Company Quick10K Filing
Quick10K
Idexx Laboratories
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$246.22 86 $21,180
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-16 Officers, Exhibits
8-K 2019-06-28 Officers, Exhibits
8-K 2019-05-08 Shareholder Vote
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-03-14 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-01 Earnings, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-06-13 Officers
8-K 2018-05-09 Officers, Shareholder Vote
8-K 2018-02-14 Officers
8-K 2018-02-01 Earnings, Exhibits
8-K 2018-01-05 Earnings, Regulation FD, Exhibits
PG Procter & Gamble 261,470
CAG Conagra Brands 14,200
AVX AVX 2,680
ADUS Addus Homecare 900
EGLE Eagle Bulk Shipping 388
ARYA ARYA Sciences Acquisition 143
MOTS Motus Gi Holdings 84
CLD Cloud Peak Energy 0
NOVC Novation Companies 0
PTEO Proteo 0
IDXX 2019-03-31
Part I- Financial Information
Item 1. Financial Statements.
Note 1. Basis of Presentation and Principles of Consolidation
Note 2. Accounting Policies
Note 3. Revenue Recognition
Note 4. Share-Based Compensation
Note 5. Inventories
Note 6. Leases
Note 7. Other Current and Long-Term Assets
Note 8. Accrued Liabilities
Note 9. Debt
Note 10. Repurchases of Common Stock
Note 11. Income Taxes
Note 12. Accumulated Other Comprehensive Income
Note 13. Earnings per Share
Note 14. Commitments, Contingencies and Guarantees
Note 15. Segment Reporting
Note 16. Fair Value Measurements
Note 17. Hedging Instruments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 idxx2019q110-qexhibit311.htm
EX-31.2 idxx2019q110-qexhibit312.htm
EX-32.1 idxx2019q110-qexhibit321.htm
EX-32.2 idxx2019q110-qexhibit322.htm

Idexx Laboratories Earnings 2019-03-31

IDXX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 idxx2019q110-q.htm 10-Q Document


UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549 
FORM 10-Q 
 
(Mark One) 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2019
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-20180331x10qg001a04.jpg
  
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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨





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

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

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 86,006,332 on April 26, 2019.




GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS

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

Term/ Abbreviation
 
Definition

 
AOCI
Accumulated other comprehensive income or loss
ASU 2016-02
ASU 2016-02, Leases (Topic 842); also referred to as the “New Leasing Standard”
CAG
Companion Animal Group, a reporting segment that provides veterinarians diagnostic products and services and information management solutions that enhance the health and well-being of pets
Credit Facility
Our $850 million five-year unsecured revolving credit facility under an amended and restated credit agreement that was executed in December 2015, also referred to as line of credit
FASB
U.S. Financial Accounting Standards Board
LPD
Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy efficiency
OPTI Medical
OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., located in Roswell, Georgia. This business manufactures and supplies blood gas analyzers and consumables worldwide for the human point-of-care medical diagnostics market. The Roswell facility also manufactures electrolytes slides (instrument consumables) to run Catalyst One®, Catalyst Dx®, and blood gas analyzers and consumables for the veterinary market; also referred to as OPTI.
Organic revenue growth
A non-GAAP financial measure and represents the percentage change in revenue, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies.
R&D
Research and Development
Reported revenue growth
Represents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year
SaaS
Software-as-a-service
SEC
U.S. Securities and Exchange Commission
Senior Note Agreements
Note purchase agreements for the private placement of senior notes having an aggregate principal amount of approximately $700 million, referred to as senior notes or long-term debt
U.S. GAAP
Accounting principles generally accepted in the United States of America
Water
Water, a reporting segment that provides water microbiology testing products





IDEXX LABORATORIES, INC. 
Quarterly Report on Form 10-Q 
Table of Contents 


 
 
Item No.
 
Page

 
 

PART I—FINANCIAL INFORMATION
 
 



 



PART II—OTHER INFORMATION
 
 
໿





PART I— FINANCIAL INFORMATION 
Item 1.  Financial Statements. 
 
IDEXX LABORATORIES, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 
(in thousands, except per share amounts) 
(Unaudited)

March 31, 2019
 
December 31, 2018
 
 
 
 
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
116,616

 
$
123,794

Accounts receivable, net of reserves of $4,566 in 2019 and $4,702 in 2018
281,159

 
248,855

Inventories
189,468

 
173,303

Other current assets
110,403

 
108,220

Total current assets
697,646

 
654,172

Long-Term Assets:
 
 
 
Property and equipment, net
449,103

 
437,270

Operating lease right-of-use assets (Notes 2 and 6)
80,594

 

Goodwill
214,517

 
214,489

Intangible assets, net
39,499

 
41,825

Other long-term assets
199,609

 
189,593

Total long-term assets
983,322

 
883,177

TOTAL ASSETS
$
1,680,968

 
$
1,537,349

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
70,143

 
$
69,534

Accrued liabilities
229,127

 
260,683

Line of credit
346,998

 
398,937

Current portion of deferred revenue
43,351

 
41,290

Total current liabilities
689,619

 
770,444

Long-Term Liabilities:
 
 
 
Deferred income tax liabilities
32,931

 
29,267

Long-term debt
699,334

 
601,348

Long-term deferred revenue, net of current portion
55,695

 
60,697

Long-term operating lease liabilities (Notes 2 and 6)
68,955

 

Other long-term liabilities
82,564

 
84,826

Total long-term liabilities
939,479

 
776,138

Total liabilities
1,629,098

 
1,546,582

 
 
 
 
Commitments and Contingencies (Note 14)


 


 
 
 
 
Stockholders’ Equity (Deficit):
 
 
 
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 105,345 shares in 2019 and 105,087 shares in 2018; Outstanding: 86,054 shares in 2019 and 86,100 shares in 2018
10,535

 
10,509

Additional paid-in capital
1,155,875

 
1,138,216

Deferred stock units: Outstanding: 162 units in 2019 and 2018
4,592

 
4,524

Retained earnings
1,270,609

 
1,167,928

Accumulated other comprehensive loss
(40,015
)
 
(41,791
)
Treasury stock, at cost: 19,290 shares in 2019 and 18,988 shares in 2018
(2,350,034
)
 
