IDEXX(IDXX) - 2021 Q3 - Quarterly Report

FORM 10-Q Filing Information This section provides key administrative details of the Form 10-Q filing, including company identification and stock information Filing Details This document is a Quarterly Report on Form 10-Q for IDEXX Laboratories, Inc., filed for the quarterly period ended September 30, 2021 - The report is a Quarterly Report on Form 10-Q for the period ended September 30, 2021[2] - IDEXX Laboratories, Inc. is incorporated in Delaware and its common stock trades on the NASDAQ Global Select Market under the symbol IDXX[3][4] Filing Metrics | Metric | Value | | :--- | :--- | | Shares Outstanding (as of Oct 27, 2021) | 84,793,608 | | Filer Status | Large Accelerated Filer | Glossary of Terms and Selected Abbreviations This section defines key financial and business terms and abbreviations used throughout the report for enhanced clarity Key Definitions This section provides definitions for key terms and abbreviations used throughout the 10-Q report to aid reader comprehension - The glossary defines terms and abbreviations used in the report for clarity[7] - Key business segments defined include Companion Animal Group (CAG), Livestock, Poultry and Dairy (LPD), and Water[7] - Financial terms like 'Organic revenue growth' (non-GAAP) and 'Reported revenue growth' (GAAP) are explicitly defined[7] PART I—FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries, along with detailed notes - The financial statements are unaudited and prepared in accordance with U.S. GAAP for interim financial information and Regulation S-X[23] - Management's opinion is that all necessary adjustments for a fair statement of financial position and results of operations have been included, and all such adjustments are of a recurring nature[25] Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheets (in thousands) | ASSETS (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $145,203 | $383,928 | | Accounts receivable, net | $376,760 | $331,429 | | Inventories | $258,484 | $209,873 | | Total current assets | $938,037 | $1,062,738 | | Property and equipment, net | $573,385 | $555,167 | | Goodwill | $355,240 | $243,347 | | Intangible assets, net | $94,976 | $52,543 | | Total long-term assets | $1,447,707 | $1,231,823 | | TOTAL ASSETS | $2,385,744 | $2,294,561 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :------------------------------------ | :----------- | :----------- | | Accounts payable | $86,684 | $74,558 | | Accrued liabilities | $431,047 | $415,648 | | Current portion of long-term debt | $74,990 | $49,988 | | Total current liabilities | $633,849 | $582,761 | | Long-term debt, net of current portion | $778,025 | $858,492 | | Total liabilities | $1,630,284 | $1,661,766 | | Total stockholders' equity | $755,460 | $632,795 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $2,385,744 | $2,294,561 | - Total assets increased by $91.183 million (3.97%) from December 31, 2020, to September 30, 2021[11] - Cash and cash equivalents decreased significantly by $238.725 million (-62.18%) from December 31, 2020, to September 30, 2021[11] Condensed Consolidated Statements of Income This section presents the company's financial performance, including revenues, expenses, and net income over specific periods Condensed Consolidated Statements of Income (in thousands, except per share amounts) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenue | $810,421 | $721,789 | $2,414,270 | $1,985,717 | | Gross profit | $472,921 | $422,606 | $1,433,011 | $1,161,538 | | Income from operations | $225,962 | $171,856 | $732,837 | $509,429 | | Net income attributable to IDEXX Laboratories, Inc. stockholders | $175,235 | $146,219 | $582,074 | $406,986 | | Basic EPS | $2.06 | $1.71 | $6.82 | $4.77 | | Diluted EPS | $2.03 | $1.69 | $6.71 | $4.70 | - Total revenue increased by 12.3% for the three months ended September 30, 2021, and by 21.6% for the nine months ended September 30, 2021, compared to the prior year periods[13] - Net income attributable to stockholders increased by 19.8% for the three months and 43.0% for the nine months ended September 30, 2021, year-over-year[13] Condensed Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income items Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $175,178 | $146,321 | $582,073 | $407,173 | | Other comprehensive income (loss), net of