IDEXX LABORATORIES INC /DE [IDXX] Filings

10-Q 1 idxx-20210930.htm 10-Q idxx-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

For the transition period from _______________ to _______________.

COMMISSION FILE NUMBER: 000-19271

IDEXX LABORATORIES, INC.

(Exact name of registrant as specified in its charter)


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

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

207-556-0300

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.10 par value per share

IDXX

NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 84,793,608, on October 27, 2021.

GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

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


Term/ Abbreviation			Definition

AOCI			Accumulated other comprehensive income or loss
CAG			Companion Animal Group, a reporting segment that provides veterinarians diagnostic products and services and information management solutions that enhance the health and well-being of pets.
Credit Facility			Our $1 billion unsecured revolving credit facility, also referred to as line of credit.
Clinical visits			The reason for the visit involves an interaction between a clinician and a pet.
FASB			U.S. Financial Accounting Standards Board
LPD			Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer 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, as well as COVID-19 testing products and services. The Roswell facility also manufactures electrolytes slides (instrument consumables) to run Catalyst One®, Catalyst Dx®, and blood gas analyzers and consumables for the veterinary market; also referred to as OPTI.
Organic revenue growth			A non-GAAP financial measure and represents the percentage change in revenue, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for or as a superior measure to, revenue growth reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies.
PCR			Polymerase chain reaction, a technique used to amplify small segments of DNA
R&D			Research and Development
Reported revenue growth			Represents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year.
SaaS			Software-as-a-service
SEC			U.S. Securities and Exchange Commission
Senior Note Agreements			Note purchase agreements for the private placement of senior notes, referred to as senior notes or long-term debt.
U.S. GAAP			Accounting principles generally accepted in the United States of America
Water			Water, a reporting segment that provides water microbiology testing products.

IDEXX LABORATORIES, INC.

Quarterly Report on Form 10-Q

Table of Contents



Item No.		Page

	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	3
	Condensed Consolidated Statements of Income for the Three and Nin e Months Ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nin e Months Ended September 30, 2021 and 2020	5
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	54
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	57
Signatures		58

PART I— FINANCIAL INFORMATION

Item 1. Financial Statements.

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)


	September 30, 2021		December 31, 2020

ASSETS
Current Assets:
Cash and cash equivalents	$	145,203	$	383,928
Accounts receivable, net	376,760		331,429
Inventories	258,484		209,873
Other current assets	157,590		137,508
Total current assets	938,037		1,062,738
Long-Term Assets:
Property and equipment, net	573,385		555,167
Operating lease right-of-use assets	106,962		91,171
Goodwill	355,240		243,347
Intangible assets, net	94,976		52,543
Other long-term assets	317,144		289,595
Total long-term assets	1,447,707		1,231,823
TOTAL ASSETS	$	2,385,744	$	2,294,561

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	86,684	$	74,558
Accrued liabilities	431,047		415,648
Current portion of long-term debt	74,990		49,988
Current portion of deferred revenue	41,128		42,567
Total current liabilities	633,849		582,761
Long-Term Liabilities:
Deferred income tax liabilities	15,306		11,707
Long-term debt, net of current portion	778,025		858,492
Long-term deferred revenue, net of current portion	40,391		46,163
Long-term operating lease liabilities	89,720		77,039
Other long-term liabilities	72,993		85,604
Total long-term liabilities	996,435		1,079,005
Total liabilities	1,630,284		1,661,766

Commitments and Contingencies (Note 16)

Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 106,806 shares in 2021 and 106,457 shares in 2020; Outstanding: 84,880 shares in 2021 and 85,449 shares in 2020	10,681		10,646
Additional paid-in capital	1,358,813		1,294,849
Deferred stock units: Outstanding: 90 units in 2021 and 87 units in 2020	5,669		4,503
Retained earnings	2,757,669		2,175,595
Accumulated other comprehensive loss	(52,057)		(53,615)
Treasury stock, at cost: 21,926 shares in 2021 and 21,008 shares in 2020	(3,326,021)		(2,799,890)
Total IDEXX Laboratories, Inc. stockholders’ equity	754,754		632,088
Noncontrolling interest	706		707
Total stockholders’ equity	755,460		632,795
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,385,744	$	2,294,561

