IDEXX LABORATORIES INC /DE [IDXX] Filings

10-Q 1 idxx-20230630.htm 10-Q idxx-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2023

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

For the transition period from _______________ to _______________.

COMMISSION FILE NUMBER: 000-19271

IDEXX LABORATORIES, INC.

(Exact name of registrant as specified in its charter)


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

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

207-556-0300

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.10 par value per share

IDXX

NASDAQ Global Select Market

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

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

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

Large Accelerated Filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant’s Common Stock, $0.10 par value per share, was 83,012,408 on July 27, 2023.

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
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
CAG			Companion Animal Group, a reporting segment that provides veterinarians diagnostic products and services and information management solutions that enhance the health and well-being of pets
Credit Facility			Our $1.25 billion five-year unsecured credit facility under an amended and restated credit agreement; consisting of i) $1 billion revolving credit facility, also referred to as line of credit, and ii) $250 million three-year term loan.
FASB			U.S. Financial Accounting Standards Board
LPD			Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer efficiency
OPTI Medical			OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., located in Roswell, Georgia. This business provides point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable products) for the human medical diagnostics sector. The Roswell facility also manufactures electrolytes slides (instrument consumables) to run Catalyst One®, Catalyst Dx®, and blood gas analyzers and consumables for the veterinary sector; also referred to as OPTI. OPTI Medical is reported in our Other operating segment.
Organic revenue growth			A non-GAAP financial measure and represents the percentage change in revenue, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for or as a superior measure to, revenue growth reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies.
PCR			Polymerase chain reaction, a technique used to amplify small segments of DNA
Reported revenue growth			Represents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year
SaaS			Software-as-a-service
SEC			U.S. Securities and Exchange Commission
Senior Note Agreements			Note purchase agreements for the private placement of senior notes, referred to as senior notes or long-term debt
SOFR			The secured overnight financing rate as administered by the Federal Reserve Board of New York (or a successor administrator of the secured overnight financing rate)
U.S. GAAP			Accounting principles generally accepted in the United States of America
Water			Water, a reporting segment that provides water microbiology testing products

IDEXX LABORATORIES, INC.

Quarterly Report on Form 10-Q

Table of Contents



Item No.		Page

	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 30 , 2023 and December 31, 2022	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2023 and 2022	5
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30, 2023 and 2022	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 5.	Other Information	56
Item 6.	Exhibits	57
Signatures		58

PART I— FINANCIAL INFORMATION

Item 1. Financial Statements

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(Unaudited)


	June 30, 2023		December 31, 2022

ASSETS
Current Assets:
Cash and cash equivalents	$	132,838	$	112,546
Accounts receivable, net	461,858		400,619
Inventories	395,141		367,823
Other current assets	189,188		220,489
Total current assets	1,179,025		1,101,477
Long-Term Assets:
Property and equipment, net	683,270		649,474
Operating lease right-of-use assets	114,148		118,618
Goodwill	364,206		361,795
Intangible assets, net	90,932		97,672
Other long-term assets	439,225		417,729
Total long-term assets	1,691,781		1,645,288
TOTAL ASSETS	$	2,870,806	$	2,746,765

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	107,664	$	110,221
Accrued liabilities	399,425		433,662
Credit facility	264,000		579,000
Current portion of long-term debt	74,991		74,982
Current portion of deferred revenue	37,779		37,938
Total current liabilities	883,859		1,235,803
Long-Term Liabilities:
Deferred income tax liabilities	5,568		8,150
Long-term debt, net of current portion	696,844		694,387
Long-term deferred revenue, net of current portion	29,054		30,862
Long-term operating lease liabilities	97,337		101,239
Other long-term liabilities	64,283		67,587
Total long-term liabilities	893,086		902,225
Total liabilities	1,776,945		2,138,028

Commitments and Contingencies (Note 16)

Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 107,378 shares in 2023 and 107,193 shares in 2022; Outstanding: 83,060 shares in 2023 and 82,894 shares in 2022	10,738		10,719
Additional paid-in capital	1,515,197		1,463,215
Deferred stock units: Outstanding: 59 units in 2023 and 58 units in 2022	5,515		5,182
Retained earnings	4,037,819		3,599,529
Accumulated other comprehensive loss	(73,665)		(77,796)
Treasury stock, at cost: 24,318 shares in 2023 and 24,299 shares in 2022	(4,401,743)		(4,392,112)
Total stockholders’ equity	1,093,861		608,737
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,870,806	$	2,746,765

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022

Revenue:
Product revenue	$	540,680	$	492,518	$	1,046,622	$	970,895
Service revenue	402,950		368,028		797,203		726,200
Total revenue	943,630		860,546		1,843,825		1,697,095
Cost of Revenue:
Cost of product revenue	179,999		167,323		353,609		329,394
Cost of service revenue	190,781		179,191		374,395		354,916
Total cost of revenue	370,780		346,514		728,004		684,310
Gross profit	572,850		514,032		1,115,821		1,012,785
Expenses:
Sales and marketing	140,532		130,257		288,336		262,549
General and administrative	89,669		81,488		159,770		159,437
Research and development	46,505		123,221		91,172		163,389
Income from operations	296,144		179,066		576,543		427,410
Interest expense	(10,542)		(8,317)		(23,669)		(15,313)
Interest income	327		334		743		477
Income before provision for income taxes	285,929		171,083		553,617		412,574
Provision for income taxes	61,693		39,104		115,327		86,630
Net income attributable to IDEXX Laboratories, Inc. stockholders	$	224,236	$	131,979	$	438,290	$	325,944

