SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2019~~2020

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

For the transition period from _______________ to _______________.

COMMISSION FILE NUMBER: 000-19271

(Exact name of registrant as specified in its charter)

(IRS Employer Identification No.)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant’s Common Stock, $0.10 par value per share, was ~~85,782,572~~85,054,677, on ~~October 28, 2019.~~July 27, 2020.

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 ~~2016-02~~2016-13			ASU ~~2016-02,~~ ~~Leases (Topic 842);~~2016-13, ~~also referred to as the “New Leasing Standard”~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
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~~provides point-of-care and ~~supplies~~laboratory diagnostics (including electrolyte and blood gas analyzers and ~~consumables worldwide~~related consumable products) 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. 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.
PCR			Polymerase chain reaction, a technique used to amplify small segments of DNA
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 $700 million,~~ referred to as senior notes or long-term debt
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, 2019~~June 3 0 , 2020 and December 31, ~~2018~~2019	3
	Condensed Consolidated Statements of Income for the Three and ~~Nine~~ Six Months Ended ~~September 30,~~June 3 0 , 2020 and 2019 ~~and 2018~~	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Si x Months Ended ~~September 30,~~June 3 0 , 2020 and 2019 ~~and 2018~~	5
	Condensed Consolidated Statements of Stockholders' Equity ~~(Deficit)~~ for the Three and ~~Nine~~Six Months Ended ~~September 30,~~June 3 0 , 2020 and 2019 ~~and 2018~~	6
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~ Six Months Ended ~~September 30,~~June 3 0 , 2020 and 2019 ~~and 2018~~	87
	Notes to Condensed Consolidated Financial Statements	98
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3034
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5359
Item 4.	Controls and Procedures	5460
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5460
Item 1A.	Risk Factors	5460
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5563
Item 6.	Exhibits	5664
Signatures		5765

໿

PART I— FINANCIAL INFORMATION

Item 1. Financial Statements.

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)

~~(Unaudited)~~


	June 30, 2020		December 31, 2019

ASSETS
Current Assets:
Cash and cash equivalents	$	105,293	$	90,326
Accounts receivable, net	320,320		269,312
Inventories	229,377		195,019
Other current assets	124,622		124,982
Total current assets	779,612		679,639
Long-Term Assets:
Property and equipment, net	550,895		533,845
Operating lease right-of-use assets	82,407		80,607
Goodwill	235,426		239,724
Intangible assets, net	55,619		58,468
Other long-term assets	256,754		240,192
Total long-term assets	1,181,101		1,152,836
TOTAL ASSETS	$	1,960,713	$	1,832,475

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	73,903	$	72,172
Accrued liabilities	308,768		322,938
Line of credit	121,596		288,765
Current portion of deferred revenue	36,317		41,462
Total current liabilities	540,584		725,337
Long-Term Liabilities:
Deferred income tax liabilities	36,599		33,024
Long-term debt	899,562		698,910
Long-term deferred revenue, net of current portion	57,764		48,743
Long-term operating lease liabilities	68,597		67,472
Other long-term liabilities	84,207		81,164
Total long-term liabilities	1,146,729		929,313
Total liabilities	1,687,313		1,654,650

Commitments and Contingencies (Note 16)

Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 106,031 shares in 2020 and 105,711 shares in 2019; Outstanding: 85,049 shares in 2020 and 85,471 shares in 2019	10,603		10,571
Additional paid-in capital	1,247,456		1,213,517
Deferred stock units: Outstanding: 147 units in 2020 and 143 units in 2019	5,402		4,462
Retained earnings	1,854,586		1,595,648
Accumulated other comprehensive loss	(57,032)		(46,182)
Treasury stock, at cost: 20,981 shares in 2020 and 20,240 shares in 2019	(2,788,052)		(2,600,543)
Total IDEXX Laboratories, Inc. stockholders’ equity	272,963		177,473
Noncontrolling interest	437		352
Total stockholders’ equity	273,400		177,825
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,960,713	$	1,832,475

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

September 30, 2019 December 31, 2018

ASSETS

Current Assets:

Cash and cash equivalents $ 103,996
$ 123,794
Accounts receivable, net of reserves of $3,831 in 2019 and $4,702 in 2018 268,319
248,855
Inventories 204,893
173,303
Other current assets 126,174
108,220
Total current assets 703,382
654,172
Long-Term Assets:
Property and equipment, net 496,584
437,270
Operating lease right-of-use assets (Notes 2 and 8) 78,977
—
Goodwill 212,171
214,489
Intangible assets, net 35,662
41,825
Other long-term assets 224,705
189,593
Total long-term assets 1,048,099
883,177
TOTAL ASSETS $ 1,751,481
$ 1,537,349

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 75,515
$ 69,534
Accrued liabilities 278,626
260,683
Line of credit 229,500
398,937
Current portion of deferred revenue 42,986
41,290
Total current liabilities 626,627
770,444
Long-Term Liabilities:
Deferred income tax liabilities 33,734
29,267
Long-term debt 696,634
601,348
Long-term deferred revenue, net of current portion 48,345
60,697
Long-term operating lease liabilities (Notes 2 and 8) 66,341
—
Other long-term liabilities 77,078
84,826
Total long-term liabilities 922,132
776,138
Total liabilities 1,548,759
1,546,582

Commitments and Contingencies (Note 16)

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 1,189,554
1,138,216
Deferred stock units: Outstanding: 143 units in 2019 and 162 units in 2018 4,416
4,524
Retained earnings 1,505,152
1,167,928
Accumulated other comprehensive loss (45,565 ) (41,791 )
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 304
280
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. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF 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 June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018				2020		2019		2020		2019

Revenue:													Revenue:
Product revenue	$	360,000		$	324,303		$	1,059,696		$	990,364		Product revenue	$	366,058	$	365,638	$	730,831	$	699,696
Service revenue	245,303			221,145			741,766			673,492			Service revenue	271,534		254,465		533,097		496,463
Total revenue	605,303			545,448			1,801,462			1,663,856			Total revenue	637,592		620,103		1,263,928		1,196,159
Cost of Revenue:													Cost of Revenue:
Cost of product revenue	125,112			120,294			370,388			365,810			Cost of product revenue	124,024		127,893		249,478		245,276
Cost of service revenue	135,241			119,511			396,674			356,865			Cost of service revenue	134,226		134,357		275,518		261,433
Total cost of revenue	260,353			239,805			767,062			722,675			Total cost of revenue	258,250		262,250		524,996		506,709
Gross profit	344,950			305,643			1,034,400			941,181			Gross profit	379,342		357,853		738,932		689,450
Expenses:													Expenses:
Sales and marketing	104,551			95,146			312,499			291,502			Sales and marketing	94,181		101,364		210,324		207,948
General and administrative	66,337			63,955			186,653			185,966			General and administrative	60,268		59,955		126,080		120,316
Research and development	34,260			29,192			98,033			87,725			Research and development	31,645		32,259		64,955		63,773
Income from operations	139,802			117,350			437,215			375,988			Income from operations	193,248		164,275		337,573		297,413
Interest expense	(7,090		)	(8,453		)	(23,662		)	(26,184		)	Interest expense	(9,495)		(8,186)		(17,187)		(16,572)
Interest income	86			142			159			893			Interest income	69		33		209		73
Income before provision for income taxes	132,798			109,039			413,712			350,697			Income before provision for income taxes	183,822		156,122		320,595		280,914
Provision for income taxes	23,960			15,825			76,464			59,327			Provision for income taxes	34,826		30,421		59,743		52,504
Net income	108,838			93,214			337,248			291,370			Net income	148,996		125,701		260,852		228,410
Less: Net income (loss) attributable to noncontrolling interest	1			(37		)	24			(23		)	Less: Net income (loss) attributable to noncontrolling interest	56		(5)		85		23
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	108,837		$	93,251		$	337,224		$	291,393		Net income attributable to IDEXX Laboratories, Inc. stockholders	$	148,940	$	125,706	$	260,767	$	228,387

Earnings per Share:													Earnings per Share:
Basic	$	1.26		$	1.07		$	3.91		$	3.35		Basic	$	1.75	$	1.46	$	3.06	$	2.65
Diluted	$	1.24		$	1.05		$	3.85		$	3.29		Diluted	$	1.72	$	1.43	$	3.01	$	2.61
Weighted Average Shares Outstanding:													Weighted Average Shares Outstanding:
Basic	86,198			86,756			86,206			87,029			Basic	85,134		86,215		85,282		86,210
Diluted	87,667			88,453			87,633			88,687			Diluted	86,402		87,615		86,568		87,594

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. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,							For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018				2020		2019		2020		2019