(2,288,899
)
Total IDEXX Laboratories, Inc. stockholders’ equity (deficit)
51,562

 
(9,513
)
Noncontrolling interest
308

 
280

Total stockholders’ equity (deficit)
51,870

 
(9,233
)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$
1,680,968

 
$
1,537,349

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

3



IDEXX LABORATORIES, INC. AND SUBSIDIARIES 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
(in thousands, except per share amounts) 
(Unaudited)  

For the Three Months Ended
March 31,

2019
 
2018

 
 
 
Revenue:
 
 
 
Product revenue
$
334,058

 
$
317,440

Service revenue
241,998

 
220,216

Total revenue
576,056

 
537,656

Cost of Revenue:
 
 
 
Cost of product revenue
117,383

 
118,246

Cost of service revenue
127,076

 
116,311

Total cost of revenue
244,459

 
234,557

Gross profit
331,597

 
303,099

Expenses:
 
 
 
Sales and marketing
106,584

 
100,101

General and administrative
60,361

 
60,931

Research and development
31,514

 
29,023

Income from operations
133,138

 
113,044

Interest expense
(8,386
)
 
(9,274
)
Interest income
40

 
579

Income before provision for income taxes
124,792

 
104,349

Provision for income taxes
22,083

 
14,873

Net income
102,709

 
89,476

Less: Net income attributable to noncontrolling interest
28

 
25

Net income attributable to IDEXX Laboratories, Inc. stockholders
$
102,681

 
$
89,451


 
 
 
Earnings per Share:
 
 
 
Basic
$
1.19

 
$
1.02

Diluted
$
1.17

 
$
1.01

Weighted Average Shares Outstanding:
 
 
 
Basic
86,204

 
87,331

Diluted
87,549

 
88,944


 
 
 
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,

2019
 
2018

 
 
 
Net income
$
102,709

 
$
89,476

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
(1,423
)
 
5,165

Unrealized gain (loss) on net investment hedge
1,480

 
(2,216
)
Unrealized gain on investments, net of tax expense of $128 in 2019 and $40 in 2018
407

 
118

Unrealized gain (loss) on derivative instruments:
 
 
 
Unrealized gain (loss), net of tax expense (benefit) of $531 in 2019 and $(377) in 2018
2,474

 
(2,388
)
Reclassification adjustment for (gain) loss included in net income, net of tax (expense) benefit of $(249) in 2019 and $250 in 2018
(1,162
)
 
1,585

Unrealized gain (loss) on derivative instruments
1,312

 
(803
)
Other comprehensive gain, net of tax
1,776

 
2,264

Comprehensive income
104,485

 
91,740

Less: Comprehensive income attributable to noncontrolling interest
28

 
25

Comprehensive income attributable to IDEXX Laboratories, Inc.
$
104,457

 
$
91,715


 
 
 
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 Value
 
Additional Paid-in Capital
 
Deferred Stock Units
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Noncontrolling Interest
 
Total Stockholders’ Equity (Deficit)
Balance December 31, 2017
104,275

 
$
10,428

 
$
1,073,931

 
$
5,988

 
$
803,545

 
$
(36,470
)
 
$
(1,911,528
)
 
$
264

 
$
(53,842
)
Cumulative effect of accounting changes

 

 

 

 
(12,648
)
 

 

 

 
(12,648
)
Balance January 1, 2018
104,275

 
$
10,428

 
$
1,073,931

 
$
5,988

 
$
790,897

 
$
(36,470
)
 
$
(1,911,528
)
 
$
264

 
$
(66,490
)
Net income

 

 

 

 
89,451

 

 

 
25

 
89,476

Other comprehensive income, net

 

 

 

 

 
2,264

 

 

 
2,264

Repurchases of common stock, net

 

 

 

 

 

 
(94,285
)
 

 
(94,285
)
Common stock issued under stock plans
401

 
40

 
14,311

 
(259
)
 

 

 

 

 
14,092

Share-based compensation cost

 

 
5,917

 
43

 

 

 

 

 
5,960

Balance March 31, 2018
104,676

 
$
10,468

 
$
1,094,159

 
$
5,772

 
$
880,348

 
$
(34,206
)
 
$
(2,005,813
)
 
$
289

 
$
(48,983
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2018
105,087

 
10,509

 
1,138,216

 
4,524

 
1,167,928

 
(41,791
)
 
(2,288,899
)
 
280

 
(9,233
)
Net income

 

 

 

 
102,681

 

 

 
28

 
102,709

Other comprehensive income, net

 

 

 

 

 
1,776

 

 

 
1,776

Repurchases of common stock, net

 

 

 

 

 

 
(61,135
)
 

 
(61,135
)
Common stock issued under stock plans
258

 
26

 
11,393

 

 

 

 

 

 
11,419

Share-based compensation cost

 

 
6,266

 
68

 

 

 

 

 
6,334

Balance March 31, 2019
105,345

 
$
10,535

 
$
1,155,875

 
$
4,592

 
$
1,270,609

 
$
(40,015
)
 
$
(2,350,034
)
 
$
308

 
$
51,870


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


6



IDEXX LABORATORIES, INC.  AND SUBSIDIARIES 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
(Unaudited) 

For the Three Months Ended
March 31,

2019
 
2018

 

 
 

Cash Flows from Operating Activities:
 

 
 

Net income
$
102,709

 
$
89,476

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,355

 
20,804

Benefit of deferred income taxes
3,294

 
3,005

Share-based compensation expense
6,334

 
5,960

Other
628

 
1,091

Changes in assets and liabilities:
 
 
 
Accounts receivable
(33,421
)
 
(21,800
)
Inventories
(14,521
)
 
(8,070
)
Other assets and liabilities
(49,601
)
 
(52,302
)
Accounts payable
699

 
(1,939
)
Deferred revenue
(3,098
)
 
(1,327
)
Net cash provided by operating activities
34,378

 
34,898

Cash Flows from Investing Activities:
 
 
 
Purchases of property and equipment
(38,206
)
 
(23,726
)
Purchase of marketable securities

 
(87
)
Proceeds from the sale and maturities of marketable securities

 
284,125

Net cash (used) provided by investing activities
(38,206
)
 
260,312

Cash Flows from Financing Activities:
 
 
 
