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

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 September 30, ~~2018~~2019 and December 31, ~~2017~~2018	3
	Condensed Consolidated Statements of ~~Operations~~Income for the Three and Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018	5
	Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018	68
	Notes to Condensed Consolidated Financial Statements	79
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3130
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5453
Item 4.	Controls and Procedures	5554
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5554
Item 1A.	Risk Factors	5554
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	56
~~Item 6.~~	~~Exhibits~~	57
Signatures		5857

໿

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

IDEXX LABORATORIES, INC.ANDSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)


	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018

ASSETS
Current Assets:
Cash and cash equivalents	$	146,877		$	187,675		$	103,996		$	123,794
Marketable securities	—			284,255
Accounts receivable, net of reserves of $4,874 in 2018 and $4,576 in 2017	264,563			234,597
Accounts receivable, net of reserves of $3,831 in 2019 and $4,702 in 2018							268,319			248,855
Inventories	179,684			164,318			204,893			173,303
Other current assets	113,073			101,140			126,174			108,220
Total current assets	704,197			971,985			703,382			654,172
Long-Term Assets:
Property and equipment, net	409,980			379,096			496,584			437,270
Operating lease right-of-use assets (Notes 2 and 8)							78,977			—
Goodwill	216,046			199,873			212,171			214,489
Intangible assets, net	42,420			43,846			35,662			41,825
Other long-term assets	171,887			118,616			224,705			189,593
Total long-term assets	840,333			741,431			1,048,099			883,177
TOTAL ASSETS	$	1,544,530		$	1,713,416		$	1,751,481		$	1,537,349

LIABILITIES AND STOCKHOLDERS’ DEFICIT
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable	$	65,457		$	66,968		$	75,515		$	69,534
Accrued liabilities	238,431			253,418			278,626			260,683
Line of credit	414,500			655,000			229,500			398,937
Current portion of deferred revenue	41,149			29,181			42,986			41,290
Total current liabilities	759,537			1,004,567			626,627			770,444
Long-Term Liabilities:
Deferred income tax liabilities	39,899			25,353			33,734			29,267
Long-term debt	602,416			606,075			696,634			601,348
Long-term deferred revenue, net of current portion	62,547			35,545			48,345			60,697
Long-term operating lease liabilities (Notes 2 and 8)							66,341			—
Other long-term liabilities	81,494			95,718			77,078			84,826
Total long-term liabilities	786,356			762,691			922,132			776,138
Total liabilities	1,545,893			1,767,258			1,548,759			1,546,582

Commitments and Contingencies (Note 15)
Commitments and Contingencies (Note 16)

Stockholders’ Deficit:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 105,042 shares in 2018 and 104,275 shares in 2017; Outstanding: 86,546 shares in 2018 and 87,104 shares in 2017	10,504			10,428
Stockholders’ Equity (Deficit):
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 105,594 shares in 2019 and 105,087 shares in 2018; Outstanding: 85,888 shares in 2019 and 86,100 shares in 2018							10,559			10,509
Additional paid-in capital	1,128,484			1,073,931			1,189,554			1,138,216
Deferred stock units: Outstanding: 162 units in 2018 and 229 units in 2017	4,455			5,988
Deferred stock units: Outstanding: 143 units in 2019 and 162 units in 2018							4,416			4,524
Retained earnings	1,082,292			803,545			1,505,152			1,167,928
Accumulated other comprehensive loss	(42,187		)	(36,470		)	(45,565		)	(41,791		)
Treasury stock, at cost: 18,497 shares in 2018 and 17,171 shares in 2017	(2,185,152		)	(1,911,528		)
Total IDEXX Laboratories, Inc. stockholders’ deficit	(1,604		)	(54,106		)
Treasury stock, at cost: 19,707 shares in 2019 and 18,988 shares in 2018							(2,461,698		)	(2,288,899		)
Total IDEXX Laboratories, Inc. stockholders’ equity (deficit)							202,418			(9,513		)
Noncontrolling interest	241			264			304			280
Total stockholders’ deficit	(1,363		)	(53,842		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,544,530		$	1,713,416
Total stockholders’ equity (deficit)							202,722			(9,233		)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)							$	1,751,481		$	1,537,349

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

IDEXX LABORATORIES,INC.ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018

Revenue:
Product revenue	$	324,303		$	291,031		$	990,364		$	867,087		$	360,000		$	324,303		$	1,059,696		$	990,364
Service revenue	221,145			200,945			673,492			595,850			245,303			221,145			741,766			673,492
Total revenue	545,448			491,976			1,663,856			1,462,937			605,303			545,448			1,801,462			1,663,856
Cost of Revenue:
Cost of product revenue	120,294			109,848			365,810			323,205			125,112			120,294			370,388			365,810
Cost of service revenue	119,511			108,126			356,865			314,824			135,241			119,511			396,674			356,865
Total cost of revenue	239,805			217,974			722,675			638,029			260,353			239,805			767,062			722,675
Gross profit	305,643			274,002			941,181			824,908			344,950			305,643			1,034,400			941,181
Expenses:
Sales and marketing	95,146			88,818			291,502			263,755			104,551			95,146			312,499			291,502
General and administrative	63,955			57,186			185,966			165,560			66,337			63,955			186,653			185,966
Research and development	29,192			27,585			87,725			80,373			34,260			29,192			98,033			87,725
Income from operations	117,350			100,413			375,988			315,220			139,802			117,350			437,215			375,988
Interest expense	(8,453		)	(9,764		)	(26,184		)	(27,508		)	(7,090		)	(8,453		)	(23,662		)	(26,184		)
Interest income	142			1,400			893			3,659			86			142			159			893
Income before provision for income taxes	109,039			92,049			350,697			291,371			132,798			109,039			413,712			350,697
Provision for income taxes	15,825			21,535			59,327			66,392			23,960			15,825			76,464			59,327
Net income	93,214			70,514			291,370			224,979			108,838			93,214			337,248			291,370
Less: Net (loss) income attributable to noncontrolling interest	(37		)	3			(23		)	92
Less: Net income (loss) attributable to noncontrolling interest													1			(37		)	24			(23		)
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	93,251		$	70,511		$	291,393		$	224,887		$	108,837		$	93,251		$	337,224		$	291,393

Earnings per Share:
Basic	$	1.07		$	0.81		$	3.35		$	2.56		$	1.26		$	1.07		$	3.91		$	3.35
Diluted	$	1.05		$	0.79		$	3.29		$	2.51		$	1.24		$	1.05		$	3.85		$	3.29
Weighted Average Shares Outstanding:
Basic	86,756			87,537			87,029			87,884			86,198			86,756			86,206			87,029
Diluted	88,453			89,256			88,687			89,735			87,667			88,453			87,633			88,687

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

໿

IDEXX LABORATORIES, INC.ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018

Net income	$	93,214		$	70,514		$	291,370		$	224,979		$	108,838		$	93,214		$	337,248		$	291,370
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(1,845		)	8,282			(18,172		)	24,250			(13,912		)	(1,845		)	(12,231		)	(18,172		)
Unrealized gain (loss) on net investment hedge	555			(2,035		)	2,818			(6,895		)
Unrealized gain on investments, net of tax expense of $12 and $61 in 2018 and $12 and $35 in 2017	37			23			187			109
Unrealized gain on net investment hedge, net of tax expense of $947 and $1,105 in 2019 and $175 and $888 in 2018													3,007			555			3,507			2,818
Unrealized (loss) gain on investments, net of tax (benefit) expense of $(21) and $93 in 2019 and $12 and $61 in 2018													(67		)	37			295			187
Unrealized gain (loss) on derivative instruments:
Unrealized gain (loss), net of tax expense (benefit) of $62 and $1,846 in 2018 and $(1,836) and $(5,035) in 2017	1,728			(3,090		)	7,514			(8,472		)
Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $(153) and $476 in 2018 and $333 and $(348) in 2017	(103		)	560			1,936			(587		)
Unrealized gain (loss) on derivative instruments	1,625			(2,530		)	9,450			(9,059		)
Other comprehensive gain (loss), net of tax	372			3,740			(5,717		)	8,405
Unrealized gain, net of tax expense of $1,973 and $2,335 in 2019 and $62 and $1,846 in 2018													8,473			1,728			10,451			7,514
Reclassification adjustment for (gain) loss included in net income, net of tax (expense) benefit of $(688) and $(1,295) in 2019 and $(153) and $476 in 2018													(2,483		)	(103		)	(5,796		)	1,936
Unrealized gain on derivative instruments													5,990			1,625			4,655			9,450
Other comprehensive (loss) gain, net of tax													(4,982		)	372			(3,774		)	(5,717		)
Comprehensive income	93,586			74,254			285,653			233,384			103,856			93,586			333,474			285,653
Less: Comprehensive (loss) income attributable to noncontrolling interest	(37		)	3			(23		)	92
Less: Comprehensive income (loss) attributable to noncontrolling interest													1			(37		)	24			(23		)
Comprehensive income attributable to IDEXX Laboratories, Inc.	$	93,623		$	74,251		$	285,676		$	233,292		$	103,855		$	93,623		$	333,450		$	285,676

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

໿

IDEXX LABORATORIES, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF~~CASHFLOWS~~ STOCKHOLDERS’ EQUITY (DEFICIT)

(in ~~thousands)~~thousands, except per share amounts)

(Unaudited)

For the Nine Months Ended
September 30,
2018 2017

Cash Flows from Operating Activities:

Net income $ 291,370
$ 224,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 62,574
61,620
Impairment charge 2,629
—
Benefit of (provision for) deferred income taxes 12,850
(438 )
Share-based compensation expense 18,948
17,762
Other 2,385
1,912
Changes in assets and liabilities:
Accounts receivable (33,041 ) (18,724 )
Inventories (27,415 ) (22,966 )
Other assets and liabilities (58,214 ) (10,734 )
Accounts payable (1,336 ) (3,540 )
Deferred revenue (6,314 ) 2,279
Net cash provided by operating activities 264,436
252,150
Cash Flows from Investing Activities:
Purchases of property and equipment (82,642 ) (54,370 )
Purchase of marketable securities (87 ) (269,798 )
Proceeds from the sale and maturities of marketable securities 284,125
224,816
Acquisitions of intangible assets (450 ) (320 )
Acquisitions of a business, net of cash acquired (22,500 ) (14,529 )
Net cash provided (used) by investing activities 178,446
(114,201 )
Cash Flows from Financing Activities:
(Repayments) borrowings on revolving credit facilities, net (240,500 ) 75,250
Payment of acquisition-related contingent consideration (1,266 ) —
Repurchases of common stock (263,712 ) (228,693 )
Proceeds from exercises of stock options and employee stock purchase plans 34,595
31,314
Shares withheld for statutory tax withholding on restricted stock (9,110 ) (7,829 )
Net cash used by financing activities (479,993 ) (129,958 )
Net effect of changes in exchange rates on cash (3,687 ) 6,127
Net (decrease) increase in cash and cash equivalents (40,798 ) 14,118
Cash and cash equivalents at beginning of period 187,675
154,901
Cash and cash equivalents at end of period $ 146,877
$ 169,019

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



	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, 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
Net income (loss)	—	—		—			—			125,706		—			—			(5		)	125,701
Other comprehensive loss, net	—	—		—			—			—		(568		)	—			—			(568		)
Repurchases of common stock, net	—	—		—			—			—		—			(20,343		)	—			(20,343		)
Common stock issued under stock plans	133	13		8,556			(578		)	—		—			—			—			7,991
Deferred stock units activity	—	—		(324		)	324			—		—			—			—			—
Share-based compensation cost	—	—		6,855			43			—		—			—			—			6,898
Balance June 30, 2019	105,478	$	10,548	$	1,170,962		$	4,381		$	1,396,315	$	(40,583	)	$	(2,370,377	)	$	303		$	171,549
Net income	—	—		—			—			108,837		—			—			1			108,838
Other comprehensive loss, net	—	—		—			—			—		(4,982		)	—			—			(4,982		)
Repurchases of common stock, net	—	—		—			—			—		—			(91,321		)	—			(91,321		)
Common stock issued under stock plans	116	11		9,247			(11		)	—		—			—			—			9,247
Share-based compensation cost	—	—		9,345			46			—		—			—			—			9,391
Balance September 30, 2019	105,594	$	10,559	$	1,189,554		$	4,416		$	1,505,152	$	(45,565	)	$	(2,461,698	)	$	304		$	202,722

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

IDEXX LABORATORIES, INC.ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)

(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	)
Net income (loss)	—	—		—			—			108,691			—			—			(11		)	108,680
Other comprehensive loss, net	—	—		—			—			—			(8,353		)	—			—			(8,353		)
Repurchases of common stock, net	—	—		—			—			—			—			(105,834		)	—			(105,834		)
Common stock issued under stock plans	171	17		9,053			(1,821		)	—			—			—			—			7,249
Deferred stock units activity	—	—		(385		)	385			—			—			—			—			—
Share-based compensation cost	—	—		6,330			62			—			—			—			—			6,392
Balance June 30, 2018	104,847	$	10,485	$	1,109,157		$	4,398		$	989,039		$	(42,559	)	$	(2,111,647	)	$	278		$	(40,849	)
Net income (loss)	—	—		—			—			93,251			—			—			(37		)	93,214
Other comprehensive income, net	—	—		—			—			—			372			—			—			372
Repurchases of common stock, net	—	—		—			—			—			—			(73,505		)	—			(73,505		)
Common stock issued under stock plans	195	19		12,800			(12		)	—			—			—			—			12,807
Share-based compensation cost	—	—		6,527			69			—			—			—			—			6,596
Balance September 30, 2018	105,042	$	10,504	$	1,128,484		$	4,455		$	1,082,290		$	(42,187	)	$	(2,185,152	)	$	241		$	(1,365	)

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

IDEXX LABORATORIES, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OFCASHFLOWS

(in thousands)

(Unaudited)