Net income	$	108,838		$	93,214		$	337,248		$	291,370		Net income	$	148,996	$	125,701	$	260,852	$	228,410
Other comprehensive income (loss), net of tax:													Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(13,912		)	(1,845		)	(12,231		)	(18,172		)	Foreign currency translation adjustments	7,006		3,104		(15,200)		1,681
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 (loss) gain on Euro-denominated notes, net of tax (benefit) expense of $(532) and $(202) in 2020 and $(309) and $158 in 2019													Unrealized (loss) gain on Euro-denominated notes, net of tax (benefit) expense of $(532) and $(202) in 2020 and $(309) and $158 in 2019	(1,689)		(980)		(642)		500
Unrealized (loss) gain on investments, net of tax (benefit) expense of $(93) and $(181) in 2020 and $(14) and $114 in 2019													Unrealized (loss) gain on investments, net of tax (benefit) expense of $(93) and $(181) in 2020 and $(14) and $114 in 2019	(295)		(45)		(574)		362
Unrealized gain (loss) on derivative instruments:													Unrealized gain (loss) on derivative instruments:
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
Unrealized gain (loss) on foreign currency exchange contracts, net of tax (benefit) expense of $(805) and $1,247 in 2020 and $(21) and $203 in 2019													Unrealized gain (loss) on foreign currency exchange contracts, net of tax (benefit) expense of $(805) and $1,247 in 2020 and $(21) and $203 in 2019	(3,888)		67		5,538		1,110
Unrealized gain (loss) on cross currency swaps, net of tax expense (benefit) expense of $(283) and $586 in 2020 and $(148) and $159 in 2019													Unrealized gain (loss) on cross currency swaps, net of tax expense (benefit) expense of $(283) and $586 in 2020 and $(148) and $159 in 2019	(1,447)		(563)		2,602		868
Reclassification adjustment for (gain) included in net income, net of tax (expense) of $(339) and $(579) in 2020 and $(358) and $(607) in 2019													Reclassification adjustment for (gain) included in net income, net of tax (expense) of $(339) and $(579) in 2020 and $(358) and $(607) in 2019	(1,473)		(2,151)		(2,574)		(3,313)
Unrealized (loss) gain on derivative instruments													Unrealized (loss) gain on derivative instruments	(6,808)		(2,647)		5,566		(1,335)
Other comprehensive (loss) gain, net of tax	(4,982		)	372			(3,774		)	(5,717		)	Other comprehensive (loss) gain, net of tax	(1,786)		(568)		(10,850)		1,208
Comprehensive income	103,856			93,586			333,474			285,653			Comprehensive income	147,210		125,133		250,002		229,618
Less: Comprehensive income (loss) attributable to noncontrolling interest	1			(37		)	24			(23		)	Less: Comprehensive income (loss) attributable to noncontrolling interest	56		(5)		85		23
Comprehensive income attributable to IDEXX Laboratories, Inc.	$	103,855		$	93,623		$	333,450		$	285,676		Comprehensive income attributable to IDEXX Laboratories, Inc.	$	147,154	$	125,138	$	249,917	$	229,595

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. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except per share amounts)

(Unaudited)


	Common Stock
	Number of Shares	$0.10 Par Value		Additional Paid-in Capital		Deferred Stock Units		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Noncontrolling Interest		Total Stockholders’ Equity (Deficit)
Balance December 31, 2019	105,711	$	10,571	$	1,213,517	$	4,462	$	1,595,648	$	(46,182)	$	(2,600,543)	$	352	$	177,825
Cumulative effect of accounting changes (Note 2)	—	—		—		—		(1,829)		—		—		—		(1,829)
Net income	—	—		—		—		111,827		—		—		29		111,856
Other comprehensive loss, net	—	—		—		—		—		(9,064)		—		—		(9,064)
Repurchases of common stock, net	—	—		—		—		—		—		(187,767)		—		(187,767)
Common stock issued under stock plans	203	20		9,730		—		—		—		—		—		9,750
Share-based compensation cost	—	—		7,238		46		—		—		—		—		7,284
Balance March 31, 2020	105,914	$	10,591	$	1,230,485	$	4,508	$	1,705,646	$	(55,246)	$	(2,788,310)	$	381	$	108,055
Net income	—	—		—		—		148,940		—		—		56		148,996
Other comprehensive loss, net	—	—		—		—		—		(1,786)		—		—		(1,786)
Issuances of common stock, net	—	—		—		—		—		—		258		—		258
Common stock issued under stock plans	117	12		10,068		—		—		—		—		—		10,080
Deferred stock units activity	—	—		(894)		894		—		—		—		—		—
Share-based compensation cost	—	—		7,797		—		—		—		—		—		7,797
Balance June 30, 2020	106,031	$	10,603	$	1,247,456	$	5,402	$	1,854,586	$	(57,032)	$	(2,788,052)	$	437	$	273,400




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

The accompanying notes are an integral part of these 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. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2020		2019

Cash Flows from Operating Activities:
Net income	$	260,852	$	228,410
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	46,786		42,976
Provision for credit losses (Note 2 & Note 6)	5,352		299
Benefit of deferred income taxes	2,658		3,426
Share-based compensation expense	15,081		13,232
Other	699		448
Changes in assets and liabilities:
Accounts receivable	(57,277)		(37,699)
Inventories	(29,254)		(22,911)
Other assets and liabilities	4,540		(45,822)
Accounts payable	(6,729)		(4,030)
Deferred revenue	(6,695)		(6,849)
Net cash provided by operating activities	236,013		171,480
Cash Flows from Investing Activities:
Purchases of property and equipment	(73,558)		(71,987)
Acquisition of intangible assets	(668)		—
Acquisitions of a business, net of cash acquired	—		(304)
Net cash used by investing activities	(74,226)		(72,291)
Cash Flows from Financing Activities:
Repayments on revolving credit facilities, net	(167,692)		(147,519)
Issuance of senior notes	200,000		100,000
Debt issuance costs	(4,988)		(142)
Payment of acquisition-related contingent consideration	(1,080)		(1,695)
Repurchases of common stock, net	(182,815)		(74,994)
Proceeds from exercises of stock options and employee stock purchase plans	20,613		19,653
Shares withheld for statutory tax withholding on restricted stock	(8,668)		(7,572)
Net cash used by financing activities	(144,630)		(112,269)
Net effect of changes in exchange rates on cash	(2,190)		131
Net increase (decrease) in cash and cash equivalents	14,967		(12,949)
Cash and cash equivalents at beginning of period	90,326		123,794
Cash and cash equivalents at end of period	$	105,293	$	110,845

Supplemental Cash Flow Information:
Cash paid for income taxes	$	29,983	$	56,950
Unpaid property and equipment, reflected in accounts payable and accrued liabilities	$	12,670	$	11,633

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

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. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “IDEXX,” the “Company,” “we,” “our,” or “us” refer to IDEXX Laboratories, Inc. and its subsidiaries.

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

The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, ~~2018,~~2019, 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~~six months ended ~~September~~June 30, ~~2019,~~2020, are not necessarily indicative of the results to be expected for the full year or any future ~~period.~~period, particularly in light of the COVID-19 pandemic and its effects on the domestic and global economies as described below. These unaudited condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019,~~2020, and our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, (the ~~“2018~~“2019 Annual Report”) filed with the SEC.

Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses, including those that we serve, to adjust, reduce, or suspend business and operating activities. The primary impacts of the COVID-19 pandemic have been seen in our CAG and Water businesses. Veterinary care is widely recognized as an “essential” service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed during 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits. Our reference laboratories and manufacturing facilities are operating and have been designated as essential businesses although disruptions or reductions to operations may occur as the impacts from the COVID-19 pandemic and related responses continue to develop. In order to maintain the quality of drinking and surface water, Water compliance testing is also recognized as an "essential" service; however, our business has been impacted due to lower non-compliance testing, as well as some disruption in compliance testing due to social distancing policies, including beach and pool closures. During the second quarter of 2020, local, state, and federal governments began to ease the stay-at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated demand for our diagnostic services. The extent to which the continuation, or a possible second-wave outbreak of COVID-19, or an outbreak of other health epidemics could impact our business, results of operations and financial condition, including the potential for write-offs or impairments of assets and suspension of capital investments, will depend on future developments. We are unable to predict with certainty the effects of the COVID-19 pandemic on our customers, suppliers, and vendors, as well as the actions of governments, and when and to what extent normal economic and operating conditions can resume; these effects may differ from those assumed in our projected estimates. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic impact that has occurred or may occur in the future.

The preparation of our condensed consolidated financial statements requires us to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments, and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses. We have made estimates of the impact of the COVID-19 pandemic within our financial statements, and our actual results may differ from these estimates and there may be changes to those estimates in future periods.

We have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q in the ~~"Glossary~~“Glossary of Terms and 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~~six months ended ~~September~~June 30, ~~2019,~~2020, are consistent with those discussed in Note 22. Summary of Significant Accounting Policies to the consolidated financial statements in our ~~2018~~2019 Annual Report, except as noted below.

New Accounting Pronouncements Adopted

We adopted ASU ~~2016-02,~~ ~~Leases~~2018-13, Fair Value Measurement (Topic ~~842)~~ ~~(the "New Leasing Standard")~~820), as of January 1, ~~2019, using~~2020, which modifies the ~~optional transition method that allows~~disclosure requirements on fair value measurements under ASC Topic No. 820, Fair Value Measurement, as amended (“ASC 820”). ASU 2018-13 removes (a) the prior requirement to disclose the amount and reason for ~~a cumulative-effect adjustment~~transfers between Level 1 and Level 2 of the fair value hierarchy contained in ASC 820, (b) the ~~period~~policy for timing of ~~adoption~~transfers between levels, and ~~did not restate prior periods. In addition, we elected~~(c) the ~~package of practical expedients permitted under the transition guidance within the new standard, which~~valuation processes used for Level 3 fair value measurements. ASU 2018-13 also adds, among other things, ~~allowed us~~a requirement to ~~carry forward~~disclose the ~~historical lease classification.~~range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. The adoption of the New Leasing Standard resulted in the recording of operating lease liabilities of $86.7 million and right-of-use assets of $83.7 million. Prior to our adoption of the New Leasing Standard, rent prepayments of approximately $1.0 million were recorded within other current assets and the impact of recognizing rent expense on a straight-line basis of approximately $4.0 million was recorded within other current and long-term liabilities. Upon adoption of the New Leasing Standard, these rent prepayments and straight-line rent impacts are now recorded within operating lease right-of-use assets and represent the net difference between operating lease liabilities and right-of-use assets.

The New Leasing Standard requires us to classify 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 prior U.S. GAAP, instruments placed under our reagent rental programs were classified as operating leases and instrument revenue and cost was recognized over the term of the program. The New Leasing Standard did not have a material impact on our consolidated ~~earnings and had no impact~~financial statements.

Effective January 1, 2020, we adopted ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on ~~cash flows for~~Financial Instruments,” using the ~~three and nine months ended September 30, 2019.~~

~~Adoption~~modified retrospective transition method. This ASU amends the impairment model to utilize an expected loss methodology in place of the ~~New Leasing Standard impacted~~incurred loss methodology for financial instruments, including trade receivables and leased equipment. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. We recorded a non-cash cumulative effect adjustment to retained earnings of $1.8 million, net of $0.6 million of income taxes, on our ~~condensed~~opening 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

~~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~~2020. This adjustment, before the impact of income taxes, was comprised of $2.3 million related to ~~reclassify the $1.7~~our contract assets and sales-type leases, and $0.2 million ~~of stranded tax effects from the Tax Cuts and Jobs Act enacted~~related to accounts receivable. See Note 6. Credit Losses, for more information on ~~December 22, 2017, from accumulated other comprehensive income to retained earnings in the period of adoption.~~

In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes meant to simplify interim disclosures. The new rule requires aour 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 financial statements, for the current and comparative year-to-date interim periods. The additional elements of this release did not 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.

credit losses.

