 2003, the Company repurchased 400,000 and 657,000 shares, respectively, of common stock for $14.2 million and $23.5 million, respectively. From the inception of the program in August 1999 to June 30, 2003, the Company had repurchased 9,271,000 shares for $200.8 million. In addition, during the six months ended June 30, 2003, the Company received 133,000 mature shares of stock, which were owned by the holder for greater than six months, with a market value of $4.9 million in payment for the exercise price of stock options.
In January 2002, the Company’s Founder, Chairman and Chief Executive Officer was succeeded by its current Chairman and Chief Executive Officer. Under an employment agreement, the Company is required to make certain payments to its former Chief Executive Officer and provide certain benefits to him following this succession. During the three months ended March 31, 2002, the Company incurred a pre-tax charge of $2.9 million, $1.8 million of which was non-cash, related to this agreement. During the three months ended June 30, 2002, the Company incurred a pre-tax charge of $0.5 million related to this agreement.
The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company’s actual warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Should actual product failure rates or service delivery costs differ from management’s estimates, which are based on historical data and engineering estimates where applicable, revisions to the estimated warranty liability would be required.
Below is a summary of changes in accrued warranty expense for products sold to customers for the three and six month periods ended June 30, 2002 and 2003, respectively (in thousands):
On June 18, 2003, the Company and Beijing Fortunate Century Animal Health Co., Ltd. (“BFCAH”), formed a joint venture, Beijing IDEXX-Yuanheng Laboratories Co. Limited (the “Venture”), to assemble and market veterinary diagnostic products for production animals in China. The Venture will be headquartered in Beijing, China. The Company’s initial interest in the Venture will be 40%, however, the Company is committed to acquire an additional 20% of the Venture from BFCAH within two years, subject to Chinese government approval. The Company bears an economic risk that is greater than its equity interest and also has the ability to make decisions that significantly affect the results of the activities of the Venture through majority voting and similar rights. Therefore the Venture will be consolidated into the Company’s financial statements in accordance with FIN No. 46. Contingent upon the timely approval of the Venture and issuance of a business license by the Chinese government, the Company is obligated to make capital contributions of $2.1 million as follows: $0.4 million within forty-five days from issuance of the business license, $0.6 million within twelve months from issuance of the business license and $1.1 million in installments within two years from issuance of the business license. The Company is obligated to pay $0.6 million for the additional 20% interest discussed above, and will make an additional $1.5 million capital contribution to the Venture within three months after the approval by the Chinese government of the additional 20% interest. The initial funding of the Venture and its commencement of operations are expected to occur during the quarter ending September 30, 2003 and, as such, had no impact on the consolidated financial statements for the three and six months ended June 30, 2003.
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The Company is also obligated to make available to the Venture selected technology, know-how and licenses and to assist with certain logistical, management training and operating matters. In connection with the joint venture agreement, the Company has not entered into indemnification agreements or assumed liabilities pre-dating the establishment of the Venture.
This quarterly report on Form 10-Q includes or incorporates forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to future earnings, revenue growth rates, FDA and other regulatory approvals of our products, timing of product launches, future product sales and expenses. You can generally identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” and similar words and expressions are intended to help you identify forward-looking statements. These statements give our current expectations or forecasts of future events, are based on current estimates, projections, beliefs, and assumptions of IDEXX and its management, and are not guarantees of future performance. Actual results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties as more fully described under the heading “Future Operating Results” in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2002. The risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2002 do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Quarterly Report was first filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
In addition to the discussion below under “Critical Accounting Policies and Estimates,” reference is made to the section of our 2002 Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” for a discussion of significant judgments and estimates used in the preparation of our consolidated financial statements.
We operate primarily through two business segments: the Companion Animal Group (“CAG”) and the Food and Environmental Group (“FEG”). CAG comprises our veterinary diagnostic products and services (rapid assays, instruments, instrument consumables and laboratory and consulting services), veterinary pharmaceuticals, and veterinary information products and services. FEG comprises our services and products for water and dairy testing and our production animal services business (poultry and livestock diagnostics). Other is comprised primarily of corporate research and development, a CEO succession charge and interest income.
The following is a discussion of the strategic and operating factors that we believe have the most significant effect on the performance of our business.
Our CAG segment accounts for approximately 80% of our sales and is therefore our most significant business. The largest product lines within our CAG segment are instruments and instrument consumables, laboratory services, and rapid assays. To date, revenues from sales of pharmaceutical products have not been substantial. However, we are investing significantly in a pipeline of companion animal pharmaceutical products. If we are successful in developing, obtaining U.S. Food and Drug Administration (“FDA”) approval for, and marketing these products, we believe that sales of pharmaceutical products will become a more material component of CAG sales in the future.
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By offering to companion animal veterinarians a broad range and an integrated set of proprietary diagnostic products and services, therapeutics and practice management computer systems, we believe we have developed a strong customer franchise, providing us a strategic advantage over companies with more narrow product or service offerings. Our complementary products and services give us scale in sales and distribution in this market, and permit us to offer programs such as “Practice Developer”, a loyalty program that allows clinics to earn points with purchases, depending on the number of product categories they purchase from and the volume of those purchases, and to apply earned points towards, among other things, the purchase of a variety of IDEXX products and services. By offering both point-of-care diagnostics for use in the clinic and outside laboratory services, we are able to develop integrated disease management solutions that leverage the advantages of both point-of-care and laboratory testing. In addition, by integrating our practice management software systems with our instruments and with our reference laboratories, we enhance the veterinary practices of our customers by facilitating the flow of medical information in the clinic.