	For the Nine Months Ended September 30,
	2019			2018

Cash Flows from Operating Activities:
Net income	$	337,248		$	291,370
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	65,422			62,574
Impairment charge	—			2,629
Benefit of deferred income taxes	2,403			12,850
Share-based compensation expense	22,623			18,948
Other	1,497			2,385
Changes in assets and liabilities:
Accounts receivable	(24,451		)	(33,041		)
Inventories	(36,582		)	(27,415		)
Other assets and liabilities	(54,770		)	(58,214		)
Accounts payable	1,181			(1,336		)
Deferred revenue	(10,826		)	(6,314		)
Net cash provided by operating activities	303,745			264,436
Cash Flows from Investing Activities:
Purchases of property and equipment	(109,058		)	(82,642		)
Purchase of marketable securities	—			(87		)
Proceeds from the sale and maturities of marketable securities	—			284,125
Acquisitions of intangible assets	(255		)	(450		)
Acquisition of a business	(304		)	(22,500		)
Net cash (used) provided by investing activities	(109,617		)	178,446
Cash Flows from Financing Activities:
Repayments on revolving credit facilities, net	(169,532		)	(240,500		)
Issuance of senior notes	100,000			—
Debt issuance costs	(154		)	—
Payment of acquisition-related contingent consideration	(2,255		)	(1,266		)
Repurchases of common stock, net	(160,969		)	(263,712		)
Proceeds from exercises of stock options and employee stock purchase plans	28,739			34,595
Shares withheld for statutory tax withholding on restricted stock	(7,849		)	(9,110		)
Net cash used by financing activities	(212,020		)	(479,993		)
Net effect of changes in exchange rates on cash	(1,906		)	(3,687		)
Net decrease in cash and cash equivalents	(19,798		)	(40,798		)
Cash and cash equivalents at beginning of period	123,794			187,675
Cash and cash equivalents at end of period	$	103,996		$	146,877

Supplemental Cash Flow Information:
Unpaid property and equipment, reflected in accounts payable and accrued liabilities	$	19,196		$	10,239

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

IDEXX LABORATORIES, INC.ANDSUBSIDIARIES

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 nine months ended September 30, ~~2018,~~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 September 30, ~~2018,~~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 nine months ended September 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 nine months ended September 30, ~~2018,~~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 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~~):

໿

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 nine months ended September 30, 2018, to the balances without the adoption of the New Revenue Standard ("previous U.S. GAAP") (~~in thousands~~):

໿

Condensed Consolidated Balance Sheet
As of September 30, 2018

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

Attributed to the
New Revenue Standard

ASSETS

Cash and cash equivalents $ 146,877
$ 146,877
$ —
Accounts receivable 260,803
264,563
3,760
Inventories 181,830
179,684
(2,146 )
Property and equipment, net 409,980
409,980
—
Goodwill and intangible assets, net 258,466
258,466
—
Other assets 245,276
284,960
39,684
TOTAL ASSETS $ 1,503,232
$ 1,544,530
$ 41,298

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable $ 65,457
$ 65,457
$ —
Accrued liabilities 237,904
238,431
527
Deferred income tax liabilities 38,897
39,899
1,002
Line of credit and long-term debt 1,016,916
1,016,916
—
Deferred revenue 63,764
103,696
39,932
Other long-term liabilities 90,420
81,494
(8,926 )
Total liabilities 1,513,358
1,545,893
32,535

Stockholders’ Deficit:
Retained earnings 1,073,597
1,082,292
8,695
Accumulated other comprehensive (loss) income (42,255 ) (42,187 ) 68
All other stockholders' deficit and noncontrolling interest (1,041,468 ) (1,041,468 ) —
Total stockholders’ deficit (10,126 ) (1,363 ) 8,763
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 1,503,232
$ 1,544,530
$ 41,298

໿

Condensed Consolidated Statement of Operations
For the Three Months Ended September 30, 2018 For the Nine Months Ended September 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 $ 531,525
$ 545,448
$ 13,923
$ 1,622,773
$ 1,663,856
$ 41,083
Total cost of revenue 231,277
239,805
8,528
698,733
722,675
23,942
Gross profit 300,248
305,643
5,395
924,040
941,181
17,141

Total operating expense 188,725
188,293
(432 ) 566,672
565,193
(1,479 )
Income from operations 111,523
117,350
5,827
357,368
375,988
18,620
Interest expense (8,453 ) (8,453 ) —
(26,184 ) (26,184 ) —
Interest income 394
142
(252 ) 1,693
893
(800 )
Income before provision for income taxes 103,464
109,039
5,575
332,877
350,697
17,820
Provision for income taxes 14,642
15,825
1,183
55,178
59,327
4,149
Net income $ 88,822
$ 93,214
$ 4,392
$ 277,699
$ 291,370
$ 13,671

໿

Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended September 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 $ 277,699
$ 291,370
$ 13,671
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit of deferred income taxes 9,244
12,850
3,606
All other adjustments to reconcile net income to net cash provided by operating activities 86,536
86,536
—
Changes in assets and liabilities, net (109,043 ) (126,320 ) (17,277 )
Net cash provided by operating activities $ 264,436
$ 264,436
$ —

໿

~~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 nine months 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 12. 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, the FASB has issued updates to ASU 2016-02. The principal difference from previous guidance is that effective upon adoption, the lease assets and lease liabilities arising from operating leases will be recognized in the balance sheet. For public business entities, 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. We intend to electas of January 1, 2019, using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and ~~will~~did not restate prior periods. ~~We also intend to elect~~In addition, we elected the ~~transition~~ package of ~~three~~ practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The adoption of the New Leasing Standard ~~which among other things, allows~~resulted in the ~~carryforward~~recording of ~~historical~~operating lease ~~classifications.~~

~~We currently expect that under~~liabilities of $86.7 million and right-of-use assets of $83.7 million. Prior to our adoption of the New Leasing Standard, asrent prepayments of approximately $1.0 million were recorded within other current assets and the impact of recognizing rent expense on a ~~lessee, our~~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 ~~commitments will be recognized as~~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 Note 14 to the consolidated financial statements in our 2017 Annual Report for a summary of undiscounted minimum annual rental payments under operating lease commitments. Upon adoption, we anticipate our portfolio of real estate, vehicle and equipment leases will be relatively consistent with 2017 and therefore assets and liabilities recorded upon adoption will be of a similar magnitude, except they will be recorded on a discounted basis.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 and nine months ended September 30, 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 or retrospectively. We are currently evaluating the impact these amendments will have on our consolidated financial statements.~~adoption.

In August 2018, the ~~FASB~~SEC issued ~~ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework-Changes~~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 in the notes to the ~~Disclosure Requirements~~financial statements, for ~~Fair Value Measurement~~ ~~("ASU 2018-13"),which modifies~~ the ~~disclosure requirements of fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019,~~current and ~~early adoption is permitted.~~comparative year-to-date interim periods. The ~~adoption~~additional elements of this ~~guidance is~~release did not ~~expected to~~ have a material impact on our overall condensed consolidated financial statements. We adopted the new disclosure requirements in our Form 10-Q during the first quarter of 2019.

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's~~New Accounting ~~for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ ("ASU 2018-15"), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.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 Note 2. Summary of Significant Accounting Policies - New Accounting Pronouncements Not Yet Adopted 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~~apply 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 predominantly 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 $5.3 million and $14.5 million for the three and nine months ended September 30, 2019, respectively, as compared to $3.0 million and $9.0 million for the three and nine months ended September 30, 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 systemsextended warranties typically provide customers with continued coverage for a period of 1one to 5five 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 ~~$2.4~~$2.8 million and ~~$16.5~~$18.5 million were recognized during the three and nine months ended September 30, ~~2018,~~2019, respectively. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was ~~$41.1~~$37.8 million at September 30, ~~2018.~~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 ~~$28.0~~$24.3 million at September 30, ~~2018,~~2019, of which approximately 7%9%, ~~30%~~35%, ~~26%~~28%, 18%, and ~~37%~~10% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full ~~year~~years 2020, 2021, 2022, 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 IDEXX Neo^®, Animana^®, Pet Health Network^® Pro, Petly^® Plans, Web PACS, rVetLink^®, and Smart ~~Flow.~~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 2two 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 current and long-term 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 ~~$7.1~~$8.5 million and ~~$21.5~~$26.2 million were recognized as a reduction of revenue during the three and nine months ended September 30, ~~2018,~~2019, respectively. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were ~~$119.8~~$131.0 million at September 30, ~~2018.~~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 nine months ended September 30, ~~2018,~~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 in advance of billing the customer, 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 ~~$1.0~~$2.0 million and ~~$3.4~~$7.0 million were reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended September 30, ~~2018,~~2019, respectively. Furthermore, as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable, our contract assets were ~~$29.0~~$70.5 million at September 30, ~~2018.~~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 nine months ended September 30, ~~2018,~~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 ~~$1.1~~$1.6 billion, of which approximately 7%, ~~26%~~25%, 21%, 19%, and ~~46%~~28% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full ~~year~~years 2020, 2021, 2022, 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 total consideration to identified performance obligations, including the 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 ~~$4.5~~$4.4 million and ~~$13.7~~$13.9 million were recognized when customers purchased eligible products and services and earned rebates during the three and nine months ended September 30, ~~2018,~~2019, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was ~~$58.7~~$50.1 million at September 30, ~~2018,~~2019, of which approximately 8%9%, ~~30%~~31%, ~~24%~~25%, 17%, and ~~38%~~18% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full ~~year~~years 2020, 2021, 2022, 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 $4.5 million at September 30, 2019. The impacts of discounting and unearned income

at September 30, 2019, were not material. Profit and loss recognized at the commencement date and interest income during the three and nine months ended September 30, 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 and nine months ended September 30, 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 and ~~is charged~~nine months ended September 30, 2019, we transferred instruments of $5.5 million and $10.5 million, respectively, as compared to ~~cost of product revenue ratably over~~$6.6 million and $14.7 million for the ~~term of the agreement.~~three and nine months ended September 30, 2018, respectively, from inventory to property and equipment.

We estimate future revenue to be recognized related to ~~these multi-year agreements with customers~~our reagent rental programs of approximately ~~$54.8~~$30.9 million, of which approximately 9%11%, ~~34%~~37%, 27%, 16%, and ~~30%~~9% are expected to be recognized during the remainder of ~~2018, the full year~~ 2019, the full ~~year~~years 2020, 2021, 2022, and thereafter, respectively. These future revenues relate to ~~future~~ 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 nine months ended September 30, ~~2018,~~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 September 30, ~~2018.~~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 nine months ended September 30, 2018 and 2017 (in thousands~~):

categories:໿


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)									For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017		2019		2018		2019		2018
CAG segment revenue:
CAG Diagnostics recurring revenue:	$	409,162	$	364,937	$	1,252,876	$	1,091,936	$	460,974	$	409,162	$	1,382,196	$	1,252,876
IDEXX VetLab consumables	152,509		129,434		460,642		385,081		177,276		152,509		519,646		460,642
Rapid assay products	53,821		50,924		169,200		159,085		58,930		53,821		181,966		169,200
Reference laboratory diagnostic and consulting services	184,103		167,851		568,308		498,218		204,919		184,103		621,469		568,308
CAG Diagnostics service and accessories	18,729		16,728		54,726		49,552
CAG Diagnostics services and accessories									19,849		18,729		59,115		54,726
CAG Diagnostics capital - instruments	31,561		29,119		97,000		83,018		32,608		31,561		92,883		97,000
Veterinary software, services and diagnostic imaging systems	37,374		32,630		106,541		94,907		39,548		37,374		114,318		106,541
CAG segment revenue	478,097		426,686		1,456,417		1,269,861		533,130		478,097		1,589,397		1,456,417

Water segment revenue	33,108		31,030		94,909		85,531		34,906		33,108		99,980		94,909
LPD segment revenue	29,420		28,396		96,658		91,266		31,370		29,420		95,980		96,658
Other segment revenue	4,823		5,864		15,872		16,279		5,897		4,823		16,105		15,872
Total revenue	$	545,448	$	491,976	$	1,663,856	$	1,462,937	$	605,303	$	545,448	$	1,801,462	$	1,663,856

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

follows:໿



(in thousands)	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	380,184	$	340,692	$	1,127,347	$	1,024,889
Europe, the Middle East and Africa	122,050		112,466		368,636		355,310
Asia Pacific Region	64,648		56,954		188,756		175,498
Canada	24,334		22,459		75,212		71,410
Latin America	14,087		12,877		41,511		36,749
Total	$	605,303	$	545,448	$	1,801,462	$	1,663,856

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2018 2017 2018 2017
United States $ 340,692
$ 301,457
$ 1,024,889
$ 905,765
Europe, the Middle East and Africa 112,466
106,548
355,310
305,458
Asia Pacific Region 56,954
51,161
175,498
156,198
Canada 22,459
20,654
71,410
62,480
Latin America 12,877
12,156
36,749
33,036
Total $ 545,448
$ 491,976
$ 1,663,856
$ 1,462,937

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 ~~$0.8~~$1.1 million and ~~$2.7~~$3.4 million of ~~commissions~~commission expense were recognized during the three and nine months ended September 30, ~~2018,~~2019, respectively. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were ~~$13.3~~$15.2 million at September 30, ~~2018.~~2019. Impairments of deferred commission costs during the three and nine months ended September 30, ~~2018,~~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.

During the third quarter of 2018, we acquired substantially all of the assets of a software company for $25.0 million, including a holdback payment of $1.0 million, to offset possible pre-acquisition indemnity claims, and a contingent payment of $1.5 million. The holdback payment, less settlement of any indemnity claims, will be paid on the second anniversary of the acquisition date, while the contingent payment will be paid within 36 months if certain commercial goals are achieved. This acquisition expands the IDEXX suite of veterinary software offerings and further underscores our commitment to investing in software innovations that advance the veterinary profession. This acquisition was accounted for as a business combination. The ~~preliminary~~ fair value ~~estimate~~ of the assets acquired consist of ~~approximately~~ $20.3 million of goodwill, representing synergies with our current software product offerings, ~~approximately~~ $2.6 million in technology intangible assets, ~~approximately~~ $2.4 million in customer relationship intangible assets, and ~~approximately~~ $0.3 million of net tangible liabilities. ~~We are still in the process of reviewing our estimates and expect to have the valuation finalized before the end of the fourth quarter of 2018.~~ The goodwill is expected to be deductible for income tax purposes. Pro forma information has not been presented for this acquisition 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. The acquisition expenses incurred were not material.

During the third quarter of 2018, we also acquired a reference laboratory customer list in the United States for approximately $0.5 million and recorded this transaction as an asset acquisition. The results of operations for this reference laboratory has been included in our CAG segment since the acquisition date.

During the third quarter of 2017, we acquired three reference laboratory customer lists in the United States for approximately $1.3 million and recorded these transactions as asset acquisitions. The results of operations for these reference laboratories have been included in our CAG segment since the acquisition dates.