New Accounting Pronouncements Not Yet Adopted

~~For a discussion of other accounting standards that have been issued by~~In December 2019, the FASB ~~prior~~issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new guidance is intended to ~~January 1, 2019, but are~~simplify the accounting for income taxes by removing certain exceptions and by updating accounting requirements around goodwill recognized for tax purposes and the allocation of current and deferred tax expense among legal entities, among other minor changes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We do not ~~yet effective, refer~~expect the adoption of ASU 2019-12 to ~~Note 2. Summary~~have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, "Facilitation of ~~Significant Accounting Policies - New Accounting Pronouncements Not Yet Adopted in~~the Effects of Reference Rate Reform on Financial Reporting". ASU 2020-04 is intended to provide optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The relief offered by this guidance, if adopted, is available to companies for the period March 12, 2020 through December 31, 2022. We do not expect the discontinuation of LIBOR to have a material impact on our ~~2018 Annual Report.~~consolidated financial statements.

NOTE 3. REVENUE RECOGNITION

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 accurately present the consideration received in exchange for promised products or services, we apply the 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~~

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. 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. Revenues from instrument rental agreements and reagent rental programs are recognized either as operating leases on a ratable basis over the term of the 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~~$3.5 million and ~~$14.5~~$7.7 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, as compared

to ~~$3.0~~$4.6 million and ~~$9.0~~ $9.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, including both operating leases and sales-type leases under ASC 842, Leases, ~~during~~for leases entered into after January 1, 2019, and ASC 840, Leases, for leases entered into prior to 2019. See below for revenue recognition under our reagent rental programs.

Extended Warranties and Post-Contract Support. CAG Diagnostics capital instruments and diagnostic imaging systems extended warranties typically provide customers with continued coverage for a period of one to five 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 measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.

On December 31, ~~2018,~~2019, our deferred revenue related to extended warranties and post-contract support was ~~$40.7~~$38.0 million, of which approximately ~~$2.8~~$3.0 million and ~~$18.5~~$16.7 million were recognized during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively.~~2020. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support ~~was $37.8~~was $35.8 million at ~~September~~June 30, ~~2019.~~2020. 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. Deferred revenue related to extended warranties and post-contract support with an original duration of more than one year was ~~$24.3~~$22.1 million at ~~September~~June 30, ~~2019,~~2020, of which approximately 9%22%, ~~35%~~36%, ~~28%~~25%, ~~18%~~12%, and ~~10%~~5% are expected to be recognized during the remainder of ~~2019,~~2020, the

full years ~~2020,~~ 2021, 2022, 2023, and thereafter, respectively. ~~Additionally,~~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^™. 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 two 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 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. To the extent invoiced instrument revenue exceeds recognized instrument revenue, we record deferred revenue as a contract liability, which is subsequently recognized upon the purchase of future products and services. 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.

On December 31, ~~2018,~~2019, our capitalized customer acquisition costs were ~~$124.4~~$137.4 million, of which approximately ~~$8.5~~ $10.0 million and ~~$26.2~~$20.2 million were recognized as a reduction of revenue during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively.~~2020. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs ~~were $131.0~~were $146.0 million ~~at September~~at June 30, ~~2019.~~2020. 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~~six months ended ~~September~~June 30, ~~2019,~~2020, 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 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.

On December 31, ~~2018,~~2019, our volume commitment contract assets were ~~$40.9~~$83.9 million, of which approximately ~~$2.0~~$4.7 million and ~~$7.0~~$9.6 million were reclassified to accounts receivable when customers were billed for related products and services during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively.~~2020. Furthermore, as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses upon adoption of ASU 2016-13, our contract assets ~~were $70.5~~were $91.6 million at ~~September~~ June 30, ~~2019.~~2020. 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~~six months ended ~~September~~June 30, ~~2019,~~2020, 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 $1.6~~approximately $2.0 billion, of which approximately 7%13%, 25%, ~~21%~~22%, 19%, and ~~28%~~ 21% are expected to be recognized during the remainder of ~~2019,~~2020, the full years ~~2020,~~ 2021, 2022, 2023, 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.

On December 31, ~~2018,~~2019, our deferred revenue related to instrument rebate programs was ~~$57.4~~$49.1 million, of which approximately ~~$4.4~~$4.2 million and ~~$13.9~~$8.5 million were recognized when customers purchased eligible products and services and earned rebates during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively.~~2020. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred ~~revenue~~revenue was ~~$50.1~~$43.3 million at ~~September~~June 30, ~~2019,~~2020, of which approximately 9%18%, 31%, ~~25%~~23%, ~~17%~~15%, and ~~18%~~13% are expected to be recognized during the remainder of ~~2019,~~2020, the full years ~~2020,~~ 2021, 2022, 2023, and thereafter, respectively.

Reagent Rental 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 lease for the right to use our instrument, and we determine the amount of lease revenue allocated to the instrument based on relative standalone selling 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 therefore all reagent rental program placements prior to January 1, 2019 will continue to be classified as operating leases. We have not elected the practical expedient within the New Leasing Standard to combine lease and non-lease components.lease.

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 and cost in 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 term of the contract. AsOn December 31, 2019, our lease receivable assets were $7.2 million,

of which approximately $0.3 million and $0.7 million were reclassified to accounts receivable when customers were billed for related products and services during the three and six months ended June 30, 2020, respectively. Furthermore, as a result of new placements under sales-type reagent rental programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses upon adoption of ASU 2016-13, our lease receivable ~~assets~~assets were ~~$4.5~~$7.9 million at ~~September~~ June 30, ~~2019.~~2020. The impacts of discounting and unearned income

at ~~September~~June 30, ~~2019,~~2020, were not material. Profit and loss recognized at the commencement date and interest income during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, 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~~six months ended ~~September~~June 30, ~~2019,~~2020, 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. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we transferred instruments of ~~$5.5~~$1.7 million and ~~$10.5~~$4.1 million, ~~respectively,~~respectively, as compared to ~~$6.6~~$3.0 million and ~~$14.7~~$5.0 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, from inventory to property and equipment.

We estimate future revenue to be recognized related to our reagent rental programs of ~~approximately $30.9~~approximately $26.6 million, of which approximately ~~11%~~21%, ~~37%~~35%, ~~27%~~22%, ~~16%~~11%, and 9%11% are expected to be recognized during the remainder of ~~2019,~~2020, the full years ~~2020,~~ 2021, 2022, 2023, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied for which customers have committed to future purchases, net of any expected price adjustments, and as a result, may be lower than stated contractual commitments by our customers.

Other Customer Incentive Programs. Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers and the expected-value method for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, 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. 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 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~~June 30, ~~2019.~~2020.

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 our LPD segment does not meet the quantitative thresholds to be reported as a separate segment, we believe it is important to disaggregate these revenues as a major product and service category within our Other reportable segment given its distinct markets, and therefore we have elected to report LPD as a reportable segment.

The following table presents disaggregated revenue by major product and service categories:໿


(in thousands)	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
CAG segment revenue:
CAG Diagnostics recurring revenue:	$	510,254	$	477,431	$	998,179	$	921,222
IDEXX VetLab consumables	196,061		175,159		384,774		342,370
Rapid assay products	64,658		68,605		122,088		123,036
Reference laboratory diagnostic and consulting services	228,816		213,892		449,077		416,550
CAG Diagnostics services and accessories	20,719		19,775		42,240		39,266
CAG Diagnostics capital - instruments	18,871		31,526		42,704		60,275
Veterinary software, services and diagnostic imaging systems	36,975		38,392		77,213		74,770
CAG segment revenue	566,100		547,349		1,118,096		1,056,267

Water segment revenue	28,116		34,764		62,265		65,074
LPD segment revenue	32,244		33,104		66,398		64,610
Other segment revenue	11,132		4,886		17,169		10,208
Total revenue	$	637,592	$	620,103	$	1,263,928	$	1,196,159

(in thousands) For the Three Months Ended
September 30, For the Nine Months Ended
September 30,
2019 2018 2019 2018
CAG segment revenue:

CAG Diagnostics recurring revenue: $ 460,974
$ 409,162
$ 1,382,196
$ 1,252,876
IDEXX VetLab consumables 177,276
152,509
519,646
460,642
Rapid assay products 58,930
53,821
181,966
169,200
Reference laboratory diagnostic and consulting services 204,919
184,103
621,469
568,308
CAG Diagnostics services and accessories 19,849
18,729
59,115
54,726
CAG Diagnostics capital - instruments 32,608
31,561
92,883
97,000
Veterinary software, services and diagnostic imaging systems 39,548
37,374
114,318
106,541
CAG segment revenue 533,130
478,097
1,589,397
1,456,417

Water segment revenue 34,906
33,108
99,980
94,909
LPD segment revenue 31,370
29,420
95,980
96,658
Other segment revenue 5,897
4,823
16,105
15,872
Total revenue $ 605,303
$ 545,448
$ 1,801,462
$ 1,663,856

Revenue by principal geographic area, based on customers’ domiciles, was as follows:໿


(in thousands)	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
United States	$	405,998	$	388,875	$	802,781	$	747,163
Europe, the Middle East and Africa	123,969		124,840		253,735		246,586
Asia Pacific Region	71,750		64,033		135,262		124,108
Canada	25,357		27,654		49,604		50,878
Latin America	10,518		14,701		22,546		27,424
Total	$	637,592	$	620,103	$	1,263,928	$	1,196,159

(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

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 income. Deferred commission costs are periodically reviewed for impairment.