In the U.S., we sell instrument consumables, rapid assays and pharmaceuticals through distributors, and therefore our reported sales of these products are sales made to distributors, rather than sales to veterinarians, the end users. Because distributor inventory levels and purchasing patterns may fluctuate, sales of a particular product line in a particular period may not always be representative of the underlying customer demand for the product. Therefore, we closely track sales of these products by our distributors to the clinics (“clinic-level sales”), which we think provide a more accurate picture of the real growth rate for these products. In the discussion of results below, we note certain instances where we believe reported sales have been influenced, positively or negatively, by changes in distributor inventories.
Instruments and Instrument Consumables. Our instrument strategy is to provide veterinarians with an integrated set of instruments (called IDEXX VetLab®) that, individually and together, provide superior diagnostic information in the clinic, enabling veterinarians to practice better medicine and build more profitable practices. We derive substantial revenues from the sale of consumables that are used in these instruments. During the early stage of an instrument life cycle, we derive relatively greater revenues from instrument placements, while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placements begin to decline. Our long-term success in this area of our business is dependent on our ability both to develop and sell new instruments with enhanced diagnostic capabilities and to maximize customer utilization of those instruments, which creates more consumables sales.
We have a large installed base of VetTest® chemistry analyzers, and substantially all of our revenues from that product line are now derived from consumables sales, although we continue to place instruments through sales and through rental and other programs. As a result, the success of this product line is dependent on increased customer utilization of those instruments. Toward that end, we seek to educate veterinarians about best medical practices that emphasize the importance of blood chemistry testing for a variety of diagnostic purposes.
In the fourth quarter of 2002, we introduced our new hematology analyzer, the LaserCyte™ system, which provides more extensive hematological diagnostic information than our original platform, the QBC® VetAutoread™ system. Our success in growing hematology revenues over the next several years will depend upon our ability to sell LaserCyte instruments, although we intend to continue to sell the QBC® VetAutoread™ system. We do not intend to rent LaserCyte instruments in the foreseeable future. At earlier stages in the life cycle of this product, a substantial portion of LaserCyte placements will be made at veterinary clinics that already own our QBC® VetAutoread™ instruments. As a result, net consumables sales are not likely to grow significantly in the near future, as we expect the increase in LaserCyte consumable sales to be largely offset by declines in sales of QBC® VetAutoread™ consumables. However, we believe that the enhanced diagnostic capabilities of the LaserCyte system will lead veterinarians to perform more in-clinic hematology testing, which will increase consumables sales as our installed base of LaserCyte systems increases. In addition, we expect the gross margin percentage of LaserCyte consumables to exceed the gross margin percentage of the QBC® VetAutoread™ consumables.
With all of our instrument lines, we seek to differentiate our products based on superior system capability, quality of diagnostic information, reliability and customer service. Our equipment and consumables typically are sold at a premium price to competitive offerings. Our success depends on our ability to maintain a premium price strategy. In addition, our in-clinic instrumentation competes with outside laboratory services for similar diagnostic information, and such services are typically offered at a lower cost. Therefore, our success also depends on our ability to market the relative attractiveness of in-clinic diagnostic testing, versus less convenient and timely, but lower priced, laboratory testing.
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Laboratory Services. We believe that more than half of all diagnostic testing by U.S. veterinarians is done at outside reference laboratories such as our IDEXX Laboratory Services laboratories. We attempt to differentiate our laboratory testing services from those of our competitors primarily on the basis of quality, customer service and technology. Revenue growth in this business is achieved both through increased sales from existing customers and through the acquisition of new customers. Profitability of this business is largely the result of our ability to achieve efficiencies from both volume and operational improvements.
Rapid Assays. Our rapid assay business comprises single-use kits for in-clinic testing and microwell-based kits for large clinic and laboratory testing for canine and feline diseases and conditions. Our two principal product lines are canine heartworm products (which include the SNAP® 3Dx™ heartworm antigen, Ehrlichia canis and Lyme antibody combination test) and the feline SNAP® FIV antibody/FeLV antigen combination test. Our rapid assay strategy is to develop, manufacture, market and sell proprietary tests with superior performance that address important medical needs. As in our other lines of business, we also seek to differentiate our products through superior customer support. These products carry price premiums over competitive products that do not offer equivalent performance and diagnostic capabilities, and which do not include a similar level of support. We augment our product development and customer service efforts with marketing programs that enhance medical awareness and understanding regarding our target diseases and the importance of diagnostic testing.
Water and Dairy Testing. Our strategy in the water testing business is to develop, manufacture, market and sell proprietary products with superior performance, supported by exceptional customer service. Our customers are primarily water utilities to whom strong relationships and customer support are very important. Over the past several years the rate of growth of this product line has slowed as a result of increased competition and market penetration. International sales of water testing products during the six months ended June 30, 2003 represented approximately 38% of total water product sales and we expect that future growth in this business will be significantly dependent on our ability to increase international sales. Growth also will be dependent on our ability to enhance and broaden our product line. Most water microbiological testing is driven by regulation, and in many countries a test may not be used for regulatory testing unless it has been approved by the applicable regulatory body. As a result, we maintain an active regulatory program under which we are seeking regulatory approvals in a number of countries, primarily in Europe. We follow a similar strategy in marketing and selling our dairy testing products.
