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, 2018~~March 31, 2019

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

For the transition period from _______________ to _______________.

COMMISSION FILE NUMBER: 000-19271

IDEXX LABORATORIES, INC.

(Exact name of registrant as specified in its charter)



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

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

207-556-0300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 ý No ¨

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



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer ~~(Do not check if a smaller~~	¨	Smaller reporting ~~company)~~company	¨
		Emerging growth company	¨
~~Smaller reporting company~~	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

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 per share, was ~~86,590,964~~86,006,332 on ~~July 25, 2018.~~April 26, 2019.

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

In order to aid the reader, we have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q below:



Term/ Abbreviation	Definition

AOCI	Accumulated other comprehensive income or loss
ASU ~~2014-09~~	~~Accounting Standards Update (“ASU”) 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606);~~ ~~also referred to as the “New Revenue Standard”~~
~~ASU~~ 2016-02	ASU 2016-02, Leases (Topic 842); also referred to as the “New Leasing Standard”
~~ASU 2016-16~~	~~ASU 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~
~~ASU 2018-05~~	~~ASU 2018-05,~~ ~~Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118~~
CAG	Companion Animal Group, a reporting segment that provides veterinarians diagnostic products and services and information management solutions that enhance the health and well-being of pets
Credit Facility	Our $850 million five-year unsecured revolving credit facility under an amended and restated credit agreement that was executed in December 2015, also referred to as line of credit
FASB	U.S. Financial Accounting Standards Board
LPD	Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy efficiency
OPTI Medical	OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., located in Roswell, Georgia. This business manufactures and supplies blood gas analyzers and consumables worldwide for the human point-of-care medical diagnostics market. The Roswell facility also manufactures electrolytes slides (instrument consumables) to run Catalyst One^®, Catalyst Dx^®, and blood gas analyzers and consumables for the veterinary market; also referred to as OPTI.
Organic revenue growth	A non-GAAP financial measure and represents the percentage change in revenue, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions and ~~divestitures~~divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies.
R&D	Research and Development
Reported revenue growth	Represents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year
SaaS	Software-as-a-service
SEC	U.S. Securities and Exchange Commission
Senior Note Agreements	Note purchase agreements for the private placement of senior notes having an aggregate principal amount of approximately ~~$600~~$700 million, referred to as senior notes ~~and~~or long-term debt
~~2017 Tax Act~~	~~The Tax Cuts and Jobs Act enacted on December 22, 2017, which includes significant changes to the U.S. corporate tax system~~
U.S. GAAP	Accounting principles generally accepted in the United States of America
Water	Water, a reporting segment that provides water microbiology testing products ~~around the world~~

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, 2018~~March 31, 2019 and December 31, ~~2017~~2018	3
	Condensed Consolidated Statements of ~~Operations~~Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4
	Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5
	Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	67
	Notes to Condensed Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3027
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5342
Item 4.	Controls and Procedures	5443
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5443
Item 1A.	Risk Factors	5443
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5744
Item 6.	Exhibits	5845
Signatures		5946

໿

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, 2018			December 31, 2017			March 31, 2019			December 31, 2018

ASSETS
Current Assets:
Cash and cash equivalents	$	174,559		$	187,675		$	116,616		$	123,794
Marketable securities	—			284,255
Accounts receivable, net of reserves of $4,689 in 2018 and $4,576 in 2017	265,012			234,597
Accounts receivable, net of reserves of $4,566 in 2019 and $4,702 in 2018							281,159			248,855
Inventories	176,487			164,318			189,468			173,303
Other current assets	123,774			101,140			110,403			108,220
Total current assets	739,832			971,985			697,646			654,172
Long-Term Assets:
Property and equipment, net	394,021			379,096			449,103			437,270
Operating lease right-of-use assets (Notes 2 and 6)							80,594			—
Goodwill	195,974			199,873			214,517			214,489
Intangible assets, net	39,036			43,846			39,499			41,825
Other long-term assets	151,822			118,616			199,609			189,593
Total long-term assets	780,853			741,431			983,322			883,177
TOTAL ASSETS	$	1,520,685		$	1,713,416		$	1,680,968		$	1,537,349

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	68,015		$	66,968		$	70,143		$	69,534
Accrued liabilities	228,380			253,418			229,127			260,683
Line of credit	437,000			655,000			346,998			398,937
Current portion of deferred revenue	40,921			29,181			43,351			41,290
Total current liabilities	774,316			1,004,567			689,619			770,444
Long-Term Liabilities:
Deferred income tax liabilities	35,459			25,353			32,931			29,267
Long-term debt	603,130			606,075			699,334			601,348
Long-term deferred revenue, net of current portion	65,362			35,545			55,695			60,697
Long-term operating lease liabilities (Notes 2 and 6)							68,955			—
Other long-term liabilities	83,267			95,718			82,564			84,826
Total long-term liabilities	787,218			762,691			939,479			776,138
Total liabilities	1,561,534			1,767,258			1,629,098			1,546,582

Commitments and Contingencies (Note 14)

Stockholders’ Deficit:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 104,847 shares in 2018 and 104,275 shares in 2017; Outstanding: 86,642 shares in 2018 and 87,104 shares in 2017	10,485			10,428
Stockholders’ Equity (Deficit):
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 105,345 shares in 2019 and 105,087 shares in 2018; Outstanding: 86,054 shares in 2019 and 86,100 shares in 2018							10,535			10,509
Additional paid-in capital	1,109,157			1,073,931			1,155,875			1,138,216
Deferred stock units: Outstanding: 162 units in 2018 and 229 units in 2017	4,398			5,988
Deferred stock units: Outstanding: 162 units in 2019 and 2018							4,592			4,524
Retained earnings	989,039			803,545			1,270,609			1,167,928
Accumulated other comprehensive income (loss)	(42,559		)	(36,470		)
Treasury stock, at cost: 18,195 shares in 2018 and 17,171 shares in 2017	(2,111,647		)	(1,911,528		)
Total IDEXX Laboratories, Inc. stockholders’ deficit	(41,127		)	(54,106		)
Accumulated other comprehensive loss							(40,015		)	(41,791		)
Treasury stock, at cost: 19,290 shares in 2019 and 18,988 shares in 2018							(2,350,034		)	(2,288,899		)
Total IDEXX Laboratories, Inc. stockholders’ equity (deficit)							51,562			(9,513		)
Noncontrolling interest	278			264			308			280
Total stockholders’ deficit	(40,849		)	(53,842		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,520,685		$	1,713,416
Total stockholders’ equity (deficit)							51,870			(9,233		)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)							$	1,680,968		$	1,537,349

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Revenue:
Product revenue	$	348,621		$	304,091		$	666,061		$	576,056		$	334,058		$	317,440
Service revenue	232,131			204,849			452,347			394,905			241,998			220,216
Total revenue	580,752			508,940			1,118,408			970,961			576,056			537,656
Cost of Revenue:
Cost of product revenue	127,270			110,330			245,516			213,357			117,383			118,246
Cost of service revenue	121,043			105,895			237,354			206,698			127,076			116,311
Total cost of revenue	248,313			216,225			482,870			420,055			244,459			234,557
Gross profit	332,439			292,715			635,538			550,906			331,597			303,099
Expenses:
Sales and marketing	96,255			87,693			196,356			174,937			106,584			100,101
General and administrative	61,080			55,460			122,011			108,374			60,361			60,931
Research and development	29,510			26,998			58,533			52,788			31,514			29,023
Income from operations	145,594			122,564			258,638			214,807			133,138			113,044
Interest expense	(8,457		)	(9,155		)	(17,731		)	(17,744		)	(8,386		)	(9,274		)
Interest income	172			1,176			751			2,259			40			579
Income before provision for income taxes	137,309			114,585			241,658			199,322			124,792			104,349
Provision for income taxes	28,629			29,178			43,502			44,857			22,083			14,873
Net income	108,680			85,407			198,156			154,465			102,709			89,476
Less: Net (loss) income attributable to noncontrolling interest	(11		)	50			14			89
Less: Net income attributable to noncontrolling interest													28			25
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	108,691		$	85,357		$	198,142		$	154,376		$	102,681		$	89,451

Earnings per Share:
Basic	$	1.25		$	0.97		$	2.27		$	1.75		$	1.19		$	1.02
Diluted	$	1.23		$	0.95		$	2.23		$	1.72		$	1.17		$	1.01
Weighted Average Shares Outstanding:
Basic	87,004			88,004			87,166			88,060			86,204			87,331
Diluted	88,596			89,878			88,786			89,962			87,549			88,944

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

໿

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018

Net income	$	108,680		$	85,407		$	198,156		$	154,465		$	102,709		$	89,476
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(21,492		)	7,954			(16,327		)	15,968			(1,423		)	5,165
Unrealized gain (loss) on net investment hedge	4,479			(3,767		)	2,263			(4,860		)	1,480			(2,216		)
Unrealized gain on investments, net of tax expense of $9 and $49 in 2018 and $49 and $23 in 2017	32			125			150			86
Unrealized gain on investments, net of tax expense of $128 in 2019 and $40 in 2018													407			118
Unrealized gain (loss) on derivative instruments:
Unrealized gain (loss), net of tax expense (benefit) of $2,161 and $1,784 in 2018 and $(2,287) and $(3,199) in 2017	8,174			(3,848		)	5,786			(5,382		)
Reclassification adjustment for losses (gains) included in net income, net of tax benefit (expense) of $379 and $629 in 2018 and $(280) and $(681) in 2017	454			(473		)	2,039			(1,147		)
Unrealized gain (loss), net of tax expense (benefit) of $531 in 2019 and $(377) in 2018													2,474			(2,388		)
Reclassification adjustment for (gain) loss included in net income, net of tax (expense) benefit of $(249) in 2019 and $250 in 2018													(1,162		)	1,585
Unrealized gain (loss) on derivative instruments	8,628			(4,321		)	7,825			(6,529		)	1,312			(803		)
Other comprehensive (loss) gain, net of tax	(8,353		)	(9		)	(6,089		)	4,665
Other comprehensive gain, net of tax													1,776			2,264
Comprehensive income	100,327			85,398			192,067			159,130			104,485			91,740
Less: comprehensive (loss) income attributable to noncontrolling interest	(11		)	50			14			89
Less: Comprehensive income attributable to noncontrolling interest													28			25
Comprehensive income attributable to IDEXX Laboratories, Inc.	$	100,338		$	85,348		$	192,053		$	159,041		$	104,457		$	91,715

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

໿

IDEXX LABORATORIES, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except per share amounts)

(Unaudited)



	Common Stock
	Number of Shares	$0.10 Par Value		Additional Paid-in Capital		Deferred Stock Units			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Noncontrolling Interest		Total Stockholders’ Equity (Deficit)
Balance December 31, 2017	104,275	$	10,428	$	1,073,931	$	5,988		$	803,545		$	(36,470	)	$	(1,911,528	)	$	264	$	(53,842	)
Cumulative effect of accounting changes	—	—		—		—			(12,648		)	—			—			—		(12,648		)
Balance January 1, 2018	104,275	$	10,428	$	1,073,931	$	5,988		$	790,897		$	(36,470	)	$	(1,911,528	)	$	264	$	(66,490	)
Net income	—	—		—		—			89,451			—			—			25		89,476
Other comprehensive income, net	—	—		—		—			—			2,264			—			—		2,264
Repurchases of common stock, net	—	—		—		—			—			—			(94,285		)	—		(94,285		)
Common stock issued under stock plans	401	40		14,311		(259		)	—			—			—			—		14,092
Share-based compensation cost	—	—		5,917		43			—			—			—			—		5,960
Balance March 31, 2018	104,676	$	10,468	$	1,094,159	$	5,772		$	880,348		$	(34,206	)	$	(2,005,813	)	$	289	$	(48,983	)

Balance December 31, 2018	105,087	10,509		1,138,216		4,524			1,167,928			(41,791		)	(2,288,899		)	280		(9,233		)
Net income	—	—		—		—			102,681			—			—			28		102,709
Other comprehensive income, net	—	—		—		—			—			1,776			—			—		1,776
Repurchases of common stock, net	—	—		—		—			—			—			(61,135		)	—		(61,135		)
Common stock issued under stock plans	258	26		11,393		—			—			—			—			—		11,419
Share-based compensation cost	—	—		6,266		68			—			—			—			—		6,334
Balance March 31, 2019	105,345	$	10,535	$	1,155,875	$	4,592		$	1,270,609		$	(40,015	)	$	(2,350,034	)	$	308	$	51,870

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2018			2017			2019			2018

Cash Flows from Operating Activities:
Net income	$	198,156		$	154,465		$	102,709		$	89,476
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	41,696			40,893			21,355			20,804
Benefit of deferred income taxes	8,638			2,691			3,294			3,005
Share-based compensation expense	12,352			11,742			6,334			5,960
Other	1,613			1,031			628			1,091
Changes in assets and liabilities:
Accounts receivable	(32,872		)	(32,400		)	(33,421		)	(21,800		)
Inventories	(16,825		)	(18,850		)	(14,521		)	(8,070		)
Other assets and liabilities	(55,781		)	(21,426		)	(49,601		)	(52,302		)
Accounts payable	3			1,422			699			(1,939		)
Deferred revenue	(3,252		)	1,898			(3,098		)	(1,327		)
Net cash provided by operating activities	153,728			141,466			34,378			34,898
Cash Flows from Investing Activities:
Purchases of property and equipment	(51,377		)	(38,566		)	(38,206		)	(23,726		)
Purchase of marketable securities	(87		)	(175,522		)	—			(87		)
Proceeds from the sale and maturities of marketable securities	284,125			155,903			—			284,125
Acquisitions of a business, net of cash acquired	—			(14,529		)
Net cash provided (used) by investing activities	232,661			(72,714		)
Net cash (used) provided by investing activities							(38,206		)	260,312
Cash Flows from Financing Activities:
(Repayments) borrowings on revolving credit facilities, net	(218,000		)	93,000
Repayments on revolving credit facilities, net							(52,024		)	(247,500		)
Issuance of senior notes							100,000			—
Debt issuance costs							(30		)	—
Payment of acquisition-related contingent consideration	(1,000		)	—			(573		)	—
Repurchases of common stock	(189,884		)	(170,798		)	(54,302		)	(83,487		)
Proceeds from exercises of stock options and employee stock purchase plans	21,905			23,170			11,551			14,551
Shares withheld for statutory tax withholding on restricted stock	(8,720		)	(7,459		)	(7,403		)	(8,555		)
Net cash used by financing activities	(395,699		)	(62,087		)	(2,781		)	(324,991		)
Net effect of changes in exchange rates on cash	(3,806		)	4,409			(569		)	1,335
Net (decrease) increase in cash and cash equivalents	(13,116		)	11,074
Net decrease in cash and cash equivalents							(7,178		)	(28,446		)
Cash and cash equivalents at beginning of period	187,675			154,901			123,794			187,675
Cash and cash equivalents at end of period	$	174,559		$	165,975		$	116,616		$	159,229

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 unaudited condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries have been prepared in accordance with 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 this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “IDEXX,” the “Company,” “we,” “our,” or “us” refer to IDEXX Laboratories, Inc. and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. We do not have any variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, ~~2017,~~2018, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, are not necessarily indicative of the results to be expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2018,~~March 31, 2019, and our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, (the ~~“2017~~“2018 Annual Report”) filed with the SEC.

~~For the six months ended June 30, 2018, changes in stockholders’ equity~~We have included ~~(i) changes in other comprehensive income reflected~~certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q in the ~~unaudited condensed consolidated statements~~"Glossary of ~~comprehensive income; (ii) changes in common stock~~Terms and additional paid-in capital reflected in the unaudited condensed consolidated statements of cash flows (including share-based compensation expense, proceeds from exercise of stock options and employee stock purchase plans and repurchases of common stock); (iii) changes in noncontrolling interest; (iv) changes in net income and (v) adjustments to retained earnings in connection with the adoption of ASU 2014-09 and ASU 2016-16. The cumulative effect of applying these standards was an adjustment of $12.6 million to the opening balance of retained earnings. See “Note 2. Accounting Policies” for the impact of new accounting pronouncements adopted.Selected Abbreviations."

NOTE 2. ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, are consistent with those discussed in Note 2 to the consolidated financial statements in our ~~2017~~2018 Annual Report, except as noted below.

New Accounting Pronouncements Adopted

~~Effective January 1, 2018, we adopted the New Revenue Standard using the modified retrospective method for all contracts not completed as of the date of adoption.~~

We recognized the cumulative effect of initially applying the New Revenue Standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods presented. As a result of the adoption of ASU 2014-09, we have changed our accounting policy for revenue recognition and the details of the significant changes and quantitative impact of the changes are set out below.

~~Up-Front Customer Loyalty Programs.~~ Our up-front loyalty programs provide customers with incentives in the form of cash or IDEXX Points upon entering into multi-year agreements to purchase annual minimum amounts of future products or services. Under previous U.S. GAAP, if up-front incentives were subsequently utilized to purchase instruments, we limited instrument revenue to the amount of consideration received from the customer at the time of placement that was not contingent on future purchases and consequently deferred instrument revenue and costs at the time of placement. The New Revenue

Standard permits revenue recognition at the time of instrument placement when the consideration is committed, but contingent on the purchase of future goods and services. As a result, we have accelerated our recognition of instrument revenues and costs when up-front incentives are used to purchase instruments. The New Revenue Standard did not change our accounting for up-front payments to customers, which continue to be capitalized as customer acquisition costs, within other assets, and subsequently recognized as a reduction to revenue over the term of the agreement. We previously reported deferred instrument revenues and costs within net customer acquisition cost, and upon transition to the New Revenue Standard the decrease in deferred revenue and costs resulted in an increase in our reported customer acquisition costs.

~~Volume Commitment Programs.~~ Our volume commitment programs provide customers with a free or discounted instrument or system upon entering into multi-year agreements to purchase annual minimum amounts of future products or services and includes our new IDEXX 360 program introduced in the first quarter of 2018. Under previous U.S. GAAP, we limited instrument revenue to the amount of consideration received from the customer at the time of placement that was not contingent on future purchases and consequently instrument revenue and cost were recognized over the term of the customer agreement. The New Revenue Standard permits revenue recognition at the time of instrument placement when the consideration is committed, but contingent on the purchase of future goods and services. As a result, we have accelerated recognition on instrument revenues and costs placed through our volume commitment programs. This change resulted in a net increase in current and long-term other assets upon transition to the New Revenue Standard as we recognized contract assets related to instrument revenue recognized in advance of billings, offset by a reduction in previously deferred instrument costs.

~~Instrument Rebate Programs.~~ Our instrument rebate programs, previously referred to as IDEXX Instrument Marketing Programs, require an instrument purchase and provide customers the opportunity to earn future rebates based on the volume of products and services they purchase over the term of the program. Under previous U.S. GAAP, the total consideration in the contract, including an estimate of future optional purchases, was allocated to all products and services based on their standalone selling prices. This resulted in deferring a portion of instrument revenue related to our obligation to provide future rebate incentives, which was included in accrued liabilities. Under the New Revenue Standard, the total consideration in the contract is limited to only goods and services that the customer is presently obligated to purchase and does not include future purchases that are optional. The customer’s right to earn rebates on future purchases is accounted for as a separate performance obligation. The exclusion of optional future purchases resulted in the instrument absorbing a higher relative allocation of future rebates. Therefore, we defer an increased portion of instrument revenue upon placement, which is realized as higher recurring revenue when customers buy future products and services, offsetting future rebates as they are earned. This change resulted in an increase in current and long-term deferred revenue upon transition to the New Revenue Standard and a reduction to accrued and other long-term liabilities for rebate obligations that are now reported as deferred revenues.

~~Reagent Rental Programs.~~Our reagent rental programs provide customers the right to use our instruments upon entering into multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded operating lease for the right to use our instrument and no instrument revenue is recognized at the time of instrument installation. Under the New Revenue Standard, we continue to recognize a portion of the revenue allocated to the embedded lease concurrent with the future sale of consumables over the term of the agreement. We determine the amount of revenue allocated from the consumable to the embedded lease based on standalone selling prices and determine the rate of lease revenue recognition in proportion to the customer’s minimum volume commitment. There was no impact to our consolidated financial statements upon transition to the New Revenue Standard, as a result of our reagent rental programs.

~~Other Customer Incentive Programs~~. Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified threshold of goods and services. Under the New Revenue Standard, we continue to record revenue reductions related to these customer incentive programs and record the related refund obligations in accrued liabilities based on the actual issuance of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future. There was no impact to our consolidated financial statements upon transition to the New Revenue Standard, as a result of our other customer incentive programs.

~~IDEXX Points.~~IDEXX Points may be applied to trade receivables due to us, converted to cash, or applied against the purchase price of IDEXX products and services. Under the New Revenue Standard, we continue to consider IDEXX Points equivalent to cash and IDEXX Points that have not yet been used by customers are included in accrued liabilities until utilized or expired. There was no impact to our consolidated financial statements upon transition to the New Revenue Standard, as a result of IDEXX Points.