Repayments on revolving credit facilities, net
(52,024
)
 
(247,500
)
Issuance of senior notes
100,000

 

Debt issuance costs
(30
)
 

Payment of acquisition-related contingent consideration
(573
)
 

Repurchases of common stock
(54,302
)
 
(83,487
)
Proceeds from exercises of stock options and employee stock purchase plans
11,551

 
14,551

Shares withheld for statutory tax withholding on restricted stock
(7,403
)
 
(8,555
)
Net cash used by financing activities
(2,781
)
 
(324,991
)
Net effect of changes in exchange rates on cash
(569
)
 
1,335

Net decrease in cash and cash equivalents
(7,178
)
 
(28,446
)
Cash and cash equivalents at beginning of period
123,794

 
187,675

Cash and cash equivalents at end of period
$
116,616

 
$
159,229


 

 
 

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


7



IDEXX LABORATORIES, INC. AND SUBSIDIARIES 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 1.      BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION 
 
The accompanying unaudited condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to IDEXX,the Company,” “we, our, or us refer to IDEXX Laboratories, Inc. and its subsidiaries.
 
The accompanying unaudited condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. We do not have any variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. 

The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, 2018, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, and our Annual Report on Form 10-K for the year ended December 31, 2018, (the “2018 Annual Report”) filed with the SEC.

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 for the three months ended March 31, 2019, are consistent with those discussed in Note 2 to the consolidated financial statements in our 2018 Annual Report, except as noted below.

New Accounting Pronouncements Adopted

We adopted ASU 2016-02, Leases (Topic 842) (the "New Leasing Standard"), as of January 1, 2019, using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The adoption of the New Leasing Standard resulted in the recording of operating lease liabilities of $86.7 million and right-of-use assets of $83.7 million. Prior to our adoption of the New Leasing Standard, rent prepayments of approximately $1.0 million were recorded within other current assets and the impact of recognizing rent expense on a straight-line basis of approximately $4.0 million was recorded within other current and long-term liabilities. Upon adoption of the New Leasing Standard, these rent prepayments and straight-line rent impacts are now recorded within operating lease right-of-use assets and represent the net difference between operating lease liabilities and right-of-use assets.

The New Leasing Standard requires us to classify certain reagent rental programs as sales-type leases and thus accelerate instrument revenue and cost recognition at the time of instrument placement. We did not change the historical lease classification for placements prior to January 1, 2019, therefore this change will apply to certain new placements beginning on January 1, 2019. Under prior U.S. GAAP, instruments placed under our reagent rental programs were classified as operating leases and instrument revenue and cost was recognized over the term of the program. The New Leasing Standard did not have a material impact on our consolidated earnings and had no impact on cash flows for the three months ended March 31, 2019.


8



Adoption of the New Leasing Standard impacted our condensed consolidated balance sheet as follows:

Consolidated Balance Sheet

 
 
 
 
 

Previous U.S. GAAP
December 31, 2018
(Reported)
 
New U.S. GAAP
January 1, 2019
 
Impact of the
New Leasing Standard

 

 
 
 
 
ASSETS
 

 
 
 
 
Other current assets
$
108,220

 
$
107,228

 
$
(992
)
Total current assets
$
654,172

 
$
653,180

 
$
(992
)
Operating lease right-of-use asset
$

 
$
83,707

 
$
83,707

Total long-term assets
$
883,177

 
$
966,884

 
$
83,707

TOTAL ASSETS
$
1,537,349

 
$
1,620,064

 
$
82,715

 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Accrued liabilities
$
260,683

 
$
274,459

 
$
13,776

Total current liabilities
$
770,444

 
$
784,220

 
$
13,776

Long-term operating lease liability
$

 
$
68,939

 
$
68,939

Total long-term liabilities
$
776,138

 
$
845,077

 
$
68,939

TOTAL LIABILITIES
$
1,546,582

 
$
1,629,297

 
$
82,715


We adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, on January 1, 2019. We elected not to reclassify the $1.7 million of stranded tax effects from the Tax Cuts and Jobs Act enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings in the period of adoption.

In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes meant to simplify interim disclosures. The new rule requires a presentation of changes in stockholders’ equity and noncontrolling interest in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and comparative year-to-date interim periods. The additional elements of this release did not have a material impact on our overall condensed consolidated financial statements. We adopted the new disclosure requirements in our Form 10-Q for the period ended March 31, 2019.

New Accounting Pronouncements Not Yet Adopted

For a discussion of other accounting standards that have been issued by the FASB prior to January 1, 2019, but are not yet effective, refer to Note 2. Summary of Significant Accounting Policies - New Accounting Pronouncements Not Yet Adopted in our 2018 Annual Report.

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 applied 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

9



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 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 $4.6 million and $2.9 million for the three months ended March 31, 2019 and 2018, respectively, including both operating leases and sales-type leases under ASC 842, Leases, during 2019, and ASC 840, Leases, prior to 2019. See below for revenue recognition under 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 1 to 5 years beyond the first-year standard warranty. Customers can either pay in full for the extended warranty at the time of instrument or system purchase or can be billed on a quarterly basis over the term of the contract. We recognize revenue associated with extended warranties over time on a ratable basis using a time elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.

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

On December 31, 2018, our deferred revenue related to extended warranties and post-contract support was $40.7 million, of which approximately $12.7 million was recognized during the three months ended March 31, 2019. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $40.2 million at March 31, 2019. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less and do not adjust for the effect of the financing components when the period between customer payment and revenue recognition is one year or less. Deferred revenue related to extended warranties and post-contract support with an original duration of more than one year was $26.7 million at March 31, 2019, of which approximately 24%, 31%23% and 22% are expected to be recognized during the remainder of 2019, the full year 2020, the full year 2021, and thereafter, respectively. Additionally, we have determined these agreements do not include a significant financing component.


10



SaaS Subscriptions. We offer a variety of veterinary software and diagnostic imaging SaaS subscriptions including 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 2 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 assets, which are subsequently recognized as a reduction to revenue over the term of the customer agreement. If these up-front incentives are subsequently utilized to purchase instruments, we allocate total consideration, including future committed purchases less up-front incentives and estimates of expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.

