UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 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

IDEXX LABORATORIES, INC.

(Exact name of registrant as specified in its charter)



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

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

~~207~~-~~556-0300~~207-556-0300

(Registrant’s telephone number, including area code)

Securities Registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.10 par value per share

IDXX

NASDAQ Global Select Market

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large ~~accelerated filer~~Accelerated Filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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~~was 85,299,893, on October ~~28, 2019.~~26, 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~~2020 and December 31, ~~2018~~2019	3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~September~~Se ptember 30, ~~2019~~2020 and ~~2018~~2019	5
	Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3035
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5360
Item 4.	Controls and Procedures	5461
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	5461
Item 1A.	Risk Factors	5461
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5564
Item 6.	Exhibits	5665
Signatures		5766

໿

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)~~


	September 30, 2020		December 31, 2019

ASSETS
Current Assets:
Cash and cash equivalents	$	175,587	$	90,326
Accounts receivable, net	337,593		269,312
Inventories	217,597		195,019
Other current assets	137,902		124,982
Total current assets	868,679		679,639
Long-Term Assets:
Property and equipment, net	547,624		533,845
Operating lease right-of-use assets	84,735		80,607
Goodwill	238,100		239,724
Intangible assets, net	53,467		58,468
Other long-term assets	254,802		240,192
Total long-term assets	1,178,728		1,152,836
TOTAL ASSETS	$	2,047,407	$	1,832,475

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	71,933	$	72,172
Accrued liabilities	362,326		322,938
Line of credit	0		288,765
Current portion of long-term debt	49,983		0
Current portion of deferred revenue	42,599		41,462
Total current liabilities	526,841		725,337
Long-Term Liabilities:
Deferred income tax liabilities	27,590		33,024
Long-term debt, net of current portion	853,316		698,910
Long-term deferred revenue, net of current portion	48,226		48,743
Long-term operating lease liabilities	70,655		67,472
Other long-term liabilities	79,664		81,164
Total long-term liabilities	1,079,451		929,313
Total liabilities	1,606,292		1,654,650

Commitments and Contingencies (Note 16)

Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued:106,282 shares in 2020 and 105,711 shares in 2019; Outstanding: 85,300 shares in 2020 and 85,471 shares in 2019	10,628		10,571
Additional paid-in capital	1,274,069		1,213,517
Deferred stock units: Outstanding: 147 units in 2020 and 143 units in 2019	5,411		4,462
Retained earnings	2,000,805		1,595,648
Accumulated other comprehensive loss	(61,925)		(46,182)
Treasury stock, at cost: 20,982 shares in 2020 and 20,240 shares in 2019	(2,788,412)		(2,600,543)
Total IDEXX Laboratories, Inc. stockholders’ equity	440,576		177,473
Noncontrolling interest	539		352
Total stockholders’ equity	441,115		177,825
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,047,407	$	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 September 30,				For the Nine Months Ended September 30,
	2019			2018			2019			2018				2020		2019		2020		2019

Revenue:													Revenue:
Product revenue	$	360,000		$	324,303		$	1,059,696		$	990,364		Product revenue	$	422,283	$	360,000	$	1,153,114	$	1,059,696
Service revenue	245,303			221,145			741,766			673,492			Service revenue	299,506		245,303		832,603		741,766
Total revenue	605,303			545,448			1,801,462			1,663,856			Total revenue	721,789		605,303		1,985,717		1,801,462
Cost of Revenue:													Cost of Revenue:
Cost of product revenue	125,112			120,294			370,388			365,810			Cost of product revenue	146,804		125,112		396,282		370,388
Cost of service revenue	135,241			119,511			396,674			356,865			Cost of service revenue	152,379		135,241		427,897		396,674
Total cost of revenue	260,353			239,805			767,062			722,675			Total cost of revenue	299,183		260,353		824,179		767,062
Gross profit	344,950			305,643			1,034,400			941,181			Gross profit	422,606		344,950		1,161,538		1,034,400
Expenses:													Expenses:
Sales and marketing	104,551			95,146			312,499			291,502			Sales and marketing	108,202		104,551		318,526		312,499
General and administrative	66,337			63,955			186,653			185,966			General and administrative	105,031		66,337		231,111		186,653
Research and development	34,260			29,192			98,033			87,725			Research and development	37,517		34,260		102,472		98,033
Income from operations	139,802			117,350			437,215			375,988			Income from operations	171,856		139,802		509,429		437,215
Interest expense	(7,090		)	(8,453		)	(23,662		)	(26,184		)	Interest expense	(8,110)		(7,090)		(25,297)		(23,662)
Interest income	86			142			159			893			Interest income	208		86		417		159
Income before provision for income taxes	132,798			109,039			413,712			350,697			Income before provision for income taxes	163,954		132,798		484,549		413,712
Provision for income taxes	23,960			15,825			76,464			59,327			Provision for income taxes	17,633		23,960		77,376		76,464
Net income	108,838			93,214			337,248			291,370			Net income	146,321		108,838		407,173		337,248
Less: Net income (loss) attributable to noncontrolling interest	1			(37		)	24			(23		)
Less: Net income attributable to noncontrolling interest													Less: Net income attributable to noncontrolling interest	102		1		187		24
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	108,837		$	93,251		$	337,224		$	291,393		Net income attributable to IDEXX Laboratories, Inc. stockholders	$	146,219	$	108,837	$	406,986	$	337,224

Earnings per Share:													Earnings per Share:
Basic	$	1.26		$	1.07		$	3.91		$	3.35		Basic	$	1.71	$	1.26	$	4.77	$	3.91
Diluted	$	1.24		$	1.05		$	3.85		$	3.29		Diluted	$	1.69	$	1.24	$	4.70	$	3.85
Weighted Average Shares Outstanding:													Weighted Average Shares Outstanding:
Basic	86,198			86,756			86,206			87,029			Basic	85,314		86,198		85,293		86,206
Diluted	87,667			88,453			87,633			88,687			Diluted	86,690		87,667		86,635		87,633

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 September 30,				For the Nine Months Ended September 30,
	2019			2018			2019			2018				2020		2019		2020		2019

Net income	$	108,838		$	93,214		$	337,248		$	291,370		Net income	$	146,321	$	108,838	$	407,173	$	337,248
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	7,329		(13,912)		(7,871)		(12,231)
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 $(890) and $(1,092) in 2020 and $947 and $1,105 in 2019													Unrealized (loss) gain on Euro-denominated notes, net of tax (benefit) expense of $(890) and $(1,092) in 2020 and $947 and $1,105 in 2019	(2,824)		3,007		(3,466)		3,507
Unrealized (loss) gain on investments, net of tax (benefit) expense of $52 and $(129) in 2020 and $(21) and $93 in 2019													Unrealized (loss) gain on investments, net of tax (benefit) expense of $52 and $(129) in 2020 and $(21) and $93 in 2019	166		(67)		(408)		295
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
Other comprehensive (loss) gain, net of tax	(4,982		)	372			(3,774		)	(5,717		)
Unrealized gain (loss) on foreign currency exchange contracts, net of tax (benefit) expense of $(1,408) and $(161) in 2020 and $1,240 and $1,443 in 2019													Unrealized gain (loss) on foreign currency exchange contracts, net of tax (benefit) expense of $(1,408) and $(161) in 2020 and $1,240 and $1,443 in 2019	(6,161)		5,348		(623)		6,458
Unrealized gain (loss) on cross currency swaps, net of tax (benefit) expense of $(933) and $(347) in 2020 and $733 and $892 in 2019													Unrealized gain (loss) on cross currency swaps, net of tax (benefit) expense of $(933) and $(347) in 2020 and $733 and $892 in 2019	(3,941)		3,125		(1,339)		3,993
Reclassification adjustment for (gain) loss included in net income, net of tax (expense) benefit of $53 and $(526) in 2020 and $(688) and $(1,295) in 2019													Reclassification adjustment for (gain) loss included in net income, net of tax (expense) benefit of $53 and $(526) in 2020 and $(688) and $(1,295) in 2019	538		(2,483)		(2,036)		(5,796)
Unrealized (loss) gain on derivative instruments													Unrealized (loss) gain on derivative instruments	(9,564)		5,990		(3,998)		4,655
Other comprehensive (loss), net of tax													Other comprehensive (loss), net of tax	(4,893)		(4,982)		(15,743)		(3,774)
Comprehensive income	103,856			93,586			333,474			285,653			Comprehensive income	141,428		103,856		391,430		333,474
Less: Comprehensive income (loss) attributable to noncontrolling interest	1			(37		)	24			(23		)
Less: Comprehensive income attributable to noncontrolling interest													Less: Comprehensive income attributable to noncontrolling interest	102		1		187		24
Comprehensive income attributable to IDEXX Laboratories, Inc.	$	103,855		$	93,623		$	333,450		$	285,676		Comprehensive income attributable to IDEXX Laboratories, Inc.	$	141,326	$	103,855	$	391,243	$	333,450

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) Income		Treasury Stock		Noncontrolling Interest		Total Stockholders’ Equity
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		—		—		—		—		0
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
Net income (loss)	—	—		—		—		146,219		—		—		102		146,321
Other comprehensive income, net	—	—		—		—		—		(4,893)		—		—		(4,893)
Repurchases of common stock, net	—	—		—		—		—		—		(360)		—		(360)
Common stock issued under stock plans	251	25		18,706		(12)		—		—		—		—		18,719
Share-based compensation cost	—	—		7,907		21		—		—		—		—		7,928
Balance September 30, 2020	106,282	$	10,628	$	1,274,069	$	5,411	$	2,000,805	$	(61,925)	$	(2,788,412)	$	539	$	441,115


	Common Stock																								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)				Number of Shares	$0.10 Par Value		Additional Paid-in Capital		Deferred Stock Units		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		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	)	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			Net income	—	—		—		—		102,681		—		—		28		102,709
Other comprehensive income, net	—	—		—			—			—		1,776			—			—			1,776			Other comprehensive income, net	—	—		—		—		—		1,776		—		—		1,776
Repurchases of common stock, net	—	—		—			—			—		—			(61,135		)	—			(61,135		)	Repurchases of common stock, net	—	—		—		—		—		—		(61,135)		—		(61,135)
Common stock issued under stock plans	258	26		11,393			—			—		—			—			—			11,419			Common stock issued under stock plans	258	26		11,393		—		—		—		—		—		11,419
Share-based compensation cost	—	—		6,266			68			—		—			—			—			6,334			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		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			Net income (loss)	—	—		—		—		125,706		—		—		(5)		125,701
Other comprehensive loss, net	—	—		—			—			—		(568		)	—			—			(568		)	Other comprehensive loss, net	—	—		—		—		—		(568)		—		—		(568)
Repurchases of common stock, net	—	—		—			—			—		—			(20,343		)	—			(20,343		)	Repurchases of common stock, net	—	—		—		—		—		—		(20,343)		—		(20,343)
Common stock issued under stock plans	133	13		8,556			(578		)	—		—			—			—			7,991			Common stock issued under stock plans	133	13		8,556		(578)		—		—		—		—		7,991
Deferred stock units activity	—	—		(324		)	324			—		—			—			—			—			Deferred stock units activity	—	—		(324)		324		—		—		—		—		0
Share-based compensation cost	—	—		6,855			43			—		—			—			—			6,898			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		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			Net income	—	—		—		—		108,837		—		—		1		108,838
Other comprehensive loss, net	—	—		—			—			—		(4,982		)	—			—			(4,982		)	Other comprehensive loss, net	—	—		—		—		—		(4,982)		—		—		(4,982)
Repurchases of common stock, net	—	—		—			—			—		—			(91,321		)	—			(91,321		)	Repurchases of common stock, net	—	—		—		—		—		—		(91,321)		—		(91,321)
Common stock issued under stock plans	116	11		9,247			(11		)	—		—			—			—			9,247			Common stock issued under stock plans	116	11		9,247		(11)		—		—		—		—		9,247
Share-based compensation cost	—	—		9,345			46			—		—			—			—			9,391			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		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.	The accompanying notes are an integral part of these consolidated financial statements.																							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 Nine Months Ended September 30,
	2020		2019

Cash Flows from Operating Activities:
Net income	$	407,173	$	337,248
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	71,437		65,422
Impairment charge	1,993		0
Provision for credit losses (Note 2 & Note 6)	5,235		618
Deferred income taxes	(3,363)		2,403
Share-based compensation expense	23,008		22,623
Other	488		879
Changes in assets and liabilities:
Accounts receivable	(72,409)		(24,451)
Inventories	(25,091)		(36,582)
Other assets and liabilities	30,579		(54,770)
Accounts payable	512		1,181
Deferred revenue	(10,433)		(10,826)
Net cash provided by operating activities	429,129		303,745
Cash Flows from Investing Activities:
Purchases of property and equipment	(92,768)		(109,058)
Acquisition of intangible assets	(668)		(255)
Acquisitions of a business and equity investment, net of cash acquired	(250)		(304)
Net cash used by investing activities	(93,686)		(109,617)
Cash Flows from Financing Activities:
Repayments on revolving credit facilities, net	(289,625)		(169,532)
Issuance of senior notes	200,000		100,000
Debt issuance costs	(4,995)		(154)
Payment of acquisition-related contingent consideration	(1,580)		(2,255)
Repurchases of common stock, net	(182,815)		(160,969)
Proceeds from exercises of stock options and employee stock purchase plans	39,230		28,739
Shares withheld for statutory tax withholding on restricted stock	(9,029)		(7,849)
Net cash used by financing activities	(248,814)		(212,020)
Net effect of changes in exchange rates on cash	(1,368)		(1,906)
Net increase (decrease) in cash and cash equivalents	85,261		(19,798)
Cash and cash equivalents at beginning of period	90,326		123,794
Cash and cash equivalents at end of period	$	175,587	$	103,996