~~Shipping and Delivery.~~ Under previous U.S. GAAP, we recognized revenue and cost from the sales of diagnostic products and accessories upon delivery to the customer because our typical business practice is to cover losses incurred while in transit. Under the New Revenue Standard, revenue and costs are recognized when a customer obtains control of the product

based on legal title transfer and our right to payment, which generally occurs at the time of shipment. This resulted in an acceleration of revenue and cost recognition and an increase in accounts receivable and a reduction in inventories upon transition to the New Revenue Standard.

~~Costs to Obtain a Contract.~~ Under previous U.S. GAAP, we recognized sales commissions incurred to obtain long term product and service contracts as sales and marketing expenses as incurred. Under the New Revenue Standard, we defer commissions incurred to obtain long term contracts, when considered incremental and recoverable. Sales commissions are amortized as sales and marketing expenses consistently with the pattern of transfer for the product or service to which the asset relates. If the expected amortization period is one year or less, the sales commission is expensed when incurred. This change resulted in an increase to other current and long-term assets upon transition to the New Revenue Standard.

~~Income Taxes.~~ The adoption of the New Revenue Standard primarily resulted in an acceleration of revenues under up-front customer loyalty programs and an increase in deferred revenue under instrument rebate programs, which in turn generated additional deferred tax assets within other long-term assets.

~~The cumulative effects of the changes made to our consolidated balance sheet as of January 1, 2018, in connection with the adoption of the New Revenue Standard were as follows (in thousands~~):

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Condensed Consolidated Balance Sheet

Previous U.S. GAAP
December 31, 2017
(Reported)

New U.S. GAAP
January 1, 2018

Attributed to the
New Revenue Standard

ASSETS

Cash, cash equivalents and marketable securities $ 471,930
$ 471,930
$ —
Accounts receivable 234,597
237,281
2,684
Inventories 164,318
163,184
(1,134 )
Property and equipment, net 379,096
379,096
—
Goodwill and intangible assets, net 243,719
243,719
—
Other assets 219,756
246,481
26,725
TOTAL ASSETS $ 1,713,416
$ 1,741,691
$ 28,275

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable $ 66,968
$ 66,968
$ —
Accrued liabilities 253,418
254,381
963
Deferred income tax liabilities 25,353
25,087
(266 )
Line of credit and long-term debt 1,261,075
1,261,075
—
Deferred revenue 64,726
110,158
45,432
Other long-term liabilities 95,718
82,840
(12,878 )
Total liabilities 1,767,258
1,800,509
33,251

Stockholders’ Deficit:
Retained earnings 803,545
798,569
(4,976 )
All other stockholders' deficit and noncontrolling interest (857,387 ) (857,387 ) —
Total stockholders’ deficit (53,842 ) (58,818 ) (4,976 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 1,713,416
$ 1,741,691
$ 28,275

The following tables compare the reported unaudited condensed consolidated balance sheet, statement of operations and cash flows, as of and for the three and six months ended June 30, 2018, to the balances without the adoption of ASC 606 ("previous U.S. GAAP") (~~in thousands~~):

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Condensed Consolidated Balance Sheet
As of June 30, 2018

Previous U.S. GAAP
New U.S. GAAP
(As Reported)

Attributed to the
New Revenue Standard

ASSETS

Cash and cash equivalents $ 174,559
$ 174,559
$ —
Accounts receivable 262,420
265,012
2,592
Inventories 178,187
176,487
(1,700 )
Property and equipment, net 394,021
394,021
—
Goodwill and intangible assets, net 235,010
235,010
—
Other assets 238,682
275,596
36,914
TOTAL ASSETS $ 1,482,879
$ 1,520,685
$ 37,806

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable $ 68,015
$ 68,015
$ —
Accrued liabilities 228,095
228,380
285
Deferred income tax liabilities 35,470
35,459
(11 )
Line of credit and long-term debt 1,040,130
1,040,130
—
Deferred revenue 64,061
106,283
42,222
Other long-term liabilities 92,290
83,267
(9,023 )
Total liabilities 1,528,061
1,561,534
33,473

Stockholders’ Deficit:
Retained earnings 984,736
989,039
4,303
Accumulated other comprehensive income (loss) (42,589 ) (42,559 ) 30
All other stockholders' deficit and noncontrolling interest (987,329 ) (987,329 ) —
Total stockholders’ deficit (45,182 ) (40,849 ) 4,333
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 1,482,879
$ 1,520,685
$ 37,806

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Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2018 For the Six Months Ended June 30, 2018

Previous U.S. GAAP
New U.S. GAAP
(As Reported)

Attributed to the
New Revenue Standard
Previous U.S. GAAP New U.S. GAAP
(As Reported) Attributed to the
New Revenue Standard

Total revenue $ 565,879
$ 580,752
$ 14,873
$ 1,091,248
$ 1,118,408
$ 27,160
Total cost of revenue 239,491
248,313
8,822
467,456
482,870
15,414
Gross profit 326,388
332,439
6,051
623,792
635,538
11,746

Total operating expense 187,321
186,845
(476 ) 377,947
376,900
(1,047 )
Income from operations 139,067
145,594
6,527
245,845
258,638
12,793
Interest expense (8,457 ) (8,457 ) —
(17,731 ) (17,731 ) —
Interest income 437
172
(265 ) 1,299
751
(548 )
Income before provision for income taxes 131,047
137,309
6,262
229,413
241,658
12,245
Provision for income taxes 27,107
28,629
1,522
40,536
43,502
2,966
Net income $ 103,940
$ 108,680
$ 4,740
$ 188,877
$ 198,156
$ 9,279

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Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 2018

Previous U.S. GAAP
New U.S. GAAP
(As Reported)

Attributed to the
New Revenue Standard
Cash Flows from Operating Activities:

Net income $ 188,877
$ 198,156
$ 9,279
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit of deferred income taxes 6,218
8,638
2,420
All other adjustments to reconcile net income to net cash provided by operating activities 55,661
55,661
—
Changes in assets and liabilities, net (97,028 ) (108,727 ) (11,699 )
Net cash provided by operating activities $ 153,728
$ 153,728
$ —

໿

~~There were no changes to cash flows from investing and financing activities as a result of the adoption of the New Revenue Standard.~~

~~Effective January 1, 2018, we adopted FASB ASU 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. We recognized the cumulative effect of applying this standard as an adjustment to the opening balance of retained earnings and a reduction to other long-term assets of $7.7 million.

~~Effective January 1, 2018, we adopted FASB ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists on the classification of certain cash receipts and payments.~~ We adopted ~~this amendment on a retrospective basis. This amendment did not have an impact on our financial statements.~~

~~Effective January 1, 2018, we adopted FASB ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~, to add guidance on the classification and presentation of restricted cash. These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this standard did not have an impact on our financial statements.

~~Effective January 1, 2018, we adopted FASB ASU 2017-04,~~ ~~Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~, to simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill. The adoption of this standard did not have an impact on our financial statements.

~~Effective January 1, 2018, we adopted FASB ASU 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting~~, which provides clarification on accounting for modifications in share-based payment awards. The adoption of this guidance did not have an impact on our consolidated financial statements or related disclosures as there were no modifications to our share-based payment awards during the first half of 2018.

~~In March 2018, we adopted FASB ASU 2018-05,~~ ~~Income Taxes~~ (~~Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting to reflect the SEC’s interpretive guidance released on December 22, 2017, when the 2017 Tax Act was signed into law. See “Note 11. Income Taxes.”~~

~~In April 2018, we early adopted FASB ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~, which amends the hedge accounting recognition and presentation requirements, effective January 1, 2018. The adoption of this guidance allowed us to simplify our procedures to assess critical terms and broadens the application of hedge accounting. The early adoption of this standard did not have a material impact on our consolidated financial statements.

~~New Accounting Pronouncements Not Yet Adopted~~

~~In February 2016, the FASB issued~~ ASU 2016-02, Leases (Topic 842) (the "New Leasing Standard"), ~~to increase transparency and comparability among organizations’ leasing arrangements. Since then,~~as of January 1, 2019, using the ~~FASB has issued updates to ASU 2016-02. The principal difference from previous guidance is~~optional transition method that ~~effective upon adoption, the lease assets and lease liabilities arising from operating leases will be recognized~~allows for a cumulative-effect adjustment in the ~~balance sheet. For public business entities,~~period of adoption and did not restate prior periods. In addition, we elected the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. In transition, we are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including the option to utilize a numberpackage of practical ~~expedients. We are in~~expedients permitted under the ~~process~~transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The adoption of ~~evaluating our lessee and lessor arrangements.~~

~~We currently expect that under~~ the New Leasing Standard ~~as a lessee, our~~resulted in the recording of operating lease ~~commitments will be recognized as~~liabilities of $86.7 million and right-of-use assets of $83.7 million. Prior to our adoption of the New Leasing Standard, rent prepayments of approximately $1.0 million were recorded within other current assets and the impact of recognizing rent expense on a straight-line basis of approximately $4.0 million was recorded within other current and long-term liabilities. Upon adoption of the New Leasing Standard, these rent prepayments and straight-line rent impacts are now recorded within operating lease right-of-use assets and represent the net difference between operating lease liabilities and right-of-use assets upon our adoption, which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption. See lease commitments in Note 14 to the consolidated financial statements in our 2017 Annual Report for additional information.assets.

~~While the~~The New Leasing Standard ~~will not impact the overall economics of our products and services sold under customer incentive programs, we currently expect that the New Leasing Standard will require~~requires us to classify ~~new instrument placements for~~ certain reagent rental programs as sales-type leases and thus accelerate instrument revenue and cost recognition at the time of instrument placement. We did not change the historical lease classification for placements prior to January 1, 2019, therefore this change will apply to certain new placements beginning on January 1, 2019. Under ~~current~~prior U.S. GAAP, instruments placed under our reagent rental programs ~~are~~were classified as operating leases and instrument revenue and cost iswas recognized over the term of the program. ~~We do~~The New Leasing Standard did not ~~expect this change to~~ have a material impact on our ~~financial statements. See "Note 3. Revenue Recognition"~~consolidated earnings and had no impact on cash flows for ~~a description~~the three months ended March 31, 2019.

Adoption of the New Leasing Standard impacted our ~~reagent rental programs.~~condensed consolidated balance sheet as follows:



	Consolidated Balance Sheet

	Previous U.S. GAAP December 31, 2018 (Reported)		New U.S. GAAP January 1, 2019		Impact of the New Leasing Standard

ASSETS
Other current assets	$	108,220	$	107,228	$	(992	)
Total current assets	$	654,172	$	653,180	$	(992	)
Operating lease right-of-use asset	$	—	$	83,707	$	83,707
Total long-term assets	$	883,177	$	966,884	$	83,707
TOTAL ASSETS	$	1,537,349	$	1,620,064	$	82,715

LIABILITIES
Accrued liabilities	$	260,683	$	274,459	$	13,776
Total current liabilities	$	770,444	$	784,220	$	13,776
Long-term operating lease liability	$	—	$	68,939	$	68,939
Total long-term liabilities	$	776,138	$	845,077	$	68,939
TOTAL LIABILITIES	$	1,546,582	$	1,629,297	$	82,715

~~In February 2018, the FASB issued~~We adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, on January 1, 2019. We elected not to ~~allow a reclassification~~reclassify the $1.7 million of stranded tax effects from the Tax Cuts and Jobs Act enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings related to the stranded effects of the 2017 Tax Act. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted. In transition, we are required to apply the amendments either in the period of ~~adoption~~adoption.

In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes meant to simplify interim disclosures. The new rule requires a presentation of changes in stockholders’ equity and noncontrolling interest in the form of a reconciliation, either as a separate financial statement or ~~retrospectively. We are currently evaluating~~in the notes to the financial statements, for the current and comparative year-to-date interim periods. The additional elements of this release did not have a material impact ~~these amendments will have~~ on our overall condensed consolidated financial statements. We adopted the new disclosure requirements in our Form 10-Q for the period ended March 31, 2019.

New Accounting Pronouncements Not Yet Adopted

For a discussion of other accounting standards that have been issued by the FASB prior to January 1, 2019, but are not yet effective, refer to ~~the~~Note 2. Summary of Significant Accounting Policies - New Accounting Pronouncements Not Yet Adopted ~~section~~ in our ~~2017~~2018 Annual Report.

NOTE 3. REVENUE RECOGNITION

~~Under the New Revenue Standard,~~Our revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To ~~meet the requirements of the New Revenue Standard and~~ accurately present the consideration received in exchange for promised products or services, we applied the ~~prescribed~~ five-step model outlined below:


1.	Identification of a contract or agreement with a customer


2.	Identification of our performance obligations in the contract or agreement


3.	Determination of the transaction price


4.	Allocation of the transaction price to the performance obligations


5.	Recognition of revenue when, or as, we satisfy a performance obligation

We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The timing of revenue recognition, billings, and cash collections results in accounts receivable, contract assets and lease receivables as a result of revenue recognized in advance of

billings (included within other assets), and contract liabilities or deferred revenue as a result of receiving consideration in advance of revenue recognition within our unaudited condensed consolidated balance sheet. Our general payment terms range from 30 to 60 days, with exceptions in certain geographies. Below is a listing of our major categories of revenue for our products and services:

Diagnostic Products and Accessories. Diagnostic products and accessories revenues, including IDEXX VetLab consumables and accessories, rapid assay, LPD, Water, and OPTI testing products, are recognized and invoiced at the time of

shipment, which is when the customer obtains control of the product based on legal title transfer and we have the right to payment. Shipping costs reimbursed by the customer are included in revenue and cost of sales. As a practical expedient, we do not account for shipping activities as a separate performance obligation.

Reference Laboratory Diagnostic and Consulting Services. Reference laboratory revenues are recognized and invoiced when the laboratory diagnostic service is performed.

Instruments, Software and ~~Systems.~~Systems. CAG Diagnostics capital instruments, veterinary software and diagnostic imaging systems revenues are recognized and invoiced when the customer obtains control of the products based on legal title transfer and we have the right to payment, which generally occurs at the time of installation and customer acceptance. Our instruments, software, and systems are often included in one of our significant customer programs, as further described below. For veterinary software systems that include multiple performance obligations, such as perpetual software licenses and computer hardware, we allocate revenue to each performance obligation based on estimates of the price that we would charge the customer for each promised product or service if it were sold on a standalone basis.

Lease Revenue. ~~Lease revenue on~~Revenues from instrument ~~systems under~~ rental agreements and reagent rental programs isare recognized either as operating leases on a ratable basis over the term of the ~~agreement.~~agreement or as sales-type leases at the time of installation and customer acceptance. Customers typically pay for the right to use instruments under rental agreements in equal monthly amounts over the term of the rental agreement. Our reagent rental programs provide our customers the right to use our instruments upon entering into agreements to purchase specified amounts of consumables, which are considered embedded leases. For some agreements, the customers are provided with the right to purchase the instrument at the end of the lease term. Lease revenues from these agreements are presented in product revenue on our unaudited condensed consolidated income statement. Lease revenue was approximately $4.6 million and $2.9 million for the three months ended March 31, 2019 and 2018, respectively, including both operating leases and sales-type leases under ASC 842, Leases, during 2019, and ASC 840, Leases, prior to 2019. See below for revenue recognition under ~~Reagent Rental Programs.~~our reagent rental programs.

Extended Warranties and Post-Contract Support. CAG Diagnostics capital instruments and diagnostic imaging systems extended warranties typically provide customers with continued coverage for a period of 1 to 5 years beyond the first-year standard warranty. Customers can either pay in full for the extended warranty at the time of instrument or system purchase or can be billed on a quarterly basis over the term of the contract. We recognize revenue associated with extended warranties over time on a ratable basis using a time elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.

Veterinary software post-contract support provides customers with access to technical support when and as needed through access to call centers and online customer assistance. Post-contract support contracts typically have a term of 12 months and customers are billed for post-contract support in equal quarterly amounts over the term. We recognize revenue for post-contract support services over time on a ratable basis using a ~~time elapsed~~time-elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.

~~Upon adoption of the New Revenue Standard on January 1,~~On December 31, 2018, our deferred revenue related to extended warranties and post-contract support was ~~$40.3~~$40.7 million, of which approximately ~~$2.3~~$12.7 million ~~and $14.1 million were~~was recognized during the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was ~~$41.6~~$40.2 million at ~~June 30, 2018.~~March 31, 2019. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less and do not adjust for the effect of the financing components when the period between customer payment and revenue recognition is one year or ~~less, which are practical expedients provided within the New Revenue Standard.~~less. Deferred revenue related to extended warranties and post-contract support with an original duration of more than one year was ~~$29.0~~$26.7 million at ~~June 30, 2018,~~March 31, 2019, of which approximately ~~13%~~24%, ~~29%~~31%, ~~24%~~23% and ~~34%~~22% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full year 2020, the full year 2021, and thereafter, respectively. Additionally, we have determined these agreements do not include a significant financing component.

SaaS Subscriptions. We offer a variety of veterinary software and diagnostic imaging SaaS subscriptions including Neo, Animana, Pet Health Network Pro, Petly Plans, Web PACS, rVetLink, and ~~rVetLink.~~Smart Flow. We recognize revenue for our SaaS subscriptions over time on a ratable basis over the contract term, beginning on the date our service is made available to the customer. Our subscription contracts vary in term from monthly to 2 years. Customers typically pay for our subscription contracts in equal monthly amounts over the term of the agreement. Deferred revenue related to our SaaS subscriptions is not material.

Contracts with Multiple Performance Obligations. We enter into contracts where customers purchase a combination of IDEXX products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires significant judgment. We determine the transaction price for a contract based on the consideration we expect to receive in exchange for the transferred goods or services. To the extent the transaction price includes variable consideration, such as volume rebates or expected price adjustments, we apply judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts.

We allocate revenue to each performance obligation in proportion to the relative standalone selling prices and recognize revenue when transfer of the related goods or services has occurred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the performance obligation when sold separately. When standalone selling prices for our products or services are not directly observable we determine the standalone selling prices using relevant information available and apply suitable estimation methods including, but not limited to, the cost plus a margin approach. We recognize revenue as each performance obligation is satisfied, either at a point in time or over time, as described in the revenue categories above. We ~~apply a practical expedient provided by the New Revenue Standard and~~ do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less.

The following customer programs represent our most significant customer contracts which contain multiple performance obligations:

Customer Commitment Programs. We offer customer incentives upon entering into multi-year agreements to purchase annual minimum amounts of products and services.

Up-Front Customer Loyalty Programs. Our up-front loyalty programs provide customers with incentives in the form of cash payments or IDEXX Points upon entering into multi-year agreements to purchase annual minimum amounts of future products or services. If a customer breaches its agreement, they are required to refund all or a portion of the up-front cash or IDEXX Points, or make other repayments, remedial actions, or both. Up-front incentives to customers in the form of cash or IDEXX Points are not made in exchange for distinct goods or services and are capitalized as customer acquisition costs within other assets, which are subsequently recognized as a reduction to revenue over the term of the customer agreement. If these up-front incentives are subsequently utilized to purchase instruments, we allocate total consideration, including future committed purchases less up-front incentives and estimates of expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.

~~Upon adoption of the New Revenue Standard on January 1,~~On December 31, 2018, our capitalized customer acquisition costs were ~~$107.5~~$124.4 million, of which approximately ~~$7.2~~$8.9 million ~~and $14.4 million were~~was recognized as a reduction of revenue during the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019. Furthermore, as a result of new up-front customer loyalty payments, our capitalized customer acquisition costs were ~~$118.5~~$125.2 million at ~~June 30, 2018.~~March 31, 2019. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, were not material.

Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with a free or discounted instrument or system upon entering into multi-year agreements to purchase annual minimum amounts of products and services. We allocate total consideration, including future committed purchases and expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost in advance of billing the customer at the time of installation and customer acceptance, which is also when the customer obtains

control of the instrument based on legal title transfer. Our right to future consideration related to instrument revenue is recorded as a contract asset within other current and long-term assets. The contract asset is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.

~~Upon adoption of the New Revenue Standard on January 1,~~On December 31, 2018, our volume commitment contract assets were ~~$5.6~~$40.9 million, of which approximately ~~$1.1~~$2.7 million ~~and $2.4 million were~~was reclassified to accounts receivable when customers were billed for related products and services during the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019. Furthermore, as a result of new placements under volume commitment programs, our contract assets were ~~$21.5~~$49.5 million at ~~June 30, 2018.~~March 31, 2019. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, were not material.

For our up-front customer loyalty and volume commitment programs, we estimate future revenues related to multi-year agreements to be approximately ~~$975.0 million,~~$1.4 billion, of which approximately ~~15%~~20%, ~~25%~~23%, ~~20%~~19%, and ~~40%~~38% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full year 2020, the full year 2021, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied, for which customers have committed to purchase goods and services, net of the expected revenue reductions from customer acquisition costs and expected price adjustments, and as a result, are lower than stated contractual commitments by our customers.

Instrument Rebate Programs. Our instrument rebate programs, previously referred to as IDEXX Instrument Marketing Programs, require an instrument purchase and provide customers the opportunity to earn future rebates based on the volume of products and services they purchase over the term of the program. We account for the customer’s right to earn rebates on future purchases as a separate performance obligation and determine the standalone selling price based on an estimate of rebates the customer will earn over the term of the program. Total consideration allocated to identified performance obligations is limited to goods and services that the customer is presently obligated to purchase and does not include estimates of future purchases that are optional. We allocate ~~a portion of instrument revenue~~total consideration to ~~our~~identified performance obligations, including customer’s right to earn rebates on future purchases, which is deferred and recognized upon the purchase of future products and services, offsetting future rebates as they are earned.