tax | $(3,666) | $(4,893) | $1,558 | $(15,743) | | Comprehensive income attributable to IDEXX Laboratories, Inc. | $171,569 | $141,326 | $583,632 | $391,243 | - Other comprehensive income (loss) improved from a loss of $4.893 million in Q3 2020 to a loss of $3.666 million in Q3 2021, and from a loss of $15.743 million in 9M 2020 to a gain of $1.558 million in 9M 2021[16] - Foreign currency translation adjustments contributed to a loss of $12.967 million in Q3 2021, compared to a gain of $7.329 million in Q3 2020[16] Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including net income, stock repurchases, and other comprehensive income Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Dec 31, 2020 | Sep 30, 2021 | | :-------------------- | :----------- | :----------- | | Total Stockholders' Equity | $632,795 | $755,460 | | Net income | $2,175,595 (Retained Earnings) | $2,757,669 (Retained Earnings) | | Repurchases of common stock, net | $(2,799,890) (Treasury Stock) | $(3,326,021) (Treasury Stock) | | Accumulated other comprehensive loss | $(53,615) | $(52,057) | - Total stockholders' equity increased by $122.665 million (19.38%) from December 31, 2020, to September 30, 2021[19] - Retained earnings increased by $582.074 million during the nine months ended September 30, 2021, reflecting net income[13][19] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $545,582 | $429,129 | | Net cash used by investing activities | $(248,927) | $(93,686) | | Net cash used by financing activities | $(531,594) | $(248,814) | | Net (decrease) increase in cash and cash equivalents | $(238,725) | $85,261 | | Cash and cash equivalents at end of period | $145,203 | $175,587 | - Net cash provided by operating activities increased by $116.453 million (27.14%) for the nine months ended September 30, 2021, compared to the prior year[22][205] - Net cash used by investing activities significantly increased by $155.241 million (165.71%) due to business acquisitions in 2021[22][207] - Net cash used by financing activities increased by $282.780 million (113.65%) primarily due to increased common stock repurchases[22][209] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1. Basis of Presentation and Principles of Consolidation This note outlines that the unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC Regulation S-X - Financial statements are prepared under U.S. GAAP for interim reporting and SEC Regulation S-X[23] - Consolidation includes all wholly-owned and majority-owned subsidiaries, with intercompany transactions eliminated[24] - The preparation of financial statements involves estimates, judgments, and assumptions that affect reported amounts[26] NOTE 2. Accounting Policies This note details the significant accounting policies, consistent with the 2020 Annual Report, and updates on newly adopted accounting pronouncements - Significant accounting policies remain consistent with the 2020 Annual Report[27] - Adopted ASU 2019-12 (Income Taxes) and ASU 2021-05 (Leases) in 2021, with no material impact[28][29] - Does not expect ASU 2020-04 (Reference Rate Reform) to have a material impact[30] NOTE 3. Revenue Recognition This note describes the company's revenue recognition policies, applying a five-step model, and disaggregates revenue by categories and geographic areas - Revenue is recognized when control of promised products or services is transferred to the customer, following a five-step model[31] - Major revenue categories include diagnostic products, reference laboratory services, instruments/software, lease revenue, extended warranties, post-contract support, and SaaS subscriptions[31][32][33][34][36][37][39] - Significant customer programs (e.g., Up-Front Customer Loyalty, Volume Commitment, Instrument Rebate, Reagent Rental) involve multiple performance obligations and specific revenue recognition treatments[41][42][44][48][50] Disaggregated Revenue by Segment (in thousands) | Segment (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | CAG segment revenue | $732,495 | $638,017 | $2,170,857 | $1,756,113 | | Water segment revenue | $38,143 | $33,272 | $109,374 | $95,537 | | LPD segment revenue | $29,126 | $36,971 | $101,920 | $103,369 | | Other segment revenue | $10,657 | $13,529 | $32,119 | $30,698 | | Total revenue | $810,421 | $721,789 | $2,414,270 | $1,985,717 | Revenue by Principal Geographic Area (in thousands) | Geographic Area (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $514,343 | $454,836 | $1,502,219 | $1,257,617 | | Europe, Middle East, Africa | $167,956 | $147,193 | $510,759 | $400,928 | | Asia Pacific Region | $78,239 | $77,401 | $246,645 | $212,663 | | Canada | $32,813 | $28,710 | $105,608 | $78,314 | | Latin America | $17,070 | $13,649 | $49,039 | $36,195 | | Total revenue | $810,421 | $721,789 | $2,414,270 | $1,985,717 | NOTE 4. Acquisitions This note details business acquisitions made during the nine months ended September 30, 2021, expanding geographic reach, customer base, or product lines - Acquired a teleradiology business for approximately $5.4 million in Q3 2021, expanding current capabilities[64] - Acquired ezyVet and VetRadar cloud-based veterinary software businesses for approximately $157.2 million in Q2 2021, expanding cloud-based software offerings[66] - Acquired a Swiss reference laboratory for approximately $5.5 million in Q1 2021, expanding international reference laboratory presence[66] - Goodwill from the ezyVet/VetRadar acquisition was approximately $109.4 million, allocated across IDEXX VetLab, Reference Laboratory, Rapid Assay, and Veterinary Software Services[66] NOTE 5. Share-Based Compensation This note outlines the company's share-based compensation, including options, restricted stock units, and employee stock purchase rights - Total unrecognized compensation expense for unvested share-based awards was $72.6 million as of September 30, 2021, with a weighted average recognition period of approximately 1.6 years[67] Share-Based Compensation Expense (in thousands) | Period | 2021 | 2020 | | :----- | :--- | :--- | | 3 Months Ended Sep 30 | $9,500 | $7,900 | | 9 Months Ended Sep 30 | $28,000 | $23,000 | Weighted Average Fair Value of Options Granted | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | | Share price at grant | $527.49 | $290.15 | | Expected stock price volatility | 30% | 27% | | Weighted average fair value of options granted | $169.13 | $84.60 | NOTE 6. Credit Losses This note details the company's exposure to credit losses and its maintenance of allowances, based on customer analysis and historical experience - Allowances for credit losses are maintained based on specific customer situations, aging analysis, and historical experience, adjusted for current economic conditions[70] Allowance for Credit Losses (in thousands) | Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------- | :----------- | :----------- | | Accounts receivable | $6,500 | $6,800 | | Contract assets and lease receivables | $4,300 | $3,700 | - At September 30, 2021, approximately 91% of accounts receivable had not yet reached the invoice due date, and substantially all of the 9% past due was less than 60 days past due[73] NOTE 7. Inventories This note provides a breakdown of inventories, valued at the lower of cost or net realizable value, which increased by $48.611 million - Inventories are valued at the lower of cost (FIFO) or net realizable value[75] Inventories (in thousands) | Component (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :----------------------- | :----------- | :----------- | | Raw materials | $59,609 | $45,986 | | Work-in-process | $24,617 | $20,374 | | Finished goods | $174,258 | $143,513 | | Total Inventories | $258,484 | $209,873 | NOTE 8. Leases This note details the maturities of operating lease liabilities and supplemental cash flow information for leases Maturities of Operating Lease Liabilities (in thousands) | Year (in thousands) | September 30, 2021 | | :------------------ | :----------------- | | 2021 (remainder) | $4,586 | | 2022 | $24,124 | | 2023 | $20,195 | | 2024 | $15,581 | | 2025 | $12,049 | | Thereafter | $48,987 | | Total lease payments | $125,522 | | Less imputed interest | $(15,364) | | Total | $110,158 | Supplemental Cash Flow Information for Leases (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | | Cash paid for operating leases | $17,232 | $14,619 | | Right-of-use assets obtained | $33,052 | $17,064 | - Additions for right-of-use assets in 2021 include $7.9 million from the ezyVet acquisition[77] NOTE 9. Other Current and Long-Term Assets This note provides a detailed breakdown of other current and long-term assets, which saw increases primarily driven by customer acquisition costs and contract assets Other