Supplemental Cash Flow Information:
Cash paid for income taxes	$	79,909	$	80,036
Unpaid property and equipment, reflected in accounts payable and accrued liabilities	$	7,708	$	19,196

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 months ended September 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 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 early in 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. During the second and third quarters of 2020, certain 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 as of and for the three and nine months ended September 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

WeEffective January 1, 2020, we adopted ASU ~~2016-02,~~ ~~Leases~~2018-13, Fair Value Measurement (Topic ~~842)~~ (820), which modifies the ~~"New Leasing Standard"),~~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 transfers between Level 1 and Level 2 of ~~January 1, 2019, using~~ the ~~optional transition method that allows~~fair value hierarchy contained in ASC 820, (b) the policy for ~~a cumulative-effect adjustment in~~timing of transfers between levels, and (c) the ~~period of adoption and did not restate prior periods. In addition, we elected 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~~approximately $4.5 million and $12.2 million for the three and nine months ended September 30, 2020, respectively, as compared to $5.3 million and $14.5 million for the three and nine months ended September 30, 2019, ~~respectively, as compared to $3.0 million and $9.0 million for the three and nine months ended September 30, 2018,~~ respectively, including both operating leases and sales-type leases under ASC 842, Leases, ~~during~~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~~$2.8 million and ~~$18.5~~$19.5 million were recognized during the three and nine months ended September 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 $35.2 million at September 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~~$21.2 million at September 30, ~~2019,~~2020, of which approximately 9%11%, ~~35%~~40%, 28%, ~~18%~~14%, and ~~10%~~7% 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~~ $9.7 million and ~~$26.2~~$29.9 million were recognized as a reduction of revenue during the three and nine months ended September 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 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 months ended September 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~~$4.5 million and ~~$7.0~~$14.0 million were reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended September 30, ~~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 $101.3 million at September 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 months ended September 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%, 25%, ~~21%~~23%, ~~19%~~20%, and ~~28% are~~25% 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~~$4.0 million and ~~$13.9~~$12.5 million were recognized when customers purchased eligible products and services and earned rebates during the three and nine months ended September 30, ~~2019,~~2020, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred ~~revenue~~revenue was ~~$50.1~~

$41.0 million at September 30, ~~2019,~~2020, of which approximately 9%10%, ~~31%~~34%, 25%, ~~17%~~16%, and ~~18%~~15% 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 $1.0 million were reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended September 30, 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~~$9.2 million at September 30, ~~2019.~~2020. The impacts of discounting and unearned income

at September 30, ~~2019,~~2020, were not material. Profit and loss recognized at the commencement date and interest income during the three and nine months ended September 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 months ended September 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 months ended September 30, ~~2019,~~2020, we transferred ~~instruments~~instruments of $2.6 million and $6.6 million, respectively, as compared to $5.5 million and $10.5 ~~million, respectively, as compared to $6.6 million and $14.7~~ million for the three and nine months ended September 30, ~~2018,~~2019, respectively, from inventory to property and equipment.

We estimate future revenue to be recognized related to our reagent rental ~~programs~~programs of approximately ~~$30.9~~$25.9 million, of which approximately 11%, 37%, ~~27%~~24%, ~~16%~~13%, and 9%15% 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 months ended September 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 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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
CAG segment revenue:
CAG Diagnostics recurring revenue:	$	567,416	$	460,974	$	1,565,595	$	1,382,196
IDEXX VetLab consumables	218,605		177,276		603,379		519,646
Rapid assay products	70,593		58,930		192,681		181,966
Reference laboratory diagnostic and consulting services	254,223		204,919		703,300		621,469
CAG Diagnostics services and accessories	23,995		19,849		66,235		59,115
CAG Diagnostics capital - instruments	29,336		32,608		72,040		92,883
Veterinary software, services and diagnostic imaging systems	41,265		39,548		118,478		114,318
CAG segment revenue	638,017		533,130		1,756,113		1,589,397

Water segment revenue	33,272		34,906		95,537		99,980
LPD segment revenue	36,971		31,370		103,369		95,980
Other segment revenue	13,529		5,897		30,698		16,105
Total revenue	$	721,789	$	605,303	$	1,985,717	$	1,801,462

(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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
United States	$	454,836	$	380,184	$	1,257,617	$	1,127,347
Europe, the Middle East and Africa	147,193		122,050		400,928		368,636
Asia Pacific Region	77,401		64,648		212,663		188,756
Canada	28,710		24,334		78,314		75,212
Latin America	13,649		14,087		36,195		41,511
Total	$	721,789	$	605,303	$	1,985,717	$	1,801,462

(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~~$4.0 million of ~~commission~~commission expense ~~were~~was recognized during the three and nine months ended September 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~~$16.5 million at September 30, ~~2019.~~2020. Impairments of deferred commission costs during the three and nine months ended September 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 months ended September 30, ~~2019,~~2020, totaled $1.3 million and $39.9 million as compared to $3.8 million and $40.1 ~~million, respectively, as compared to $0.7 million and $33.5~~ million for the three and nine months ended September 30, ~~2018, respectively.~~2019. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at September 30, ~~2019,~~2020, was ~~$63.2~~$64.0 million, which will be recognized over a weighted average period of approximately ~~1.9~~1.7 years. During the three and nine months ended September 30, ~~2019,~~2020, we recognized expenses of $7.9 million and $23.0 million as compared to $9.4 million and $22.6 ~~million, respectively, as compared to $6.5 million and $18.9~~ million for the three and nine months ended September 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 Nine Months Ended September 30,
	2020			2019

Share price at grant	$	290.15		$	213.35
Expected stock price volatility	27		%	26		%
Expected term, in years	6.0			6.0
Risk-free interest rate	1.4		%	2.4		%
Weighted average fair value of options granted	$	84.60		$	64.99

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.

Accounts Receivable

The allowance for credit losses associated with accounts receivable was $6.6 million and $3.6 million at September 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 September 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 1.7% 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 $3.3 million, at September 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.

NOTE 7. INVENTORIES

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


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

Raw materials	$	46,791	$	41,202
Work-in-process	19,582		20,077
Finished goods	151,224		133,740
Inventories	$	217,597	$	195,019

(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

໿

~~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.

NOTE 8. LEASES

~~The majority of our facilities are occupied under operating lease arrangements with various expiration dates through 2067, some of which include options~~See Note 7 to ~~extend~~ the life of the lease, and some of which include options to terminate the lease within 1 year. In certain instances, we are responsible for the real estate taxes and operating expenses related to these facilities. Additionally, we enter into operating leases for certain vehicles and office equipment in the normal course of business. We determine the expected term of any executed agreements using the non-cancelable lease term plus any renewal options by which the failure to renew imposes a penalty in such amount that renewal is reasonably assured. The derived expected term is then used in the determination of a financing or operating lease and in the calculation of straight-line rent expense. Rent escalations are considered in the calculation of minimum lease paymentsconsolidated financial statements in our ~~capital lease tests and in determining straight-line rent expense~~2019 Annual Report for ~~operating~~additional information regarding leases. Minimum lease payments include the fixed lease component of the agreement, as well as fixed rate increases that are initially measured at the lease commencement date. Variable lease payments based on an index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred. Consideration is allocated to the lease and non-lease components based on the estimated standalone prices.

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

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

Maturities of operating lease liabilities were as follows:

(in thousands, except lease term and discount rate) September 30,
2019

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

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

Weighted average remaining lease term - operating leases 10.7 years

Weighted average discount rate - operating leases 3.3 %


(in thousands, except lease term and discount rate)	September 30, 2020

2020 (remainder of year)	$	3,824
2021	20,660
2022	17,572
2023	12,453
2024	8,280
Thereafter	39,188
Total lease payments	101,977
Less imputed interest	(14,724)
Total	$	87,253

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

Supplemental cash flow information for leases was as follows:


(in thousands)	For the Nine Months Ended September 30, 2020		For the Nine Months Ended September 30, 2019

Cash paid for amounts included in the measurement of operating leases liabilities	$	14,619	$	14,878
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations	$	17,064	$	7,870

(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)	September 30, 2020		December 31, 2019

Customer acquisition costs	$	42,906	$	39,329
Prepaid expenses	35,966		31,992
Taxes receivable	24,051		20,516
Contract assets, net	20,361		17,659
Deferred sales commissions	5,510		5,202
Other assets	9,108		10,284
Other current assets	$	137,902	$	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)	September 30, 2020		December 31, 2019
Customer acquisition costs	$	103,075	$	98,117
Contract assets, net	80,936		66,226
Investment in long-term product supply arrangements	12,599		13,657
Deferred sales commissions	10,993		10,442
Deferred income taxes	8,198		8,100
Taxes receivable	6,329		14,960
Other assets	32,672		28,690
Other long-term assets	$	254,802	$	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)	September 30, 2020		December 31, 2019

Accrued employee compensation and related expenses	$	133,032	$	127,174
Accrued expenses (Note 16)	100,798		86,296
Accrued customer incentives and refund obligations	71,885		63,079
Accrued taxes	40,013		31,108
Current lease liabilities	16,598		15,281
Accrued liabilities	$	362,326	$	322,938

໿

Other long-term liabilities consisted of the following:໿


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

Accrued taxes	$	59,663	$	67,463
Other accrued long-term expenses	20,001		13,701
Other long-term liabilities	$	79,664	$	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

NOTE 11. DEBT

Senior Notes

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

Credit Facility

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 months ended September 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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019

Shares repurchased in the open market	0		330		721		683
Shares acquired through employee surrender for statutory tax withholding	1		1		31		38
Total shares repurchased	1		331		752		721

Cost of shares repurchased in the open market	$	0	$	91,051	$	179,623	$	165,198
Cost of shares for employee surrenders	360		277		9,029		7,849
Total cost of shares	$	360	$	91,328	$	188,652	$	173,047

Average cost per share - open market repurchases	$	0	$	275.50	$	249.20	$	241.56
Average cost per share - employee surrenders	$	393.12	$	286.65	$	292.03	$	209.20
Average cost per share - total	$	393.12	$	275.53	$	250.96	$	239.87

໿

NOTE 13. INCOME TAXES

Our effective income tax rate was 10.8% for the three months ended September 30, 2020, as compared to 18.0% for the three months ended September 30, 2019, ~~as compared to 14.5%~~and 16.0% for the ~~three~~nine months ended September 30, ~~2018, and~~2020, as compared to 18.5% for the nine months ended September 30, ~~2019, as compared to 16.9% for the nine months ended September 30, 2018.~~2019. The ~~increase~~decrease in our effective tax rate for the three and nine months ended September 30, ~~2019,~~2020, as compared to the same period in the prior year, was primarily driven by ~~lower~~higher tax benefits from share-based compensation. The increase in our effective tax rate for the nine months ended September 30, 2019, as compared to the same period in the prior year, was primarily driven by lower tax benefits from share-based compensation, partially offset by a nonrecurring item recorded in the three months ended March 31, 2018, that resulted from the 2017 Tax Cut and Jobs Act.