On December 31, 2018, our capitalized customer acquisition costs were $124.4 million, of which approximately $8.9 million was recognized as a reduction of revenue during the three months ended March 31, 2019. Furthermore, as a result of new up-front customer loyalty payments, our capitalized customer acquisition costs were $125.2 million at March 31, 2019. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three months ended March 31, 2019, were not material.

Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with a free or discounted instrument or system upon entering into multi-year agreements to purchase annual minimum amounts of products and services. We allocate total consideration, including future committed purchases and expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost in advance of billing the customer at the time of installation and customer acceptance, which is also when the customer obtains

11



control of the instrument based on legal title transfer. Our right to future consideration related to instrument revenue is recorded as a contract asset within other current and long-term assets. The contract asset is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.

On December 31, 2018, our volume commitment contract assets were $40.9 million, of which approximately $2.7 million was reclassified to accounts receivable when customers were billed for related products and services during the three months ended March 31, 2019. Furthermore, as a result of new placements under volume commitment programs, our contract assets were $49.5 million at March 31, 2019. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three months ended March 31, 2019, were not material.

For our up-front customer loyalty and volume commitment programs, we estimate future revenues related to multi-year agreements to be approximately $1.4 billion, of which approximately 20%, 23%, 19%, and 38% are expected to be recognized during the remainder of 2019, the full year 2020, the full year 2021, 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 customer’s right to earn rebates on future purchases, which is deferred and recognized upon the purchase of future products and services, offsetting future rebates as they are earned.

On December 31, 2018, our deferred revenue related to instrument rebate programs was $57.4 million, of which approximately $4.9 million was recognized when customers purchased eligible products and services and earned rebates during the three months ended March 31, 2019. Furthermore, as a result of new instrument purchases under rebate programs, our deferred revenue was $55.0 million at March 31, 2019, of which approximately 24%, 28%, 22%, and 26% are expected to be recognized during the remainder of 2019, the full year 2020, the full year 2021, and thereafter, respectively.

Reagent Rental Programs. Our reagent rental programs provide our customers the right to use our instruments upon entering into multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded lease for the right to use our instrument and we determine the amount of lease revenue allocated to the instrument based on relative standalone selling prices. We evaluate the terms of these embedded leases to determine classification as either a sales-type lease or an operating lease, as defined within the New Leasing Standard. We elected the package of practical expedients permitted under the transition guidance within the New Leasing Standard, which among other things, allowed us to carryforward our historical lease classification and therefore all reagent rental program placements prior to January 1, 2019 will continue to be classified as operating leases. We have not elected the practical expedient within the New Leasing Standard to combine lease and non-lease components.

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. As a result of new placements under reagent rental programs, our lease receivable assets were $1.3 million at March 31, 2019. The impact of discounting and unearned income at March 31, 2019 were not material. Profit and loss recognized at the commencement date and interest income

12



during the three months ended March 31, 2019 were not material. We monitor customer purchases over the term of their agreement to assess the realizability of our lease receivable assets. Impairments during the three months ended March 31, 2019 were not material.

Operating-type Reagent Rental Programs. Our reagent rental programs that do not effectively transfer control of instruments to our customers are classified as operating leases and we recognize instrument revenue and costs ratably over the term of the agreement. The cost of the instrument is capitalized within property and equipment. During the three months ended March 31, 2019 and 2018, we transferred instruments of $2.0 million and $4.0 million, respectively from inventory to property and equipment.

We estimate future revenue to be recognized related to our reagent rental programs of approximately $38.1 million, of which approximately 30%, 32%, 23%, and 15% are expected to be recognized during the remainder of 2019, the full year 2020, the full year 2021, 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 months ended March 31, 2019, were not material. Refund obligations related to customer incentive programs are recorded in accrued liabilities for the actual issuance of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future.

Program Combinations. At times, we combine elements of our significant customer programs within a single customer contract. We separate each significant program element and include the contract assets, customer acquisition costs, deferred revenues and estimated future revenues within the most relevant program disclosures above. Each customer contract is presented as a net contract asset or net contract liability on our unaudited condensed consolidated balance sheet.

Future market conditions and changes in product offerings may cause us to change marketing strategies to increase or decrease customer incentive offerings, possibly resulting in incremental reductions of revenue in future periods as compared to reductions in the current or prior periods. Additionally, certain customer programs require us to estimate, based on historical experience, and apply judgment to predict the amounts of future customer purchases, customer rebates and other incentive payments, and price adjustments related to multi-year agreements. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.

IDEXX Points. IDEXX Points may be applied to trade receivables due to us, converted to cash, or applied against the purchase price of IDEXX products and services. We consider IDEXX Points equivalent to cash. IDEXX Points that have not yet been used by customers are included in accrued liabilities until utilized or expired. Breakage is not material because customers can apply IDEXX Points to trade receivables at any time.

Accounts Receivable. We recognize revenue when it is probable that we will collect substantially all of the consideration to which we will be entitled, based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. We maintain allowances for doubtful accounts for potentially uncollectible receivables. We base our estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. Additional allowances may be required if either the financial condition of our customers were to deteriorate, or a strengthening U.S. dollar impacts the ability of foreign customers to make payments to us on their U.S. dollar-denominated purchases. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. We have no significant customers that accounted for greater than 10% of our consolidated revenues and we have no concentration of credit risk as of March 31, 2019.


13



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 for the three months ended March 31, 2019 and 2018 (in thousands):໿

For the Three Months Ended
March 31,

2019
 
2018
CAG segment revenue:
 

 
 

CAG Diagnostics recurring revenue:
$
443,791

 
$
406,048

IDEXX VetLab consumables
167,211

 
149,513

Rapid assay products
54,431

 
52,017

Reference laboratory diagnostic and consulting services
202,658

 
186,937

CAG Diagnostics service and accessories
19,491

 
17,581

CAG Diagnostics capital - instruments
28,749

 
30,895

Veterinary software, services and diagnostic imaging systems
36,378

 
33,890

CAG segment revenue
508,918

 
470,833


 
 
