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 March 31,September 30, 2020
OR 
☐ 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 

idxx-20200930_g1.jpg
  IDEXX LABORATORIES, INC. 
(Exact name of registrant as specified in its charter) 

Delaware01-0393723
(State or other jurisdiction of incorporation 

or organization)
(IRS Employer Identification No.)
One IDEXX DriveWestbrookMaine04092
(Address of principal executive offices)(ZIP Code)
207-556-0300207-556-0300
(Registrant’s telephone number, including area code)

Securities Registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.10 par value per shareIDXXNASDAQ 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☐
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 84,932,969was 85,299,893, on April 27,October 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
AOCIAccumulated other comprehensive income or loss
ASU 2016-13
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
CAGCompanion 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 FacilityOur unsecured revolving credit facility, also referred to as line of credit
FASBU.S. Financial Accounting Standards Board
LPDLivestock, 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 provides point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable products) for the human 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 growthA 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.
PCRPolymerase chain reaction, a technique used to amplify small segments of DNA
R&DResearch and Development
Reported revenue growthRepresents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year
SaaSSoftware-as-a-service
SECU.S. Securities and Exchange Commission
Senior Note AgreementsNote purchase agreements for the private placement of senior notes, referred to as senior notes or long-term debt
U.S. GAAPAccounting principles generally accepted in the United States of America
WaterWater, 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
3
4
5
6
78
89
2935
4560
4661
PART II—OTHER INFORMATION
4661
4661
4964
5065
5266
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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, 2020December 31, 2019
ASSETS  
Current Assets:  
Cash and cash equivalents$175,587 $90,326 
Accounts receivable, net337,593 269,312 
Inventories217,597 195,019 
Other current assets137,902 124,982 
Total current assets868,679 679,639 
Long-Term Assets:
Property and equipment, net547,624 533,845 
Operating lease right-of-use assets84,735 80,607 
Goodwill238,100 239,724 
Intangible assets, net53,467 58,468 
Other long-term assets254,802 240,192 
Total long-term assets1,178,728 1,152,836 
TOTAL ASSETS$2,047,407 $1,832,475 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable$71,933 $72,172 
Accrued liabilities362,326 322,938 
Line of credit0 288,765 
Current portion of long-term debt49,983 0 
Current portion of deferred revenue42,599 41,462 
Total current liabilities526,841 725,337 
Long-Term Liabilities:
Deferred income tax liabilities27,590 33,024 
Long-term debt, net of current portion853,316 698,910 
Long-term deferred revenue, net of current portion48,226 48,743 
Long-term operating lease liabilities70,655 67,472 
Other long-term liabilities79,664 81,164 
Total long-term liabilities1,079,451 929,313 
Total liabilities1,606,292 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 201910,628 10,571 
Additional paid-in capital1,274,069 1,213,517 
Deferred stock units: Outstanding: 147 units in 2020 and 143 units in 20195,411 4,462 
Retained earnings2,000,805 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’ equity440,576 177,473 
Noncontrolling interest539 352 
Total stockholders’ equity441,115 177,825 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,047,407 $1,832,475 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
March 31, 2020 December 31, 2019
    
ASSETS 
  
Current Assets: 
  
Cash and cash equivalents$81,395
 $90,326
Accounts receivable, net299,983
 269,312
Inventories211,644
 195,019
Other current assets128,329
 124,982
Total current assets721,351
 679,639
Long-Term Assets:   
Property and equipment, net546,158
 533,845
Operating lease right-of-use assets78,612
 80,607
Goodwill233,211
 239,724
Intangible assets, net57,948
 58,468
Other long-term assets248,965
 240,192
Total long-term assets1,164,894
 1,152,836
TOTAL ASSETS$1,886,245
 $1,832,475
    
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current Liabilities:   
Accounts payable$74,210
 $72,172
Accrued liabilities247,179
 322,938
Line of credit486,824
 288,765
Current portion of deferred revenue38,028
 41,462
Total current liabilities846,241
 725,337
Long-Term Liabilities:   
Deferred income tax liabilities38,908
 33,024
Long-term debt697,363
 698,910
Long-term deferred revenue, net of current portion49,042
 48,743
Long-term operating lease liabilities65,343
 67,472
Other long-term liabilities81,293
 81,164
Total long-term liabilities931,949
 929,313
Total liabilities1,778,190
 1,654,650
    
Commitments and Contingencies (Note 16)


 


    
Stockholders’ Equity:   
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 105,914 shares in 2020 and 105,711 shares in 2019; Outstanding: 84,929 shares in 2020 and 85,471 shares in 201910,591
 10,571
Additional paid-in capital1,230,485
 1,213,517
Deferred stock units: Outstanding: 144 units in 2020 and 143 units in 20194,508
 4,462
Retained earnings1,705,646
 1,595,648
Accumulated other comprehensive loss(55,246) (46,182)
Treasury stock, at cost: 20,985 shares in 2020 and 20,240 shares in 2019(2,788,310) (2,600,543)
Total IDEXX Laboratories, Inc. stockholders’ equity107,674
 177,473
Noncontrolling interest381
 352
Total stockholders’ equity108,055
 177,825
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,886,245
 $1,832,475
    
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
March 31,		 For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020 2019 2020201920202019
      
Revenue:   Revenue:  
Product revenue$364,773
 $334,058
Product revenue$422,283 $360,000 $1,153,114 $1,059,696 
Service revenue261,563
 241,998
Service revenue299,506 245,303 832,603 741,766 
Total revenue626,336
 576,056
Total revenue721,789 605,303 1,985,717 1,801,462 
Cost of Revenue:   Cost of Revenue:
Cost of product revenue125,454
 117,383
Cost of product revenue146,804 125,112 396,282 370,388 
Cost of service revenue141,292
 127,076
Cost of service revenue152,379 135,241 427,897 396,674 
Total cost of revenue266,746
 244,459
Total cost of revenue299,183 260,353 824,179 767,062 
Gross profit359,590
 331,597
Gross profit422,606 344,950 1,161,538 1,034,400 
Expenses:   Expenses:
Sales and marketing116,143
 106,584
Sales and marketing108,202 104,551 318,526 312,499 
General and administrative65,812
 60,361
General and administrative105,031 66,337 231,111 186,653 
Research and development33,310
 31,514
Research and development37,517 34,260 102,472 98,033 
Income from operations144,325
 133,138
Income from operations171,856 139,802 509,429 437,215 
Interest expense(7,692) (8,386)Interest expense(8,110)(7,090)(25,297)(23,662)
Interest income140
 40
Interest income208 86 417 159 
Income before provision for income taxes136,773
 124,792
Income before provision for income taxes163,954 132,798 484,549 413,712 
Provision for income taxes24,917
 22,083
Provision for income taxes17,633 23,960 77,376 76,464 
Net income111,856
 102,709
Net income146,321 108,838 407,173 337,248 
Less: Net income attributable to noncontrolling interest29
 28
Less: Net income attributable to noncontrolling interest102 1 187 24 
Net income attributable to IDEXX Laboratories, Inc. stockholders$111,827
 $102,681
Net income attributable to IDEXX Laboratories, Inc. stockholders$146,219 $108,837 $406,986 $337,224 
   
Earnings per Share:   Earnings per Share:
Basic$1.31
 $1.19
Basic$1.71 $1.26 $4.77 $3.91 
Diluted$1.29
 $1.17
Diluted$1.69 $1.24 $4.70 $3.85 
Weighted Average Shares Outstanding:   Weighted Average Shares Outstanding:
Basic85,427
 86,204
Basic85,314 86,198 85,293 86,206 
Diluted86,705
 87,549
Diluted86,690 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.
໿


4

IDEXX LABORATORIES, INC. AND SUBSIDIARIES 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
(in thousands) 
(Unaudited) 
For the Three Months Ended
March 31,		 For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020 2019 2020201920202019
      
Net income$111,856
 $102,709
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(22,206) (1,423)Foreign currency translation adjustments7,329 (13,912)(7,871)(12,231)
Unrealized gain on Euro-denominated notes, net of tax expense of $330 in 2020 and $466 in 20191,047
 1,480
Unrealized (loss) gain on investments, net of tax (benefit) expense of $(89) in 2020 and $128 in 2019(279) 407
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 2019Unrealized (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 2019Unrealized (loss) gain on investments, net of tax (benefit) expense of $52 and $(129) in 2020 and $(21) and $93 in 2019166 (67)(408)295 
Unrealized gain (loss) on derivative instruments:   Unrealized gain (loss) on derivative instruments:
Unrealized gain on foreign currency exchange contracts, net of tax expense of $2,052 in 2020 and $224 in 20199,426
 1,043
Unrealized gain on cross currency swaps, net of tax expense of $869 in 2020 and $307 in 20194,049
 1,431
Reclassification adjustment for gain included in net income, net of tax (expense) of $(240) in 2020 and $(249) in 2019(1,101) (1,162)
Unrealized gain on derivative instruments12,374
 1,312
Other comprehensive (loss) gain, net of tax(9,064) 1,776
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 2019Unrealized 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 2019Unrealized 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 2019Reclassification 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 2019538 (2,483)(2,036)(5,796)
Unrealized (loss) gain on derivative instrumentsUnrealized (loss) gain on derivative instruments(9,564)5,990 (3,998)4,655 
Other comprehensive (loss), net of taxOther comprehensive (loss), net of tax(4,893)(4,982)(15,743)(3,774)
Comprehensive income102,792
 104,485
Comprehensive income141,428 103,856 391,430 333,474 
Less: Comprehensive income attributable to noncontrolling interest29
 28
Less: Comprehensive income attributable to noncontrolling interest102 1 187 24 
Comprehensive income attributable to IDEXX Laboratories, Inc.$102,763
 $104,457
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.
໿


5

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 ValueAdditional Paid-in CapitalDeferred Stock UnitsRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTreasury StockNoncontrolling InterestTotal Stockholders’ Equity
Balance December 31, 2019105,711 $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 plans203 20 9,730 — — — — — 9,750 
Share-based compensation cost— — 7,238 46 — — — — 7,284 
Balance March 31, 2020105,914 $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 plans117 12 10,068 — — — — — 10,080 
Deferred stock units activity— — (894)894 — — — — 0 
Share-based compensation cost— — 7,797 — — — — — 7,797 
Balance June 30, 2020106,031 $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 plans251 25 18,706 (12)— — — — 18,719 
Share-based compensation cost— — 7,907 21 — — — — 7,928 
Balance September 30, 2020106,282 $10,628 $1,274,069 $5,411 $2,000,805 $(61,925)$(2,788,412)$539 $441,115 

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, 2018105,087
 $10,509
 $1,138,216
 $4,524
 $1,167,928
 $(41,791) $(2,288,899) $280
 $(9,233)
Net income—
 —
 —
 —
 102,681
 —
 —
 28
 102,709
Other comprehensive income, net—
 —
 —
 —
 —
 1,776
 —
 —
 1,776
Repurchases of common stock, net—
 —
 —
 —
 —
 —
 (61,135) —
 (61,135)
Common stock issued under stock plans258
 26
 11,393
 —
 —
 —
 —
 —
 11,419
Share-based compensation cost—
 —
 6,266
 68
 —
 —
 —
 —
 6,334
Balance March 31, 2019105,345
 $10,535
 $1,155,875
 $4,592
 $1,270,609
 $(40,015) $(2,350,034) $308
 $51,870
6