Current Assets (in thousands) | Component (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :----------------------- | :----------- | :----------- | | Customer acquisition costs | $48,164 | $43,751 | | Prepaid expenses | $37,462 | $34,556 | | Contract assets, net | $31,446 | $23,837 | | Deferred sales commissions | $6,302 | $5,738 | | Total Other current assets | $157,590 | $137,508 | Other Long-Term Assets (in thousands) | Component (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :----------------------- | :----------- | :----------- | | Customer acquisition costs | $108,947 | $104,369 | | Contract assets, net | $114,668 | $91,681 | | Deferred income taxes | $24,861 | $31,549 | | Deferred sales commissions | $12,695 | $11,719 | | Total Other long-term assets | $317,144 | $289,595 | NOTE 10. Accrued Liabilities This note provides a breakdown of accrued liabilities, which increased by $15.399 million, with employee compensation remaining the largest component Accrued Liabilities (in thousands) | Component (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :----------------------- | :----------- | :----------- | | Accrued employee compensation and related expenses | $161,579 | $167,649 | | Accrued expenses | $124,465 | $112,526 | | Accrued customer incentives and refund obligations | $81,029 | $75,064 | | Accrued taxes | $43,536 | $42,676 | | Current lease liabilities | $20,438 | $17,733 | | Total Accrued liabilities | $431,047 | $415,648 | Other Long-Term Liabilities (in thousands) | Component (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :----------------------- | :----------- | :----------- | | Accrued taxes | $58,727 | $60,313 | | Other accrued long-term expenses | $14,266 | $25,291 | | Total Other long-term liabilities | $72,993 | $85,604 | NOTE 11. Debt This note details the company's outstanding unsecured senior notes, including the payoff of 2021 Series A Notes and the upcoming maturity of 2022 Series A Notes - Paid off $50.0 million 2021 Series A Notes on July 21, 2021, using cash from operations[81] - The $75.0 million 2022 Series A Notes will become due and payable on February 12, 2022[81] Outstanding Senior Notes (Principal Amount in thousands) | Series | Due Date | Principal Amount | Coupon Rate | | :----- | :------- | :--------------- | :---------- | | 2023 Series A Notes | 12/11/2023 | $75,000 | 3.94% | | 2025 Series B Notes | 12/11/2025 | $75,000 | 4.04% | | 2026 Senior Notes | 9/4/2026 | $75,000 | 3.72% | | 2024 Series B Notes | 7/21/2024 | $75,000 | 3.76% | | 2025 Series C Notes (Euro) | 6/18/2025 | €88,857 | 1.785% | | 2022 Series A Notes | 2/12/2022 | $75,000 | 3.25% | | 2027 Series B Notes | 2/12/2027 | $75,000 | 3.72% | | 2029 Series C Notes | 03/14/2029 | $100,000 | 4.19% | | MetLife 2030 Series D Notes | 04/02/2030 | $125,000 | 2.50% | | Prudential 2030 Series D Notes | 04/14/2030 | $75,000 | 2.50% | NOTE 12. Repurchases of Common Stock This note summarizes common stock repurchases, including open market repurchases and shares acquired through employee surrenders for tax withholding - Common stock repurchases occur primarily in the open market, and also through employee surrenders for tax withholding[82] Common Stock Repurchases (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Shares repurchased in open market | 274 | — | 892 | 721 | | Shares acquired through employee surrender | 1 | 1 | 29 | 31 | | Total shares repurchased | 275 | 1 | 921 | 752 | | Cost of shares repurchased in open market | $183,315 | $— | $510,937 | $179,623 | | Cost of shares for employee surrenders | $515 | $360 | $15,501 | $9,029 | | Total cost of shares | $183,830 | $360 | $526,438 | $188,652 | | Average cost per share - total | $668.38 | $393.12 | $571.36 | $250.96 | - The average cost per share for total repurchases increased from $250.96 in 9M 2020 to $571.36 in 9M 2021[83] NOTE 13. Income Taxes This note discusses the company's effective income tax rate, which increased primarily due to lower tax benefits from share-based compensation Effective Income Tax Rate | Period | 2021 | 2020 | | :----- | :--- | :--- | | 3 Months Ended Sep 30 | 20.0% | 10.8% | | 9 Months Ended Sep 30 | 18.1% | 16.0% | - The increase in the effective tax rate was primarily driven by a decrease in tax benefits from share-based compensation and the resolution of uncertain tax positions[84] - The effective