 
Water segment revenue
30,310

 
29,143

LPD segment revenue
31,506

 
32,240

Other segment revenue
5,322

 
5,440

Total revenue
$
576,056

 
$
537,656


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

For the Three Months Ended
March 31,

2019
 
2018
United States
$
358,288

 
$
327,461

Europe, the Middle East and Africa
121,746

 
120,574

Asia Pacific Region
60,075

 
56,039

Canada
23,224

 
22,544

Latin America
12,723

 
11,038

Total
$
576,056

 
$
537,656


Costs to Obtain a Contract. We capitalize sales commissions and the related fringe benefits earned by our sales force when considered incremental and recoverable costs of obtaining a contract. Our contracts include performance obligations related to various goods and services, some of which are satisfied at a point in time and others over time. Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time, including extended warranties and SaaS subscriptions, are deferred and recognized on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates. We apply judgment in estimating the amortization period, which ranges from 3 to 7 years, by taking into consideration our customer contract terms, history of renewals, expected length of customer relationship, as well as the useful life of the underlying technology and products. Amortization expense is included in sales and marketing expenses in the accompanying unaudited condensed consolidated statements of income. Deferred commission costs are periodically reviewed for impairment.

On December 31, 2018, our deferred commission costs, included within other assets, were $13.9 million, of which approximately $1.2 million of commission expense was recognized during the three months ended March 31, 2019. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, our deferred commission costs were $14.4 million at March 31, 2019. Impairments of deferred commission costs during the three months ended March 31, 2019, were not material.


14



NOTE 4.    SHARE-BASED COMPENSATION 
 
The fair value of options, restricted stock units, deferred stock units, and employee stock purchase rights awarded during the three months ended March 31, 2019, totaled $34.4 million as compared to $31.1 million for the three months ended March 31, 2018. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at March 31, 2019, was $73.4 million, which will be recognized over a weighted average period of approximately 2.3 years. During the three months ended March 31, 2019, we recognized expenses of $6.3 million as compared to $6.0 million for the three months ended March 31, 2018, 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 Three Months Ended
March 31,

2019
 
2018

 

 
 

Share price at grant
$
206.94

 
$
178.26

Expected stock price volatility
26
%
 
24
%
Expected term, in years
6.0

 
5.8

Risk-free interest rate
2.5
%
 
2.7
%
Weighted average fair value of options granted
$
63.55

 
$
52.49


NOTE 5.    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)

March 31,
2019
 
December 31,
2018

 

 
 

Raw materials
$
32,869

 
$
31,973

Work-in-process
20,077

 
17,009

Finished goods
136,522

 
124,321

Inventories
$
189,468

 
$
173,303

໿

NOTE 6.    LEASES

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

15



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 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 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,
2019

 

2019 (remainder of year)
$
12,308

2020
17,414

2021
14,821

2022
11,175

2023
7,705

Thereafter
37,722

Total lease payments
101,145

Less imputed interest
(18,258
)
Total
$
82,887

 
 
Current operating lease liabilities, included in accrued liabilities
$
13,932

Long-term operating lease liabilities
$
68,955

 
 
Weighted average remaining lease term - operating leases
10.9 years

 
 
Weighted average discount rate - operating leases
3.7
%

Rent expense charged to operations under operating leases was approximately $5.2 million during the three months ended March 31, 2019. Variable rent and short term lease expenses were not material.

Supplemental cash flow information for leases was as follows (in thousands):
 
For the Three Months Ended
March 31, 2019

 

Cash paid for amounts included in the measurement of operating leases liabilities
$
5,728

Right-of-use assets obtained in exchange for operating lease obligations
$
2,196

At December 31, 2018, under ASC 840 Leases, the minimum annual rental payments under our lease agreements were as follows: $19.4 million in 2019; $17.1 million in 2020; $14.5 million in 2021; $10.8 million in 2022; $8.5 million in 2023; and $36.5 million thereafter.

16



NOTE 7.    OTHER CURRENT AND LONG-TERM ASSETS 

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

March 31,
2019
 
December 31,
2018

 

 
 

Prepaid expenses (Note 2)
$
31,593

 
$
30,314

Taxes receivable
13,813

 
14,098

Customer acquisition costs
35,495

 
34,515

Contract assets
11,669

 
9,670

Deferred sales commissions
4,664

 
4,464

Other assets
13,169

 
15,159

Other current assets
$
110,403

 
$
108,220


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

March 31,
2019
 
December 31,
2018

 

 
 

Investment in long-term product supply arrangements
$
11,621

 
$
10,894

Customer acquisition costs
89,690

 
89,862

Contract assets
37,839

 
31,269

Deferred sales commissions
9,731

 
9,470

Deferred income taxes
8,368

 
8,481

Other assets
42,360

 
39,617

Other long-term assets
$
199,609

 
$
189,593

໿

NOTE 8.    ACCRUED LIABILITIES
 
Accrued liabilities consisted of the following (in thousands):

March 31,
2019
 
December 31,
2018

 

 
 

Accrued expenses (Note 2)
$
58,589

 
$
65,212

Accrued employee compensation and related expenses
60,351

 
109,488

Accrued taxes
36,326

 
26,609

Accrued customer incentives and refund obligations
59,929

 
59,374

Current lease liabilities (Notes 2 and 6)
13,932

 

Accrued liabilities
$
229,127

 
$
260,683

໿

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

March 31,
2019
 
December 31,
2018
 
 
 
 
Accrued taxes
$
67,525

 
$
66,767

Other accrued long-term expenses (Note 2)
15,039

 
18,059

Other long-term liabilities
$
82,564

 
$
84,826

໿
 

17



NOTE 9.   DEBT

On December 19, 2014, we entered into a Multicurrency Note Purchase and Private Shelf Agreement among ourselves, Metropolitan Life Insurance Company ("MetLife"), and each of the accredited institutional purchasers named therein (the "Existing Agreement"). Pursuant to the terms of the Existing Agreement, we may request that MetLife purchase, over the three-year period beginning on December 19, 2014, up to $50 million of additional senior promissory notes of ours at a fixed interest rate and with a maturity date not to exceed fifteen years (the "Shelf Notes").

On March 14, 2019, we amended the Existing Agreement to (i) increase the Shelf Notes facility size from $50 million to $150 million, (ii) extend the Shelf Notes facility issuance period from December 19, 2017 to December 20, 2021 and (iii) make various implementing and administrative changes in order to facilitate a $100 million Shelf Notes issuance on March 14, 2019. We also submitted to MetLife a request to purchase $100 million of our Shelf Notes at a 4.19% per annum rate, due March 14, 2029, (the "Series C Notes"). We used the proceeds received from the Series C Notes for general corporate purposes, including a partial repayment of borrowings under our Credit Facility.