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

Revenue:
Product revenue	$	471,787	$	422,283	$	1,406,850	$	1,153,114
Service revenue	338,634		299,506		1,007,420		832,603
Total revenue	810,421		721,789		2,414,270		1,985,717
Cost of Revenue:
Cost of product revenue	166,748		146,804		483,850		396,282
Cost of service revenue	170,752		152,379		497,409		427,897
Total cost of revenue	337,500		299,183		981,259		824,179
Gross profit	472,921		422,606		1,433,011		1,161,538
Expenses:
Sales and marketing	124,434		108,202		358,277		318,526
General and administrative	82,098		105,031		226,194		231,111
Research and development	40,427		37,517		115,703		102,472
Income from operations	225,962		171,856		732,837		509,429
Interest expense	(7,134)		(8,110)		(22,331)		(25,297)
Interest income	122		208		265		417
Income before provision for income taxes	218,950		163,954		710,771		484,549
Provision for income taxes	43,772		17,633		128,698		77,376
Net income	175,178		146,321		582,073		407,173
Less: Net (loss) income attributable to noncontrolling interest	(57)		102		(1)		187
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	175,235	$	146,219	$	582,074	$	406,986

Earnings per Share:
Basic	$	2.06	$	1.71	$	6.82	$	4.77
Diluted	$	2.03	$	1.69	$	6.71	$	4.70
Weighted Average Shares Outstanding:
Basic	85,123		85,314		85,325		85,293
Diluted	86,511		86,690		86,712		86,635

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

Net income	$	175,178	$	146,321	$	582,073	$	407,173
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(12,967)		7,329		(20,213)		(7,871)
Unrealized gain (loss) on Euro-denominated notes, net of tax expense (benefit) of $498 and $1,335 in 2021 and $(890) and $(1,092) in 2020	1,581		(2,824)		4,235		(3,466)
Unrealized gain (loss) on investments, net of tax expense (benefit) of $0 and $48 in 2021 and $52 and $(129) in 2020	(1)		166		153		(408)
Unrealized gain (loss) on derivative instruments:
Unrealized gain (loss) on foreign currency exchange contracts, net of tax expense (benefit) of $940 and $1,595 in 2021 and $(1,408) and $(161) in 2020	4,109		(6,161)		7,300		(623)
Unrealized gain (loss) on cross currency swaps, net of tax expense (benefit) of $744 and $1,438 in 2021 and $(933) and $(347) in 2020	2,359		(3,941)		4,561		(1,339)
Reclassification adjustment for loss (gain) included in net income, net of tax benefit (expense) of $330 and $1,206 in 2021 and $53 and $(526) in 2020	1,253		538		5,522		(2,036)
Unrealized gain (loss) on derivative instruments	7,721		(9,564)		17,383		(3,998)
Other comprehensive gain (loss), net of tax	(3,666)		(4,893)		1,558		(15,743)
Comprehensive income	171,512		141,428		583,631		391,430
Less: Comprehensive income (loss) attributable to noncontrolling interest	(57)		102		(1)		187
Comprehensive income attributable to IDEXX Laboratories, Inc.	$	171,569	$	141,326	$	583,632	$	391,243

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

(Unaudited)


	Common Stock
	Number of Shares	$0.10 Par Value		Additional Paid-in Capital		Deferred Stock Units		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Noncontrolling Interest		Total Stockholders’ Equity
Balance December 31, 2020	106,457	$	10,646	$	1,294,849	$	4,503	$	2,175,595	$	(53,615)	$	(2,799,890)	$	707	$	632,795
Net income	—	—		—		—		204,257		—		—		32		204,289
Other comprehensive loss, net	—	—		—		—		—		(5,921)		—		—		(5,921)
Repurchases of common stock, net	—	—		—		—		—		—		(154,033)		—		(154,033)
Common stock issued under stock plans, including excess tax benefit	219	22		17,408		—		—		—		—		—		17,430
Share-based compensation cost	—	—		8,829		46		—		—		—		—		8,875
Balance March 31, 2021	106,676	$	10,668	$	1,321,086	$	4,549	$	2,379,852	$	(59,536)	$	(2,953,923)	$	739	$	703,435
Net income	—	—		—		—		202,582		—		—		24		202,606
Other comprehensive income (loss), net	—	—		—		—		—		11,145		—		—		11,145
Repurchases of common stock	—	—		—		—		—		—		(188,378)		—		(188,378)
Common stock issued under stock plans, including excess tax benefit	72	7		9,771		—		—		—		—		—		9,778
Deferred stock units activity	—	—		(1,035)		1,035		—		—		—		—		—
Share-based compensation cost	—	—		9,591		46		—		—		—		—		9,637
Balance June 30, 2021	106,748	$	10,675	$	1,339,413	$	5,630	$	2,582,434	$	(48,391)	$	(3,142,301)	$	763	$	748,223
Net income	—	—		—		—		175,235		—		—		(57)		175,178
Other comprehensive income (loss), net	—	—		—		—		—		(3,666)		—		—		(3,666)
Repurchases of common stock	—	—		—		—		—		—		(183,720)		—		(183,720)
Common stock issued under stock plans, including excess tax benefit	58	6		9,921		(12)		—		—		—		—		9,915
Share-based compensation cost	—	—		9,479		51		—		—		—		—		9,530
Balance September 30, 2021	106,806	$	10,681	$	1,358,813	$	5,669	$	2,757,669	$	(52,057)	$	(3,326,021)	$	706	$	755,460