tax rate for both periods in 2021 differed from the U.S. statutory tax rate of 21% primarily due to tax benefits from share-based compensation[85] NOTE 14. Accumulated Other Comprehensive Income This note details the changes in Accumulated Other Comprehensive Income (AOCI), net of tax, including foreign currency translation adjustments and hedging activities Changes in AOCI (in thousands) | Component (in thousands) | Dec 31, 2020 Balance | 9 Months Ended Sep 30, 2021 OCI (Loss) | Sep 30, 2021 Balance | | :----------------------- | :------------------- | :------------------------- | :------------------ | | Unrealized Gain (Loss) on Investments, Net of Tax | $(272) | $153 | $(119) | | Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax (Foreign Currency Exchange Contracts) | $(9,934) | $7,300 | $2,888 | | Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax (Euro Denominated Notes) | $(5,982) | $4,235 | $(1,747) | | Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax (Cross Currency Swaps) | $(2,159) | $4,561 | $2,402 | | Cumulative Translation Adjustment | $(35,268) | $(20,213) | $(55,481) | | Total AOCI | $(53,615) | $(3,964) (before reclassifications) | $(52,057) | - Foreign currency translation adjustments resulted in a loss of $20.213 million for the nine months ended September 30, 2021[86] - Gains on derivative instruments classified as cash flow hedges reclassified from AOCI to net income were $2.036 million for the nine months ended September 30, 2021[87] NOTE 15. Earnings Per Share This note details the computation of basic and diluted earnings per share (EPS), including the dilutive effect of share-based payment awards - Basic EPS is computed using net income attributable to stockholders and weighted average common shares outstanding[88] - Diluted EPS includes the dilutive effect of share-based payment awards using the treasury stock method[88] Weighted Average Shares Outstanding (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Shares outstanding for basic EPS | 85,123 | 85,314 | 85,325 | 85,293 | | Dilutive effect of share-based payment awards | 1,388 | 1,376 | 1,387 | 1,342 | | Shares outstanding for diluted EPS | 86,511 | 86,690 | 86,712 | 86,635 | NOTE 16. Commitments, Contingencies and Guarantees This note addresses the company's commitments, contingencies, and guarantees, primarily focusing on an ongoing litigation matter - The company is subject to claims and litigation in the ordinary course of business[92] - An accrual of $27.5 million was established in Q3 2020 for an alleged breach of contract litigation, with a plaintiff claim of approximately $50 million[93] - No material changes to contingencies and guarantees have occurred since the 2020 Annual Report[95] NOTE 17. Segment Reporting This note defines the company's operating segments: Companion Animal Group (CAG), Water, and Livestock, Poultry and Dairy (LPD), with 'Other' encompassing human medical diagnostics - Operating segments are CAG (veterinary market), Water (water quality products), and LPD (livestock, poultry, and dairy health)[97] - The 'Other' segment includes OPTI Medical (human medical diagnostics) and out-licensing arrangements[97] Segment Performance (Income from Operations in thousands) | Segment (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | CAG | $201,947 | $139,434 | $649,892 | $426,062 | | Water | $17,599 | $15,243 | $49,599 | $43,383 | | LPD | $3,600 | $10,505 | $24,276 | $28,417 | | Other | $2,816 | $6,674 | $9,070 | $11,567 | | Consolidated Total Income from Operations | $225,962 | $171,856 | $732,837 | $509,429 | NOTE 18. Fair Value Measurements This note describes the fair value measurements of financial assets and liabilities, categorized into a three-level hierarchy based on input observability - Fair value measurements are classified into a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1 prices; Level 3: unobservable inputs)[101][102] - Cross currency swaps and foreign currency exchange contracts are measured at fair value on a recurring basis using Level 2 inputs[103][104] Fair Value of Long-Term Debt (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Estimated Fair Value | $928.2 | $1,000.0 | | Carrying Value | $853.6 | $909.1 | - Contingent consideration related to acquisitions is classified within Level 3 of the fair value hierarchy due to significant unobservable