NOTE 10.   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 months ended March 31, 2019 and 2018, was not material.

The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrender for the three months ended March 31, 2019 and 2018 (in thousands, except per share amounts)

For the Three Months Ended
March 31,

2019
 
2018

 
 
 
Shares repurchased in the open market
267

 
465

Shares acquired through employee surrender for statutory tax withholding
36

 
48

Total shares repurchased
303

 
513


 
 
 
Cost of shares repurchased in the open market
$
53,862

 
$
86,188

Cost of shares for employee surrenders
7,403

 
8,555

Total cost of shares
$
61,265

 
$
94,743


 
 
 
Average cost per share - open market repurchases
$
201.41

 
$
185.23

Average cost per share - employee surrenders
$
206.35

 
$
178.83

Average cost per share - total
$
202.00

 
$
184.63

໿
໿

NOTE 11.     INCOME TAXES 
 
Our effective income tax rate was 17.7% for the three months ended March 31, 2019, as compared to 14.3% for the three months ended March 31, 2018. The increase in our effective tax rate was primarily related to lower tax benefits from share-based compensation, partially offset by a nonrecurring item recorded in the three months ended March 31, 2018, that resulted from the 2017 Tax Cut and Jobs Act.

18



NOTE 12.  ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The changes in AOCI, net of tax, for the three months ended March 31, 2019, consisted of the following (in thousands)
For the Three Months Ended March 31, 2019
 
Unrealized (Loss) Gain on Investments,
Net of Tax
 
Unrealized Gain (Loss)
on Derivative Instruments, Net of Tax
 
Unrealized (Loss) Gain on Net
Investment Hedge, Net of Tax
 
Cumulative Translation
Adjustment
 
Total

 
 

 
 

 
 

 
 

 
 
Balance as of December 31, 2018
 
$
(157
)
 
$
7,589

 
$
(394
)
 
$
(48,829
)
 
$
(41,791
)
Other comprehensive income (loss) before reclassifications
 
407

 
2,474

 
1,480

 
(1,423
)
 
2,938

Gains reclassified from accumulated other comprehensive income
 

 
(1,162
)
 

 

 
(1,162
)
Balance as of March 31, 2019
 
$
250

 
$
8,901

 
$
1,086

 
$
(50,252
)
 
$
(40,015
)

໿
The changes in AOCI, net of tax, for the three months ended March 31, 2018, consisted of the following (in thousands)
For the Three Months Ended March 31, 2018
 
Unrealized (Loss) Gain on Investments,
Net of Tax
 
Unrealized (Loss) Gain
on Derivative Instruments, Net of Tax
 
Unrealized Loss on Net
Investment Hedge, Net of Tax
 
Cumulative Translation
Adjustment
 
Total

 
 

 
 

 
 

 
 

 
 
Balance as of December 31, 2017
 
$
(22
)
 
$
(5,219
)
 
$
(4,311
)
 
$
(26,918
)
 
$
(36,470
)
Other comprehensive income (loss) before reclassifications
 
118

 
(2,388
)
 
(2,216
)
 
5,165

 
679

Losses reclassified from accumulated other comprehensive income
 

 
1,585

 

 

 
1,585

Balance as of March 31, 2018
 
$
96

 
$
(6,022
)
 
$
(6,527
)
 
$
(21,753
)
 
$
(34,206
)

The following is a summary of reclassifications out of AOCI for the three months ended March 31, 2019 and 2018 (in thousands):
Details about AOCI Components
 
Affected Line Item in the Statements of Income
 
Amounts Reclassified from AOCI For the Three Months Ended March 31,

 
 
 
2019
 
2018
Gain (loss) on derivative instruments classified as cash flow hedges included in net income:
 
 
 
 
 
 
Foreign currency exchange contracts
 
Cost of revenue
 
$
1,411

 
$
(1,835
)

 
Tax expense (benefit)
 
249

 
(250
)

 
Gain (loss), net of tax
 
$
1,162

 
$
(1,585
)

19



NOTE 13.  EARNINGS PER SHARE
 
Basic earnings per share is computed by dividing net income attributable to our stockholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the total unrecognized compensation expense for unvested share-based compensation awards would be used to purchase our common stock at the average market price during the period. Vested deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed and issuance is not contingent. See Note 5 to the consolidated financial statements in our 2018 Annual Report for additional information regarding deferred stock units.  

The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2019 and 2018 (in thousands):    

For the Three Months Ended
March 31,

2019
 
2018

 
 
 
Shares outstanding for basic earnings per share
86,204

 
87,331


 
 
 
Shares outstanding for diluted earnings per share:
 
 
 
Shares outstanding for basic earnings per share
86,204

 
87,331

Dilutive effect of share-based payment awards
1,345

 
1,613


87,549

 
88,944

໿
໿

Certain 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 options for the three months ended March 31, 2019 and 2018 (in thousands):  

For the Three Months Ended
March 31,

2019
 
2018

 
 
 
Weighted average number of shares underlying anti-dilutive options
463

 
167

໿
  
NOTE 14.  COMMITMENTS, CONTINGENCIES AND GUARANTEES
 
Commitments

See "Note 6. Leases", for more information regarding our lease commitments.

Contingencies and Guarantees

We are subject to claims that may arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. We accrue for loss contingencies when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. However, the results of legal actions cannot be predicted with certainty, and therefore our actual losses with respect to these contingencies could exceed our accruals. At March 31, 2019, our accruals with respect to actual and threatened litigation were not material.

From time to time, we have received notices alleging that our products infringe third-party proprietary rights, although we are not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that we will prevail in any

20



infringement proceedings that may be commenced against us. If we lose any such litigation, we may be stopped from selling certain products and/or we may be required to pay damages as a result of the litigation.

We have had no significant changes to our contingencies and guarantees discussed in Note 15 to the consolidated financial statements in our 2018 Annual Report.