Earnings per Share:
Basic	$	2.70	$	1.57	$	5.28	$	3.87
Diluted	$	2.67	$	1.56	$	5.22	$	3.82
Weighted Average Shares Outstanding:
Basic	83,086		83,922		83,039		84,164
Diluted	83,983		84,858		83,980		85,222

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022

Net income	$	224,236	$	131,979	$	438,290	$	325,944
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	1,752		(31,081)		6,010		(27,804)
Benefit plans, net of tax expense of $0 and $0 in 2023 and $(991) and $(991) in 2022	—		(5,056)		—		(5,056)
Reclassification adjustment for benefit plans included in net income, net of tax of $34 and $54 in 2023 and $51 and $51 in 2022	178		260		297		260
Unrealized gain (loss) on Euro-denominated notes, net of tax expense (benefit) of $(110) and $(575) in 2023 and $1,286 and $1,725 in 2022	(353)		4,124		(1,843)		5,533
Unrealized gain (loss) on investments, net of tax expense (benefit) of $0 and $2 in 2023 and $(7) and $(12) in 2022	1		(25)		7		(42)
Unrealized gain (loss) on derivative instruments:
Unrealized gain (loss) on foreign currency exchange contracts, net of tax expense (benefit) of $46 and $20 in 2023 and $4,298 and 5,735 in 2022	(131)		11,343		(340)		13,440
Unrealized gain (loss) on cross currency swaps, net of tax expense (benefit) of $(553) and $(940) in 2023 and $1,335 and $1,646 in 2022	(1,776)		4,282		(3,016)		5,278
Unrealized gain (loss) on interest rate swap, net of tax expense (benefit) of $1,107 and $1,093 in 2023 and $0 and $0 in 2022	3,550		—		3,505		—
Reclassification adjustments for (gain) loss included in net income, net of tax (expense) benefit of $(127) and $(244) in 2023 and $(1,577) and $(2,187) in 2022	(271)		(4,204)		(489)		(5,830)
Unrealized gain (loss) on derivative instruments	1,372		11,421		(340)		12,888
Other comprehensive income, net of tax	2,950		(20,357)		4,131		(14,221)
Comprehensive income attributable to IDEXX Laboratories, Inc.	$	227,186	$	111,622	$	442,421	$	311,723

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

(Unaudited)


	Common Stock
	Number of Shares	$0.10 Par Value		Additional Paid-in Capital		Deferred Stock Units		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total Stockholders’ Equity
Balance December 31, 2022	107,193	$	10,719	$	1,463,215	$	5,182	$	3,599,529	$	(77,796)	$	(4,392,112)	$	608,737
Net income	—	—		—		—		214,054		—		—		214,054
Other comprehensive income, net	—	—		—		—		—		1,181		—		1,181
Repurchases of common stock, net	—	—		—		—		—		—		(9,554)		(9,554)
Common stock issued under stock plans, including excess tax benefit	128	13		12,765		(25)		—		—		—		12,753
Share-based compensation cost	—	—		13,923		7		—		—		—		13,930
Balance March 31, 2023	107,321	$	10,732	$	1,489,903	$	5,164	$	3,813,583	$	(76,615)	$	(4,401,666)	$	841,101
Net income	—	—		—		—		224,236		—		—		224,236
Other comprehensive income, net	—	—		—		—		—		2,950		—		2,950
Repurchases of common stock, net	—	—		—		—		—		—		(77)		(77)
Common stock issued under stock plans, including excess tax benefit	57	6		10,283		—		—		—		—		10,289
Deferred stock units activity	—	—		(345)		345		—		—		—		—
Share-based compensation cost	—	—		15,356		6		—		—		—		15,362
Balance June 30, 2023	107,378	$	10,738	$	1,515,197	$	5,515	$	4,037,819	$	(73,665)	$	(4,401,743)	$	1,093,861


