Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.53M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 31K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 28K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 28K
11: R1 Cover HTML 79K
12: R2 Condensed Consolidated Balance Sheets HTML 161K
13: R3 Condensed Consolidated Balance Sheets HTML 39K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Income HTML 128K
15: R5 Condensed Consolidated Statements of Comprehensive HTML 83K
Income
16: R6 Condensed Consolidated Statements of Comprehensive HTML 44K
Income (Parenthetical)
17: R7 Condensed Consolidated Statements of Stockholders' HTML 98K
Equity
18: R8 Condensed Consolidated Statements of Stockholders' HTML 28K
Equity (Parenthetical)
19: R9 Condensed Consolidated Statements of Cash Flows HTML 116K
20: R10 Basis of Presentation and Principles of HTML 31K
Consolidation
21: R11 Accounting Policies HTML 33K
22: R12 Revenue Recognition HTML 116K
23: R13 Acquisitions, Asset Purchases and Investments HTML 33K
24: R14 Share-Based Compensation HTML 39K
25: R15 Credit Losses HTML 33K
26: R16 Inventories HTML 34K
27: R17 Leases HTML 40K
28: R18 Other Current and Long-Term Assets HTML 51K
29: R19 Accrued Liabilities HTML 43K
30: R20 Debt HTML 58K
31: R21 Repurchases of Common Stock HTML 53K
32: R22 Income Taxes HTML 32K
33: R23 Accumulated Other Comprehensive Income HTML 99K
34: R24 Earnings Per Share HTML 49K
35: R25 Commitments, Contingencies and Guarantees HTML 33K
36: R26 Segment Reporting HTML 102K
37: R27 Fair Value Measurements HTML 92K
38: R28 Hedging Instruments HTML 79K
39: R29 Accounting Policies (Policies) HTML 75K
40: R30 Revenue Recognition (Tables) HTML 72K
41: R31 Share-Based Compensation (Tables) HTML 37K
42: R32 Inventories (Tables) HTML 35K
43: R33 Leases (Tables) HTML 41K
44: R34 Other Current and Long-Term Assets (Tables) HTML 53K
45: R35 Accrued Liabilities (Tables) HTML 44K
46: R36 Debt (Tables) HTML 54K
47: R37 Repurchases of Common Stock (Tables) HTML 53K
48: R38 Accumulated Other Comprehensive Income (Tables) HTML 101K
49: R39 Earnings Per Share (Tables) HTML 49K
50: R40 Segment Reporting (Tables) HTML 98K
51: R41 Fair Value Measurements (Tables) HTML 85K
52: R42 Hedging Instruments (Tables) HTML 69K
53: R43 Accounting Policies (Details) HTML 27K
54: R44 Revenue Recognition (General Narrative) (Details) HTML 31K
55: R45 Revenue Recognition (Lease Revenue) (Details) HTML 28K
56: R46 Revenue Recognition (Extended Warranties and HTML 42K
Post-Contract Support) (Details)
57: R47 Revenue Recognition (Remaining Performance HTML 72K
Obligation) (Details)
58: R48 Revenue Recognition (SaaS Subscriptions) (Details) HTML 29K
59: R49 Revenue Recognition (Up-Front Customer Loyalty HTML 31K
Programs) (Details)
60: R50 Revenue Recognition (Volume Commitment Programs) HTML 37K
(Details)
61: R51 Revenue Recognition (Instrument Rebate Programs) HTML 32K
(Details)
62: R52 Revenue Recognition (Reagent Rental Programs) HTML 39K
(Details)
63: R53 Revenue Recognition (Disaggregation of Revenue by HTML 58K
Major Product and Service Categories) (Details)
64: R54 Revenue Recognition (Disaggregation of Revenue by HTML 43K
Principal Geographic Area, Based on Customers'
Domiciles) (Details)
65: R55 Revenue Recognition (Costs to Obtain a Contract) HTML 36K
(Details)
66: R56 Acquisitions, Asset Purchases and Investments HTML 85K
(Details)
67: R57 Share-Based Compensation (Narrative) (Details) HTML 36K
68: R58 Share-Based Compensation (Assumptions Used) HTML 39K
(Details)
69: R59 Credit Losses (Details) HTML 39K
70: R60 Inventories (Details) HTML 35K
71: R61 Leases (Maturities of Operating Lease Liabilities) HTML 44K
(Details)
72: R62 Leases (Narrative) (Details) HTML 27K
73: R63 Leases (Supplemental Cash Flow Information) HTML 30K
(Details)
74: R64 Other Current and Long-Term Assets (Schedule Of HTML 44K
Other Current Assets) (Details)
75: R65 Other Current and Long-Term Assets (Schedule Of HTML 46K
Other Long-term Assets) (Details)
76: R66 Accrued Liabilities (Schedule Of Accrued HTML 43K
Liabilities) (Details)
77: R67 Accrued Liabilities (Schedule Of Other Long-term HTML 33K
Liabilities) (Details)
78: R68 Debt (Narrative) (Details) HTML 50K
79: R69 Debt (Schedule of Current Senior Notes HTML 53K
Outstanding) (Details)
80: R70 Repurchases of Common Stock (Details) HTML 45K
81: R71 Income Taxes (Details) HTML 28K
82: R72 Accumulated Other Comprehensive Income (Schedule HTML 68K
of AOCI) (Details)
83: R73 Accumulated Other Comprehensive Income (Schedule HTML 57K
Associated with Cash Flow Hedges and Pension of