On December 31, ~~2018,~~2019, our deferred commission costs, included within other assets, were ~~$13.9~~$15.6 million, of which ~~approximately $1.1~~approximately $1.3 million and ~~$3.4~~$2.7 million of ~~commission~~commission expense ~~were~~was recognized during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were ~~$15.2~~$15.7 million at ~~September~~June 30, ~~2019.~~2020. Impairments of deferred commission costs during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, 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. From time to time we may acquire the assets of small reference labs that we account for as an asset purchase.

During the ~~third~~fourth quarter of ~~2018,~~2019, 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 onmulti-site reference laboratory in the ~~second anniversary~~Midwest of the ~~acquisition date, while the contingent payment will be paid within 36 months if certain commercial goals are achieved.~~U.S. for $50.0 million in cash. This acquisition expands our national reference laboratory presence in the ~~IDEXX suite of veterinary software offerings~~U.S. and ~~further underscores our commitment to investing in software innovations that advance the veterinary profession. This acquisition~~ was accounted for as a business combination. We finalized the valuation of the assets acquired during the first quarter of 2020. The fair value of the assets acquired ~~consist~~consists of ~~$20.3~~$26.9 million in intangible assets, primarily for customer relationships, with a weighted average life of 13.8 years, $0.2 million of tangible assets, and $22.9 million of goodwill, representing synergies ~~with~~within our ~~current software product offerings, $2.6 million in technology intangible assets, $2.4 million in customer relationship intangible assets, and $0.3 million of net tangible liabilities.~~reference laboratory portfolio. 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.

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~~six months ended ~~September~~June 30, ~~2019,~~2020, totaled ~~$3.8~~$2.3 million and ~~$40.1~~$38.6 million ~~respectively,~~ as compared to ~~$0.7~~$1.9 million and ~~$33.5~~$36.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively.~~2019. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at ~~September~~June 30, ~~2019,~~2020, was ~~$63.2~~$70.5 million, which will be recognized over a weighted average period of approximately 1.9 years. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recognized expenses of ~~$9.4~~$7.8 million and ~~$22.6~~$15.1 million ~~respectively,~~ as compared to ~~$6.5~~$6.9 million and ~~$18.9~~$13.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively,~~2019, related to share-based compensation.

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

The weighted averages of the valuation assumptions used to determine the fair value of each option award on the date of grant and the weighted average estimated fair values were as follows:


	For the Six Months Ended June 30,
	2020			2019

Share price at grant	$	288.49		$	208.25
Expected stock price volatility	27		%	26		%
Expected term, in years	6.0			6.0
Risk-free interest rate	1.4		%	2.5		%
Weighted average fair value of options granted	$	84.09		$	63.93

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

NOTE 6. ~~INVENTORIES~~CREDIT LOSSES

We are exposed to credit losses primarily through our sales of products and services to our customers. We maintain allowances for credit losses 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. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current economic conditions. See Note 2. Accounting Policies, for more information on our adoption of ASU 2016-13 on January 1, 2020, using the modified retrospective transition method.

Additional allowances may be required if either the financial condition of our customers was 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 purchases. We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and

due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We may require collateralized asset support or a prepayment to mitigate credit risk. We do not have any off-balance sheet credit exposure related to our customers.

The allowance for credit losses associated with accounts receivable was $7.6 million and $3.6 million at June 30, 2020 and December 31, 2019, respectively. Accounts receivable reflected on the balance sheet is net of this reserve. Based on an aging analysis, at June 30, 2020, approximately 88% of our accounts receivable had not yet reached the invoice due date and approximately 12% was considered past due, of which approximately 2.1% was greater than 60 days past due. At December 31, 2019, approximately 84% of our accounts receivable had not yet reached the invoice due date and approximately 16% was considered past due, of which approximately 1.5% was greater than 60 days past due.

Contract assets and lease receivables

The allowance for credit losses associated with the contract assets and lease receivables was $3.0 million, at June 30, 2020. The assets reflected on the balance sheet are net of these reserves. Historically, we have experienced low credit loss rates on our customer commitment programs and lease receivables. 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.

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

~~NOTE 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 was recorded as general and administrative expense in our CAG reporting segment.

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 1one 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)	June 30, 2020

2020 (remainder of year)	$	9,263
2021	19,956
2022	16,841
2023	11,714
2024	7,833
Thereafter	35,739
Total lease payments	101,346
Less imputed interest	(16,276)
Total	$	85,070

Current operating lease liabilities, included in accrued liabilities	$	16,473
Long-term operating lease liabilities	$	68,597

Weighted average remaining lease term - operating leases	9.9 years

Weighted average discount rate - operating leases	3.5		%

(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 %

Total minimum future lease payments of approximately $1.3 million for leases that have not commenced as of June 30, 2020, are not included in the condensed consolidated financial statements, as we do not yet control the underlying assets. These leases are expected to commence between 2020 and 2021 with lease terms of approximately 5 years to 10 years.

Rent expense charged to operations under operating leases was approximately ~~$5.3~~$5.2 million and ~~$15.6~~$10.6 million during the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively, and $5.1 million and $10.3 million during the three and six months ended June 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 Six Months Ended June 30, 2020

Cash paid for amounts included in the measurement of operating leases liabilities	$	9,346
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations	$	10,738

(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)	June 30, 2020		December 31, 2019

Customer acquisition costs	$	41,569	$	39,329
Prepaid expenses	31,795		31,992
Contract assets, net	18,860		17,659
Taxes receivable	15,769		20,516
Deferred sales commissions	5,321		5,202
Other assets	11,308		10,284
Other current assets	$	124,622	$	124,982

(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

Other long-term assets consisted of the following:


(in thousands)	June 30, 2020		December 31, 2019
Customer acquisition costs	$	104,406	$	98,117
Contract assets, net	72,721		66,226
Investment in long-term product supply arrangements	13,388		13,657
Deferred sales commissions	10,409		10,442
Deferred income taxes	7,575		8,100
Taxes receivable	11,543		14,960
Other assets	36,712		28,690
Other long-term assets	$	256,754	$	240,192

(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
໿

NOTE 10. ACCRUED LIABILITIES

Accrued liabilities consisted of the 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


(in thousands)	June 30, 2020		December 31, 2019

Accrued employee compensation and related expenses	$	106,191	$	127,174
Accrued expenses	67,265		86,296
Accrued customer incentives and refund obligations	63,149		63,079
Accrued taxes	55,690		31,108
Current lease liabilities	16,473		15,281
Accrued liabilities	$	308,768	$	322,938

Other long-term liabilities consisted of the following:໿


(in thousands)	June 30, 2020		December 31, 2019

Accrued taxes	$	66,100	$	67,463
Other accrued long-term expenses	18,107		13,701
Other long-term liabilities	$	84,207	$	81,164

(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

The following describes all of our currently outstanding unsecured senior notes issued and sold in private placements (collectively, the “Senior Notes”) as of June 30, 2020:


(Principal Amount in thousands)

Issue Date	Due Date	Series	Principal Amount		Coupon Rate		Senior Note Agreement⁽¹⁾

12/11/2013	12/11/2023	2023 Series A Notes	$	75,000	3.94	%	NY Life 2013 Note Agreement
12/11/2013	12/11/2025	2025 Series B Notes	$	75,000	4.04	%	NY Life 2013 Note Agreement
09/04/2014	09/04/2026	2026 Senior Notes	$	75,000	3.72	%	NY Life 2014 Note Agreement
07/21/2014	07/21/2021	2021 Series A Notes	$	50,000	3.32	%	Prudential 2015 Amended Agreement
07/21/2014	07/21/2024	2024 Series B Notes	$	75,000	3.76	%	Prudential 2015 Amended Agreement
06/18/2015	06/18/2025	2025 Series C Notes	€	88,857	1.785	%	Prudential 2015 Amended Agreement
02/12/2015	02/12/2022	2022 Series A Notes	$	75,000	3.25	%	MetLife 2014 Note Agreement
02/12/2015	02/12/2027	2027 Series B Notes	$	75,000	3.72	%	MetLife 2014 Note Agreement
03/14/2019	03/14/2029	2029 Series C Notes	$	100,000	4.19	%	MetLife 2014 Note Agreement
04/02/2020	04/02/2030	MetLife 2030 Series D Notes	$	125,000	2.50	%	MetLife 2014 Note Agreement
04/14/2020	04/14/2030	Prudential 2030 Series D Notes	$	75,000	2.50	%	Prudential 2015 Amended Agreement

(1) In each case, as amended.

MetLife 2014 Note Agreement

On ~~December 19, 2014,~~March 23, 2020, 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~~Second Amendment to the ~~terms of the Existing~~MetLife 2014 Note 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"~~“MetLife Second Amendment”).

~~On March 14, 2019, we amended the Existing Agreement~~, in order to (i) increase the ~~Shelf Notes~~ facility size from ~~$50~~$150 million to ~~$150~~$300 million, (ii) extend the ~~Shelf Notes~~ facility issuance period ~~from December 19, 2017~~ to December 20, ~~2021 and~~2022, (iii) make various implementing and administrative changes in order to facilitate a ~~$100~~$125 million ~~Shelf Notes~~notes issuance on ~~March 14, 2019. We also submitted~~April 2, 2020 and (iv) allow the amount available to be issued under the facility to equal $300 million, less the amounts outstanding on 2029 Series C Notes and MetLife 2030 Series D Notes.

On April 2, 2020, we issued and sold to MetLife ~~a request to purchase $100~~and other purchasers $125 million of our ~~Shelf~~unsecured senior notes (the “MetLife 2030 Series D Notes”) pursuant to the MetLife Second Amendment. The entire outstanding principal balance of the MetLife 2030 Series D Notes is due and payable on April 2, 2030, and the MetLife 2030 Series D Notes bear interest at ~~a 4.19%~~the rate of 2.50% per ~~annum rate, due March 14, 2029, (the "Series C Notes").~~annum. We used the proceeds received from the MetLife 2030 Series CD Notes for general corporate ~~purposes,~~purposes.