Common Stock   
Number of Shares$0.10 Par ValueAdditional Paid-in CapitalDeferred Stock UnitsRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTreasury StockNoncontrolling InterestTotal Stockholders’ Equity (Deficit)
Balance December 31, 2018105,087 $10,509 $1,138,216 $4,524 $1,167,928 $(41,791)$(2,288,899)$280 $(9,233)
Net income— — — — 102,681 — — 28 102,709 
Other comprehensive income, net— — — — — 1,776 — — 1,776 
Repurchases of common stock, net— — — — — — (61,135)— (61,135)
Common stock issued under stock plans258 26 11,393 — — — — — 11,419 
Share-based compensation cost— — 6,266 68 — — — — 6,334 
Balance March 31, 2019105,345 $10,535 $1,155,875 $4,592 $1,270,609 $(40,015)$(2,350,034)$308 $51,870 
Net income (loss)— — — — 125,706 — — (5)125,701 
Other comprehensive loss, net— — — — — (568)— — (568)
Repurchases of common stock, net— — — — — — (20,343)— (20,343)
Common stock issued under stock plans133 13 8,556 (578)— — — — 7,991 
Deferred stock units activity— — (324)324 — — — — 0 
Share-based compensation cost— — 6,855 43 — — — — 6,898 
Balance June 30, 2019105,478 $10,548 $1,170,962 $4,381 $1,396,315 $(40,583)$(2,370,377)$303 $171,549 
Net income— — — — 108,837 — — 1 108,838 
Other comprehensive loss, net— — — — — (4,982)— — (4,982)
Repurchases of common stock, net— — — — — — (91,321)— (91,321)
Common stock issued under stock plans116 11 9,247 (11)— — — — 9,247 
Share-based compensation cost— — 9,345 46 — — — — 9,391 
Balance September 30, 2019105,594 $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.
7
Balance December 31, 2019105,711
 $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 plans203
 20
 9,730
 —
 —
 —
 —
 —
 9,750
Share-based compensation cost—
 —
 7,238
 46
 —
 —
 —
 —
 7,284
Balance March 31, 2020105,914
 $10,591
 $1,230,485
 $4,508
 $1,705,646
 $(55,246) $(2,788,310) $381
 $108,055
                 
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,
20202019
  
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 amortization71,437 65,422 
Impairment charge1,993 0 
Provision for credit losses (Note 2 & Note 6)5,235 618 
Deferred income taxes(3,363)2,403 
Share-based compensation expense23,008 22,623 
Other488 879 
Changes in assets and liabilities:
Accounts receivable(72,409)(24,451)
Inventories(25,091)(36,582)
Other assets and liabilities30,579 (54,770)
Accounts payable512 1,181 
Deferred revenue(10,433)(10,826)
Net cash provided by operating activities429,129 303,745 
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 notes200,000 100,000 
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 plans39,230 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 equivalents85,261 (19,798)
Cash and cash equivalents at beginning of period90,326 123,794 
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.

8
For the Three Months Ended
March 31,
2020 2019
 
  
Cash Flows from Operating Activities: 
  
Net income$111,856
 $102,709
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization23,204
 21,355
Provision for credit losses4,229
 365
Benefit of deferred income taxes2,853
 3,294
Share-based compensation expense7,284
 6,334
Other(13) 263
Changes in assets and liabilities:   
Accounts receivable(38,062) (33,421)
Inventories(14,434) (14,521)
Other assets and liabilities(64,881) (49,601)
Accounts payable(1,755) 699
Deferred revenue(2,410) (3,098)
Net cash provided by operating activities27,871
 34,378
Cash Flows from Investing Activities:   
Purchases of property and equipment(49,002) (38,206)
Acquisitions of intangible assets(668) —
Net cash used by investing activities(49,670) (38,206)
Cash Flows from Financing Activities:   
Borrowing (repayments) on revolving credit facilities, net198,110
 (52,024)
Issuance of senior notes—
 100,000
Debt issuance costs—
 (30)
Payment of acquisition-related contingent consideration—
 (573)
Repurchases of common stock, net(182,815) (54,302)
Proceeds from exercises of stock options and employee stock purchase plans10,210
 11,551
Shares withheld for statutory tax withholding on restricted stock(8,604) (7,403)
Net cash provided (used) by financing activities16,901
 (2,781)
Net effect of changes in exchange rates on cash(4,033) (569)
Net decrease in cash and cash equivalents(8,931) (7,178)
Cash and cash equivalents at beginning of period90,326
 123,794
Cash and cash equivalents at end of period$81,395
 $116,616
 
  
Supplemental Cash Flow Information:   
Cash paid for income taxes$12,020
 $8,717
Unpaid property and equipment, reflected in accounts payable and accrued liabilities$14,123
 $9,007
    
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, 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 March 31,September 30, 2020, are not necessarily indicative of the results to be expected for the full year or any future 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 March 31,September 30, 2020, and our Annual Report on Form 10-K for the year ended December 31, 2019, (the “2019 Annual Report”) filed with the SEC.

ToBeginning in the first quarter of 2020, to limit the spread of COVID-19, governments have takentook 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 business. While veterinaryand Water businesses. Veterinary care is widely recognized as an “essential” service for pet owners, and veterinarians continuecontinued to deliver essential medical care for sick and injured pets,pets. The stay-at-home policies being deployed early in 2020 to combat the spread of COVID-19 have resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits. While ourOur 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, pandemic impactsor 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."”


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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 March 31,September 30, 2020, are consistent with those discussed in Note 22. Summary of Significant Accounting Policies to the consolidated financial statements in our 2019 Annual Report, except as noted below.

New Accounting Pronouncements Adopted

WeEffective January 1, 2020, we adopted ASU 2018-13, Fair Value Measurement (Topic 820), as of January 1, 2020, which modifies the 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 the fair value hierarchy contained in ASC 820, (b) the policy for timing of transfers between levels, and (c) the valuation processes used for Level 3 fair value measurements. ASU 2018-13 also adds, among other things, a requirement to disclose the range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. The adoption did not have a material impact on our consolidated financial statements.
Effective January 1, 2020, we adopted ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” using the modified retrospective transition method. This ASU amends the impairment model to utilize an expected loss methodology in place of the 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 opening consolidated balance sheet as of January 1, 2020. This adjustment, before the impact of income taxes, was comprised of $2.2$2.3 million related to our contract assets and sales-type leases, and $0.2 million related to accounts receivable. See Note 6. Credit Losses, for more information on our presentation of credit losses.

New Accounting Pronouncements Not Yet Adopted

For a discussion of other accounting standards that have been issued byIn December 2019, the FASB priorissued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new guidance is intended to January 1,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, but areincluding interim periods within those fiscal years. Early adoption is permitted. We do not yet effective, referexpect the adoption of ASU 2019-12 to Note 2. Summaryhave 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 inthe 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 2019 Annual Report.consolidated financial statements.

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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 $4.2approximately $4.5 million and $4.6$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 March 31, 2020 andSeptember 30, 2019, respectively, including both operating leases and sales-type leases under ASC 842, Leases, for leases entered into after January 1,2019,1, 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.

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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, 2019, our deferred revenue related to extended warranties and post-contract support was $38.0 million, of which approximately $13.7$2.8 million wasand $19.5 million were recognized during the three and nine months ended March 31,September 30, 2020. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $36.6was $35.2 million at March 31,September 30, 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 $23.1$21.2 million at March 31,September 30, 2020, of which approximately 29%11%, 34%40%, 22%28%, 10%14%, and 5%7% are expected to be recognized during the remainder of 2020, the full years 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
12

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, 2019, our capitalized customer acquisition costs were $137.4 million, of which approximately $10.3 $9.7 million wasand $29.9 million were recognized as a reduction of revenue during the three and nine months ended March 31,September 30, 2020. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $138.2were $146.0 million at March 31, 2020.September 30, 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 March 31,September 30, 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, 2019, our volume commitment contract assets were $83.9 million, of which approximately $4.9$4.5 million wasand $14.0 million were reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended March 31,September 30, 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 $87.9were $101.3 million at March 31,September 30, 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 March 31,September 30, 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 $1.9approximately $2.0 billion, of which approximately 19%7%, 25%, 23%, 21%, 18%20%, and 19% are25% are expected to be recognized during the remainder of 2020, the full years 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, 2019, our deferred revenue related to instrument rebate programs was $49.1 million, of which approximately $4.4$4.0 million wasand $12.5 million were recognized when customers purchased eligible products and services and earned rebates during the three and nine months ended March 31, 2020.September 30, 2020, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenuerevenue was $46.5
13

$41.0 million at March 31,September 30, 2020, of which approximately 27%10%, 28%34%, 20%25%, 13%16%, and 12%15% are expected to be recognized during the remainder of 2020, the full years 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.

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. On December 31, 2019, our lease receivable assets were $7.2 million, of which approximately $0.4approximately $0.3 million was 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 March 31, 2020.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 assetsassets were $7.7$9.2 million at March 31, September 30, 2020. The impacts of discounting and unearned income at March 31,September 30, 2020, were not material. Profit and loss recognized at the commencement date and interest income during the three and nine months ended March 31,September 30, 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 March 31,September 30, 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 March 31,September 30, 2020, and 2019, we transferred instrumentsinstruments of $2.3$2.6 million and $2.0$6.6 million, respectively, as compared to $5.5 million and $10.5 million for the three and nine months ended September 30, 2019, respectively, from inventory to property and equipment.

We estimate future revenue to be recognized related to our reagent rental programsprograms of approximately $28.8$25.9 million, of which approximately 30%11%, 32%37%, 20%24%, 10%13%, and 8%15% are expected to be recognized during the remainder of 2020, the full years 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 March 31,September 30, 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.

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
14

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 have no significant customers that accounted for greater than 10% of our consolidated revenues, and we have no concentration of credit risk as of March 31,September 30, 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,
2020201920202019
CAG segment revenue:  
CAG Diagnostics recurring revenue:$567,416 $460,974 $1,565,595 $1,382,196 
IDEXX VetLab consumables218,605 177,276 603,379 519,646 
Rapid assay products70,593 58,930 192,681 181,966 
Reference laboratory diagnostic and consulting services254,223 204,919 703,300 621,469 
CAG Diagnostics services and accessories23,995 19,849 66,235 59,115 
CAG Diagnostics capital - instruments29,336 32,608 72,040 92,883 
Veterinary software, services and diagnostic imaging systems41,265 39,548 118,478 114,318 
CAG segment revenue638,017 533,130 1,756,113 1,589,397 

Water segment revenue33,272 34,906 95,537 99,980 
LPD segment revenue36,971 31,370 103,369 95,980 
Other segment revenue13,529 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
March 31,
2020 2019
CAG segment revenue:   
CAG Diagnostics recurring revenue:$487,925
 $443,791
IDEXX VetLab consumables188,713
 167,211
Rapid assay products57,430
 54,431
Reference laboratory diagnostic and consulting services220,261
 202,658
CAG Diagnostics services and accessories21,521
 19,491
CAG Diagnostics capital - instruments23,833
 28,749
Veterinary software, services and diagnostic imaging systems40,238
 36,378
CAG segment revenue551,996
 508,918
   
Water segment revenue34,149
 30,310
LPD segment revenue34,154
 31,506
Other segment revenue6,037
 5,322
Total revenue$626,336
 $576,056

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,
2020201920202019
United States$454,836 $380,184 $1,257,617 $1,127,347 
Europe, the Middle East and Africa147,193 122,050 400,928 368,636 
Asia Pacific Region77,401 64,648 212,663 188,756 
Canada28,710 24,334 78,314 75,212 
Latin America13,649 14,087 36,195 41,511 
Total$721,789 $605,303 $1,985,717 $1,801,462 
(in thousands)For the Three Months Ended
March 31,
2020 2019
United States$396,783
 $358,288
Europe, the Middle East and Africa129,766
 121,746
Asia Pacific Region63,512
 60,075
Canada24,247
 23,224
Latin America12,028
 12,723
Total$626,336
 $576,056


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.
15


On December 31, 2019, our deferred commission costs, included within other assets, were $15.6 million, of which approximately $1.4approximately $1.3 million and $4.0 million of commissioncommission expense was recognized during the three and nine months ended March 31, 2020.September 30, 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 $16.0$16.5 million at March 31,September 30, 2020. Impairments of deferred commission costs during the three and nine months ended March 31,September 30, 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 fourth quarter of 2019, we acquired the assets of a multi-site reference laboratory in the midwestMidwest of the U.S. for $50.0 million in cash. This acquisition expands our national reference laboratory presence in the U.S., and was accounted for as a business combination. We finalized the valuation the fair value of the assets acquired during the first quarter of 2020. The fair value of the assets acquired consists of $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 within our reference laboratory portfolio. The goodwill is expected to be deductible for income tax purposes.