~~Upon adoption of the New Revenue Standard on January 1,~~On December 31, 2018, our deferred revenue related to instrument rebate programs was ~~$65.9~~$57.4 million, of which approximately ~~$4.6~~$4.9 million ~~and $9.2 million were~~was recognized when customers purchased eligible products and services and earned rebates during the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019. Furthermore, as a result of new instrument purchases under rebate programs, our deferred revenue was ~~$60.7~~$55.0 million at ~~June 30, 2018,~~March 31, 2019, of which approximately ~~15%~~24%, 28%, 22%, and ~~35%~~26% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full year 2020, the full year 2021, and thereafter, respectively.

Reagent Rental ~~Programs.~~Programs. Our reagent rental programs provide our customers the right to use our instruments upon entering into multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded ~~operating~~ lease for the right to use our instrument and ~~no instrument revenue is recognized at the time of instrument installation. We~~we determine the amount of lease revenue allocated to the instrument based on relative standalone selling ~~prices~~prices. We evaluate the terms of these embedded leases to determine classification as either a sales-type lease or an operating lease, as defined within the New Leasing Standard. We elected the package of practical expedients permitted under the transition guidance within the New Leasing Standard, which among other things, allowed us to carryforward our historical lease classification and ~~determine~~therefore all reagent rental program placements prior to January 1, 2019 will continue to be classified as operating leases. We have not elected the ~~pattern~~practical expedient within the New Leasing Standard to combine lease and non-lease components.

Sales-type Reagent Rental Programs. Our reagent rental programs that effectively transfer control of instruments to our customers are classified as sales-type leases and we recognize instrument revenue ~~recognition~~and cost in ~~proportion~~advance of billing the customer, at the time of installation and customer acceptance. Our right to future consideration related to instrument revenue is recorded as a lease receivable within other current and long-term assets, and is transferred to accounts receivable when customers are billed for future products and services over the ~~customer’s minimum purchase commitment.~~term of the contract. As a result of new placements under reagent rental programs, our lease receivable assets were $1.3 million at March 31, 2019. The impact of discounting and unearned income at March 31, 2019 were not material. Profit and loss recognized at the commencement date and interest income

during the three months ended March 31, 2019 were not material. We monitor customer purchases over the term of their agreement to assess the realizability of our lease receivable assets. Impairments during the three months ended March 31, 2019 were not material.

Operating-type Reagent Rental Programs. Our reagent rental programs that do not effectively transfer control of instruments to our customers are classified as operating leases and we recognize instrument revenue and costs ratably over the term of the agreement. The cost of the instrument is capitalized within property and ~~equipment,~~equipment. During the three months ended March 31, 2019 and ~~is charged~~2018, we transferred instruments of $2.0 million and $4.0 million, respectively from inventory to ~~cost of product revenue ratably over the term of the agreement.~~property and equipment.

We estimate future revenue to be recognized related to ~~these multi-year agreements with customers~~our reagent rental programs of approximately ~~$92.0~~$38.1 million, of which approximately ~~17%~~30%, ~~31%~~32%, ~~25%~~23%, and ~~27%~~15% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full year 2020, the full year 2021, and thereafter, respectively. These ~~represent~~ future revenues relate to performance obligations not yet satisfied for which customers have committed to future purchases, net of any expected price adjustments, and as a result, may be lower than stated contractual commitments by our customers.

Other Customer Incentive Programs. Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method, for incentives that are offered to individual customers, and the expected-value method, for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, were not material. Refund obligations related to customer incentive programs are recorded in accrued liabilities for the actual issuance of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future.

Program Combinations. At times, we combine elements of our significant customer programs within a single customer contract. We separate each significant program element and include the contract assets, customer acquisition costs, deferred revenues and estimated future revenues within the most relevant program disclosures above. Each customer contract is presented as a net contract asset or net contract liability on our unaudited condensed consolidated balance sheet.

Future market conditions and changes in product offerings may cause us to change marketing strategies to increase or decrease customer incentive offerings, possibly resulting in incremental reductions of revenue in future periods as compared to reductions in the current or prior periods. Additionally, certain customer programs require us to estimate, based on historical experience, and apply judgment to predict the amounts of future customer purchases, customer rebates and other incentive payments, and price adjustments related to multi-year agreements. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.

IDEXX Points. IDEXX Points may be applied to trade receivables due to us, converted to cash, or applied against the purchase price of IDEXX products and services. We consider IDEXX Points equivalent to ~~cash and~~cash. IDEXX Points that have not yet been used by customers are included in accrued liabilities until utilized or expired. Breakage is not material because customers can apply IDEXX Points to trade receivables at any time.

Accounts Receivable. We recognize revenue when it is probable that we will collect substantially all of the consideration to which we will be entitled, based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. We maintain allowances for doubtful accounts for potentially uncollectible receivables. We base our

estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. Additional allowances may be required if either the financial condition of our customers were to deteriorate, or a strengthening U.S. dollar impacts the ability of foreign customers to make payments to us on their U.S. ~~dollar denominated~~dollar-denominated purchases. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. We have no significant customers that accounted for greater than 10% of our consolidated revenues and we have no concentration of credit risk as of ~~June 30, 2018.~~March 31, 2019.

Disaggregated Revenues. We present disaggregated revenue for our CAG segment based on major product and service categories. Our Water segment is comprised of a single major product category. Although ~~Water and~~our LPD dosegment does not meet the quantitative thresholds to be reported as a separate ~~segments,~~segment, we believe it is important to disaggregate these revenues as a major product and service ~~categories~~category within our Other reportable segment given ~~their~~its distinct markets, and therefore we have elected to report ~~Water and~~ LPD as a reportable ~~segments.~~ segment.

The following table presents disaggregated revenue by major product and service categories for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 (in thousands):

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	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
CAG segment revenue:
CAG Diagnostics recurring revenue:	$	437,666	$	380,319	$	843,714	$	726,999	$	443,791	$	406,048
IDEXX VetLab consumables	158,620		132,094		308,133		255,647		167,211		149,513
Rapid assay products	63,362		60,266		115,379		108,161		54,431		52,017
Reference laboratory diagnostic and consulting services	197,268		171,298		384,205		330,367		202,658		186,937
CAG Diagnostics service and accessories	18,416		16,661		35,997		32,824		19,491		17,581
CAG Diagnostics capital - instruments	34,544		27,716		65,439		53,899		28,749		30,895
Veterinary software, services and diagnostic imaging systems	35,277		31,913		69,167		62,277		36,378		33,890
CAG segment revenue	507,487		439,948		978,320		843,175		508,918		470,833

Water segment revenue	32,658		29,424		61,801		54,501		30,310		29,143
LPD segment revenue	34,998		33,553		67,238		62,870		31,506		32,240
Other segment revenue	5,609		6,015		11,049		10,415		5,322		5,440
Total revenue	$	580,752	$	508,940	$	1,118,408	$	970,961	$	576,056	$	537,656

Revenue by principal geographic area, based on customers’ domiciles, was as follows (in thousands):

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	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
United States	$	356,736	$	315,695	$	684,197	$	604,308	$	358,288	$	327,461
Europe, the Middle East and Africa	122,270		102,482		242,844		198,910		121,746		120,574
Asia Pacific Region	62,505		56,085		118,544		105,037		60,075		56,039
Canada	26,407		23,078		48,951		41,826		23,224		22,544
Latin America	12,834		11,600		23,872		20,880		12,723		11,038
Total	$	580,752	$	508,940	$	1,118,408	$	970,961	$	576,056	$	537,656

Costs to Obtain a Contract. We capitalize sales commissions and the related fringe benefits earned by our sales force when considered incremental and recoverable costs of obtaining a contract. Our contracts include performance obligations related to various goods and services, some of which are satisfied at a point in time and others over time. Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time, including extended warranties and SaaS subscriptions, are deferred and recognized on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates. We apply judgment in estimating the amortization period, which ranges from 3 to 7 years, by taking into consideration our customer contract terms, history of renewals, expected length of customer relationship, as well as the useful life of the underlying technology and products. Amortization expense is included in sales and marketing expenses in the accompanying unaudited condensed consolidated statements of ~~operations.~~income. Deferred commission costs are periodically reviewed for impairment.

~~Upon adoption of the New Revenue Standard on January 1,~~On December 31, 2018, our deferred ~~commissions~~commission costs, included within other assets, were ~~$11.8~~$13.9 million, of which approximately ~~$1.0 million and $2.0~~$1.2 million of ~~commissions~~commission expense ~~were~~was recognized during the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, our deferred commission costs were ~~$12.8~~$14.4 million at ~~June 30, 2018.~~March 31, 2019. Impairments of deferred commission costs during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, were not material.

~~NOTE~~4. ~~ACQUISITIONS~~

We believe that our acquisitions of businesses and other assets enhance our existing businesses by either expanding our geographic range and customer base or expanding our existing product lines. We made no acquisitions during the first half of 2018.

During the second quarter of 2017, we acquired the assets of two software companies that expand our suite of technology applications for the veterinary profession, specifically related to patient referral management and other connectivity needs between practices and other parties. The combined purchase price of $15 million consists of $12 million paid at closing and a $3 million contingent payment to be paid within 36 months if certain commercial goals are achieved. The fair value estimate of the assets acquired consists of $13.3 million of goodwill, representing synergies within our broader CAG portfolio, $1.0 million of customer relationship intangible assets and $0.6 million of technology intangible assets. Goodwill related to these acquisitions is expected to be deductible for income tax purposes. The amount of net tangible assets acquired was immaterial. Pro forma information has not been presented for these acquisitions because such information is not material to our financial statements. The results of operations have been included in our CAG segment since the acquisition date.

During the first quarter of 2017, we acquired a reference laboratory in Austria for approximately €1.3 million, with the majority of the acquisition price valued as an intangible asset. This acquisition was accounted for as an acquisition of a business and the results of operations of this reference laboratory have been included in our CAG segment since the acquisition date. Pro forma information has not been presented for this business acquisition because such information is not material to our financial statements.

NOTE 5.4. SHARE-BASED COMPENSATION

The fair value of options, restricted stock units, deferred stock units, and employee stock purchase rights awarded during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, totaled ~~$1.7~~$34.4 million ~~and $32.8 million, respectively,~~ as compared to ~~$1.6 million and $29.5~~$31.1 million for the three ~~and six~~ months ended ~~June 30, 2017, respectively.~~March 31, 2018. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at ~~June 30, 2018,~~March 31, 2019, was ~~$62.8~~$73.4 million, which will be recognized over a weighted average period of approximately ~~2.1~~2.3 years. During the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, we recognized ~~expense~~expenses of ~~$6.5~~$6.3 million ~~and $12.4 million, respectively,~~ as compared to $6.0 million ~~and $11.7 million~~ for the three ~~and six~~ months ended ~~June 30, 2017, respectively,~~March 31, 2018, related to share-based compensation.

We determine the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions at each grant date. As such, we may use different assumptions for options granted throughout the year. Option awards are granted with an exercise price equal to the closing market price of our common stock at the date of grant. We have never paid any cash dividends on our common stock, and we have no intention to pay such a dividend at this time; 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,
2018 2017

Share price at grant $ 179.56
$ 142.66
Expected stock price volatility 24 % 26 %
Expected term, in years 5.8
5.8
Risk-free interest rate 2.7 % 2.0 %
Weighted average fair value of options granted $ 52.99
$ 40.79

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	For the Three Months Ended March 31,
	2019			2018

Share price at grant	$	206.94		$	178.26
Expected stock price volatility	26		%	24		%
Expected term, in years	6.0			5.8
Risk-free interest rate	2.5		%	2.7		%
Weighted average fair value of options granted	$	63.55		$	52.49

NOTE 6.5. INVENTORIES ~~MARKETABLE SECURITIES~~

As a result of the passage of the 2017 Tax Act during the fourth quarter of 2017, we liquidated our marketable securities held outside the U.S. during the first quarter of 2018 and recognized a loss of approximately $0.3 million. We repatriated these funds and reduced our revolving debt balance during the first quarter of 2018.

~~The amortized cost and fair value of marketable securities as of December 31, 2017, were as follows (in thousands~~):

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As of December 31, 2017 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Corporate bonds $ 140,969
$ 96
$ (179 ) $ 140,886
Certificates of deposit 58,510
—
—
58,510
Commercial paper 29,171
—
—
29,171
Asset backed securities 22,206
4
(43 ) 22,167
U.S. government bonds 15,619
11
(19 ) 15,611
Agency bonds 10,990
9
(52 ) 10,947
Treasury bills 6,964
—
(1 ) 6,963
Total marketable securities $ 284,429
$ 120
$ (294 ) $ 284,255

~~We held marketable securities with effective maturities of~~ ~~two years~~ ~~or less that had an average AA- credit rating as of~~ ~~December 31, 2017~~.

~~NOTE 7. INVENTORIES~~

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Net realizable value is the estimated selling ~~prices~~price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The components of inventories were as follows (in thousands):


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018

Raw materials	$	34,336	$	32,994	$	32,869	$	31,973
Work-in-process	16,982		17,786		20,077		17,009
Finished goods	125,169		113,538		136,522		124,321
Inventories (Note 2)	$	176,487	$	164,318
Inventories					$	189,468	$	173,303

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NOTE 6. LEASES

The majority of our facilities are occupied under operating lease arrangements with various expiration dates through 2067, some of which include options to extend the life of the lease, and some of which include options to terminate the lease within 1 year. In certain instances, we are responsible for the real estate taxes and operating expenses related to these facilities. Additionally, we enter into operating leases for certain vehicles and office equipment in the normal course of business. We determine the expected term of any executed agreements using the non-cancelable lease term plus any renewal options by which the failure to renew imposes a penalty in such amount that renewal is reasonably assured. The derived expected term is then used in the determination of a financing or operating lease and in the calculation of straight-line rent expense. Rent escalations are considered in the calculation of minimum lease payments in our capital lease tests and in determining straight-line rent expense for operating leases. Minimum lease payments include the fixed lease component of the agreement, as well as fixed rate increases that are initially measured at the lease commencement date. Variable lease payments based on an index, payments associated with non-lease components and short-term rentals (leases with terms less than 12

months) are expensed as incurred. Consideration is allocated to the lease and non-lease components based on the estimated standalone prices.

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, accrued liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Our financing leases are not material to our financial statements.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities and right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an explicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Rent expense for lease payments is recognized on a straight-line basis over the lease term. The operating lease right-of-use assets also includes any rent prepayments, lease incentives upon receipt and straight-line rent expense impacts, which represent the difference between our operating lease liabilities and right-of-use assets.

Maturities of operating lease liabilities were as follows (in thousands, except lease term and discount rate):



	March 31, 2019

2019 (remainder of year)	$	12,308
2020	17,414
2021	14,821
2022	11,175
2023	7,705
Thereafter	37,722
Total lease payments	101,145
Less imputed interest	(18,258		)
Total	$	82,887

Current operating lease liabilities, included in accrued liabilities	$	13,932
Long-term operating lease liabilities	$	68,955

Weighted average remaining lease term - operating leases	10.9 years

Weighted average discount rate - operating leases	3.7		%

Rent expense charged to operations under operating leases was approximately $5.2 million during the three months ended March 31, 2019. Variable rent and short term lease expenses were not material.

Supplemental cash flow information for leases was as follows (in thousands):



	For the Three Months Ended March 31, 2019

Cash paid for amounts included in the measurement of operating leases liabilities	$	5,728
Right-of-use assets obtained in exchange for operating lease obligations	$	2,196

At December 31, 2018, under ASC 840 Leases, the minimum annual rental payments under our lease agreements were as follows: $19.4 million in 2019; $17.1 million in 2020; $14.5 million in 2021; $10.8 million in 2022; $8.5 million in 2023; and $36.5 million thereafter.

NOTE 8.7. OTHER CURRENT AND LONG-TERM ASSETS

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

໿

June 30,
2018 December 31,
2017

Prepaid expenses $ 27,250
$ 28,967
Taxes receivable 41,315
35,475
Customer acquisition costs (Notes 2 and 3) 32,303
23,520
Contract assets (Notes 2 and 3) 6,558
—
Deferred sales commissions (Notes 2 and 3) 4,440
—
Other assets (Notes 2 and 3) 11,908
13,178
Other current assets $ 123,774
$ 101,140



	March 31, 2019		December 31, 2018

Prepaid expenses (Note 2)	$	31,593	$	30,314
Taxes receivable	13,813		14,098
Customer acquisition costs	35,495		34,515
Contract assets	11,669		9,670
Deferred sales commissions	4,664		4,464
Other assets	13,169		15,159
Other current assets	$	110,403	$	108,220

Other long-term assets consisted of the following (in thousands):

June 30,
2018 December 31,
2017

Investment in long-term product supply arrangements $ 11,344
$ 9,949
Customer acquisition costs (Notes 2 and 3) 86,147
64,670
Contract assets (Notes 2 and 3) 14,903
—
Deferred sales commissions (Notes 2 and 3) 8,349
—
Deferred income taxes (Note 2) 8,723
7,698
Other assets (Notes 2 and 3) 22,356
36,299
Other long-term assets $ 151,822
$ 118,616



	March 31, 2019		December 31, 2018

Investment in long-term product supply arrangements	$	11,621	$	10,894
Customer acquisition costs	89,690		89,862
Contract assets	37,839		31,269
Deferred sales commissions	9,731		9,470
Deferred income taxes	8,368		8,481
Other assets	42,360		39,617
Other long-term assets	$	199,609	$	189,593

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NOTE 9.8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

June 30,
2018 December 31,
2017

Accrued expenses $ 61,302
$ 64,430
Accrued employee compensation and related expenses 79,394
102,944
Accrued taxes 25,109
29,389
Accrued customer incentives and refund obligations (Notes 2 and 3) 62,575
56,655
Total accrued liabilities $ 228,380
$ 253,418



	March 31, 2019		December 31, 2018

Accrued expenses (Note 2)	$	58,589	$	65,212
Accrued employee compensation and related expenses	60,351		109,488
Accrued taxes	36,326		26,609
Accrued customer incentives and refund obligations	59,929		59,374
Current lease liabilities (Notes 2 and 6)	13,932		—
Accrued liabilities	$	229,127	$	260,683

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Other long-term liabilities consisted of the following (in thousands):

໿

June 30,
2018 December 31,
2017
Accrued taxes $ 67,886
$ 66,506
Accrued customer incentives (Note 2) —
12,956
Other accrued long-term expenses 15,381
16,256
Total other long-term liabilities $ 83,267
$ 95,718



	March 31, 2019		December 31, 2018

Accrued taxes	$	67,525	$	66,767
Other accrued long-term expenses (Note 2)	15,039		18,059
Other long-term liabilities	$	82,564	$	84,826

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NOTE 9. DEBT

On December 19, 2014, we entered into a Multicurrency Note Purchase and Private Shelf Agreement among ourselves, Metropolitan Life Insurance Company ("MetLife"), and each of the accredited institutional purchasers named therein (the "Existing Agreement"). Pursuant to the terms of the Existing Agreement, we may request that MetLife purchase, over the three-year period beginning on December 19, 2014, up to $50 million of additional senior promissory notes of ours at a fixed interest rate and with a maturity date not to exceed fifteen years (the "Shelf Notes").

On March 14, 2019, we amended the Existing Agreement to (i) increase the Shelf Notes facility size from $50 million to $150 million, (ii) extend the Shelf Notes facility issuance period from December 19, 2017 to December 20, 2021 and (iii) make various implementing and administrative changes in order to facilitate a $100 million Shelf Notes issuance on March 14, 2019. We also submitted to MetLife a request to purchase $100 million of our Shelf Notes at a 4.19% per annum rate, due March 14, 2029, (the "Series C Notes"). We used the proceeds received from the Series C Notes for general corporate purposes, including a partial repayment of borrowings under our Credit Facility.

NOTE 10. REPURCHASES OF COMMON STOCK

໿

We primarily acquire shares by repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required statutory withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders. We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock issued during the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ was not material.

The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrender for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands, except per share amounts):


	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018

Shares repurchased in the open market	517		696		982		1,086		267		465
Shares acquired through employee surrender for statutory tax withholding	1		1		49		53		36		48
Total shares repurchased	518		697		1,031		1,139		303		513

Cost of shares repurchased in the open market	$	105,774	$	114,163	$	191,962	$	164,907	$	53,862	$	86,188
Cost of shares for employee surrenders	165		156		8,720		7,459		7,403		8,555
Total cost of shares	$	105,939	$	114,319	$	200,682	$	172,366	$	61,265	$	94,743

Average cost per share - open market repurchases	$	204.69	$	163.96	$	195.47	$	151.81	$	201.41	$	185.23
Average cost per share - employee surrenders	$	215.36	$	168.25	$	179.41	$	141.56	$	206.35	$	178.83
Average cost per share - total	$	204.71	$	163.97	$	194.71	$	151.34	$	202.00	$	184.63

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NOTE 11. INCOME TAXES

Our effective income tax rate was ~~20.9%~~17.7% for the three months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~25.5%~~14.3% for the three months ended ~~June 30, 2017, and 18.0% for the six months ended June 30, 2018, as compared to 22.5% for the six months ended June 30, 2017.~~March 31, 2018. The ~~decrease~~increase in our effective tax rate ~~for each period, as compared to the same periods in the prior year,~~ was primarily related to lower tax benefits from share-based compensation, partially offset by a nonrecurring item recorded in the ~~reduction in our U.S. statutory tax rate as a result of~~three months ended March 31, 2018, that resulted from the 2017 Tax Cut and Jobs Act.