Prudential 2015 Amended Agreement

On April 10, 2020, we entered into the Second Amendment to the Prudential 2015 Amended Agreement (the “Prudential Second Amendment”), in order to (i) increase the facility size to $425 million, (ii) extend the facility issuance period to April 10, 2023, (iii) make various implementing and administrative changes in order to facilitate a $75 million notes issuance on April 14, 2020, (iv) allow the amount available to be issued under the facility to equal $425 million less the amount of notes outstanding from time to time during the issuance period and (v) modify several defined terms, schedules and covenant baskets in the Prudential 2015 Amended Agreement to create additional operating flexibility, and in particular to align such provisions with similar modifications we made substantially concurrently in our other debt facilities.

On April 14, 2020, we issued and sold to Prudential and other purchasers $75 million of our unsecured senior notes (the “Prudential 2030 Series D Notes”) pursuant to the Prudential Second Amendment. The entire outstanding balance of the Prudential 2030 Series D Notes is due and payable on April 14, 2030, and the Prudential 2030 Series D Notes bear interest at the rate of 2.50% per annum. We used the proceeds received from the Prudential 2030 Series D Notes for general corporate purposes.

NY Life 2013 and 2014 Note Agreements

On April 10, 2020, we amended the NY Life 2013 Note Agreement and the NY Life 2014 Note Agreement by entering into two Amendments to Note Purchase Agreement with New York Life Insurance Company and the other parties thereto, which modified several defined terms, schedules and covenant baskets in the NY Life 2013 Agreement and the NY Life 2014 Note Agreement to create additional operating flexibility, and in particular to align such provisions with similar modifications we made substantially concurrently in our other debt facilities.

Senior Note Agreements

The Senior Note Agreements contain affirmative, negative, and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements, and violations of laws and regulations. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, acquisition-related expense, and share-based compensation, as defined in the Senior Note Agreements, not to exceed 3.5-to-1. At June 30, 2020, we were in compliance with the covenants of the Senior Note Agreements.

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

On April 14, 2020, we, along with IDEXX Distribution, Inc., IDEXX Operations, Inc., OPTI Medical Systems, Inc., IDEXX Laboratories Canada Corporation, IDEXX Europe B.V., and IDEXX Holding B.V., our wholly-owned subsidiaries (whether directly or indirectly held) (collectively, the “Borrowers”), entered into a ~~partial repayment~~third amended and restated credit agreement (the “Credit Agreement”) relating to a three-year unsecured revolving credit facility in the principal amount of $1 billion, among the Borrowers, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Toronto agent, and the other parties thereto.

The Credit Agreement amends and restates that certain second amended and restated credit agreement, dated as of December 4, 2015, (which provided for a $850 million five-year unsecured revolving credit facility) to extend the maturity to April 14, 2023 and to increase the aggregate commitments available for borrowing by the Borrowers to $1 billion with the option to increase the aggregate commitments by $250 million, for an aggregate maximum of up to $1.25 billion, subject to the Borrowers obtaining commitments from existing or new lenders and satisfying other conditions specified in the Credit Agreement.

Although the Credit Facility does not mature until April 14, 2023, all individual borrowings under the terms of the Credit Facility with an interest rate based on a LIBOR, EURIBOR, or Canadian Dollar rate (as selected by the borrower) have a stated term between 30 and 180 days. At the end of each term, the obligation is either repaid or rolled over into a new borrowing, or replaced by a borrowing based on a published prime rate (where interest is then paid quarterly). The Credit Facility contains a subjective material adverse event notification clause, which allows the debt holders to call the loans under the Credit Facility if we fail to provide prompt written notice to the syndicate of such an event. Based on the stated term and the existence of the subjective material adverse event clause, this Credit Facility is reflected in the current liabilities section of our ~~Credit Facility.~~

consolidated balance sheets.

NOTE 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~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, 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:

(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


(in thousands, except per share amounts)	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019

Shares repurchased in the open market	—		86		721		353
Shares acquired through employee surrender for statutory tax withholding	—		1		30		37
Total shares repurchased	—		87		751		390

Cost of shares repurchased in the open market	$	—	$	20,285	$	179,623	$	74,147
Cost of shares for employee surrenders	65		169		8,669		7,572
Total cost of shares	$	65	$	20,454	$	188,292	$	81,719

Average cost per share - open market repurchases	$	—	$	235.94	$	249.20	$	209.81
Average cost per share - employee surrenders	$	312.19	$	249.77	$	288.94	$	207.16
Average cost per share - total	$	312.19	$	236.04	$	250.79	$	209.56

NOTE 13. INCOME TAXES

Our effective income tax rate was ~~18.0%~~18.9% for the three months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~14.5%~~19.5% for the three months ended ~~September~~June 30, ~~2018,~~2019, and ~~18.5%~~18.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~16.9%~~18.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in our effective tax rate for the three and six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the same period in the prior year, was primarily driven by regional earnings mix, with relatively higher statutory earnings subject to lower international tax ~~benefits from share-based compensation. The increase in our effective~~rates than domestic 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.rates.

The effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, differed from the U.S. statutory tax rate of 21% primarily due to tax benefits from share-based compensation.

NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in AOCI, net of tax, 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 Six Months Ended June 30, 2020
			Unrealized (Loss) Gain on Cash Flow Hedges, Net of Tax		Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax
(in thousands)	Unrealized Gain (Loss) on Investments, Net of Tax		Foreign Currency Exchange Contracts		Euro-Denominated Notes		Cross Currency Swaps		Cumulative Translation Adjustment		Total

Balance as of December 31, 2019	$	110	$	(736)	$	1,396	$	3,467	$	(50,419)	$	(46,182)
Other comprehensive (loss) income before reclassifications	(574)		5,538		(642)		2,602		(15,200)		(8,276)
Gain reclassified from accumulated other comprehensive income	—		(2,574)		—		—		—		(2,574)
Balance as of June 30, 2020	$	(464)	$	2,228	$	754	$	6,069	$	(65,619)	$	(57,032)

໿


	For the Six Months Ended June 30, 2019
			Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax		Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax
(in thousands)	Unrealized (Loss) Gain on Investments, Net of Tax		Foreign Currency Exchange Contracts		Euro-Denominated Notes		Cross Currency Swaps		Cumulative Translation Adjustment		Total

Balance as of December 31, 2018	$	(157)	$	6,229	$	(394)	$	1,360	$	(48,829)	$	(41,791)
Other comprehensive income before reclassifications	362		1,110		500		868		1,681		4,521
Gain reclassified from accumulated other comprehensive income	—		(3,313)		—		—		—		(3,313)
Balance as of June 30, 2019	$	205	$	4,026	$	106	$	2,228	$	(47,148)	$	(40,583)

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


(in thousands)	Affected Line Item in the Statements of Income	Amounts Reclassified from AOCI For the Three Months Ended June 30,
		2020		2019
Gain on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	1,812	$	2,509
	Tax expense	339		358
	Gain, net of tax	$	1,473	$	2,151

(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 )


(in thousands)	Affected Line Item in the Statements of Income	Amounts Reclassified from AOCI For the Six Months Ended June 30,
		2020		2019
Gain on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	3,153	$	3,920
	Tax expense	579		607
	Gain, net of tax	$	2,574	$	3,313

NOTE 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 5 to the consolidated financial statements in our ~~2018~~2019 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:

(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


(in thousands)	For the Three Months Ended June 30,			For the Six Months Ended June 30,
	2020	2019	2020	2019

Shares outstanding for basic earnings per share	85,134	86,215	85,282	86,210

Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share	85,134	86,215	85,282	86,210
Dilutive effect of share-based payment awards	1,268	1,400	1,286	1,384
	86,402	87,615	86,568	87,594

Certain awards and options to acquire shares have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. The following table presents information concerning those anti-dilutive awards and options:

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES

See ~~"Note~~“Note 8. ~~Leases"~~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~~June 30, ~~2019,~~2020, 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.

We are a defendant in an ongoing litigation matter involving an alleged breach of contract for underpayment of royalty payments made from 2004 through 2017 under an expired patent license agreement. The plaintiff has asserted a claim of approximately $50 million, inclusive of interest, alleging that the incorrect royalty provision was applied to certain licensed products and services throughout the agreement term and that royalties were also due on non-licensed diagnostic services that were provided concurrently with licensed services. While it is possible that we may have a loss related to this claim, we do not believe a loss is probable at this time. We are vigorously defending ourselves against the plaintiff’s allegations. While we believe the claim is without merit, litigation is inherently unpredictable and there can be no assurance that we will prevail in this matter.

Excluding the litigation described above, we have had no significant changes to our contingencies and guarantees discussed in Note 15 to the consolidated financial statements in our ~~2018~~2019 Annual Report.

NOTE 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 (“OPTI Medical”) market with our out-licensing arrangements. Assets are not allocated to segments for internal reporting purposes.

Effective January 1, 2020, we modified our management reporting to the Chief Operating Decision Maker to provide a more comprehensive view of the performance of our operating segments by including costs ~~are~~that previously were not allocated to our segments. Prior to January 1, 2020, certain costs were not allocated to our operating segments and ~~are~~were instead reported under the caption “Unallocated ~~Amounts.”~~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 ~~and~~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~~were charged to our business segments at pre-determined budgeted amounts or rates. ~~Differences from~~Beginning January 1, 2020, the segments reflect these ~~pre-determined budgeted amounts or rates~~actual costs allocated to the segment based on various allocation methods, including revenue and headcount. Foreign exchange losses on settlements of foreign currency denominated transactions are ~~also captured~~not allocated to our operating segments and are instead reported within our Other reporting segment.