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 March 31,September 30, 2020, totaled $36.3$1.3 million and $39.9 million as compared to $34.4$3.8 million and $40.1 million for the three and nine months ended March 31,September 30, 2019. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at March 31,September 30, 2020, was $75.1$64.0 million, which will be recognized over a weighted average period of approximately 1.91.7 years. During the three and nine months ended March 31,September 30, 2020, we recognized expenses of $7.3$7.9 million and $23.0 million as compared to $6.3$9.4 million and $22.6 million for the three and nine months ended March 31,September 30, 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,
20202019
  
Share price at grant$290.15 $213.35 
Expected stock price volatility27 %26 %
Expected term, in years6.06.0
Risk-free interest rate1.4 %2.4 %
Weighted average fair value of options granted$84.60 $64.99 
For the Three Months Ended
March 31,
2020 2019
 
  
Share price at grant$288.78
 $206.94
Expected stock price volatility27% 26%
Expected term, in years6.0
 6.0
Risk-free interest rate1.5% 2.5%
Weighted average fair value of options granted$84.21
 $63.55


NOTE 6. 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
16

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 receivablereceivable was $7.0$6.6 million andand $3.6 million at March 31,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 March 31,September 30, 2020, approximately 84%88% of our accounts receivable had not yet reached the invoice due date and approximately 16%12% was considered past due. Of the amounts that were past due, of which approximately 1.3%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 the amounts that were 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 receivablesreceivables was $2.9$3.3 million, at March 31,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, 2020December 31, 2019
  
Raw materials$46,791 $41,202 
Work-in-process19,582 20,077 
Finished goods151,224 133,740 
Inventories$217,597 $195,019 
(in thousands)March 31,
2020		 December 31,
2019
 
  
Raw materials$42,290
 $41,202
Work-in-process20,970
 20,077
Finished goods148,384
 133,740
Inventories$211,644
 $195,019

໿
17

NOTE 8. LEASES


The majority of our facilities are occupied under operating lease arrangements with various expiration dates through 2067, some of which include optionsSee 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 expense2019 Annual Report for operatingadditional 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)March 31,
2020
 
2020 (remainder of year)$13,498
202117,676
202214,695
202310,300
20246,813
Thereafter33,376
Total lease payments96,358
Less imputed interest(15,522)
Total$80,836
  
Current operating lease liabilities, included in accrued liabilities$15,493
Long-term operating lease liabilities$65,343
  
Weighted average remaining lease term - operating leases10.2 years
  
Weighted average discount rate - operating leases3.5%

(in thousands, except lease term and discount rate)September 30, 2020
 
2020 (remainder of year)$3,824 
202120,660 
202217,572 
202312,453 
20248,280 
Thereafter39,188 
Total lease payments101,977 
Less imputed interest(14,724)
Total$87,253 
    
Total minimum future lease payments of approximately $4.4 million for leases that have not commenced as of March 31, 2020, are not included in the condensed consolidated financial statements, as we do not yet control the underlying assets. These leases are expected to commence between 2020 and 2021 with lease terms of approximately 5 years to 11 years.

Rent expense charged to operations under operating leases was approximately $5.4 million and $5.2 million during the three months ended March 31, 2020 and 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 Three Months Ended
March 31, 2020
 
Cash paid for amounts included in the measurement of operating leases liabilities$5,015
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations$2,796




NOTE 9. OTHER CURRENT AND LONG-TERM ASSETS

Other current assets consisted of the following:໿
(in thousands)September 30, 2020December 31, 2019
  
Customer acquisition costs$42,906 $39,329 
Prepaid expenses35,966 31,992 
Taxes receivable24,051 20,516 
Contract assets, net20,361 17,659 
Deferred sales commissions5,510 5,202 
Other assets9,108 10,284 
Other current assets$137,902 $124,982 
(in thousands)March 31,
2020		 December 31,
2019
 
  
Customer acquisition costs$39,719
 $39,329
Prepaid expenses32,403
��31,992
Contract assets, net18,670
 17,659
Taxes receivable15,150
 20,516
Deferred sales commissions5,302
 5,202
Other assets17,085
 10,284
Other current assets$128,329
 $124,982

18

Other long-term assets consisted of the following:
(in thousands)September 30, 2020December 31, 2019
Customer acquisition costs$103,075 $98,117 
Contract assets, net80,936 66,226 
Investment in long-term product supply arrangements12,599 13,657 
Deferred sales commissions10,993 10,442 
Deferred income taxes8,198 8,100 
Taxes receivable6,329 14,960 
Other assets32,672 28,690 
Other long-term assets$254,802 $240,192 
(in thousands)March 31,
2020		 December 31,
2019
Customer acquisition costs$98,463
 $98,117
Contract assets, net69,196
 66,226
Taxes receivable14,960
 14,960
Investment in long-term product supply arrangements13,785
 13,657
Deferred sales commissions10,672
 10,442
Deferred income taxes7,172
 8,100
Other assets34,717
 28,690
Other long-term assets$248,965
 $240,192

໿

NOTE 10. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:
(in thousands)March 31,
2020		 December 31,
2019
 
  
Accrued employee compensation and related expenses$71,568
 $127,174
Accrued expenses66,742
 86,296
Accrued customer incentives and refund obligations60,025
 63,079
Accrued taxes33,351
 31,108
Current lease liabilities15,493
 15,281
Accrued liabilities$247,179
 $322,938

(in thousands)September 30, 2020December 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 obligations71,885 63,079 
Accrued taxes40,013 31,108 
Current lease liabilities16,598 15,281 
Accrued liabilities$362,326 $322,938 
໿

Other long-term liabilities consisted of the following:໿
(in thousands)September 30, 2020December 31, 2019
Accrued taxes$59,663 $67,463 
Other accrued long-term expenses20,001 13,701 
Other long-term liabilities$79,664 $81,164 
(in thousands)March 31,
2020		 December 31,
2019
    
Accrued taxes$68,118
 $67,463
Other accrued long-term expenses13,175
 13,701
Other long-term liabilities$81,293
 $81,164



19

NOTE 11. DEBT


Senior Notes

Senior Notes

The following describes all of our currently outstanding unsecured senior notes issued and sold in private placements (collectively, the "Senior Notes"“Senior Notes”) as of March 31,September 30, 2020:
(Principal Amount in thousands)(Principal Amount in thousands)(Principal Amount in thousands)
     
Issue Date Due Date Series Principal Amount Coupon Rate 
Senior Note Agreement (1)
Issue DateDue DateSeriesPrincipal AmountCoupon Rate
Senior Note Agreement (1)
     
12/11/2013 12/11/2023 2023 Series A Notes $75,000
 3.94% NY Life 2013 Note Agreement12/11/201312/11/20232023 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 Agreement12/11/201312/11/20252025 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 Agreement09/04/201409/04/20262026 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 Agreement07/21/201407/21/20212021 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 Agreement07/21/201407/21/20242024 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 Agreement06/18/201506/18/20252025 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 Agreement02/12/201502/12/20222022 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 Agreement02/12/201502/12/20272027 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 Agreement03/14/201903/14/20292029 Series C Notes$100,000 4.19 %MetLife 2014 Note Agreement
04/02/202004/02/202004/02/2030MetLife 2030 Series D Notes$125,000 2.50 %MetLife 2014 Note Agreement
04/14/202004/14/202004/14/2030Prudential 2030 Series D Notes$75,000 2.50 %Prudential 2015 Amended Agreement
(1) In each case, as amended.
Senior Notes - Subsequent Event

The following describes unsecured senior notes issued and sold in private placements after March 31, 2020:
(Principal Amount in thousands)
           
Issue Date Due Date Series Principal Amount Coupon Rate 
Senior Note Agreement (1)
           
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 March 23, 2020, we entered into the Second Amendment to the MetLife 2014 Note Agreement (the “MetLife Second Amendment”), in order to (i) increase the facility size from $150 million to $300 million, (ii) extend the facility issuance period to December 20, 2022, (iii) make various implementing and administrative changes in order to facilitate a $125 million notes issuance on April 2, 2020 and (iv) allow the amount available to be issued under the facility to equal $300 million, less the amount of notesamounts outstanding from time to time during the issuance period.on 2029 Series C Notes and MetLife 2030 Series D Notes.

On April 2, 2020, we issued and sold to MetLife and other purchasers $125 million of our 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 the rate of 2.50% per annum. We anticipate usingused the proceeds received from the MetLife 2030 Series D Notes for general corporate 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 anticipate usingused the proceeds received from the Prudential 2030 Series D Notes for general corporate purposes.


20

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 - Subsequent Event

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 third amended and restated credit agreement (the "Credit Agreement"“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 consolidated balance sheets.
21

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 March 31,September 30, 2020 and 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
March 31,
2020 2019
   
Shares repurchased in the open market721
 267
Shares acquired through employee surrender for statutory tax withholding30
 36
Total shares repurchased751
 303
   
Cost of shares repurchased in the open market$179,623
 $53,862
Cost of shares for employee surrenders8,604
 7,403
Total cost of shares$188,227
 $61,265
   
Average cost per share - open market repurchases$249.20
 $201.41
Average cost per share - employee surrenders$288.78
 $206.35
Average cost per share - total$250.77
 $202.00

(in thousands, except per share amounts)For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020201920202019
  
Shares repurchased in the open market0 330 721 683 
Shares acquired through employee surrender for statutory tax withholding1 1 31 38 
Total shares repurchased1 331 752 721 

Cost of shares repurchased in the open market$0 $91,051 $179,623 $165,198 
Cost of shares for employee surrenders360 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 
໿
໿


22

NOTE 13. INCOME TAXES 

Our effective income tax rate was 18.2%10.8% for the three months ended March 31,September 30, 2020, as compared to 17.7%18.0% for the three months ended March 31,September 30, 2019, and 16.0% for the nine months ended September 30, 2020, as compared to 18.5% for the nine months ended September 30, 2019. The increasedecrease in our effective tax rate for the three and nine months ended March 31,September 30, 2020, as compared to the same period in the prior year, was primarily driven by regional earnings mix, with relatively lower statutory earnings subject to lower international tax rates than domestic tax rates, partially offset by higher tax benefits from share-based compensation.

The effective tax rate for the three and nine months ended March 31,September 30, 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 Three Months Ended March 31, 2020For the Nine Months Ended September 30, 2020
   Unrealized (Loss) Gain on Cash Flow Hedges, Net of Tax 
Unrealized Gain on
Net Investment Hedges, Net of Tax
    Unrealized (Loss) on Cash Flow Hedges, Net of TaxUnrealized (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(in thousands)Unrealized Gain (Loss) on Investments,
Net of Tax		Foreign Currency Exchange ContractsEuro-Denominated NotesCross Currency SwapsCumulative Translation
Adjustment		Total
  
  
  
    
        
Balance as of December 31, 2019 $110
 $(736) $1,396
 $3,467
 $(50,419) $(46,182)Balance as of December 31, 2019$110 $(736)$1,396 $3,467 $(50,419)$(46,182)
Other comprehensive (loss) income before reclassifications (279) 9,426
 1,047
 4,049
 (22,206) (7,963)
Other comprehensive (loss) before reclassificationsOther comprehensive (loss) before reclassifications(408)(623)(3,466)(1,339)(7,871)(13,707)
Gain reclassified from accumulated other comprehensive income —
 (1,101) —
 —
 —
 (1,101)Gain reclassified from accumulated other comprehensive income0 (2,036)0 0 0 (2,036)
Balance as of March 31, 2020 $(169) $7,589
 $2,443
 $7,516
 $(72,625) $(55,246)
Balance as of September 30, 2020Balance as of September 30, 2020$(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 ContractsEuro-Denominated NotesCross Currency SwapsCumulative Translation
Adjustment		Total
     
Balance as of December 31, 2018$(157)$6,229 $(394)$1,360 $(48,829)$(41,791)
Other comprehensive (loss) income before reclassifications295 6,458 3,507 3,993 (12,231)2,022 
Gain reclassified from accumulated other comprehensive income0 (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 Three Months Ended March 31, 2019
    
Unrealized Gain (Loss) on Cash Flow Hedges,
Net of Tax
 Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax    
(in thousands) Unrealized (Loss) Gain on Investments,
Net of Tax		 Foreign Currency Exchange Contracts Euro-Denominated Notes Cross Currency Swaps Cumulative Translation
Adjustment		 Total
  
  
  
  
    
Balance as of December 31, 2018 $(157) $6,229
 $(394) $1,360
 $(48,829) $(41,791)
Other comprehensive income (loss) before reclassifications 407
 1,043
 1,480
 1,431
 (1,423) 2,938
Gain reclassified from accumulated other comprehensive income —
 (1,162) —
 —
 —
 (1,162)
Balance as of March 31, 2019 $250
 $6,110
 $1,086
 $2,791
 $(50,252) $(40,015)
23