The effective tax rate for the three and nine months ended September 30, ~~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 Nine Months Ended September 30, 2020
			Unrealized (Loss) 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) before reclassifications	(408)		(623)		(3,466)		(1,339)		(7,871)		(13,707)
Gain reclassified from accumulated other comprehensive income	0		(2,036)		0		0		0		(2,036)
Balance as of September 30, 2020	$	(298)	$	(3,395)	$	(2,070)	$	2,128	$	(58,290)	$	(61,925)

໿


	For the Nine Months Ended September 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 (loss) income before reclassifications	295		6,458		3,507		3,993		(12,231)		2,022
Gain reclassified from accumulated other comprehensive income	0		(5,796)		0		0		0		(5,796)
Balance as of September 30, 2019	$	138	$	6,891	$	3,113	$	5,353	$	(61,060)	$	(45,565)

For the Nine Months Ended September 30, 2018
(in thousands)
Unrealized (Loss) Gain on Investments,
Net of Tax

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

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

Cumulative Translation
Adjustment
Total

Balance as of December 31, 2017 $ (22 ) $ (5,219 ) $ (4,311 ) $ (26,918 ) $ (36,470 )
Other comprehensive income (loss) before reclassifications 187
7,514
2,818
(18,172 ) (7,653 )
Losses reclassified from accumulated other comprehensive income —
1,936
—
—
1,936
Balance as of September 30, 2018 $ 165
$ 4,231
$ (1,493 ) $ (45,090 ) $ (42,187 )

The following 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 September 30,
		2020		2019
Gain (loss) on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	(591)	$	3,171
	Tax expense (benefit)	(53)		688
	Gain (loss), net of tax	$	(538)	$	2,483

(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 Nine Months Ended September 30,
		2020		2019
Gain on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts	Cost of revenue	$	2,562	$	7,091
	Tax expense	526		1,295
	Gain, net of tax	$	2,036	$	5,796

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 September 30,		For the Nine Months Ended September 30,
	2020	2019	2020	2019

Shares outstanding for basic earnings per share	85,314	86,198	85,293	86,206

Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share	85,314	86,198	85,293	86,206
Dilutive effect of share-based payment awards	1,376	1,469	1,342	1,427
	86,690	87,667	86,635	87,633

໿

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:


(in thousands)	For the Three Months Ended September 30,		For the Nine Months Ended September 30,		(in thousands)	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2019	2018	2019	2018		2020	2019	2020	2019

Weighted average number of shares underlying anti-dilutive awards					Weighted average number of shares underlying anti-dilutive awards	1	0	0	0
Weighted average number of shares underlying anti-dilutive options	29	15	247	274	Weighted average number of shares underlying anti-dilutive options	10	29	236	247

໿

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

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~~be higher and lower than our accruals. AtExcept for the litigation matter described below, at September 30, ~~2019,~~2020, our accruals with respect to actual and threatened litigation were not material.

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. The trial court has ruled in favor of the plaintiff in this matter and we are appealing the judgment and continue to vigorously defend 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. We have established an accrual of $27.5 million related to this ongoing matter, which represents the amount of a possible loss that we have determined to be probable and estimable. The actual cost of resolving this matter may be higher or lower than the amount we have accrued.

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.

WeExcluding 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”). 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. 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.

~~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 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 nine months ended September 30, 2019, respectively:


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

Cost of sales	$	(428)	$	(19)	$	(24)	$	(10)	$	481
Gross profit	428		19		24		10		(481)

Operating Expenses:
Sales and marketing	$	211	$	9	$	12	$	0	$	(232)
General and administrative	2,472		105		131		1,058		(3,766)
Research and development	4,544		20		25		0		(4,589)
Total operating expenses	$	7,227	$	134	$	168	$	1,058	$	(8,587)
Income from operations	$	(6,799)	$	(115)	$	(144)	$	(1,048)	$	8,106


(in thousands)	Nine Months Ended September 30, 2019
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	(266)	$	(12)	$	(15)	$	(6)	$	299
Gross profit	266		12		15		6		(299)

Operating Expenses:
Sales and marketing	$	322	$	14	$	18	$	0	$	(354)
General and administrative	1,377		(114)		(122)		2,222		(3,363)
Research and development	12,062		39		49		0		(12,150)
Total operating expenses	$	13,761	$	(61)	$	(55)	$	2,222	$	(15,867)
Income from operations	$	(13,495)	$	73	$	70	$	(2,216)	$	15,568

The following is a summary of segment performance:


	For the Three Months Ended September 30,
	CAG		Water		LPD		Other		Consolidated Total
2020
Revenue	$	638,017	$	33,272	$	36,971	$	13,529	$	721,789

Income from operations	$	139,434	$	15,243	$	10,505	$	6,674	$	171,856
Interest expense, net									(7,902)
Income before provision for income taxes									163,954
Provision for income taxes									17,633
Net income									146,321
Less: Net income attributable to noncontrolling interest									102
Net income attributable to IDEXX Laboratories, Inc. stockholders									$	146,219

2019
Revenue	$	533,130	$	34,906	$	31,370	$	5,897	$	605,303

Income from operations	$	117,691	$	16,930	$	4,850	$	331	$	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

(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


(in thousands)	For the Nine Months Ended September 30,
	CAG		Water		LPD		Other		Consolidated Total
2020
Revenue	$	1,756,113	$	95,537	$	103,369	$	30,698	$	1,985,717

Income from operations	$	426,062	$	43,383	$	28,417	$	11,567	$	509,429
Interest expense, net									(24,880)
Income before provision for income taxes									484,549
Provision for income taxes									77,376
Net income									407,173
Less: Net income attributable to noncontrolling interest									187
Net income attributable to IDEXX Laboratories, Inc. stockholders									$	406,986

2019
Revenue	$	1,589,397	$	99,980	$	95,980	$	16,105	$	1,801,462

Income from operations	$	370,600	$	47,467	$	17,707	$	1,441	$	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

See “Note 3. Revenue Recognition” for a summary of disaggregated revenue by reportable segment and by major product and service category for the three and nine months ended September 30, ~~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:



Level 1						Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2						Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3						Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2 or transfers in or out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, ~~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~~$998.5 million and ~~$697.2~~$904.0 million, respectively, as of September 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 September 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 September 30, 2020

Assets
Money market funds(1)	$	76	$	0	$	0	$	76
Equity mutual funds(2)	$	1,182	$	0	$	0	$	1,182
Cross currency swaps(3)	$	0	$	2,797	$	0	$	2,797
Foreign currency exchange contracts(3)	$	0	$	609	$	0	$	609
Liabilities
Foreign currency exchange contracts(3)	$	0	$	4,821	$	0	$	4,821
Deferred compensation(4)	$	1,182	$	0	$	0	$	1,182


(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	$	0	$	0	$	71
Equity mutual funds⁽²⁾	$	1,708	$	—	$	—	$	1,708	Equity mutual funds(2)	$	1,676	$	0	$	0	$	1,676
Cross currency swaps⁽³⁾	$	—	$	7,040	$	—	$	7,040	Cross currency swaps(3)	$	0	$	4,559	$	0	$	4,559
Foreign currency exchange contracts⁽³⁾	$	—	$	8,197	$	—	$	8,197	Foreign currency exchange contracts(3)	$	0	$	1,791	$	0	$	1,791
Liabilities									Liabilities
Foreign currency exchange contracts⁽³⁾	$	—	$	148	$	—	$	148	Foreign currency exchange contracts(3)	$	0	$	2,886	$	0	$	2,886
Deferred compensation⁽⁴⁾	$	1,708	$	—	$	—	$	1,708	Deferred compensation(4)	$	1,676	$	0	$	0	$	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 September 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


~~(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.

(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 months ended September 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.

Cash Flow Hedges

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

We did not de-designate any instruments from hedge accounting treatment during either the three and nine months ended September 30, ~~2019~~2020 or ~~2018.~~2019. At September 30, ~~2019,~~2020, the estimated amount of net ~~gains,~~losses, net of tax, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is ~~$5.9~~$2.5 million if exchange rates do not fluctuate from the levels at September 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~~$208.6 million and ~~$190.9~~$210.9 million at September 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,
		2020		2019

Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	299,183	$	260,353
Foreign exchange contracts
Amount of gain (loss) reclassified from accumulated other comprehensive income into income		$	(591)	$	3,171

(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)		Nine Months Ended September 30,
		2020		2019

Financial statement line items in which effects of cash flow hedges are recorded	Cost of revenue	$	824,179	$	767,062
Foreign exchange contracts
Amount of gain reclassified from accumulated other comprehensive income into income		$	2,562	$	7,091

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~~$2.8 million and $3.5 million, net of tax, within AOCI as a result of this net investment hedge for the three and nine months ended September 30, ~~2019, respectively.~~2020, respectively, and gains of $3.0 million and $3.5 million for the three and nine months ended September 30, 2019. The related cumulative unrealized gain recorded at September 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, and March 2019, we~~We have entered into several 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~~These cross currency swaps have a maturity ~~date of~~dates beginning on June 30, ~~2023.~~2023, through June 18, 2025. 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.~~counterparties on June 30, 2023, and we will deliver the notional amount of €10 million and will receive approximately $11.4 million from the counterparties on June 18, 2025. 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 months ended September 30, ~~2019,~~2020, we recorded ~~gains~~losses of ~~$3.1~~$3.9 million and ~~$4.0~~$1.3 million, net of tax, within AOCI as a result of these net investment hedges, ~~respectively.~~respectively, and gains of $3.1 million and $4.0 million during the three and nine months ended September 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~~$2.0 million related to the excluded component as a reduction of interest expense for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.7 million for the three and nine months ended September 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
		September 30, 2020		December 31, 2019

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Other current assets	$	519	$	1,791
Cross currency swaps	Other long-term assets	2,797		4,559
Foreign currency exchange contracts	Other long-term assets	90		0
Total derivative instruments presented as hedge instruments on the balance sheet		3,406		6,350
Gross amounts subject to master netting arrangements not offset on the balance sheet		(609)		(1,354)
Net amount		$	2,797	$	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
		September 30, 2020		December 31, 2019

Derivatives and non-derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Accrued liabilities	$	3,631	$	2,886
Foreign currency exchange contracts	Other long-term liabilities	1,190		0
Total derivative instruments presented as cash flow hedges on the balance sheet		4,821		2,886
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet(1)	Long-term debt	103,980		99,422
Total hedging instruments presented on the balance sheet		108,801		102,308
Gross amounts subject to master netting arrangements not offset on the balance sheet		(609)		(1,354)
Net amount		$	108,192	$	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

Market Trends and COVID-19 Pandemic Impact 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 a sharp rebound in clinical visit activity which accelerated through the second quarter of 2020, and continued in the third 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 and sustained at 6% in the third quarter of 2020, supported by 11% growth in wellness visits and 3% growth in non-wellness visits during the third quarter of 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, followed by increases of approximately 8% in May 2020, 30% in June 2020, 24% in July 2020, and approximately 20% for the remainder of the third quarter of 2020. CAG growth dynamics remained healthy across regions in the third quarter of 2020.

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.

We have also seen impacts from the COVID-19 pandemic 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, which has since had a solid recovery. 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.

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. These products and services are included within our OPTI Medical business in our Other segment and are the primary driver of growth in that segment.

Currency and Other Items

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.

Business Overview

We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing markets. We also ~~sell a line~~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.” 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 September 30, 2019:


(in thousands)
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	(428)	$	(19)	$	(24)	$	(10)	$	481
Gross profit	428		19		24		10		(481)

Operating Expenses:
Sales and marketing	$	211	$	9	$	12	$	—	$	(232)
General and administrative	2,472		105		131		1,058		(3,766)
Research and development	4,544		20		25		—		(4,589)
Total operating expenses	$	7,227	$	134	$	168	$	1,058	$	(8,587)
Income from operations	$	(6,799)	$	(115)	$	(144)	$	(1,048)	$	8,106

For the nine months ended September 30, 2019:


(in thousands)
	CAG		Water		LPD		Other		Unallocated

Cost of sales	$	(266)	$	(12)	$	(15)	$	(6)	$	299
Gross profit	266		12		15		6		(299)

Operating Expenses:
Sales and marketing	$	322	$	14	$	18	$	—	$	(354)
General and administrative	1,377		(114)		(122)		2,222		(3,363)
Research and development	12,062		39		49		—		(12,150)
Total operating expenses	$	13,761	$	(61)	$	(55)	$	2,222	$	(15,867)
Income from operations	$	(13,495)	$	73	$	70	$	(2,216)	$	15,568

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 September 30, 2019:


	CAG		Water		LPD		Other

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

Operating Expenses:
Sales and marketing	—	%	—	%	—	%	—	%
General and administrative	0.5	%	0.3	%	0.4	%	17.9	%
Research and development	0.9	%	0.1	%	0.1	%	—	%
Total operating expenses	1.4	%	0.4	%	0.5	%	17.9	%
Income from operations	(1.3)	%	(0.3)	%	(0.5)	%	(17.8)	%

For the nine months ended September 30, 2019:


	CAG		Water		LPD		Other

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

Operating Expenses:
Sales and marketing	—	%	—	%	—	%	—	%
General and administrative	0.1	%	(0.1)	%	(0.1)	%	13.8	%
Research and development	0.8	%	—	%	0.1	%	—	%
Total operating expenses	0.9	%	(0.1)	%	(0.1)	%	13.8	%
Income from operations	(0.8)	%	0.1	%	0.1	%	(13.8)	%

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 months ended September 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. No triggering events have occurred since the date of our last annual impairment test. 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 months ended September 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.

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

We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and operating trends. We exclude only acquisitions that are considered to be a business from organic revenue growth. In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single asset or group of similar assets, we do not consider these assets to be a business and include these acquisitions in organic revenue growth. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth.

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

Environmental, Social and Governance

During the third quarter of 2020, we established a charitable donor-advised fund, the IDEXX Foundation, administered and controlled by a national donor-advised fund program, and donated $10 million. The goal of the IDEXX Foundation is to make a positive impact in our communities, with an initial focus on supporting education in the veterinary and STEM fields including advancing diversity, equity, and inclusion in animal healthcare.

Comparison to Prior Periods

Our fiscal ~~quarter(s)~~quarter ended on September 30. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent ~~prior year~~prior-year periods.