Balance December 31, 2021	106,878	$	10,688	$	1,377,320	$	5,719	$	2,920,440	$	(53,484)	$	(3,570,691)	$	689,992
Net income	—	—		—		—		193,965		—		—		193,965
Other comprehensive income, net	—	—		—		—		—		6,136		—		6,136
Repurchases of common stock, net	—	—		—		—		—		—		(273,058)		(273,058)
Common stock issued under stock plans, including excess tax benefit	125	12		11,583		(5)		—		—		—		11,590
Share-based compensation cost	—	—		11,122		51		—		—		—		11,173
Balance March 31, 2022	107,003	$	10,700	$	1,400,025	$	5,765	$	3,114,405	$	(47,348)	$	(3,843,749)	$	639,798
Net income	—	—		—		—		131,979		—		—		131,979
Other comprehensive income, net	—	—		—		—		—		(20,357)		—		(20,357)
Repurchases of common stock, net	—	—		—		—		—		—		(313,508)		(313,508)
Common stock issued under stock plans, including excess tax benefit	72	7		7,779		(1,060)		—		—		—		6,726
Deferred stock units activity	—	—		(459)		459		—		—		—		—
Share-based compensation cost	—	—		12,364		6		—		—		—		12,370
Balance June 30, 2022	107,075	$	10,707	$	1,419,709	$	5,170	$	3,246,384	$	(67,705)	$	(4,157,257)	$	457,008

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Six Months Ended June 30,
	2023		2022

Cash Flows from Operating Activities:
Net income	$	438,290	$	325,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	56,186		54,633
Impairment charges	—		2,346
Provision for credit losses	3,857		3,358
Deferred income taxes	(12,932)		(23,517)
Share-based compensation expense	29,292		23,543
Other	(157)		1,200
Changes in assets and liabilities:
Accounts receivable	(61,158)		(53,794)
Inventories	(38,906)		(49,349)
Other assets and liabilities	(24,236)		(94,729)
Accounts payable	(4,155)		(6,735)
Deferred revenue	(1,855)		(2,344)
Net cash provided by operating activities	384,226		180,556
Cash Flows from Investing Activities:
Purchases of property and equipment	(66,981)		(61,924)
Acquisition of intangible assets	—		(10,000)
Equity investment	—		(25,000)
Net cash used by investing activities	(66,981)		(96,924)
Cash Flows from Financing Activities:
(Repayments) borrowings under credit facility, net	(315,000)		537,500
Payment of senior debt	—		(75,000)
Proceeds from maturity of net investment hedges	6,256		—
Payments of acquisition-related contingent consideration and holdbacks	(1,780)		(2,816)
Repurchases of common stock, net	—		(573,060)
Proceeds from exercises of stock options and employee stock purchase plans	23,086		18,379
Shares withheld for statutory tax withholding payments on restricted stock	(9,676)		(10,390)
Net cash used by financing activities	(297,114)		(105,387)
Net effect of changes in exchange rates on cash	161		(8,337)
Net increase (decrease) in cash and cash equivalents	20,292		(30,092)
Cash and cash equivalents at beginning of period	112,546		144,454
Cash and cash equivalents at end of period	$	132,838	$	114,362

Supplemental Cash Flow Information:
Cash paid for income taxes	$	97,127	$	128,325
Unpaid property and equipment, reflected in accounts payable and accrued liabilities	$	15,448	$	10,340

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

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

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

The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The condensed consolidated balance sheet data as of December 31, 2022, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and six months ended June 30, 2023, 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 June 30, 2023, and our Annual Report on Form 10-K for the year ended December 31, 2022, (the “2022 Annual Report”) filed with the SEC.

The preparation of our condensed consolidated financial statements requires us to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments, and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenues and expenses.

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

NOTE 2. ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2023, are consistent with those discussed in “Note 2. Summary of Significant Accounting Policies” to the consolidated financial statements in our 2022 Annual Report, and as updated below.

Accounts Payable - Supplier Financing Program

We have an agreement with a third party to provide a supplier finance program, which facilitates participating suppliers’ ability to finance payment obligations from us with a designated third-party financial institution. Participating suppliers may, at their sole discretion, make offers to finance one or more of our payment obligations prior to their scheduled due dates at a discounted price. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under these arrangements. The terms of payments are in-line with the terms of our trade payables. Activity related to the obligations is presented within operating activities on the unaudited consolidated statements of cash flows. The changes in our outstanding payment obligations under this arrangement, which are included in accounts payable on the unaudited condensed consolidated balance sheets, are as follows:


(in thousands)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022

Payment obligations outstanding at the beginning of the period	$	7,536	$	5,364	$	10,171	$	4,775
Payment obligation additions during the period	12,343		18,264		25,374		31,605
Payment obligations settled during the period	(14,484)		(15,618)		(30,150)		(28,370)
Payment obligations outstanding at the end of the period	$	5,395	$	8,010	$	5,395	$	8,010

New Accounting Pronouncements Adopted

We adopted ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” as of January 1, 2023, which adds certain disclosure requirements for a buyer in a supplier finance program. The amendments in this update require that a buyer in a supplier finance program discloses sufficient information about the program to allow a user of financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude.

We adopted ASU 2021-08, “Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities,” as of January 1, 2023. ASU 2021-08 is intended to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination by providing consistent recognition guidance. The adoption of ASU 2021-08 did not have a material impact on our unaudited condensed consolidated financial statements.

NOTE 3. REVENUE RECOGNITION

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

1.Identification of a contract or agreement with a customer

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

3.Determination of the transaction price

4.Allocation of the transaction price to the performance obligations

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

We enter into contracts where customers purchase 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, lease receivables, and contract assets as a result of revenue recognized in advance of billings, 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.