	Common Stock
	Number of Shares	$0.10 Par Value		Additional Paid-in Capital		Deferred Stock Units		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Noncontrolling Interest		Total Stockholders’ Equity
Balance December 31, 2019	105,711	$	10,571	$	1,213,517	$	4,462	$	1,595,648	$	(46,182)	$	(2,600,543)	$	352	$	177,825
Cumulative effect of accounting changes	—	—		—		—		(1,829)		—		—		—		(1,829)
Net income	—	—		—		—		111,827		—		—		29		111,856
Other comprehensive loss, net	—	—		—		—		—		(9,064)		—		—		(9,064)
Repurchases of common stock	—	—		—		—		—		—		(187,767)		—		(187,767)
Common stock issued under stock plans, including excess tax benefit	203	20		9,730		—		—		—		—		—		9,750

Share-based compensation cost	—	—		7,238		46		—		—		—		—		7,284
Balance March 31, 2020	105,914	$	10,591	$	1,230,485	$	4,508	$	1,705,646	$	(55,246)	$	(2,788,310)	$	381	$	108,055
Net income	—	—		—		—		148,940		—		—		56		148,996
Other comprehensive loss, net	—	—		—		—		—		(1,786)		—		—		(1,786)
Issuance of common stock	—	—		—		—		—		—		258		—		258
Common stock issued under stock plans, including excess tax benefit	117	12		10,068		—		—		—		—		—		10,080
Deferred stock units activity	—	—		(894)		894		—		—		—		—		—
Share-based compensation cost	—	—		7,797		—		—		—		—		—		7,797
Balance June 30, 2020	106,031	$	10,603	$	1,247,456	$	5,402	$	1,854,586	$	(57,032)	$	(2,788,052)	$	437	$	273,400
Net income (loss)	—	—		—		—		146,219		—		—		102		146,321
Other comprehensive loss, net	—	—		—		—		—		(4,893)		—		—		(4,893)
Repurchases of common stock, net	—	—		—		—		—		—		(360)		—		(360)
Common stock issued under stock plans, including excess tax benefit	251	25		18,706		(12)		—		—		—		—		18,719
Share-based compensation cost	—	—		7,907		21		—		—		—		—		7,928
Balance September 30, 2020	106,282	$	10,628	$	1,274,069	$	5,411	$	2,000,805	$	(61,925)	$	(2,788,412)	$	539	$	441,115

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2021		2020

Cash Flows from Operating Activities:
Net income	$	582,073	$	407,173
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	76,901		71,437
Impairment charge	5,148		1,993
Provision for credit losses	1,719		5,235
Deferred income taxes	4,049		(3,363)
Share-based compensation expense	28,042		23,008
Other	2,402		488
Changes in assets and liabilities:
Accounts receivable	(49,050)		(72,409)
Inventories	(46,891)		(25,091)
Other assets and liabilities	(51,961)		30,579
Accounts payable	637		512
Deferred revenue	(7,487)		(10,433)
Net cash provided by operating activities	545,582		429,129
Cash Flows from Investing Activities:
Purchases of property and equipment	(87,761)		(92,768)
Acquisition of intangible assets and equity investments	—		(918)
Acquisitions of a business, net of cash acquired	(161,166)		—
Net cash used by investing activities	(248,927)		(93,686)
Cash Flows from Financing Activities:
Repayments on revolving credit facilities, net	—		(289,625)
Issuance of senior debt	—		200,000
Payment of senior debt	(50,000)		—
Debt issuance costs	—		(4,995)
Payments of acquisition-related contingent considerations and holdbacks	(1,500)		(1,580)
Repurchases of common stock, net	(502,021)		(182,815)
Proceeds from exercises of stock options and employee stock purchase plans	37,428		39,230
Shares withheld for statutory tax withholding payments on restricted stock	(15,501)		(9,029)
Net cash used by financing activities	(531,594)		(248,814)
Net effect of changes in exchange rates on cash	(3,786)		(1,368)
Net (decrease) increase in cash and cash equivalents	(238,725)		85,261
Cash and cash equivalents at beginning of period	383,928		90,326
Cash and cash equivalents at end of period	$	145,203	$	175,587