inputs[112] NOTE 19. Hedging Instruments This note explains the company's use of derivative and non-derivative instruments to manage foreign currency exchange risk - The primary risk managed through hedging instruments is foreign currency exchange risk[115] - Foreign currency exchange contracts are designated as cash flow hedges for forecasted intercompany inventory purchases and sales, targeting approximately 85% of exposure[121][123] - Euro-denominated notes and cross currency swaps are designated as net investment hedges to offset foreign currency translation gains and losses on net investments in foreign operations[125][126] - Estimated net gains of $2.0 million (net of tax) from cash flow hedges are expected to be reclassified into earnings within the next 12 months[122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including a business overview, market trends, and non-GAAP measures - The discussion includes forward-looking statements about business expectations, financial performance, and potential risks[128] - The analysis is based on unaudited condensed consolidated financial statements and requires management estimates and judgments[141] - Non-GAAP financial measures like organic revenue growth and Adjusted EBITDA are used to provide supplemental analysis for investors[143][146] Business Overview IDEXX Laboratories, Inc. develops, manufactures, and distributes products and services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing markets - IDEXX primarily serves companion animal veterinary, livestock, poultry and dairy, and water testing markets, with a presence in human medical diagnostics[132] - Key operating segments are CAG (veterinary diagnostics and IT), Water (water microbiology testing), and LPD (livestock/poultry health, milk quality)[132][133][134] - The 'Other' segment includes OPTI Medical (point-of-care and laboratory diagnostics for human medical market) and out-licensing arrangements[133][134] Effects of Certain Factors and Trends on Results of Operations This section discusses market trends impacting operations, including positive global trends in companion animal healthcare and anticipated reduced LPD revenues - Positive global trends in companion animal healthcare continue to drive strong growth for CAG diagnostic products and services[135] - LPD revenues are expected to decline year-over-year due to lower swine testing in China, influenced by changing disease management, low pork prices, and government requirements[136] - The company is actively managing supply chain and logistics challenges (product/component availability, shipping delays, inflationary pressures) through proactive planning and supplier/logistics partner collaboration[137] Critical Accounting Estimates and Assumptions This section highlights that the preparation of financial statements requires significant estimates and judgments affecting reported asset, liability, revenue, and expense amounts - Financial statements rely on estimates and judgments impacting reported financial figures[141] - Estimates are based on historical experience and reasonable assumptions, consistent with the 2020 Annual Report[141] Recent Accounting Pronouncements This section refers to Note 2 of the financial statements for information on the impact of recent accounting standards and amendments on the consolidated financial statements - Refer to Note 2 for details on recent accounting pronouncements and their impact[142] Non-GAAP Financial Measures This section explains the use of non-GAAP financial measures, specifically organic revenue growth, Adjusted EBITDA, gross debt, net debt, and related ratios - Organic revenue growth (non-GAAP) excludes foreign currency exchange rate changes and certain business acquisitions/divestitures to show underlying business trends[143][144][145] - Other non-GAAP measures include Adjusted EBITDA, gross debt, net debt, and their ratios, used to evaluate business performance and borrowing capacity[146] - Non-GAAP measures are considered in addition to, not as a replacement for, U.S. GAAP financial measures[143][146] Results of Operations This section provides a detailed analysis of the company's financial performance for the three and nine months ended September 30, 2021, compared to the corresponding periods in 2020 Three Months Ended September 30, 2021, Compared to Three Months Ended