Production Animal Services. We develop, manufacture, market and sell a broad range of tests for various poultry, cattle and swine diseases and conditions, and have an active research and development and in-licensing program in this area. Our strategy is to offer proprietary tests with superior performance characteristics. Disease outbreaks are episodic and unpredictable and certain diseases that are prevalent at one time may be substantially contained or eradicated. In response to outbreaks, testing initiatives may lead to exceptional demand for certain products in certain periods. Conversely, successful eradication programs may result in significantly decreased demand for certain products. The performance of this business, therefore, can be subject to fluctuation. During the six months ended June 30, 2003, approximately 68% of our sales in this business were international. Because of the significant dependence of this business on international sales, the performance of the business is particularly subject to the various risks described below that are associated with doing business internationally.
The critical accounting policies utilized during the six months ended June 30, 2003 are consistent with those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.” The significant judgments and estimates used in the preparation of our consolidated financial statements for the three months and six months ended June 30, 2003 are also consistent with those used to prepare the consolidated financial statements as of and for the year ended December 31, 2002, except that management has revised certain estimates relating to the realizability of the Company’s nitazoxanide inventory during the three months ended June 30, 2003 as more fully described below.
Nitazoxanide, our product for the treatment of equine protozoal myeloencephalitis (“EPM”), is in registration with the FDA. We have completed the manufacturing, efficacy and safety components of our submission, we have submitted revised labeling information as requested by the FDA and we are awaiting final approval of the New Animal Drug Application by the FDA. Our inventories as of June 30, 2003 included $8.4 million of inventory associated with the nitazoxanide product, consisting of $8.3 million of active ingredient and $0.1 million of other raw materials. The $8.3 million of active ingredient included in inventory at June 30, 2003 will expire in 2005. The shelf life of the active ingredient is 60 months from the date of manufacture. Upon use of unexpired active ingredient in the manufacture of finished goods, the active ingredient shelf life is no longer relevant. The shelf life of the finished goods is measured from the date of manufacture, regardless of the age of the active ingredient used to manufacture the finished goods. During the three months ended June 30, 2003, the FDA verbally informed us that the shelf life of the finished goods would be extended from 36 months to 48 months upon product approval.
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We evaluate our nitazoxanide inventory on a quarterly basis for realizability. Our quarterly evaluation is based upon active ingredient raw materials and finished goods expiration dates described, assumptions regarding the timing of FDA approval and launch of the product and assumptions regarding sales volumes that we expect to achieve following approval and launch of the product. For purposes of this evaluation, our assumptions are that the product will be approved in late 2003 and launched shortly thereafter, that the worldwide market for EPM treatments is approximately 40,000 treatments annually, and that our nitazoxanide product will capture approximately half of that market over four years following launch. During the three months and six months ended June 30, 2003, we incurred no further write-downs for this inventory due to expected product expiration. Should FDA approval be delayed beyond 2003 or should sales volumes be lower than those assumed, additional active ingredient might expire and would need to be written off. For example, if FDA approval was obtained in late 2003, but sales volumes over the next six years were less than approximately 45% of anticipated volumes, additional inventory would expire and require a charge to operations. However, if sales volumes over the next six years were at least approximately 45% of anticipated volumes, no additional inventory would expire and require a charge to operations.
If we do not receive FDA approval of the nitazoxanide product, and if we then elect to terminate our license to use the active ingredient, we have the right to require our supplier to repurchase the active ingredient at a price equal to our cost. We have no assurances that our supplier has the financial ability to repurchase all of this inventory. To the extent we were unable to sell the active ingredient to our supplier, we would incur a loss in the amount of any unrecovered costs of the active ingredient. This could result in a loss of up to the full value of our net inventory, or $8.4 million as of June 30, 2003.
Total Company. Revenue for the total company increased $16.2 million, or 15%, to $121.8 million from $105.7 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:
Companion Animal Group. Revenue for CAG increased $14.2 million, or 17%, to $98.8 million from $84.6 million in the same period of the prior year. This increase resulted primarily from sales of our LaserCyte™ system, which was introduced in the fourth quarter of 2002, and increased sales of rapid assay products, instrument consumables, and laboratory services. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $3.1 million to the increase in CAG revenue.
Sales of LaserCyte systems contributed $4.5 million to the revenue increase.
The increase in sales of rapid assay products (approximately $4.4 million, or 21%) is due primarily to higher shipments to distributors in the second quarter of 2003, increased domestic clinic-level sales and average unit prices of canine heartworm and feline test kits, and the favorable impact of currency exchange rates on sales outside of the U.S. Shipments to distributors in the same period in 2002 were reduced as a result of the Company’s efforts to reduce product inventories held by distributors. These reductions were substantially achieved during the first half of 2002. As a result, shipments to distributors in the second quarter of 2003 were at a level that is more reflective of the clinic-level demand for these products, rather than the Company’s management of its distribution channel. The reduced shipments in the 2002 period create a favorable year-to-year comparison that causes reported growth to exceed the Company’s estimates of the underlying clinic-level growth for these products.