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 $15.0 million consists of $12.0 million paid at closing and a $3.0 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. SHARE-BASED COMPENSATION

The fair value of options, restricted stock units, deferred stock units, and employee stock purchase rights awarded during the three and nine months ended September 30, ~~2018,~~2019, totaled ~~$0.7~~$3.8 million and ~~$33.5~~$40.1 million, respectively, as compared to ~~$1.5~~$0.7 million and ~~$31.0~~$33.5 million for the three and nine months ended September 30, ~~2017,~~2018, respectively. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at September 30, ~~2018,~~2019, was ~~$57.0~~$63.2 million, which will be recognized over a weighted average period of approximately 1.9 years. During the three and nine months ended September 30, ~~2018,~~2019, we recognized ~~expense~~expenses of ~~$6.5~~$9.4 million and ~~$18.9~~$22.6 million, respectively, as compared to ~~$6.1~~$6.5 million and ~~$17.8~~$18.9 million for the three and nine months ended September 30, ~~2017,~~2018, respectively, 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 Nine Months Ended September 30,
	2019			2018

Share price at grant	$	213.35		$	179.56
Expected stock price volatility	26		%	24		%
Expected term, in years	6.0			5.8
Risk-free interest rate	2.4		%	2.7		%
Weighted average fair value of options granted	$	64.99		$	52.99

For the Nine Months Ended
September 30,
2018 2017

Share price at grant $ 179.56
$ 142.89
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
$ 40.83

໿

NOTE 6. ~~MARKETABLE SECURITIES~~ INVENTORIES

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~~):

໿

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)~~:

follows:



(in thousands)	September 30, 2019		December 31, 2018

Raw materials	$	39,851	$	31,973
Work-in-process	20,609		17,009
Finished goods	144,433		124,321
Inventories	$	204,893	$	173,303

September 30,
2018 December 31,
2017

Raw materials $ 33,068
$ 32,994
Work-in-process 17,696
17,786
Finished goods 128,920
113,538
Inventories (Note 2) $ 179,684
$ 164,318

໿

NOTE 8.7. PROPERTY AND EQUIPMENT, NET

During the third quarter of 2018, we decided to discontinue the development of our in–house SNAP Fecal product and focus resources and capital on supporting fecal antigen testing within our reference laboratories, which resulted in a $2.6 million impairment of construction in progress production equipment related to SNAP Fecal. This impairment charge iswas recorded as general and administrative expense in our CAG reporting segment.

NOTE 8. 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 its 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 the 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)	September 30, 2019

2019 (remainder of year)	$	3,256
2020	18,803
2021	16,426
2022	12,890
2023	8,574
Thereafter	38,398
Total lease payments	98,347
Less imputed interest	(17,204		)
Total	$	81,143

Current operating lease liabilities, included in accrued liabilities	$	14,802
Long-term operating lease liabilities	$	66,341

Weighted average remaining lease term - operating leases	10.7 years

Weighted average discount rate - operating leases	3.3		%

Rent expense charged to operations under operating leases was approximately $5.3 million and $15.6 million during the three and nine months ended September 30, 2019, respectively. Variable rent and short-term lease expenses were not material.

Supplemental cash flow information for leases was as follows:



(in thousands)	For the Nine Months Ended September 30, 2019

Cash paid for amounts included in the measurement of operating leases liabilities	$	14,878
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations	$	7,870

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 9. OTHER CURRENT AND LONG-TERM ASSETS

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

following:໿



(in thousands)	September 30, 2019		December 31, 2018

Prepaid expenses (Note 2)	$	32,646	$	30,314
Taxes receivable	20,535		14,098
Customer acquisition costs	37,754		34,515
Contract assets	15,218		9,670
Deferred sales commissions	5,055		4,464
Other assets	14,966		15,159
Other current assets	$	126,174	$	108,220

September 30,
2018 December 31,
2017

Prepaid expenses $ 31,997
$ 28,967
Taxes receivable 23,769
35,475
Customer acquisition costs (Notes 2 and 3) 32,768
23,520
Contract assets (Notes 2 and 3) 7,357
—
Deferred sales commissions (Notes 2 and 3) 4,428
—
Other assets (Notes 2 and 3) 12,754
13,178
Other current assets $ 113,073
$ 101,140

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

following:



(in thousands)	September 30, 2019		December 31, 2018

Investment in long-term product supply arrangements	$	13,082	$	10,894
Taxes receivable	14,982		19,219
Customer acquisition costs	93,288		89,862
Contract assets	55,283		31,269
Deferred sales commissions	10,178		9,470
Deferred income taxes	8,399		8,481
Other assets	29,493		20,398
Other long-term assets	$	224,705	$	189,593

September 30,
2018 December 31,
2017

Investment in long-term product supply arrangements $ 10,532
$ 9,949
Customer acquisition costs (Notes 2 and 3) 87,034
64,670
Contract assets (Notes 2 and 3) 21,680
—
Deferred sales commissions (Notes 2 and 3) 8,894
—
Deferred income taxes (Note 2) 8,436
7,698
Other assets (Notes 2 and 3) 35,311
36,299
Other long-term assets $ 171,887
$ 118,616

໿

NOTE 10. ACCRUED LIABILITIES

Accrued liabilities consisted of the ~~following~~ ~~(in thousands)~~:

following:



(in thousands)	September 30, 2019		December 31, 2018

Accrued expenses (Note 2)	$	75,485	$	65,212
Accrued employee compensation and related expenses	98,357		109,488
Accrued taxes	26,368		26,609
Accrued customer incentives and refund obligations	63,614		59,374
Current lease liabilities (Notes 2 and 8)	14,802		—
Accrued liabilities	$	278,626	$	260,683

September 30,
2018 December 31,
2017

Accrued expenses $ 61,301
$ 64,430
Accrued employee compensation and related expenses 87,184
102,944
Accrued taxes 28,082
29,389
Accrued customer incentives and refund obligations (Notes 2 and 3) 61,864
56,655
Total accrued liabilities $ 238,431
$ 253,418

໿

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

following:໿

໿



(in thousands)	September 30, 2019		December 31, 2018

Accrued taxes	$	63,784	$	66,767
Other accrued long-term expenses (Note 2)	13,294		18,059
Other long-term liabilities	$	77,078	$	84,826

September 30,
2018 December 31,
2017

Accrued taxes $ 63,385
$ 66,506
Accrued customer incentives (Note 2) —
12,956
Other accrued long-term expenses 18,109
16,256
Total other long-term liabilities $ 81,494
$ 95,718

໿

NOTE 11. 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 had the ability to 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 ~~11.~~12. 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 nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, 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~~surrender:



(in thousands, except per share amounts)	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018

Shares repurchased in the open market	330		302		683		1,284
Shares acquired through employee surrender for statutory tax withholding	1		1		38		50
Total shares repurchased	331		303		721		1,334

Cost of shares repurchased in the open market	$	91,051	$	73,247	$	165,198	$	265,209
Cost of shares for employee surrenders	277		390		7,849		9,110
Total cost of shares	$	91,328	$	73,637	$	173,047	$	274,319

Average cost per share - open market repurchases	$	275.50	$	242.78	$	241.56	$	206.59
Average cost per share - employee surrenders	$	286.65	$	253.34	$	209.20	$	181.68
Average cost per share - total	$	275.53	$	242.83	$	239.87	$	205.65

໿

NOTE 13. INCOME TAXES

Our effective income tax rate was 18.0% for the three months ended September 30, 2019, as compared to 14.5% for the three months ended September 30, 2018, and 18.5% for the nine months ended September 30, 2019, as compared to 16.9% for the nine months ended September 30, 2018. The increase in our effective tax rate for the three months ended September 30, 2019, as compared to the same period in the prior year, was primarily driven by lower tax benefits from share-based compensation. The increase in our effective tax rate for the nine months ended September 30, 2019, as compared to the same period in the prior year, was primarily driven by lower tax benefits from share-based compensation, partially offset by a nonrecurring item recorded in the three months ended March 31, 2018, that resulted from the 2017 Tax Cut and Jobs Act.

The effective tax rate for the three and nine months ended September 30, ~~2018 and 2017~~ ~~(in thousands, except per share amounts)~~:

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2018 2017 2018 2017

Shares repurchased in the open market 302
312
1,284
1,398
Shares acquired through employee surrender for statutory tax withholding 1
2
50
55
Total shares repurchased 303
314
1,334
1,453

Cost of shares repurchased in the open market $ 73,247
$ 50,413
$ 265,209
$ 215,320
Cost of shares for employee surrenders 390
370
9,110
7,829
Total cost of shares $ 73,637
$ 50,783
$ 274,319
$ 223,149

Average cost per share - open market repurchases $ 242.78
$ 161.57
$ 206.59
$ 153.99
Average cost per share - employee surrenders $ 253.34
$ 155.14
$ 181.68
$ 142.15
Average cost per share - total $ 242.83
$ 161.52
$ 205.65
$ 153.54

໿

~~NOTE 12. INCOME TAXES~~

~~Our effective income tax rate was 14.5% for~~2019, differed from the three months ended September 30, 2018, as compared to 23.4% for the three months ended September 30, 2017, and 16.9% for the nine months ended September 30, 2018, as compared to 22.8% for the nine months ended September 30, 2017. The decrease in our effective tax rate for each period, as compared to the same periods in the prior year, was primarily related to the reduction in our U.S. statutory tax rate ~~as a result~~ of ~~the 2017 Tax Act and~~21% primarily due to tax benefits ~~related to~~from share-based compensation.

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 nine months 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 ~~13.~~14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in AOCI, net of tax, ~~for the nine months ended September 30, 2018~~ consisted of the following:



	For the Nine Months Ended September 30, 2019
(in thousands)	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	295			10,451			3,507			(12,231		)	2,022
Gains reclassified from accumulated other comprehensive income	—			(5,796		)	—			—			(5,796		)
Balance as of September 30, 2019	$	138		$	12,244		$	3,113		$	(61,060	)	$	(45,565	)

໿



	For the Nine Months Ended September 30, 2018
(in thousands)	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	187			7,514			2,818			(18,172		)	(7,653		)
Losses reclassified from accumulated other comprehensive income	—			1,936			—			—			1,936
Balance as of September 30, 2018	$	165		$	4,231		$	(1,493	)	$	(45,090	)	$	(42,187	)

The following ~~(in thousands)~~:

tables present components and amounts reclassified out of AOCI to net income:

For the Nine Months Ended September 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 187
7,514
2,818
(18,172 ) (7,653 )
Gains reclassified from accumulated other comprehensive income —
1,936
—
—
1,936
Balance as of September 30, 2018 $ 165
$ 4,231
$ (1,493 ) $ (45,090 ) $ (42,187 )

໿

~~The following is a summary of reclassifications out of AOCI for the three and nine months ended September 30, 2018 and 2017~~ ~~(in thousands)~~:



(in thousands)	Affected Line Item in the Statements of Income	Amounts Reclassified from AOCI For the Three Months Ended September 30,
		2019		2018
Gain on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	3,171	$	256
	Tax expense	688		153
	Gain, net of tax	$	2,483	$	103



(in thousands)	Affected Line Item in the Statements of Income	Amounts Reclassified from AOCI For the Nine Months Ended September 30,
		2019		2018
Gain (loss) on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	7,091	$	(2,412	)
	Tax expense (benefit)	1,295		(476		)
	Gain (loss), net of tax	$	5,796	$	(1,936	)

Details about AOCI Components Affected Line Item in the Statement of Operations Amounts Reclassified from AOCI For the Three Months Ended September 30,
2018 2017
Gains (losses) on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts Cost of revenue $ 256
$ (893 )
Tax expense (benefits) 153
(333 )
Gains (losses), net of tax $ 103
$ (560 )

Details about AOCI Components Affected Line Item in the Statement of Operations Amounts Reclassified from AOCI For the Nine Months Ended September 30,
2018 2017
(Losses) gains on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts Cost of revenue $ (2,412 ) $ 935
Tax (benefits) expense (476 ) 348
(Losses) gains, net of tax $ (1,936 ) $ 587

໿

NOTE ~~14.~~15. 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 nine months ended September 30, 2018 and 2017~~ ~~(in thousands)~~: share:



(in thousands)	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018

Shares outstanding for basic earnings per share	86,198	86,756	86,206	87,029

Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share	86,198	86,756	86,206	87,029
Dilutive effect of share-based payment awards	1,469	1,697	1,427	1,658
	87,667	88,453	87,633	88,687

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2018 2017 2018 2017

Shares outstanding for basic earnings per share 86,756
87,537
87,029
87,884

Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share 86,756
87,537
87,029
87,884
Dilutive effect of share-based payment awards 1,697
1,719
1,658
1,851
88,453
89,256
88,687
89,735

໿

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 nine months ended September 30, 2018 and 2017.~~ The following table presents information concerning those anti-dilutive ~~options for the three and nine months ended September 30, 2018 and 2017~~ ~~(in thousands~~): options:



(in thousands)	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018

Weighted average number of shares underlying anti-dilutive options	29	15	247	274

For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2018 2017 2018 2017

Weighted average number of shares underlying anti-dilutive options 15
377
274
310

໿

NOTE ~~15.~~16. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

See "Note 8. 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 September 30, ~~2018,~~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 September 30, 2018, are consistent with those~~ discussed in Note 1415 to the consolidated financial statements in our ~~2017~~2018 Annual Report.