NOTE 15.   SEGMENT REPORTING
  
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. Our reportable segments include diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other operating segment combines and presents products for the human point-of-care medical diagnostics market with our out-licensing arrangements. Assets are not allocated to segments for internal reporting purposes.

Certain costs are not allocated to our operating segments and are instead reported under the caption “Unallocated Amounts.” These costs include costs that do not align with one of our existing operating segments or are cost prohibitive to allocate, which primarily consist of our R&D function, regional or country expenses, certain foreign currency revaluation and settlement gains and losses on monetary balances in currencies other than our subsidiaries’ functional currency and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation are charged to our business segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or rates are also captured within Unallocated Amounts.

The following is a summary of segment performance for the three months ended March 31, 2019 and 2018 (in thousands):໿

 
For the Three Months Ended March 31,

 
CAG
 
Water
 
LPD
 
Other
 
Unallocated Amounts
 
Consolidated Total
2019
 
 

 
 

 
 

 
 

 
 

 
 

Revenue
 
$
508,918

 
$
30,310

 
$
31,506

 
$
5,322

 
$

 
$
576,056


 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
115,022

 
$
13,782

 
$
6,250

 
$
1,526

 
$
(3,442
)
 
$
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


 
 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
470,833

 
$
29,143

 
$
32,240

 
$
5,440

 
$

 
$
537,656


 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
100,398

 
$
12,462

 
$
2,961

 
$
498

 
$
(3,275
)
 
$
113,044

Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
(8,695
)
Income before provision for income taxes
 
 
 
 
 
 
 
 
 
 
 
104,349

Provision for income taxes
 
 
 
 
 
 
 
 
 
 
 
14,873

Net income
 
 
 
 
 
 
 
 
 
 
 
89,476

Less: Net income attributable to noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
25

Net income attributable to IDEXX Laboratories, Inc. stockholders
 
 
 
 
 
 
 
 
 
 
 
$
89,451



21



See “Note 3. Revenue Recognition” for a summary of disaggregated revenue by reportable segment and by major product and service category for the three months ended March 31, 2019 and 2018

NOTE 16.   FAIR VALUE MEASUREMENTS 
 
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.  

We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a non-recurring basis and certain financial assets and liabilities that are not measured at fair value in our unaudited condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows: 
 
Level 1
 
Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2
 
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
 
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2 or transfers in or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2019.     

Our cross currency swap contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our cross currency swap contracts classified as derivative instruments using prevailing market conditions as of the close of business on each balance sheet date. The product of this calculation is then adjusted for counterparty risk.

            Our foreign currency exchange contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our foreign currency exchange contracts classified as derivative instruments using an income approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.

The amounts outstanding under our unsecured revolving credit facility (“Credit Facility” or “line of credit”) and senior notes (“long-term debt”) are measured at carrying value in our unaudited condensed consolidated balance sheets though we disclose the fair value of these financial instruments. We determine the fair value of the amount outstanding under our Credit Facility and long-term debt using an income approach, utilizing a discounted cash flow analysis based on current market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk. Our Credit Facility and long-term debt are valued using Level 2 inputs. The estimated fair value of our Credit Facility approximates its carrying value. The estimated fair value and carrying value of our long-term debt were $717.1 million and $699.8 million, respectively, as of March 31, 2019, and $607.3 million and $601.8 million, respectively, as of December 31, 2018


22



The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis at March 31, 2019, and at December 31, 2018, by level within the fair value hierarchy (in thousands):
As of March 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
March 31, 2019

 
 

 
 

 
 

 
 

Assets
 
 

 
 

 
 

 
 

Money market funds(1)
 
$
255

 
$

 
$

 
$
255

Equity mutual funds(2)
 
$
1,809

 
$

 
$

 
$
1,809

Cross currency swaps(3)
 
$

 
$
3,670

 
$

 
$
3,670

Foreign currency exchange contracts(3)
 
$

 
$
7,326

 
$

 
$
7,326

Liabilities
 
 
 
 
 
 
 
 
Foreign currency exchange contracts(3)
 
$

 
$
74

 
$

 
$
74

Deferred compensation(4)
 
$
1,809

 
$

 
$

 
$
1,809


As of December 31, 2018
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance at
December 31, 2018

 
 

 
 

 
 

 
 

Assets
 
 

 
 

 
 

 
 

Money market funds(1)
 
$
250

 
$

 
$

 
$
250

Equity mutual funds(2)
 
$
1,673

 
$

 
$

 
$
1,673

Cross currency swaps(3)
 
$

 
$
1,789

 
$

 
$
1,789

Foreign currency exchange contracts(3)
 
$

 
$
8,163

 
$

 
$
8,163

Liabilities
 
 
 
 
 
 
 
 
Foreign currency exchange contracts(3)
 
$

 
$
603

 
$

 
$
603

Deferred compensation(4)
 
$
1,673

 
$

 
$

 
$
1,673


(1)
Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of March 31, 2019 and December 31, 2018, consisted of demand deposits.
(2)
Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount is included within other long-term assets. See number (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 number (2) above.  

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate carrying value due to their short maturity.

NOTE 17.  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

23



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 12. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on our unaudited condensed consolidated statements of income for the three months ended March 31, 2019 and 2018.

We enter into master netting arrangements with the counterparties to our derivative transactions which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged. 
 
Cash Flow Hedges 
 
We have designated our foreign currency exchange contracts as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.  
 
We did not de-designate any instruments from hedge accounting treatment during either the three months ended March 31, 2019 or 2018.  At March 31, 2019, the estimated amount of net gains, net of income tax benefit, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is $5.9 million if exchange rates do not fluctuate from the levels at March 31, 2019
 
We hedge approximately 85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, Australian dollar, and Swiss franc. We have additional unhedged foreign currency exposures related to foreign services and emerging markets where it is not practical to hedge. We primarily utilize foreign currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $184.6 million and $190.9 million at March 31, 2019 and December 31, 2018, respectively.