Results of Operations

Three Months Ended September 30, ~~2019~~,2020, Compared to Three Months Ended September 30, ~~2018~~2019

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

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,
Net Revenue (dollars in thousands)	2020		2019		Dollar Change		Reported Revenue Growth(1)		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth(1)

CAG	$	638,017	$	533,130	$	104,887	19.7	%	1.0	%	0.7	%	18.0	%
United States	428,105		357,810		70,295		19.6	%	—		1.1	%	18.6	%
International	209,912		175,320		34,592		19.7	%	2.9	%	—		16.8	%

Water	33,272		34,906		(1,634)		(4.7	%)	(0.7	%)	—		(4.0	%)
United States	16,634		16,794		(160)		(1.0	%)	—		—		(1.0	%)
International	16,638		18,112		(1,474)		(8.1	%)	(1.2	%)	—		(6.9	%)

LPD	36,971		31,370		5,601		17.8	%	0.3	%	—		17.5	%
United States	3,784		3,649		135		3.7	%	—		—		3.7	%
International	33,187		27,721		5,466		19.7	%	0.4	%	—		19.3	%

Other	13,529		5,897		7,632		129.5	%	—		—		129.5	%

Total Company	$	721,789	$	605,303	$	116,486	19.2	%	0.8	%	0.6	%	17.8	%
United States	454,836		380,184		74,652		19.6	%	—		1.0	%	18.6	%
International	266,953		225,119		41,834		18.6	%	2.2	%	—		16.4	%

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

Total Company Revenue. The increase in both U.S. and international organic revenues was driven by strong volume gains in CAG ~~Diagnostics~~Diagnostic recurring revenue, reflecting a continued recovery in market demand for companion animal diagnostics globally, supported by ~~our differentiated diagnostic technologies~~pent-up demand for wellness testing as social distancing procedures and expanded commercial organization that are driving increased volumes from new and existing customers in our reference laboratory business and high growth in consumable revenue, supported by the impact of the continued expansion of our CAG Diagnostics instrument installed base globally,guidelines were eased, as well as ~~a 1% growth benefit from greater equivalent business days. The growth in~~higher clinical visits related to new patients. In our LPD business, ~~was primarily due~~we continue to see strong ~~performance~~demand for swine testing in ~~Asia compared to a weaker performance~~China. Lower revenues in ~~the prior year in that region, including impacts from the African swine fever outbreak. Our~~our Water business ~~also contributed to~~are primarily the result of the COVID-19 pandemic with lower demand for non-compliance testing. Our new OPTI COVID-19 PCR test for humans increased our overall revenue growth ~~primarily from higher sales volumes of our Colilert~~^® ~~test products and related accessories.~~by approximately 1%. The impact of currency movements decreased total revenue by ~~1.3%~~0.8%, while acquisitions increased revenue by 0.6%.

The following table presents total Company results of operations:

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
Total Company - Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	721,789			$	605,303			$	116,486	19.2	%
Cost of revenue	299,183				260,353				38,830		14.9	%
Gross profit	422,606		58.5	%	344,950		57.0	%	77,656		22.5	%

Operating Expenses:
Sales and marketing	108,202		15.0	%	104,551		17.3	%	3,651		3.5	%
General and administrative	105,031		14.6	%	66,337		11.0	%	38,694		58.3	%
Research and development	37,517		5.2	%	34,260		5.7	%	3,257		9.5	%
Total operating expenses	250,750		34.7	%	205,148		33.9	%	45,602		22.2	%
Income from operations	$	171,856	23.8	%	$	139,802	23.1	%	$	32,054	22.9	%

Gross Profit. Gross profit increased due to higher sales volumes and a ~~100~~150 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by several factors including productivity in our reference laboratories, the mix benefits from strong IDEXX VetLab consumable and Rapid Assay products, and lower CAG Diagnostics instrument revenue, the net benefit of price increases, ~~in our CAG Diagnostics recurring revenue portfolio, mix benefits~~as well as the benefit from ~~high growth in IDEXX VetLab consumable revenues, volume leverage, and the favorable impact of lower product costs in our CAG business.~~OPTI COVID-19 PCR testing. The impact from foreign currency movements ~~increased~~decreased the gross profit margin by ~~approximately 35~~approximately 45 basis ~~points,~~points, including the impact of ~~higher~~hedge losses in the current year compared to hedge gains in the ~~current period, as compared to the~~ prior ~~period.~~year.

Operating Expenses. The ~~changes~~increase in sales and marketing expense was primarily due to higher personnel-related costs, partially offset by restricted travel and overall prudent expense management. The increase in general and administrative expense was primarily due to an accrual related to an ongoing litigation matter and a charitable donation, as well as increases in personnel and facilities costs. The increase in research and development expense was primarily due to increased project costs. The overall change in currency exchange rates ~~including foreign exchange losses on settlements of foreign currency denominated transactions recorded within Unallocated Amounts, resulting~~resulted in ~~approximately~~ a 1% decrease ~~to our overall~~in operating expenses. Sales and marketing expense increased approximately 11%, excluding the impact of foreign currency, primarily due to increased personnel-related costs from our expanded global commercial infrastructure. General and administrative expense increased approximately 4%, excluding the impact of foreign currency, primarily due to personnel related costs, partially offset from the benefits of cost control initiatives. Research and development expense increased primarily due to higher project and personnel-related costs, with an immaterial impact from foreign currency.expenses by less than 1%.



Companion Animal Group

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

໿

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 Diagnostics recurring revenue: $ 460,974
$ 409,162
$ 51,812
12.7 % (1.2 %) —
13.9 %
IDEXX VetLab consumables 177,276
152,509
24,767
16.2 % (1.6 %) —
17.8 %
Rapid assay products 58,930
53,821
5,109
9.5 % (0.5 %) —
10.0 %
Reference laboratory diagnostic and consulting services 204,919
184,103
20,816
11.3 % (1.2 %) —
12.5 %
CAG diagnostics services and accessories 19,849
18,729
1,120
6.0 % (1.3 %) —
7.3 %
CAG Diagnostics capital - instruments 32,608
31,561
1,047
3.3 % (1.6 %) —
4.9 %
Veterinary software, services and diagnostic imaging systems 39,548
37,374
2,174
5.8 % (0.3 %) —
6.1 %
Net CAG revenue $ 533,130
$ 478,097
$ 55,033
11.5 % (1.2 %) —
12.7 %


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


	For the Three Months Ended September 30,
Net Revenue (dollars in thousands)	2020		2019		Dollar Change		Reported Revenue Growth (1)		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth (1)

CAG Diagnostics recurring revenue:	$	567,416	$	460,974	$	106,442	23.1	%	1.0	%	0.8	%	21.3	%
IDEXX VetLab consumables	218,605		177,276		41,329		23.3	%	1.2	%	—		22.1	%
Rapid assay products	70,593		58,930		11,663		19.8	%	—	%	—		19.8	%
Reference laboratory diagnostic and consulting services	254,223		204,919		49,304		24.1	%	1.2	%	1.8	%	21.1	%
CAG diagnostics services and accessories	23,995		19,849		4,146		20.9	%	1.0	%	—		19.9	%
CAG Diagnostics capital - instruments	29,336		32,608		(3,272)		(10.0	%)	1.2	%	—		(11.2	%)
Veterinary software, services and diagnostic imaging systems	41,265		39,548		1,717		4.3	%	0.2	%	—		4.2	%
Net CAG revenue	$	638,017	$	533,130	$	104,887	19.7	%	1.0	%	0.7	%	18.0	%

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

CAG Diagnostics Recurring Revenue. Following a period of significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines, we saw a sharp recovery in market demand for CAG diagnostics recurring revenues globally across modalities, including high levels of growth in testing volumes beginning in June and sustaining through the third quarter of 2020, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. The increase in CAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables, ~~and~~ reference laboratory diagnostic services, and rapid assay products, and to a lesser extent, higher realized prices. ~~Greater equivalent business days contributed approximately 2% to revenue growth.~~

The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes ~~across all regions~~ for our Catalyst^® consumables and, to a lesser extent, Procyte Dx^® consumables. These increases were supported by an expansion of our instrument installed base, growth in testing by new and existing customers, our expanded menu of available tests, and to a lesser extent, benefits from higher average unit sales prices. ~~Greater equivalent business days contributed approximately 3% to revenue growth.~~

The increase in rapid assay revenue resulted primarily from higher SNAP® 4Dx Plus sales volumes ~~across our SNAP~~^® ~~product portfolio, driven by SNAP~~^® ~~4Dx~~^® ~~Plus,~~ and ~~to a lesser extent,~~ higher realized prices. ~~Greater equivalent business days contributed approximately 3%~~We continued to ~~revenue growth.~~see a sharp rebound in rapid assay testing volumes, consistent with the broader U.S. market recovery for wellness testing.

The increase in reference laboratory diagnostic and consulting services revenue was primarily due to ~~the impact of~~ higher testing volumes ~~throughout our worldwide network of laboratories,~~in all major regions, most prominently in the U.S., ~~resulting from increased testing from new and existing customers, supported by our differentiated diagnostic technologies, such as IDEXX SDMAand fecal antigen testing,~~ as well as higher average unit sales prices. Acquisitions increased revenue by 1.8%.

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

CAG Diagnostics Capital – Instruments Revenue. The ~~increase~~decrease in instrument revenue ~~reflects higher Catalyst One, Procyte Dx, and LaserCyte~~^® ~~Dx instrument placements. These increases were partially offset by lower allocated revenue per unit~~was primarily due to the impacts of the COVID-19 pandemic, including restrictions on our ~~IDEXX VetLab instruments related~~sales professionals’ access to ~~increased international placements under our customer volume commitment programs.~~clinics and certain customers deferring new purchase decisions.

Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software and diagnostic imaging subscription-based services, ~~as well as higher realized prices on these service offerings,~~due to increases in our active installed base, and to a lesser extent, higher ~~diagnostic imaging services as a result of the increase in our active installed base.~~realized prices. These increases were partially offset by ~~lower allocated revenue per unit~~the impacts of the COVID-19 pandemic on new diagnostic imaging placements, including restrictions on our ~~diagnostic imaging systems related~~sales professionals’ access to ~~increased placements under our customer volume commitment programs, as well as comparisons to high digital imaging system placement levels in the prior year.~~clinics and certain customers deferring purchase decisions.

The following table presents the CAG segment results of operations:

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

Revenues $ 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 %


	For the Three Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	638,017			$	533,130			$	104,887	19.7	%
Cost of revenues	269,720				234,613				35,107		15.0	%
Gross profit	368,297		57.7	%	298,517		56.0	%	69,780		23.4	%

Operating Expenses:
Sales and marketing	98,995		15.5	%	94,445		17.7	%	4,550		4.8	%
General and administrative	97,258		15.2	%	56,896		10.7	%	40,362		70.9	%
Research and development	32,610		5.1	%	29,485		5.5	%	3,125		10.6	%
Total operating expenses	228,863		35.9	%	180,826		33.9	%	48,037		26.6	%
Income from operations	$	139,434	21.9	%	$	117,691	22.1	%	$	21,743	18.5	%

Gross Profit. Gross profit increased primarily due to higher sales volume, as well as a ~~110~~170 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by productivity in our reference laboratories and the mix benefits from high growth in IDEXX VetLab consumable revenues ~~volume leverage,~~and Rapid Assay products, and lower ~~product costs,~~CAG Diagnostics instrument revenue, as well as the net benefit of price increases in our CAG Diagnostics recurring revenue ~~portfolio,~~portfolio. These favorable factors were partially offset by incremental investments in reference laboratory capacity and systems, including acquisitions, a write-down of excess inventory related to product transition, and a software ~~services field resources.~~impairment charge. The impact from foreign currency movements ~~increased~~decreased the gross profit margin by approximately 2030 basis points, including the impact of hedge losses in the current year compared to hedge gains in the prior year.

Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs, partially offset by restricted travel and overall prudent expense management. General and administrative expense increased primarily due to an accrual related to an ongoing litigation matter and a charitable donation, as well as increases in personnel-related and facilities costs. Research and development expense increased primarily due to increased project costs, including our new ProCyte One analyzer. The overall change in currency exchange rates increased operating expenses by approximately 1%.


Water

The following table presents the Water segment results of operations:


	For the Three Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	33,272			$	34,906			$	(1,634)	(4.7)	%
Cost of revenue	10,208				9,517				691		7.3	%
Gross profit	23,064		69.3	%	25,389		72.7	%	(2,325)		(9.2)	%

Operating Expenses:
Sales and marketing	3,470		10.4	%	4,021		11.5	%	(551)		(13.7	%)
General and administrative	3,329		10.0	%	3,395		9.7	%	(66)		(1.9)	%
Research and development	1,022		3.1	%	1,043		3.0	%	(21)		(2.0)	%
Total operating expenses	7,821		23.5	%	8,459		24.2	%	(638)		(7.5)	%
Income from operations	$	15,243	45.8	%	$	16,930	48.5	%	$	(1,687)	(10.0)	%

Revenue. The decrease in revenue was primarily due to the impact of the COVID-19 pandemic, primarily due to lower non-compliance testing, which was partially offset by the benefit of price increases. The impact of currency movements decreased revenue by approximately 0.7%.