NOTE ~~16.~~17. 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 orand 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 nine months ended September 30, 2018 and 2017~~ ~~(in thousands)~~:

໿

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

Revenue $ 478,097
$ 33,108
$ 29,420
$ 4,823
$ —
$ 545,448

Income (loss) from operations $ 102,241
$ 15,874
$ 4,007
$ 443
$ (5,215 ) $ 117,350
Interest expense, net (8,311 )
Income before provision for income taxes 109,039
Provision for income taxes 15,825
Net income 93,214
Less: Net loss attributable to noncontrolling interest (37 )
Net income attributable to IDEXX Laboratories, Inc. stockholders $ 93,251

2017
Revenue $ 426,686
$ 31,030
$ 28,396
$ 5,864
$ —
$ 491,976

Income (loss) from operations $ 89,271
$ 14,505
$ 902
$ 2,114
$ (6,379 ) $ 100,413
Interest expense, net (8,364 )
Income before provision for income taxes 92,049
Provision for income taxes 21,535
Net income 70,514
Less: Net income attributable to noncontrolling interest 3
Net income attributable to IDEXX Laboratories, Inc. stockholders $ 70,511

໿

performance:


(in thousands)															For the Three Months Ended September 30,
	For the Nine Months Ended September 30,														CAG		Water		LPD		Other		Unallocated Amounts			Consolidated Total
2019
Revenue															$	533,130	$	34,906	$	31,370	$	5,897	$	—		$	605,303

Income (loss) from operations															$	124,490	$	17,045	$	4,994	$	1,379	$	(8,106	)	$	139,802
Interest expense, net																										(7,004		)
Income before provision for income taxes																										132,798
Provision for income taxes																										23,960
Net income																										108,838
Less: Net income attributable to noncontrolling interest																										1
Net income attributable to IDEXX Laboratories, Inc. stockholders																										$	108,837
	CAG		Water		LPD		Other		Unallocated Amounts			Consolidated Total
2018
Revenue	$	1,456,417	$	94,909	$	96,658	$	15,872	$	—		$	1,663,856		$	478,097	$	33,108	$	29,420	$	4,823	$	—		$	545,448

Income (loss) from operations	$	332,435	$	43,458	$	13,439	$	2,071	$	(15,415	)	$	375,988		$	102,241	$	15,874	$	4,007	$	443	$	(5,215	)	$	117,350
Interest expense, net												(25,291		)												(8,311		)
Income before provision for income taxes												350,697														109,039
Provision for income taxes												59,327														15,825
Net income												291,370														93,214
Less: Net loss attributable to noncontrolling interest												(23		)												(37		)
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	291,393													$	93,251

2017
Revenue	$	1,269,861	$	85,531	$	91,266	$	16,279	$	—		$	1,462,937

Income (loss) from operations	$	277,857	$	38,421	$	9,880	$	3,275	$	(14,213	)	$	315,220
Interest expense, net												(23,849		)
Income before provision for income taxes												291,371
Provision for income taxes												66,392
Net income												224,979
Less: Net income attributable to noncontrolling interest												92
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	224,887



(in thousands)	For the Nine Months Ended September 30,
	CAG		Water		LPD		Other		Unallocated Amounts			Consolidated Total
2019
Revenue	$	1,589,397	$	99,980	$	95,980	$	16,105	$	—		$	1,801,462

Income (loss) from operations	$	384,095	$	47,394	$	17,637	$	3,657	$	(15,568	)	$	437,215
Interest expense, net												(23,503		)
Income before provision for income taxes												413,712
Provision for income taxes												76,464
Net income												337,248
Less: Net income attributable to noncontrolling interest												24
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	337,224

2018
Revenue	$	1,456,417	$	94,909	$	96,658	$	15,872	$	—		$	1,663,856

Income (loss) from operations	$	332,435	$	43,458	$	13,439	$	2,071	$	(15,415	)	$	375,988
Interest expense, net												(25,291		)
Income before provision for income taxes												350,697
Provision for income taxes												59,327
Net income												291,370
Less: Net loss attributable to noncontrolling interest												(23		)
Net income attributable to IDEXX Laboratories, Inc. stockholders												$	291,393

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 nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018.

NOTE ~~17.~~18. 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 nine months ended September 30, ~~2018.~~ 2019.

Our marketable debt securities are initially valued at the transaction price and are subsequently remeasured to fair value as of the balance sheet date utilizing third-party pricing services. 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.

Our cross currency swap 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 cross currency swap contracts classified as derivative instruments using prevailing market conditions as of the close of business on each balance sheet date. The 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 ~~$601.7~~$751.9 million and ~~$602.9~~$697.2 million, respectively, as of September 30, ~~2018,~~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 September 30, 2018, and at December 31, 2017,~~ by level within the fair value ~~hierarchy~~ ~~(in thousands)~~:

hierarchy:


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

Assets
Money market funds⁽¹⁾	$	8,617	$	—	$	—	$	8,617	$	58	$	—	$	—	$	58
Equity mutual funds⁽²⁾	$	1,991	$	—	$	—	$	1,991	$	1,708	$	—	$	—	$	1,708
Cross currency swaps⁽³⁾	—		$	148	—		$	148	$	—	$	7,040	$	—	$	7,040
Foreign currency exchange contracts⁽³⁾	$	—	$	5,808	$	—	$	5,808	$	—	$	8,197	$	—	$	8,197
Liabilities
Foreign currency exchange contracts⁽³⁾	$	—	$	744	$	—	$	744	$	—	$	148	$	—	$	148
Deferred compensation⁽⁴⁾	$	1,991	$	—	$	—	$	1,991	$	1,708	$	—	$	—	$	1,708

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



(in thousands)
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 September 30, ~~2018~~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 (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;~~assets, other long-term ~~assets;~~assets, accrued ~~liabilities;~~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 (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 ~~18.~~19. 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 ~~13.~~14. 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 nine months ended September 30, ~~2018~~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 nine months ended September 30, ~~2018~~2019 or ~~2017.~~2018. At September 30, ~~2018,~~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 ~~$3.0~~$5.9 million if exchange rates do not fluctuate from the levels at September 30, ~~2018.~~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, in prior years, the 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 ~~$192.5~~$176.0 million and ~~$176.5~~$190.9 million at September 30, ~~2018~~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 September 30,
		2019		2018

Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	260,353	$	239,805
Foreign exchange contracts
Amount of gain reclassified from accumulated other comprehensive income into income		$	3,171	$	256



(in thousands)		Nine Months Ended September 30,
		2019		2018

Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	767,062	$	722,675
Foreign exchange contracts
Amount of gain (loss) reclassified from accumulated other comprehensive income into income		$	7,091	$	(2,412	)

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 ~~$0.6~~$3.0 million and ~~$2.8~~$3.5 million, net of ~~income~~ tax, within AOCI as a result of this net investment hedge for the three and nine months ended September 30, ~~2018,~~2019, respectively. The related cumulative unrealized gain recorded at September 30, ~~2018,~~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,~~contracts, 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 and nine months ended September 30, ~~2018,~~2019, we recorded ~~a loss~~gains of ~~$0.1~~$3.1 million and ~~a gain of $0.1~~$4.0 million, net of ~~income~~ tax, within AOCI as a result of these net investment hedges, respectively. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency ~~swap.~~swaps. This interest rate component is excluded from the assessment of hedge effectiveness and, thus ~~will be~~is recognized as a reduction to interest expense over the life of the hedge instrument. We recognized approximately ~~$0.4~~$0.6 million and ~~$0.6~~$1.7 million related to the excluded component as a reduction of interest expense for the three and nine months ended September 30, ~~2018,~~2019, respectively.

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

Three Months Ended September 30,
2018 2017

Financial statement line items in which effects of cash flow hedges are recorded Cost of revenue $ 239,805
$ 217,974
Foreign exchange contracts
Amount of gain (loss) reclassified from accumulated other comprehensive income into income $ 256
$ (893 )

Nine Months Ended September 30,
2018 2017

Financial statement line items in which effects of cash flow hedges are recorded Cost of revenue $ 722,675
$ 638,029
Foreign exchange contracts
Amount of (loss) gain reclassified from accumulated other comprehensive income into income $ (2,412 ) $ 935

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)~~:

noted:



(in thousands)		Hedging Assets
		September 30, 2019		December 31, 2018

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Other current assets	$	7,079	$	8,163
Cross currency swaps	Other long-term assets	7,040		1,789
Foreign currency exchange contracts	Other long-term assets	1,118		—
Total derivative instruments presented as hedge instruments on the balance sheet		15,237		9,952
Gross amounts subject to master netting arrangements not offset on the balance sheet		148		603
Net amount		$	15,089	$	9,349

Hedging Assets
September 30, 2018 December 31, 2017

Derivatives and non-derivatives designated as hedging instruments Balance Sheet Classification
Foreign currency exchange contracts Other current assets $ 4,469
$ 477
Cross currency swaps Other current assets 148
—
Foreign currency exchange contracts Other long-term assets 1,339
—
Total derivative instruments presented as cash flow hedges on the balance sheet 5,956
477
Gross amounts subject to master netting arrangements not offset on the balance sheet 419
477
Net amount $ 5,537
$ —

໿



(in thousands)		Hedging Liabilities
		September 30, 2019		December 31, 2018

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Accrued liabilities	$	121	$	603
Foreign currency exchange contracts	Other long-term liabilities	27		—
Total derivative instruments presented as cash flow hedges on the balance sheet		148		603
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet⁽¹⁾	Long-term debt	97,165		101,777
Total hedging instruments presented on the balance sheet		97,313		102,380
Gross amounts subject to master netting arrangements not offset on the balance sheet		148		603
Net amount		$	97,165	$	101,777

Hedging Liabilities
September 30, 2018 December 31, 2017

Derivatives and non-derivatives designated as hedging instruments Balance Sheet Classification
Foreign currency exchange contracts Accrued liabilities $ 681
$ 6,468
Foreign currency exchange contracts Other long-term liabilities 63
—
Total derivative instruments presented as cash flow hedges on the balance sheet 744
6,468
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet⁽¹⁾
Long-term debt 102,861
106,567
Total hedging instruments presented on the balance sheet 103,605
113,035
Gross amounts subject to master netting arrangements not offset on the balance sheet 419
477
Net amount $ 103,186
$ 112,558

(1) Amounts represent reported carrying amounts of our foreign currency denominated debt. See ~~Note 17~~"Note 18. 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,~~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; projected charges related to our leadership transition; 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, among other things, the matters ~~discussed in Item 1A, “Risk Factors”~~ described under the headings "Business," "Risk Factors,” "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosure About Market Risk" in our ~~2017~~2018 Annual Report and in the corresponding sections of 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,I. Item 11. 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;

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

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

Diagnostic, health-monitoring products for livestock, poultry, and 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.

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.

Executive Officers and Directors. As reported previously, effective October 23, 2019, our Board of Directors (our “Board”) appointed Jonathan (Jay) Mazelsky as our President and Chief Executive Officer and as a director of the Company. Mr. Mazelsky had been serving as our Interim President and Chief Executive Officer since June 28, 2019. Prior to that time, since August 2012, Mr. Mazelsky had been an Executive Vice President of the Company. In addition, effective November 1, 2019, Lawrence D. Kingsley, a Company director since October 2016 and Lead Independent Director since May 2018, will be appointed as Independent Non-Executive Chairman of our Board. Also, effective November 1, 2019, Jonathan W. Ayers, our Chairman and former President and Chief Executive Officer, who has been on a medical leave of absence since June 28, 2019, will step down as Chairman of our Board, cease to be an employee of the Company and transition to the role of external Senior Advisor to the Company. Mr. Ayers will continue to serve as a member of our Board. While we cannot provide assurances as to whether we may experience management or other challenges in connection with our leadership transition that could adversely affect our future success, we believe that under the leadership of Mr. Mazelsky as President and Chief Executive Officer and Mr. Kingsley as Independent Non-Executive Chairman, we will continue to successfully execute our strategy and create long-term value for shareholders, customers and employees.

In connection with the foregoing, Mr. Ayers and IDEXX entered into a mutual separation agreement pursuant to which severance payments will be made to Mr. Ayers and his outstanding stock options were modified. As a result of his severance payments and the modification of Mr. Ayers’s outstanding stock options, we expect to recognize a charge to operating income of approximately $13.4 million in the fourth quarter of 2019, representing the cost of the severance and an acceleration of the cost of the equity awards. In addition, we expect to increase our provision for income taxes by approximately $2.1 million, including a reduction of deferred tax assets related to previously recognized stock option tax benefits, resulting in a total charge to net income of approximately $15.5 million, net of tax impacts.

Effects of Certain Factorsand Trendson 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,~~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 nine months ended September 30, ~~2018,~~2019, are consistent with those discussed in our ~~2017~~2018 Annual Report in the section under the heading “Part ~~II,~~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.

Recent Accounting Pronouncements

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 the~~ impact that ~~other~~ 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,I. Item 11. 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 nine months ended September 30, ~~2018,~~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 nine months ended September 30, 2018. Prior to January 1, 2018, we excluded all acquisitions from organic revenue growth and we have not restated previously reported organic revenue growth for the three and nine months ended September 30, 2017, as this change would not have been material.

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

Comparison to Prior Periods.

Our fiscal ~~quarter~~quarter(s) ended on September 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.~~periods.

Results of Operations

Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018

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


	For the Three Months Ended September 30,															For the Three Months Ended September 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⁾		2019		2018		Dollar Change		Reported Revenue Growth⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions	Organic Revenue Growth⁽¹⁾

CAG	$	478,097	$	426,686	$	51,411		12.0	%	(1.0	%)	0.1	%	12.9	%	$	533,130	$	478,097	$	55,033	11.5	%	(1.2	%)	—	12.7	%
United States	319,561		280,651		38,910			13.9	%	—		0.1	%	13.7	%	357,810		319,561		38,249		12.0	%	—		—	12.0	%
International	158,536		146,035		12,501			8.6	%	(2.9	%)	0.1	%	11.4	%	175,320		158,536		16,784		10.6	%	(3.6	%)	—	14.2	%

Water	33,108		31,030		2,078			6.7	%	(2.2	%)	—		8.9	%	34,906		33,108		1,798		5.4	%	(1.7	%)	—	7.1	%
United States	15,878		14,972		906			6.0	%	—		—		6.0	%	16,794		15,878		916		5.8	%	—		—	5.8	%
International	17,230		16,058		1,172			7.3	%	(4.4	%)	—		11.8	%	18,112		17,230		882		5.1	%	(3.3	%)	—	8.4	%

LPD	29,420		28,396		1,024			3.6	%	(3.4	%)	—		7.0	%	31,370		29,420		1,950		6.6	%	(2.9	%)	—	9.5	%
United States	3,502		3,576		(74		)	(2.1	%)	—		—		(2.1	%)	3,649		3,502		147		4.2	%	—		—	4.2	%
International	25,918		24,820		1,098			4.4	%	(4.0	%)	—		8.4	%	27,721		25,918		1,803		7.0	%	(3.3	%)	—	10.3	%

Other	4,823		5,864		(1,041		)	(17.7	%)	—		—		(17.7	%)	5,897		4,823		1,074		22.2	%	—		—	22.2	%

Total Company	$	545,448	$	491,976	$	53,472		10.9	%	(1.2	%)	0.1	%	12.0	%	$	605,303	$	545,448	$	59,855	11.0	%	(1.3	%)	—	12.3	%
United States	340,692		301,457		39,235			13.0	%	—		0.1	%	12.9	%	380,184		340,692		39,492		11.6	%	—		—	11.6	%
International	204,756		190,519		14,237			7.5	%	(3.1	%)	—		10.5	%	225,119		204,756		20,363		9.9	%	(3.5	%)	—	13.4	%


(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 high growth in consumable revenue, supported by the impact of the continued expansion of our CAG Diagnostics instrument installed ~~base.~~base globally, as well as a 1% growth benefit from greater equivalent business days. The growth in our LPD business was primarily due to strong performance in Asia compared to a weaker performance in the prior year in that region, including impacts from the African swine fever outbreak. Our Water business also contributed to our ~~international~~overall 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 $13.9 million in the third quarter of 2018 that was attributed to the New Revenue Standard.~~by 1.3%.