Contracts may be amended to account for changes in contract specifications and requirements. Contract modifications exist when the amendment either creates new, or changes existing, enforceable rights and obligations. A modification is considered to be a separate contract, and revenue is recognized prospectively, when the modification creates new performance obligations to deliver additional goods or services and the related increase in consideration approximates the standalone selling price for the additional goods or services. If a contract modification does not create a new performance obligation to deliver new goods and/or services but the goods and/or services to be delivered after the contract modification date are distinct from the goods and/or services delivered on or before the contract modification date, then this contract modification is not accounted for as a separate contract, and we account for the goods and/or services to be delivered after the contract modification date prospectively. We account for a contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. The effect that these contract modifications have on the transaction price, and on our measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue at the date of the contract modification, with the adjustment to revenue made on a cumulative catch-up basis.

Below is a listing of our major categories of revenue for our products and services:

Diagnostic Products and Accessories. Diagnostic products and accessories revenues, including IDEXX VetLab® consumables and accessories, rapid assay, LPD, Water, and OPTI testing products, are predominantly recognized and invoiced at the time of shipment, which is when the customer obtains control of the product based on legal title transfer and we have the right to payment. We also provide customers with certain consumables that are recognized upon utilization by the customer, which is when we have the right to payment and the risks and rewards of ownership transfer. Shipping costs reimbursed by the customer are included in revenue and cost of sales. As a practical expedient, we do not account for shipping activities as a separate performance obligation.

Laboratory Diagnostic and Consulting Services. Laboratory diagnostic and consulting services 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 multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded lease for the right to use our instruments. For some agreements, the customers are provided with the right to purchase the instrument at the end of the lease term. Lease revenues from these agreements are presented in product revenue on our unaudited condensed consolidated income statement. Lease revenue was approximately $5.5 million and $10.0 million for the three and six months ended June 30, 2023, respectively, as compared to $4.9 million and $9.9 million for the three and six months ended June 30, 2022, respectively, including both operating leases and sales-type leases under ASC 842, Leases, for leases entered into after January 1, 2019, and ASC 840, “Leases,” for leases entered into prior to 2019. Refer to below for revenue recognition under our reagent rental programs.

Extended Warranties and Post-Contract Support. CAG Diagnostics capital instruments and diagnostic imaging systems extended warranties typically provide customers with continued coverage for a period of one to five years beyond the first-year standard warranty. Customers can either pay in full for the extended warranty at the time of instrument or system

purchase or can be billed on a quarterly basis over the term of the contract. We recognize revenue associated with extended warranties over time on a ratable basis using a time-elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.

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

On December 31, 2022, our deferred revenue related to extended warranties and post-contract support was $26.4 million, of which approximately $1.8 million and $16.9 million were recognized during the three and six months ended June 30, 2023, respectively. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $25.9 million as of June 30, 2023. 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 $10.0 million as of June 30, 2023, of which approximately 24%, 37%, 21%, 9%, and 9% are expected to be recognized during the remainder of 2023, the full years 2024, 2025, 2026, and thereafter, respectively. Additionally, we have determined these agreements do not include a significant financing component.

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

Contracts with Multiple Performance Obligations. We enter into contracts with multiple performance obligations 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 total 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 promised product or service 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 that 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 their agreement, they are required to refund all or a portion of the up-front cash or IDEXX Points, or make other repayments, remedial actions, or both. Up-front incentives to customers in the form of cash or IDEXX Points are not made in exchange for distinct goods or services and are capitalized as customer acquisition costs within other current and long-term assets, which are subsequently recognized as a reduction to revenue over the term of

the customer agreement. If these up-front incentives are subsequently utilized to purchase instruments, we allocate total consideration, including future committed purchases less up-front incentives and estimates of expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance. To the extent invoiced instrument revenue exceeds recognized instrument revenue, we record deferred revenue as a contract liability, which is subsequently recognized upon the purchase of 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 timing and amount of revenue recognition.

On December 31, 2022, our capitalized customer acquisition costs were $158.0 million, of which approximately $13.0 million and $26.4 million were recognized as a reduction of revenue during the three and six months ended June 30, 2023, respectively. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $162.6 million as of June 30, 2023. 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 and revenue adjustments that relate to performance obligations satisfied in prior periods, including cumulative catch-up adjustments to revenue arising from contract modifications during the three and six months ended June 30, 2023, were not material.

Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with free or discounted instruments or systems upon entering into multi-year agreements to purchase annual minimum amounts of products and services. We allocate total consideration, including future committed purchases and expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance in advance of billing the customer, which is also when the customer obtains control of the instrument based on legal title transfer. Our right to future consideration related to instrument revenue is recorded as a contract asset within other current and long-term assets. The contract asset is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the timing and amount of revenue recognition.