The following tables present components and amounts reclassified out of AOCI to net income:
(in thousands)Affected Line Item in the Statements of IncomeAmounts Reclassified from AOCI For the Three Months Ended September 30,
 20202019
Gain (loss) on derivative instruments classified as cash flow hedges included in net income: 
Foreign currency exchange contractsCost 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 March 31,
   2020 2019
Gain on derivative instruments classified as cash flow hedges included in net income:      
Foreign currency exchange contracts Cost of revenue $1,341
 $1,411
 Tax expense 240
 249
 Gain, net of tax $1,101
 $1,162

(in thousands)Affected Line Item in the Statements of IncomeAmounts Reclassified from AOCI For the Nine Months Ended September 30,
 20202019
Gain on derivative instruments classified as cash flow hedges included in net income:   
Foreign currency exchange contractsCost of revenue$2,562 $7,091 
Tax expense526 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 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
March 31,
2020 2019
   
Shares outstanding for basic earnings per share85,427
 86,204
   
Shares outstanding for diluted earnings per share:   
Shares outstanding for basic earnings per share85,427
 86,204
Dilutive effect of share-based payment awards1,278
 1,345
86,705
 87,549

(in thousands)For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020201920202019
  
Shares outstanding for basic earnings per share85,314 86,198 85,293 86,206 

Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share85,314 86,198 85,293 86,206 
Dilutive effect of share-based payment awards1,376 1,469 1,342 1,427 
86,690 87,667 86,635 87,633 
໿
໿

24

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
March 31,		(in thousands)For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
2020 2019 2020201920202019
      
Weighted average number of shares underlying anti-dilutive awards34
 1
Weighted average number of shares underlying anti-dilutive awards100 0
Weighted average number of shares underlying anti-dilutive options197
 463
Weighted average number of shares underlying anti-dilutive options10 29 236 247 
໿

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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 exceedbe higher and lower than our accruals. At March 31,Except for the litigation matter described below, at September 30, 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 2019 Annual Report.

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

Effective January 1, 2020, we modified our management reporting to the Chief Operating Decision Maker to provide a more comprehensive view of the performance of our operating segments by including costs that previously were not allocated to our segments. Prior to January 1, 2020, certain costs were not allocated to our operating segments and were instead reported under the caption “Unallocated Amounts”. These costs primarily consist of our R&D function, regional or country expenses and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation were charged to our business segments at pre-determined budgeted amounts or rates. Beginning January 1, 2020, the segments will reflect these 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 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 segment, that are now allocated to our CAG, Water, LPD and Other segments for the three and nine months ended March 31, 2019:September 30, 2019, respectively:
(in thousands)Three Months Ended September 30, 2019
CAGWaterLPDOtherUnallocated
Cost of sales$(428)$(19)$(24)$(10)$481 
Gross profit428 19 24 10 (481)
Operating Expenses:
Sales and marketing$211 $9 $12 $0 $(232)
General and administrative2,472 105 131 1,058 (3,766)
Research and development4,544 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)          
  CAG Water LPD Other Unallocated
           
Cost of sales $(182) $(8) $(10) $(4) $204
Gross profit 182

8

10

4

(204)
           
Operating Expenses:          
Sales and marketing $129
 $6
 $7
 $—
 $(142)
General and administrative (202) (40) (47) 215
 74
Research and development 3,558
 9
 11
 —
 (3,578)
Total operating expenses 3,485

(25)
(29)
215

(3,646)
Income from operations $(3,303)
$33

$39

$(211)
$3,442

(in thousands)Nine Months Ended September 30, 2019
CAGWaterLPDOtherUnallocated
Cost of sales$(266)$(12)$(15)$(6)$299 
Gross profit266 12 15 6 (299)
Operating Expenses:
Sales and marketing$322 $14 $18 $0 $(354)
General and administrative1,377 (114)(122)2,222 (3,363)
Research and development12,062 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 



26

27

The following is a summary of segment performance:

For the Three Months Ended September 30,
CAGWaterLPDOtherConsolidated 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 taxes163,954 
Provision for income taxes17,633 
Net income146,321 
Less: Net income attributable to noncontrolling interest102 
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 taxes132,798 
Provision for income taxes23,960 
Net income108,838 
Less: Net income attributable to noncontrolling interest1 
Net income attributable to IDEXX Laboratories, Inc. stockholders$108,837 
(in thousands) For the Three Months Ended March 31,
 CAG Water LPD Other Consolidated Total
2020  
  
  
  
  
Revenue $551,996
 $34,149
 $34,154
 $6,037
 $626,336
          
Income from operations $118,659
 $15,882
 $9,663
 $121
 $144,325
Interest expense, net         (7,552)
Income before provision for income taxes         136,773
Provision for income taxes         24,917
Net income         111,856
Less: Net income attributable to noncontrolling interest         29
Net income attributable to IDEXX Laboratories, Inc. stockholders         $111,827
          
2019          
Revenue $508,918
 $30,310
 $31,506
 $5,322
 $576,056
          
Income from operations $111,719
 $13,815
 $6,289
 $1,315
 $133,138
Interest expense, net         (8,346)
Income before provision for income taxes         124,792
Provision for income taxes         22,083
Net income         102,709
Less: Net income attributable to noncontrolling interest         28
Net income attributable to IDEXX Laboratories, Inc. stockholders         $102,681


28

(in thousands)For the Nine Months Ended September 30,
CAGWaterLPDOtherConsolidated 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 taxes484,549 
Provision for income taxes77,376 
Net income407,173 
Less: Net income attributable to noncontrolling interest187 
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 taxes413,712 
Provision for income taxes76,464 
Net income337,248 
Less: Net income attributable to noncontrolling interest24 
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 March 31,September 30, 2020 and 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 1Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2Observable 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 3Unobservable 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 March 31,September 30, 2020.


29

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 fairfair value of our Credit Facility approximates its carrying value. The estimated fair value and carrying value of our long-term debt were $790.7$998.5 million and $698.0$904.0 million, respectively, as of March 31,September 30, 2020, and $753.6 million and $699.4 million, respectively, as of December 31, 2019.


30

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, 2020Quoted 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 March 31, 2020 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Balance at
March 31, 2020
As of December 31, 2019As of December 31, 2019Quoted 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)
 $76
 $—
 $—
 $76
Money market funds(1)
$71 $0 $0 $71 
Equity mutual funds(2)
 $1,278
 $—
 $—
 $1,278
Equity mutual funds(2)
$1,676 $0 $0 $1,676 
Cross currency swaps(3)
 $—
 $9,883
 $—
 $9,883
Cross currency swaps(3)
$0 $4,559 $0 $4,559 
Foreign currency exchange contracts(3)
 $—
 $9,643
 $—
 $9,643
Foreign currency exchange contracts(3)
$0 $1,791 $0 $1,791 
Liabilities        Liabilities
Foreign currency exchange contracts(3)
 $—
 $39
 $—
 $39
Foreign currency exchange contracts(3)
$0 $2,886 $0 $2,886 
Deferred compensation(4)
 $1,278
 $—
 $—
 $1,278
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, 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  
  
  
  
Money market funds(1)
 $71
 $—
 $—
 $71
Equity mutual funds(2)
 $1,676
 $—
 $—
 $1,676
Cross currency swaps(3)
 $—
 $4,559
 $—
 $4,559
Foreign currency exchange contracts(3)
 $—
 $1,791
 $—
 $1,791
Liabilities        
Foreign currency exchange contracts(3)
 $—
 $2,886
 $—
 $2,886
Deferred compensation(4)
 $1,676
 $—
 $—
 $1,676
(1)Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of March 31, 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.  
(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.

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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 March 31,September 30, 2020 and 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 March 31,September 30, 2020 or 2019. At March 31,September 30, 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 $6.5$2.5 million if exchange rates do not fluctuate from the levels at March 31,September 30, 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. 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
32

portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $202.3$208.6 million and $210.9 million at March 31,September 30, 2020 and December 31, 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,
 20202019
Financial statement line items in which effects of cash flow hedges are recordedCost 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 March 31,
   2020 2019
       
Financial statement line items in which effects of cash flow hedges are recorded Cost of revenue $266,746
 $244,459
Foreign exchange contracts      
Amount of gain reclassified from accumulated other comprehensive income into income   $1,341
 $1,411


(in thousands) Nine Months Ended September 30,
 20202019
Financial statement line items in which effects of cash flow hedges are recordedCost 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 gainslosses of $1.0$2.8 million and $1.5$3.5 million, net of tax, within AOCI as a result of this net investment hedge for the three and nine months ended March 31,September 30, 2020, respectively, and 2019, respectively.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 March 31,September 30, 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 2019 Annual Report for further information regarding the issuance of these euro-denominated notes.



During May 2018, January 2019, March 2019, and November 2019, weWe 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. TheThese cross currency swaps have a maturity date ofdates 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 €90.0 million and will receive approximately $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 March 31,September 30, 2020, and 2019, we recorded gainslosses of $4.0$3.9 million and $1.4$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 approximatelyapproximately $0.7 million and $0.5$2.0 million related to the excluded component as a reduction of interest expense for the three and nine months ended March 31,September 30, 2020, respectively, and $0.6 million and $1.7 million for the three and nine months ended September 30, 2019, respectively.
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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, 2020December 31, 2019
   
Derivatives and non-derivatives designated as hedging instrumentsBalance Sheet Classification  
Foreign currency exchange contractsOther current assets$519 $1,791 
Cross currency swapsOther long-term assets2,797 4,559 
Foreign currency exchange contractsOther long-term assets90 0 
Total derivative instruments presented as hedge instruments on the balance sheet3,406 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
   March 31, 2020 December 31, 2019
      
Derivatives and non-derivatives designated as hedging instruments Balance Sheet Classification    
Foreign currency exchange contracts Other current assets $8,346
 $1,791
Cross currency swaps Other long-term assets 9,883
 4,559
Foreign currency exchange contracts Other long-term assets 1,297
 —
Total derivative instruments presented as hedge instruments on the balance sheet   19,526
 6,350
Gross amounts subject to master netting arrangements not offset on the balance sheet   (39) (1,354)
Net amount   $19,487
 $4,996


໿
(in thousands)   Hedging Liabilities
   March 31, 2020 December 31, 2019
      
Derivatives and non-derivatives designated as hedging instruments Balance Sheet Classification    
Foreign currency exchange contracts Accrued liabilities $39
 $2,886
Total derivative instruments presented as cash flow hedges on the balance sheet   39
 2,886
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet(1)
 Long-term debt 98,045
 99,422
Total hedging instruments presented on the balance sheet   98,084
 102,308
Gross amounts subject to master netting arrangements not offset on the balance sheet   (39) (1,354)
Net amount   $98,045
 $100,954

(in thousands) Hedging Liabilities
 September 30, 2020December 31, 2019
   
Derivatives and non-derivatives designated as hedging instrumentsBalance Sheet Classification  
Foreign currency exchange contractsAccrued liabilities$3,631 $2,886 
Foreign currency exchange contractsOther long-term liabilities1,190 0 
Total derivative instruments presented as cash flow hedges on the balance sheet4,821 2,886 
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet(1)
Long-term debt103,980 99,422 
Total hedging instruments presented on the balance sheet108,801 102,308 
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.

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NOTE 20. SUBSEQUENT EVENTS

     In April of 2020, we issued an additional $200 million in long-term, fixed-rate senior notes and amended the existing Credit Facility to extend the term to 2023 and expand the borrowing capacity to $1 billion. For more information, see "Note 11. 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; participation in any COVID-19-related government programs; future revenue growth rates; projected tax 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; 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 impact of certain debt financing transactions and cash flow management measures; the working capital and liquidity outlook; the estimated amount and impact of certain cost control measures; interest expense; warranty expense; share-based compensation expense; the adoption and projected impact of new accounting standards; critical accounting estimates; new products and 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 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 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.


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Effects of Certain Factors and Trends on 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, for pet owners, and veterinarians continue to deliver essential medical care for sick and injured pets, stay-at-home and social distancing policies being deployed to combat the spread of COVID-19 and prioritization of sick and emergencyconstrained visits to veterinary practices significantly in late March 2020 through early April 2020, pressuring diagnostic testing atvolumes. Restrictions on sales professionals’ access to veterinary clinics have resultedalso contributed to deferrals on new CAG instrument placements.