Reclassifications out of AOCI) (Details)
84: R74 Earnings Per Share (Schedule Of Reconciliation Of HTML 37K
Shares Outstanding For Basic And Diluted Earnings
Per Share) (Details)
85: R75 Earnings Per Share (Schedule Of Number Of HTML 33K
Anti-Dilutive Stock Options) (Details)
86: R76 Commitments, Contingencies and Guarantees HTML 33K
(Details)
87: R77 Segment Reporting (Summary of Segment Performance) HTML 86K
(Details)
88: R78 Fair Value Measurements (Narrative) (Details) HTML 36K
89: R79 Fair Value Measurements (Schedule of Assets and HTML 78K
Liabilities) (Details)
90: R80 Fair Value Measurements (Schedule of Contingent HTML 32K
Consideration Liability) (Details)
91: R81 Hedging Instruments (Narrative) (Details) HTML 71K
92: R82 Hedging Instruments (Derivatives Designated In HTML 38K
Cash Flow Hedging Relationships) (Details)
93: R83 Hedging Instruments (Schedule Of Fair Values And HTML 61K
Balance Sheet Classifications Of Derivatives
Designated As Hedging Instruments) (Details)
96: XML IDEA XML File -- Filing Summary XML 185K
94: XML XBRL Instance -- idxx-20220630_htm XML 2.63M
95: EXCEL IDEA Workbook of Financial Reports XLSX 172K
7: EX-101.CAL XBRL Calculations -- idxx-20220630_cal XML 221K
8: EX-101.DEF XBRL Definitions -- idxx-20220630_def XML 571K
9: EX-101.LAB XBRL Labels -- idxx-20220630_lab XML 1.60M
10: EX-101.PRE XBRL Presentations -- idxx-20220630_pre XML 973K
6: EX-101.SCH XBRL Schema -- idxx-20220630 XSD 178K
97: JSON XBRL Instance as JSON Data -- MetaLinks 432± 649K
98: ZIP XBRL Zipped Folder -- 0000874716-22-000033-xbrl Zip 469K
(Exact
name of registrant as specified in its charter)
iDelaware
i01-0393723
(State
or other jurisdiction of incorporation or organization)
(IRSEmployer Identification No.)
iOne IDEXX Drive
iWestbrook
iMaine
i04092
(Address
of principal executive offices)
(ZIP Code)
i207-i556-0300
(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
iCommon Stock,
$0.10 par value per share
iIDXX
iNASDAQ 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. iYesýNo ¨
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). iYesý 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.
iLarge
Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐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 i83,253,705
on July 27, 2022.
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 billion unsecured revolving credit facility, also referred to as line of credit
Clinical visits
The
reason for the visit involves an interaction between a clinician and a pet
FASB
U.S. Financial Accounting Standards Board
LPD
Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer efficiency
OPTI Medical
OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., located in Roswell, Georgia. This business provides point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable products) for the human medical diagnostics
sector, as well as COVID-19 testing products and services. The Roswell facility also manufactures electrolytes slides (instrument consumables) to run Catalyst One®, Catalyst Dx®, and blood gas analyzers and consumables for the veterinary 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
R&D
Research and development
Reported revenue growth
Represents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year
SaaS
Software-as-a-service
SEC
U.S. Securities and Exchange Commission
Senior
Note Agreements
Note purchase agreements for the private placement of senior notes, referred to as senior notes or long-term debt
U.S. GAAP
Accounting principles generally accepted in the United States of America
Water
Water, a reporting segment that provides water microbiology testing products
Long-term
deferred revenue, net of current portion
i36,965
i41,174
Long-term
operating lease liabilities
i98,041
i87,377
Other
long-term liabilities
i69,777
i70,941
Total
long-term liabilities
i983,630
i983,632
Total
liabilities
i2,150,177
i1,747,211
Commitments
and Contingencies (Note 16)
i
i
Stockholders’
Equity:
Common stock, $ii0.10/
par value: Authorized: ii120,000/ shares; Issued:
i107,075 shares in 2022 and i106,878 shares in 2021; Outstanding: i83,428
shares in 2022 and i84,562 shares in 2021
i10,707
i10,688
Additional
paid-in capital
i1,419,709
i1,377,320
Deferred
stock units: Outstanding: i58 units in 2022 and i90 units in 2021
i5,170
i5,719
Retained
earnings
i3,246,384
i2,920,440
Accumulated
other comprehensive loss
(i67,705)
(i53,484)
Treasury
stock, at cost: i23,647 shares in 2022 and i22,317 shares in 2021
(i4,157,257)
(i3,570,691)
Total
stockholders’ equity
i457,008
i689,992