The following table reflects adjustments to previously reported costs in our Unallocated ~~Amounts.~~segment, that are now allocated to our CAG, Water, LPD and Other segments for the three and six months ended June 30, 2019, respectively:


(in thousands)	Three Months Ended June 30, 2019
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	344	$	15	$	19	$	8	$	(386)
Gross profit	(344)		(15)		(19)		(8)		386

Operating Expenses:
Sales and marketing	$	(18)	$	(1)	$	(1)	$	—	$	20
General and administrative	(893)		(179)		(206)		949		329
Research and development	3,960		10		13		—		(3,983)
Total operating expenses	3,049		(170)		(194)		949		(3,634)
Income from operations	$	(3,393)	$	155	$	175	$	(957)	$	4,020


(in thousands)	Six Months Ended June 30, 2019
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	162	$	7	$	9	$	4	$	(182)
Gross profit	(162)		(7)		(9)		(4)		182

Operating Expenses:
Sales and marketing	$	111	$	5	$	6	$	—	$	(122)
General and administrative	(1,095)		(219)		(253)		1,164		403
Research and development	7,518		19		24		—		(7,561)
Total operating expenses	6,534		(195)		(223)		1,164		(7,280)
Income from operations	$	(6,696)	$	188	$	214	$	(1,168)	$	7,462

The following is a summary of segment performance:


	For the Three Months Ended June 30,
	CAG		Water		LPD		Other		Consolidated Total
2020
Revenue	$	566,100	$	28,116	$	32,244	$	11,132	$	637,592

Income (loss) from operations	$	167,969	$	12,258	$	8,249	$	4,772	$	193,248
Interest expense, net									(9,426)
Income before provision for income taxes									183,822
Provision for income taxes									34,826
Net income									148,996
Less: Net income attributable to noncontrolling interest									56
Net income attributable to IDEXX Laboratories, Inc. stockholders									$	148,940

2019
Revenue	$	547,349	$	34,764	$	33,104	$	4,886	$	620,103

Income (loss) from operations	$	141,190	$	16,722	$	6,568	$	(205)	$	164,275
Interest expense, net									(8,153)
Income before provision for income taxes									156,122
Provision for income taxes									30,421
Net income									125,701
Less: Net loss attributable to noncontrolling interest									(5)
Net income attributable to IDEXX Laboratories, Inc. stockholders									$	125,706

(in thousands) For the Three 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

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


(in thousands)	For the Six Months Ended June 30,
	CAG		Water		LPD		Other		Consolidated Total
2020
Revenue	$	1,118,096	$	62,265	$	66,398	$	17,169	$	1,263,928

Income from operations	$	286,628	$	28,140	$	17,912	$	4,893	$	337,573
Interest expense, net									(16,978)
Income before provision for income taxes									320,595
Provision for income taxes									59,743
Net income									260,852
Less: Net income attributable to noncontrolling interest									85
Net income attributable to IDEXX Laboratories, Inc. stockholders									$	260,767

2019
Revenue	$	1,056,267	$	65,074	$	64,610	$	10,208	$	1,196,159

Income from operations	$	252,909	$	30,537	$	12,857	$	1,110	$	297,413
Interest expense, net									(16,499)
Income before provision for income taxes									280,914
Provision for income taxes									52,504
Net income									228,410
Less: Net income attributable to noncontrolling interest									23
Net income attributable to IDEXX Laboratories, Inc. stockholders									$	228,387

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~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

NOTE 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 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:

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~~six months ended ~~September~~June 30, ~~2019.~~2020.

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~~fair value of our Credit Facility approximates its carrying value. The estimated fair value and carrying value of our long-term debt were ~~$751.9~~$996.9 million and ~~$697.2~~$900.3 million, respectively, as of ~~September~~June 30, ~~2019,~~2020, and ~~$607.3~~$753.6 million and ~~$601.8~~$699.4 million, respectively, as of December 31, ~~2018.~~2019.

The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy:


(in thousands)
As of June 30, 2020	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2020

Assets
Money market funds⁽¹⁾	$	76	$	—	$	—	$	76
Equity mutual funds⁽²⁾	$	1,244	$	—	$	—	$	1,244
Cross currency swaps⁽³⁾	$	—	$	7,980	$	—	$	7,980
Foreign currency exchange contracts⁽³⁾	$	—	$	3,889	$	—	$	3,889
Liabilities
Foreign currency exchange contracts⁽³⁾	$	—	$	1,374	$	—	$	1,374
Deferred compensation⁽⁴⁾	$	1,244	$	—	$	—	$	1,244


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

Assets									Assets
Money market funds⁽¹⁾	$	58	$	—	$	—	$	58	Money market funds⁽¹⁾	$	71	$	—	$	—	$	71
Equity mutual funds⁽²⁾	$	1,708	$	—	$	—	$	1,708	Equity mutual funds⁽²⁾	$	1,676	$	—	$	—	$	1,676
Cross currency swaps⁽³⁾	$	—	$	7,040	$	—	$	7,040	Cross currency swaps⁽³⁾	$	—	$	4,559	$	—	$	4,559
Foreign currency exchange contracts⁽³⁾	$	—	$	8,197	$	—	$	8,197	Foreign currency exchange contracts⁽³⁾	$	—	$	1,791	$	—	$	1,791
Liabilities									Liabilities
Foreign currency exchange contracts⁽³⁾	$	—	$	148	$	—	$	148	Foreign currency exchange contracts⁽³⁾	$	—	$	2,886	$	—	$	2,886
Deferred compensation⁽⁴⁾	$	1,708	$	—	$	—	$	1,708	Deferred compensation⁽⁴⁾	$	1,676	$	—	$	—	$	1,676

(1)Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of June 30, 2020 and December 31, 2019, consisted of demand deposits.

(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, other long-term assets, accrued liabilities, or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.

(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

(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 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 risk that we currently manage by using hedging instruments is foreign currency exchange risk. 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.

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.

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. 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 14. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on our unaudited condensed consolidated statements of income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

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.

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~~six months ended ~~September~~June 30, ~~2019~~2020 or ~~2018.~~2019. At ~~September~~June 30, ~~2019,~~2020, the estimated amount of net gains, net of tax, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is ~~$5.9~~$2.3 million if exchange rates do not fluctuate from the levels at ~~September~~June 30, ~~2019.~~2020.

We hedge approximately 85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, and Australian ~~dollar, and, in prior years, the Swiss franc.~~dollar. 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 ~~$176.0~~$188.3 million and ~~$190.9~~$210.9 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 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~~losses of ~~$3.0~~$1.7 million and ~~$3.5~~$0.6 million, net of tax, within AOCI as a result of this net investment hedge for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively.~~2020, respectively, and a loss of $1.0 million and a gain of $0.5 million for the three and six months ended June 30, 2019. The related cumulative unrealized gain recorded at ~~September~~June 30, ~~2019,~~2020, 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 12 to the consolidated financial statements included in our ~~2018~~2019 Annual Report for further information regarding the issuance of these euro-denominated notes.

During May 2018, January 2019, March 2019, and ~~March~~November 2019, we entered into 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 contracts, we will deliver the notional amount of ~~€80.0~~€90.0 million and will receive approximately ~~$93.5~~$104.5 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.~~liquidated. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we recorded losses of $1.4 million and gains of ~~$3.1 million and $4.0~~$2.6 million, net of tax, within AOCI as a result of these net investment hedges, ~~respectively.~~respectively, and a loss of $0.6 million and gain of $0.9 million during the three and six months ended June 30, 2019. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swaps. This interest rate component is excluded from the assessment of hedge effectiveness and, thus is recognized as a reduction to interest expense over the life of the hedge instrument. We recognized ~~approximately $0.6~~approximately $0.7 million and ~~$1.7~~$1.3 million related to the excluded component as a reduction of interest expense for the three and ~~nine~~six months ended ~~September~~June 30, 2020, respectively, and $0.6 million and $1.1 million for the three and six months ended June 30, 2019, respectively.

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

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


(in thousands)		Hedging Assets
		June 30, 2020		December 31, 2019

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Other current assets	$	3,322	$	1,791
Cross currency swaps	Other long-term assets	7,980		4,559
Foreign currency exchange contracts	Other long-term assets	567		—
Total derivative instruments presented as hedge instruments on the balance sheet		11,869		6,350
Gross amounts subject to master netting arrangements not offset on the balance sheet		(1,156)		(1,354)
Net amount		$	10,713	$	4,996

(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

(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


(in thousands)		Hedging Liabilities
		June 30, 2020		December 31, 2019

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Accrued liabilities	$	625	$	2,886
Foreign currency exchange contracts	Other long-term liabilities	749		—
Total derivative instruments presented as cash flow hedges on the balance sheet		1,374		2,886
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet⁽¹⁾	Long-term debt	100,267		99,422
Total hedging instruments presented on the balance sheet		101,641		102,308
Gross amounts subject to master netting arrangements not offset on the balance sheet		(1,156)		(1,354)
Net amount		$	100,485	$	100,954

(1) Amounts represent reported carrying amounts of our foreign currency denominated debt. See ~~"Note~~“Note 18. Fair Value ~~Measurements"~~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, among other things, the impact of the COVID-19 pandemic; future revenue growth rates; ~~future~~projected tax ~~benefits;~~rates and the impact of tax legislation and regulatory action; 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, capital spending and operating expenditures; the working capital ~~spending;~~and liquidity outlook; interest expense; warranty expense; share-based compensation expense; the adoption and projected impact of new accounting standards; critical accounting estimates; 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 adverse impact, and the duration, of the effects of the ongoing COVID-19 pandemic on our business, results of operations, liquidity, financial condition, and stock price, as well as the other matters described under the headings ~~"Business," "Risk~~“Business,” “Risk Factors,” ~~"Legal~~“Legal Proceedings,~~" "Management's~~” “Management's Discussion and Analysis of Financial Condition and Results of Operations,"” and ~~"Quantitative~~“Quantitative and Qualitative Disclosure About Market ~~Risk"~~Risk” in our ~~2018~~2019 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 ~~2018~~2019 Annual Report that includes additional information about us, our results of operations, our financial position, and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in Part I. Item 1. of this Quarterly Report on Form 10-Q.

Effects of Certain Factorsand Trendson Results of Operations

COVID-19 Update. The primary impacts of the COVID-19 pandemic have been seen in our CAG business. While veterinary care is widely recognized as an “essential” service, stay-at-home policies deployed to combat the spread of COVID-19 constrained visits to veterinary practices significantly in late March 2020 through early April 2020, pressuring diagnostic testing volumes. Restrictions on sales professionals’ access to veterinary clinics also contributed to deferrals on new CAG instrument placements

As stay-at-home policies were relaxed, there was significant improvement in clinical visit activity which accelerated through the second quarter of 2020. Weekly U.S. companion animal practice data show improvement in same-store clinical visits trends since mid-April 2020. Same-store clinical visits gains were 7% in June 2020, supported by high growth in wellness visits. Solid same-store clinical visit gains have continued in July 2020, reflected in 6% same-store visit gains for the three-week period ended July 17, 2020.