Gross Profit.Gross profit decreased due to lower sales volumes, and a 340 basis point decrease in the gross profit margin. Foreign currency movements decreased the gross profit margin by approximately 170 basis points, including the impact of hedge losses in the current year compared to hedge gains in the prior year. The remaining decrease in the gross profit margin was primarily due to higher distribution and freight costs, as well as higher product costs and product mix, partially offset by the net benefit of price increases.

Operating Expenses. Overall operating expenses were lower primarily as a result of travel restrictions and prudent expense management implemented in response to the COVID-19 pandemic. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 1%.


Livestock, Poultry and Dairy

The following table presents the LPD segment results of operations:


	For the Three Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	36,971			$	31,370			$	5,601	17.9	%
Cost of revenue	14,203				13,201				1,002		7.6	%
Gross profit	22,768		61.6	%	18,169		57.9	%	4,599		25.3	%

Operating Expenses:
Sales and marketing	5,245		14.2	%	5,728		18.3	%	(483)		(8.4	%)
General and administrative	4,299		11.6	%	4,305		13.7	%	(6)		(0.1	%)
Research and development	2,719		7.4	%	3,286		10.5	%	(567)		(17.3	%)
Total operating expenses	12,263		33.2	%	13,319		42.5	%	(1,056)		(7.9	%)
Income from operations	$	10,505	28.4	%	$	4,850	15.5	%	$	5,655	116.6	%

Revenue. The increase in revenue was primarily due to the continued demand for swine testing in China, as well as increased poultry diagnostic testing. These increases were partially offset by the impact of lower dairy testing volumes and herd health screening.

Gross Profit.The increase in gross profit was primarily due to higher sales volume and a 370 basis point increase in the gross profit margin. The gross profit margin increased primarily as a result of favorable product costs from volume leverage and favorable product mix from high levels of swine testing, and to a lesser extent, price increases, partially offset by lower herd health screening. Foreign currency movements, including the impact of hedge losses in the current year compared to hedge gains in the prior year, which decreased the gross profit margin by approximately 210 basis points.

Operating Expenses. Overall operating expenses were lower primarily as a result of prudent expense management implemented in response to the COVID-19 pandemic, as well as travel restrictions. The reduction in sales and marketing expense was primarily personnel-related costs and travel expenses. The decrease in research and development expense was primarily due to leveraging LPD personnel to support our human COVID testing initiative and lower project costs. The overall change in currency exchange rates resulted in an increase in operating expenses of less than 1%.

Other

The following table presents the Other results of operations:

໿


	For the Three Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	13,529			$	5,897			$	7,632	129.4	%
Cost of revenue	5,052				3,022				2,030		67.2	%
Gross profit	8,477		62.7	%	2,875		48.8	%	5,602		194.9	%

Operating Expenses:
Sales and marketing	492		3.6	%	357		6.1	%	135		37.8	%
General and administrative	145		1.1	%	1,741		29.5	%	(1,596)		(91.7	%)
Research and development	1,166		8.6	%	446		7.6	%	720		161.4	%
Total operating expenses	1,803		13.3	%	2,544		43.1	%	(741)		(29.1	%)
Income from operations	$	6,674	49.3	%	$	331	5.6	%	$	6,343	1,916.3	%

Revenue.The increase in revenue was primarily due to our new OPTI COVID-19 PCR testing products and services. The future demand for this product is difficult to project given the uncertain nature of the COVID-19 pandemic, including short-term project commitments, available PCR testing capacity and alternative suppliers. The impact of currency movements on revenue was immaterial.

Gross Profit. The increase in gross profit was primarily due to sales volumes of our new OPTI COVID-19 PCR testing products and services and a 1,390 basis point increase in the gross profit margin, primarily due to favorable product mix from OPTI COVID-19 PCR testing and higher royalties associated with our former pharmaceutical product line, partially offset by higher product costs in our other OPTI products. The overall change in currency exchange rates had an immaterial impact on gross profit.

Operating Expenses. The increase in sales and marketing expense was primarily due to higher personnel-related costs related to new positions associated with our new OPTI COVID-19 PCR testing initiative. The decrease in general and administrative expense was primarily due to foreign exchange gains on settlements of foreign currency denominated transactions, as compared to losses in the prior year, for all operating segments, which are reported within our Other segment. The increase in research and development cost was primarily due to higher personnel-related and project costs.

Non-Operating Items

Interest Expense. Interest expense was $8.1 million for the three months ended September 30, 2020, as compared to $7.1 million for the same period in the prior year. The increase in interest expense was the result of higher average debt levels, as well as lower capitalized interest related to the expansion of our Westbrook, Maine headquarters and relocation of our core reference laboratory in Germany, partially offset by slightly lower interest rates.

Provision for Income Taxes.Our effective income tax rate was 10.8% for the three months ended September 30, 2020, as compared to 18.0% for the three months ended September 30, 2019. The decrease in our effective tax rate was primarily driven by higher tax benefits from share-based compensation.

Results of Operations

Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019

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


	For the Nine Months Ended September 30,
Net Revenue (dollars in thousands)	2020		2019		Dollar Change		Reported Revenue Growth (1)		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth (1)

CAG	$	1,756,113	$	1,589,397	$	166,716	10.5	%	(0.4	%)	0.7	%	10.1	%
United States	1,188,493		1,062,715		125,778		11.8	%	—		1.1	%	10.8	%
International	567,620		526,682		40,938		7.8	%	(1.1	%)	—		8.9	%

Water	95,537		99,980		(4,443)		(4.4	%)	(2.1	%)	—		(2.3	%)
United States	47,510		48,157		(647)		(1.3	%)	—		—		(1.3	%)
International	48,027		51,823		(3,796)		(7.3	%)	(4.1	%)	—		(3.2	%)

LPD	103,369		95,980		7,389		7.7	%	(2.7	%)	—		10.4	%
United States	10,803		10,221		582		5.7	%	—		—		5.7	%
International	92,566		85,759		6,807		7.9	%	(3.0	%)	—		10.9	%

Other	30,698		16,105		14,593		90.6	%	—		—		90.6	%

Total Company	$	1,985,717	$	1,801,462	$	184,255	10.2	%	(0.6	%)	0.6	%	10.2	%
United States	1,257,617		1,127,347		130,270		11.6	%	—		1.0	%	10.6	%
International	728,100		674,115		53,985		8.0	%	(1.6	%)	—		9.6	%

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

Total Company Revenue. In our CAG business, following a period of significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines, we saw a sharp recovery in market demand for companion animal diagnostics globally, including high levels of growth in testing volumes beginning in June 2020 through the third quarter, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. In our LPD business, the increased demand for swine testing in China was partially offset by lower herd health screening revenue. Lower revenues in our Water business are primarily the result of the COVID-19 pandemic, due to lower demand for non-compliance testing in the second and third quarters of 2020. The impact of currency movements decreased total revenue by 0.6%, while acquisitions increased revenue by 0.6%.

The following table presents total Company results of operations:


	For the Nine Months Ended September 30,								Change
Total Company - Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	1,985,717			$	1,801,462			$	184,255	10.2	%
Cost of revenue	824,179				767,062				57,117		7.4	%
Gross profit	1,161,538		58.5	%	1,034,400		57.4	%	127,138		12.3	%

Operating Expenses:
Sales and marketing	318,526		16.0	%	312,499		17.3	%	6,027		1.9	%
General and administrative	231,111		11.6	%	186,653		10.4	%	44,458		23.8	%
Research and development	102,472		5.2	%	98,033		5.4	%	4,439		4.5	%
Total operating expenses	652,109		32.8	%	597,185		33.2	%	54,924		9.2	%
Income from operations	$	509,429	25.7	%	$	437,215	24.3	%	$	72,214	16.5	%

Gross Profit. Gross profit increased due to higher sales volumes, as well as a 110 basis point increase in the gross profit margin. The increase in the gross profit margin was driven by several factors, including productivity in our reference laboratories, the mix benefits from strong IDEXX VetLab consumable and lower CAG Diagnostics instrument revenue, the net benefit of price increases, as well as the benefit from OPTI COVID-19 PCR testing. These favorable factors were offset by the incremental investments in reference laboratory capacity and systems, including acquisitions. The impact from foreign currency movements decreased the gross profit margin by approximately 30 basis points, including the impact of lower hedge gains in the current year compared to higher hedge gains in the ~~current period, as compared to the~~ prior ~~period.~~year.

Operating Expenses. The increase in sales and marketing expense was primarily due to increased personnel-related costs related to our expanded global commercial ~~infrastructure.~~infrastructure, partially offset by cost containment efforts implemented in response to the COVID-19 pandemic, including temporary compensation and benefit reductions and travel restrictions. The increase in general and administrative expense was ~~the result of higher personnel-related costs.~~ primarily due to an accrual related to an ongoing litigation matter and a charitable donation, as well as increases in bad debt reserves and facilities costs, partially offset by temporary cost containment efforts and prudent expense management across our business segments. The increase in ~~research~~research and development expense was primarily due to ~~increased~~higher personnel-related costs, ~~and higher project costs.~~partially offset by temporary cost containment efforts. The overall change in currency exchange rates decreased operating expenses by ~~approximately~~approximately 1%.

~~Water~~

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

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

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

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

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

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

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

~~Livestock, Poultry and Dairy~~

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

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

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

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

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

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

~~Operating Expenses~~. The decrease in sales and marketing expense was primarily due to lower personnel-related costs mostly offset by third-party costs. The decrease in general and administrative expense was primarily due to lower third-party services and travel costs, as a result of cost control initiatives. The increase in research and development expense was primarily due to increased personnel-related costs. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 2%.

~~Other~~

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

໿

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

Revenues $ 5,897
$ 4,823
$ 1,074
22.3 %
Cost of revenue 3,032
2,171
861
39.7 %
Gross profit 2,865
48.6 % 2,652
55.0 % 213
8.0 %

Operating Expenses:
Sales and marketing 357
6.1 % 423
8.8 % (66 ) (15.6 %)
General and administrative 683
11.6 % 1,557
32.3 % (874 ) (56.1 %)
Research and development 446
7.6 % 229
4.7 % 217
94.8 %
Total operating expenses 1,486
25.2 % 2,209
45.8 % (723 ) (32.7 %)
Income from operations $ 1,379
23.4 % $ 443
9.2 % $ 936
211.3 %

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

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

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

~~Unallocated Amounts~~

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

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

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

Revenues $ —
$ —
$ —
—
Cost of revenue (481 ) (473 ) (8 ) 1.7 %
Gross profit 481
473
8
1.7 %

Operating Expenses:
Sales and marketing 232
(483 ) 715
(148.0 %)
General and administrative 3,766
2,515
1,251
49.7 %
Research and development 4,589
3,656
933
25.5 %
Total operating expenses 8,587
5,688
2,899
51.0 %
Loss from operations $ (8,106 ) $ (5,215 ) $ (2,891 ) 55.4 %

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

~~Non-Operating Items~~

~~Interest Expense~~. Interest expense was $7.1 million for the three months ended September 30, 2019, as compared to $8.5 million for the same period in the prior year. The decrease in interest expense was the result of lower average debt levels, offset by slightly higher interest rates. We also realized lower interest expense from the benefit of our cross currency swaps, as well as increased capitalized interest related to the expansion of our Westbrook, Maine headquarters and relocation of our core reference laboratory in Germany.

~~Provision for Income Taxes~~.Our effective income tax rate was 18.0% for the three months ended September 30, 2019, as compared to 14.5% for the three months ended September 30, 2018. The increase in our effective tax rate was primarily driven by lower tax benefits from share-based compensation.

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

~~Results of Operations~~

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

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

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

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

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

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

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

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


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

Companion Animal Group

~~Total Company Revenue~~. The increase in both U.S. and international organic revenues was driven by strong volume gains in CAG Diagnostics recurring revenue, supported by our differentiated diagnostic technologies and expanded commercial organization that are driving increased volumes from new and existing customers in our reference laboratory business and high growth in consumable revenues, supported by the impact of the continued expansion of our CAG Diagnostics instrument installed base globally. Our Water business also contributed to our overall growth, primarily from higher sales volumes of our Colilert test products and related accessories. The impact of currency movements decreased revenue by 2.1%.