We have accounted for the impacts of the 2017 Tax Act as of December 31, 2017, to the extent a reasonable estimate could be made, and we recognized provisional amounts related to the deemed repatriation tax, offset by the remeasurement of our deferred tax assets and liabilities to record the effects of the tax law change in the period of enactment. This treatment is provided for in ASU 2018-05, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law during the measurement period. The measurement period ends when the company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. During the first half of 2018, the Internal Revenue Service issued additional guidance providing clarification on certain aspects of the deemed repatriation tax calculation. The additional guidance did not result in any measurement period adjustments to the provisional amounts recorded as of December 31, 2017. We will continue to monitor for new guidance related to provisional amounts recorded.

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in AOCI, net of tax, for the ~~six~~three months ended ~~June 30,~~March 31, 2019, consisted of the following (in thousands):



For the Three Months Ended March 31, 2019	Unrealized (Loss) Gain on Investments, Net of Tax			Unrealized Gain (Loss) on Derivative Instruments, Net of Tax			Unrealized (Loss) Gain on Net Investment Hedge, Net of Tax			Cumulative Translation Adjustment			Total

Balance as of December 31, 2018	$	(157	)	$	7,589		$	(394	)	$	(48,829	)	$	(41,791	)
Other comprehensive income (loss) before reclassifications	407			2,474			1,480			(1,423		)	2,938
Gains reclassified from accumulated other comprehensive income	—			(1,162		)	—			—			(1,162		)
Balance as of March 31, 2019	$	250		$	8,901		$	1,086		$	(50,252	)	$	(40,015	)

໿

The changes in AOCI, net of tax, for the three months ended March 31, 2018, consisted of the following (in thousands):

For the Six Months Ended June 30, 2018
Unrealized (Loss) Gain on Investments,
Net of Tax

Unrealized (Loss) Gain
on Derivative Instruments, Net of Tax

Unrealized (Loss) Gain on Net
Investment Hedge, Net of Tax

Cumulative Translation
Adjustment
Total

Balance as of December 31, 2017 $ (22 ) $ (5,219 ) $ (4,311 ) $ (26,918 ) $ (36,470 )
Other comprehensive income (loss) before reclassifications 150
5,786
2,263
(16,327 ) (8,128 )
Gains reclassified from accumulated other comprehensive income —
2,039
—
—
2,039
Balance as of June 30, 2018 $ 128
$ 2,606
$ (2,048 ) $ (43,245 ) $ (42,559 )

໿



For the Three Months Ended March 31, 2018	Unrealized (Loss) Gain on Investments, Net of Tax			Unrealized (Loss) Gain on Derivative Instruments, Net of Tax			Unrealized Loss on Net Investment Hedge, Net of Tax			Cumulative Translation Adjustment			Total

Balance as of December 31, 2017	$	(22	)	$	(5,219	)	$	(4,311	)	$	(26,918	)	$	(36,470	)
Other comprehensive income (loss) before reclassifications	118			(2,388		)	(2,216		)	5,165			679
Losses reclassified from accumulated other comprehensive income	—			1,585			—			—			1,585
Balance as of March 31, 2018	$	96		$	(6,022	)	$	(6,527	)	$	(21,753	)	$	(34,206	)

The following is a summary of reclassifications out of AOCI for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


Details about AOCI Components	Affected Line Item in the Statement of Operations	Amounts Reclassified from AOCI For the Three Months Ended June 30,					Affected Line Item in the Statements of Income	Amounts Reclassified from AOCI For the Three Months Ended March 31,
		2018			2017			2019		2018
(Losses) gains on derivative instruments classified as cash flow hedges included in net income:
Gain (loss) on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	(833	)	$	753	Cost of revenue	$	1,411	$	(1,835	)
	Tax (benefits) expense	(379		)	280		Tax expense (benefit)	249		(250		)
	(Losses) gains, net of tax	$	(454	)	$	473	Gain (loss), net of tax	$	1,162	$	(1,585	)

Details about AOCI Components Affected Line Item in the Statement of Operations Amounts Reclassified from AOCI For the Six Months Ended June 30,
2018 2017
(Losses) gains on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts Cost of revenue $ (2,668 ) $ 1,828
Tax (benefits) expense (629 ) 681
(Losses) gains, net of tax $ (2,039 ) $ 1,147

໿

NOTE 13. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to our stockholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the total unrecognized compensation expense for unvested share-based compensation awards would be used to purchase our common stock at the average market price during the period. Vested deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed and issuance is not contingent. See Note 45 to the consolidated financial statements in our ~~2017~~2018 Annual Report for additional information regarding deferred stock units.

The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	For the Three Months Ended June 30,		For the Six Months Ended June 30,		For the Three Months Ended March 31,
	2018	2017	2018	2017	2019	2018

Shares outstanding for basic earnings per share	87,004	88,004	87,166	88,060	86,204	87,331

Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share	87,004	88,004	87,166	88,060	86,204	87,331
Dilutive effect of share-based payment awards	1,592	1,874	1,620	1,902	1,345	1,613
	88,596	89,878	88,786	89,962	87,549	88,944

໿

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. ~~There were no anti-dilutive restricted stock units for the three and six months ended June 30, 2018 and 2017.~~ The following table presents information concerning those anti-dilutive options for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):

For the Three Months Ended
June 30, For the Six Months Ended
June 30,
2018 2017 2018 2017

Weighted average number of shares underlying anti-dilutive options 326
368
245
275



	For the Three Months Ended March 31,
	2019	2018

Weighted average number of shares underlying anti-dilutive options	463	167

໿

NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

See "Note 6. Leases", for more information regarding our lease commitments.

Contingencies and Guarantees

We are subject to claims that may arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. We accrue for loss contingencies when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. However, the results of legal actions cannot be predicted with certainty, and therefore our actual losses with respect to these contingencies could exceed our accruals. At ~~June 30, 2018,~~March 31, 2019, our accruals with respect to actual and threatened litigation were not material.

From time to time, we have received notices alleging that our products infringe third-party proprietary rights, although we are not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that we will prevail in any

infringement proceedings that may be commenced against us. If we lose any such litigation, we may be stopped from selling certain products and/or we may be required to pay damages as a result of the litigation.

~~Significant commitments,~~We have had no significant changes to our contingencies and guarantees ~~at June 30, 2018, are consistent with those~~ discussed in Note 1415 to the consolidated financial statements in our ~~2017~~2018 Annual Report.

NOTE 15. SEGMENT REPORTING

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 (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. Our reportable segments include diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other operating segment combines and presents products for the human point-of-care medical diagnostics market with our ~~pharmaceutical product line and our~~ out-licensing arrangements. Assets are not allocated to segments for internal reporting purposes.

Certain costs are not allocated to our operating segments and are instead reported under the caption “Unallocated Amounts.” These costs include costs that do not align with one of our existing operating segments or are cost prohibitive to allocate, which primarily consist of our R&D function, regional or country expenses, certain foreign currency revaluation and settlement gains and losses on monetary balances in currencies other than our subsidiaries’ functional currency and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation are charged to our business segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or rates are also captured within Unallocated Amounts.

The following is a summary of segment performance for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):

໿

For the Three Months Ended June 30,
CAG Water LPD Other Unallocated Amounts Consolidated Total
2018

Revenue $ 507,487
$ 32,658
$ 34,998
$ 5,609
$ —
$ 580,752

Income (loss) from operations $ 129,796
$ 15,122
$ 6,471
$ 1,130
$ (6,925 ) $ 145,594
Interest expense, net (8,285 )
Income before provision for income taxes 137,309
Provision for income taxes 28,629
Net income 108,680
Less: Net loss attributable to noncontrolling interest (11 )
Net income attributable to IDEXX Laboratories, Inc. stockholders $ 108,691

2017
Revenue $ 439,948
$ 29,424
$ 33,553
$ 6,015
$ —
$ 508,940

Income (loss) from operations $ 108,731
$ 13,653
$ 5,176
$ 768
$ (5,764 ) $ 122,564
Interest expense, net (7,979 )
Income before provision for income taxes 114,585
Provision for income taxes 29,178
Net income 85,407
Less: Net income attributable to noncontrolling interest 50
Net income attributable to IDEXX Laboratories, Inc. stockholders $ 85,357

໿



	For the Three Months Ended March 31,
	CAG		Water		LPD		Other		Unallocated Amounts			Consolidated Total
2019
Revenue	$	508,918	$	30,310	$	31,506	$	5,322	$	—		$	576,056

Income (loss) from operations	$	115,022	$	13,782	$	6,250	$	1,526	$	(3,442	)	$	133,138
Interest expense, net												(8,346		)
Income before provision for income taxes												124,792
Provision for income taxes												22,083
Net income												102,709
Less: Net income attributable to noncontrolling interest												28
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	102,681

2018
Revenue	$	470,833	$	29,143	$	32,240	$	5,440	$	—		$	537,656

Income (loss) from operations	$	100,398	$	12,462	$	2,961	$	498	$	(3,275	)	$	113,044
Interest expense, net												(8,695		)
Income before provision for income taxes												104,349
Provision for income taxes												14,873
Net income												89,476
Less: Net income attributable to noncontrolling interest												25
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	89,451

For the Six Months Ended June 30,
CAG Water LPD Other Unallocated Amounts Consolidated Total
2018

Revenue $ 978,320
$ 61,801
$ 67,238
$ 11,049
$ —
$ 1,118,408

Income (loss) from operations $ 230,194
$ 27,584
$ 9,432
$ 1,628
$ (10,200 ) $ 258,638
Interest expense, net (16,980 )
Income before provision for income taxes 241,658
Provision for income taxes 43,502
Net income 198,156
Less: Net income attributable to noncontrolling interest 14
Net income attributable to IDEXX Laboratories, Inc. stockholders $ 198,142

2017
Revenue $ 843,175
$ 54,501
$ 62,870
$ 10,415
$ —
$ 970,961

Income (loss) from operations $ 188,586
$ 23,916
$ 8,978
$ 1,161
$ (7,834 ) $ 214,807
Interest expense, net (15,485 )
Income before provision for income taxes 199,322
Provision for income taxes 44,857
Net income 154,465
Less: Net income attributable to noncontrolling interest 89
Net income attributable to IDEXX Laboratories, Inc. stockholders $ 154,376

See “Note 3. Revenue Recognition” for a summary of disaggregated revenue by reportable segment and by major product and service category for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

NOTE 16. FAIR VALUE MEASUREMENTS

U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a ~~nonrecurring~~non-recurring basis and certain financial assets and liabilities that are not measured at fair value in our unaudited condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:



Level 1		Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
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.
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.

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 transfers between Level 1 and Level 2 or transfers in or out of Level 3 of the fair value hierarchy during the three ~~and six~~ months ended ~~June 30, 2018.~~

March 31, 2019.

Our ~~marketable debt securities~~cross currency swap contracts are ~~initially valued~~measured at ~~the transaction price and are subsequently remeasured to~~ fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our cross currency swap contracts classified as derivative instruments using prevailing market conditions as of the close of business on each balance sheet ~~date utilizing third-party pricing services.~~date. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. Observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers and other industry and economic events. We validate the prices provided by our third-party pricing services by obtaining independent market values from other pricing sources and analyzing pricing data in certain instances. product of this calculation is then adjusted for counterparty risk.

Our foreign currency exchange contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our foreign currency exchange contracts classified as derivative instruments using an income approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.

The amounts outstanding under our unsecured revolving credit facility (“Credit Facility” or “line of credit”) and senior notes (“long-term debt”) are measured at carrying value in our unaudited condensed consolidated balance sheets though we disclose the fair value of these financial instruments. We determine the fair value of the amount outstanding under our Credit Facility and long-term debt using an income approach, utilizing a discounted cash flow analysis based on current market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk. Our Credit Facility and long-term debt are valued using Level 2 inputs. The estimated fair value of our Credit Facility approximates its carrying value. The estimated fair value and carrying value of our long-term debt were ~~$608.1~~$717.1 million and ~~$603.6~~$699.8 million, respectively, as of ~~June 30, 2018,~~March 31, 2019, and ~~$632.0~~$607.3 million and ~~$606.6~~$601.8 million, respectively, as of December 31, ~~2017.~~ 2018.

The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis at ~~June 30, 2018,~~March 31, 2019, and at December 31, ~~2017,~~2018, by level within the fair value hierarchy (in thousands):


As of June 30, 2018	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, 2018
As of March 31, 2019									Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2019

Assets
Money market funds⁽¹⁾	$	12,677	$	—	$	—	$	12,677	$	255	$	—	$	—	$	255
Equity mutual funds⁽²⁾	$	2,026	$	—	$	—	$	2,026	$	1,809	$	—	$	—	$	1,809
Cross currency swaps ⁽³⁾	—		$	314	—		$	314	$	—	$	3,670	$	—	$	3,670
Foreign currency exchange contracts⁽³⁾	$	—	$	4,459	$	—	$	4,459	$	—	$	7,326	$	—	$	7,326
Liabilities
Foreign currency exchange contracts⁽³⁾	$	—	$	1,360	$	—	$	1,360	$	—	$	74	$	—	$	74
Deferred compensation⁽⁴⁾	$	2,026	$	—	$	—	$	2,026	$	1,809	$	—	$	—	$	1,809

As of December 31, 2017 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, 2017

Assets

Money market funds⁽¹⁾
$ 32,962
$ —
$ —
$ 32,962
Certificates of deposit⁽¹⁾
$ —
$ 1,250
$ —
$ 1,250

Marketable Securities
Corporate bonds $ —
$ 140,886
$ —
$ 140,886
Certificates of deposit —
58,510
—
58,510
Commercial paper —
29,171
—
29,171
Asset backed securities —
22,167
—
22,167
U.S. government bonds —
15,611
—
15,611
Agency bonds —
10,947
—
10,947
Treasury bills —
6,963
—
6,963
Total marketable securities $ —
$ 284,255
$ —
$ 284,255

Equity mutual funds⁽²⁾
$ 2,162
$ —
$ —
$ 2,162
Foreign currency exchange contracts⁽³⁾
$ —
$ 477
$ —
$ 477
Liabilities
Foreign currency exchange contracts⁽³⁾
$ —
$ 6,468
$ —
$ 6,468
Deferred compensation⁽⁴⁾
$ 2,162
$ —
$ —
$ 2,162



As of December 31, 2018	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, 2018

Assets
Money market funds⁽¹⁾	$	250	$	—	$	—	$	250
Equity mutual funds⁽²⁾	$	1,673	$	—	$	—	$	1,673
Cross currency swaps⁽³⁾	$	—	$	1,789	$	—	$	1,789
Foreign currency exchange contracts⁽³⁾	$	—	$	8,163	$	—	$	8,163
Liabilities
Foreign currency exchange contracts⁽³⁾	$	—	$	603	$	—	$	603
Deferred compensation⁽⁴⁾	$	1,673	$	—	$	—	$	1,673

(1)

Money market funds ~~and certificates of deposit~~ with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, consisted of demand deposits. ~~Certificates of deposit with an original maturity of over ninety days are included within marketable securities.~~


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


(3)	Cross currency swaps and foreign currency exchange contracts are included within other current assets; other long-term assets; accrued liabilities; or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.


(4)	A deferred compensation plan assumed as part of a previous business combination is included within accrued liabilities and 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~~number (2) above.

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

NOTE 17. HEDGING INSTRUMENTS

Disclosure within this note is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging 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.

We are exposed to certain risks related to our ongoing business operations. The primary ~~risks~~risk that we currently manage by using hedging instruments ~~are~~is foreign currency exchange ~~risk and~~risk. We may also enter into interest rate ~~risk.~~ swaps to minimize the impact of interest rate fluctuations associated with borrowings under our variable-rate Credit Facility.

Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts, cross currency swaps or foreign-denominated debt issuances to minimize the impact of

foreign currency fluctuations associated with specific balance sheet exposures, including net investments in certain foreign subsidiaries. ~~We may also enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with borrowings under our variable-rate Credit Facility.~~

The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions, including transactions denominated in the euro, British pound, Japanese yen, Canadian dollar, and Australian ~~dollar, and Swiss franc.~~dollar. 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 foreign currency exchange contracts with well-capitalized 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 the designation of such instruments as hedging transactions.

We recognize all hedging instruments on the balance sheet at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment must be recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. 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 AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See “Note 12. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on our unaudited condensed consolidated statements of ~~operations~~income for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

We enter into master netting arrangements with the counterparties to our derivative transactions which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.

Cash Flow Hedges

We have designated our foreign currency exchange contracts as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.

We did not de-designate any instruments from hedge accounting treatment during either the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 or ~~2017.~~2018. At ~~June 30, 2018,~~March 31, 2019, the estimated amount of net gains, net of income tax benefit, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is ~~$1.0~~$5.9 million if exchange rates do not fluctuate from the levels at ~~June 30, 2018.~~March 31, 2019.

We hedge approximately 85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, Australian dollar, and Swiss franc. We have additional unhedged foreign currency exposures related to foreign services and emerging markets where it is not practical to hedge. We primarily utilize foreign currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled ~~$202.7~~$184.6 million and ~~$176.5~~$190.9 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

The following tables present the effect of cash flow hedge accounting on our unaudited condensed consolidated statements of income and comprehensive income, and provide information regarding the location and amounts of pretax gains or losses of derivatives (in thousands):



		Three Months Ended March 31,
		2019		2018


Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	244,459	$	234,557
Foreign exchange contracts
Amount of gain (loss) reclassified from accumulated other comprehensive income into income		$	1,411	$	(1,835	)

Net Investment Hedges

In June 2015, we issued and sold through a private placement an aggregate principal amount of €88.9 million in euro-denominated 1.785% Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded ~~gains of $4.5~~a $1.5 million ~~and $2.3 million,~~gain, net of income tax, within AOCI as a result of this net investment hedge for the three ~~and six~~ months ended ~~June 30, 2018, respectively.~~March 31, 2019. The related cumulative unrealized gain recorded at ~~June 30, 2018,~~March 31, 2019, will not be reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged foreign operations or a portion of the hedge no longer qualifies for hedge accounting treatment. See Note 1112 to the consolidated financial statements included in our ~~2017~~2018 Annual Report for further information regarding the issuance of these euro-denominated notes.

InDuring May 2018, January 2019, and March 2019, we entered into ~~two~~ cross currency swap contracts as a hedge of our net investment in foreign operations to offset foreign currency translation gains and losses on the net investment. The cross currency swaps have a maturity date of June 30, 2023. At maturity of the cross currency swap contract, we will deliver the notional amount of ~~€50.0~~€80.0 million and will receive approximately ~~$59.4~~$93.5 million from the counterparties. The change in fair value of the cross currency swap contracts are recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. During the three ~~month period~~months ended ~~June 30, 2018,~~March 31, 2019, we recorded a gain of ~~$0.2~~$1.4 million, net of income tax, within AOCI as a result of these net investment hedges. ~~The Company~~We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swap. This interest rate component is excluded from the assessment of hedge effectiveness, thus ~~will be~~is recognized as a reduction to interest expense over the life of the hedge instrument. ~~During the second quarter, we~~We recognized approximately ~~$0.2~~$0.5 million related to the excluded component as a reduction of interest ~~expense.~~expense for the three months ended March 31, 2019.

