IDEXX Laboratories, Inc. (IDXX)

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IDEXX Laboratories Inc. (IDXX)

Q4 2008 Earnings Call

January 30, 2009 9:00 am ET


Bonnie Reid - IR

Jon Ayers - CEO

Merilee Raines - CFO


David Clair - Piper Jaffray

Ryan Daniels - William Blair & Company

Jonathan Block - SunTrust Robinson Humphrey

Ross Taylor - C.L. King & Associates

Daniel Owczarski - Avondale Partners



Ladies and gentlemen, thank you for standing by and welcome to the IDEXX Laboratories fourth quarter 2008 Earnings Call. (Operator Instructions).

We will now begin the conference.

Bonnie Reid

Good morning, everyone, and welcome to the IDEXX Laboratories fourth quarter 2008 earnings conference call. Just a reminder, today's conference is being recorded.

Participating in the call this morning are Jon Ayers, Chief Executive Officer; Merilee Raines, Chief Financial Officer; and Susan Astro, Director of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX Management may make on this call regarding Management's future expectations and plans and IDEXX's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to statements regarding Management's expectations for financial results for future periods and the timing of new product introductions.

Listeners are reminded that actual results could differ materially from Management's expectations. Factors that could cause or contribute to such differences are described in IDEXX's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and Form 10-K for the year ended December 31, 2007 in the section captioned Risk Factors, which are on file with the SEC, and also available on IDEXX's website,

In addition any forward-looking statements represent IDEXX's estimates only as of today and should not be relied upon as representing the company's estimates as of any subsequent date. The company disclaims any obligation to update or revise any forward-looking statements in the future, even if its estimates or expectations change.

At this time, I would like to turn the conference over to Merilee Raines. Please go ahead.

Merilee Raines

Thank you, Bonnie. Good morning and thank you for joining us today. In our press release this morning, we reported fourth quarter revenue of $243 million and diluted earnings per share of $0.39.

As anticipated at the time of our last earnings call, we completed the sale of certain of our pharmaceutical product lines in the fourth quarter, and the transaction and related restructuring cost reduced earnings per share by $0.06.

As we had indicated at the end of October, the updated 2008 EPS guidance we gave at that time was exclusive of this discrete item. Fourth quarter EPS of $0.44 as adjusted for the transaction grew 10% year-to-year.

Full year earnings per share adjusted for discrete items were $90, an increase of 20% over 2007 earnings of a $58, as similarly adjusted for discrete items. Please refer to the table in our earnings press release for full detail on the discrete items in both years.

Adjusted earnings were a $0.01 above the high end of the guidance we gave in the third quarter call, as the impact of slightly lower than anticipated revenues was more than offset by careful control of operating expenses.

Before I further discuss operating results, I would like to briefly discuss our pharmaceutical transaction.

The financial details of the product line divestiture have been highlighted in our press release. The net loss of $3.6 million, or $0.06 a share, consists of two components. The first is a pre-tax loss of $1.5 million that is inclusive of all transaction-related fees, severance and restructuring costs. The second is the tax provision of $2.1 million, which results from the tax bases of that divested assets, being less than the book basis and consequently producing a taxable gain.

Although the impact to earnings from these transactions is negative, from a cash perspective, the transaction yields $9.7 million, a positive cash flow, consisting of the net proceeds of $5.5 million and the realization of a tax deduction of approximately $4.2 million for the disposition of the nitazoxanide inventory we wrote-off for book purposes in 2007.

There is also the possibility for future cash flows from this transaction, if and when the feline insulin product, currently in the regulatory approval process, becomes commercialized.

Additionally, as previously announced, we entered into an agreement with the top-tier animal pharmaceutical company to out-license one of our promising pipeline product.

We received a $250,000 payment at the time of signing in the fourth quarter and the agreement provides for development milestone payments and revenue-based royalty payments, once the product is commercialized.

We do not anticipate any follow-on payments from either the insulin product or the out-licensed agreement to be significant in 2009.

Now on to fourth quarter operating results. Fourth quarter revenues grew organically 6.5% after adjusting for currency and the divestiture and discontinuance of pharmaceutical products. This growth of 6.5% compares to 10% for the third quarter and 11% for the first half.

The third quarter growth just sided is normalized for the acceleration of PZI VET insulin product sale from the second half of 2008 into the second quarter. The first half growth is further normalized for the impact of the pet food recall that occurred in the first half of 2007.

Isolating the impact of the economy on our revenues is a not a precise science and it varies by product and service category and geography.

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