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The increase in sales of instrument consumables (approximately $3.6 million, or 14%) is due primarily to higher shipments to distributors in the second quarter of 2003 and the favorable impact of currency exchange rates on sales outside of the U.S. Shipments to distributors in the same period in 2002 were reduced as a result of the Company’s efforts to reduce product inventories held by distributors as described above. The reduced shipments in the 2002 period create a favorable year-to-year comparison that causes reported growth to exceed the Company’s estimates of the underlying clinic-level growth for these products.
The increase in sales of laboratory services (approximately $2.6 million, or 13%) resulted primarily from higher volume worldwide and, to a lesser extent, the favorable impact of currency exchange rates on sales at our laboratories outside the U.S. and price increases.
Food and Environmental Group. Revenue for FEG increased $2.0 million, or 9%, to $23.1 million from $21.1 million for the same period of the prior year primarily due to an increase in sales of water testing products. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $1.5 million to the increase in FEG revenue.
The increase in sales of water testing products (approximately $1.3 million, or 13%) resulted primarily from higher sales volume of the water testing products and, to a lesser extent, the favorable impact of currency exchange rates on sales outside of the U.S.
The increase in sales of production animal diagnostic products (approximately $0.6 million, or 8%) resulted primarily from the favorable impact of currency exchange rates on sales outside of the U.S. and, to a lesser extent, the timing of annual sales to a significant customer that occurred in the third quarter of 2002 but in the second quarter of 2003. These increases were partially offset by lower average unit prices, particularly in Germany due to competition.
The increase in sales of dairy testing products (approximately $0.1 million, or 2%) was attributable primarily to the favorable impact of currency exchange rates on sales outside of the U.S., substantially offset by lower unit sales volume.
Total Company. Gross profit for the total company increased $9.8 million, or 20%, to $59.7 million from $49.9 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased from 47% to 49%. The following table presents gross profit and gross profit percentage for the Company and its operating segments:
Companion Animal Group. Gross profit for CAG increased $8.0 million, or 21%, to $46.2 million from $38.2 million in the same period of the prior year, primarily due to increased sales volume across the CAG product lines and an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 47% from 45% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to higher relative sales of high margin rapid assay products; the absence of inventory writedowns in 2003 compared to those recognized in 2002 for consumables used in our VetTest® analyzers and VetTest components; the favorable impact of foreign currency rates on gross profits denominated in those currencies, net of foreign exchange hedge contract losses; reduced amortization of VetTest instruments in our rental and trade-up programs as units become fully amortized; and productivity improvements across CAG product lines, partly due to fixed costs spread against a higher revenue base. These factors were offset partially by an overall negative impact from our LaserCyte hematology instrument, including a lower than average gross margin for sales of these units, warranty cost adjustments, and manufacturing inefficiencies due to low production volumes and start-up inefficiencies; unfavorable manufacturing variances; and the higher cost of VetTest slides purchased in 2002 and sold in 2003 as a result of the 2002 renegotiation of our VetTest slide supply agreement with Ortho-Clinical Diagnostics. We expect that VetTest slides purchased in 2002 will be fully sold by the end of the third quarter of 2003, at which time the associated cost of sales will be reduced to levels more comparable with the first nine months of 2002.
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Food and Environmental Group. Gross profit for FEG increased $1.8 million, or 15%, to $13.4 million from $11.7 million for the same period in the prior year, primarily due to an increase in the gross profit percentage and increased sales volume in water testing products. As a percentage of FEG revenue, gross profit increased to 58% from 55% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to the absence of inventory writedowns in 2003 compared to those recognized in 2002 for dairy products, primarily our Parallux® instrument and components; higher relative sales of high margin production animal diagnostic and water products; and the favorable impact of foreign currency rates on gross profits denominated in those currencies, net of foreign exchange hedge contract losses. These factors were offset partially by unfavorable manufacturing variances and decreased average unit prices as a result of competitive pricing pressure on production animal diagnostic and water testing products in certain regions outside of the U.S.
Total Company. Total company operating expenses increased $4.1 million to $35.3 million from $31.2 million for the same period of the prior year. As a percentage of revenues, operating expenses declined slightly to 29% from 30%. The following tables present operating expenses and operating income for the Company and its operating segments:
Companion Animal Group. Operating expenses for CAG increased $3.5 million, or 15%, to $27.7 million from $24.2 million in the same period of the prior year. The increase was attributable to a 19% increase in sales and marketing expenses, a 13% increase in administrative expenses, and an 8% increase in research and development expenses. The increase in sales and marketing expenses resulted primarily from increased marketing activities including spending on promotions, the unfavorable impact of foreign currency denominated expenses, increased headcount to support LaserCyte, and other increases in compensation costs including higher commission expense as a result of increased sales. The increase in administrative expenses reflects higher spending on information technology and other corporate functions and an increase in bad debt provisions, partly offset by the elimination of certain expenses related to legal matters that concluded in 2002. The increase in research and development expenses is primarily due to increased staffing for research and development projects, offset partially by reduced research and development expenses related to the LaserCyte™ system.