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

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

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

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

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

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

~~Companion Animal Group~~

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

໿

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

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


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


	For the For the Nine Months Ended September 30,
Net Revenue (dollars in thousands)	2020		2019		Dollar Change		Reported Revenue Growth (1)		Percentage Change from Currency		Percentage Change from Acquisitions		Organic Revenue Growth (1)

CAG Diagnostics recurring revenue:	$	1,565,595	$	1,382,196	$	183,399	13.3	%	(0.4	%)	0.8	%	12.8	%
IDEXX VetLab consumables	603,379		519,646		83,733		16.1	%	(0.6	%)	—		16.7	%
Rapid assay products	192,681		181,966		10,715		5.9	%	(0.4	%)	—		6.3	%
Reference laboratory diagnostic and consulting services	703,300		621,469		81,831		13.2	%	(0.2	%)	1.8	%	11.5	%
CAG diagnostics services and accessories	66,235		59,115		7,120		12.0	%	(0.6	%)	—		12.7	%
CAG Diagnostics capital - instruments	72,040		92,883		(20,843)		(22.4	%)	(0.4	%)	—		(22.0	%)
Veterinary software, services and diagnostic imaging systems	118,478		114,318		4,160		3.6	%	(0.1	%)	—		3.8	%
Net CAG revenue	$	1,756,113	$	1,589,397	$	166,716	10.5	%	(0.4	%)	0.7	%	10.1	%

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

CAG Diagnostics Recurring Revenue. We had significant pressure on testing volumes in late-March through mid-April related to COVID-19 social distancing procedures and guidelines. We then saw a sharp recovery in market demand for CAG diagnostics recurring revenues globally across modalities, including high levels of growth in testing volumes beginning in June and sustaining through the third quarter of 2020, supported by pent-up demand for wellness testing as social distancing procedures and guidelines were eased, as well as higher clinical visits related to new patients. The increase in CAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, and to a lesser extent, higher realized prices.

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

The increase inin rapid assay revenue resulted primarily from higher SNAP® 4Dx Plus sales volumes, ~~across our SNAP product portfolio, driven by SNAP 4Dx Plus, and to a lesser extent,~~as well as higher realized prices. Rapid assay testing is relatively more dependent on wellness visits, which were impacted more severely by COVID-19 stay-at-home policies and procedures due to typical seasonality of wellness testing that occurs in the second quarter, however we saw a sharp rebound in rapid assay testing volumes in June, and continued during the third quarter of 2020, consistent with the broader U.S. market recovery for wellness testing.

The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes, ~~throughout our worldwide network of laboratories,~~ most prominently in the U.S., ~~resulting from increased testing from new and existing customers, supported by our differentiated diagnostic technologies, such~~ as ~~IDEXX SDMAand fecal antigen testing. The increase was also the result of~~well as higher average unit sales prices. Solid growth internationally was driven by strong growth in Canada and Asia Pacific.

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

CAG Diagnostics Capital – Instruments Revenue. The decrease in instrument revenue ~~reflects~~was primarily due to the ~~impact~~impacts of ~~product mix,~~the COVID-19 pandemic, including ~~lower SediVue Dx placements compared to high prior year levels, as well as the impact of lower allocated revenue per unit~~restrictions on our ~~IDEXX VetLab instruments related~~sales professionals’ access to ~~increased international placements under our customer volume commitment programs, partially offset by higher Catalyst~~clinics and ~~Procyte Dx instrument placements.~~certain customers deferring new purchase decisions.

Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software and diagnostic imaging subscription-based services ~~as well as~~due to the increases in our active installed base, veterinary software, and hardware upgrades, and to a lesser extent, higher realized prices on these service ~~offerings, and to a lesser extent, higher diagnostic imaging services as a result of the increase in our active installed base.~~offerings. These ~~increases~~factors were partially offset by ~~lower allocated revenue per unit~~impacts of the COVID-19 pandemic on new diagnostic imaging placements, including restrictions on our ~~diagnostic imaging systems related~~sales professionals’ access to ~~increased placements under~~clinics and certain customers deferring purchase decisions, which began to occur in mid-March of 2020.

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

The following table presents the CAG segment results of operations:

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

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

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


	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	1,756,113			$	1,589,397			$	166,716	10.5	%
Cost of revenue	744,006				691,915				52,091		7.5	%
Gross profit	1,012,107		57.6	%	897,482		56.5	%	114,625		12.8	%

Operating Expenses:
Sales and marketing	291,093		16.6	%	282,562		17.8	%	8,531		3.0	%
General and administrative	206,394		11.8	%	160,162		10.1	%	46,232		28.9	%
Research and development	88,558		5.0	%	84,158		5.3	%	4,400		5.2	%
Total operating expenses	586,045		33.4	%	526,882		33.1	%	59,163		11.2	%
Income from operations	$	426,062	24.3	%	$	370,600	23.3	%	$	55,462	15.0	%

Gross Profit. Gross profit increased primarily due to higher sales volume, as well as a 90110 basis point increase in the gross profit margin. The increase in the gross profit margin was ~~driven by~~primarily due to productivity gains in our reference laboratories and the mix benefits from ~~high~~higher growth in IDEXX VetLab consumable revenues ~~volume leverage,~~and lower ~~product costs,~~CAG Diagnostics instrument revenues, as well as the net benefit of price increases in our CAG Diagnostics recurring revenue ~~portfolio,~~portfolio. These favorable factors were partially offset by incremental investments in reference laboratory capacity and ~~software services field resources.~~systems, including acquisitions. The impact from foreign currency movements ~~increased~~decreased the gross profit margin by approximately 1020 basis points, including the impact of lower hedge gains in the current year as compared to higher hedge ~~losses~~gains in the prior year.

Operating Expenses. The increase in sales and marketing expense was primarily due to increased personnel-related costs ~~as we continue~~related to ~~invest in~~ our global commercial ~~infrastructure.~~infrastructure, partially offset by cost containment efforts implemented in response to the COVID-19 pandemic, including temporary compensation and benefit reductions and travel restrictions. The increase in general and administrative expense ~~resulted~~was primarily ~~from~~due to an accrual related to an ongoing litigation matter and a charitable donation, as well as higher personnel-related ~~costs.~~costs, facility costs, and bad debt reserves, partially offset by temporary cost containment efforts. The increase in research and development expense was primarily due to increased project and personnel-related costs, ~~and higher project costs.~~partially offset by temporary cost containment initiatives. The overall change in currency exchange rates resulted in a decrease in operating expenses by ~~approximately 2%~~less than 1%.



Water

The following table presents the Water segment results of operations:

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

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

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


	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	95,537			$	99,980			$	(4,443)	(4.4)	%
Cost of revenue	28,046				27,583				463		1.7	%
Gross profit	67,491		70.6	%	72,397		72.4	%	(4,906)		(6.8)	%

Operating Expenses:
Sales and marketing	11,243		11.8	%	11,982		12.0	%	(739)		(6.2	%)
General and administrative	10,018		10.5	%	9,822		9.8	%	196		2.0	%
Research and development	2,847		3.0	%	3,126		3.1	%	(279)		(8.9)	%
Total operating expenses	24,108		25.2	%	24,930		24.9	%	(822)		(3.3)	%
Income from operations	$	43,383	45.4	%	$	47,467	47.5	%	$	(4,084)	(8.6)	%

Revenue. The ~~increase~~decrease in revenue was ~~attributable~~primarily due to the ~~benefit~~impact of ~~price increases~~the COVID-19 pandemic, primarily from reductions in our non-compliance testing in the second and third quarters of 2020, partially offset by higher sales volumes of our Colilert test products and related accessories used in coliform and E. coli testing ~~including strong volume growth across all regions.~~during the first quarter of 2020, as well as the benefit of price increases. The impact of currency movements decreased revenue by approximately ~~2.9%~~2.1%.

Gross Profit. Gross profit ~~increased~~decreased due to ~~higher~~lower sales volumes, ~~as well as~~and a ~~190~~180 basis point ~~increase~~decrease in the gross profit ~~margin. Foreign~~margin, primarily due to a 110 basis point reduction from foreign currency movements, ~~increased the gross profit margin by approximately 80 basis points,~~ including the impact of lower hedge gains in the current year as compared to ~~hedge losses in~~ the prior ~~year. The remaining increase~~year, as well as higher distribution and freight costs and higher product costs. These reductions in the gross profit margin ~~was primarily due to the net benefit of price increases,~~were partially offset by ~~higher product and distribution costs.~~the net benefits of price increases.

Operating Expenses. ~~While both sales and marketing and research and development~~Overall operating expenses ~~had higher personnel-related costs, the overall decrease~~were lower primarily as a result of cost containment efforts implemented in ~~sales and marketing expense and increase in research and development expense were primarily due~~response to the ~~realignment of certain personnel within operating expense categories. General~~COVID-19 pandemic, including temporary compensation and ~~administrative expense increased primarily due to personnel-related costs.~~benefit reductions and travel restrictions. The overall change in currency exchange rates resulted in a decrease in operating expenses of ~~approximately 2.5%~~approximately 2%.



Livestock, Poultry and Dairy

The following table presents the LPD segment results of operations:

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

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

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


	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	103,369			$	95,980			$	7,389	7.7	%
Cost of revenue	39,450				39,083				367		0.9	%
Gross profit	63,919		61.8	%	56,897		59.3	%	7,022		12.3	%

Operating Expenses:
Sales and marketing	14,925		14.4	%	16,916		17.6	%	(1,991)		(11.8	%)
General and administrative	12,466		12.1	%	12,891		13.4	%	(425)		(3.3	%)
Research and development	8,111		7.8	%	9,383		9.8	%	(1,272)		(13.6)	%
Total operating expenses	35,502		34.3	%	39,190		40.8	%	(3,688)		(9.4	%)
Income from operations	$	28,417	27.5	%	$	17,707	18.4	%	$	10,710	60.5	%

Revenue. ~~The decrease in revenue was~~Revenue increased primarily due to the continued demand for swine testing in China, as well as increased poultry, bovine disease, and pregnancy testing. These increases were offset by decreased herd health screening, which reflects comparisons to a strong prior year, and lower volumes as the result of the COVID-19 pandemic. The unfavorable impact of foreign currency movements ~~that~~ decreased revenue by ~~approximately 4.8%~~2.7%. On an organic basis, the increase in growth was primarily due to increased herd health screening, new diagnostic testing programs in Asia, higher poultry testing volumes across our Asia Pacific and European regions, and higher pregnancy testing in our European and Asia Pacific regions. These increases were partially offset by lower bovine testing across most regions, primarily in Europe, and a decline in diagnostic testing related to African swine fever outbreaks in China.

Gross Profit. The increase in gross profit was primarily due to higher sales volumes ~~as well as~~and a ~~180~~250 basis point increase in the gross profit margin. The increase in the gross profit margin is primarily due to favorable product costs from volume leverage, offset by the impact from foreign currency movements, ~~increased~~which decreased gross profit margin by approximately ~~140~~150 basis points, including the impact of ~~hedges. The remaining increase~~lower hedge gains in the ~~gross profit margin reflected favorable product mix from~~current year compared to higher ~~herd health screening, as well as lower product costs.~~hedge gains in the prior year.

Operating Expenses. ~~The decrease~~Overall operating expenses were lower primarily as a result of cost containment efforts implemented in ~~sales~~response to the COVID-19 pandemic, including temporary compensation and benefit reductions and travel restrictions. Sales and marketing ~~expense was primarily due to lower personnel-related costs, including cost control initiatives. The decrease in~~and general and administrative ~~expense was~~expenses decreased primarily ~~due to lower third-party services.~~from reduced travel and personnel-related costs, partially offset by higher bad debt reserves. The ~~increase~~decrease in research and development expense was primarily due to ~~increased personnel-related costs.~~leveraging LPD personnel to support our human COVID testing initiative and lower project costs, partially offset by third-party services. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 3% 1%.

Other

The following table presents the Other results of operations:

໿

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

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

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


	For the Nine Months Ended September 30,								Change
Results of Operations (dollars in thousands)	2020		Percent of Revenue		2019		Percent of Revenue		Amount		Percentage

Revenues	$	30,698			$	16,105			$	14,593	90.6	%
Cost of revenue	12,677				8,481				4,196		49.5	%
Gross profit	18,021		58.7	%	7,624		47.3	%	10,397		136.4	%

Operating Expenses:
Sales and marketing	1,265		4.1	%	1,039		6.5	%	226		21.8	%
General and administrative	2,233		7.3	%	3,778		23.5	%	(1,545)		(40.9	%)
Research and development	2,956		9.6	%	1,366		8.5	%	1,590		116.4	%
Total operating expenses	6,454		21.0	%	6,183		38.4	%	271		4.4	%
Income from operations	$	11,567	37.7	%	$	1,441	8.9	%	$	10,126	702.7	%

Revenue. The increase in revenue was primarily due to ~~higher volumes of~~ our new OPTI ~~Medical~~COVID-19 PCR testing products and services, ~~partially offset by lower realized prices.~~which was introduced in the second quarter of 2020. The future demand for this product is difficult to project given the uncertain nature of the COVID-19 pandemic, including short-term project commitments, available PCR testing capacity and alternative suppliers. The impact of currency movements on revenue was immaterial.

Gross Profit. The increase in gross profit was primarily due to ~~a 110 basis point increase in the~~sales volumes of our new OPTI COVID-19 PCR testing products and services. The gross profit margin increased 1,140 basis points primarily due to favorable product mix from OPTI COVID-19 PCR testing and the net benefit of ~~product mix within~~price increases in our core OPTI ~~Medical product line and, to a lesser extent, lower OPTI Medical product costs. These increases were~~products, partially offset by higher product costs in our other OPTI ~~Medical service costs and lower realized prices.~~products. The overall change in currency exchange rates had an immaterial impact on ~~the~~ gross ~~profit margin.~~profit.