As stay-at-home policies were relaxed, there was a sharp rebound in a decreaseclinical visit activity which accelerated through the second quarter of 2020, and continued in companion animal clinical visits, including delaythe third quarter of elective procedures and wellness visits.

As an example, tracking of weekly2020. Weekly U.S. companion animal practice data indicates year-over-year declines of 15% to 30%show improvement in per practicesame-store clinical visits fromtrends since mid-April 2020. Same-store clinical visits gains were 7% in June 2020 and sustained at 6% in the week ending March 27,third quarter of 2020, through the week ended April 24, 2020, with lower levels of declinesupported by 11% growth in wellness visits and 3% growth in non-wellness visits and higher levelsduring the third quarter of decline in wellness visits. These types of2020.

Companion animal market improvement trends globally have contributed to year-over-year declinessupported a strong recovery in demand for ourCAG diagnostic products and services during this period, with varying impactsservices. Global CAG Diagnostics recurring revenues declined approximately 16% in April 2020, followed by regionincreases of approximately 8% in May 2020, 30% in June 2020, 24% in July 2020, and diagnostic testing modality. These impactsapproximately 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 dynamic, and we have seen meaningful improvement in diagnostic testing trends over the two-week period ended April 24th driven by U.S. and International regions whereencouraging, potential effects related to ongoing COVID-19 case management efforts have progressed furtherare challenging to predict and where stay-at-home andmay pressure future revenues should enhanced social distancing policies and higher infection rates impact veterinary clinic operations in certain regions.

We have been moderated.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.


Protecting Employee HealthIn managing our businesses, we continue to provide high levels of service delivery and Safety

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 have been enabledcontinue to work remotely during this time.and travel remains highly restricted. We have also implemented other measures, such as restricting travel where possible,introduced new employee benefits to protectsupport remote workers.

Human COVID-19 Testing

On May 7, 2020, we announced that OPTI Medical was granted by the healthUnited States Food and safetyDrug Administration (FDA) an Emergency Use Authorization (EUA) for the OPTI® SARS-CoV-2 RT-PCR laboratory test kit for the detection of our customers, their patients and our employees.

Maintaining Operations and Customer Service

Major IDEXX operations, such as global manufacturing, distribution and our network of reference laboratories, are operating efficiently under enhanced health and safety precautionary measures, and we are continuing to serve our customers globally. For our employees involved in these essential operations, we have implemented recommended best practices to protectSARS-CoV-2, the health and safety of our workforce.

Operating Cost and Liquidity Management

We have taken proactive steps to prudently control costs in response to the COVID-19 pandemic, while ensuring we are well-positioned for a recovery in market conditions. We have advanced actions to reduce quarterly operating expenses by approximately $25 million compared to original plan levels. These actions include the temporary reductionvirus that causes COVID-19. This announcement followed an earlier validation of the salariestest 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 chief executive officer by 30%, officers and senior executives by 20% and the majority of other salaried employees by 10%, which we intend to stop as market conditions improve, as well as the suspension of cash compensation for our Board of Directors. These savings will mitigate near-term financial impacts from potential revenue declines related to COVID-19 social distancing procedures, which we estimate will flow through at high incremental gross margin rates associated with CAG Diagnostics recurring revenues.

We are confidentOPTI Medical business in our working capitalOther segment and liquidity levels, supported by our high-return recurring revenue business model with relatively low capital intensity. In April, we further enhanced our liquidityare the primary driver of growth in that segment.



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Currency and financial flexibility by issuing $200 million in 10-year, 2.5% fixed-rate financing and securing an expanded $1 billion Credit Facility extended through 2023. We have also suspended share repurchase activity.

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 design, manufacture, and distribute point of care and laboratory diagnostics for the human 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 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 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) for the human medical diagnostics market.

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 that were previously not allocated to our segments. Prior to January 1, 2020, certain costs were not allocated to our operating segments and were instead reported under the caption “Unallocated Amounts”.Amounts.” These costs included costs primarily consisting of our R&D function, regional or country expenses and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation were charged to our business segments at pre-determined budgeted amounts or rates. Beginning January 1, 2020, the segments will reflect these 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 not allocated to our operating segments and are instead reported within our Other reporting segment.


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The following table reflects adjustments to previously reported costs in our Unallocated segment, that are now allocated to our CAG, Water, LPD and Other segments forsegments:

For the three months ended March 31,September 30, 2019:
(in thousands)
CAGWaterLPDOtherUnallocated
Cost of sales$(428)$(19)$(24)$(10)$481 
Gross profit428 19 24 10 (481)
Operating Expenses:
Sales and marketing$211 $9 $12 $— $(232)
General and administrative2,472 105 131 1,058 (3,766)
Research and development4,544 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)
CAGWaterLPDOtherUnallocated
Cost of sales$(266)$(12)$(15)$(6)$299 
Gross profit266 12 15 6 (299)
Operating Expenses:
Sales and marketing$322 $14 $18 $— $(354)
General and administrative1,377 (114)(122)2,222 (3,363)
Research and development12,062 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 



38
(in thousands)          
  CAG Water LPD Other Unallocated
           
Cost of sales $(182) $(8) $(10) $(4) $204
Gross profit 182

8

10

4

(204)
           
Operating Expenses:          
Sales and marketing $129
 $6
 $7
 $—
 $(142)
General and administrative (202) (40) (47) 215
 74
Research and development 3,558
 9
 11
 —
 (3,578)
Total operating expenses 3,485

(25)
(29)
215

(3,646)
Income from operations $(3,303)
$33

$39

$(211)
$3,442


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


For the three months ended March 31,September 30, 2019:
CAGWaterLPDOther
Cost of sales(0.1)%(0.1)%(0.1)%(0.2)%
Gross profit0.1 %0.1 %0.1 %0.2 %
Operating Expenses:
Sales and marketing— %— %— %— %
General and administrative0.5 %0.3 %0.4 %17.9 %
Research and development0.9 %0.1 %0.1 %— %
Total operating expenses1.4 %0.4 %0.5 %17.9 %
Income from operations(1.3)%(0.3)%(0.5)%(17.8)%
  CAG Water LPD Other 
          
Cost of sales — % — % — % (0.1)% 
Gross profit — % — % — % 0.1 % 
          
Operating Expenses:         
Sales and marketing — % — % — % — % 
General and administrative — % (0.1)% (0.1)% 4.0 % 
Research and development 0.7 % — % — % — % 
Total operating expenses 0.7 % (0.1)% (0.1)% 4.0 % 
Income from operations (0.6)% 0.1 % 0.1 % (4.0)% 


For the nine months ended September 30, 2019:

CAGWaterLPDOther
Cost of sales— %— %— %— %
Gross profit— %— %— %— %
Operating Expenses:
Sales and marketing— %— %— %— %
General and administrative0.1 %(0.1)%(0.1)%13.8 %
Research and development0.8 %— %0.1 %— %
Total operating expenses0.9 %(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. 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 March 31,September 30, 2020, are consistent with those discussed in our 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
39

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.
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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 March 31,September 30, 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 yearprior-year period to foreign currency denominated revenues for the prior yearprior-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 ended on March 31.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 yearprior-year periods.


41

Results of Operations

Three Months Ended March 31,September 30, 2020,, Compared to Three Months Ended March 31,September 30, 2019


Total Company. The following table presents total Company revenue by operating segment:
  For the Three Months Ended March 31,          
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 $551,996
 $508,918
 $43,078
 8.5% (0.9%) 0.8% 8.6%
United States 373,275
 337,874
 35,401
 10.5% —
 1.1% 9.3%
International 178,721
 171,044
 7,677
 4.5% (2.6%) —
 7.1%
              
Water 34,149
 30,310
 3,839
 12.7% (2.8%) —
 15.4%
United States 16,941
 14,604
 2,337
 16.0% —
 —
 16.0%
International 17,208
 15,706
 1,502
 9.6% (5.3%) —
 14.9%
              
LPD 34,154
 31,506
 2,648
 8.4% (3.6%) —
 12.0%
United States 3,777
 3,263
 514
 15.8% —
 —
 15.8%
International 30,377
 28,243
 2,134
 7.6% (4.0%) —
 11.6%
              
Other 6,037
 5,322
 715
 13.4% —
 —
 13.4%
              
Total Company $626,336
 $576,056
 $50,280
 8.7% (1.1%) 0.7% 9.2%
United States 396,783
 358,288
 38,495
 10.7% —
 1.1% 9.7%
International 229,553
 217,768
 11,785
 5.4% (3.0%) —
 8.4%
(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)
20202019Dollar Change
Reported Revenue Growth(1)
Percentage Change from CurrencyPercentage Change from Acquisitions
Organic Revenue Growth(1)
       
CAG$638,017 $533,130 $104,887 19.7 %1.0 %0.7 %18.0 %
United States428,105 357,810 70,295 19.6 %— 1.1 %18.6 %
International209,912 175,320 34,592 19.7 %2.9 %— 16.8 %

Water33,272 34,906 (1,634)(4.7 %)(0.7 %)— (4.0 %)
United States16,634 16,794 (160)(1.0 %)— — (1.0 %)
International16,638 18,112 (1,474)(8.1 %)(1.2 %)— (6.9 %)

LPD36,971 31,370 5,601 17.8 %0.3 %— 17.5 %
United States3,784 3,649 135 3.7 %— — 3.7 %
International33,187 27,721 5,466 19.7 %0.4 %— 19.3 %

Other13,529 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 States454,836 380,184 74,652 19.6 %— 1.0 %18.6 %
International266,953 225,119 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 DiagnosticsDiagnostic recurring revenue, despite the negative impacts of COVID-19reflecting a continued recovery in market demand for companion animal diagnostics globally, supported by pent-up demand for wellness testing as social distancing procedures and guidelines which began in mid-March. These volume gains continue to be 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 growth in consumable revenues, supported by the impact of the continued expansion of our CAG Diagnostics instrument installed base globally. Within our CAG business we did not see a positive impact of customers accelerating orders in the first quarterwere eased, as well as higher clinical visits related to COVID-19. Conversely, our LPD and Water businesses benefited from accelerated stocking orders related to the COVID-19 pandemic. Additionally,new patients. In our LPD business, benefited from increasedwe continue to see strong demand for African swine fever testing programs in China, offset by decreased herd health screening, andChina. Lower revenues in our Water business benefited from higher sales volumesare 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 Colilert® test products and related accessories.overall revenue growth by approximately 1%. The impact of currency movements decreased total revenue by 1.1%0.8%, while acquisitions increased revenue by 0.6%.
42

    


The following table presents total Company results of operations:
 For the Three Months Ended March 31, Change
Total Company - Results of Operations
(dollars in thousands)
 2020 Percent of Revenue 2019 Percent of Revenue Amount Percentage
  
    
      
Revenues $626,336
   $576,056
   $50,280
 8.7%
Cost of revenue 266,746
   244,459
   22,287
 9.1%
Gross profit 359,590
 57.4% 331,597
 57.6% 27,993
 8.4%
            
Operating Expenses:            
Sales and marketing 116,143
 18.5% 106,584
 18.5% 9,559
 9.0%
General and administrative 65,812
 10.5% 60,361
 10.5% 5,451
 9.0%
Research and development 33,310
 5.3% 31,514
 5.5% 1,796
 5.7%
Total operating expenses 215,265
 34.4% 198,459
 34.5% 16,806
 8.5%
Income from operations $144,325
 23.0% $133,138
 23.1% $11,187
 8.4%

For the Three Months Ended September 30,Change
Total Company - Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
      
Revenues$721,789 $605,303 $116,486 19.2 %
Cost of revenue299,183 260,353 38,830 14.9 %
Gross profit422,606 58.5 %344,950 57.0 %77,656 22.5 %

Operating Expenses:
Sales and marketing108,202 15.0 %104,551 17.3 %3,651 3.5 %
General and administrative105,031 14.6 %66,337 11.0 %38,694 58.3 %
Research and development37,517 5.2 %34,260 5.7 %3,257 9.5 %
Total operating expenses250,750 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 offset byand a modest 20150 basis point decreaseincrease in the gross profit margin. The impact from foreign currency movements decreasedincrease in the gross profit margin was driven by approximately 20 basis points,several factors including productivity in our reference laboratories, the impact of hedges. Our gross profit margin reflected mix benefits from strong IDEXX VetLab consumable and Water revenue growthRapid Assay products, and lower CAG Diagnostics instrument revenue, lower product costs from volume leverage in our LPD business, as well as the net benefit of price increases. These favorable factors were offset by the negative impact of the COVID-19 pandemic on our reference laboratory volumes in late March of 2020,increases, as well as incremental investmentsthe benefit from OPTI COVID-19 PCR testing. The impact from foreign currency movements decreased the gross profit margin by approximately 45 basis points, including the impact of hedge losses in reference laboratory capacity and the Marshfield laboratory acquisition.current year compared to hedge gains in the prior year.