Food and Environmental Group. Operating expenses for FEG increased $1.1 million, or 20%, to $6.9 million from $5.7 million in the same period of the prior year. The increase was attributable to a 23% increase in sales and marketing expenses, a 16% increase in administrative expenses, and a 19% increase in research and development expenses. The increase in sales and marketing expenses resulted primarily from expenses incurred in connection with the formation of the China joint venture (see Note 11 to the consolidated financial statements), increased headcount, and increased marketing spending. The increase in administrative expenses reflects higher spending on information technology and other corporate functions and an increase in bad debt provisions. The increase in research and development expenses is due to new product development efforts, primarily related to products for diagnosis of transmissible spongiform encephalopathies.
Other.Operating expenses for other decreased $0.5 million to $0.7 million from $1.3 million in the same period of the prior year. The decrease resulted primarily from non-recurring severance and related benefits provided in 2002 in connection with the retirement of our former Chairman and Chief Executive Officer in January 2002.
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Total Company. Revenue for the total company increased $28.9 million, or 14%, to $231.1 million from $202.2 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:
Companion Animal Group. Revenue for CAG increased $26.0 million, or 16%, to $187.0 million from $161.0 million in the same period of the prior year. This increase resulted primarily from increased sales of instrument consumables, sales of our LaserCyte system, and increased sales of rapid assay products and laboratory services. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $5.9 million to the increase in CAG revenue.
The increase in sales of instrument consumables (approximately $7.8 million, or 15%) resulted primarily from higher shipments to distributors in the first half of 2003, the favorable impact of currency exchange rates on sales outside of the U.S., and volume growth outside of the U.S. Shipments to distributors in the same period in 2002 were reduced as a result of the Company’s efforts to reduce product inventories held by distributors. These reductions were substantially achieved during the first half of 2002. As a result, shipments to distributors in the first half of 2003 were at a level that is more reflective of the clinic-level demand for these products, rather than the Company’s management of its distribution channel. The reduced shipments in the 2002 period create a favorable year-to-year comparison that causes reported growth to exceed the Company’s estimates of the underlying clinic-level growth for these products.
Sales of the LaserCyte system contributed $7.5 million to the revenue increase.
The increase in sales of rapid assay products (approximately $7.0 million, or 19%) resulted primarily from increased domestic clinic-level sales and average unit prices of canine heartworm and feline test kits, higher shipments to distributors in the first half of 2003, and the favorable impact of currency exchange rates on sales outside of the U.S. Shipments to distributors in the same period in 2002 were reduced as a result of the Company’s efforts to reduce product inventories held by distributors as described above. The reduced shipments in the 2002 period create a favorable year-to-year comparison that causes reported growth to exceed the Company’s estimates of the underlying clinic-level growth for these products.
The increase in sales of laboratory services (approximately $5.2 million, or 13%) resulted primarily from higher volume worldwide, the favorable impact of currency exchange rates on sales at our laboratories outside the U.S., and price increases.
We estimate that reported total year 2003 CAG revenue growth will be approximately 15%. Sales of our LaserCyte hematology instrument are expected to be a significant component of this growth. We expect reported revenue growth for instrument consumables and rapid assay products to drop in the second half of 2003 as the majority of 2002 distributor inventory reductions (which increase reported growth in 2003) occurred in the first half of 2002.
Food and Environmental Group. Revenue for FEG increased $2.9 million, or 7%, to $44.1 million from $41.2 million for the same period of the prior year. The increase was due to an increase in sales of water testing products and production animal diagnostics, offset in part by a decrease in sales of dairy testing products. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $2.8 million to the increase in FEG revenue.
The increase in sales of water testing products (approximately $2.1 million, or 11%) resulted primarily from higher sales volume of water testing products and the favorable impact of currency exchange rates on sales outside of the U.S.
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The increase in sales of production animal diagnostics (approximately $1.1 million, or 8%) resulted from the favorable impact of currency exchange rates on sales outside of the U.S. and, to a lesser extent, the timing of annual sales to a significant customer that occurred in the third quarter of 2002 but in the second quarter of 2003. These increases were partially offset by lower average unit prices, particularly in Germany due to competition.
The decrease in sales of dairy testing products (approximately $0.3 million, or 3%) was attributable primarily to lower unit sales volume, offset partially by the favorable impact of currency exchange rates on sales outside of the U.S.
Total Company. Gross profit for the total company increased $18.2 million, or 20%, to $111.1 million from $93.0 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased from 46% to 48%. The following table presents gross profit and gross profit percentage for the Company and its operating segments:
Companion Animal Group. Gross profit for CAG increased $15.7 million, or 23%, to $85.6 million from $69.9 million in the same period of the prior year, primarily due to increased sales volume across the CAG product lines and an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 46% from 43% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to higher relative sales of high margin rapid assay products; the absence of inventory writedowns in the first six months of 2003 compared to those recognized in the same period in 2002 for VetTest consumables and components; reduced amortization of VetTest instruments in our rental and trade-up programs as units become fully amortized; higher prices, primarily on laboratory services, canine heartworm test kits, and feline test kits; the favorable impact of foreign currency exchange rates on gross profits denominated in those currencies, net of foreign exchange hedge contract losses; and productivity improvements, partly due to fixed costs spread against a higher revenue base. These factors were offset partially by an overall negative impact from our LaserCyte hematology instrument, including a lower than average gross margin for sales of these units, warranty cost adjustments, and manufacturing inefficiencies due to low production volumes and start-up inefficiencies; the higher cost of VetTest slides purchased in 2002 and sold in 2003 as a result of the 2002 renegotiation of our VetTest slide supply agreement with Ortho-Clinical Diagnostics; and unfavorable manufacturing variances. We expect that VetTest slides purchased in 2002 will be fully sold by the end of the third quarter of 2003, at which time the associated cost of sales will be reduced to levels more comparable with the first nine months of 2002.