September 30, 2020 For the three months ended September 30, 2021, total company revenue increased by 12.3% (10.2% organic), driven by strong CAG Diagnostics recurring revenue and instrument placements Total Company Revenue Growth (3 Months Ended Sep 30) | Metric | 2021 Revenue (k) | Reported Growth | Organic Growth | | :----- | :--------------- | :-------------- | :------------- | | CAG | $732,495 | 14.8% | 12.7% | | Water | $38,143 | 14.6% | 12.7% | | LPD | $29,126 | (21.2%) | (22.5%) | | Other | $10,657 | (21.2%) | (21.1%) | | Total Company | $810,421 | 12.3% | 10.2% | - Total Company organic revenue growth was 10.2%, driven by strong volume gains in CAG Diagnostics recurring revenue and instrument placements[147][148] - LPD revenues decreased primarily due to lower swine testing in China, and Other revenues declined due to lower demand for human OPTI COVID-19 PCR testing[148] Total Company Operating Results (3 Months Ended Sep 30, in thousands) | Metric (in thousands) | 2021 | 2020 | Change Amount | Change % | | :-------------------- | :--- | :--- | :------------ | :------- | | Revenues | $810,421 | $721,789 | $88,632 | 12.3% | | Gross profit | $472,921 | $422,606 | $50,315 | 11.9% | | Gross profit margin | 58.4% | 58.5% | (0.1%) | - | | Income from operations | $225,962 | $171,856 | $54,106 | 31.5% | - General and administrative expense decreased by 21.8% due to a prior-year litigation accrual and charitable donation, partially offset by higher personnel and acquisition costs[150] Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020 For the nine months ended September 30, 2021, total company revenue increased by 21.6% (18.5% organic), driven by strong CAG performance and recovery in Water Total Company Revenue Growth (9 Months Ended Sep 30) | Metric | 2021 Revenue (k) | Reported Growth | Organic Growth | | :----- | :--------------- | :-------------- | :------------- | | CAG | $2,170,857 | 23.6% | 20.6% | | Water | $109,374 | 14.5% | 11.4% | | LPD | $101,920 | (1.4%) | (5.4%) | | Other | $32,119 | 4.6% | 2.7% | | Total Company | $2,414,270 | 21.6% | 18.5% | - Total Company organic revenue growth was 18.5%, driven by strong CAG Diagnostics recurring revenue, increased clinical visits, and diagnostic utilization[173][174] - LPD business declined due to lower swine testing demand in China, while Water revenue increased due to recovery in testing volumes[174] Total Company Operating Results (9 Months Ended Sep 30, in thousands) | Metric (in thousands) | 2021 | 2020 | Change Amount | Change % | | :-------------------- | :--- | :--- | :------------ | :------- | | Revenues | $2,414,270 | $1,985,717 | $428,553 | 21.6% | | Gross profit | $1,433,011 | $1,161,538 | $271,473 | 23.4% | | Gross profit margin | 59.4% | 58.5% | 0.9% | - | | Income from operations | $732,837 | $509,429 | $223,408 | 43.9% | - Gross profit margin increased by 90 basis points due to volume leverage in CAG Diagnostics recurring revenue, price increases, and strong growth in veterinary software and services[175] Liquidity and Capital Resources The company funds its operations through cash on hand, operating cash flows, senior note financings, and its $1 billion unsecured revolving credit facility - Liquidity is supported by cash on hand, operating cash flows, senior note financings, and a $1 billion unsecured revolving credit facility[200] Cash and Cash Equivalents (in millions) | Metric (in millions) | Sep 30, 2021 | Dec 31, 2020 | | :------------------- | :----------- | :----------- | | U.S. | $6.1 | $248.4 | | Foreign | $139.1 | $135.5 | | Total | $145.2 | $383.9 | - As of September 30, 2021, $998.6 million was available under the Credit Facility, with no outstanding borrowings[200] Cash Flow Summary (9 Months Ended Sep 30, in thousands) | Activity (in thousands) | 2021 | 2020 | Dollar Change | | :---------------------- | :--- | :--- | :------------ | | Operating Activities | $545,582 | $429,129 | $116,453 | | Investing Activities | $(248,927) | $(93,686) | $(155,241) | | Financing Activities | $(531,594) | $(248,814) | $(282,780) | - The consolidated leverage ratio (debt to Adjusted EBITDA) was 0.81 at September 30, 2021, well within the 3.5-to-1 covenant limit[218] Other Commitments, Contingencies and Guarantees This section refers to Note 16 for details on significant commitments, contingencies, and guarantees as of September 30, 