The following table presents total Company results of operations:


	For the Three Months Ended September 30,								Change				For the Three Months Ended September 30,								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	$	545,448			$	491,976			$	53,472	10.9	%	$	605,303			$	545,448			$	59,855	11.0	%
Cost of revenue	239,805				217,974				21,831		10.0	%	260,353				239,805				20,548		8.6	%
Gross profit	305,643		56.0	%	274,002		55.7	%	31,641		11.5	%	344,950		57.0	%	305,643		56.0	%	39,307		12.9	%

Operating Expenses:
Sales and marketing	95,146		17.4	%	88,818		18.1	%	6,328		7.1	%	104,551		17.3	%	95,146		17.4	%	9,405		9.9	%
General and administrative	63,955		11.7	%	57,186		11.6	%	6,769		11.8	%	66,337		11.0	%	63,955		11.7	%	2,382		3.7	%
Research and development	29,192		5.4	%	27,585		5.6	%	1,607		5.8	%	34,260		5.7	%	29,192		5.4	%	5,068		17.4	%
Total operating expenses	188,293		34.5	%	173,589		35.3	%	14,704		8.5	%	205,148		33.9	%	188,293		34.5	%	16,855		9.0	%
Income from operations	$	117,350	21.5	%	$	100,413	20.4	%	$	16,937	16.9	%	$	139,802	23.1	%	$	117,350	21.5	%	$	22,452	19.1	%

Gross Profit. Gross profit increased due to higher sales volumes and a 30100 basis point increase in the gross profit ~~percentage.~~margin. The increase in the gross profit ~~percentage~~margin was driven by ~~lower product costs in our LPD segment and~~several factors, including the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, mix benefits from high growth in IDEXX VetLab consumable revenues, volume leverage, and ~~productivity gains. These impacts were partially offset by higher information technology~~the favorable impact of lower product costs ~~including costs that were previously captured within operating expenses, increased investments~~ in ~~reference laboratory capacity and employee benefits, as well as unfavorable impacts related to instrument program mix under the New Revenue Standard.~~our CAG business. The impact from foreign currency movements ~~decreased~~increased gross profit margin by ~~less than 10~~approximately 35 basis points, including the impact of ~~hedges. Gross profit included approximately $5.4 million~~higher hedge gains in the ~~third quarter of 2018 attributed~~current period, as compared to the ~~New Revenue Standard.~~prior period.

Operating Expenses. The increase in sales and marketing expense was primarily due 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 due to higher personnel-related costs, costs related to the impairment of construction in progress production equipment in connection with the discontinuation of our in–house SNAP Fecal product, and increased information technology investments, 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 changes in currency exchange rates, ~~decreased total operating expenses within our segments, which was offset by~~including foreign exchange losses on settlements of foreign currency denominated transactions recorded within Unallocated Amounts, resulting in approximately a 1% decrease to our overall operating expenses. Sales and marketing expense increased approximately 11%, excluding the impact of foreign currency, primarily due to increased personnel-related costs from our expanded global commercial infrastructure. General and administrative expense increased approximately 4%, excluding the impact of foreign currency, primarily due to personnel related costs, partially offset from the benefits of cost control initiatives. Research and development expense increased primarily due to higher project and personnel-related costs, with an ~~overall decrease in operating expenses of less than 1%.~~immaterial impact from foreign currency.

Companion Animal Group

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

໿


	For the Three Months Ended September 30,														For the Three Months Ended September 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⁾		2019		2018		Dollar Change		Reported Revenue Growth⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions	Organic Revenue Growth⁽¹⁾

CAG Diagnostics recurring revenue:	$	409,162	$	364,937	$	44,225	12.1	%	(1.0	)%	—		13.1	%	$	460,974	$	409,162	$	51,812	12.7	%	(1.2	%)	—	13.9	%
IDEXX VetLab consumables	152,509		129,434		23,075		17.8	%	(1.3	)%	—		19.1	%	177,276		152,509		24,767		16.2	%	(1.6	%)	—	17.8	%
Rapid assay products	53,821		50,924		2,897		5.7	%	(0.6	)%	—		6.3	%	58,930		53,821		5,109		9.5	%	(0.5	%)	—	10.0	%
Reference laboratory diagnostic and consulting services	184,103		167,851		16,252		9.7	%	(0.8	)%	—		10.5	%	204,919		184,103		20,816		11.3	%	(1.2	%)	—	12.5	%
CAG diagnostics services and accessories	18,729		16,728		2,001		12.0	%	(1.2	)%	—		13.2	%	19,849		18,729		1,120		6.0	%	(1.3	%)	—	7.3	%
CAG Diagnostics capital - instruments	31,561		29,119		2,442		8.4	%	(2.1	)%	—		10.4	%	32,608		31,561		1,047		3.3	%	(1.6	%)	—	4.9	%
Veterinary software, services and diagnostic imaging systems	37,374		32,630		4,744		14.5	%	(0.4	)%	1.4	%	13.5	%	39,548		37,374		2,174		5.8	%	(0.3	%)	—	6.1	%
Net CAG revenue	$	478,097	$	426,686	$	51,411	12.0	%	(1.0	)%	0.1	%	12.9	%	$	533,130	$	478,097	$	55,033	11.5	%	(1.2	%)	—	12.7	%


(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 to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, ~~supported by our differentiated diagnostic technologies, expanded commercial organization,~~ and to a lesser extent, higher realized prices. ~~CAG Diagnostics recurring~~Greater equivalent business days contributed approximately 2% to revenue ~~included approximately $5.2 million~~growth.

The increase in ~~the third 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 and, to a lesser extent, Procyte Dx^® ~~consumables and Sedivue Dx~~^®~~analyzer pay-per-run sales,~~ consumables. These increases were supported by an 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~~Greater equivalent business days contributed approximately 3% to revenue ~~included approximately $3.1 million in the third quarter of 2018 that was attributed to the New Revenue Standard.~~growth.

The increase in rapid assay revenue resulted ~~from higher sales volumes of canine SNAP~~^® ~~4Dx Plus and single analyte SNAP products. Rapid assay revenue included $0.6 million in the third quarter 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 primarily 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 $1.4 million in the third 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 in instrument revenue reflects increased placements of Catalyst, SediVue Dx, and Procyte Dx~~analyzers, supported by our volume commitment program that we refer to as IDEXX 360. The success of our 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 $6.9 million in the third 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 diagnostic imaging system placements and higher veterinary subscription service revenue, partially offset by lower diagnostic imaging system prices. Veterinary software, services and diagnostic imaging revenue included approximately $1.6 million in the third quarter of 2018 attributed to the New Revenue Standard. Our acquisition of a software company in the third quarter of 2018 also contributed 1.4% to reported revenue growth.

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

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

Revenues $ 478,097
$ 426,686
$ 51,411
12.0 %
Cost of revenue 216,235
191,920
24,315
12.7 %
Gross profit 261,862
54.8 % 234,766
55.0 % 27,096
11.5 %

Operating Expenses:
Sales and marketing 85,655
17.9 % 78,684
18.4 % 6,971
8.9 %
General and administrative 52,113
10.9 % 46,624
10.9 % 5,489
11.8 %
Research and development 21,853
4.6 % 20,187
4.7 % 1,666
8.3 %
Total operating expenses 159,621
33.4 % 145,495
34.1 % 14,126
9.7 %
Income from operations $ 102,241
21.4 % $ 89,271
20.9 % $ 12,970
14.5 %

~~Gross Profit~~. Gross profit increased primarily due to higher sales volume and was offset by a 20 basis point decrease in the gross profit percentage. The decrease 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 impacts related to instrument program mix under the New Revenue Standard. These impacts were partially offset by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio and productivity gains. The impact from foreign currency movements had an immaterial impact to the gross profit margin. Gross profit included approximately $5.3 million in the third quarter of 2018 attributed to the New Revenue Standard.

~~Operating Expenses~~. The increase in sales and marketing expense was primarily due to increased personnel-related costs as we continue to invest in our global commercial infrastructure, offset by approximately $0.5 million related to net deferred costs to obtain contracts under the New Revenue Standard. The increase in general and administrative expense was the result of higher personnel-related costs, costs related to the impairment of construction in progress production equipment in connection with the discontinuation of our in–house SNAP Fecal product, 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 primarily due to increased personnel-related costs. The overall change in currency exchange rates decreased operating expenses by approximately 1%.

~~Water~~

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

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

Revenues $ 33,108
$ 31,030
$ 2,078
6.7 %
Cost of revenue 9,685
9,401
284
3.0 %
Gross profit 23,423
70.7 % 21,629
69.7 % 1,794
8.3 %

Operating Expenses:
Sales and marketing 3,823
11.5 % 3,546
11.4 % 277
7.8 %
General and administrative 3,086
9.3 % 2,949
9.5 % 137
4.6 %
Research and development 640
1.9 % 629
2.0 % 11
1.7 %
Total operating expenses 7,549
22.8 % 7,124
23.0 % 425
6.0 %
Income from operations $ 15,874
47.9 % $ 14,505
46.7 % $ 1,369
9.4 %

~~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 to a lesser extent, the benefit of price increases. The impact of currency movements decreased revenue by approximately 2%. The New Revenue Standard did not have a material impact on Water revenue in the third quarter of 2018.

~~Gross Profit~~.Gross profit increased due to higher sales volumes as well as a 100 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 and decreases in manufacturing costs, partially offset by higher distribution costs. The impact from foreign currency movements was immaterial. The New Revenue Standard did not have a material impact on Water gross profit in the third quarter of 2018.

~~Operating Expenses~~. The increase in sales and marketing expense was primarily due to higher personnel-related costs. General and administrative expenses increased primarily due to personnel-related costs and consultant fees. Research and development expense was relatively unchanged. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 2%.

~~Livestock, Poultry and Dairy~~

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

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

Revenues $ 29,420
$ 28,396
$ 1,024
3.6 %
Cost of revenue 12,187
13,740
(1,553 ) (11.3 %)
Gross profit 17,233
58.6 % 14,656
51.6 % 2,577
17.6 %

Operating Expenses:
Sales and marketing 5,728
19.5 % 6,052
21.3 % (324 ) (5.4 %)
General and administrative 4,684
15.9 % 4,765
16.8 % (81 ) (1.7 %)
Research and development 2,814
9.6 % 2,937
10.3 % (123 ) (4.2 %)
Total operating expenses 13,226
45.0 % 13,754
48.4 % (528 ) (3.8 %)
Income from operations $ 4,007
13.6 % $ 902
3.2 % $ 3,105
344.2 %

~~Revenue~~. The increase in revenue was primarily due to higher herd health screening in the Asia-Pacific region and poultry testing across many regions, as well as the benefit of prices increases. These increases were partially offset by the impact of an African swine fever outbreak in China. We also continue to experience pressure in our dairy business, including impacts of lower milk prices. The unfavorable impact of currency movements decreased revenue by approximately 3%. The New Revenue Standard did not have a material impact on LPD revenue in the third quarter of 2018.

~~Gross Profit~~.The increase in gross profit was due to higher sales volumes as well as a 7% increase in the gross profit percentage. The increase in the gross profit percentage was primarily due to lower product costs, as well as favorable product mix driven by higher herd health screening. The impact from foreign currency movements increased gross profit margin by less than 10 basis points, including the impact of hedges.

~~Operating Expenses~~. The decrease in sales and marketing expense was primarily due to lower personnel-related costs. General and administrative and research and development costs were consistent as compared to the prior period. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 3%.

~~Other~~

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

໿

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

Revenues $ 4,823
$ 5,864
$ (1,041 ) (17.8 %)
Cost of revenue 2,171
2,252
(81 ) (3.6 %)
Gross profit 2,652
55.0 % 3,612
61.6 % (960 ) (26.6 %)

Operating Expenses:
Sales and marketing 423
8.8 % 438
7.5 % (15 ) (3.4 %)
General and administrative 1,557
32.3 % 843
14.4 % 714
84.7 %
Research and development 229
4.7 % 217
3.7 % 12
5.5 %
Total operating expenses 2,209
45.8 % 1,498
25.5 % 711
47.5 %
Income from operations $ 443
9.2 % $ 2,114
36.1 % $ (1,671 ) (79.0 %)

~~Revenue~~.The decrease in revenue was due to lower volumes of our OPTI Medical analyzers and related consumables in the Middle East and Asia, partially offset by higher realized prices of our OPTI Medical products and services. The impact of currency movements on revenue was immaterial.

~~Gross Profit~~. The decrease in gross profit was due to a 6.6% decrease in the gross profit percentage primarily due to unfavorable product mix and higher service and distribution expense, partially offset by higher OPTI Medical realized prices. The overall change in currency exchange rates had an immaterial impact on the gross profit percentage.

~~Operating Expenses~~. The increase in general and administrative expenses were primarily due to bad debt reserves established as a result of the impact of economic and political instability on certain customers in the Middle East. Sales and marketing and research and development costs were consistent as compared to the prior period.

~~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 September 30, Change
Results of Operations
(dollars in thousands)
2018 2017 Amount Percentage

Revenues $ —
$ —
$ —
—
Cost of revenue (473 ) 661
(1,134 ) NM
Gross profit 473
(661 ) 1,134
NM

Operating Expenses:
Sales and marketing (483 ) 98
(581 ) NM
General and administrative 2,515
2,005
510
25.4 %
Research and development 3,656
3,615
41
1.1 %
Total operating expenses 5,688
5,718
(30 ) (0.5 %)
Loss from operations $ (5,215 ) $ (6,379 ) $ 1,164
(18.2 %)

~~NM - Not Meaningful~~

~~Unallocated Amounts~~. The net change in cost of revenue and operating expenses was primarily due to lower unallocated employee benefit and incentive costs, as well as corporate function costs as a result of increased allocations to our segments, largely offset by foreign exchange losses on settlements of foreign currency denominated transactions compared to gains in the prior period.

~~Non-Operating Items~~

~~Interest Income~~. Interest income was $0.1 million for the three months ended September 30, 2018, as compared to $1.4 million for the three months ended September 30, 2017. The decrease in interest income was primarily due 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 third quarter of 2018.

~~Interest Expense~~. Interest expense was $8.5 million for the three months ended September 30, 2018, as compared to $9.8 million for the same period in the prior year. The decrease in interest expense was due to a lower average balance on our Credit Facility, partially offset by higher variable interest rates.

~~Provision for Income Taxes~~.Our effective income tax rate was 14.5% for the three months ended September 30, 2018, as compared to 23.4% for the three months ended September 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 of the 2017 Tax Act and tax benefits related to share-based compensation.