On December 31, 2022, our volume commitment contract assets were $190.8 million, of which approximately $10.9 million and $22.0 million were reclassified to accounts receivable when customers were billed for related products and services during the three and six months ended June 30, 2023, respectively. Furthermore, as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our volume commitment contract assets were $207.9 million as of June 30, 2023. 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 and revenue adjustments that relate to performance obligations satisfied in prior periods, including cumulative catch-up adjustments to revenue arising from contract modifications during the three and six months ended June 30, 2023, 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 $3.0 billion, of which approximately 15%, 27%, 22%, 18%, and 18% are expected to be recognized during the remainder of 2023, the full years 2024, 2025, 2026, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied, for which customers have committed to future purchases, net of the expected revenue reductions from customer acquisition costs and expected price adjustments, and, as a result, are lower than stated contractual commitments by our customers.

Instrument Rebate Programs. Our instrument rebate programs require an instrument purchase and provide customers the opportunity to earn future rebates based on the volume of products and services they purchase over the term of the program. We account for the customer’s right to earn rebates on future purchases as a separate performance obligation and determine the standalone selling price based on an estimate of rebates the customer will earn over the term of the program. Total consideration allocated to identified performance obligations is limited to goods and services that the customer is presently obligated to purchase and does not include estimates of future purchases that are optional. We allocate total consideration to identified performance obligations, including the customer’s right to earn rebates on future purchases, which is deferred and subsequently recognized upon the purchase of products and services, partly offsetting rebates as they are earned.

On December 31, 2022, our deferred revenue related to instrument rebate programs was $25.6 million, of which approximately $2.4 million and $5.0 million were recognized when customers purchased eligible products and services and earned rebates during the three and six months ended June 30, 2023, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $23.7 million as of June 30, 2023, of which approximately 19%, 29%, 22%, 15%, and 15% are expected to be recognized during the remainder of 2023, the full years 2024, 2025, 2026, and thereafter, respectively.

Reagent Rental Programs. Our reagent rental programs provide our customers the right to use our instruments upon entering into multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded lease for the right to use our instrument, and we determine the amount of lease revenue allocated to the instrument based on relative standalone selling prices. We evaluate the terms of these embedded leases to determine classification as either a sales-type lease or an operating lease.

Sales-type Reagent Rental Programs. Our reagent rental programs that effectively transfer control of instruments to our customers are classified as sales-type leases, and we recognize instrument revenue and cost in advance of billing the customer, at the time of installation and customer acceptance. Our right to future consideration related to instrument revenue is recorded as a lease receivable within other current and long-term assets, and is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. On December 31, 2022, our lease receivable assets were $18.4 million, of which approximately $1.1 million and $2.2 million were reclassified to accounts receivable when customers were billed for related products and services during the three and six months ended June 30, 2023, respectively. Furthermore, as a result of new placements under sales-type reagent rental programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our lease receivable assets were $19.7 million as of June 30, 2023. The impacts of discounting and unearned income as of June 30, 2023 were not material. Profit and loss recognized at the commencement date and interest income during the three and six months ended June 30, 2023, were not material. We monitor customer purchases over the term of their agreement to assess the realizability of our lease receivable assets. Impairments during the three and six months ended June 30, 2023 were not material.

Operating-type Reagent Rental Programs. Our reagent rental programs that do not effectively transfer control of instruments to our customers are classified as operating leases, and we recognize instrument revenue and costs ratably over the term of the agreement. The cost of the instrument is capitalized within property and equipment. During the three and six months ended June 30, 2023, we transferred instruments of $4.8 million and $8.6 million, respectively, as compared to $4.6 million and $7.6 million for the three and six months ended June 30, 2022, respectively, from inventory to property and equipment.

We estimate future revenue to be recognized related to our reagent rental programs of approximately $47.8 million, of which approximately 13%, 25%, 21%, 16%, and 25% are expected to be recognized during the remainder of 2023, the full years 2024, 2025, 2026, 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, including cumulative catch-up adjustment to revenue arising from contract modifications, during the three and six months ended June 30, 2023, were not material. Refund obligations related to customer incentive programs are recorded in accrued liabilities for the actual issuance of incentives, incentives earned but not yet issued, and estimates of incentives to be earned in the future.

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

IDEXX Points. IDEXX Points may be applied to trade receivables due to us, converted to cash, or applied against the purchase price of IDEXX products and services. We consider IDEXX Points equivalent to cash. IDEXX Points that have not 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. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers that purchase our products and services, and we have no significant customers that accounted for greater than 10% of our consolidated revenues during the three and six months ended June 30, 2023.

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 requirements to be reported as a separate segment, we believe it is important to disaggregate these revenues as a major product and service category separately from our Other reportable segment given its distinct markets, and therefore we have elected to report LPD as a reportable segment.