2021 - Refer to Note 16 for details on commitments, contingencies, and guarantees[219] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily foreign currency exchange risk, and its potential impact on revenue and operating income - The primary market risk is foreign currency exchange risk, as approximately 22% of consolidated revenue is derived from products manufactured in the U.S. and sold internationally in local currencies[221] - A strengthening U.S. dollar negatively impacts revenues and profits from international sales, while a weakening dollar has the opposite effect[221] - A projected 1% strengthening of the U.S. dollar for the remainder of 2021 would reduce revenue by approximately $3 million and operating income by $1.5 million, with hedging contracts providing an incremental offset of $0.5 million[222] Estimated Foreign Currency Exchange Impact (as compared to prior period, in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | | Revenue impact | $6,760 | $51,474 | | Operating profit impact | $2,114 | $19,930 | | Diluted EPS impact | $0.02 | $0.18 | Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting - Disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021[226] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2021[227] PART II — OTHER INFORMATION This section includes legal proceedings, risk factors, equity security sales, and a list of exhibits Item 1. Legal Proceedings This section states that the company is subject to legal actions in the ordinary course of business, with management believing current matters will not materially affect financial results - The company is subject to pending and threatened legal actions arising from ordinary business operations[229] - Management believes current legal matters are not expected to have a material effect on financial results, but outcomes are inherently unpredictable[229] - Further details on litigation are provided in Note 16 to the financial statements[92][93] Item 1A. Risk Factors This section highlights potential risks that could negatively affect future operating results, specifically focusing on changes in tax rates and new tax legislation - Future operating results could be negatively affected by changes in tax rates, new U.S. or international tax legislation, or additional tax liabilities[231] - Proposed corporate tax reforms, including a global minimum tax rate, could materially and adversely impact income tax liability and effective tax rate[232] - The non-renewal of a tax ruling from the Netherlands creates uncertainty regarding future tax rates and could lead to increased operating costs or tax liabilities[233][234] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides a summary of common stock repurchases during the three months ended September 30, 2021, and the remaining shares available under the repurchase program Common Stock Repurchases (3 Months Ended Sep 30, 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :----- | :--------------------- | :--------------------------- | | July 1 to July 31, 2021 | 19,967 | $648.57 | | August 1 to August 31, 2021 | 112,900 | $676.08 | | September 1 to September 30, 2021 | 142,168 | $665.06 | | Total | 275,035 | $668.38 | - As of September 30, 2021, 5,382,823 shares remained available for repurchase under the company's share repurchase program, which has no specified expiration date[237][239] - Shares acquired through employee surrender for statutory tax withholding are included in total shares purchased but do not reduce the number of shares available under the repurchase program[238][239] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including amendments to supply agreements, certifications, and financial information in Inline XBRL format - Exhibits include Amendment No. 7 to U.S. Supply Agreement and Amendment No. 5 to European Supply Agreement[241] - Certifications from the Principal Executive Officer and Principal Financial Officer are included as Exhibits 31.1, 31.2, 32.1, and 32.2[241] - Financial and related information is provided in Inline XBRL format as Exhibit 101[241] Signatures This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its due authorization and filing - The report is duly signed on behalf of IDEXX Laboratories, Inc. by Brian P. McKeon, Executive Vice President, Chief Financial Officer and Treasurer, on November 2, 2021[243][244][245]