~~Results of Operations~~

~~Nine Months Ended~~ ~~September 30, 2018, Compared to Nine Months Ended September 30, 2017~~

~~Comparison to Prior Periods~~. Our nine month period ended on September 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 Nine Months Ended September 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 $ 1,456,417
$ 1,269,861
$ 186,556
14.7 % 1.5 % 0.1 % 13.1 %
United States 962,712
846,968
115,744
13.7 % —
0.1 % 13.6 %
International 493,705
422,893
70,812
16.7 % 4.3 % —
12.4 %

Water 94,909
85,531
9,378
11.0 % 1.1 % —
9.8 %
United States 45,539
42,357
3,182
7.5 % —
—
7.5 %
International 49,370
43,174
6,196
14.4 % 2.3 % —
12.1 %

LPD 96,658
91,266
5,392
5.9 % 3.1 % —
2.8 %
United States 10,496
10,493
3
—
—
—
—
International 86,162
80,773
5,389
6.7 % 3.5 % —
3.2 %

Other 15,872
16,279
(407 ) (2.5 %) 0.5 % —
(3.0 %)

Total Company $ 1,663,856
$ 1,462,937
$ 200,919
13.7 % 1.5 % 0.1 % 12.1 %
United States 1,024,889
905,765
119,124
13.2 % —
0.1 % 13.0 %
International 638,967
557,172
81,795
14.7 % 4.0 % —
10.7 %


~~(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. Our Water business also contributed to our international growth, primarily from higher sales volumes ofacross our ~~Colilert test products and related accessories. Total company revenue included approximately $41.1 million in the first nine months of 2018 that was attributed to the New Revenue Standard.~~

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

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

Revenues $ 1,663,856
$ 1,462,937
$ 200,919
13.7 %
Cost of revenue 722,675
638,029
84,646
13.3 %
Gross profit 941,181
56.6 % 824,908
56.4 % 116,273
14.1 %

Operating Expenses:
Sales and marketing 291,502
17.5 % 263,755
18.0 % 27,747
10.5 %
General and administrative 185,966
11.2 % 165,560
11.3 % 20,406
12.3 %
Research and development 87,725
5.3 % 80,373
5.5 % 7,352
9.1 %
Total operating expenses 565,193
34.0 % 509,688
34.8 % 55,505
10.9 %
Income from operations $ 375,988
22.6 % $ 315,220
21.5 % $ 60,768
19.3 %

~~Gross Profit. Gross profit increased due to higher sales volumes and a 20 basis point increase in the gross profit percentage. The increase in the gross profit percentage was supported~~SNAP^® product portfolio, driven by the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, the favorable impact of lower product costs and productivity gains. These impacts were partially offset 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 impacts related to instrument program mix under the New Revenue Standard. 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 $17.1 million in the first nine months of 2018 attributed to the New Revenue Standard.

~~Operating Expenses~~. The increase in sales and marketing expense was primarily due 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 higher personnel-related costs, 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 costs related to the impairment of construction in progress production equipment in connection with the discontinuation of our in–house SNAP Fecal product. These increases were 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 2%, including foreign exchange losses on settlements of foreign currency denominated transactions recorded within Unallocated Amounts.

~~Companion Animal Group~~

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

໿

For the Nine Months Ended September 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: $ 1,252,876
$ 1,091,936
$ 160,940
14.7 % 1.5 % —
13.2 %
IDEXX VetLab consumables 460,642
385,081
75,561
19.6 % 1.7 % —
17.9 %
Rapid assay products 169,200
159,085
10,115
6.4 % 0.7 % —
5.7 %
Reference laboratory diagnostic and consulting services 568,308
498,218
70,090
14.1 % 1.6 % —
12.5 %
CAG diagnostics services and accessories 54,726
49,552
5,174
10.4 % 1.6 % —
8.8 %
CAG Diagnostics capital - instruments 97,000
83,018
13,982
16.8 % 2.1 % —
14.7 %
Veterinary software, services and diagnostic imaging systems 106,541
94,907
11,634
12.3 % 0.3 % 1.1 % 10.8 %
Net CAG revenue $ 1,456,417
$ 1,269,861
$ 186,556
14.7 % 1.5 % 0.1 % 13.1 %


~~(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 to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, supported by our differentiated diagnostic technologies, expanded commercial organization,^® 4Dx^® Plus, and to a lesser extent, higher realized prices. ~~CAG Diagnostics recurring~~Greater equivalent business days contributed approximately 3% to revenue ~~included approximately $14.2 million in the first nine months 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 Dxanalyzer 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 $9.2 million in the first nine months 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. Rapid assay revenue included approximately $0.9 million in the first nine months of 2018 that was attributed to the New Revenue Standard.growth.

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,~~as well as higher average unit sales prices. ~~Reference laboratory diagnostic and consulting revenue included approximately $4.2 million during the first nine months of 2018 that was attributed to the New Revenue Standard.~~

The increase in 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 placements of~~higher Catalyst ~~SediVue~~One, Procyte Dx, and ~~to a lesser extent, Procyte~~LaserCyte^® Dx ~~analyzers, supported~~instrument placements. These increases were partially offset by ~~the introduction of IDEXX 360 in the first quarter of 2018. The success of~~lower allocated revenue per unit on our IDEXX ~~360 program caused a shift away from both~~VetLab instruments related to increased international placements under our ~~instrument rebate and reagent~~customer volume commitment programs.

rental programs, which resulted in increased upfront instrument revenue recognition attributed to the New Revenue Standard. CAG Diagnostics capital instrument revenue included approximately $22.6 million in the first nine months 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-based 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 ~~relative~~allocated revenue per unit on our diagnostic imaging systems related to increased placements under our customer volume commitment programs, as well as comparisons to high digital imaging system ~~prices. Veterinary software, services and diagnostic imaging revenue included approximately $3.7 million~~placement levels in the first nine months of 2018 attributed to the New Revenue Standard. Our acquisition of a software company in the third quarter of 2018 and two software companies in the second quarter of 2017 also contributed 1.1% to reported revenue growth.prior year.

The following table presents the CAG segment results of operations:


	For the Nine Months Ended September 30,								Change				For the Three Months Ended September 30,								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	$	1,456,417			$	1,269,861			$	186,556	14.7	%	$	533,130			$	478,097			$	55,033	11.5	%
Cost of revenue	646,712				563,939				82,773		14.7	%
Cost of revenues													235,041				216,235				18,806		8.7	%
Gross profit	809,705		55.6	%	705,922		55.6	%	103,783		14.7	%	298,089		55.9	%	261,862		54.8	%	36,227		13.8	%

Operating Expenses:
Sales and marketing	259,429		17.8	%	232,840		18.3	%	26,589		11.4	%	94,234		17.7	%	85,655		17.9	%	8,579		10.0	%
General and administrative	153,241		10.5	%	136,087		10.7	%	17,154		12.6	%	54,424		10.2	%	52,113		10.9	%	2,311		4.4	%
Research and development	64,600		4.4	%	59,138		4.7	%	5,462		9.2	%	24,941		4.7	%	21,853		4.6	%	3,088		14.1	%
Total operating expenses	477,270		32.8	%	428,065		33.7	%	49,205		11.5	%	173,599		32.6	%	159,621		33.4	%	13,978		8.8	%
Income from operations	$	332,435	22.8	%	$	277,857	21.9	%	$	54,578	19.6	%	$	124,490	23.4	%	$	102,241	21.4	%	$	22,249	21.8	%

Gross Profit. Gross profit increased primarily due to higher sales ~~volume. The~~volume as well as a 110 basis point increase in the gross profit ~~percentage~~margin. The increase in gross profit margin was ~~relatively unchanged. The~~driven by the mix benefits from high growth in IDEXX VetLab consumable revenues, volume leverage, lower product costs, as well as the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, ~~and the favorable impact of productivity gains were~~partially offset by ~~higher information technology costs, including costs that were previously captured within operating expenses, as well as increased~~incremental investments in reference laboratory capacity and ~~employee benefits, as well as unfavorable impacts related to instrument program mix under the New Revenue Standard.~~software services field resources. The impact from foreign currency movements ~~had an immaterial impact on the~~increased gross profit ~~margin. Gross profit included~~margin by approximately ~~$16.7 million~~20 basis points, including the impact of higher hedge gains in the ~~first nine months of 2018 attributed~~current period, as compared to the ~~New Revenue Standard.~~prior period.

Operating Expenses. The increase in sales and marketing expense was primarily due to increased personnel-related costs ~~as we continue~~related to ~~invest in~~ our expanded global commercial ~~infrastructure, offset by approximately $1.5 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. The increase in research and development expense was primarily due to increased personnel-related costs ~~incremental information technology investments,~~ and ~~costs related~~higher project costs. The overall change in currency exchange rates decreased operating expenses by approximately 1%.

Water

The following table presents the Water segment results of operations:



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

Revenues	$	34,906			$	33,108			$	1,798		5.4	%
Cost of revenue	9,536				9,685				(149		)	(1.5	%)
Gross profit	25,370		72.7	%	23,423		70.7	%	1,947			8.3	%

Operating Expenses:
Sales and marketing	4,012		11.5	%	3,823		11.5	%	189			4.9	%
General and administrative	3,290		9.4	%	3,086		9.3	%	204			6.6	%
Research and development	1,023		2.9	%	640		1.9	%	383			59.8	%
Total operating expenses	8,325		23.8	%	7,549		22.8	%	776			10.3	%
Income from operations	$	17,045	48.8	%	$	15,874	47.9	%	$	1,171		7.4	%

Revenue. The increase in revenue was primarily attributable to the ~~impairment~~benefit of ~~construction~~price increases and higher sales volumes of our Colilert test products and related accessories used in ~~progress production equipment~~coliform and E. coli testing, with strong volume growth rates in ~~connection~~most regions, including the U.S. The impact of currency movements decreased revenue by approximately 1.7%.

Gross Profit.Gross profit increased due to higher sales volumes, as well as a 200 basis point increase in the gross profit margin. Foreign currency movements increased the gross profit margin by approximately 90 basis points, including the impact of higher hedge gains in the current period, as compared to the prior period. The remaining increase in the gross profit margin was primarily due to the net benefit of price increases and favorable product mix, partially offset by higher product costs.

Operating Expenses. The increases in sales and marketing and research and development expenses were primarily due to higher personnel-related costs. The realignment of certain personnel within operating expense categories also increased research and development costs and reduced sales and marketing costs. General and administrative expense increased primarily due to increased personnel-related costs. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 2%.

Livestock, Poultry and Dairy

The following table presents the LPD segment results of operations:



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

Revenues	$	31,370			$	29,420			$	1,950		6.6	%
Cost of revenue	13,225				12,187				1,038			8.5	%
Gross profit	18,145		57.8	%	17,233		58.6	%	912			5.3	%

Operating Expenses:
Sales and marketing	5,716		18.2	%	5,728		19.5	%	(12		)	(0.2	%)
General and administrative	4,174		13.3	%	4,684		15.9	%	(510		)	(10.9	%)
Research and development	3,261		10.4	%	2,814		9.6	%	447			15.9	%
Total operating expenses	13,151		41.9	%	13,226		45.0	%	(75		)	(0.6	%)
Income from operations	$	4,994	15.9	%	$	4,007	13.6	%	$	987		24.6	%

Revenue. The prolonged outbreak of African swine fever in Asia, which began with the ~~discontinuation of our in–house SNAP Fecal product.~~first reported outbreak in August 2018, continues to negatively impact the swine population in China, however demand for new diagnostic testing programs has increased and diagnostic testing for alternative food sources has also increased, including poultry, which more than offset the lower recurring swine testing volumes. Revenue growth in the quarter also benefited from a favorable comparison to soft prior year results in Asia, in part impacted by the African swine fever outbreak. These ~~increases~~favorable factors were partially offset by ~~certain information technology~~lower herd health screening, which compares to very strong prior year levels, and the unfavorable impact of foreign currency movements that decreased revenue by 2.9%.

Gross Profit.The increase in gross profit was primarily due to higher sales volume, partially offset by an 80 basis point decrease in the gross profit margin. Foreign currency movements increased the gross profit margin by approximately 170 basis points, including the impact of higher hedge gains in the current period, as compared to the prior period. The overall decrease in the gross profit margin was driven by higher product related costs ~~that are now captured within~~and product mix impacts from lower herd health screening volumes.

Operating Expenses. The decrease in sales and marketing expense was primarily due to lower personnel-related costs mostly offset by third-party costs. The decrease in general and administrative expense was primarily due to lower third-party services and travel costs, as a result of cost ~~of revenue.~~control initiatives. The increase in research and development expense was primarily due to increased personnel-related costs. The overall change in currency exchange rates resulted in ~~an increase in operating expenses by approximately 1%.~~

~~Water~~

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

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

Revenues $ 94,909
$ 85,531
$ 9,378
11.0 %
Cost of revenue 28,045
25,775
2,270
8.8 %
Gross profit 66,864
70.5 % 59,756
69.9 % 7,108
11.9 %

Operating Expenses:
Sales and marketing 11,991
12.6 % 10,714
12.5 % 1,277
11.9 %
General and administrative 9,484
10.0 % 8,734
10.2 % 750
8.6 %
Research and development 1,931
2.0 % 1,887
2.2 % 44
2.3 %
Total operating expenses 23,406
24.7 % 21,335
24.9 % 2,071
9.7 %
Income from operations $ 43,458
45.8 % $ 38,421
44.9 % $ 5,037
13.1 %

~~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 to~~ a lesser extent, 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 $0.6 million in the first nine months of 2018 was attributed to the New Revenue Standard, as a result of accelerated revenue recognition upon shipping to the customer instead of delivery to the customer. The favorable impact of currency movements increased revenue by approximately 1%.

~~Gross Profit~~.Gross profit increased due to higher sales volumes as well as a 60 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, and to a lesser extent, decreases in manufacturing costs. The impact from foreign currency movements decreased gross profit margin by approximately 40 basis points, including the impact of hedges. Gross profit included approximately $0.5 million in the first nine months of 2018 attributed to the New Revenue Standard.

~~Operating Expenses~~. The increase in sales and marketing expense was primarily due to higher personnel-related costs. General and administrative expenses increased primarily due to personnel-related costs and consultant fees. Research and development expense was relatively unchanged. The overall change in currency exchange rates resulted in an increasedecrease in operating expenses of approximately 1%2%.

~~Livestock, Poultry and Dairy~~

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

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

Revenues $ 96,658
$ 91,266
$ 5,392
5.9 %
Cost of revenue 41,091
40,083
1,008
2.5 %
Gross profit 55,567
57.5 % 51,183
56.1 % 4,384
8.6 %

Operating Expenses:
Sales and marketing 18,847
19.5 % 18,528
20.3 % 319
1.7 %
General and administrative 14,399
14.9 % 13,927
15.3 % 472
3.4 %
Research and development 8,882
9.2 % 8,848
9.7 % 34
0.4 %
Total operating expenses 42,128
43.6 % 41,303
45.3 % 825
2.0 %
Income from operations $ 13,439
13.9 % $ 9,880
10.8 % $ 3,559
36.0 %

~~Revenue~~. The increase in revenue was primarily due to higher herd health screening in the Asia-Pacific region and an increase in recurring poultry and livestock testing in Latin America and Europe. These increases were partially offset by the impact of an African swine fever outbreak in China and continued pressure on our dairy business, including impacts from lower milk prices. The favorable impact of currency movements increased revenue by approximately 3%. The New Revenue Standard did not have a material impact on LPD revenue in the first nine months of 2018.