The following tables presents the effect of cash flow hedge accounting on our unaudited condensed consolidated statement of operations and comprehensive income and provides information regarding the location and amounts of pretax gains or losses of derivatives ~~(in thousands)~~:

Three Months Ended June 30,
2018 2017
Costs of revenue Costs of revenue

Financial statement line items in which effects of cash flow hedges are recorded $ 248,313
$ 216,225
Foreign exchange contracts
Amount of (loss) gain reclassified from accumulated other comprehensive income into income (833 ) 753

Six Months Ended June 30,
2018 2017
Costs of revenue Costs of revenue

Financial statement line items in which effects of cash flow hedges are recorded $ 482,870
$ 420,055
Foreign exchange contracts
Amount of (loss) gain reclassified from accumulated other comprehensive income into income (2,668 ) 1,828

Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets

The fair values of hedging instruments and their respective classification on our unaudited condensed consolidated balance sheets and amounts subject to offset under master netting arrangements consisted of the following derivative instruments, unless otherwise noted (in thousands):


		Hedging Assets					Hedging Assets
		June 30, 2018		December 31, 2017			March 31, 2019		December 31, 2018

Derivatives designated as hedging instruments	Balance Sheet Classification
Derivatives and non-derivatives designated as hedging instruments						Balance Sheet Classification
Foreign currency exchange contracts	Other current assets	$	2,704	$	477	Other current assets	$	7,127	$	8,163
Cross currency swaps	Other current assets	314		—		Other long-term assets	3,670		1,789
Foreign currency exchange contracts	Other long-term assets	1,755		—		Other long-term assets	199		—
Total derivative instruments presented as cash flow hedges on the balance sheet		4,773		477
Total derivative instruments presented as hedge instruments on the balance sheet							10,996		9,952
Gross amounts subject to master netting arrangements not offset on the balance sheet		703		477			74		603
Net amount		$	4,070	$	—		$	10,922	$	9,349

໿



		Hedging Liabilities
		March 31, 2019		December 31, 2018

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Accrued liabilities	$	59	$	603
Foreign currency exchange contracts	Other long-term liabilities	15		—
Total derivative instruments presented as cash flow hedges on the balance sheet		74		603
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet⁽¹⁾	Long-term debt	99,831		101,777
Total hedging instruments presented on the balance sheet		99,905		102,380
Gross amounts subject to master netting arrangements not offset on the balance sheet		74		603
Net amount		$	99,831	$	101,777

Hedging Liabilities
June 30, 2018 December 31, 2017

Derivatives designated as hedging instruments Balance Sheet Classification
Foreign currency exchange contracts Accrued liabilities $ 1,304
$ 6,468
Foreign currency exchange contracts Other long-term liabilities 56
—
Total derivative instruments presented as cash flow hedges on the balance sheet 1,360
6,468
Foreign currency borrowings designated as net investment hedge on the balance sheet Long-term debt 103,590
106,567
Total hedging instruments presented on the balance sheet 104,950
113,035
Gross amounts subject to master netting arrangements not offset on the balance sheet 703
477
Net amount $ 104,247
$ 112,558

໿(1) Amounts represent reported carrying amounts of our foreign currency denominated debt. See "Note 16. Fair Value Measurements" for information regarding the fair value of our long-term debt.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), include statements relating to future revenue growth rates, future tax benefits; business trends, earnings and other measures of financial performance; the effect of economic downturns on our business performance; projected impact of foreign currency exchange rates; demand for our products; realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending; interest expense; warranty expense; share-based compensation expense; the adoption and projected impact of new accounting standards; future commercial efforts; and competition. Forward-looking statements can be identified by the use of words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” “project,” and similar words and expressions. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including the matters discussed in "Part I. Item ~~1A, “Risk~~1A. Risk Factors” described in our ~~2017~~2018 Annual Report and this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with the SEC.

Any forward-looking statements represent our estimates only as of the day this Quarterly Report on Form 10-Q was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. 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 or expectations change.

You should read the following discussion and analysis in conjunction with our ~~2017~~2018 Annual Report that includes additional information about us, our results of operations, our financial position, and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Business Overview

We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing markets. We also sell a line of portable electrolytes and blood gas analyzers for the human point-of-care medical diagnostics market. Our primary products and services are:

Point-of-care veterinary diagnostic products, comprising instruments, consumables, and rapid assay test kits;

Veterinary reference laboratory diagnostic and consulting services;

~~Veterinary~~Practice management and diagnostic imaging systems and ~~services;~~services used by veterinaries;

~~Biomedical research, reference~~Health monitoring, biological materials testing, laboratory diagnostic instruments and services ~~and instruments;~~used by the biomedical research community;

Diagnostic, health-monitoring products for livestock, poultry, and ~~antibiotic residue testing in~~ dairy;

Products that test water for certain microbiological contaminants;

Point-of-care electrolytes and blood gas analyzers used in the human point-of-care medical diagnostics market.

Operating Segments. We operate primarily through three business segments: diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy reproductive efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other operating segment combines and presents products for the human point-of-care medical diagnostics market (“OPTI Medical”) with ~~our pharmaceutical product line and~~ our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.

CAG develops, designs, manufactures, and distributes products and performs services for veterinarians and the biomedical analytics market, primarily related to diagnostics and information management. Water develops, designs, manufactures, and distributes a range of products used in the detection of various microbiological parameters in water. LPD develops, designs, manufactures, and distributes diagnostic tests and related software and performs services that are used to manage the health status of livestock and poultry, to improve bovine reproductive efficiency, and to ensure the quality and safety of milk and food. OPTI Medical manufactures and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.

Effects of Certain Factors and Trends on Results of Operations

Currency Impact. See “Part I. Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Quarterly Report on Form 10-Q for additional information regarding the impact of foreign currency exchange rates.

Other Items. See “Part I. Item 1. Business - Patents and Licenses” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our ~~2017~~2018 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration.

Critical Accounting ~~Policies~~Estimates and ~~Estimates~~Assumptions

The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. ~~Excluding the adoption of the New Revenue Standard, the~~The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, are consistent with those discussed in our ~~2017~~2018 Annual Report in the section under the heading “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting ~~Policies~~Estimates and ~~Estimates.~~Assumptions.”

~~Revenue Recognition.~~ We adopted the New Revenue Standard in the first quarter of 2018 on a modified-retrospective basis. While the New Revenue Standard will not impact the overall economics of our products and services sold under customer marketing and incentive programs, it has changed the timing of revenue recognition. For more information regarding the adoption of the New Revenue Standard and new revenue recognition accounting policies, see Note 2 and Note 3, respectively, to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

~~We are evaluating~~For more information regarding the impact ~~that other~~of recent accounting standards and amendments will have on our consolidated financial statements as described in Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion to “revenue,” “revenues” or “revenue growth” are references to “organic revenue growth.” Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions, and divestitures. Organic revenue growth should be considered in addition to, and not as a

replacement for, or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers.

We exclude from organic revenue growth the effect of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under management’s control, are subject to volatility and can obscure underlying business trends. We calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year period and the comparable prior year period to foreign currency denominated revenues for the prior year period.

We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and

operating trends. ~~Effective January 1, 2018, we~~We exclude only acquisitions that are considered to be a business from organic revenue growth. ~~We consider acquisitions to be a business when all three elements of inputs, processes and outputs are present, consistent with ASU 2017-01, “Business Combinations: (Topic 805) Clarifying the Definition of a Business.~~” In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single ~~identifiable~~ asset or group of similar ~~identifiable~~ assets, we do not consider these assets to be a business and ~~effective January 1, 2018, we~~ include these acquisitions in organic revenue growth. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth. This change did not have a material impact on organic revenue growth during the three and six months ended June 30, 2018. Prior to January 1, 2018, we excluded all acquisitions from organic revenue growth. This change would not have impacted previously reported organic revenue growth for the three and six months ended June 30, 2018, as all acquisitions were business acquisitions.

We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio, in this Quarterly Report on Form 10-Q, all of which are non-GAAP financial measures that should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.

~~Results of Operations~~

~~Three Months Ended~~ ~~June 30, 2018, Compared to Three Months Ended June 30, 2017~~

Comparison to Prior Periods.

Our fiscal quarter ended on ~~June 30.~~March 31. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior year period.

Results of Operations

Three Months Ended March 31, 2019, Compared to Three Months Ended March 31, 2018

Total Company. The following table presents total Company revenue by operating segment:


	For the Three Months Ended June 30,															For the Three Months Ended March 31,
Net Revenue (dollars in thousands)	2018		2017		Dollar Change			Reported Revenue Growth ⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth ⁽¹⁾		2019		2018		Dollar Change			Reported Revenue Growth⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth⁽¹⁾

CAG	$	507,487	$	439,948	$	67,539		15.4	%	1.8	%	0.1	%	13.4	%	$	508,918	$	470,833	$	38,085		8.1	%	(2.5	%)	0.2	%	10.5	%
United States	334,865		295,829		39,036			13.2	%	—		0.1	%	13.1	%	337,874		308,286		29,588			9.6	%	—		0.2	%	9.4	%
International	172,622		144,119		28,503			19.8	%	5.6	%	—		14.1	%	171,044		162,547		8,497			5.2	%	(7.5	%)	0.1	%	12.6	%

Water	32,658		29,424		3,234			11.0	%	2.0	%	—		9.0	%	30,310		29,143		1,167			4.0	%	(4.0	%)	—		8.0	%
United States	15,740		14,366		1,374			9.6	%	—		—		9.6	%	14,604		13,921		683			4.9	%	—		—		4.9	%
International	16,918		15,058		1,860			12.3	%	3.8	%	—		8.5	%	15,706		15,222		484			3.2	%	(7.9	%)	—		11.1	%

LPD	34,998		33,553		1,445			4.3	%	4.0	%	—		0.3	%	31,506		32,240		(734		)	(2.3	%)	(6.3	%)	—		4.0	%
United States	3,681		3,433		248			7.3	%	—		—		7.3	%	3,263		3,313		(50		)	(1.5	%)	—		—		(1.5	%)
International	31,317		30,120		1,197			4.0	%	4.5	%	—		(0.5	%)	28,243		28,927		(684		)	(2.4	%)	(7.0	%)	—		4.6	%

Other	5,609		6,015		(406		)	(6.7	%)	0.4	%	—		(7.2	%)	5,322		5,440		(118		)	(2.2	%)	—		—		(2.2	%)

Total Company	$	580,752	$	508,940	$	71,812		14.1	%	2.0	%	0.1	%	12.1	%	$	576,056	$	537,656	$	38,400		7.1	%	(2.8	%)	0.1	%	9.8	%
United States	356,736		315,695		41,041			13.0	%	—		0.1	%	12.9	%	358,288		327,461		30,827			9.4	%	—		0.2	%	9.2	%
International	224,016		193,245		30,771			15.9	%	5.2	%	—		10.7	%	217,768		210,195		7,573			3.6	%	(7.3	%)	0.1	%	10.8	%


(1)	Reported revenue growth and organic revenue growth may not recalculate due to rounding.

Total Company Revenue. The increase in both U.S. and international organic revenues was driven by strong volume gains in CAG Diagnostics recurring revenue, supported by our differentiated diagnostic technologies and expanded commercial organization that are driving increased volumes from new and existing customers in our reference laboratory business and the impact of the continued expansion of our CAG Diagnostics instrument installed base. ~~International organic growth was strong across all regions, reflecting the aforementioned CAG Diagnostics recurring volume driven growth.~~ Our Water business also contributed to our international growth, primarily from higher sales volumes of our Colilert test products and related accessories. ~~Total company~~The impact of currency movements decreased revenue ~~included approximately $14.9 million in the second quarter of 2018 that was attributed to the New Revenue Standard.~~by 2.8%.

The following table presents total Company results of operations:


	For the Three Months Ended June 30,								Change				For the Three Months Ended March 31,								Change
Total Company - Results of Operations (dollars in thousands)	2018		Percent of Revenue		2017		Percent of Revenue		Amount		Percentage		2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	580,752			$	508,940			$	71,812	14.1	%	$	576,056			$	537,656			$	38,400		7.1	%
Cost of revenue	248,313				216,225				32,088		14.8	%	244,459				234,557				9,902			4.2	%
Gross profit	332,439		57.2	%	292,715		57.5	%	39,724		13.6	%	331,597		57.6	%	303,099		56.4	%	28,498			9.4	%

Operating Expenses:
Sales and marketing	96,255		16.6	%	87,693		17.2	%	8,562		9.8	%	106,584		18.5	%	100,101		18.6	%	6,483			6.5	%
General and administrative	61,080		10.5	%	55,460		10.9	%	5,620		10.1	%	60,361		10.5	%	60,931		11.3	%	(570		)	(0.9	%)
Research and development	29,510		5.1	%	26,998		5.3	%	2,512		9.3	%	31,514		5.5	%	29,023		5.4	%	2,491			8.6	%
Total operating expenses	186,845		32.2	%	170,151		33.4	%	16,694		9.8	%	198,459		34.5	%	190,055		35.3	%	8,404			4.4	%
Income from operations	$	145,594	25.1	%	$	122,564	24.1	%	$	23,030	18.8	%	$	133,138	23.1	%	$	113,044	21.0	%	$	20,094		17.8	%

Gross Profit. Gross profit increased due to higher sales volumes and ~~was offset by~~ a 30120 basis point ~~decrease~~increase in the gross profit percentage. The ~~decrease~~increase in the gross profit percentage was driven by ~~higher information technology costs,~~several factors, including costs that were previously captured within operating expenses, increased investments in reference laboratory capacity and employee benefits, as well as unfavorable mix impacts from high instrument revenue growth. These impacts were partially offset by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, mix benefits from high growth in VetLab consumable revenues, volume leverage and productivity ~~gains.~~benefits in our U.S. reference laboratory services, and the favorable impact of lower product costs in our CAG and LPD businesses. The impact from foreign currency movements increased gross profit margin by ~~less than~~approximately 10 basis points, including the impact of hedge gains in the ~~prior period~~current year, as compared to hedge losses in the ~~current period. Gross profit included approximately $6.0 million in the second quarter of 2018 attributable to the New Revenue Standard.~~prior year.

Operating ~~Expense~~Expenses. The increase in ~~total Company~~ sales and marketing expense was primarily due ~~primarily~~ to increased personnel-related costs ~~as we continue to invest in and grow~~from our expanded global commercial infrastructure. The ~~increase~~decrease in general and administrative expense ~~resulted from~~was primarily due to lower corporate function costs, including certain information technology projects that will occur later in the year. Research and development expense increased primarily due to higher project and personnel-related costs. The changes in currency exchange rates decreased total operating expenses within our segments, which was offset by foreign exchange losses on settlements of foreign currency denominated transactions ~~compared~~recorded within Unallocated Amounts, resulting in approximately a 2% decrease to gains in the prior period, information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and higher personnel-related costs, partially offset by certain information technology costs that are now captured within cost of revenue. Research and development expense increased primarily due to higher personnel-related costs. Theour overall ~~change in currency exchange rates resulted in an increase in total~~ operating ~~expenses of approximately 2.5%.~~expenses.

Companion Animal Group

The following table presents revenue by product and service category for CAG:

໿


	For the Three Months Ended June 30,														For the Three Months Ended March 31,
Net Revenue (dollars in thousands)	2018		2017		Dollar Change		Reported Revenue Growth ⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth ⁽¹⁾		2019		2018		Dollar Change			Reported Revenue Growth⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth⁽¹⁾

CAG Diagnostics recurring revenue:	$	437,666	$	380,319	$	57,347	15.1	%	1.9	%	—		13.2	%	$	443,791	$	406,048	$	37,743		9.3	%	(2.6	%)	—		11.9	%
IDEXX VetLab consumables	158,620		132,094		26,526		20.1	%	2.2	%	—		17.8	%	167,211		149,513		17,698			11.8	%	(3.1	%)	—		15.0	%
Rapid assay products	63,362		60,266		3,096		5.1	%	0.8	%	—		4.3	%	54,431		52,017		2,414			4.6	%	(1.4	%)	—		6.1	%
Reference laboratory diagnostic and consulting services	197,268		171,298		25,970		15.2	%	2.0	%	—		13.1	%	202,658		186,937		15,721			8.4	%	(2.4	%)	—		10.8	%
CAG diagnostics services and accessories	18,416		16,661		1,755		10.5	%	1.9	%	—		8.6	%	19,491		17,581		1,910			10.9	%	(3.7	%)	—		14.6	%
CAG Diagnostics capital - instruments	34,544		27,716		6,828		24.6	%	2.8	%	—		21.8	%	28,749		30,895		(2,146		)	(6.9	%)	(3.5	%)	—		(3.4	%)
Veterinary software, services and diagnostic imaging systems	35,277		31,913		3,364		10.5	%	0.5	%	1.0	%	9.0	%	36,378		33,890		2,488			7.3	%	(0.6	%)	2.2	%	5.8	%
Net CAG revenue	$	507,487	$	439,948	$	67,539	15.4	%	1.8	%	0.1	%	13.4	%	$	508,918	$	470,833	$	38,085		8.1	%	(2.5	%)	0.2	%	10.5	%


(1)	Reported revenue growth and organic revenue growth may not recalculate due to rounding

CAG Diagnostics Recurring Revenue. The increase in CAG Diagnostics recurring revenue was primarily due ~~primarily~~ to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, ~~supported by our differentiated diagnostic technologies and our expanded commercial organization~~ and to a lesser extent, higher realized prices. ~~CAG Diagnostics recurring revenue included approximately $4.7 million in the second quarter of 2018 that was attributed to the New Revenue Standard.~~

IDEXX VetLab consumables revenue growth was primarily due to higher sales volumes ~~in the U.S., Europe, and the Asia-Pacific region~~across all regions for our Catalyst consumables, including SDMA consumables, and to a lesser extent, Procyte Dx^® consumables and Sedivue Dx^®analyzer pay-per-run ~~sales,~~sales. These increases were supported by expansion of our instrument installed base, growth in testing by new and existing customers, ~~and~~ our expanded menu of available tests, ~~as well as~~and to a lesser extent, benefits from higher average unit sales ~~prices. IDEXX VetLab consumables revenue included approximately $3.4 million~~prices, and customer stocking in the ~~second quarter~~U.K ahead of ~~2018 that was attributed to~~ the ~~New Revenue Standard.~~planned exit from the European Union.

The increase in rapid assay revenue resulted primarily from higher sales volumes ~~and average unit prices~~ of canine SNAP^® 4Dx Plus and to a lesser extent, higher sales volume of single analyte SNAP products and SNAP feline combination products. Rapid assay revenue included less than $0.1 million in the second quarter of 2018 that was attributed to the New Revenue Standard.realized prices.

The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S., resulting from increased testing from new and existing customers, supported by our differentiated diagnostic technologies, such as IDEXX SDMA^™and fecal antigen ~~testing and to a lesser extent,~~testing. The increase was also the result of higher average unit sales prices. ~~Reference laboratory diagnostic and consulting revenue included approximately $1.3 million in the second quarter of 2018 that was attributed to the New Revenue Standard.~~

CAG Diagnostics services and accessories revenue growth was primarily a result of the increase in our active installed base of instruments.

CAG Diagnostics Capital – Instruments Revenue. The ~~increase~~decrease in instrument revenue reflects ~~increased~~slightly lower overall instrument placements as well as the impact of product mix, including lower SediVue Dx analyzer placements compared to high prior year levels, partially offset by higher Procyte Dx analyzer placements, and higher Catalyst analyzer and SediVue Dx instrument placements, supported by our new volume commitment program that we refer to as IDEXX 360. The success of our new IDEXX 360 program caused a shift away from both our instrument rebate and reagentplacements.

rental programs which resulted in increased upfront instrument revenue recognition attributed to the New Revenue Standard. CAG Diagnostics capital instrument revenue included approximately $8.8 million in the second quarter of 2018 that was attributed to the New Revenue Standard.

Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software, subscription, and services, as well as higher realized prices on these service offerings, and to a lesser extent, higher diagnostic imaging ~~system placements and higher veterinary subscription service revenue,~~services as a result of the increase in our active installed base. These increases were partially offset by lower diagnostic imaging system ~~prices. Veterinary~~placements compared to high prior year levels. Our acquisition of a software ~~services and diagnostic imaging revenue included approximately $1.5 million~~company in the second ~~quarter~~half of 2018 ~~attributed~~contributed 2.2% to ~~the New Revenue Standard.~~reported revenue growth.

The following table presents the CAG segment results of operations:


	For the Three Months Ended June 30,								Change				For the Three Months Ended March 31,								Change
Results of Operations (dollars in thousands)	2018		Percent of Revenue		2017		Percent of Revenue		Amount		Percentage		2019		Percent of Revenue		2018		Percent of Revenue		Amount		Percentage

Revenues	$	507,487			$	439,948			$	67,539	15.4	%	$	508,918			$	470,833			$	38,085	8.1	%
Cost of revenue	221,577				189,862				31,715		16.7	%
Cost of revenues													221,430				208,900				12,530		6.0	%
Gross profit	285,910		56.3	%	250,086		56.8	%	35,824		14.3	%	287,488		56.5	%	261,933		55.6	%	25,555		9.8	%

Operating Expenses:
Sales and marketing	84,668		16.7	%	76,374		17.4	%	8,294		10.9	%	96,819		19.0	%	89,106		18.9	%	7,713		8.7	%
General and administrative	49,993		9.9	%	45,396		10.3	%	4,597		10.1	%	52,311		10.3	%	51,135		10.9	%	1,176		2.3	%
Research and development	21,453		4.2	%	19,585		4.5	%	1,868		9.5	%	23,336		4.6	%	21,294		4.5	%	2,042		9.6	%
Total operating expenses	156,114		30.8	%	141,355		32.1	%	14,759		10.4	%	172,466		33.9	%	161,535		34.3	%	10,931		6.8	%
Income from operations	$	129,796	25.6	%	$	108,731	24.7	%	$	21,065	19.4	%	$	115,022	22.6	%	$	100,398	21.3	%	$	14,624	14.6	%

Gross ~~Profit.~~Profit. Gross profit increased primarily due to higher sales volume ~~and was offset by~~as well as a 5090 basis point ~~decrease~~increase in the gross profit percentage. The ~~decrease~~increase in gross profit percentage was driven by higher information technology costs, including costs that were previously captured within operating expenses, increased investments in reference laboratory capacity and employee benefits, as well as unfavorable mix impacts from high instrument revenue growth. These impacts were partially offset by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, mix benefits from high growth in VetLab consumable revenues, scale and productivity ~~gains.~~gains in U.S. reference laboratory services, and the favorable impact of lower product costs. The impact from foreign currency movements ~~increased~~had an immaterial impact on gross profit margin by less than 10 basis points, including the impact of hedge gains in the prior period compared to hedge losses in the current period. Gross profit included approximately $6.0 million in the second quarter of 2018 attributable to the New Revenue Standard.margin.