Food and Environmental Group. Gross profit for FEG increased $2.4 million, or 11%, to $25.5 million from $23.1 million for the same period in the prior year, primarily due to an increase in the gross profit percentage and increased sales volume in the water testing products. As a percentage of FEG revenue, gross profit increased to 58% from 56% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to the absence of inventory writedowns in the first six months of 2003 compared to those recognized in the same period in 2002 for dairy products, primarily on our Parallux instrument and components; higher relative sales of high margin production animal diagnostic and water testing products; and the favorable impact of foreign currency exchange rates on gross profits denominated in those currencies, net of foreign exchange hedge contract losses. These factors were offset partially by unfavorable manufacturing variances and higher royalty expenses.
Total Company. Total company operating expenses increased $5.4 million to $69.4 million from $63.9 million for the same period of the prior year. As a percentage of revenues, operating expenses declined to 30% from 32%. The following tables present operating expenses and operating income for the Company and its operating segments:
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Companion Animal Group. Operating expenses for CAG increased $6.5 million, or 14%, to $54.4 million from $47.9 million in the same period of the prior year. The increase was attributable to a 18% increase in sales and marketing expenses, a 14% increase in administrative expenses, and a 4% increase in research and development expenses. The increase in sales and marketing expenses resulted primarily from increased marketing activities including spending on promotions, the unfavorable impact of foreign currency denominated expenses, increased costs to support LaserCyte, and other increases in compensation costs including higher commission expense as a result of increased sales. The increase in administrative expenses reflects higher spending on information technology and other corporate functions and an increase in bad debt provisions, offset partially by the elimination of certain expenses related to legal matters that concluded in 2002. The increase in research and development expenses is primarily due to increased staffing for research and development projects, offset partially by reduced research and development expenses related to the LaserCyte system.
Food and Environmental Group. Operating expenses for FEG increased $2.3 million, or 20%, to $13.4 million from $11.1 million in the same period of the prior year. The increase was attributable to a 25% increase in sales and marketing expenses, a 17% increase in administrative expenses, and a 14% increase in research and development expenses. The increase in sales and marketing expenses resulted primarily from expenses incurred in connection with the formation of the China joint venture (see Note 11 to the consolidated financial statements), increased marketing and business development spending, and increased headcount. The increase in administrative expenses reflects higher spending on information technology and other corporate functions and an increase in bad debt provisions. The increase in research and development expenses is due to new product development efforts, primarily related to products for diagnosis of transmissible spongiform encephalopathies.
Other.Operating expenses for other decreased $3.4 million to $1.5 million from $4.9 million in the same period of the prior year. The decrease resulted primarily from non-recurring severance and related benefits provided in 2002 in connection with the retirement of our former Chairman and Chief Executive Officer in January 2002.
Net interest income was $0.8 million for the three months ended June 30, 2003 compared to $0.9 million for the same period in the prior year and $1.5 million for the six months ended June 30, 2003 and 2002. The slight decrease in interest income was due to lower effective interest rates and the receipt of $0.3 million interest on a domestic tax refund during the second quarter of 2002, partially offset by higher invested cash balances.
Our effective tax rate was 33.5% for the three-month and six-month periods ended June 30, 2003 compared with 34.0% for the three-month and six-month periods ended June 30, 2002. The reduction in the effective tax rate was due to increased benefits resulting from U.S. and international planning initiatives.
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We fund the capital needs of our business through our existing cash, cash equivalents and investments and cash generated from operations. At June 30, 2003, we had $190.1 million of cash, cash equivalents and short-term investments, and working capital of $244.0 million. As of June 30, 2003, we also had long-term investments in debt securities of $20.3 million.
In connection with the acquisition of Genera Technologies Limited (“Genera”) in August 2000, we issued $8.5 million in notes payable to a former shareholder of Genera, of which $7.0 million was secured by cash in escrow. The remaining $1.5 million was unsecured and noninterest bearing, and was discounted at 6% to a fair value of $1.3 million. In April 2002, we repaid $7.5 million, of which $7.0 million was paid from the cash held in escrow. The remaining unsecured portion of $1.0 million is due in three annual installments, beginning in August 2002. The noteholder elected to defer the August 2002 payment of $0.5 million, which bore interest at 3% until we repaid the installment in April 2003.
In January 2003, we entered into a $15.0 million uncommitted line of credit with a large multi-national bank. Under the terms of this agreement, the bank will retain the right to approve all borrowings and all borrowings will be due on demand. Any borrowings under this line will bear interest at the mutually agreed upon rate at the time of borrowing. There were no borrowings outstanding under this line of credit at June 30, 2003.
Effective January 1, 2003, we entered into a workers’ compensation insurance policy where we retain the first $250,000 in claim liability per incident and up to $1.2 million in claim liability in the aggregate. The insurance company administers and pays these claims and we reimburse the insurance company for our portion of these claims. We also issued a $450,000 letter of credit to the insurance company as security for these claims. Previously, we were fully insured for workers’ compensation liabilities. We do not expect that this change in insurance coverage will have an unfavorable impact on our total workers’ compensation costs.