24



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 March 31,

 
 
 
2019
 
2018

 
 
 
 
 
 
 
 
 
 
 
 
 
Financial statement line items in which effects of cash flow hedges are recorded
 
Cost of revenue
 
$
244,459

 
$
234,557

Foreign exchange contracts
 
 
 
 
 
 
Amount of gain (loss) reclassified from accumulated other comprehensive income into income
 
 
 
$
1,411

 
$
(1,835
)

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 a $1.5 million gain, net of income tax, within AOCI as a result of this net investment hedge for the three months ended March 31, 2019. The related cumulative unrealized gain recorded at March 31, 2019, will not be reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged foreign operations or a portion of the hedge no longer qualifies for hedge accounting treatment. See Note 12 to the consolidated financial statements included in our 2018 Annual Report for further information regarding the issuance of these euro-denominated notes.

During May 2018, January 2019, and March 2019, we entered into cross currency swap contracts as a hedge of our net investment in foreign operations to offset foreign currency translation gains and losses on the net investment. The cross currency swaps have a maturity date of June 30, 2023. At maturity of the cross currency swap contract, we will deliver the notional amount of €80.0 million and will receive approximately $93.5 million from the counterparties. The change in fair value of the cross currency swap contracts are recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. During the three months ended March 31, 2019, we recorded a gain of $1.4 million, net of income tax, within AOCI as a result of these net investment hedges. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swap. This interest rate component is excluded from the assessment of hedge effectiveness, thus is recognized as a reduction to interest expense over the life of the hedge instrument. We recognized approximately $0.5 million related to the excluded component as a reduction of interest expense for the three months ended March 31, 2019.


25



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

 
 
 
March 31, 2019
 
December 31, 2018

 
 
 
 
 
 
Derivatives and non-derivatives designated as hedging instruments
 
Balance Sheet Classification
 
 
 
 
Foreign currency exchange contracts
 
Other current assets
 
$
7,127

 
$
8,163

Cross currency swaps
 
Other long-term assets
 
3,670

 
1,789

Foreign currency exchange contracts
 
Other long-term assets
 
199

 

Total derivative instruments presented as hedge instruments on the balance sheet
 
 
 
10,996

 
9,952

Gross amounts subject to master netting arrangements not offset on the balance sheet
 
 
 
74

 
603

Net amount
 
 
 
$
10,922

 
$
9,349


໿

 
 
 
Hedging Liabilities

 
 
 
March 31, 2019
 
December 31, 2018

 
 
 
 
 
 
Derivatives and non-derivatives designated as hedging instruments
 
Balance Sheet Classification
 
 
 
 
Foreign currency exchange contracts
 
Accrued liabilities
 
$
59

 
$
603

Foreign currency exchange contracts
 
Other long-term liabilities
 
15

 

Total derivative instruments presented as cash flow hedges on the balance sheet
 
 
 
74

 
603

Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet(1)
 
Long-term debt
 
99,831

 
101,777

Total hedging instruments presented on the balance sheet
 
 
 
99,905

 
102,380

Gross amounts subject to master netting arrangements not offset on the balance sheet
 
 
 
74

 
603

Net amount
 
 
 
$
99,831

 
$
101,777


(1) Amounts represent reported carrying amounts of our foreign currency denominated debt. See "Note 16. Fair Value Measurements" for information regarding the fair value of our long-term debt.

26



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
 
This Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), include statements relating to future revenue growth rates, future tax benefits; business trends, earnings and other measures of financial performance;  the effect of economic downturns on our business performance; projected impact of foreign currency exchange rates; demand for our products; realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending; interest expense; warranty expense; share-based compensation expense; the adoption and projected impact of new accounting standards; future commercial efforts; and competition. Forward-looking statements can be identified by the use of words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” “project,” and similar words and expressions. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including the matters discussed in "Part I. Item 1A. Risk Factors” described in our 2018 Annual Report and this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with the SEC.

Any forward-looking statements represent our estimates only as of the day this Quarterly Report on Form 10-Q was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change.  

You should read the following discussion and analysis in conjunction with our 2018 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.
 
Business Overview 
 
We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing markets. We also sell a line of portable electrolytes and blood gas analyzers for the human point-of-care medical diagnostics market. Our primary products and services are:

Point-of-care veterinary diagnostic products, comprising instruments, consumables, and rapid assay test kits;
Veterinary reference laboratory diagnostic and consulting services;
Practice management and diagnostic imaging systems and services used by veterinaries;
Health monitoring, biological materials testing, laboratory diagnostic instruments and services used by the biomedical research community;
Diagnostic, health-monitoring products for livestock, poultry, and dairy;
Products that test water for certain microbiological contaminants;
Point-of-care electrolytes and blood gas analyzers used in the human point-of-care medical diagnostics market.

Operating Segments. We operate primarily through three business segments: diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy reproductive efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other operating segment combines and presents products for the human point-of-care medical diagnostics market (“OPTI Medical”) with our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments. 

CAG develops, designs, manufactures, and distributes products and performs services for veterinarians and the biomedical analytics market, primarily related to diagnostics and information management. Water develops, designs, manufactures, and distributes a range of products used in the detection of various microbiological parameters in water. LPD develops, designs, manufactures, and distributes diagnostic tests and related software and performs services that are used to manage the health status of livestock and poultry, to improve bovine reproductive efficiency, and to ensure the quality and safety of milk and food. OPTI Medical manufactures and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.

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Certain costs are not allocated to our operating segments and are instead reported under the caption “Unallocated Amounts.” These costs include costs that do not align with one of our existing operating segments or are cost prohibitive to allocate, which primarily consist of our R&D function, regional or country expenses, certain foreign currency revaluation and settlement gains and losses on monetary balances in currencies other than our subsidiaries’ functional currency and unusual items. Corporate support function costs (such as information technology, facilities, human resources, finance and legal), health benefits and incentive compensation are charged to our business segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or rates are also captured within Unallocated Amounts.

Effects of Certain Factors and Trends on Results of Operations 
  
Currency Impact. See “Part I. Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Quarterly Report on Form 10-Q for additional information regarding the impact 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 2018 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration.

Critical Accounting Estimates and Assumptions 
 
The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three months ended March 31, 2019, are consistent with those discussed in our 2018 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.”  

Recent Accounting Pronouncements 

For more information regarding the impact of 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 months ended March 31, 2019, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions, and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for, or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers.

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

We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and

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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. 

Comparison to Prior Periods

Our fiscal quarter ended on March 31. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior year period.


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Results of Operations

Three Months Ended March 31, 2019, Compared to Three Months Ended March 31, 2018

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