Operating ~~Expense.~~ Expenses. The increase in sales and marketing expense was primarily due ~~primarily~~ to increased personnel-related costs ~~as we continue~~related to ~~invest in~~ our expanded global commercial ~~infrastructure, offset by approximately $0.4 million related to net deferred costs to obtain contracts under the New Revenue Standard.~~infrastructure. The increase in general and administrative expense ~~resulted primarily from~~was the result of higher personnel-related ~~costs and incremental information technology investments, partially offset by certain information technology costs that are now captured within cost of revenue.~~costs. The increase in research and development expense was primarily due ~~primarily~~ to higher project costs and increased personnel-related costs. The overall change in currency exchange rates ~~resulted in an immaterial increase in~~decreased operating ~~expenses.~~expenses by approximately 3%.

Water

The following table presents the Water segment results of operations:


	For the Three Months Ended June 30,								Change				For the Three Months Ended March 31,								Change
Results of Operations (dollars in thousands)	2018		Percent of Revenue		2017		Percent of Revenue		Amount		Percentage		2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	32,658			$	29,424			$	3,234	11.0	%	$	30,310			$	29,143			$	1,167		4.0	%
Cost of revenue	9,579				8,772				807		9.2	%	8,171				8,781				(610		)	(6.9	%)
Gross profit	23,079		70.7	%	20,652		70.2	%	2,427		11.8	%	22,139		73.0	%	20,362		69.9	%	1,777			8.7	%

Operating Expenses:
Sales and marketing	4,103		12.6	%	3,505		11.9	%	598		17.1	%	3,995		13.2	%	4,065		13.9	%	(70		)	(1.7	%)
General and administrative	3,210		9.8	%	2,854		9.7	%	356		12.5	%	3,314		10.9	%	3,188		10.9	%	126			4.0	%
Research and development	644		2.0	%	640		2.2	%	4		0.6	%	1,048		3.5	%	647		2.2	%	401			62.0	%
Total operating expenses	7,957		24.4	%	6,999		23.8	%	958		13.7	%	8,357		27.6	%	7,900		27.1	%	457			5.8	%
Income from operations	$	15,122	46.3	%	$	13,653	46.4	%	$	1,469	10.8	%	$	13,782	45.5	%	$	12,462	42.8	%	$	1,320		10.6	%

Revenue. The increase in revenue was primarily attributable to the benefit of price increases and higher sales volumes of our Colilert test products and related accessories used in coliform and E. coli testing, including strong volume growth rates in ~~North America and~~our Latin America and Asia Pacific regions, as well as customer stocking in the ~~benefit~~U.K ahead of ~~price increases in North America and Europe.~~the planned exit from the European Union. The ~~favorable~~ impact of currency movements ~~increased~~decreased revenue by approximately 2%4.0%. ~~The New Revenue Standard did not have a material impact on Water revenue in the second quarter of 2018.~~

Gross Profit. Gross profit increased due to higher sales volumes as well as a 50310 basis point increase in the gross profit percentage. The increase in the gross profit percentage was primarily due to the decreases in manufacturing costs and net benefit of price increases, ~~and decreases in manufacturing costs,~~ partially offset by higher ~~freight~~distribution costs. The impact from foreign currency movements ~~decreased~~increased our gross profit ~~margin~~percentage by approximately 3590 basis points, including the impact of hedge gains in the ~~prior period~~current year, as compared to hedge losses in the ~~current period. The New Revenue Standard did not have a material impact on Water gross profit in the second quarter of 2018.~~prior year.

Operating Expenses. The ~~increase in operating expense was primarily due to higher personnel-related costs~~decrease in sales and marketing expenses and ~~general~~increase in research and development expenses was primarily due to the realignment of certain personnel within operating expense categories. General and administrative ~~expenses. Research and development expense was relatively unchanged.~~expenses increased primarily due to personnel-related costs. The overall change in currency exchange rates resulted in ~~an increase~~a decrease in operating expenses of approximately 1%3%.

Livestock, Poultry and Dairy

The following table presents the LPD segment results of operations:


	For the Three Months Ended June 30,								Change					For the Three Months Ended March 31,								Change
Results of Operations (dollars in thousands)	2018		Percent of Revenue		2017		Percent of Revenue		Amount			Percentage		2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	34,998			$	33,553			$	1,445		4.3	%	$	31,506			$	32,240			$	(734	)	(2.3	%)
Cost of revenue	14,311				13,871				440			3.2	%	12,467				14,593				(2,126		)	(14.6	%)
Gross profit	20,687		59.1	%	19,682		58.7	%	1,005			5.1	%	19,039		60.4	%	17,647		54.7	%	1,392			7.9	%

Operating Expenses:
Sales and marketing	6,505		18.6	%	6,941		20.7	%	(436		)	(6.3	%)	5,281		16.8	%	6,614		20.5	%	(1,333		)	(20.2	%)
General and administrative	4,805		13.7	%	4,753		14.2	%	52			1.1	%	4,465		14.2	%	4,910		15.2	%	(445		)	(9.1	%)
Research and development	2,906		8.3	%	2,812		8.4	%	94			3.3	%	3,043		9.7	%	3,162		9.8	%	(119		)	(3.8	%)
Total operating expenses	14,216		40.6	%	14,506		43.2	%	(290		)	(2.0	%)	12,789		40.6	%	14,686		45.6	%	(1,897		)	(12.9	%)
Income from operations	$	6,471	18.5	%	$	5,176	15.4	%	$	1,295		25.0	%	$	6,250	19.8	%	$	2,961	9.2	%	$	3,289		111.1	%

Revenue. The ~~increase~~decrease in revenue was primarily due to ~~an increase in recurring livestock and poultry testing in~~ the U.S., Europe, and Latin America. These increases were mostly offset by lower revenue in the Asia-Pacific region related to continued pressure in our dairy business and lower pregnancy product sales, including impacts from lower milk prices. The favorableunfavorable impact of foreign currency movements ~~increased~~that decreased revenue by approximately ~~4%. The New Revenue Standard did not have~~6.3%, as well as a ~~material impact on LPD revenue~~decline in ~~the second quarter of 2018.~~European bovine testing programs, lower diagnostic testing related to African swine fever outbreaks in China, and lower dairy sales impacted by low milk prices. These decreases were partially offset by increased herd health screening, poultry testing volumes in our Asia Pacific region, and higher pregnancy testing in our European and Asia Pacific regions.

Gross Profit. The increase in gross profit was primarily due to higher ~~sales~~herd health screening volumes ~~as well as~~and a ~~40 basis point~~5.7% increase in the gross profit percentage. The ~~increase in the~~ gross profit percentage increase was primarily due to ~~foreign currency movements and~~ lower product manufacturing costs ~~partially offset by lower prices.~~and favorable product mix. The impact from foreign currency movements increased gross profit margin by approximately 60130 basis points, including the impact of ~~higher relative~~hedge gains in the current year, as compared to hedge losses in the ~~current period.~~prior year.

Operating Expenses. The ~~decrease~~decreases in ~~sales and marketing expense was~~operating expenses were due ~~primarily~~ to lower personnel-related ~~costs. General and administrative and research and development~~ costs, ~~were consistent as compared~~primarily due to ~~the prior period.~~open positions. The overall change in currency exchange rates resulted in ~~an increase~~a decrease in operating expenses of approximately 1%4%.

Other

The following table presents the Other results of operations:

໿


	For the Three Months Ended June 30,								Change					For the Three Months Ended March 31,								Change
Results of Operations (dollars in thousands)	2018		Percent of Revenue		2017		Percent of Revenue		Amount			Percentage		2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	5,609			$	6,015			$	(406	)	(6.7	%)	$	5,322			$	5,440			$	(118	)	(2.2	%)
Cost of revenue	2,996				3,512				(516		)	(14.7	%)	2,595				3,366				(771		)	(22.9	%)
Gross profit	2,613		46.6	%	2,503		41.6	%	110			4.4	%	2,727		51.2	%	2,074		38.1	%	653			31.5	%

Operating Expenses:
Sales and marketing	439		7.8	%	601		10.0	%	(162		)	(27.0	%)	347		6.5	%	520		9.6	%	(173		)	(33.3	%)
General and administrative	773		13.8	%	826		13.7	%	(53		)	(6.4	%)	345		6.5	%	804		14.8	%	(459		)	(57.1	%)
Research and development	271		4.8	%	308		5.1	%	(37		)	(12.0	%)	509		9.6	%	252		4.6	%	257			102.0	%
Total operating expenses	1,483		26.4	%	1,735		28.8	%	(252		)	(14.5	%)	1,201		22.6	%	1,576		29.0	%	(375		)	(23.8	%)
Income from operations	$	1,130	20.1	%	$	768	12.8	%	$	362		47.1	%	$	1,526	28.7	%	$	498	9.2	%	$	1,028		206.4	%

Revenue. The decrease in revenue was due to lower volumes of our OPTI Medical analyzers and related consumables, ~~reflecting prior year customer restocking after temporary product availability constraints during the first quarter of 2017,~~mostly offset by higher royalties associated with intellectual property related to our former pharmaceutical product line, and to a lesser extent higher realized prices ofon our OPTI Medical products and services. The ~~favorable~~ impact of currency movements ~~increased~~on revenue ~~by approximately 40 basis points.~~was immaterial.

Gross Profit. The increase in gross profit was due to a 5%13.1% increase in the gross profit percentage primarily due ~~primarily~~ to ~~increased~~favorable product mix from higher royalties, ~~and higher~~as well as price increases on OPTI Medical ~~realized prices,~~products and services and lower manufacturing costs, partially offset by higher ~~OPTI Medical product costs.~~service and distribution expense. The overall change in currency exchange rates had an immaterial impact on the gross profit percentage.

Operating Expenses. The decrease in ~~operating~~sales and marketing expense was primarily due ~~primarily~~ to lower ~~personnel costs~~personnel-related costs. The decrease in ~~sales and marketing. General~~general and administrative expenses was primarily due to the recovery of previously established bad debt reserves in Africa and the Middle East. The increase in research and development costs ~~were consistent as compared~~was primarily due to ~~the prior period.~~higher personnel-related and project costs.

Unallocated Amounts

We estimate certain personnel-related costs and allocate these budgeted expenses to the operating segments. This allocation differs from actual expense and consequently yields a difference that is reported under the caption “Unallocated Amounts.”

The following table presents the Unallocated Amounts results of operations:


	For the Three Months Ended June 30,						Change					For the Three Months Ended March 31,						Change
Results of Operations (dollars in thousands)	2018			2017			Amount			Percentage		2019			2018			Amount			Percentage

Revenues	$	—		$	—		$	—		N/A		$	—		$	—		$	—		—
Cost of revenue	(150		)	208			(358		)	(172.1	%)	(204		)	(1,083		)	879			(81.2	%)
Gross profit	150			(208		)	358			(172.1	%)	204			1,083			(879		)	(81.2	%)

Operating Expenses:
Sales and marketing	540			272			268			98.5	%	142			(204		)	346			(169.6	%)
General and administrative	2,299			1,631			668			41.0	%	(74		)	894			(968		)	(108.3	%)
Research and development	4,236			3,653			583			16.0	%	3,578			3,668			(90		)	(2.5	%)
Total operating expenses	7,075			5,556			1,519			27.3	%	3,646			4,358			(712		)	(16.3	%)
Loss from operations	$	(6,925	)	$	(5,764	)	$	(1,161	)	20.1	%	$	(3,442	)	$	(3,275	)	$	(167	)	5.1	%

~~Gross Profit. Costs of revenue impacts that were not allocated to segments were relatively consistent.~~

~~Operating Expenses~~Unallocated Amounts. The ~~overall increase~~change in ~~operating expenses~~unallocated amounts was ~~primarily~~ due to higher foreign exchange losses on settlements of foreign currency denominated transactions compared to gains in the prior period, ~~partially~~as well as higher unallocated employee benefit and incentive costs. These impacts were offset by lower unallocated ~~employee incentive costs and~~ corporate function costs, ~~as a result of increased allocations to our segments.~~including certain information technology projects that will occur later in the year.

Non-Operating Items

Interest Income. Interest income was ~~$0.2~~$0.04 million for the three months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~$1.2~~$0.6 million for the three months ended ~~June 30, 2017.~~March 31, 2018. The decrease in interest income was primarily due ~~primarily~~ to the liquidation of our portfolio of marketable securities during the first quarter of 2018. We do not anticipate any material interest income for the remainder of 2018. The adoption of the New Revenue Standard decreased interest income by approximately $0.3 million in the second quarter of 2018.

Interest Expense. Interest expense was ~~$8.5~~$8.4 million for the three months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~$9.2~~$9.3 million for the same period in the prior year. The decrease in interest expense was ~~due to~~the result of lower average ~~balance on our Credit Facility, partially~~debt levels, offset by higher ~~variable~~ interest ~~rates~~.rates. We also realized lower interest expense from the benefit of our cross currency swaps, as well as increased capitalized interest related to the expansion of our Westbrook, Maine headquarters and relocation of our core reference laboratory in Germany.

Provision for Income Taxes. Our effective income tax rate was ~~20.9%~~17.7% for the three months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~25.5%~~14.3% for the three months ended ~~June 30, 2017.~~March 31, 2018. The ~~decrease~~increase in our effective tax rate was primarily related to ~~the reduction in our U.S. statutory~~lower tax ~~rate as a result of the 2017 Tax Act.~~

~~Results of Operations~~

~~Six Months Ended~~ ~~June 30, 2018, Compared to Six Months Ended June 30, 2017~~

~~Comparison to Prior Periods~~. Our six month period, also referred to as our first half of 2018, ended on June 30. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior year period.

~~Total Company.~~ ~~The following table presents total Company revenue by operating segment:~~

For the Six Months Ended June 30,
Net Revenue
(dollars in thousands)
2018 2017 Dollar Change
Reported Revenue Growth ⁽¹⁾
Percentage Change from Currency Percentage Change from Acquisitions
Organic Revenue Growth ⁽¹⁾

CAG $ 978,320
$ 843,175
$ 135,145
16.0 % 2.7 % 0.1 % 13.3 %
United States 643,151
566,317
76,834
13.6 % —
0.1 % 13.5 %
International 335,169
276,858
58,311
21.1 % 8.2 % —
12.9 %

Water 61,801
54,501
7,300
13.4 % 3.1 % —
10.3 %
United States 29,661
27,385
2,276
8.3 % —
—
8.3 %
International 32,140
27,116
5,024
18.5 % 6.3 % —
12.3 %

LPD 67,238
62,870
4,368
6.9 % 5.9 % —
1.1 %
United States 6,994
6,917
77
1.1 % —
—
1.1 %
International 60,244
55,953
4,291
7.7 % 6.6 % —
1.1 %

Other 11,049
10,415
634
6.1 % 0.8 % —
5.3 %

Total Company $ 1,118,408
$ 970,961
$ 147,447
15.2 % 2.9 % 0.1 % 12.2 %
United States 684,197
604,308
79,889
13.2 % —
0.1 % 13.1 %
International 434,211
366,653
67,558
18.4 % 7.7 % —
10.8 %


~~(1)~~	~~Reported revenue growth and organic revenue growth may not recalculate due to rounding.~~

~~Total Company Revenue~~. The increase in both U.S. and international organic revenues was driven by strong volume gains in CAG Diagnostics recurring revenue, supported by our differentiated diagnostic technologies and expanded commercial organization that are driving increased volumes from new and existing customers in our reference laboratory business and the continued expansion of our CAG Diagnostics instrument installed base. International organic growth was strong in Europe and the Asia Pacific region, reflecting CAG Diagnostics recurring volume driven growth. Our Water business also contributed to our international growth, primarily from higher sales volumes of our Colilert test products and related accessories. Total company revenue included approximately $27.2 million in the first half of 2018 that was attributed to the New Revenue Standard.

~~The following table presents total Company results of operations:~~

For the Six Months Ended June 30, Change
Total Company - Results of Operations
(dollars in thousands)
2018 Percent of Revenue 2017 Percent of Revenue Amount Percentage

Revenues $ 1,118,408
$ 970,961
$ 147,447
15.2 %
Cost of revenue 482,870
420,055
62,815
15.0 %
Gross profit 635,538
56.8 % 550,906
56.7 % 84,632
15.4 %

Operating Expenses:
Sales and marketing 196,356
17.6 % 174,937
18.0 % 21,419
12.2 %
General and administrative 122,011
10.9 % 108,374
11.2 % 13,637
12.6 %
Research and development 58,533
5.2 % 52,788
5.4 % 5,745
10.9 %
Total operating expenses 376,900
33.7 % 336,099
34.6 % 40,801
12.1 %
Income from operations $ 258,638
23.1 % $ 214,807
22.1 % $ 43,831
20.4 %

~~Gross Profit~~. Gross profit increased due to higher sales volumes and a 10 basis point increase in the gross profit percentage. The increase in the gross profit percentage was supported by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, the favorable impact of lower product costs and productivity gains, partially offset by higher information technology costs, including costs that were previously captured within operating expenses, as well as increased investments in reference laboratory capacity. The impact from foreign currency movements including the impact of hedge gains in the prior period compared to hedge losses in the current period did not have a material impact. Gross profit included approximately $11.7 million in the first half of 2018 attributable to the New Revenue Standard.

~~Operating Expense~~. The increase in total Company sales and marketing expense was due primarily to increased personnel-related costs as we continue to invest in and grow our global commercial infrastructure. The increase in general and administrative expense resulted primarily from foreign exchange losses on settlements of foreign currency denominated transactions compared to gains in the prior period, information technology investments, including ongoing depreciation and maintenance associated with prior year projects, and higher personnel-related costs, partially offset by certain information technology costs that are now captured within cost of revenue. Research and development expense increased primarily due to higher personnel-related costs. The overall change in currency exchange rates resulted in an increase in operating expenses of approximately 3%.

~~Companion Animal Group~~

~~The following table presents revenue by product and service category for CAG:~~

໿

For the Six Months Ended June 30,
Net Revenue
(dollars in thousands)
2018 2017 Dollar Change
Reported Revenue Growth ⁽¹⁾
Percentage Change from Currency Percentage Change from Acquisitions
Organic Revenue Growth ⁽¹⁾

CAG Diagnostics recurring revenue: $ 843,714
$ 726,999
$ 116,715
16.1 % 2.8 % —
13.3 %
IDEXX VetLab consumables 308,133
255,647
52,486
20.5 % 3.2 % —
17.3 %
Rapid assay products 115,379
108,161
7,218
6.7 % 1.3 % —
5.4 %
Reference laboratory diagnostic and consulting services 384,205
330,367
53,838
16.3 % 2.9 % —
13.4 %
CAG diagnostics services and accessories 35,997
32,824
3,173
9.7 % 3.0 % —
6.6 %
CAG Diagnostics capital - instruments 65,439
53,899
11,540
21.4 % 4.5 % —
16.9 %
Veterinary software, services and diagnostic imaging systems 69,167
62,277
6,890
11.1 % 0.6 % 1.0 % 9.5 %
Net CAG revenue $ 978,320
$ 843,175
$ 135,145
16.0 % 2.7 % 0.1 % 13.3 %


~~(1)~~	~~Reported revenue growth and organic revenue growth may not recalculate due to rounding~~

~~CAG Diagnostics Recurring Revenue~~. The increase in CAG Diagnostics recurring revenue was due primarily to increased volumes in reference laboratory diagnostic services and IDEXX VetLab consumables, supported by our differentiated diagnostic technologies and our expanded commercial organization. CAG Diagnostics recurring revenue included approximately $9.0 million in the first half of 2018 that was attributed to the New Revenue Standard.

~~IDEXX VetLab~~consumables revenue growth was primarily due to higher sales volumes in the U.S., Europe, and the Asia-Pacific region for our Catalyst consumables, and to a lesser extent Procyte Dx consumables and Sedivue Dx~~analyzer pay-per-run sales, supported by growth in testing by new and existing customers and our expanded menu of available tests, as well as~~ benefits from ~~higher average unit sales prices. IDEXX VetLab consumables revenue included approximately $6.1 million in the first half of 2018 that was attributed to the New Revenue Standard.~~

~~The increase in rapid assay revenue resulted from higher sales volumes and average unit prices of canine SNAP~~^®4Dx Plus tests and higher sales volumes of single analyte SNAP products and SNAP feline combination products. Rapid assay revenue included approximately $0.3 million in the first half of 2018 that was attributed to the New Revenue Standard.

The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S., resulting from increased testing from new and existing customers, supported by our differentiated diagnostic technologies, such as IDEXX SDMA^™ and fecal antigen testing and, to a lesser extent, higher average unit sales prices. Reference laboratory diagnostic and consulting revenue included approximately $2.8 million in the first half of 2018 that was attributed to the New Revenue Standard.

~~CAG Diagnostics services and accessories revenue growth was primarily a result of the increase in our active installed base of instruments.~~

~~CAG Diagnostics Capital – Instruments Revenue~~. The increase in instrument revenue reflects increased SediVue Dx and Catalyst analyzer placements, supported by the introduction of IDEXX 360 in the first quarter of 2018. The success of our new IDEXX 360 program caused a shift away from both our instrument rebate and reagent rental programs, which resulted in

increased upfront instrument revenue recognition attributed to the New Revenue Standard. CAG Diagnostics capital instrument revenue included approximately $15.7 million in the first half of 2018 that was attributed to the New Revenue Standard.