Companion animal market improvement trends globally have supported a strong recovery in demand for CAG diagnostic products and services. Global CAG Diagnostics recurring revenues declined approximately 16% in April 2020, increased approximately 8% in May 2020, and grew approximately 30% in June 2020, in part supported by pent-up demand for diagnostic testing.

While these trends are encouraging, potential effects related to ongoing COVID-19 case management efforts are challenging to predict and may pressure future revenues should enhanced social distancing policies and higher infection rates impact veterinary clinic operations in certain regions.

In addition to impacts on our CAG business, we have also seen pressure on Water testing volumes. There was some disruption to compliance Water testing early in the second quarter of 2020 related to business lockdown effects, as well as beach and pool closures. Approximately 20% of our Water revenues are related to non-compliance testing, which has seen declines related to reduced overall business activity and prioritization of laboratory spending. We anticipate that near-to-moderate-term demand for non-compliance testing will continue to be impacted by pandemic and related economic pressures.

In managing our businesses, we continue to provide high levels of service delivery and product support for customers during this time and maintain high health and safety standards to protect our employees and ensure business continuity. In an effort to continue to protect the health and safety of our workforce and their families and our communities, the majority of our employees continue to work remotely and travel remains highly restricted. We have introduced new employee benefits to support remote workers. Given improved market and business trends, we have discontinued temporary reductions in employee salaries and benefits and Board of Directors compensation.

Human COVID-19 Testing

On May 7, 2020, we announced that OPTI Medical was granted by the United States Food and Drug Administration (FDA) an Emergency Use Authorization (EUA) for the OPTI® SARS-CoV-2 RT-PCR laboratory test kit for the detection of SARS-CoV-2, the virus that causes COVID-19. This announcement followed an earlier validation of the test by the Institut Pasteur of France. The test kit provides results in approximately 2 to 3.5 hours and has been validated on commonly available PCR instruments. The OPTI SARS-CoV-2 RT-PCR test kit was developed by utilizing the EUA process outlined by the FDA in March 2020. Use in the United States is limited to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988, 42 U.S.C. §263a (CLIA), to perform high complexity tests to assist physicians in the diagnosis of COVID-19. On June 5, 2020 OPTI Medical announced that it has received the CE mark certification in the European Union for its OPTI® SARS-CoV-2 RT-PCR laboratory test kit. Additionally, the FDA has granted EUA for the new OPTI DNA/RNA Magnetic Bead Kit for nucleic acid extraction from respiratory samples to be used with the OPTI SARS-CoV-2 RT-PCR test kit, which enables OPTI Medical Systems to provide laboratories with a complete OPTI Medical Systems-manufactured workflow solution for COVID-19 testing.

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

Other Items. See “Part I. Item 1. Business - Patents and Licenses” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration.

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~~design, manufacture, and distribute point of ~~portable electrolytes~~care and ~~blood gas analyzers~~laboratory diagnostics 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 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; and

•Point-of-care electrolytes and blood gas analyzers, and laboratory diagnostics 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 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 develops, designs, manufactures and distributes point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable ~~products~~products) for the human medical diagnostics market.

~~Certain~~Effective January 1, 2020, we modified our management reporting to the Chief Operating Decision Maker to provide a more comprehensive view of the performance of our operating segments by including costs ~~are~~that were previously not allocated to our segments. Prior to January 1, 2020, certain costs were not allocated to our operating segments and ~~are~~were instead reported under the caption “Unallocated ~~Amounts.”~~Amounts”. These costs ~~include~~included costs ~~that do not align with one of our existing operating segments or are cost prohibitive to allocate, which~~ primarily ~~consist~~consisting 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~~were charged to our business segments at pre-determined budgeted amounts or rates. ~~Differences from~~Beginning January 1, 2020, the segments will reflect 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 transitionactual costs allocated 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 Presidentsegment based on various allocation methods, including revenue 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 Trends~~headcount. Foreign exchange losses on ~~Results of Operations~~

~~Currency Impact.~~ ~~See “Part I. Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Quarterly Report on Form 10-Q for additional information regarding the impact~~settlements of foreign currency ~~exchange rates.~~denominated transactions are not allocated to our operating segments and are instead reported within our Other reporting segment.

~~Other Items.~~ ~~See “Part I. Item 1. Business - Patents and Licenses” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included~~The following table reflects adjustments to previously reported costs in our ~~2018 Annual Report for additional information regarding distributor purchasing~~Unallocated segment, that are now allocated to our CAG, Water, LPD and ~~inventories, economic conditions,~~Other segments:

For the three months ended June 30, 2019:


(in thousands)
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	344	$	15	$	19	$	8	$	(386)
Gross profit	(344)		(15)		(19)		(8)		386

Operating Expenses:
Sales and marketing	$	(18)	$	(1)	$	(1)	$	—	$	20
General and administrative	(893)		(179)		(206)		949		329
Research and development	3,960		10		13		—		(3,983)
Total operating expenses	3,049		(170)		(194)		949		(3,634)
Income from operations	$	(3,393)	$	155	$	175	$	(957)	$	4,020

For the six months ended June 30, 2019:


(in thousands)
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	162	$	7	$	9	$	4	$	(182)
Gross profit	(162)		(7)		(9)		(4)		182

Operating Expenses:
Sales and marketing	$	111	$	5	$	6	$	—	$	(122)
General and administrative	(1,095)		(219)		(253)		1,164		403
Research and development	7,518		19		24		—		(7,561)
Total operating expenses	6,534		(195)		(223)		1,164		(7,280)
Income from operations	$	(6,696)	$	188	$	214	$	(1,168)	$	7,462

The following table reflects the impact to previously reported segment gross profit margin, operating income margin and ~~patent expiration.~~operating expenses as a percentage of revenue, due to the allocation of these costs to our CAG, Water, LPD and Other segments:

For the three months ended June 30, 2019:


	CAG		Water		LPD		Other

Cost of sales	0.1	%	—	%	0.1	%	0.2	%
Gross profit	(0.1)	%	—	%	(0.1)	%	(0.2)	%

Operating Expenses:
Sales and marketing	—	%	—	%	—	%	—	%
General and administrative	(0.2)	%	(0.5)	%	(0.6)	%	19.4	%
Research and development	0.7	%	—	%	—	%	—	%
Total operating expenses	0.6	%	(0.5)	%	(0.6)	%	19.4	%
Income from operations	(0.6)	%	0.4	%	0.5	%	(19.6)	%

For the six months ended June 30, 2019:


	CAG		Water		LPD		Other

Cost of sales	—	%	—	%	—	%	—	%
Gross profit	—	%	—	%	—	%	—	%

Operating Expenses:
Sales and marketing	—	%	—	%	—	%	—	%
General and administrative	(0.1)	%	(0.3)	%	(0.4)	%	11.4	%
Research and development	0.7	%	—	%	—	%	—	%
Total operating expenses	0.6	%	(0.3)	%	(0.3)	%	11.4	%
Income from operations	(0.6)	%	0.3	%	0.3	%	(11.4)	%

Critical Accounting Estimates and 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. ~~The~~Except as described below, 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~~six months ended ~~September~~June 30, ~~2019,~~2020, are consistent with those discussed in our ~~2018~~2019 Annual Report in the section under the heading “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Assumptions.”

Valuation of Goodwill and Other Intangible Assets

A significant portion of the purchase price for acquired businesses is generally assigned to intangible assets. Intangible assets other than goodwill are initially valued at fair value. If a quoted price in an active market for the identical asset is not readily available at the measurement date, the fair value of the intangible asset is estimated based on discounted cash flows using market participant assumptions, which are assumptions that are not specific to IDEXX. The selection of appropriate valuation methodologies and the estimation of discounted cash flows require significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the useful lives of intangible assets. When material, we utilize independent valuation experts to advise and assist us in determining the fair values of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets. Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair

value of acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.

We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and whenever events or circumstances indicate impairment may exist. Our reporting units are the individual product and service categories that comprise our CAG operating segment, our Water and LPD operating segments and goodwill remaining from the restructuring of our pharmaceutical business in the fourth quarter of 2008. We also assess the realizability of other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

We considered the effects of the ongoing COVID-19 pandemic and have evaluated factors specific to our reporting units, as well as industry and macroeconomic factors that are reasonably likely to have a material impact on the fair value of our reporting units and determined it is more likely than not that the fair value of our reporting units and intangible assets continues to exceed the carrying amount. Examples of the factors considered in assessing the fair value of our reporting units include: the results of the most recent goodwill impairment test, recent and anticipated revenue growth trends, the market price of our common stock, our overall financial position including our working capital and liquidity levels, the competitive environment, the regulatory environment, anticipated changes in product or labor costs, the consistency of operating margins and cash flows and current and long-range financial forecasts.

The results of our most recent goodwill impairment test in the fourth quarter of 2019, indicated an excess of estimated fair value over the carrying amount for each of our reporting units with a minimum of 71% and an average of approximately 1,060% in total. The majority of our goodwill is related to our CAG Diagnostics reporting units with an average of approximately 1,200% excess of estimated fair value over the carrying amount, including our Reference Laboratory Diagnostic and Consulting Services, Rapid Assay Products, and IDEXX VetLab Consumables, Instruments, Services and Accessories.

We also maintain approximately $45 million of goodwill associated with our Veterinary Software and Services reporting unit, which is primarily comprised of recent acquisitions of early-stage software companies that expand our suite of technology applications for the veterinary profession, including SaaS-based practice management systems, applications that extend workflow capabilities, client marketing, wellness plan management and other connectivity and communication needs. These software applications continue to be in the earlier stages of commercial development, and therefore our Veterinary Software and Services reporting unit has a relatively lower excess of estimated fair value over the carrying amount, as indicated by the results of our most recent goodwill impairment test, which indicated approximately $208 million and 217% of the reporting unit’s carrying value. Realization of this goodwill is dependent on our successful commercialization of these early-stage software applications.