Operating Expenses. SalesThe increase in sales and marketing expense increased approximately 10.5%, 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 7.6%, excluding the impact of foreign currency, primarily due to increases in bad debt reserves and facilities costs, partially offset by the benefits of cost control initiatives across our business segments. Research and development expense increased 5.7% excluding the impact of foreign currency,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 resulted in a decrease in operating expenses by less than 1%.





43

idxx-20200930_g2.jpgCompanion Animal Group


The following table presents revenue by product and service category for CAG: 
໿
໿
  For the Three Months Ended March 31,      
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: $487,925
 $443,791
 $44,134
 9.9 % (0.9%) 0.9% 10.0 %
IDEXX VetLab consumables 188,713
 167,211
 21,502
 12.9 % (1.3%) —
 14.1 %
Rapid assay products 57,430
 54,431
 2,999
 5.5 % (0.5%) —
 6.1 %
Reference laboratory diagnostic and consulting services 220,261
 202,658
 17,603
 8.7 % (0.7%) 1.9% 7.5 %
CAG diagnostics services and accessories 21,521
 19,491
 2,030
 10.4 % (1.2%) —
 11.6 %
CAG Diagnostics capital - instruments 23,833
 28,749
 (4,916) (17.1%) (1.3%) —
 (15.8%)
Veterinary software, services and diagnostic imaging systems 40,238
 36,378
 3,860
 10.6 % (0.2%) —
 10.8 %
Net CAG revenue $551,996
 $508,918
 $43,078
 8.5 % (0.9%) 0.8% 8.6 %
(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)
20202019Dollar Change
Reported Revenue Growth (1)
Percentage Change from CurrencyPercentage 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 consumables218,605 177,276 41,329 23.3 %1.2 %— 22.1 %
Rapid assay products70,593 58,930 11,663 19.8 %— %— 19.8 %
Reference laboratory diagnostic and consulting services254,223 204,919 49,304 24.1 %1.2 %1.8 %21.1 %
CAG diagnostics services and accessories23,995 19,849 4,146 20.9 %1.0 %— 19.9 %
CAG Diagnostics capital - instruments29,336 32,608 (3,272)(10.0 %)1.2 %— (11.2 %)
Veterinary software, services and diagnostic imaging systems41,265 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, reference laboratory diagnostic services, and rapid assay products, and to a lesser extent, higher realized prices.

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

The increase in rapid assay revenue resulted primarily from higher SNAP® 4Dx Plus sales volumes and higher realized prices. We continued to 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 higher testing volumes in all major regions, most prominently in the U.S., 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 decrease in instrument revenue was primarily due to the impacts of the COVID-19 pandemic, including restrictions on our sales professionals’ access to clinics and certain customers deferring new purchase decisions.

44

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, due to increases in our active installed base, and to a lesser extent, higher realized prices. These increases were partially offset by the impacts of the COVID-19 pandemic on new diagnostic imaging placements, including restrictions on our sales professionals’ access to 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)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
Revenues$638,017 $533,130 $104,887 19.7 %
Cost of revenues269,720 234,613 35,107 15.0 %
Gross profit368,297 57.7 %298,517 56.0 %69,780 23.4 %

Operating Expenses:
Sales and marketing98,995 15.5 %94,445 17.7 %4,550 4.8 %
General and administrative97,258 15.2 %56,896 10.7 %40,362 70.9 %
Research and development32,610 5.1 %29,485 5.5 %3,125 10.6 %
Total operating expenses228,863 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 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 and Rapid Assay products, and lower CAG Diagnostics instrument revenue, as well as the net benefit of price increases in our CAG Diagnostics recurring revenue 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 impairment charge. The impact from foreign currency movements decreased the gross profit margin by approximately 30 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%.

45

idxx-20200930_g3.jpgWater

The following table presents the Water segment results of operations:
For the Three Months Ended September 30,Change
Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
Revenues$33,272 $34,906 $(1,634)(4.7)%
Cost of revenue10,208 9,517 691 7.3 %
Gross profit23,064 69.3 %25,389 72.7 %(2,325)(9.2)%

Operating Expenses:
Sales and marketing3,470 10.4 %4,021 11.5 %(551)(13.7 %)
General and administrative3,329 10.0 %3,395 9.7 %(66)(1.9)%
Research and development1,022 3.1 %1,043 3.0 %(21)(2.0)%
Total operating expenses7,821 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%.



46

idxx-20200930_g4.jpgLivestock, 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)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
      
Revenues$36,971 $31,370 $5,601 17.9 %
Cost of revenue14,203 13,201 1,002 7.6 %
Gross profit22,768 61.6 %18,169 57.9 %4,599 25.3 %

Operating Expenses:
Sales and marketing5,245 14.2 %5,728 18.3 %(483)(8.4 %)
General and administrative4,299 11.6 %4,305 13.7 %(6)(0.1 %)
Research and development2,719 7.4 %3,286 10.5 %(567)(17.3 %)
Total operating expenses12,263 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%.

47

Other

The following table presents the Other results of operations:
໿
For the Three Months Ended September 30,Change
Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
      
Revenues$13,529 $5,897 $7,632 129.4 %
Cost of revenue5,052 3,022 2,030 67.2 %
Gross profit8,477 62.7 %2,875 48.8 %5,602 194.9 %

Operating Expenses:
Sales and marketing492 3.6 %357 6.1 %135 37.8 %
General and administrative145 1.1 %1,741 29.5 %(1,596)(91.7 %)
Research and development1,166 8.6 %446 7.6 %720 161.4 %
Total operating expenses1,803 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.

48

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)
20202019Dollar ChangeReported Revenue Growth (1)Percentage Change from CurrencyPercentage Change from AcquisitionsOrganic Revenue Growth (1)

CAG$1,756,113 $1,589,397 $166,716 10.5 %(0.4 %)0.7 %10.1 %
United States1,188,493 1,062,715 125,778 11.8 %— 1.1 %10.8 %
International567,620 526,682 40,938 7.8 %(1.1 %)— 8.9 %

Water95,537 99,980 (4,443)(4.4 %)(2.1 %)— (2.3 %)
United States47,510 48,157 (647)(1.3 %)— — (1.3 %)
International48,027 51,823 (3,796)(7.3 %)(4.1 %)— (3.2 %)

LPD103,369 95,980 7,389 7.7 %(2.7 %)— 10.4 %
United States10,803 10,221 582 5.7 %— — 5.7 %
International92,566 85,759 6,807 7.9 %(3.0 %)— 10.9 %

Other30,698 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 States1,257,617 1,127,347 130,270 11.6 %— 1.0 %10.6 %
International728,100 674,115 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%.

49

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)
2020Percent of Revenue2019Percent of RevenueAmountPercentage

Revenues$1,985,717 $1,801,462 $184,255 10.2 %
Cost of revenue824,179 767,062 57,117 7.4 %
Gross profit1,161,538 58.5 %1,034,400 57.4 %127,138 12.3 %

Operating Expenses:
Sales and marketing318,526 16.0 %312,499 17.3 %6,027 1.9 %
General and administrative231,111 11.6 %186,653 10.4 %44,458 23.8 %
Research and development102,472 5.2 %98,033 5.4 %4,439 4.5 %
Total operating expenses652,109 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 prior 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, 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 wasprimarily 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 and development expense was primarily due to higher personnel-related costs, partially offset by temporary cost containment efforts. The overall change in currency exchange rates decreased operating expenses by approximately 1%.

50

idxx-20200930_g2.jpgCompanion Animal Group

The following table presents revenue by product and service category for CAG: 
໿
For the For the Nine Months Ended September 30,
Net Revenue
(dollars in thousands)		20202019Dollar Change
Reported Revenue Growth (1)
Percentage Change from CurrencyPercentage 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 consumables603,379 519,646 83,733 16.1 %(0.6 %)— 16.7 %
Rapid assay products192,681 181,966 10,715 5.9 %(0.4 %)— 6.3 %
Reference laboratory diagnostic and consulting services703,300 621,469 81,831 13.2 %(0.2 %)1.8 %11.5 %
CAG diagnostics services and accessories66,235 59,115 7,120 12.0 %(0.6 %)— 12.7 %
CAG Diagnostics capital - instruments72,040 92,883 (20,843)(22.4 %)(0.4 %)— (22.0 %)
Veterinary software, services and diagnostic imaging systems118,478 114,318 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. In mid-March of 2020, our CAG Diagnostic Recurring revenues began to be negatively impacted by the COVID-19 social distancing procedures and guidelines, which constrained overall growth as described above in "Effects of Certain Factors and Trends on Results of Operations - COVID-19 Update". Unlike our Water and LPD businesses, we did not see a positive impact of customers accelerating orders in the first quarter related to the COVID-19 pandemic in our CAG business.

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, most prominently in the U.S., resulting from increased testing from new and existing customers, supported by our differentiated diagnostic technologies and to a lesser extent,as 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 was primarily due to the impacts of the COVID-19 pandemic, including restrictions on our sales professionals’ access to clinics and certain customers deferring instrument orders and placements, as well as the impacts of product mix, including lower SediVue Dx placements compared to high prior year levels.new purchase decisions.
51


Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software and hardware upgrades,diagnostic imaging subscription-based services as well as higher diagnostic imaging


services as a result ofdue to the increaseincreases in our active installed base, veterinary software, and hardware upgrades, and to a lesser extent, higher realized prices on these service offerings. These factors were partially offset by a moderate impact related toimpacts of the COVID-19 pandemic on new diagnostic imaging placements, including restrictions on our sales professionals’ access to clinics and certain customers deferring diagnostic imaging and practice management orders and installations,purchase decisions, which began to occur in mid-March of 2020.

The following table presents the CAG segment results of operations:
 For the Three Months Ended March 31, Change
Results of Operations
(dollars in thousands)
 2020 Percent of Revenue 2019 Percent of Revenue Amount Percentage
             
Revenues $551,996
   $508,918
   $43,078
 8.5%
Cost of revenue 242,653
   221,248
   21,405
 9.7%
Gross profit 309,343
 56.0% 287,670
 56.5% 21,673
 7.5%
            
Operating Expenses:            
Sales and marketing 106,002
 19.2% 96,948
 19.0% 9,054
 9.3%
General and administrative 55,603
 10.1% 52,109
 10.2% 3,494
 6.7%
Research and development 29,079
 5.3% 26,894
 5.3% 2,185
 8.1%
Total operating expenses 190,684
 34.5% 175,951
 34.6% 14,733
 8.4%
Income from operations $118,659
 21.5% $111,719
 22.0% $6,940
 6.2%

For the Nine Months Ended September 30,Change
Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
Revenues$1,756,113 $1,589,397 $166,716 10.5 %
Cost of revenue744,006 691,915 52,091 7.5 %
Gross profit1,012,107 57.6 %897,482 56.5 %114,625 12.8 %

Operating Expenses:
Sales and marketing291,093 16.6 %282,562 17.8 %8,531 3.0 %
General and administrative206,394 11.8 %160,162 10.1 %46,232 28.9 %
Research and development88,558 5.0 %84,158 5.3 %4,400 5.2 %
Total operating expenses586,045 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, moderated byas well a 50110 basis point decreaseincrease in the gross profit margin. The impact from foreign currency movements decreased gross profit margin by approximately 10 basis points, includingincrease in the impact of hedges. The remaining decrease in gross profit margin was driven by the impact of the COVID-19 pandemic onprimarily due to productivity gains in our reference laboratory volumes beginning in mid-March of 2020, as well as incremental investments in reference laboratory capacitylaboratories and the Marshfield laboratory acquisition. These impacts were partially offset by mix benefits from higher growth in IDEXX VetLab consumable revenues and lower growth inCAG Diagnostics instrument revenues, as well as lower product costs and the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio. These favorable factors were partially offset by incremental investments in reference laboratory capacity and systems, including acquisitions. The impact from foreign currency movements decreased the gross profit margin by approximately 20 basis points, including the impact of lower hedge gains in the current year compared to higher hedge gains in the prior year.