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
$
i2,607,185
$
i2,437,203
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Benefit
plans, net of tax expense of $(i991) and $(i991)
in 2022 and $i0 and $i0
in 2021
(i5,056)
i—
(i5,056)
i—
Reclassification
adjustment for benefit plans included in net income, net of tax of $i51 and $i51
in 2022 and $i0 and $i0
in 2021
i260
i—
i260
i—
Unrealized
gain (loss) on Euro-denominated notes, net of tax expense (benefit) of $i1,286 and $i1,725
in 2022 and $(i313) and $i837
in 2021
i4,124
(i994)
i5,533
i2,654
Unrealized
gain (loss) on investments, net of tax expense (benefit) of $(i7) and $(i12)
in 2022 and $i2 and $i48 in 2021
(i25)
i7
(i42)
i154
Unrealized
gain (loss) on derivative instruments:
Unrealized gain (loss) on foreign currency exchange contracts, net of tax expense (benefit) of $i4,298
and $i5,734 in 2022 and $(i594)
and $i655 in 2021
i11,343
(i1,224)
i13,440
i3,191
Unrealized
gain (loss) on cross currency swaps, net of tax expense (benefit) of $i1,335 and $i1,646
in 2022 and $(i349) and $i694
in 2021
i4,282
(i1,106)
i5,278
i2,202
Reclassification
adjustment for loss (gain) included in net income, net of tax benefit (expense) of $(i1,577) and $(i2,187)
in 2022 and $i340 and $i876
in 2021
(i4,204)
i2,375
(i5,830)
i4,269
Unrealized
gain on derivative instruments
i11,421
i45
i12,888
i9,662
Other
comprehensive gain (loss), net of tax
(i20,357)
i11,145
(i14,221)
i5,224
Comprehensive
income
i111,622
i213,751
i311,723
i412,119
Less:
Comprehensive income attributable to noncontrolling interest
i—
i24
i—
i56
Comprehensive
income attributable to IDEXX Laboratories, Inc.
$
i111,622
$
i213,727
$
i311,723
$
i412,063
The
accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. iBASIS
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, 2021, 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, 2022, 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, 2022, and our Annual Report on Form 10-K for the year ended December 31, 2021, (the “2021 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. iACCOUNTING
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, 2022, are consistent with those discussed in “Note 2. Summary of Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report, and as updated below.
i
Investments
in Companies Accounted for Using the Equity or Cost Method of Accounting
Investments where we have the ability to exercise significant influence, but do not control the entity, are accounted for under the equity method of accounting. Significant influence generally exists if we have a 20% to 50% ownership interest in the investee. Equity investments in entities for which we do not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost less impairment, if any, adjusted for changes resulting from qualifying observable price changes for the identical investment of the same issuer should they occur.
We evaluate our investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such
investments may be impaired. If a decline in the value of an investment is determined to be other than temporary, a loss is recorded in earnings in the current period.
As of June 30, 2022 and December 31, 2021, our equity investments of $i30.3 million and $i5.3 million,
respectively, are recorded at cost as other long-term assets.
/
8
i
New Accounting Pronouncements Adopted
None
New
Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities.” 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. This standard is effective for fiscal years beginning after December 15, 2022. Adoption of the ASU 2021-08 should be applied prospectively. Early adoption
is permitted, including in an interim period, for any period for which financial statements have not yet been issued. We are currently evaluating the impact, if any, of ASU 2021-08 on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The FASB also issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope," in January 2021. It clarifies that certain
optional expedients and exceptions apply to derivatives that are affected by the discounting transition. The amendments in this ASU affect the guidance in ASU No. 2020-04 and are effective in the same timeframe as ASU 2020-04. The relief offered by this guidance, if adopted, is available to companies for the period March 12, 2020 through December 31, 2022. Our Credit Facility includes a provision for the determination of a benchmark replacement rate as a successor to the LIBOR rate; therefore, we do not expect the discontinuation of LIBOR to have an impact on our consolidated financial statements.