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


(in thousands)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
CAG segment revenue:
CAG Diagnostics recurring revenue:	$	762,476	$	685,413	$	1,489,378	$	1,350,223
IDEXX VetLab consumables	303,735		266,079		594,849		533,252
Rapid assay products	97,340		87,481		179,372		162,000
Reference laboratory diagnostic and consulting services	330,106		304,130		653,286		599,205
CAG Diagnostics services and accessories	31,295		27,723		61,871		55,766
CAG Diagnostics capital - instruments	34,054		36,227		67,198		73,224
Veterinary software, services and diagnostic imaging systems	70,122		62,447		137,355		121,824
CAG segment revenue	866,652		784,087		1,693,931		1,545,271

Water segment revenue	43,029		39,195		81,912		75,566
LPD segment revenue	29,911		29,889		59,119		60,759
Other segment revenue	4,038		7,375		8,863		15,499
Total revenue	$	943,630	$	860,546	$	1,843,825	$	1,697,095

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


(in thousands)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	621,607	$	559,825	$	1,212,020	$	1,085,731
Europe, the Middle East and Africa	178,666		161,993		354,674		335,801
Asia Pacific Region	80,906		80,100		159,266		163,961
Canada	41,635		39,533		77,597		74,765
Latin America & Caribbean	20,816		19,095		40,268		36,837
Total revenue	$	943,630	$	860,546	$	1,843,825	$	1,697,095

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, and 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, 2022, our deferred commission costs, included within other assets, were $19.2 million, of which approximately $1.7 million and $3.4 million of commission expense was recognized during the three and six months ended, respectively. June 30, 2023. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $19.5 million as of June 30, 2023. Impairments of deferred commission costs during the three and six months ended June 30, 2023, were not material.

NOTE 4. ACQUISITIONS, ASSET PURCHASES AND INVESTMENTS

We believe that our acquisitions of businesses and other assets enhance our existing businesses by either expanding our geographic range, customer base, or existing product and service lines. From time to time we may acquire small reference laboratories or radiology practices that we account for as either asset purchases or business combinations.

Asset Purchases and Investments

During the first quarter of 2022 we made a $10.0 million payment for a perpetual intellectual property license, which will be amortized over 10 years. The related amortization expense is recorded in our CAG segment.

During the second quarter of 2022, we entered into two discrete arrangements to license intellectual property for which we paid $65.0 million over the course of the 2022, and accrued $15.0 million in subsequent payments, all of which was charged to research and development expense. The $15.0 million milestone payment was made in the first quarter of 2023. These two arrangements were treated as asset acquisitions under U.S. GAAP and resulted in the full amount being expensed to research and development expense as in-process research and development costs with no alternative future use. The acquisition of these licensing arrangements supports new instrument platform advancements.

During the second quarter of 2022 we purchased $25.0 million of preferred shares for a noncontrolling minority interest in one of the entities with which we have a license agreement. We elected to measure the investment as an equity security investment, under ASC 321, “Investment - Equity Securities,” and recorded the investment at cost.

Business Combinations

During the third quarter of 2022, we acquired the assets of an international water testing company located in Canada for approximately $12.8 million in cash, including a holdback of approximately $1.3 million. This acquisition expands our product offering in the Water segment. The fair values of the assets and liabilities acquired consists of technology intangibles of approximately $3.4 million, with a life of 10 years; customer relationship intangibles of approximately $1.2 million, with a life of 10 years; approximately $6.9 million of goodwill, representing synergies with our Water testing portfolio; and approximately $1.3 million of tangible assets, including inventory and accounts receivable. Goodwill related to this acquisition is expected to be deductible for tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our Water segment since the acquisition date. The acquisition expenses were not material.

NOTE 5. SHARE-BASED COMPENSATION

The fair value of options, restricted stock units, deferred stock units, and employee stock purchase rights awarded during the three and six months ended June 30, 2023, totaled $3.3 million and $60.6 million, respectively, as compared to $4.4 million and $55.4 million for the three and six months ended June 30, 2022, respectively. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding as of June 30, 2023, was $94.3 million, which will be recognized over a weighted average period of approximately 1.7 years. During the three and six months ended June 30, 2023, we recognized expenses of $15.4 million and $29.3 million, respectively, as compared to $12.3 million and $23.5 million for the three and six months ended June 30, 2022, respectively, 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 or greater than the closing market price of our common stock at the date of grant. We have never paid any cash dividends on our common stock, and we have no intention to pay such a dividend at this time; therefore, we assume that no dividends will be paid over the expected terms of option awards.

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


	For the Six Months Ended June 30,
	2023			2022

Expected stock price volatility	32		%	30		%
Expected term, in years	6.7			6.4
Risk-free interest rate	3.7		%	2.0		%
Weighted average fair value of options granted	$	201.37		$	167.25

NOTE 6. CREDIT LOSSES

We are exposed to credit losses primarily through our sales of products and services to our customers. We maintain allowances for credit losses for potentially uncollectible receivables. We base our estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current economic conditions.

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. We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution, and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

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

Accounts Receivable

The allowance for credit losses associated with accounts receivable was $9.8 million and $8.3 million as of June 30, 2023 and December 31, 2022, respectively. The amount of accounts receivable reflected on the balance sheet is net of this reserve. Based on an aging analysis, as of June 30, 2023, approximately 89% of our accounts receivable had not yet reached the invoice due date, and approximately 11% was considered past due, of which less than 1% was greater than 60 days past due. As of December 31, 2022, approximately 86% of our accounts receivable had not yet reached the invoice due date, and approximately 14% was considered past due, of which approximately 2% was greater than 60 days past due.