~~Veterinary Software, Services and Diagnostic Imaging Systems Revenue~~.The increase in revenue was primarily due to increased diagnostic imaging system placements and higher veterinary subscription service revenue, partially offset by lower relative diagnostic imaging system prices. Veterinary software, services and diagnostic imaging revenue included approximately $2.1 million in the first half of 2018 attributed to the New Revenue Standard.

~~The following table presents the CAG segment results of operations:~~

For the Six Months Ended June 30, Change
Results of Operations
(dollars in thousands)
2018 Percent of Revenue 2017 Percent of Revenue Amount Percentage

Revenues $ 978,320
$ 843,175
$ 135,145
16.0 %
Cost of revenue 430,477
372,019
58,458
15.7 %
Gross profit 547,843
56.0 % 471,156
55.9 % 76,687
16.3 %

Operating Expenses:
Sales and marketing 173,774
17.8 % 154,156
18.3 % 19,618
12.7 %
General and administrative 101,128
10.3 % 89,463
10.6 % 11,665
13.0 %
Research and development 42,747
4.4 % 38,951
4.6 % 3,796
9.7 %
Total operating expenses 317,649
32.5 % 282,570
33.5 % 35,079
12.4 %
Income from operations $ 230,194
23.5 % $ 188,586
22.4 % $ 41,608
22.1 %

~~Gross Profit.~~ Gross profit increased primarily due to higher sales volume and a 10 basis point increase in the gross profit percentage. The increase in gross profit percentage was supported by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio and the favorable impact of productivity gains, partially offset by higher information technology costs, including costs that were previously captured within operating expenses, as well as increased investments in reference laboratory capacity. The impact from foreign currency movements increased gross profit margin by less than 10 basis points, including the impact of hedge gains in the prior period compared to hedge losses in the current period. Gross profit included approximately $11.4 million in the first half of 2018 attributable to the New Revenue Standard.

~~Operating Expense.~~ The increase in sales and marketing expense was due primarily to increased personnel-related costs as we continue to invest in our global commercial infrastructure, offset by approximately $1.0 million related to net deferred costs to obtain contracts under the New Revenue Standard. The increase in general and administrative expense resulted primarily from higher personnel-related costs and incremental information technology investments, partially offset by certain information technology costs that are now captured within cost of revenue. The increase in research and development expense was due primarily to increased personnel-related costs. The overall change in currency exchange rates resulted in an increase in operating expenses of approximately 2%.

~~Water~~

~~The following table presents the Water segment results of operations:~~

For the Six Months Ended June 30, Change
Results of Operations
(dollars in thousands)
2018 Percent of Revenue 2017 Percent of Revenue Amount Percentage

Revenues $ 61,801
$ 54,501
$ 7,300
13.4 %
Cost of revenue 18,360
16,374
1,986
12.1 %
Gross profit 43,441
70.3 % 38,127
70.0 % 5,314
13.9 %

Operating Expenses:
Sales and marketing 8,168
13.2 % 7,168
13.2 % 1,000
14.0 %
General and administrative 6,398
10.4 % 5,785
10.6 % 613
10.6 %
Research and development 1,291
2.1 % 1,258
2.3 % 33
2.6 %
Total operating expenses 15,857
25.7 % 14,211
26.1 % 1,646
11.6 %
Income from operations $ 27,584
44.6 % $ 23,916
43.9 % $ 3,668
15.3 %

~~Revenue. The increase in revenue was attributable to higher sales volumes of our Colilert test products and related accessories, used in coliform and~~ ~~E. coli~~ testing in North America and Latin America, and the benefit of price increases. Revenue growth in Latin America was driven by our go-direct initiative in Brazil, which contributed approximately 1% to revenue growth, including the impact of reductions in distributor inventories in the prior year and the benefit of price increases in the current year. Water revenue of approximately $0.4 million in the first half of 2018 was attributed to the New Revenue Standard, as a result of accelerated revenue recognition upon shipping to customer instead of delivery to the customer. The favorable impact of currency movements increased revenue by approximately 3%.

~~Gross Profit~~.Gross profit increased due to higher sales volumes as well as a 30 basis point increase in the gross profit percentage. The increase in the gross profit percentage was primarily due to the net benefit of price increases, as well as decreases in manufacturing costs. The impact from foreign currency movements decreased gross profit margin by approximately 60 basis points, including the impact of hedge gains in the prior period compared to hedge losses in the current period. Gross profit included approximately $0.3 million in the first half of 2018 attributable to the New Revenue Standard.

~~Operating Expenses~~. The increase in operating expense was primarily due to higher personnel-related costs in sales and marketing expenses and general and administrative expenses. Research and development expense was relatively unchanged. The overall change in currency exchange rates resulted in an increase in operating expenses of approximately 3%.

~~Livestock, Poultry and Dairy~~

~~The following table presents the LPD segment results of operations:~~

For the Six Months Ended June 30, Change
Results of Operations
(dollars in thousands)
2018 Percent of Revenue 2017 Percent of Revenue Amount Percentage

Revenues $ 67,238
$ 62,870
$ 4,368
6.9 %
Cost of revenue 28,904
26,343
2,561
9.7 %
Gross profit 38,334
57.0 % 36,527
58.1 % 1,807
4.9 %

Operating Expenses:
Sales and marketing 13,119
19.5 % 12,476
19.8 % 643
5.2 %
General and administrative 9,715
14.4 % 9,162
14.6 % 553
6.0 %
Research and development 6,068
9.0 % 5,911
9.4 % 157
2.7 %
Total operating expenses 28,902
43.0 % 27,549
43.8 % 1,353
4.9 %
Income from operations $ 9,432
14.0 % $ 8,978
14.3 % $ 454
5.1 %

~~Revenue~~. The increase in revenue was primarily due to an increase in recurring livestock and poultry testing in the U.S., Europe, and Latin America. These increases were partially offset by lower revenue in the Asia-Pacific region related to continued pressure in our dairy business, including impacts from lower milk prices. The favorable impact of currency movements increased revenue by approximately 6%. The New Revenue Standard did not have a material impact on LPD revenue in the first half of 2018.

~~Gross Profit~~.~~The increase in gross profit was due to higher sales volume~~share-based compensation, partially offset by a ~~110 basis point reduction~~nonrecurring item recorded in the gross profit percentage. The decrease in the gross profit percentage reflected higher product costs and lower prices. The impact from foreign currency movements increased gross profit margin by approximately 40 basis points, including the impact of hedge gains in the prior period compared to hedge losses in the current period.

~~Operating Expenses~~. The increase in sales and marketing expense was due primarily to the impact of foreign currency exchange movements. The increase in general and administrative expense resulted primarily from consultant costs. The increase in research and development expense was due primarily to increased personnel-related costs, partially offset by lower third-party costs. The overall change in currency exchange rates resulted in an increase in operating expenses of approximately 3%.

~~Other~~

~~The following table presents the Other results of operations:~~

໿

For the Six Months Ended June 30, Change
Results of Operations
(dollars in thousands)
2018 Percent of Revenue 2017 Percent of Revenue Amount Percentage

Revenues $ 11,049
$ 10,415
$ 634
6.1 %
Cost of revenue 6,362
5,801
561
9.7 %
Gross profit 4,687
42.4 % 4,614
44.3 % 73
1.6 %

Operating Expenses:
Sales and marketing 959
8.7 % 1,220
11.7 % (261 ) (21.4 %)
General and administrative 1,577
14.3 % 1,617
15.5 % (40 ) (2.5 %)
Research and development 523
4.7 % 616
5.9 % (93 ) (15.1 %)
Total operating expenses 3,059
27.7 % 3,453
33.2 % (394 ) (11.4 %)
Income from operations $ 1,628
14.7 % $ 1,161
11.1 % $ 467
40.2 %

~~Revenue~~.The increase in revenue was due to higher royalties associated with intellectual property related to our former pharmaceutical product line, as well as higher realized prices of our OPTI Medical products and services, partially offset by lower volumes of our OPTI Medical products and services. The favorable impact of currency movements increased revenue by approximately 80 basis points.

~~Gross Profit~~. Overall gross profit remained relatively flat despite a 1.9% decrease in the gross profit percentage due primarily to higher OPTI Medical product costs, offset by increased royalties. The overall change in currency exchange rates had an immaterial impact on the gross profit percentage.

~~Operating Expenses~~. The decrease in operating expense was due primarily to lower personnel costs in sales and marketing and research and development. General and administrative costs were consistent as compared to the prior period.

~~Unallocated Amounts~~

~~The following table presents the Unallocated Amounts results of operations:~~

For the Six Months Ended June 30, Change
Results of Operations
(dollars in thousands)
2018 2017 Amount Percentage

Revenues $ —
$ —
$ —
N/A
Cost of revenue (1,233 ) (482 ) (751 ) 155.8 %
Gross profit 1,233
482
751
155.8 %

Operating Expenses:
Sales and marketing 336
(83 ) 419
(504.8 %)
General and administrative 3,193
2,347
846
36.0 %
Research and development 7,904
6,052
1,852
30.6 %
Total operating expenses 11,433
8,316
3,117
37.5 %
Loss from operations $ (10,200 ) $ (7,834 ) $ (2,366 ) 30.2 %

~~Gross Profit. Costs of revenues impacts that were not allocated to segments were relatively consistent.~~

~~Operating Expenses~~. The overall increase in operating expenses was primarily due to foreign exchange losses on settlements of foreign currency denominated transactions compared to gains in the prior period, partially offset by lower unallocated employee incentive costs and corporate function costs as a result of increased allocations to our segments.

~~Non-Operating Items~~

~~Interest Income. Interest income was $0.8 million for the six~~three months ended ~~June 30,~~March 31, 2018, as compared to $2.3 million for the six months ended June 30, 2017. The decrease in interest income was due primarily to the liquidation of our portfolio of marketable securities during the first quarter of 2018. We do not anticipate any material interest income for the remainder of 2018. The adoption of the New Revenue Standard decreased interest income by approximately $0.6 million in the first half of 2018.

~~Interest Expense~~. Interest expense was $17.7 million for the six months ended June 30, 2018, as compared to $17.7 million for the same period in the prior year. Higher variable interest rates on our Credit Facility were offset by lower average balances.

~~Provision for Income Taxes~~.Our effective income tax rate was 18.0% for the six months ended June 30, 2018, as compared to 22.5% for the six months ended June 30, 2017. The decrease in our effective tax rate was primarily related to the reduction in our U.S. statutory tax rate as a result ofthat resulted from the 2017 Tax Cut and Jobs Act.

Liquidity and Capital Resources

Liquidity

We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings, and amounts available under our Credit Facility. At ~~June 30, 2018,~~March 31, 2019, we had ~~$174.6~~$116.6 million of cash and cash equivalents, ~~and short-duration marketable securities,~~ as compared to ~~$471.9~~$123.8 million on December 31, ~~2017.~~2018. Working capital, including our Credit Facility, totaled ~~negative $34.5~~$8.0 million at ~~June 30, 2018,~~March 31, 2019, as compared to negative ~~$32.6~~$116.3 million at December 31, ~~2017.~~2018. Additionally, at ~~June 30, 2018,~~March 31, 2019, we had remaining borrowing availability of ~~$412.0~~$501.7 million under our $850 million Credit Facility. We believe that, if necessary, we could obtain additional borrowings at similar rates to our existing borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing on favorable terms will also be sufficient ~~for the foreseeable future~~ to fund our business as currently ~~conducted.~~conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in the U.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in the U.S. through debt or equity issuances. These alternatives could result in increased interest expense or other dilution of our earnings.

We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside the U.S.

The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries at ~~June 30, 2018,~~March 31, 2019, and December 31, ~~2017:~~

2018:໿

Cash, cash equivalents and marketable securities
(dollars in thousands)
June 30, 2018 December 31, 2017

U.S. $ 3,302
$ 5,902
Foreign 171,257
466,028
Total $ 174,559
471,930

Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries $ 20,389
$ 334,339

Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries 11.7 % 70.8 %

໿



Cash, cash equivalents and marketable securities (dollars in thousands)	March 31, 2019			December 31, 2018

U.S.	$	2,632		$	2,044
Foreign	113,984			121,750
Total	$	116,616		$	123,794

Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	$	3,785		$	11,119

Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	3.2		%	9.0		%

Of the ~~$174.6~~$116.6 million of cash and cash equivalents held as of ~~June 30, 2018, approximately 93%~~March 31, 2019, greater than 99% was held as bank ~~deposits and approximately 7% was invested in money market funds restricted to U.S. government and agency securities.~~deposits.

The following table presents additional key information concerning working capital:

໿

For the Three Months Ended
June 30,
2018
March 31,
2018

December 31,
2017

September 30,
2017

June 30,
2017

Days sales outstanding ⁽¹⁾
41.2
42.0
41.7
43.4
41.7
Inventory turns ⁽²⁾
2.2
2.0
2.2
1.9
2.0



	For the Three Months Ended
	March 31, 2019	December 31, 2018	September 30, 2018	June 30, 2018	March 31, 2018

Days sales outstanding⁽¹⁾	42.0	42.6	44.3	41.2	42.0
Inventory turns⁽²⁾	2.0	2.3	2.1	2.2	2.0


(1)	Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.


(2)	Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the inventory balance at the end of the quarter.

Sources and Uses of Cash

The following table presents cash provided (used):

໿


	For the Six Months Ended June 30,									For the Three Months Ended March 31,
(dollars in thousands)	2018			2017			Dollar Change			2019			2018			Dollar Change

Net cash provided by operating activities	$	153,728		$	141,466		$	12,262		$	34,378		$	34,898		$	(520	)
Net cash provided (used) by investing activities	232,661			(72,714		)	305,375
Net cash (used) provided by investing activities										(38,206		)	260,312			(298,518		)
Net cash used by financing activities	(395,699		)	(62,087		)	(333,612		)	(2,781		)	(324,991		)	322,210
Net effect of changes in exchange rates on cash	(3,806		)	4,409			(8,215		)	(569		)	1,335			(1,904		)
Net change in cash and cash equivalents	$	(13,116	)	$	11,074		$	(24,190	)	$	(7,178	)	$	(28,446	)	$	21,268

Operating Activities. The ~~increase~~decrease in cash provided by operating activities of ~~$12.3~~$0.5 million was driven primarily by the ~~increases~~changes in ~~net income~~our operating assets and ~~the benefit of deferred income taxes,~~liabilities, offset by the ~~changes~~increase in ~~operating assets and liabilities.~~net income. The following table presents cash flows from changes in operating assets and liabilities:

໿


	For the Six Months Ended June 30,									For the Three Months Ended March 31,
(dollars in thousands)	2018			2017			Dollar Change			2019			2018			Dollar Change

Accounts receivable	$	(32,872	)	$	(32,400	)	$	(472	)	$	(33,421	)	$	(21,800	)	$	(11,621	)
Inventories	(16,825		)	(18,850		)	2,025			(14,521		)	(8,070		)	(6,451		)
Accounts payable	3			1,422			(1,419		)	699			(1,939		)	2,638
Deferred revenue	(3,252		)	1,898			(5,150		)	(3,098		)	(1,327		)	(1,771		)
Other assets and liabilities	(55,781		)	(21,426		)	(34,355		)	(49,601		)	(52,302		)	2,701

Total change in cash due to changes in operating assets and liabilities	$	(108,727	)	$	(69,356	)	$	(39,371	)	$	(99,942	)	$	(85,438	)	$	(14,504	)

Cash used due to changes in operating assets and liabilities during the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, as compared to the same period in the prior year, increased approximately ~~$39.4~~$14.5 million primarily due to the impact of ~~instruments placements under a new volume commitment program referred to as IDEXX 360, which increases other assets and a related decrease~~our cash used for the increase in ~~deferred revenues~~accounts receivable as a result of ~~fewer instruments placements under rebate programs. Our transition to the New Revenue Standard also impacted the classification~~revenue growth, and cash used by increases in inventory driven by timing of cash flow impacts, see Notes 2 and 3 to the unaudited condensed consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for additional information regarding our volume commitment programs and the impact of the New Revenue Standard.inventory receipts.

We have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally higher cash flows from operating activities for the remainder of the year driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned and the

seasonality of vector-borne disease testing, which has historically resulted in significant increases in accounts receivable balances during the first quarter of the year.

Investing Activities. Cash used by investing activities was $38.2 million for the three months ended March 31, 2019, as compared to cash provided by investing activities ~~was $232.7 million for the six months ended June 30, 2018, as compared to cash used by investing activities~~ of ~~$72.7~~$260.3 million for the same period in the prior year. ~~The~~This change ~~from~~in investing cash ~~used by investing activities to cash provided by investing activities~~activity was primarily due to the sale of marketable securities in 2018, as a result of our repatriation of cash and investments held by our foreign ~~subsidiaries.~~subsidiaries, as well as increased capital spending as we expand our Westbrook, Maine headquarters and relocate our core reference laboratory in Germany.

Financing Activities. Cash used by financing activities was ~~$395.7~~$2.8 million for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, as compared to cash used by financing activities of ~~$62.1~~$325.0 million for the same period in the prior year. The ~~increase~~decrease in cash used by financing activities was due to a ~~partial~~larger repayment on our revolving Credit Facility in 2018 from repatriated foreign cash, an issuance of $100 million senior notes during the first quarter of 2019, and ~~an increase~~a decrease in repurchases of our common ~~stock.~~stock in the current period as compared to the same period in the prior year.

Cash used to repurchase shares of our common stock ~~increased $19.1~~decreased $29.2 million during the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, as compared to the same period in the prior year. We believe that the repurchase of our common stock is a favorable means of returning value to our ~~shareholders~~stockholders and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing

activities and the share price. See Note 10 to the unaudited condensed consolidated financial statements in Part I, Item I1 of this Quarterly Report on Form 10-Q for additional information about our share repurchases.

Net borrowing and repayment activity under ~~the~~our Credit Facility resulted in cash used of ~~$218.0~~$52.0 million during the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~$93.0~~$247.5 million of cash ~~provided~~used in the same period of the prior year. At ~~June 30, 2018,~~March 31, 2019, we had ~~$437.0~~$347.0 million outstanding under the Credit Facility. The general availability of funds under ~~the~~our Credit Facility was further reduced by ~~$1.0~~$1.3 million for a letter of credit that was issued in connection with claims under our workers’ compensation policy. The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The obligations under ~~the~~our Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default.

On March 14, 2019, we amended our Existing Agreement with MetLife, submitted a request for purchase and drew $100 million of our Shelf Notes at 4.19% interest per annum rate, due March 14, 2029 (the "Series C Notes"). Series C Notes proceeds were used for general corporate purposes, including a partial repayment of our Credit Facility.

Since December 2013, we have issued and sold through private placements senior notes having an aggregate principal amount of approximately ~~$600~~$700 million, including the $100 million Series C Notes, pursuant to certain note purchase agreements (collectively, the “Senior Note Agreements”). The Senior Note Agreements contain affirmative, negative, and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. ~~See Note 11 to the consolidated financial statements in our 2017 Annual Report for additional information regarding our senior notes.~~

Should we elect to prepay the senior notes, such aggregate prepayment will include the applicable make-whole amount(s), as defined within the applicable Senior Note Agreements. Additionally, in the event of a change in control of the Company or upon the disposition of certain assets of the Company the proceeds of which are not reinvested (as defined in the Senior Note Agreements), we may be required to prepay all or a portion of the senior notes. The obligations under the senior notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreements, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, the failure to pay specified indebtedness and cross-acceleration to specified indebtedness.

Effect of Currency Translation on Cash. The net effect of changes in foreign currency exchange rates are related to changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries. These changes will fluctuate for each period presented as the value of the U.S. dollar relative to the value of the foreign currencies changes. A currency’s value depends on many factors, including interest rates and the country’s debt levels and strength of economy.

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities, except for letters of credit and third-party guarantees.

Financial Covenant. The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization and certain other non-cash charges (“Adjusted EBITDA”) not to exceed 3.5-to-1. At ~~June 30, 2018,~~March 31, 2019, we were in compliance with such covenant. The following details our consolidated leverage ratio calculation as of ~~June 30, 2018:~~March 31, 2019:

໿


	Twelve months ended			Twelve months ended
Trailing 12 Months Adjusted EBITDA:	June 30, 2018			March 31, 2019

Net income attributable to stockholders (as reported)	$	306,910		$	390,261
Interest expense	37,212			33,856
Provision for income taxes	116,433			87,905
Depreciation and amortization	83,943			83,729
Share-based compensation expense	24,127			25,531
Extraordinary and other non-recurring non-cash charges				2,629
Adjusted EBITDA	$	568,625		$	623,911


Debt to Adjusted EBITDA Ratio:	June 30, 2018			March 31, 2019

Line of credit	$	437,000		$	346,998
Long-term debt	603,130			699,334
Total debt	1,040,130			1,046,332
Acquisition-related contingent consideration payable	2,537			4,507
Capitalized leases	330
U.S. GAAP change - deferred financing costs	460
Financing leases				220
Deferred financing costs				497
Gross debt	1,043,457			1,051,556
Gross debt to Adjusted EBITDA ratio	1.84			1.69

Less: Cash and cash equivalents	(174,559		)	(116,616		)
Net debt	$	868,898		$	934,940
Net debt to Adjusted EBITDA ratio	1.53			1.50

Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.