Operating Expenses. The ~~decrease~~increase in sales and marketing expense was primarily due to ~~lower personnel costs.~~higher personnel-related costs related to new positions associated with our new OPTI COVID-19 PCR testing initiative. The decrease in general and administrative ~~cost~~expense was primarily due to lower foreign exchange losses on settlements of foreign currency denominated transactions, as compared to the ~~recovery of previously established bad debt reserves~~prior year, for all operating segments, which are reported within our Other segment, partially offset by an increase in ~~Africa and the Middle East.~~costs associated with our COVID-19 PCR testing . The increase in research and development cost was primarily due to higher personnel-related and project ~~costs.~~costs associated with the development of the OPTI COVID-19 PCR test.

~~Unallocated Amounts~~

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

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

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

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

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

Non-Operating Items

Interest ~~Income~~Expense. Interest ~~income~~expense was ~~$0.2~~$25.3 million for the nine months ended September 30, ~~2019,~~2020, as compared to $0.9 million for the nine months ended September 30, 2018. The decrease in interest income was primarily due to the liquidation of our portfolio of marketable securities during the first quarter of 2018.

~~Interest Expense. Interest expense was~~ $23.7 ~~million for the nine months ended September 30, 2019, as compared to $26.2~~ million for the same period in the prior year. The ~~decrease~~increase in interest expense was the result of ~~lower~~higher average debt levels, ~~offset by higher interest rates. We also realized lower interest expense from the benefit of our cross currency swaps,~~ as well as ~~increased~~lower capitalized interest related to the expansion of our Westbrook, Maine headquarters and relocation of our core reference laboratory in ~~Germany.~~Germany, partially, offset by lower interest rates.

Provision for Income Taxes. Our effective income tax rate was 16.0% for the nine months ended September 30, 2020, as compared to 18.5% for the nine months ended September 30, ~~2019, as compared to 16.9% for the nine months ended September 30, 2018.~~2019. The ~~increase~~decrease in ~~the~~our effective tax rate was primarily driven by ~~lower~~higher 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.~~compensation.

Liquidity and Capital Resources

We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings, and amounts available under our Credit Facility. At September 30, ~~2019,~~2020, we had ~~$104.0~~$175.6 million of cash and cash equivalents, as compared to ~~$123.8~~$90.3 million on December 31, ~~2018.~~2019. Working capital, including our Credit Facility, totaled ~~$76.8~~$341.8 million at September 30, ~~2019,~~2020, as compared to negative ~~$116.3~~$45.7 million at December 31, ~~2018.~~2019. Additionally, at September 30, ~~2019,~~2020, we had remaining borrowing availability of ~~$619.1~~$998.6 million under our $1 billion Credit Facility, which was expanded in April 2020, from $850 million, and extended through 2023. The general availability of funds under our Credit ~~Facility.~~Facility is reduced by $1.4 million for outstanding letters of credit. Also in April 2020, we further enhanced our liquidity and financial flexibility by issuing $200 million in 10-year, 2.50% fixed-rate senior notes. We believe that, if necessary, we could obtain additional ~~borrowings at similar rates to our existing~~ borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, ~~on favorable terms~~ will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in the U.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in the U.S. through the incurrence of debt or equity ~~issuances. These~~issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings.

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

The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries:໿


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

U.S.	$	2,133		$	2,044		U.S.	$	67,893		$	1,135
Foreign	101,863			121,750			Foreign	107,694			89,191
Total	$	103,996		$	123,794		Total	$	175,587		$	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	$	13,474		$	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	7.7		%	7.2		%

Of the ~~$104.0~~$175.6 million of cash and cash equivalents held as of September 30, ~~2019,~~2020, greater than 99% was held as bank deposits.

The following table presents additional key information concerning working capital:

໿


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

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

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

Days sales outstanding⁽¹⁾
41.8
41.7
42.0
42.6
44.3
Inventory turns⁽²⁾
2.0
2.1
2.0
2.3
2.1
(1)Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.


~~(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.~~

Sources and Uses of Cash

The following table presents cash provided (used):

໿


	For the Nine Months Ended September 30,
(in thousands)	2020		2019		Dollar Change

Net cash provided by operating activities	$	429,129	$	303,745	$	125,384
Net cash used by investing activities	(93,686)		(109,617)		15,931
Net cash used by financing activities	(248,814)		(212,020)		(36,794)
Net effect of changes in exchange rates on cash	(1,368)		(1,906)		538
Net change in cash and cash equivalents	$	85,261	$	(19,798)	$	105,059

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

Net cash provided by operating activities $ 303,745
$ 264,436
$ 39,309
Net cash (used) provided by investing activities (109,617 ) 178,446
(288,063 )
Net cash used by financing activities (212,020 ) (479,993 ) 267,973
Net effect of changes in exchange rates on cash (1,906 ) (3,687 ) 1,781
Net change in cash and cash equivalents $ (19,798 ) $ (40,798 ) $ 21,000

Operating Activities. The increase in cash provided by operating activities of ~~$39.3~~$125.4 million was driven primarily by ~~the~~an increase in net income ~~partially offset by~~and changes in ~~the benefit of deferred income taxes.~~other assets and liabilities. The following table presents cash ~~flows~~flow impacts from changes in operating assets and liabilities:

໿


	For the Nine Months Ended September 30,										For the Nine Months Ended September 30,
(in thousands)	2019			2018			Dollar Change			(in thousands)	2020		2019		Dollar Change

Accounts receivable	$	(24,451	)	$	(33,041	)	$	8,590		Accounts receivable	$	(72,409)	$	(24,451)	$	(47,958)
Inventories	(36,582		)	(27,415		)	(9,167		)	Inventories	(25,091)		(36,582)		11,491
Accounts payable	1,181			(1,336		)	2,517			Accounts payable	512		1,181		(669)
Deferred revenue	(10,826		)	(6,314		)	(4,512		)	Deferred revenue	(10,433)		(10,826)		393
Other assets and liabilities	(54,770		)	(58,214		)	3,444			Other assets and liabilities	30,579		(54,770)		85,349
Total change in cash due to changes in operating assets and liabilities	$	(125,448	)	$	(126,320	)	$	872		Total change in cash due to changes in operating assets and liabilities	$	(76,842)	$	(125,448)	$	48,606

Cash used due to changes in operating assets and liabilities during the nine months ended September 30, ~~2019,~~2020, as compared to the same period in the prior year, decreased approximately ~~$0.9~~$48.6 million. ~~This decrease~~The change in other assets and liabilities was ~~primarily~~ due to higher non-cash operating expenses recorded as accrued liabilities, including an accrued charge related to an ongoing litigation matter and higher accrued personnel-related costs related to higher incentives and delayed employer payroll taxes under the COVID-19 stimulus guidance, as well as lower investments in customer volume commitment programs to support instrument placements, Additionally, lower inventory levels due to high demand levels contributed to lower cash used ~~in accounts receivable as a result of~~compared to the ~~quarter-end timing on a weekend~~same period in the prior ~~year, which resulted in certain customer payments being delayed until the start of the fourth quarter,~~year. These factors were partially offset by increases in ~~inventory~~accounts receivable related to ~~meet anticipated demand.~~high levels of revenue growth.

We have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally higher cash flows from operating activities for the remainder of the year driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were ~~earned and the seasonality of vector-borne disease testing, which has historically resulted in significant increases in accounts receivable balances during the first quarter of the year.~~

earned.

Investing Activities. Cash used by investing activities was ~~$109.6~~$93.7 million for the nine months ended September 30, ~~2019,~~2020, as compared to cash provided by investing activities of $178.4 million for the same period in the prior year. This change in investing cash activity was primarily due to the sale of marketable securities in 2018, as a result of our repatriation of cash and investments held by our foreign subsidiaries, as well as increased capital spending in 2019 as we expand our Westbrook, Maine headquarters and relocate our core reference laboratory in Germany.

~~Financing Activities.Cash used by financing activities was $212.0 million for the nine months ended September 30, 2019, as compared to cash used by financing activities of $480.0~~$109.6 million for the same period in the prior year. The decrease in cash used by investing activities was primarily due to the completion of our long-term major facilities projects during 2020, partially offset by the purchase of one of our reference laboratory facilities that was previously leased.

Financing Activities.Cash used by financing activities was $248.8 million for the nine months ended September 30, ~~3019, was due to a decrease in repurchases of our common stock,~~2020, as compared to $212.0 million for the same period in the prior ~~year,~~year. The increase in cash used by financing activities was due to an increase in repayments on our Credit Facility and repurchases of our common stock, partially offset by the issuance of ~~$100 million~~ senior notes ~~during~~in the ~~first quarter of 2019, and a larger repayment on our revolving Credit Facility in 2018 from repatriated foreign cash.~~current year.

Cash used to repurchase shares of our common stock ~~decreased $102.7~~increased $21.8 million during the nine months ended September 30, ~~2019, primarily in the second quarter of 2019, as compared to the same period in the prior year.~~2020. We believe that the repurchase of our common stock is a favorable means of returning value to our stockholders, and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing activities and the share price. In light of the uncertainty of the duration and magnitude of the COVID-19 pandemic and its impacts, we have suspended share repurchase activity. The existing share repurchase program remains authorized by our Board of Directors. and we may resume share repurchases in the future at any time, depending upon market conditions, our capital needs, eligibility to trade, and other factors. See Note 12 to

the unaudited condensed consolidated

financial statements in Part I,I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our share repurchases.

Net ~~repayment~~repayment activity under our Credit Facility resulted in cash used of ~~$169.5~~$289.6 million during the nine months ended September 30, ~~2019,~~2020, as compared to ~~$240.5~~$169.5 million ~~of cash used~~ in the same period of the prior year. At September 30, ~~2019,~~2020, we had ~~$229.5 million outstanding~~no outstanding borrowings under the Credit Facility. The general availability of funds under our Credit Facility ~~was further~~is reduced byby $1.4 million ~~for a letter~~for outstanding letters of ~~credit that was issued in connection with claims under our workers’ compensation policy.~~credit. The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The obligations under our Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and ~~insolvency related~~insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974 ~~("ERISA"~~(“ERISA”), the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default.

~~On March 14, 2019, we amended~~See Note 11 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our ~~Existing Agreement with MetLife, submitted a request for purchase~~debt issuance and drew $100 million of our Shelf Notes at 4.19% interest per annum rate, due March 14, 2029 (the "Series C Notes"). Series C Notes proceeds were used for general corporate purposes, including a partial repayment of our Credit Facility.

Since December 2013, we have issued and sold through private placements senior notes having an aggregate principal amount of approximately $700 million, including the $100 million Series C Notes, pursuant to certain note purchase agreements (collectively, the “Senior Note Agreements”). The ~~Senior Note Agreements contain~~Credit Agreement contains affirmative, negative, and financial covenants customary for ~~agreements~~financings of this type. The negative covenants include restrictions on liens, indebtedness of ~~our~~ subsidiaries ~~priority indebtedness,~~of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and ~~violations of~~sanctions laws and regulations. The financial covenant is a consolidated leverage ratio test.

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

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

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

Financial Covenant. The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization, non-recurring transaction expenses incurred in connection with acquisitions, share-based compensation expense, and certain other non-cash losses and charges (“Adjusted EBITDA”) not to exceed 3.5-to-1. At September 30, ~~2019,~~2020, we were in compliance with such covenant. The following details our consolidated leverage ratio calculation:

໿

(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


(in thousands)	Twelve months ended
Trailing 12 Months Adjusted EBITDA:	September 30, 2020

Net income attributable to stockholders (as reported)	$	497,482
Interest expense	32,690
Provision for income taxes	95,338
Depreciation and amortization	94,026
Acquisition-related expense	1,822
Share-based compensation expense	39,663
Extraordinary and other non-recurring non-cash charges	2,962
Adjusted EBITDA	$	763,983

(in thousands)
Debt to Adjusted EBITDA Ratio:	September 30, 2020

Line of credit	$	—
Current and long-term portions of long-term debt	903,299
Total debt	903,299
Acquisition-related contingent consideration payable	1,500
Financing leases	46
Deferred financing costs	681
Gross debt	$	905,526
Gross debt to Adjusted EBITDA ratio	1.19

Less: Cash and cash equivalents	$	(175,587)
Net debt	$	729,939
Net debt to Adjusted EBITDA ratio	0.96

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

Other Commitments, Contingencies and Guarantees

Significant commitments, contingencies and guarantees at September 30, ~~2019,~~2020, are described in Note 16 to the unaudited condensed consolidated financial statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see the section under the heading “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our ~~2018~~2019 Annual Report. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our ~~2018~~2019 Annual Report, except for the impact of foreign exchange rates, as discussed below.