Contract assets and lease receivables

The allowance for credit losses associated with the contract assets and lease receivables was $6.0 million and $5.5 million as of June 30, 2023 and December 31, 2022, respectively. The assets reflected on the balance sheet are net of these reserves. Historically, we have experienced low credit loss rates on our customer commitment programs and lease receivables. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

NOTE 7. INVENTORIES

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


(in thousands)	June 30, 2023		December 31, 2022

Raw materials	$	107,311	$	92,796
Work-in-process	29,528		28,041
Finished goods	258,302		246,986
Inventories	$	395,141	$	367,823

NOTE 8. LEASES

Maturities of operating lease liabilities were as follows:


(in thousands)	June 30, 2023

2023 (remainder of year)	$	11,160
2024	24,102
2025	20,170
2026	17,321
2027	13,134
Thereafter	52,713
Total lease payments	138,600
Less imputed interest	(21,570)
Total	$	117,030

Total minimum future lease payments for a lease that has not commenced as of June 30, 2023, is approximately $0.2 million, and this lease will commence in 2024.

Supplemental cash flow information for leases was as follows:


(in thousands)	For the Six Months Ended June 30, 2023		For the Six Months Ended June 30, 2022

Cash paid for amounts included in the measurement of operating leases liabilities	$	14,136	$	12,110
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations	$	7,717	$	23,019

NOTE 9. OTHER CURRENT AND LONG-TERM ASSETS

Other current assets consisted of the following:


(in thousands)	June 30, 2023		December 31, 2022

Customer acquisition costs	$	52,457	$	50,776
Contract assets, net (1)	50,124		41,854
Prepaid expenses	38,918		41,742
Taxes receivable	20,305		48,430
Deferred sales commissions	6,583		6,472
Foreign currency exchange contracts	3,918		5,185
Cross currency swap contracts	—		8,135
Other assets	16,883		17,895
Other current assets	$	189,188	$	220,489

(1) Contract assets, net, are net of allowances for credit loss. Refer to "Note 6. Credit Losses."

Other long-term assets consisted of the following:


(in thousands)	June 30, 2023		December 31, 2022

Contract assets, net (1)	$	157,821	$	148,971
Customer acquisition costs	110,131		107,205
Deferred income taxes	65,337		55,215
Equity investments	30,250		30,250
Investment in long-term product supply arrangements	25,141		25,250
Deferred sales commissions	12,901		12,718
Taxes receivable	1,548		717
Other assets	36,096		37,403
Other long-term assets	$	439,225	$	417,729

(1) Contract assets, net, are net of allowances for credit loss. Refer to "Note 6. Credit Losses."

NOTE 10. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:


(in thousands)	June 30, 2023		December 31, 2022

Accrued employee compensation and related expenses	$	125,600	$	142,994
Accrued expenses	115,682		149,446
Accrued customer incentives and refund obligations	82,041		72,250
Accrued taxes	56,409		48,547
Current lease liabilities	19,693		20,425
Accrued liabilities	$	399,425	$	433,662

Other long-term liabilities consisted of the following:


(in thousands)	June 30, 2023		December 31, 2022

Accrued taxes	$	42,702	$	49,142
Other accrued long-term expenses	21,581		18,445
Other long-term liabilities	$	64,283	$	67,587

NOTE 11. DEBT

Credit Facility

As of June 30, 2023, we had $264.0 million in outstanding borrowings under our Credit Facility, which consisted of $14.0 million drawn under our line of credit and a $250.0 million Term Loan, with a weighted average effective interest rate of 6.3%, excluding any impact of our interest rate swap. As of December 31, 2022, we had $579.0 million in outstanding borrowings under our Credit Facility, which consisted of $329.0 million drawn under our line of credit and a $250.0 million Term Loan, with a weighted average effective interest rate of 5.1%. As of June 30, 2023, we had a remaining borrowing availability of $984.5 million under our $1.25 billion Credit Facility. The funds available under the Credit Facility reflect a further reduction due to the issuance of letters of credit, which were issued primarily in connection with our workers’ compensation policy, for $1.5 million.

The applicable interest rate for the Credit Facility is calculated at a per annum rate equal to either (at our option) (1) a prime rate plus a margin ranging from 0.0% to 0.375% based on our consolidated leverage ratio, (2) an adjusted term SOFR rate, plus 0.10%, plus a margin ranging from 0.875% to 1.375% based on our consolidated leverage ratio, or (3) an adjusted daily simple SOFR rate, plus 0.10%, plus a margin ranging from 0.875% to 1.375% based on our consolidated leverage ratio. In March 2023 we entered into an interest rate swap contract to manage the economic effect of $250 million of variable interest borrowings under our Credit Facility. Refer to Note 19 for a discussion of our derivative instruments and hedging activity.