Additionally, we maintain approximately $6.5 million of goodwill associated with our remaining pharmaceutical intellectual property, out-licensing arrangements, and certain retained drug delivery technologies (collectively “Pharmaceutical Activities”) that we seek to commercialize through arrangements with third parties. Currently, our primary support for the carrying value of this goodwill is royalty revenue associated with the commercialization of certain intellectual property. There is no guarantee that we will be able to maintain or increase revenues from our remaining Pharmaceutical Activities. The results of our most recent goodwill impairment test for these Pharmaceutical Activities indicate an excess of estimated fair value over the carrying amount of this reporting unit by approximately $4.7 million and 71% of the reporting unit’s carrying value. Realization of this goodwill is dependent upon the success of those third parties in developing and commercializing products, which will result in our receipt of royalties and other payments.

While we believe that the assumptions used in our determination that the fair values of our reporting units continue to exceed the carrying amounts are reasonable, a change in these underlying assumptions could result in a material negative effect on the estimated fair value of the reporting units. A prolonged economic downturn in the U.S. or internationally resulting in lower long-term growth rates and reduced long-term profitability may reduce the fair value of our reporting units. Industry specific events or circumstances could have a negative impact on our reporting units and may also reduce the fair value of our reporting units. Should such events occur, and it becomes more likely than not that a reporting unit’s fair value or intangible asset value has fallen below its carrying value, we will perform an interim impairment test, in addition to the annual goodwill impairment test. Future impairment tests may result in an impairment of goodwill or other intangible assets, depending on the outcome of future impairment tests. An impairment of goodwill or other intangible assets would be reported as a non-cash charge to earnings.

Recent Accounting Pronouncements

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

Non-GAAP Financial Measures

The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion to “revenue,” “revenues” or “revenue growth” are references to “organic revenue growth.” Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, 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.



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

One IDEXX Drive	Westbrook	Maine	04092
(Address of principal executive offices)			(ZIP Code)



(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


(in thousands)	June 30, 2020		December 31, 2019

Raw materials	$	49,129	$	41,202
Work-in-process	20,314		20,077
Finished goods	159,934		133,740
Inventories	$	229,377	$	195,019



	September 30, 2019			December 31, 2018

ASSETS
Current Assets:
Cash and cash equivalents	$	103,996		$	123,794
Accounts receivable, net of reserves of $3,831 in 2019 and $4,702 in 2018	268,319			248,855
Inventories	204,893			173,303
Other current assets	126,174			108,220
Total current assets	703,382			654,172
Long-Term Assets:
Property and equipment, net	496,584			437,270
Operating lease right-of-use assets (Notes 2 and 8)	78,977			—
Goodwill	212,171			214,489
Intangible assets, net	35,662			41,825
Other long-term assets	224,705			189,593
Total long-term assets	1,048,099			883,177
TOTAL ASSETS	$	1,751,481		$	1,537,349

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable	$	75,515		$	69,534
Accrued liabilities	278,626			260,683
Line of credit	229,500			398,937
Current portion of deferred revenue	42,986			41,290
Total current liabilities	626,627			770,444
Long-Term Liabilities:
Deferred income tax liabilities	33,734			29,267
Long-term debt	696,634			601,348
Long-term deferred revenue, net of current portion	48,345			60,697
Long-term operating lease liabilities (Notes 2 and 8)	66,341			—
Other long-term liabilities	77,078			84,826
Total long-term liabilities	922,132			776,138
Total liabilities	1,548,759			1,546,582

Commitments and Contingencies (Note 16)

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	1,189,554			1,138,216
Deferred stock units: Outstanding: 143 units in 2019 and 162 units in 2018	4,416			4,524
Retained earnings	1,505,152			1,167,928
Accumulated other comprehensive loss	(45,565		)	(41,791		)
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	304			280
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.



	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 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		%



(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



(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	)



(in thousands)	For the Three 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

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



(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



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.



(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 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, 2019 and December 31, 2018, consisted of demand deposits.


~~(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, other long-term assets, accrued liabilities, or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.


~~(4)~~	A deferred compensation plan assumed as part of a previous business combination is included within accrued liabilities and other long-term liabilities. The fair value of our deferred compensation plan is indexed to the performance of the underlying equity mutual funds discussed in footnote (2) above.


(in thousands)		Three Months Ended June 30,
		2020		2019

Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	258,250	$	262,250
Foreign exchange contracts
Amount of gain reclassified from accumulated other comprehensive income into income		$	1,812	$	2,509



(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	)


(in thousands)		Six Months Ended June 30,
		2020		2019

Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	524,996	$	506,709
Foreign exchange contracts
Amount of gain reclassified from accumulated other comprehensive income into income		$	3,153	$	3,920



	For the Three 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	$	533,130	$	478,097	$	55,033	11.5	%	(1.2	%)	—	12.7	%
United States	357,810		319,561		38,249		12.0	%	—		—	12.0	%
International	175,320		158,536		16,784		10.6	%	(3.6	%)	—	14.2	%

Water	34,906		33,108		1,798		5.4	%	(1.7	%)	—	7.1	%
United States	16,794		15,878		916		5.8	%	—		—	5.8	%
International	18,112		17,230		882		5.1	%	(3.3	%)	—	8.4	%

LPD	31,370		29,420		1,950		6.6	%	(2.9	%)	—	9.5	%
United States	3,649		3,502		147		4.2	%	—		—	4.2	%
International	27,721		25,918		1,803		7.0	%	(3.3	%)	—	10.3	%

Other	5,897		4,823		1,074		22.2	%	—		—	22.2	%

Total Company	$	605,303	$	545,448	$	59,855	11.0	%	(1.3	%)	—	12.3	%
United States	380,184		340,692		39,492		11.6	%	—		—	11.6	%
International	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.~~



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

Revenues	$	605,303			$	545,448			$	59,855	11.0	%
Cost of revenue	260,353				239,805				20,548		8.6	%
Gross profit	344,950		57.0	%	305,643		56.0	%	39,307		12.9	%

Operating Expenses:
Sales and marketing	104,551		17.3	%	95,146		17.4	%	9,405		9.9	%
General and administrative	66,337		11.0	%	63,955		11.7	%	2,382		3.7	%
Research and development	34,260		5.7	%	29,192		5.4	%	5,068		17.4	%
Total operating expenses	205,148		33.9	%	188,293		34.5	%	16,855		9.0	%
Income from operations	$	139,802	23.1	%	$	117,350	21.5	%	$	22,452	19.1	%



	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	$	533,130			$	478,097			$	55,033	11.5	%
Cost of revenues	235,041				216,235				18,806		8.7	%
Gross profit	298,089		55.9	%	261,862		54.8	%	36,227		13.8	%

Operating Expenses:
Sales and marketing	94,234		17.7	%	85,655		17.9	%	8,579		10.0	%
General and administrative	54,424		10.2	%	52,113		10.9	%	2,311		4.4	%
Research and development	24,941		4.7	%	21,853		4.6	%	3,088		14.1	%
Total operating expenses	173,599		32.6	%	159,621		33.4	%	13,978		8.8	%
Income from operations	$	124,490	23.4	%	$	102,241	21.4	%	$	22,249	21.8	%


Cash, cash equivalents and marketable securities (dollars in thousands)	September 30, 2019			December 31, 2018			Cash, cash equivalents and marketable securities (dollars in thousands)	June 30, 2020			December 31, 2019

U.S.	$	2,133		$	2,044		U.S.	$	3,892		$	1,135
Foreign	101,863			121,750			Foreign	101,401			89,191
Total	$	103,996		$	123,794		Total	$	105,293		$	90,326

Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	$	2,833		$	11,119		Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	$	9,047		$	6,469

Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	2.7		%	9.0		%	Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries	8.6		%	7.2		%


	For the Three Months Ended
	June 30, 2020	March 31, 2020	December 31, 2019	September 30, 2019	June 30, 2019

Days sales outstanding⁽¹⁾	44.4	41.5	40.5	41.8	41.7
Inventory turns⁽²⁾	1.6	1.9	2.2	2.0	2.1


~~(1)~~ (2)Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the average inventory balances at the beginning and end of each quarter.	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 balances at the beginning and end of each quarter.~~



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

Net income attributable to stockholders (as reported)	$	422,862
Interest expense	32,222
Provision for income taxes	97,832
Depreciation and amortization	86,026
Share-based compensation expense	28,832
Adjusted EBITDA	$	667,774

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

Line of credit	$	229,500
Long-term debt	696,634
Total debt	926,134
Acquisition-related contingent consideration payable	3,098
Financing leases	145
Deferred financing costs	531
Gross debt	929,908
Gross debt to Adjusted EBITDA ratio	1.39

Less: Cash and cash equivalents	(103,996		)
Net debt	$	825,912
Net debt to Adjusted EBITDA ratio	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)

April 1 to April 30, 2020	—		$	—	—	6,275,912
May 1 to May 31, 2020	—		$	—	—	6,275,912
June 1 to June 30, 2020	207		$	312.19	—	6,275,912
Total	207	⁽²⁾			—	6,275,912


Exhibit No.		Description


~~Exhibit No.~~		~~Description~~

~~10.1~~31.1	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~~101		~~XBRL Instance Document -~~The following financial and related information from IDEXX Laboratories, Inc.’s Quarterly Report on Form 10-Q for the ~~instance document does not appear~~quarter ended June 30, 2020, formatted in Inline eXtensible Business Reportable Language (iXBRL) includes: (i) the ~~Interactive Data File because its XBRL tags are embedded within~~Condensed Consolidated Balance Sheet; (ii) the Condensed Consolidated Statement of Income; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit); (v) the Condensed Consolidated Statement of Cash Flows; and, (vi) Notes to Consolidated Financial Statements.

104		The cover page from the Company's Quarterly Report of Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL ~~document.~~and contained in Exhibit 101.

~~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: ~~October~~July 31, ~~2019~~2020			Brian P. McKeon
			Executive Vice President, Chief Financial Officer and Treasurer
			(Principal Financial Officer)