Supplemental Cash Flow Information:
Cash paid for income taxes	$	96,103	$	79,909
Unpaid property and equipment, reflected in accounts payable and accrued liabilities	$	14,734	$	7,708

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, 2020, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, and our Annual Report on Form 10-K for the year ended December 31, 2020, (the “2020 Annual Report”) filed with the SEC.

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 included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q in the “Glossary of Terms and Selected Abbreviations.”

NOTE 2. ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021, are consistent with those discussed in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in our 2020 Annual Report, except as noted below.

New Accounting Pronouncements Adopted

Effective January 1, 2021, we adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new guidance is intended to 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. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

In July 2021, the FASB issued ASU 2021-05, “Leases (Topic 842); Lessors - Certain Leases with Variable Lease Payments.” ASU 2021-05 requires a lessor to classify a lease with variable payments that do not depend on an index or rate as an operating lease if another lease classification (i.e., sales-type or direct financing) would result in recognition of a day-one loss. We have elected to adopt this standard as of the third quarter of 2021, on a prospective basis. The adoption of ASU 2021-05 did not have an impact on our consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

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

NOTE 3. REVENUE RECOGNITION

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

1.Identification of a contract or agreement with a customer

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

3.Determination of the transaction price

4.Allocation of the transaction price to the performance obligations

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

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 payment terms generally range from 30 to 60 days, with exceptions for certain individual customers and 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. We also provide customers with certain consumables that are recognized upon utilization by the customer, which is when we have the right to payment and the risks and rewards of ownership transfer. 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 and consulting services revenues are recognized and invoiced when the services are 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 $6.3 million and $15.8 million for the three and nine months ended September 30, 2021, respectively, as

compared to $4.5 million and $12.2 million for the three and nine months ended September 30, 2020, respectively, including both operating leases and sales-type leases under ASC 842, Leases, for leases entered into after January 1, 2019, and ASC 840, Leases, for leases entered into prior to 2019. See below for revenue recognition under our reagent rental programs.

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

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

On December 31, 2020, our deferred revenue related to extended warranties and post-contract support was $35.1 million, of which approximately $2.8 million and $20.8 million was recognized during the three and nine months ended September 30, 2021, respectively. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $31.0 million at September 30, 2021. 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 $17.1 million at September 30, 2021, of which approximately 14%, 43%, 25%, 11%, and 7% are expected to be recognized during the remainder of 2021, the full years 2022, 2023, 2024, and thereafter, respectively. Additionally, we have determined these agreements do not include a significant financing component.

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

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

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

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

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

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

On December 31, 2020, our capitalized customer acquisition costs were $148.1 million, of which approximately $10.7 million and $33.3 million was recognized as a reduction of revenue during the three and nine months ended September 30, 2021, respectively. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $157.1 million at September 30, 2021. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three and nine months ended September 30, 2021, 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, 2020, our volume commitment contract assets were $115.5 million, of which approximately $6.5 million and $20.1 million was reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended September 30, 2021, respectively. 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, our contract assets were $146.1 million at September 30, 2021. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three and nine months ended September 30, 2021, 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 $2.7 billion, of which approximately 6%, 25%, 23%, 19%, and 27% are expected to be recognized during the remainder of 2021, the full years 2022, 2023, 2024, 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 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, 2020, our deferred revenue related to instrument rebate programs was $39.3 million, of which approximately $3.5 million and $11.0 million was recognized when customers purchased eligible products and services and earned rebates during the three and nine months ended September 30, 2021, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $33.9 million at September 30, 2021, of which approximately 10%, 34%, 23%, 15%, and 18%