Foreign Currency Exchange Impacts. Approximately 21% of our consolidated revenue was derived from products manufactured in the U.S. and sold internationally in local currencies for both the three and nine months ended September 30, ~~2019,~~2020, respectively, as compared to 21% for the three and nine months ended September 30, ~~2018.~~2019. Strengthening of the U.S. dollar exchange rate relative to other currencies has a negative impact on our revenues derived in currencies other than the U.S. dollar and on profits of products manufactured in the U.S. and sold internationally, and a weakening of the U.S. dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated costs and expenses and foreign currency denominated supply contracts partly offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. dollar denominated revenues.

Our foreign currency exchange impacts are comprised of three components: 1) local currency revenues and expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary. Based on projected revenues and expenses for the remainder of 2019, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, we project We estimate a 1% strengthening of the U.S. dollar would ~~reduce revenue by approximately $2 million and operating income by approximately $1 million. Additionally, we project~~result in incremental gains on our foreign currency hedge contracts in place as of September 30, ~~2019, would result in incremental offsetting gains~~2020, of approximately $0.5 million. The impact of the intercompany and trade balances, and monetary balances referred to in the third component above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably forecast the impact that changes in exchange rates would have on such balances.

~~At our current foreign currency exchange rate assumptions, we anticipate the effect of a stronger U.S. dollar~~$0.6 million for the remainder of the year will have an unfavorable impact on our operating results by decreasing our revenues, operating profit, and diluted earnings per share for the year ending December 31, 2019, by approximately $42 million, $6 million, and $0.06 per share, respectively. This unfavorable currency impact includes a favorable impact of approximately $12 million from foreign currency hedging activity. The actual impact of changes in the value of the U.S. dollar against foreign currencies in which we transact may materially differ from our expectations described above. The above estimates assume that the value of the U.S. dollar will reflect the euro at $1.09, the British pound at $1.26, the Canadian dollar at $0.75, and the Australian dollar at $0.67; and the Japanese yen at ¥110, the Chinese renminbi at RMB 7.22 and the Brazilian real at R$4.21 relative to the U.S. dollar for the remainder of 2019.remaining year.

The following table presents the estimated foreign currency exchange impact on our revenues, operating profit, and diluted earnings per share for the current period and as compared to the respective ~~prior~~prior-year period:

໿


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

Revenue impact	$	4,867	$	(6,910)	$	(9,183)	$	(34,101)

Operating profit impact, excluding hedge activity and exchange impacts on settlement of foreign currency denominated transactions	$	2,119	$	(2,723)	$	(4,490)	$	(16,309)
Hedge (losses) gains - current period	(591)		3,171		2,562		7,091
Exchange gains (losses) on settlements of foreign currency denominated transactions - current period	616		(1,007)		(492)		(1,548)
Operating profit impact - current period	$	2,144	$	(559)	$	(2,420)	$	(10,766)

Hedge (gains) losses - prior period	(3,171)		(256)		(7,091)		2,412
Exchange losses on settlement of foreign currency denominated transactions - prior period	1,007		706		1,548		2,775
Operating profit impact - as compared to prior period	$	(20)	$	(109)	$	(7,963)	$	(5,579)

Diluted earnings per share impact - as compared to prior period	$	—	$	—	$	(0.07)	$	(0.05)

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

Revenue impact $ (6,910 ) $ (5,892 ) $ (34,101 ) $ 21,715

Operating profit impact, excluding hedge activity $ (3,024 ) $ (3,979 ) $ (15,082 ) $ 6,619

Hedge (gains) losses - prior year (256 ) 893
2,412
(935 )
Hedge gains (losses) - current year 3,171
256
7,091
(2,412 )
Hedging activity impact 2,915
1,149
9,503
(3,347 )

Operating profit impact, including hedge activity $ (109 ) $ (2,830 ) $ (5,579 ) $ 3,272
Diluted earnings per share impact, including hedge activity $ —
$ (0.03 ) $ (0.05 ) $ 0.03

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining disclosure controls and procedures, as defined by the SEC in its Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act isare recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures at September 30, ~~2019,~~2020, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, ~~2019,~~2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I. Item 1A. Risk ~~Factors~~”Factors” in our ~~2018~~2019 Annual Report and the risk factor included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “First Quarter 10-Q”), as supplemented and modified in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (the “Second Quarter 10-Q”), any and all of which could materially affect our business, financial condition, or future results. There have been no material changes from the risk factors previously disclosed in the ~~2018~~2019 Annual ~~Report.~~Report, the First Quarter 10-Q and the Second Quarter 10-Q, and set forth below is the risk factor included in the First Quarter 10-Q, as supplemented and modified in the Second Quarter 10-Q. The risks described in this Quarterly Report on Form 10-Q and in our ~~2018~~2019 Annual Report, the First Quarter 10-Q and the Second Quarter 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.

The effects of the ongoing COVID-19 pandemic could have a material adverse impact on our business, results of operations, liquidity, financial condition, and stock price.

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. The global pandemic has increased economic uncertainty and has caused an economic slowdown that is likely to continue and may result in a sustained global recession. If a weakened global economy reduces our customers' ability or willingness to pay for our products and service or our suppliers' ability to provide products and services to us, then our business, results of operation, liquidity, financial condition, and stock price could be negatively impacted, and these impacts could be material.

The spread of COVID-19 has caused us to modify aspects of our business practices (including the management of and access to our facilities, employee remote work locations, and employee travel), and we may take further actions, as may be required by federal, state, and local governments or as we determine to be in the best interests of our employees and customers. Such actions may result in disruptions to our supply chain, operations, facilities, and employee workforce. In addition, the social distancing procedures and guidelines, including stay-at-home orders that may be further deployed to combat the spread of COVID-19, and possible higher infection rates could result in a decrease in companion animal clinical visits, the delay of elective procedures and wellness visits and disruption of veterinary clinic operations, all of which would have a negative effect on veterinary service providers and result in declines in demand for our CAG products and services, which represented 88% of our 2019 consolidated revenues. If stay-at-home orders are re-implemented periodically, to combat the spread of COVID-19, particularly in the United States, the negative impact on veterinary service providers and their businesses, and correspondingly on demand for our CAG products and services, may be material.

The weakened global economy caused by the effects of the COVID-19 pandemic has reduced, and may further reduce, demand for our water testing products, livestock and poultry diagnostic tests and dairy products due to reduced testing or disruptions in livestock, poultry, dairy, or other food supply and distribution chains and markets that could negatively impact the related production markets. If the global recession is sustained, the decline in our customers' demand for our water testing products, livestock and poultry diagnostic tests and dairy products may be significant.

The magnitude of the negative impact of the COVID-19 pandemic on our business, results of operations, liquidity, financial condition and stock price depends on future developments that are unpredictable and most of which are outside of our control, including the duration and scope of the pandemic, related governmental advisories and restrictions to contain COVID-19 and how quickly economic conditions improve once the COVID-19 pandemic subsides. There can be no assurance that we will be able to prevent or mitigate any or all of the COVID-19 near- or long-term adverse impacts, which could be material, including, among others:

•We may be prevented from operating our manufacturing facilities, reference laboratories, or other workplaces due to the illness of our employees, regulations, and employee inability or reluctance to appear for work or travel to our facilities, and if most of our employees are required to work remotely for an extended period, their productivity may be negatively impacted, and we may not be able to maintain the necessary information technology infrastructure to adequately support our employees working remotely.

•The operations of our customers may be disrupted thereby increasing the likelihood that our customers may attempt to delay or cancel orders, may reduce orders for our products and services in the future or may cease to operate as going concerns.

•We may experience a heightened risk of cybersecurity attacks due to governmental mandates implemented to control the spread of COVID-19, which has resulted in a greater number of our employees working remotely. There is no guarantee that the data security and privacy safeguards we have in place will be completely effective or that we will not encounter some increased risk of vulnerability or attacks associated with additional individuals accessing our data and systems remotely. In addition, security industry experts and government officials have warned about the risks of hackers and cybersecurity attacks targeting U.S. organizations conducting COVID-19 related research, such as IDEXX.

•We may have difficulty collecting accounts receivable due from our customers.

•The operations of our suppliers may be disrupted or may not operate effectively or efficiently thereby negatively impacting our ability to purchase supplies for our business at historical prices and in sufficient amounts.

•We may not be able to manage our business effectively due to key employees becoming ill, working from home inefficiently, or being unable to travel to our customers' facilities.

•We may incur significant employee health care costs under our self-insurance programs.

•Legislative and regulatory action in response to the COVID-19 pandemic in the jurisdictions in which we conduct business could negatively affect our effective tax rate. Such legislative and regulatory action may also impact our customers’ effective tax rates, which could adversely affect our results of operation and financial condition.

•The goodwill on our balance sheet may be adjusted downward if we determine that the carrying value of the asset is in excess of the fair value. We are required to perform an annual impairment review of goodwill and indefinite-lived

assets, which we last performed in the fourth quarter of fiscal 2019. We are also required to perform an interim impairment review of goodwill if an event occurs or circumstances change that would indicate that a goodwill impairment more likely than not exists. Any sustained decline in our stock price is an example of such an event or circumstance, as well as certain other macroeconomic factors that may result from the COVID-19 pandemic. If the market price of our common stock were to experience a sustained decline, we may be required to perform an interim impairment review of our goodwill and potentially record an impairment charge.

•We may not be able to generate sufficient levels of earnings to satisfy the applicable affirmative, negative, and financial covenants in our Credit Facility and senior notes, which could result in an event of default and acceleration of our obligations under these agreements, requiring us to seek additional financing or restructure existing debt on unfavorable terms.

•We may need to raise additional capital by incurring indebtedness or issuing equity securities, and our ability to do so may be negatively impacted by, among other things, negative covenants in our existing debt instruments and adverse changes in credit or equity markets, and the cost of funding and terms may not be favorable to us.

•We may have an increased risk of inventory that may expire.

•The market price of our common stock may drop significantly or remain volatile.

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

During the three months ended September 30, ~~2019,~~2020, we repurchased shares of common stock as described below:


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

July 1 to July 31, 2020	—		$	—	—	6,275,912
August 1 to August 31, 2020	276		$	395.71	—	6,275,912
September 1 to September 30, 2020	640		$	392.01	—	6,275,912
Total	916	(2)			—	6,275,912

Period
Total Number of Shares Purchased
(a)

Average Price Paid per Share
(b)

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

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

July 1 to July 31, 2019 14,546
$ 282.31
14,546
2,844,912
August 1 to August 31, 2019 145,418
$ 276.97
145,418
2,699,494
September 1 to September 30, 2019 171,492
$ 273.74
170,526
2,528,968
Total 331,456
⁽²⁾
$ 275.53
330,490
2,528,968

The total shares repurchased include shares ~~purchased in the open market and shares~~ surrendered for employee statutory tax withholding. In light of the uncertainty of the duration and magnitude of the COVID-19 pandemic and its impacts, we have suspended our open market share repurchase activity. Our existing share repurchase program remains authorized by our Board of Directors, and we may resume share repurchases in the future at any time, depending upon market conditions, our capital needs, eligibility to trade, and other factors. See Note 12 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our share repurchases.

~~(1)~~

On August 13, 1999, our Board of Directors approved and announced the repurchase of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase program. The authorization has been increased by the Board of Directors on numerous occasions; most recently, on May 2, 2017, the maximum level of shares that may be repurchased under the program was increased from 65 million to 68 million shares. There is no specified expiration date for this share repurchase program. There were no other repurchase programs outstanding during the three months ended September 30, 2019, and no share repurchase programs expired during the period. Repurchases of 330,490 shares were made during the three months ended September 30, 2019, in transactions made pursuant to our share repurchase program.

~~(2)~~

During the three months ended September 30, 2019, we received 966 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the share repurchase program.

(1)On August 13, 1999, our Board of Directors approved and announced the repurchase of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase program. The authorization has been increased by the Board of Directors on numerous occasions; most recently, on February 12, 2020, the maximum level of shares that may be repurchased under the program was increased from 68 million to 73 million shares. There is no specified expiration date for this share repurchase program. There were no other repurchase programs outstanding during the three months ended September 30, 2020, and no share repurchase programs expired during the period. There were no share repurchases made during the three months ended September 30, 2020, in transactions made pursuant to our share repurchase program.

(2)During the three months ended September 30, 2020, we received 916 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the share repurchase program.

Item 6. Exhibits


Exhibit No.		Description


~~Exhibit No.~~ 10.1 *		~~Description~~ Letter Agreement between Ortho-Clinical Diagnostics, Inc. and IDEXX Operations, Inc. and IDEXX Europe B.V. dated as of July 10 , 2020 (filed herewith).

~~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~~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 September 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 September 30, 2020, formatted in Inline XBRL ~~document.~~and contained in Exhibit 101.

~~101.SCH~~*		~~XBRL Taxonomy Extension Schema Document.~~Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).

~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document.~~

~~101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase Document.~~

~~101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase Document.~~

~~101.PRE~~	~~XBRL Taxonomy Extension Presentation Linkbase Document.~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			IDEXX LABORATORIES, INC.


			/s/ Brian P. McKeon
Date: October ~~31, 2019~~29, 2020			Brian P. McKeon
			Executive Vice President, Chief Financial Officer and Treasurer
			(Principal Financial Officer)

໿



	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)
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



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

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