Other Commitments, Contingencies and Guarantees

Significant commitments, contingencies and guarantees at ~~June 30, 2018,~~March 31, 2019, are consistent with those discussed in the section under the heading “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” anddescribed in Note 14 to the unaudited condensed consolidated financial statements ~~contained~~ in ~~our 2017 Annual Report.~~Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see the section under the heading “Part II, Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our ~~2017~~2018 Annual Report. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our ~~2017~~2018 Annual Report, except for the impact of foreign exchange rates, as discussed below.

Foreign Currency Exchange Impacts. Approximately 21% ~~and 22%~~ of our consolidated revenue was derived from products manufactured in the U.S. and sold internationally in local currencies for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019, as compared to ~~20%~~22% for ~~both~~ the three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018. Strengthening of the U.S. dollar exchange rate relative to other currencies has a negative impact on our revenues derived in currencies other than the U.S. dollar and on profits of products manufactured in the U.S. and sold internationally, and a weakening of the U.S. dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated ~~operating~~costs and expenses and foreign currency denominated supply contracts partly offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. dollar denominated revenues.

Our foreign currency exchange impacts are comprised of three components: 1) local currency revenues and expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary. Based on projected revenues and expenses for the remainder of ~~2018,~~2019, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, we project a 1% strengthening of the U.S. dollar would reduce revenue by approximately $4$6 million and operating income by approximately $2$3 million. Additionally, we project our foreign currency hedge contracts in place as of ~~June 30, 2018,~~March 31, 2019, would result in incremental offsetting gains ~~that are immaterial.~~of approximately $1 million. The impact of the intercompany and trade balances, and monetary balances referred to in the third component above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably forecast the impact that changes in exchange rates would have on such balances.

At our current foreign currency exchange rate assumptions, we anticipate the ~~favorable impact from a weaker dollar in the first half of 2018 will be partially offset by the projected impact~~effect of a stronger U.S. dollar for the remainder of the year ~~resulting in~~will have an unfavorable impact on our operating results by decreasing our revenues, operating profit, and diluted earnings per share for the year ending December 31, ~~2018, increasing~~2019, by approximately $9$38 million, $1$3 million, and ~~$0.01~~$0.03 per share, respectively. This unfavorable currency impact includes a favorable impact ~~includes an immaterial impact~~of approximately $12 million from foreign currency hedging activity. The actual impact of changes in the value of the U.S. dollar against foreign currencies in which we transact may materially differ from our expectations described above. The above estimates assume that the value of the U.S. dollar will reflect the euro at ~~$1.14,~~$1.11, the British pound at ~~$1.28,~~$1.29, the Canadian dollar at $0.74, and the Australian dollar at ~~$0.72;~~$0.71; and the Japanese yen at ~~¥115,~~¥112, the Chinese renminbi at RMB ~~6.90~~6.79 and the Brazilian real at R$~~3.95~~3.88 relative to the U.S. dollar for the remainder of ~~2018.~~2019.

The following table presents the foreign currency exchange impact on our revenues, operating profit, and diluted earnings per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ as compared to the respective prior ~~periods:~~period:

໿


	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
(dollars in thousands)	2018			2017			2018			2017			2019			2018

Revenue impact	$	9,791		$	(5,301	)	$	27,607		$	(8,256	)	$	(15,119	)	$	17,816

Operating profit impact, excluding hedge activity	$	3,456		$	(2,044	)	$	10,598		$	(4,496	)	$	(6,964	)	$	7,142

Hedge gains - prior year	(753		)	(80		)	(1,828		)	(889		)
Hedge (losses) gains - current year	(833		)	753			(2,668		)	1,828
Hedge losses (gains) - prior year													1,835			(1,075		)
Hedge gains (losses) - current year													1,411			(1,835		)
Hedging activity impact	(1,586		)	673			(4,496		)	939			3,246			(2,910		)

Operating profit impact, including hedge activity	$	1,870		$	(1,371	)	$	6,102		$	(3,557	)	$	(3,718	)	$	4,232
Diluted earnings per share impact, including hedge activity	$	0.02		$	(0.01	)	$	0.05		$	(0.03	)	$	(0.03	)	$	0.04

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining disclosure controls and procedures, as defined by the SEC in its Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures at ~~June 30, 2018,~~March 31, 2019, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended ~~June 30, 2018,~~March 31, 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Due to the nature of our activities, we are at times subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such currently pending matters is not expected to have a material effect on our results of operations, financial condition, or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” in our ~~2017~~2018 Annual Report, ~~as well as the updated risk factors below, which supplement and should be read in conjunction with the risk factors disclosed in our 2017 Annual Report, any and all of~~ which could materially affect our business, financial condition, or future results. ~~Except as described below in this Item 1A., there~~There have been no material changes from the risk factors previously disclosed in the ~~2017~~2018 Annual Report. The risks described in ~~this Quarterly Report on Form 10-Q and in~~ our ~~2017~~2018 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

~~Our dependence on suppliers could limit our ability to sell certain products or negatively affect our operating results~~

We rely on third-party suppliers to provide components for our products, manufacture products that we do not manufacture ourselves and perform services that we do not provide ourselves, including package-delivery services. Because these suppliers are independent third parties with their own financial objectives, actions taken by them could have a materially negative effect on our results of operations. The risks of relying on suppliers include our inability to enter into contracts with such suppliers on reasonable terms, breach, or termination by suppliers of their contractual obligations, inconsistent or inadequate quality control, relocation of supplier facilities, disruption to suppliers’ business, including work stoppages, suppliers’ failure to comply with complex and changing regulations, and third party financial failure. Any problems with our suppliers and associated disruptions to our supply chain could materially negatively impact our ability to supply the market, substantially decrease sales, lead to higher costs, or damage our reputation with our customers, and any longer-term disruptions

could potentially result in the permanent loss of our customers, which could reduce our recurring revenues and long-term profitability. Disruption to our supply chain could occur as a result of any number of events, including, but not limited to, increases in wages that drive up prices; the imposition of regulations, trade protection measures, tariffs, duties, import/export restrictions, quotas or embargoes on key components; labor stoppages; transportation failures affecting the supply and shipment of materials and finished goods; the unavailability of raw materials; severe weather conditions; natural disasters; civil unrest, geopolitical developments, war or terrorism; computer viruses, physical or electronic breaches, or other information system disruptions or security breaches; and disruptions in utility and other services. For more information regarding the risks presented by natural and other disasters and system disruptions and security breaches from cyberattacks, see the risk factor titled “Natural and other disasters, information technology system failures and network disruptions and cybersecurity breaches and attacks could adversely affect our business” in our 2017 Annual Report.

In addition, we currently purchase many products and materials from sole or single sources. Some of the products that we purchase from these sources are proprietary and, therefore, cannot be readily or easily replaced by alternative sources. These products include the majority of our Catalyst Dx and Catalyst One consumables; VetLyte electrolyte consumables; ProCyte Dx hematology, IDEXX VetAutoread hematology, and VetTest chemistry analyzers and related consumables and accessories; SediVue Dx urine sediment analyzer and consumables; image capture plates used in our diagnostic imaging systems; and certain components and raw materials used in our SNAP rapid assay kits and SNAP Pro Mobile Device, Catalyst One, LaserCyte and LaserCyte Dx hematology analyzers, livestock and poultry diagnostic tests, dairy testing products, and water testing products. Even where products and materials are available from alternate suppliers, if any becomes unavailable to us for any reason we likely would incur additional costs and delays in identifying or qualifying replacement materials and there can be no assurance that replacements would be available to us on acceptable terms, or at all. In certain cases, we may be required to obtain regulatory approval to use alternative suppliers, and this process of approval could delay production of our products or development of product candidates indefinitely.

We seek to mitigate risks associated with sole and single source suppliers, when possible, by entering into long-term contracts that provide for an uninterrupted supply of products at predictable or fixed prices. However, suppliers may decline to enter into long-term contracts for any number of reasons, which required us to purchase products via short-term contracts or on a purchase order basis. There can be no assurance that suppliers with which we do not have long-term contracts will continue to supply our requirements for products, that suppliers with which we do have long-term contracts will always fulfill their obligations under those contracts, or that any of our suppliers will not experience disruptions in their ability to supply our requirements for products. In cases where we purchase sole and single source products or components under purchase orders, we are more susceptible to unanticipated cost increases or changes in other terms of supply. In addition, under some contracts with suppliers we have minimum purchase obligations, and our failure to satisfy those obligations may result in loss of some or all of our rights under these contracts or require us to compensate the supplier. If we are unable to obtain adequate quantities of products in the future from sole and single source suppliers, or if such sole and single source suppliers are unable to obtain the components or other materials required to manufacture the products, we may be unable to supply the market, which could have a material adverse effect on our results of operations, and any longer-term disruptions could potentially result in the permanent loss of customers, which could reduce our recurring revenues and long-term profitability.

~~Our operations and reputation may be impaired if we, our products, or our services do not comply with evolving laws and regulations regarding data privacy and protection~~

The privacy and security of personally identifiable information stored, maintained, received, or transmitted electronically is a major issue in the United States and abroad. We offer products and services that collect and use personal data provided by client practices and individuals, including practice management systems for veterinary practices (e.g., Cornerstone and IDEXX Neo), online client communication tools and services (e.g., Pet Health Network Pro), cloud-based technology through VetConnect PLUS that enables veterinarians to access and analyze patients’ diagnostic data from our in-clinic analyzers, our rapid assays and reference laboratories in one place and two-way integration technology (e.g., IDEXX VetLab Station and IDEXX SmartService Solutions). Some of these products and services rely on third-party providers for cloud storage. We also engage in e-commerce through various websites and collect contact and other personally identifiable information from our customers and visitors to our websites.

Numerous federal and state laws and regulations govern the collection, use, retention, sharing and security of personally identifiable information, including personal data that we receive from our employees, customers, vendors and visitors to our websites and personal data collected by our customers and others when using our products and services. We are also subject to laws and regulations in non-U.S. countries covering data privacy and the protection of personal information. EU member states and other jurisdictions have adopted, or are considering adopting, data protection laws and regulations, which impose significant compliance obligations. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, sharing and security of personal information that identifies or may be used to identify an individual, such as names, contact information, and sensitive personal data. These laws and regulations are subject to frequent revisions and

differing interpretations and have generally become more stringent over time. In many cases, the federal, state and international laws described above apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, and among us, our subsidiaries, and other parties with which we have commercial relations.

For example, in April 2016, the EU Parliament adopted the General Data Protection Regulation, or GDPR, which, among other things, imposes more stringent operational requirements for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information and mandatory data breach notification requirements. The GDPR became effective May 25, 2018.

The laws and regulations related to data privacy and protection continue to develop, are subject to differing interpretations and may be applied inconsistently from jurisdiction to jurisdiction and may be inconsistent with our current data protection and privacy policies and practices. Further, the costs associated with compliance with these evolving legal and regulatory requirements are significant and likely to increase in the future and as a result may cause us to incur substantial costs, require us to change our business practices in a manner adverse to our business or limit our ability to use and share personal data. Any failure, or perceived failure, by us, the third parties with whom we work or our products and services to protect employee, applicant, vendor, website visitor or customer personal data (including as a result of a breach by or of a third-party provider) or to comply with any privacy-related laws, government regulations or directives or industry self-regulatory principles or our posted privacy policies could result in damage to our reputation, legal proceedings or actions against us by governmental entities or otherwise, which could have an adverse effect on our business. In addition, concerns about our practices with regard to the collection, use, disclosure, or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business. We have and post on our website our own privacy policy and cookie statement concerning the collection, use and disclosure of user personal data.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended ~~June 30, 2018,~~March 31, 2019, we repurchased shares of common stock as described below:

Period
Total Number of Shares Purchased
(a)

Average Price Paid per Share
(b)

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾
(c)

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
(d)

April 1 to April 30, 2018 139,550
$ 193.51
139,550
4,381,238
May 1 to May 31, 2018 233,143
$ 202.06
233,143
4,148,095
June 1 to June 30, 2018 144,816
$ 219.77
144,050
4,004,045
Total 517,509
⁽²⁾
$ 204.71
516,743
4,004,045



Period	Total Number of Shares Purchased (a)		Average Price Paid per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾ (c)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾ (d)

January 1 to January 31, 2019	130,229		$	192.88	129,223	3,083,631
February 1 to February 28, 2019	109,530		$	207.62	74,660	3,008,971
March 1 to March 31, 2019	63,533		$	210.99	63,533	2,945,438
Total	303,292	⁽²⁾	$	202.00	267,416	2,945,438

The total shares repurchased include shares purchased in the open market and shares surrendered for employee statutory tax withholding. See Note 10 to the unaudited condensed consolidated financial statements in Part I, Item I1 of this Quarterly Report on Form 10-Q for additional information about our share repurchases.

(1)

On August 13, 1999, our Board of Directors approved and announced the repurchase of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase program. The authorization has been increased by the Board of Directors on numerous occasions; most recently, on May 2, 2017, the maximum level of shares that may be repurchased under the program was increased from 65 million to 68 million shares. There is no specified expiration date for this share repurchase program. There were no other repurchase programs outstanding during the three months ended ~~June 30, 2018,~~March 31, 2019, and no share repurchase programs expired during the period. Repurchases of ~~516,743~~267,416 shares were made during the three months ended ~~June 30, 2018,~~March 31, 2019, in transactions made pursuant to our share repurchase program.

(2)

During the three months ended ~~June 30, 2018,~~March 31, 2019, we received ~~766~~35,876 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the share repurchase program.

Item 6. Exhibits



Exhibit No.	Description

10.1	~~Retirement~~Multicurrency Note Purchase and Private Shelf Agreement, dated ~~May 24, 2018, between~~as of December 19, 2014, among the Company, as issuer, and ~~Jacqueline L. Studer~~Metropolitan Life Insurance Company, White Mountains Advisors, LLC, as investment manager, and MetLife Investment Management, LLC, as sub-investment manager for Symetra Life Insurance Company, and MetLife Investment Management, LLC, as investment manager for each of MetLife Insurance K.K., AXIS Reinsurance Company, and Union Fidelity Life Insurance Company, as purchasers. (filed ~~herewith)~~as Exhibit 10.1 to Current Report on Form 8-K filed March 15, 2019, File No. 000-19271, and incorporated herein by reference).

10.2	First Amendment to Multicurrency Note Purchase and Private Shelf Agreement, dated March 14, 2019, among the Company, as issuer, each of the Subsidiary Guarantors (as defined therein), Metropolitan Life Insurance Company ('MetLife') and each of the holders of the Notes (as defined therein). (filed as Exhibit 10.2 to Current Report on Form 8-K filed March 15, 2019, File No. 000-19271, and incorporated herein by reference).

31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

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.



	IDEXX LABORATORIES, INC.


	/s/ Brian P. McKeon
Date: ~~August~~May 1, ~~2018~~2019	Brian P. McKeon
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)

໿

5946



	Condensed Consolidated Balance Sheet

	Previous U.S. GAAP December 31, 2017 (Reported)			New U.S. GAAP January 1, 2018			Attributed to the New Revenue Standard

ASSETS
Cash, cash equivalents and marketable securities	$	471,930		$	471,930		$	—
Accounts receivable	234,597			237,281			2,684
Inventories	164,318			163,184			(1,134		)
Property and equipment, net	379,096			379,096			—
Goodwill and intangible assets, net	243,719			243,719			—
Other assets	219,756			246,481			26,725
TOTAL ASSETS	$	1,713,416		$	1,741,691		$	28,275

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	66,968		$	66,968		$	—
Accrued liabilities	253,418			254,381			963
Deferred income tax liabilities	25,353			25,087			(266		)
Line of credit and long-term debt	1,261,075			1,261,075			—
Deferred revenue	64,726			110,158			45,432
Other long-term liabilities	95,718			82,840			(12,878		)
Total liabilities	1,767,258			1,800,509			33,251

Stockholders’ Deficit:
Retained earnings	803,545			798,569			(4,976		)
All other stockholders' deficit and noncontrolling interest	(857,387		)	(857,387		)	—
Total stockholders’ deficit	(53,842		)	(58,818		)	(4,976		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,713,416		$	1,741,691		$	28,275



	Condensed Consolidated Balance Sheet
	As of June 30, 2018

	Previous U.S. GAAP			New U.S. GAAP (As Reported)			Attributed to the New Revenue Standard

ASSETS
Cash and cash equivalents	$	174,559		$	174,559		$	—
Accounts receivable	262,420			265,012			2,592
Inventories	178,187			176,487			(1,700		)
Property and equipment, net	394,021			394,021			—
Goodwill and intangible assets, net	235,010			235,010			—
Other assets	238,682			275,596			36,914
TOTAL ASSETS	$	1,482,879		$	1,520,685		$	37,806

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	68,015		$	68,015		$	—
Accrued liabilities	228,095			228,380			285
Deferred income tax liabilities	35,470			35,459			(11		)
Line of credit and long-term debt	1,040,130			1,040,130			—
Deferred revenue	64,061			106,283			42,222
Other long-term liabilities	92,290			83,267			(9,023		)
Total liabilities	1,528,061			1,561,534			33,473

Stockholders’ Deficit:
Retained earnings	984,736			989,039			4,303
Accumulated other comprehensive income (loss)	(42,589		)	(42,559		)	30
All other stockholders' deficit and noncontrolling interest	(987,329		)	(987,329		)	—
Total stockholders’ deficit	(45,182		)	(40,849		)	4,333
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,482,879		$	1,520,685		$	37,806



	Condensed Consolidated Statement of Operations
	For the Three Months Ended June 30, 2018									For the Six Months Ended June 30, 2018

	Previous U.S. GAAP			New U.S. GAAP (As Reported)			Attributed to the New Revenue Standard			Previous U.S. GAAP			New U.S. GAAP (As Reported)			Attributed to the New Revenue Standard

Total revenue	$	565,879		$	580,752		$	14,873		$	1,091,248		$	1,118,408		$	27,160
Total cost of revenue	239,491			248,313			8,822			467,456			482,870			15,414
Gross profit	326,388			332,439			6,051			623,792			635,538			11,746

Total operating expense	187,321			186,845			(476		)	377,947			376,900			(1,047		)
Income from operations	139,067			145,594			6,527			245,845			258,638			12,793
Interest expense	(8,457		)	(8,457		)	—			(17,731		)	(17,731		)	—
Interest income	437			172			(265		)	1,299			751			(548		)
Income before provision for income taxes	131,047			137,309			6,262			229,413			241,658			12,245
Provision for income taxes	27,107			28,629			1,522			40,536			43,502			2,966
Net income	$	103,940		$	108,680		$	4,740		$	188,877		$	198,156		$	9,279



As of December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Corporate bonds	$	140,969	$	96	$	(179	)	$	140,886
Certificates of deposit	58,510		—		—			58,510
Commercial paper	29,171		—		—			29,171
Asset backed securities	22,206		4		(43		)	22,167
U.S. government bonds	15,619		11		(19		)	15,611
Agency bonds	10,990		9		(52		)	10,947
Treasury bills	6,964		—		(1		)	6,963
Total marketable securities	$	284,429	$	120	$	(294	)	$	284,255



	June 30, 2018		December 31, 2017

Prepaid expenses	$	27,250	$	28,967
Taxes receivable	41,315		35,475
Customer acquisition costs (Notes 2 and 3)	32,303		23,520
Contract assets (Notes 2 and 3)	6,558		—
Deferred sales commissions (Notes 2 and 3)	4,440		—
Other assets (Notes 2 and 3)	11,908		13,178
Other current assets	$	123,774	$	101,140



	June 30, 2018		December 31, 2017

Accrued expenses	$	61,302	$	64,430
Accrued employee compensation and related expenses	79,394		102,944
Accrued taxes	25,109		29,389
Accrued customer incentives and refund obligations (Notes 2 and 3)	62,575		56,655
Total accrued liabilities	$	228,380	$	253,418



Details about AOCI Components	Affected Line Item in the Statement of Operations	Amounts Reclassified from AOCI For the Six Months Ended June 30,
		2018			2017
(Losses) gains on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	(2,668	)	$	1,828
	Tax (benefits) expense	(629		)	681
	(Losses) gains, net of tax	$	(2,039	)	$	1,147



	Three Months Ended June 30,
	2018			2017
	Costs of revenue			Costs of revenue

Financial statement line items in which effects of cash flow hedges are recorded	$	248,313		$	216,225
Foreign exchange contracts
Amount of (loss) gain reclassified from accumulated other comprehensive income into income	(833		)	753



	Six Months Ended June 30,
	2018			2017
	Costs of revenue			Costs of revenue

Financial statement line items in which effects of cash flow hedges are recorded	$	482,870		$	420,055
Foreign exchange contracts
Amount of (loss) gain reclassified from accumulated other comprehensive income into income	(2,668		)	1,828



	For the Three Months Ended
	June 30, 2018	March 31, 2018	December 31, 2017	September 30, 2017	June 30, 2017

Days sales outstanding ⁽¹⁾	41.2	42.0	41.7	43.4	41.7
Inventory turns ⁽²⁾	2.2	2.0	2.2	1.9	2.0