Operating Expenses. The increase in sales and marketing expense was primarily due to increased personnel-related costs related to 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 resultedwas primarily fromdue to an accrual related to an ongoing litigation matter and a charitable donation, as well as higher personnel-related costs, facility costs, and bad debt reserves.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 of approximatelyby less than 1%.


52


idxx-20200930_g3.jpgWater

The following table presents the Water segment results of operations:
 For the Three Months Ended March 31, Change
Results of Operations
(dollars in thousands)
 2020 Percent of Revenue 2019 Percent of Revenue Amount Percentage
             
Revenues $34,149
   $30,310
   $3,839
 12.7 %
Cost of revenue 9,400
   8,163
   1,237
 15.2%
Gross profit 24,749
 72.5% 22,147
 73.1% 2,602
 11.7 %
            
Operating Expenses:            
Sales and marketing 4,374
 12.8% 4,001
 13.2% 373
 9.3%
General and administrative 3,496
 10.2% 3,274
 10.8% 222
 6.8 %
Research and development 997
 2.9% 1,057
 3.5% (60) (5.7)%
Total operating expenses 8,867
 26.0% 8,332
 27.5% 535
 6.4 %
Income from operations $15,882
 46.5% $13,815
 45.6% $2,067
 15.0 %

For the Nine Months Ended September 30,Change
Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage
Revenues$95,537 $99,980 $(4,443)(4.4)%
Cost of revenue28,046 27,583 463 1.7 %
Gross profit67,491 70.6 %72,397 72.4 %(4,906)(6.8)%

Operating Expenses:
Sales and marketing11,243 11.8 %11,982 12.0 %(739)(6.2 %)
General and administrative10,018 10.5 %9,822 9.8 %196 2.0 %
Research and development2,847 3.0 %3,126 3.1 %(279)(8.9)%
Total operating expenses24,108 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 increasedecrease in revenue was attributableprimarily due to the impact of 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 includingduring the positive impactfirst quarter of accelerated customer stocking orders in North America and Europe in response to the COVID-19 pandemic,2020, as well as the benefit of price increases. The impact of currency movements decreased revenue by approximately 2.8%2.1%.

Gross Profit. Gross profit increaseddecreased due to higherlower sales volumes, moderated byand a 60180 basis point decrease in the gross profit margin, primarily due primarily to a 110 basis point reduction from foreign currency movements, including the impact of hedges. Ourlower hedge gains in the current year compared to the prior year, as well as higher distribution and freight costs and higher product costs. These reductions in the gross profit margin reflectedwere partially offset by the net benefits of price increases and product mix, which were offset by higher product and distribution costs.increases.

Operating Expenses. The increaseOverall operating expenses were lower primarily as a result of cost containment efforts implemented in salesresponse to the COVID-19 pandemic, including temporary compensation and marketing expense was primarily due to increased personnel-related costs. The increased in generalbenefit reductions and administrative expense was primarily due to higher bad debt reserves. The decrease in research and development expense was primarily due to lower personnel-related costs.travel restrictions. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 2.5%approximately 2%.


53


idxx-20200930_g4.jpgLivestock, Poultry and Dairy 

The following table presents the LPD segment results of operations:
 For the Three Months Ended March 31, Change
Results of Operations
(dollars in thousands)
 2020 Percent of Revenue 2019 Percent of Revenue Amount Percentage
  
    
      
Revenues $34,154
   $31,506
   $2,648
 8.4%
Cost of revenue 11,842
   12,457
   (615) (4.9%)
Gross profit 22,312
 65.3% 19,049
 60.5% 3,263
 17.1 %
            
Operating Expenses:            
Sales and marketing 5,382
 15.8% 5,288
 16.8% 94
 1.8%
General and administrative 4,489
 13.1% 4,418
 14.0% 71
 1.6%
Research and development 2,778
 8.1% 3,054
 9.7% (276) (9.0)%
Total operating expenses 12,649
 37.0% 12,760
 40.5% (111) (0.9%)
Income from operations $9,663
 28.3% $6,289
 20.0% $3,374
 53.6 %

For the Nine Months Ended September 30,Change
Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage

Revenues$103,369 $95,980 $7,389 7.7 %
Cost of revenue39,450 39,083 367 0.9 %
Gross profit63,919 61.8 %56,897 59.3 %7,022 12.3 %

Operating Expenses:
Sales and marketing14,925 14.4 %16,916 17.6 %(1,991)(11.8 %)
General and administrative12,466 12.1 %12,891 13.4 %(425)(3.3 %)
Research and development8,111 7.8 %9,383 9.8 %(1,272)(13.6)%
Total operating expenses35,502 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 increase in revenue wasRevenue increased primarily due to the positive impact of accelerated customer stocking orders related to the COVID-19 pandemic,continued demand for swine testing in China, as well as continued demand for new diagnostic programs in China related to African swine fever and increased poultry, bovine disease, and pregnancy testing. These favorable factorsincreases were offset by decreased herd health screening, which reflects comparisons to a strong prior year.year, and lower volumes as the result of the COVID-19 pandemic. The unfavorable impact of foreign currency movements decreased revenue by approximately 3.6%2.7%.

Gross Profit. The increase in gross profit was primarily due to higher sales volumes and a 480250 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. Theleverage, offset by the impact from foreign currency movements, which decreased gross profit margin by approximately 80150 basis points, including the impact of hedges.lower hedge gains in the current year compared to higher hedge gains in the prior year.

Operating Expenses. Overall operating expenses were lower primarily as a result of cost containment efforts implemented in response to the COVID-19 pandemic, including temporary compensation and benefit reductions and travel restrictions. Sales and marketing and general and administrative expenses decreased primarily from reduced travel and personnel-related costs, partially offset by higher bad debt reserves. 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, partially offset by third-party services. The overall change in currency exchange rates resulted in a decrease in operating expenses of approximately 1%.

54

Other

The following table presents the Other results of operations:
໿
For the Nine Months Ended September 30,Change
Results of Operations
(dollars in thousands)
2020Percent of Revenue2019Percent of RevenueAmountPercentage

Revenues$30,698 $16,105 $14,593 90.6 %
Cost of revenue12,677 8,481 4,196 49.5 %
Gross profit18,021 58.7 %7,624 47.3 %10,397 136.4 %

Operating Expenses:
Sales and marketing1,265 4.1 %1,039 6.5 %226 21.8 %
General and administrative2,233 7.3 %3,778 23.5 %(1,545)(40.9 %)
Research and development2,956 9.6 %1,366 8.5 %1,590 116.4 %
Total operating expenses6,454 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 our new OPTI COVID-19 PCR testing products and services, 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 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 price increases in our core OPTI products, 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 partially offset by cost control initiatives.related to new positions associated with our new OPTI COVID-19 PCR testing initiative. The increasedecrease in general and administrative expense was primarily due to higher bad debt reserves, partially offset by cost control initiatives. The decrease in research and development expense was due to lower personnel-related costs and lower project 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 March 31, Change
Results of Operations
(dollars in thousands)
 2020 Percent of Revenue 2019 Percent of Revenue Amount Percentage
  
    
      
Revenues $6,037
   $5,322
   $715
 13.4%
Cost of revenue 2,851
   2,591
   260
 10.0%
Gross profit 3,186
 52.8% 2,731
 51.3% 455
 16.7%
            
Operating Expenses:            
Sales and marketing 385
 6.4% 347
 6.5% 38
 11.0%
General and administrative 2,224
 36.8% 560
 10.5% 1,664
 297.1%
Research and development 456
 7.6% 509
 9.6% (53) (10.4%)
Total operating expenses 3,065
 50.8% 1,416
 26.6% 1,649
 116.5%
Income from operations $121
 2.0% $1,315
 24.7% $(1,194) (90.8%)

Revenue.The increase in revenue was due to higher volumes of OPTI Medical products as compared to reduced levels in the first quarter of the prior year, as well as higher OPTI Medical realized prices. The impact of currency movements on revenue was immaterial.
Gross Profit. The increase in gross profit was due to higher sales volumes and a 150 basis point increase in the gross profit margin primarily due to the net benefits of price increases within our OPTI Medical product line and, to a lesser extent, mix benefits within OPTI Medical product sales, partially offset by higher OPTI Medical product costs. The overall change in currency exchange rates had an immaterial impact on the gross profit margin.

Operating Expenses. The increase in sales and marketing was primarily due to higher personnel costs in our OPTI Medical business. The increase in general and administrative cost was primarily due to higher foreign exchange losses on settlements of foreign currency denominated transactions, as compared to the prior year, for all operating segments, which are reported within our Other segment. General and administrative expense decreased approximately 5.9%, excluding the impact of foreign currency.segment, partially offset by an increase in costs associated with our COVID-19 PCR testing . The decreaseincrease in research and development cost was primarily due to lowerhigher personnel-related and project costs in ourassociated with the development of the OPTI Medical business. Total operating expense decreased approximately 2.9%, excluding the impact of foreign currency.COVID-19 PCR test.

Non-Operating Items

Interest Expense. Interest expenseexpense was $7.7$25.3 million for the threenine months ended March 31,September 30, 2020, as compared to $8.4$23.7 million for the same period in the prior year. The decreaseincrease in interest expense was the result of lowerhigher 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 increasedlower 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 18.2%16.0% for the threenine months ended March 31,September 30, 2020, as compared to 17.7%18.5% for the threenine months ended March 31,September 30, 2019. The increasedecrease in our effective tax rate was primarily driven by regional earnings mix, with relatively lower statutory earnings subject to lower international tax rates than domestic tax rates, partially offset by higher tax benefits from share-based compensation.

We continue to monitor various governmental programs intended to assist companies and their employees during the COVID 19 pandemic. This includes the Coronavirus Aid, Relief, and Economic Security Act, a substantial tax-and-spending package enacted by the U.S. Congress on March 27, 2020, intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic.  We will consider participation in any programs should we become eligible; however, at this time we are unable to determine our eligibility, and the tax impacts of any such legislation are uncertain.  


55

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 March 31,September 30, 2020, we had $81.4$175.6 million of cash and cash equivalents, as compared to $90.3 million on December 31, 2019. Working capital, including our Credit Facility, totaled negative $124.9$341.8 million at March 31,September 30, 2020, as compared to negative $45.7 million at December 31, 2019. Additionally, at March 31,September 30, 2020, we had remaining borrowing availability of $361.8$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. InFacility 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 and securing an expanded $1 billion Credit Facility extended through 2023.notes. We believe that, if necessary, we could obtain additional 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, 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, 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. For more information and factors regarding the potential impact that the COVID-19 pandemic may have on our liquidity, and steps we have taken to manage cash flow, see Effects of Certain Factors and Trends on Results of Operations - COVID-19 Update, Operating Cost and Cash Management, above.

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)
 March 31,
2020		 December 31,
2019
Cash, cash equivalents and marketable securities
(dollars in thousands)
September 30, 2020December 31, 2019
  
  
   
U.S. $1,355
 $1,135
U.S.$67,893 $1,135 
Foreign 80,040
 89,191
Foreign107,694 89,191 
Total $81,395
 $90,326
Total$175,587 $90,326 
  
  
   
Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries $4,701
 $6,469
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 5.8% 7.2%Percentage of total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries7.7 %7.2 %

Of the $81.4$175.6 million of cash and cash equivalents held as of March 31,September 30, 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, 2020June 30, 2020March 31, 2020December 31, 2019September 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
March 31,
2020		 December 31, 2019 September 30, 2019 June 30,
2019		 March 31,
2019
     
  
  
Days sales outstanding(1)
41.5
 40.5
 41.8
 41.7
 42.0
Inventory turns(2)
1.9
 2.2
 2.0
 2.1
 2.0
(1)Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.
(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.