~~Gross Profit~~.The increase in gross profit was due to higher sales volume as well as a 140 basis point increase in the gross profit percentage. The increase in the gross profit percentage reflected lower product costs, as well as favorable product mix driven by higher herd health screening. The impact from foreign currency movements increased gross profit margin by approximately 20 basis points, including the impact of hedges.

~~Operating Expenses~~. The increase in sales and marketing expense was primarily due 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 primarily due 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 1%.

Other

The following table presents the Other results of operations:

໿


	For the Nine Months Ended September 30,								Change					For the Three Months Ended September 30,								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	$	15,872			$	16,279			$	(407	)	(2.5	%)	$	5,897			$	4,823			$	1,074		22.3	%
Cost of revenue	8,533				8,053				480			6.0	%	3,032				2,171				861			39.7	%
Gross profit	7,339		46.2	%	8,226		50.5	%	(887		)	(10.8	%)	2,865		48.6	%	2,652		55.0	%	213			8.0	%

Operating Expenses:
Sales and marketing	1,382		8.7	%	1,658		10.2	%	(276		)	(16.6	%)	357		6.1	%	423		8.8	%	(66		)	(15.6	%)
General and administrative	3,134		19.7	%	2,460		15.1	%	674			27.4	%	683		11.6	%	1,557		32.3	%	(874		)	(56.1	%)
Research and development	752		4.7	%	833		5.1	%	(81		)	(9.7	%)	446		7.6	%	229		4.7	%	217			94.8	%
Total operating expenses	5,268		33.2	%	4,951		30.4	%	317			6.4	%	1,486		25.2	%	2,209		45.8	%	(723		)	(32.7	%)
Income from operations	$	2,071	13.0	%	$	3,275	20.1	%	$	(1,204	)	(36.8	%)	$	1,379	23.4	%	$	443	9.2	%	$	936		211.3	%

Revenue.The ~~decrease~~increase in revenue was primarily due to ~~lower~~higher volumes of our OPTI Medical analyzers and related consumables in the Middle East and Asia, partially offset by 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.~~services, partially offset by lower realized prices. Revenue growth also benefited from a favorable comparison to soft prior year results in the Middle East and Asia. The ~~favorable~~ impact of currency movements ~~increased~~on revenue ~~by approximately 50 basis points.~~was immaterial.

Gross Profit. The ~~decrease~~increase in gross profit was primarily due to higher volumes, despite a ~~4.3%~~6.4% decrease in the gross profit ~~percentage~~margin primarily due to lower price realization, higher ~~OPTI Medical product~~service costs and unfavorable product ~~mix, and to a lesser extent, service and distribution costs,~~mix. These decreases in the gross profit margin were partially offset by ~~higher~~lower costs on OPTI Medical ~~realized price~~products and ~~increased royalties.~~lower distribution expense. The overall change in currency exchange rates had an immaterial impact on ~~the~~ gross ~~profit percentage.~~profit.

Operating Expenses. The ~~decreases~~decrease in sales and marketing ~~and research and development expenses were~~expense was primarily due to lower ~~personnel~~personnel-related costs. The ~~increase~~decrease in general and administrative ~~costs were~~expense was primarily due to the recovery of previously established bad debt reserves ~~established as a result of the impact of economic and political instability on certain customers~~ in the Middle East. The increase in research and development cost was primarily due to higher personnel-related and project costs.

Unallocated Amounts

The following table presents the Unallocated Amounts results of operations:


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

Revenues	$	—		$	—		$	—		—		$	—		$	—		$	—		—
Cost of revenue	(1,706		)	179			(1,885		)	NM		(481		)	(473		)	(8		)	1.7	%
Gross profit	1,706			(179		)	1,885			NM		481			473			8			1.7	%

Operating Expenses:
Sales and marketing	(147		)	15			(162		)	NM		232			(483		)	715			(148.0	%)
General and administrative	5,708			4,352			1,356			31.2	%	3,766			2,515			1,251			49.7	%
Research and development	11,560			9,667			1,893			19.6	%	4,589			3,656			933			25.5	%
Total operating expenses	17,121			14,034			3,087			22.0	%	8,587			5,688			2,899			51.0	%
Loss from operations	$	(15,415	)	$	(14,213	)	$	(1,202	)	8.5	%	$	(8,106	)	$	(5,215	)	$	(2,891	)	55.4	%

~~NM - Not Meaningful~~

Unallocated Amounts. The ~~net~~ change in unallocated amounts was due to higher unallocated employee incentive costs and higher unallocated employee benefit costs, partially offset by lower unallocated corporate function costs due to cost control initiatives.

Non-Operating Items

Interest Expense. Interest expense was $7.1 million for the three months ended September 30, 2019, as compared to $8.5 million for the same period in the prior year. The decrease in interest expense was the result of lower average debt levels, offset by slightly higher interest 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 18.0% for the three months ended September 30, 2019, as compared to 14.5% for the three months ended September 30, 2018. The increase in our effective tax rate was primarily driven by lower tax benefits from share-based compensation.

During the quarter, the Swiss government enacted changes to Swiss federal tax laws and required all Swiss cantons to make conforming changes to their own laws. As the cantons consider how to implement the required changes throughout this year and in early 2020, we will continue assessing the impact, if any, of the canton’s adoption of Swiss federal tax reform. The impact of any such change will be recorded upon the date of canton's enactment.

Results of Operations

Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018

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



	For the Nine Months Ended September 30,
Net Revenue (dollars in thousands)	2019		2018		Dollar Change			Reported Revenue Growth⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth⁽¹⁾

CAG	$	1,589,397	$	1,456,417	$	132,980		9.1	%	(1.8	%)	0.1	%	10.9	%
United States	1,062,715		962,712		100,003			10.4	%	—		0.1	%	10.3	%
International	526,682		493,705		32,977			6.7	%	(5.5	%)	0.1	%	12.1	%

Water	99,980		94,909		5,071			5.3	%	(2.9	%)	—		8.3	%
United States	48,157		45,539		2,618			5.8	%	—		—		5.8	%
International	51,823		49,370		2,453			5.0	%	(5.7	%)	—		10.7	%

LPD	95,980		96,658		(678		)	(0.7	%)	(4.8	%)	—		4.1	%
United States	10,221		10,496		(275		)	(2.6	%)	—		—		(2.6	%)
International	85,759		86,162		(403		)	(0.5	%)	(5.4	%)	—		5.0	%

Other	16,105		15,872		233			1.5	%	—		—		1.5	%

Total Company	$	1,801,462	$	1,663,856	$	137,606		8.3	%	(2.1	%)	0.1	%	10.3	%
United States	1,127,347		1,024,889		102,458			10.0	%	—		0.1	%	9.9	%
International	674,115		638,967		35,148			5.5	%	(5.4	%)	0.1	%	10.9	%


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

The following table presents total Company results of operations:



	For the Nine Months Ended September 30,								Change
Total Company - Results of Operations (dollars in thousands)	2019		Percent of Revenue		2018		Percent of Revenue		Amount		Percentage

Revenues	$	1,801,462			$	1,663,856			$	137,606	8.3	%
Cost of revenue	767,062				722,675				44,387		6.1	%
Gross profit	1,034,400		57.4	%	941,181		56.6	%	93,219		9.9	%

Operating Expenses:
Sales and marketing	312,499		17.3	%	291,502		17.5	%	20,997		7.2	%
General and administrative	186,653		10.4	%	185,966		11.2	%	687		0.4	%
Research and development	98,033		5.4	%	87,725		5.3	%	10,308		11.8	%
Total operating expenses	597,185		33.2	%	565,193		34.0	%	31,992		5.7	%
Income from operations	$	437,215	24.3	%	$	375,988	22.6	%	$	61,227	16.3	%

Gross Profit. Gross profit increased due to higher sales volumes and an 80 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by several factors, including the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, mix benefits from high growth in IDEXX VetLab consumable revenues, volume leverage, and the favorable impact of lower product costs in our CAG business. The impact from foreign currency movements increased gross profit margin by approximately 20 basis points, including the impact of hedge gains in the current year, as compared to hedge losses in the prior year.

Operating Expenses. The overall change in currency exchange rates resulted in a decrease in operating expenses ~~was primarily due to~~of approximately 2%, including lower foreign exchange losses on settlements of foreign currency denominated transactions recorded within Unallocated Amounts. Sales and marketing expense increased approximately 9%, excluding the impact of foreign currency, primarily due to increased personnel-related costs related to our expanded global commercial infrastructure. General and administrative expense increased approximately 2.5%, excluding the impact of foreign currency, primarily due to personnel related costs, partially offset from the benefits of cost control initiatives across our business segments. Research and development expense increased primarily due to higher personnel-related costs, with an immaterial impact from foreign currency.

Companion Animal Group

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

໿



	For the Nine Months Ended September 30,
Net Revenue (dollars in thousands)	2019		2018		Dollar Change			Reported Revenue Growth ⁽¹⁾		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth ⁽¹⁾

CAG Diagnostics recurring revenue:	$	1,382,196	$	1,252,876	$	129,320		10.3	%	(1.9	%)	—		12.2	%
IDEXX VetLab consumables	519,646		460,642		59,004			12.8	%	(2.4	%)	—		15.2	%
Rapid assay products	181,966		169,200		12,766			7.5	%	(1.0	%)	—		8.5	%
Reference laboratory diagnostic and consulting services	621,469		568,308		53,161			9.4	%	(1.8	%)	—		11.1	%
CAG diagnostics services and accessories	59,115		54,726		4,389			8.0	%	(2.3	%)	—		10.3	%
CAG Diagnostics capital - instruments	92,883		97,000		(4,117		)	(4.2	%)	(2.5	%)	—		(1.8	%)
Veterinary software, services and diagnostic imaging systems	114,318		106,541		7,777			7.3	%	(0.4	%)	1.3	%	6.4	%
Net CAG revenue	$	1,589,397	$	1,456,417	$	132,980		9.1	%	(1.8	%)	0.1	%	10.9	%


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

The increase in IDEXX VetLabconsumables revenue was primarily due to higher sales volumes across all regions for our Catalyst consumables, and to a lesser extent, Procyte Dx consumables. These increases were supported by an expansion of our instrument installed base, growth in testing by new and existing customers, our expanded menu of available tests, and to a lesser extent, benefits from higher average unit sales prices.

The increase in rapid assay revenue resulted primarily from higher sales volumes across our SNAP product portfolio, driven by SNAP 4Dx Plus, and to a lesser extent, higher 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 SDMAand fecal antigen testing. The increase was also the result of higher average unit sales prices.

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

CAG Diagnostics Capital – Instruments Revenue. The decrease in instrument revenue reflects the impact of product mix, including lower SediVue Dx placements compared to high prior year levels, as well as the impact of lower allocated revenue per unit on our IDEXX VetLab instruments related to increased international placements under our customer volume commitment programs, partially offset by higher Catalyst and Procyte Dx instrument placements.

our volume commitment programs. Our acquisition of a software company in the second half of 2018 contributed approximately 1.3% to reported revenue growth.

The following table presents the CAG segment results of operations:



	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2019		Percent of Revenue		2018		Percent of Revenue		Amount		Percentage

Revenues	$	1,589,397			$	1,456,417			$	132,980	9.1	%
Cost of revenue	692,181				646,712				45,469		7.0	%
Gross profit	897,216		56.5	%	809,705		55.6	%	87,511		10.8	%

Operating Expenses:
Sales and marketing	282,240		17.8	%	259,429		17.8	%	22,811		8.8	%
General and administrative	158,785		10.0	%	153,241		10.5	%	5,544		3.6	%
Research and development	72,096		4.5	%	64,600		4.4	%	7,496		11.6	%
Total operating expenses	513,121		32.3	%	477,270		32.8	%	35,851		7.5	%
Income from operations	$	384,095	24.2	%	$	332,435	22.8	%	$	51,660	15.5	%

Gross Profit. Gross profit increased primarily due to higher sales volume as well as a 90 basis point increase in the gross profit margin. The increase in gross profit margin was driven by mix benefits from high growth in IDEXX VetLab consumable revenues, volume leverage, lower product costs, as well as the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio, partially offset by incremental investments in reference laboratory capacity and software services field resources. The impact from foreign currency movements increased gross profit margin by approximately 10 basis points, including the impact of hedge gains in the current year, as compared to hedge losses in the prior ~~period~~year.

Operating Expenses. The increase in sales and anmarketing expense was primarily due to increased ~~investment~~personnel-related costs as we continue to invest in our global commercial infrastructure. The increase in general and administrative expense resulted primarily from higher personnel-related costs. The increase in research and development expense was primarily due to increased personnel-related costs and higher project costs. The overall change in currency exchange rates resulted in a decrease in operating expenses by approximately 2%.

Water

The following table presents the Water segment results of operations:



	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	99,980			$	94,909			$	5,071		5.3	%
Cost of revenue	27,595				28,045				(450		)	(1.6	%)
Gross profit	72,385		72.4	%	66,864		70.5	%	5,521			8.3	%

Operating Expenses:
Sales and marketing	11,968		12.0	%	11,991		12.6	%	(23		)	(0.2	%)
General and administrative	9,936		9.9	%	9,484		10.0	%	452			4.8	%
Research and development	3,087		3.1	%	1,931		2.0	%	1,156			59.9	%
Total operating expenses	24,991		25.0	%	23,406		24.7	%	1,585			6.8	%
Income from operations	$	47,394	47.4	%	$	43,458	45.8	%	$	3,936		9.1	%

Revenue. The increase in revenue was 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 across all regions. The impact of currency movements decreased revenue by approximately 2.9%.

Gross Profit.Gross profit increased due to higher sales volumes as well as a 190 basis point increase in the gross profit margin. Foreign currency movements increased the gross profit margin by approximately 80 basis points, including the impact of hedge gains in the current year, as compared to hedge losses in the prior year. The remaining increase in the gross profit margin was primarily due to the net benefit of price increases, partially offset by higher product and distribution costs.

Operating Expenses. While both sales and marketing and research and development expenses had higher personnel-related costs, the overall decrease in sales and marketing expense and increase in research and development expense were primarily due to the realignment of certain personnel within operating expense categories. General and administrative expense increased primarily due to personnel-related costs. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 2.5%.