The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, and certain restrictive agreements. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed 3.5-to-1. At June 30, 2023 and December 31, 2022, we were in compliance with the covenants of the Credit Facility.

Senior Notes

The following describes all of our currently outstanding unsecured senior notes issued and sold in private placements (collectively, the “Senior Notes”) as of June 30, 2023:



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

12/11/2013	12/11/2023	2023 Series A Notes	$	75,000	3.94	%	NY Life 2013 Note Agreement
12/11/2013	12/11/2025	2025 Series B Notes	$	75,000	4.04	%	NY Life 2013 Note Agreement
9/4/2014	9/4/2026	2026 Senior Notes	$	75,000	3.72	%	NY Life 2014 Note Agreement
7/21/2014	7/21/2024	2024 Series B Notes	$	75,000	3.76	%	Prudential 2015 Amended Agreement
6/18/2015	6/18/2025	2025 Series C Notes	€	88,857	1.785	%	Prudential 2015 Amended Agreement
2/12/2015	2/12/2027	2027 Series B Notes	$	75,000	3.72	%	MetLife 2014 Note Agreement
3/14/2019	3/14/2029	2029 Series C Notes	$	100,000	4.19	%	MetLife 2014 Note Agreement
4/2/2020	4/2/2030	MetLife 2030 Series D Notes	$	125,000	2.50	%	MetLife 2014 Note Agreement
4/14/2020	4/14/2030	Prudential 2030 Series D Notes	$	75,000	2.50	%	Prudential 2015 Amended Agreement

The Senior Note Agreements contain affirmative, negative, and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, and certain restrictive agreements. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation, as defined in the Senior Note Agreements, not to exceed 3.5-to-1. At June 30, 2023 and December 31, 2022, we were in compliance with the covenants of the Senior Note Agreements.

NOTE 12. REPURCHASES OF COMMON STOCK

We primarily acquire shares by repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required statutory withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders. We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock issued during the three and six months ended June 30, 2023 and 2022 was not material.

The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrender:


(in thousands, except per share amounts)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2023		2022		2023		2022

Shares repurchased in the open market	—		809		—		1,311
Shares acquired through employee surrender for statutory tax withholding	—		—		19		21
Total shares repurchased	—		809		19		1,332

Cost of shares repurchased in the open market	$	—	$	313,455	$	—	$	576,238
Cost of shares for employee surrenders	79		52		9,676		10,390
Total cost of shares	$	79	$	313,507	$	9,676	$	586,628

Average cost per share - open market repurchases	$	—	$	387.78	$	—	$	439.63
Average cost per share - employee surrenders	$	469.84	$	369.63	$	503.35	$	504.60
Average cost per share - total	$	469.84	$	387.78	$	503.35	$	440.63

NOTE 13. INCOME TAXES

Our effective income tax rate was 21.6% for the three months ended June 30, 2023, as compared to 22.9% for the three months ended June 30, 2022, and 20.8% for the six months ended June 30, 2023, as compared to 21.0% for the six months ended June 30, 2022. The decrease in our effective tax rate for the three and six months ended June 30, 2023, as compared to the same period in the prior year, was primarily driven by geographical income mix, partially offset by a decrease in the tax rate benefits related to share-based compensation.

The effective tax rate for the three and six months ended June 30, 2023, differed from the U.S. federal statutory tax rate of 21% primarily due to U.S. state income taxes, net of federal benefit, partially offset by taxes benefits from share-based compensation.

NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in AOCI, net of tax, consisted of the following:


	For the Six Months Ended June 30, 2023
			Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax				Unrealized Gain (Loss) on Net Investment Hedges, Net of Tax
(in thousands)	Unrealized Gain (Loss) on Investments, Net of Tax		Foreign Currency Exchange Contracts		Interest Rate Swap		Euro-Denominated Notes		Cross Currency Swaps		Defined Benefit Plans, Net of Tax		Cumulative Translation Adjustment		Total

Balance as of December 31, 2022	$	(172)	$	839	$	—	$	4,947	$	7,057	$	(2,776)	$	(87,691)	$	(77,796)
Other comprehensive income (loss) before reclassifications	7		(340)		3,505		(1,843)		(3,016)		—		6,010		4,323
Reclassified from accumulated other comprehensive income	—		(273)		(216)		—		—		297		—		(192)
Balance as of June 30, 2023	$	(165)	$	226	$	3,289	$	3,104	$	4,041	$	(2,479)	$	(81,681)	$	(73,665)


	For the Six Months Ended June 30, 2022
			Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax		Unrealized Gain (Loss) on Net Investment Hedges, Net of Tax
(in thousands)	Unrealized (Loss) on Investments, Net of Tax		Foreign Currency Exchange Contracts		Euro-Denominated Notes		Cross Currency Swaps		Defined Benefit Plans, Net of Tax		Cumulative Translation Adjustment		Total

Balance as of December 31, 2021	$	(126)	$	4,979	$	422	$	3,240	$	—	$	(61,999)	$	(53,484)
Other comprehensive income (loss) before reclassifications	(42)		13,440		5,533