56

Sources and Uses of Cash 

The following table presents cash provided (used):
໿
For the Nine Months Ended September 30,
(in thousands)20202019Dollar 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 Three Months Ended March 31,
(in thousands) 2020 2019 Dollar Change
  
  
  
Net cash provided by operating activities $27,871
 $34,378
 $(6,507)
Net cash used by investing activities (49,670) (38,206) (11,464)
Net cash provided (used) by financing activities 16,901
 (2,781) 19,682
Net effect of changes in exchange rates on cash (4,033) (569) (3,464)
Net change in cash and cash equivalents $(8,931) $(7,178) $(1,753)

Operating Activities. The decreaseincrease in cash provided by operating activities of $6.5$125.4 million was driven primarily by an increase in net income and changes in other assets and liabilities, partially offset by an increase in net income.liabilities. The following table presents cash flowsflow impacts from changes in operating assets and liabilities: 
໿
 For the Three Months Ended March 31, For the Nine Months Ended September 30,
(in thousands) 2020 2019 Dollar Change(in thousands)20202019Dollar Change
  
  
      
Accounts receivable $(38,062) $(33,421) $(4,641)Accounts receivable$(72,409)$(24,451)$(47,958)
Inventories (14,434) (14,521) 87
Inventories(25,091)(36,582)11,491 
Accounts payable (1,755) 699
 (2,454)Accounts payable512 1,181 (669)
Deferred revenue (2,410) (3,098) 688
Deferred revenue(10,433)(10,826)393 
Other assets and liabilities (64,881) (49,601) (15,280)Other assets and liabilities30,579 (54,770)85,349 
Total change in cash due to changes in operating assets and liabilities $(121,542) $(99,942) $(21,600)Total change in cash due to changes in operating assets and liabilities$(76,842)$(125,448)$48,606 
 
Cash used due to changes in operating assets and liabilities during the threenine months ended March 31,September 30, 2020, as compared to the same period in the prior year, increaseddecreased approximately $21.6 million$48.6 million. The change in other assets and liabilities was primarily due to higher employee incentive paymentsnon-cash operating expenses recorded as accrued liabilities, including an accrued charge related to 2019 performance, as comparedan ongoing litigation matter and higher accrued personnel-related costs related to 2018,higher incentives and delayed employer payroll taxes under the COVID-19 stimulus guidance, as well as higherlower investments in customer volume commitment programs to support instrument placements, Additionally, lower inventory levels due to high demand levels contributed to lower cash income taxes paid and an increaseused compared to the same period in the prior year. These factors were partially offset by increases in accounts receivable from customers related to high levels of revenue growth and slight increase in days sales outstanding.growth.

In response to the COVID-19 crisis, we have offered our independently-owned small business veterinary customers an additional 30 days to pay certain amounts due. We expect this offer for extended payment terms may increase cash used by accounts receivable due to longer overall days sales outstanding.

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.

Investing Activities. Cash used by investing activities was $49.7$93.7 million for the threenine months ended March 31,September 30, 2020, as compared to $38.2$109.6 million for the same period in the prior year and isyear. The decrease in cash used by investing activities was primarily due to increased capital spending related tothe 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 providedused by financing activities was $16.9$248.8 million for the threenine months ended March 31,September 30, 2020, as compared to cash used by financing activities of $2.8$212.0 million for the same period in the prior year. The increase in cash providedused by financing activities was due to an increase in the amount borrowed fromrepayments on our Credit Facility partially offset by an increase inand repurchases of our common stock, partially offset by the issuance of senior notes in the current year, and a senior note borrowing in the prior year.
 
Cash used to repurchase shares of our common stock increased $128.5$21.8 million during the threenine months ended March 31,September 30, 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
57

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.



Net borrowingrepayment activity under our Credit Facility resulted in cash providedused of $198.1$289.6 million during the threenine months ended March 31,September 30, 2020, as compared to $52.0$169.5 million of cash used in the same period of the prior year. At March 31,September 30, 2020, we had $486.8 million outstandingno outstanding borrowings under the Credit Facility. The general availability of funds under our Credit Facility was furtheris reduced byby $1.4 million for a letterfor 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 relatedinsolvency-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.

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 debt issuance and Credit Facility.

The Credit Agreement 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 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 relatedinsolvency-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 areis 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 March 31,September 30, 2020, we were in compliance with such covenant. The following details our consolidated leverage ratio calculation:
໿
58
໿
(in thousands)Twelve months ended
Trailing 12 Months Adjusted EBITDA:March 31, 2020
 
Net income attributable to stockholders (as reported)$436,866
Interest expense30,361
Provision for income taxes97,260
Depreciation and amortization89,860
Acquisition-related expense1,403
Share-based compensation expense40,228
Extraordinary and other non-recurring non-cash charges968
Adjusted EBITDA$696,946
 
(in thousands) 
Debt to Adjusted EBITDA Ratio:March 31, 2020
 
Line of credit$486,824
Long-term debt697,363
Total debt1,184,187
Acquisition-related contingent consideration payable3,000
Financing leases84
Deferred financing costs682
Gross debt1,187,953
Gross debt to Adjusted EBITDA ratio1.70
 
Less: Cash and cash equivalents(81,395)
Net debt$1,106,558
Net debt to Adjusted EBITDA ratio1.59
(in thousands)Twelve months ended
Trailing 12 Months Adjusted EBITDA:September 30, 2020
Net income attributable to stockholders (as reported)$497,482 
Interest expense32,690 
Provision for income taxes95,338 
Depreciation and amortization94,026 
Acquisition-related expense1,822 
Share-based compensation expense39,663 
Extraordinary and other non-recurring non-cash charges2,962 
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 debt903,299 
Total debt903,299 
Acquisition-related contingent consideration payable1,500 
Financing leases46 
Deferred financing costs681 
Gross debt$905,526 
Gross debt to Adjusted EBITDA ratio1.19 
Less: Cash and cash equivalents$(175,587)
Net debt$729,939 
Net debt to Adjusted EBITDA ratio0.96 

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 March 31,September 30, 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.  


59


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 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 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 March 31,September 30, 2020, respectively, as compared to 21% for the three and nine months ended March 31,September 30, 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. We estimate a 1% strengthening of the U.S. dollar would result in incremental gains on our foreign currency hedge contracts in place as of March 31,September 30, 2020, of approximately $2 million. $0.6 million for the 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 priorprior-year period:
໿
For the Three Months Ended
September 30,		For the Nine Months Ended
September 30,
(in thousands, except per share amounts)2020201920202019
  
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 period616 (1,007)(492)(1,548)
Operating profit impact - current period$2,144 $(559)$(2,420)$(10,766)
Hedge (gains) losses - prior period(3,171)(256)(7,091)2,412 
Exchange losses on settlement of foreign currency denominated transactions - prior period1,007 706 1,548 2,775 
Operating profit impact - as compared to prior period$(20)$(109)$(7,963)$(5,579)
Diluted earnings per share impact - as compared to prior period$— $— $(0.07)$(0.05)
60
 For the Three Months Ended
March 31,
(in thousands, except per share amounts) 2020 2019
    
Revenue impact $(6,557) $(15,119)
    
Operating profit impact, excluding hedge activity $(4,018) $(6,964)
    
Hedge (gains) losses - prior year (1,411) 1,835
Hedge gains - current year 1,341
 1,411
Hedging activity impact (70) 3,246
    
Operating profit impact, including hedge activity $(4,088) $(3,718)
Diluted earnings per share impact, including hedge activity $(0.04) $(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 March 31,September 30, 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 March 31,September 30, 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” in our 2019 Annual Report as well asand the risk factor below, which supplements and should be read in conjunction with the risk factors disclosedincluded in our 2019 AnnualQuarterly 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. Except as described below in this Item 1A., thereThere have been no material changes from the risk factors previously disclosed in the 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 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.


61


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 travelremote work locations, and employee work locations)travel), andand 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 beingthat may be further deployed to combat the spread of COVID-19, have resultedand possible higher infection rates could result in a decrease in companion animal clinical visits, and the delay of elective procedures and wellness visits and disruption of veterinary clinic operations, all of which are havingwould have a negative effect on veterinary service providers and contributing toresult in declines in demand for our CAG products and services, which represented 88% of our 2019 consolidated revenues. If stay-at-home orders continue for extended periods of time, or 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 alsofurther reduce, demand for our water testing products, livestock and poultry diagnostic tests and dairy products due to reduced discretionary 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.
We may have an increased risk of inventory that may expire.
•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.

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 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.

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



•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 indefinite-lived
62

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.


63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
During the three months ended March 31,September 30, 2020, we repurchased shares of common stock as described below:  
PeriodTotal 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, 2020276 $395.71 — 6,275,912 
September 1 to September 30, 2020640 $392.01 — 6,275,912 
Total916 (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)
  
  
  
  
January 1 to January 31, 2020 123,213
 $276.83
 123,213
 6,873,495
February 1 to February 29, 2020 200,195
 $272.66
 170,401
 6,703,094
March 1 to March 31, 2020 427,182
 $233.00
 427,182
 6,275,912
Total 750,590
(2) 
$250.77
 720,796
 6,275,912

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 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 March 31, 2020, and no share repurchase programs expired during the period. Repurchases of 720,796 shares were made during the three months ended March 31, 2020, in transactions made pursuant to our share repurchase program.

(2)During the three months ended March 31, 2020, we received 29,794 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.



64

Item 6. Exhibits 

Exhibit No.Description
Exhibit No.Description
10.3
Second Amendment to Multicurrency Note Purchase and Private Shelf Agreement, dated March 23, 2020, among the Company, as issuer, each of the Subsidiary Guarantors (as defined therein), Metropolitan Life Insurance Company and each of the holders of the Notes (as defined therein) (filed as Exhibit 10.1 to Current Report on Form 8-K filed March 27, 2020, File No. 0-19271, and incorporated herein by reference).
10.4
Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, dated as of June 18, 2015, among the Company, as issuer, Prudential Investment Management, Inc., Pruco Life Insurance Company, The Prudential Insurance Company of America (“Prudential”), The Gibraltar Life Insurance Co., Ltd., PAR U Hartford Life Insurance Comfort Trust, The Independent Order of Foresters, Zurich American Insurance Company, Globe Life and Accident Insurance Company, Family Heritage Life Insurance Company of America, MTL Insurance Company, The Lincoln National Life Insurance Company, William Penn Life Insurance Company of New York, Farmers Insurance Exchange, Mid Century Insurance Company and Farmers New World Life Insurance Company, as purchasers (filed as Exhibit No. 99.1 to Current Report on Form 8-K filed June 24, 2015, File No. 0-19271, and incorporated herein by reference).
10.5
Amendment to Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, dated as of May 9, 2019, among the Company, as issuer, each of the Subsidiary Guarantors (as defined therein), Prudential and each of the holders of the Notes (as defined therein) (filed as Exhibit 10.2 to Current Report on Form 8-K filed April 16, 2020, File No. 0-19271, and incorporated herein by reference).
10.6
Second Amendment to Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, dated as of April 10, 2020, among the Company, as issuer, each of the Subsidiary Guarantors (as defined therein), Prudential and each of the holders of the Notes (as defined therein) (filed as Exhibit 10.3 to Current Report on Form 8-K filed April 16, 2020, File No. 0-19271, and incorporated herein by reference).
10.7
Amendment to Note Purchase Agreement, dated as of April 10, 2020, among the Company, as issuer, New York Life Insurance Company, New York Life Insurance and Annuity Corporation and New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 30C), as purchasers (filed as Exhibit 10.4 to Current Report on Form 8-K filed April 16, 2020, File No. 0-19271, and incorporated herein by reference).
10.8
Amendment to Note Purchase Agreement, dated as of April 10, 2020, among the Company, as issuer, New York Life Insurance Company, New York Life Insurance and Annuity Corporation and New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 30C), as purchasers (filed as Exhibit 10.5 to Current Report on Form 8-K filed April 16, 2020, File No. 0-19271, and incorporated herein by reference).
10.9
Third Amended and Restated Credit Agreement, dated as of April 14, 2020, among the Company, IDEXX Distribution, Inc., IDEXX Operations, Inc., OPTI Medical Systems, Inc., IDEXX Laboratories Canada Corporation, IDEXX Europe B.V., and IDEXX Holding B.V., as 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 (filed as Exhibit 10.6 to Current Report on Form 8-K filed April 16, 2020, 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.


101The following financial and related information from IDEXX Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2020, formatted in Inline eXtensible Business Reportable Language (iXBRL) includes: (i) the 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.
104The cover page from the Company's Quarterly Report of Form 10-Q for the quarter ended March 31,September 30, 2020, formatted in Inline XBRL and contained in Exhibit 101.
*Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).



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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: April 30,October 29, 2020Brian P. McKeon
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
 
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