Livestock, Poultry and Dairy

The following table presents the LPD segment results of operations:



	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	95,980			$	96,658			$	(678	)	(0.7	%)
Cost of revenue	39,098				41,091				(1,993		)	(4.9	%)
Gross profit	56,882		59.3	%	55,567		57.5	%	1,315			2.4	%

Operating Expenses:
Sales and marketing	16,898		17.6	%	18,847		19.5	%	(1,949		)	(10.3	%)
General and administrative	13,013		13.6	%	14,399		14.9	%	(1,386		)	(9.6	%)
Research and development	9,334		9.7	%	8,882		9.2	%	452			5.1	%
Total operating expenses	39,245		40.9	%	42,128		43.6	%	(2,883		)	(6.8	%)
Income from operations	$	17,637	18.4	%	$	13,439	13.9	%	$	4,198		31.2	%

Revenue. The decrease in revenue was primarily due to the unfavorable impact of foreign currency movements that decreased revenue by approximately 4.8%. On an organic basis, the increase in growth was primarily due to increased herd health screening, new diagnostic testing programs in Asia, higher poultry testing volumes across our Asia Pacific and European regions, and higher pregnancy testing in our European and Asia Pacific regions. These increases were partially offset by lower bovine testing across most regions, primarily in Europe, and a decline in diagnostic testing related to African swine fever outbreaks in China.

Gross Profit.The increase in gross profit was primarily due to higher sales volumes as well as a 180 basis point increase in the gross profit margin. The impact from foreign currency movements increased gross profit margin by approximately 140 basis points, including the impact of hedges. The remaining increase in the gross profit margin reflected favorable product mix from higher herd health screening, as well as lower product costs.

Operating Expenses. The decrease in sales and marketing expense was primarily due to lower personnel-related costs, including cost control initiatives. The decrease in general and administrative expense was primarily due to lower third-party services. The increase in research and development expense was primarily due to increased personnel-related costs. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 3%.

Other

The following table presents the Other results of operations:

໿



	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2019		Percent of Revenue		2018		Percent of Revenue		Amount			Percentage

Revenues	$	16,105			$	15,872			$	233		1.5	%
Cost of revenue	8,487				8,533				(46		)	(0.5	%)
Gross profit	7,618		47.3	%	7,339		46.2	%	279			3.8	%

Operating Expenses:
Sales and marketing	1,039		6.5	%	1,382		8.7	%	(343		)	(24.8	%)
General and administrative	1,556		9.7	%	3,134		19.7	%	(1,578		)	(50.4	%)
Research and development	1,366		8.5	%	752		4.7	%	614			81.6	%
Total operating expenses	3,961		24.6	%	5,268		33.2	%	(1,307		)	(24.8	%)
Income from operations	$	3,657	22.7	%	$	2,071	13.0	%	$	1,586		76.6	%

Revenue.The increase in revenue was due to higher volumes of our OPTI Medical products and services, partially offset by lower realized prices. The impact of currency movements on revenue was immaterial.

Gross Profit. The increase in gross profit was due to a 110 basis point increase in the gross profit margin primarily due to the benefit of product mix within our OPTI Medical product line and, to a lesser extent, lower OPTI Medical product costs. These increases were partially offset by higher OPTI Medical service costs and lower realized prices. The overall change in currency exchange rates had an immaterial impact on the gross profit margin.

Operating Expenses. The decrease in sales and marketing was primarily due to lower personnel costs. The decrease in general and administrative cost was primarily due to the recovery of previously established bad debt reserves in Africa and the Middle East. The increase in research and development cost was primarily due to higher personnel-related and project costs.

Unallocated Amounts

The following table presents the Unallocated Amounts results of operations:



	For the Nine Months Ended September 30,						Change
Results of Operations (dollars in thousands)	2019			2018			Amount			Percentage

Revenues	$	—		$	—		$	—		—
Cost of revenue	(299		)	(1,706		)	1,407			(82.5	%)
Gross profit	299			1,706			(1,407		)	(82.5	%)

Operating Expenses:
Sales and marketing	354			(147		)	501			(340.8	%)
General and administrative	3,363			5,708			(2,345		)	(41.1	%)
Research and development	12,150			11,560			590			5.1	%
Total operating expenses	15,867			17,121			(1,254		)	(7.3	%)
Loss from operations	$	(15,568	)	$	(15,415	)	$	(153	)	1.0	%

Unallocated Amounts. The change in unallocated amounts was due to higher unallocated employee incentive costs, partially offset by lower unallocated ~~employee incentive costs and~~ corporate function costs, ~~as a result~~lower unallocated employee benefit costs, and lower foreign exchange losses on settlements of ~~increased allocations to our segments.~~foreign currency denominated transactions.

Non-Operating Items

Interest Income. Interest income was $0.2 million for the nine months ended September 30, 2019, as compared to $0.9 million for the nine months ended September 30, ~~2018, as compared to $3.7 million for the nine months ended September 30, 2017.~~2018. The decrease in interest income was primarily due 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 $0.8 million in the first nine months of 2018.

Interest Expense. Interest expense was ~~$26.2~~$23.7 million for the nine months ended September 30, ~~2018,~~2019, as compared to ~~$27.5~~$26.2 million for the same period in the prior year. The decrease in interest expense was ~~due to a~~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 18.5% for the nine months ended September 30, 2019, as compared to 16.9% for the nine months ended September 30, ~~2018, as compared to 22.8% for~~2018. The increase in the ~~nine months ended September 30, 2017. The decrease in our~~ effective tax rate was primarily ~~related to~~driven by 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 ~~Act~~Cut and ~~tax benefits related to share-based compensation.~~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 September 30, ~~2018,~~2019, we had ~~$146.9~~$104.0 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 $55.3~~$76.8 million at September 30, ~~2018,~~2019, as compared to negative ~~$32.6~~$116.3 million at December 31, ~~2017.~~2018. Additionally, at September 30, ~~2018,~~2019, we had remaining borrowing availability of ~~$434.5~~$619.1 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 to fund our business as currently 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 September 30, 2018, and December 31, 2017:~~

subsidiaries:໿


Cash, cash equivalents and marketable securities (dollars in thousands)	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018

U.S.	$	2,113		$	5,902		$	2,133		$	2,044
Foreign	144,764			466,028			101,863			121,750
Total	$	146,877		471,930			$	103,996		$	123,794

Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	$	20,082		$	334,339		$	2,833		$	11,119

Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	13.7		%	70.8		%	2.7		%	9.0		%

໿

Of the ~~$146.9~~$104.0 million of cash and cash equivalents held as of September 30, ~~2018, approximately 94%~~2019, greater than 99% was held as bank ~~deposits and approximately 6% 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					For the Three Months Ended
	September 30, 2018	June 30, 2018	March 31, 2018	December 31, 2017	September 30, 2017	September 30, 2019	June 30, 2019	March 31, 2019	December 31, 2018	September 30, 2018

Days sales outstanding⁽¹⁾	44.3	41.2	42.0	41.7	43.4	41.8	41.7	42.0	42.6	44.3
Inventory turns⁽²⁾	2.1	2.2	2.0	2.2	1.9	2.0	2.1	2.0	2.3	2.1


(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 average inventory ~~balance~~balances at the beginning and end of ~~the~~each quarter.

Sources and Uses of Cash

The following table presents cash provided (used):

໿


	For the Nine Months Ended September 30,									For the Nine Months Ended September 30,
(dollars in thousands)	2018			2017			Dollar Change
(in thousands)										2019			2018			Dollar Change

Net cash provided by operating activities	$	264,436		$	252,150		$	12,286		$	303,745		$	264,436		$	39,309
Net cash provided (used) by investing activities	178,446			(114,201		)	292,647
Net cash (used) provided by investing activities										(109,617		)	178,446			(288,063		)
Net cash used by financing activities	(479,993		)	(129,958		)	(350,035		)	(212,020		)	(479,993		)	267,973
Net effect of changes in exchange rates on cash	(3,687		)	6,127			(9,814		)	(1,906		)	(3,687		)	1,781
Net change in cash and cash equivalents	$	(40,798	)	$	14,118		$	(54,916	)	$	(19,798	)	$	(40,798	)	$	21,000

Operating Activities.The increase in cash provided by operating activities of ~~$12.3~~$39.3 million was driven primarily by the ~~increases~~increase in net income, ~~and~~partially offset by changes in the benefit of deferred income ~~taxes, offset by the changes in operating assets and liabilities.~~taxes. The following table presents cash flows from changes in operating assets and liabilities:

໿


	For the Nine Months Ended September 30,									For the Nine Months Ended September 30,
(dollars in thousands)	2018			2017			Dollar Change
(in thousands)										2019			2018			Dollar Change

Accounts receivable	$	(33,041	)	$	(18,724	)	$	(14,317	)	$	(24,451	)	$	(33,041	)	$	8,590
Inventories	(27,415		)	(22,966		)	(4,449		)	(36,582		)	(27,415		)	(9,167		)
Accounts payable	(1,336		)	(3,540		)	2,204			1,181			(1,336		)	2,517
Deferred revenue	(6,314		)	2,279			(8,593		)	(10,826		)	(6,314		)	(4,512		)
Other assets and liabilities	(58,214		)	(10,734		)	(47,480		)	(54,770		)	(58,214		)	3,444
Total change in cash due to changes in operating assets and liabilities	$	(126,320	)	$	(53,685	)	$	(72,635	)	$	(125,448	)	$	(126,320	)	$	872



~~DELAWARE~~Delaware			01-0393723
(State or other jurisdiction of incorporation or organization)			(IRSEmployer Identification No.)

~~ONE~~One IDEXX ~~DRIVE, WESTBROOK, MAINE~~ Drive	Westbrook	Maine	04092
(Address of principal executive offices)			(ZIP Code)

~~207-556-0300~~



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.10 par value per share	IDXX	NASDAQ Global Select Market



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~~	¨		☐



	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 September 30, 2018

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

ASSETS
Cash and cash equivalents	$	146,877		$	146,877		$	—
Accounts receivable	260,803			264,563			3,760
Inventories	181,830			179,684			(2,146		)
Property and equipment, net	409,980			409,980			—
Goodwill and intangible assets, net	258,466			258,466			—
Other assets	245,276			284,960			39,684
TOTAL ASSETS	$	1,503,232		$	1,544,530		$	41,298

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	65,457		$	65,457		$	—
Accrued liabilities	237,904			238,431			527
Deferred income tax liabilities	38,897			39,899			1,002
Line of credit and long-term debt	1,016,916			1,016,916			—
Deferred revenue	63,764			103,696			39,932
Other long-term liabilities	90,420			81,494			(8,926		)
Total liabilities	1,513,358			1,545,893			32,535

Stockholders’ Deficit:
Retained earnings	1,073,597			1,082,292			8,695
Accumulated other comprehensive (loss) income	(42,255		)	(42,187		)	68
All other stockholders' deficit and noncontrolling interest	(1,041,468		)	(1,041,468		)	—
Total stockholders’ deficit	(10,126		)	(1,363		)	8,763
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,503,232		$	1,544,530		$	41,298



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



	September 30, 2018		December 31, 2017

Prepaid expenses	$	31,997	$	28,967
Taxes receivable	23,769		35,475
Customer acquisition costs (Notes 2 and 3)	32,768		23,520
Contract assets (Notes 2 and 3)	7,357		—
Deferred sales commissions (Notes 2 and 3)	4,428		—
Other assets (Notes 2 and 3)	12,754		13,178
Other current assets	$	113,073	$	101,140



	September 30, 2018		December 31, 2017

Accrued expenses	$	61,301	$	64,430
Accrued employee compensation and related expenses	87,184		102,944
Accrued taxes	28,082		29,389
Accrued customer incentives and refund obligations (Notes 2 and 3)	61,864		56,655
Total accrued liabilities	$	238,431	$	253,418



Details about AOCI Components	Affected Line Item in the Statement of Operations	Amounts Reclassified from AOCI For the Three Months Ended September 30,
		2018		2017
Gains (losses) on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	256	$	(893	)
	Tax expense (benefits)	153		(333		)
	Gains (losses), net of tax	$	103	$	(560	)


	Twelve months ended
(in thousands)				Twelve months ended
Trailing 12 Months Adjusted EBITDA:	September 30, 2018			September 30, 2019

Net income attributable to stockholders (as reported)	$	329,650		$	422,862
Interest expense	35,901			32,222
Provision for income taxes	110,723			97,832
Depreciation and amortization	84,094			86,026
Share-based compensation expense	24,703			28,832
Extraordinary and other non-recurring non-cash charges	2,629
Adjusted EBITDA	$	587,700		$	667,774


(in thousands)
Debt to Adjusted EBITDA Ratio:	September 30, 2018			September 30, 2019

Line of credit	$	414,500		$	229,500
Long-term debt	602,416			696,634
Total debt	1,016,916			926,134
Acquisition-related contingent consideration payable	5,037			3,098
Capitalized leases	276
U.S. GAAP change - deferred financing costs	445
Financing leases				145
Deferred financing costs				531
Gross debt	1,022,674			929,908
Gross debt to Adjusted EBITDA ratio	1.74			1.39

Less: Cash and cash equivalents	(146,877		)	(103,996		)
Net debt	$	875,797		$	825,912
Net debt to Adjusted EBITDA ratio	1.49			1.24



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)

July 1 to July 31, 2018	55,903		$	230.00	55,903	3,948,142
August 1 to August 31, 2018	132,200		$	245.82	132,200	3,815,942
September 1 to September 30, 2018	115,138		$	245.63	113,600	3,702,342
Total	303,241	⁽²⁾	$	242.83	301,703	3,702,342



Exhibit No.	Description

~~31.1~~10.1	Mutual Separation Agreement, dated October 23, 2019, by and between IDEXX Laboratories Inc. and Mr. Jonathan W. Ayers (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 24, 2019, File No. 0-19271, and incorporated herein by reference).

10.2	Senior Advisory Agreement, dated October 23, 2019, by and between IDEXX Laboratories Inc. and Mr. Jonathan W. Ayers (filed as Exhibit 10.2 to Current Report on Form 8-K filed October 24, 2019, File No. 0-19271, and incorporated herein by reference).

10.3	Second Amended and Restated Employment Agreement, dated October 23, 2019, by and between IDEXX Laboratories Inc. and Jonathan (Jay) Mazelsky (filed as Exhibit 10.3 to Current Report on Form 8-K filed October 24, 2019, File No. 0-19271, 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.~~Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.



	IDEXX LABORATORIES, INC.


	/s/ Brian P. McKeon
Date: ~~November 1, 2018~~October 31, 2019	Brian P. McKeon
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)