We purchased approximately $9.2 million in fixed assets during the six months ended June 30, 2003, principally related to the CAG segment. Our total capital budget for 2003 is approximately $19.8 million. Research and development expense as a percentage of revenue for 2003 is expected to be consistent with 2002 levels.
Cash provided by operating activities was $65.6 million for the six months ending June 30, 2003. Cash of $11.4 million was provided by an increase in accounts payable, principally for contractual supply agreements related to instrument consumables. Cash of $11.5 million was provided by an increase in accrued expenses, primarily for income taxes, employee compensation and warranty reserves. Cash of $5.4 million was generated from the decrease in inventory, principally due to a reduction in VetTest® slide inventory and, to a lesser extent, chemistry instruments and related parts.
During 1999 and 2000, the Board of Directors authorized the purchase of up to 10,000,000 shares of our common stock in the open market or in negotiated transactions. During the three months and six months ended June 30, 2003, the Company repurchased 400,000 and 657,000 shares, respectively, of common stock for $14.2 million and $23.5 million, respectively. As of June 30, 2003, we had repurchased an aggregate of 9,271,000 shares, leaving 729,000 shares remaining under the repurchase authorization. During the six months ended June 30, 2003, the Company received 133,000 mature shares of stock, which were owned by the holder for greater than six months, in payment for the exercise price of stock options. The shares of stock had a fair market value of $4.9 million. (See Note 8 to the consolidated financial statements.)
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We believe that current cash, short-term investments, long-term investments, debt facilities and funds generated from operations will be sufficient to fund our operations for the foreseeable future.
The future operating results of IDEXX involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report.
IDEXX’s Future Growth Depends on Several Factors
Our ability to grow our business in the future depends upon our ability to successfully implement various strategies, including:
However, we may not be able to successfully implement some or all of these strategies and increase or sustain our rate of growth.
The Markets in Which IDEXX Competes are Competitive and Subject to Rapid and Substantial Technological Change
We face intense competition within the markets in which we sell our products and services. We expect that future competition will become even more intense, and that we will have to compete with changing and improving technologies. Some of our competitors and potential competitors, including large pharmaceutical companies, have substantially greater capital, manufacturing, marketing and research and development resources than we do.
IDEXX’s Products and Services Are Subject to Various Government Regulations
In the U.S., the manufacture and sale of our products are regulated by agencies such as the FDA and the U.S. Environmental Protection Agency (“EPA”). Most diagnostic tests for animal health applications, including our canine, feline, poultry and livestock tests, must be approved by the USDA prior to sale. Our water testing products must be approved by the EPA before they may be used by customers in the U.S. as a part of a water quality monitoring program required by the EPA. Our pharmaceutical and dairy testing products require approval by the FDA. Any failure to comply with regulatory requirements relating to the manufacture and sale of our products could result in fines and sanctions against us or removals of our products from the market, which could have a material adverse effect on our results of operations.
We have entered into an agreement with the FDA under which we have agreed, among other things, to perform specified lot release and stability testing of our SNAP® Beta-lactam products and to provide related data to the FDA. If the FDA were to determine that one or more lots of product failed to meet applicable criteria for product performance or stability, the FDA could take various actions, including requiring us to recall products or restricting our ability to sell SNAP Beta-lactam products. Sales of dairy antibiotic residue testing products were $16.3 million in 2002 and $7.9 million in the six months ended June 30, 2003.
Commercialization of animal health pharmaceuticals in the U.S. requires prior approval by the FDA. To obtain such approvals we are required to submit substantial clinical, manufacturing and other data to the FDA. Regulatory approval for products submitted to the FDA may take several years and following approval, the FDA continues to regulate all aspects of the manufacture, labeling, storage, record keeping and promotion of pharmaceutical products. We have several animal pharmaceutical products in registration with the FDA, including a nitazoxanide product for treatment of equine protozoal myeloencephalitis and a non-steroidal anti-inflammatory for the treatment of lameness in horses. Failure to obtain, or delays in obtaining, FDA approval for these products would have a negative impact on our future growth.
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IDEXX’s Future Operating Results May Be Negatively Impacted by Various Factors
Factors such as the introduction and market acceptance of new products and services, the mix of products and services sold and the mix of domestic versus international revenue could negatively impact our future operating results.
We sell many of our products, including substantially all of the rapid assays and instrument consumables sold in the U.S., through distributors. Because significant product sales are made to a limited number of customers, unanticipated changes in the timing and size of distributor purchases can have a negative effect on quarterly results. Our financial performance, therefore, is subject to an unexpected downturn in product demand and may be unpredictable.
While our pharmaceutical products are under development, we may carry related active ingredients, other raw materials and finished goods as assets on our balance sheet when recovery of the asset value from future sales is deemed probable. To the extent that these inventories become unusable due to unanticipated delays in obtaining FDA approval for these products, or to our failure to obtain such approvals, we may be required to write down those inventories, which could have a material adverse effect on our results of operations.
We are actively developing new diagnostic platforms, including new instrument systems. In connection with these programs, we are developing production machinery and equipment. As of June 30, 2003, we had $7.3 million of these fixed assets on our balance sheet and commitments to purchase an additional $0.5 million. Were we to discontinue any such programs or to substantially change the design of the new platform, we might be required to write off some or all of the associated production machinery and equipment. Such a write-off could have a material adverse effect on our results of operations.
We believe that more than half of all veterinary diagnostic testing occurs in laboratories. Although we have a significant laboratory business, our in-clinic testing business is more material to our results of operations. If testing by companion animal veterinarians generally were to shift towards increased laboratory testing and away from in-clinic testing, this shift could have a material adverse effect on our results of operations.
Our expense levels are based in part on expectations of future revenue levels. Therefore, a loss in expected revenue could result in a disproportionate decrease in our net income.
IDEXX’s Success Is Heavily Dependent Upon Its Proprietary Technologies
We rely on a combination of patent, trade secret, trademark and copyright law to protect our proprietary rights. If we do not have adequate protection of our proprietary rights, our business may be affected by competitors who develop substantially equivalent technologies that compete with us.
We cannot assure that we will obtain issued patents, that any patents issued or licensed to us will remain valid, or that any patents owned or licensed by us will provide protection against competitors with similar technologies. Even if our patents cover products sold by our competitors, the time and expense of litigating to enforce our patent rights could be substantial, and could have a material adverse effect on our results of operations.
In the past we have received notices claiming that our products infringe third-party patents and we may receive such notices in the future. Patent litigation is complex and expensive and the outcome of patent litigation can be difficult to predict. We cannot assure that we will win a patent litigation case or negotiate an acceptable resolution to such a case. If we lose, we may be stopped from selling certain products and/or we may be required to pay damages and/or ongoing royalties as a result of the lawsuit. Any such adverse result could have a material adverse effect on our results of operations.
IDEXX Purchases Materials for Its Products From a Limited Number of Sources
We currently purchase certain products and materials from single sources or a limited number of sources. Some of the products that we purchase from these sources are proprietary, and therefore may not be available from other sources. These products include our chemistry and QBC® VetAutoread™ hematology analyzers and related consumables, active ingredients for pharmaceutical products and certain components of our SNAP rapid assay devices, water testing products, LaserCyte™ system components and computed radiography systems. If we are unable to obtain adequate quantities of these products in the future, then we could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on our results of operations. The supplier of our computed radiography systems has informed us that it believes we are in breach of our supply agreement, which could result in an interruption in supply of these products. We believe we have complied fully with that agreement and we intend to pursue all available remedies to compel the supplier to honor our agreement.
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The slides sold for use in our VetTest® instruments are purchased under an agreement with Ortho-Clinical Diagnostics at fixed prices. Under this agreement we are required to purchase a minimum of $213.0 million of slides over the remaining life of the contract. To the extent that slides purchased under the contract exceed demand for the slides, we may incur losses in the future under this agreement. To the extent that we are unable to maintain current pricing levels on sales of slides to our customers, our profits on slide sales would decline because we purchase slides at fixed prices.
International Revenue Accounts for a Significant Portion of IDEXX’s Total Revenue
Various risks associated with foreign operations may impact our international sales. Possible risks include fluctuations in the value of foreign currencies, disruptions in transportation of our products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. Prices that we charge to foreign customers may be different than the prices we charge for the same products in the U.S. due to competitive, market or other factors. As a result, the mix of domestic and international sales in a particular period could have a material impact on our results for that period.
The Company’s financial market risk consists primarily of foreign currency exchange risk. The Company operates subsidiaries in 13 foreign countries and transacts business in local currencies. The Company attempts to hedge its cash flow on intercompany sales to minimize foreign currency exposure.
The primary purpose of the Company’s foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. Corporate policy prescribes the range of allowable hedging activity. The Company primarily utilizes forward exchange contracts with a duration of less than 12 months. Gains and losses related to qualifying hedges of foreign currency from commitments or anticipated transactions are deferred in prepaid expenses or accruals and are included in the basis of the underlying transaction. Our hedging strategy is consistent with prior periods. Our hedging strategy provides that we employ the full amount of our hedges at the conclusion of our budgeting process, which is complete by year end. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the following twelve months. Accordingly, our risk with respect to foreign currency exchange fluctuations may vary throughout each annual cycle.
(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2003. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2003, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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The 2003 Annual Meeting of Stockholders of the Company was held on May 21, 2003.
Nominees Mary L. Good, Ph.D and William T. End were elected to serve as Class I directors for three-year terms to expire in 2006. The following Class II Directors of the Company were not up for reelection in 2003 and have three-year terms that expire in 2005: Thomas Craig and Errol B. De Souza, Ph.D. The following Class III Directors were not up for reelection and have three-year terms that expire in 2004: Jonathan W. Ayers, James L. Moody, Jr. and Erwin F. Workman, Jr. Ph.D. Dr. Workman retired from the Board of Directors as of August 1, 2003.
The results of the voting at the 2003 Annual Meeting of Stockholders (pursuant to a record date of March 28, 2003) were as follows:
On July 16, 2003, the Board of Directors elected Rebecca M. Henderson as a Class II Director of the Company to serve until the annual meeting of stockholders in 2005 and elected Brian P. McKeon as a Class I Director to serve until the annual meeting of stockholders in 2006.
(a) Exhibits
(b) Reports on Form 8-K
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Exhibit No. Description