NOTE 3. iREVENUE
RECOGNITION
i
Our revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring
products or services to a customer. To accurately present the consideration received in exchange for promised products or services, we apply the five-step model outlined below:
1.Identification of a contract or agreement with a customer
2.Identification of our performance obligations in the contract or agreement
3.Determination of the transaction price
4.Allocation of the transaction price to the performance obligations
5.Recognition
of revenue when, or as, we satisfy a performance obligation
We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The timing of revenue recognition, billings, and cash collections results in accounts receivable, lease receivables, and contract assets as a result of revenue recognized in advance of billings (included within other assets), and contract liabilities or deferred revenue as a result of receiving consideration in advance of revenue recognition within our unaudited condensed consolidated
balance sheet. Our payment terms generally range from i30 to i60 days, with exceptions for certain individual customers and geographies. Below is a listing of our major categories of revenue for our products and services:
Diagnostic
Products and Accessories. Diagnostic products and accessories revenues, including IDEXX VetLab® consumables and accessories, rapid assay, LPD, Water, and OPTI testing products, are predominantly recognized and invoiced at the time of shipment, which is when the customer obtains control of the product based on legal title transfer and we have the right to payment. We also provide customers with certain consumables that are recognized upon utilization by the customer, which is when we have the right to payment and the risks and rewards of ownership transfer. Shipping costs reimbursed by the customer are included in revenue and cost of sales. As a practical expedient, we do not account for shipping activities as a separate performance obligation.
Laboratory Diagnostic and Consulting Services. Laboratory diagnostic and consulting services revenues are recognized
and invoiced when performed.
9
Instruments, Software and Systems. CAG Diagnostics capital instruments, veterinary software, and diagnostic imaging systems revenues are recognized and invoiced when the customer obtains control of the products based on legal title transfer and we have the right to payment, which generally occurs at the time of installation and customer acceptance. Our instruments, software, and systems are often included in one of our significant customer programs, as further described below. For veterinary software systems that include multiple performance obligations, such as perpetual software licenses and computer hardware, we allocate revenue to each performance obligation based on estimates of the
price that we would charge the customer for each promised product or service if it were sold on a standalone basis.
Lease Revenue. Revenues from instrument rental agreements and reagent rental programs are recognized either as operating leases on a ratable basis over the term of the agreement or as sales-type leases at the time of installation and customer acceptance. Customers typically pay for the right to use instruments under rental agreements in equal monthly amounts over the term of the rental agreement. Our reagent rental programs provide our customers the right to use our instruments upon entering into agreements to purchase specified amounts of consumables, which are considered embedded leases. For some agreements, the customers are provided with the right to purchase the instrument at the end of the lease term. Lease revenues from these agreements are presented
in product revenue on our unaudited condensed consolidated income statement. Lease revenue was approximately $i4.9 million and $i9.9 million for the three and six months ended June 30,
2022, as compared to $i4.7 million and $i9.5 million for the three and six months ended June 30, 2021, 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 systemsextended warranties typically provide customers with continued coverage for a period of one to ifive
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 i12 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, 2021, our deferred revenue related to extended warranties and post-contract support was $i30.0 million, of which approximately $i2.5
million and $i17.2 million was recognized during the three and six months ended June 30, 2022, respectively. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $i27.5
million as of June 30, 2022. 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 $i13.0
million as of June 30, 2022, of which approximately i26%, i38%, i20%,
i8%, and i8% are expected to be recognized during the remainder of 2022, the full years 2023, 2024, 2025, 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 itwo 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
10
cause
reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts.
We allocate revenue to each performance obligation in proportion to the relative standalone selling prices, and recognize revenue when transfer of the related goods or services has occurred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the performance obligation when sold separately. When standalone selling prices for our products or services are not directly observable, we determine the standalone selling prices using relevant information available and apply suitable estimation methods including, but not limited to, the cost plus a margin approach. We recognize revenue as each performance obligation
is satisfied, either at a point in time or over time, as described in the revenue categories above. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less.
The following customer programs represent our most significant customer contracts which contain multiple performance obligations:
Customer Commitment Programs. We offer customer incentives upon entering into multi-year agreements to purchase annual minimum amounts of products and services.
Up-Front
Customer Loyalty Programs. Our up-front loyalty programs provide customers with incentives in the form of cash payments or IDEXX Points upon entering into multi-year agreements to purchase annual minimum amounts of future products or services. If a customer breaches 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, 2021, our capitalized customer acquisition
costs were $i158.3 million, of which approximately $i12.5 million and $i25.2
million was recognized as a reduction of revenue during the three and six months ended June 30, 2022, respectively. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $i156.4 million as of June 30, 2022. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration.
Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three and six months ended June 30, 2022, were not material.
Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with a free or discounted instrument or system upon entering into multi-year agreements to purchase annual minimum amounts of products and services. We allocate total consideration, including future committed purchases and expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance in advance
of billing the customer, which is also when the customer obtains control of the instrument based on legal title transfer. Our right to future consideration related to instrument revenue is recorded as a contract asset within other current and long-term assets. The contract asset is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the timing and amount of revenue recognition.
On December
31, 2021, our volume commitment contract assets were $i159.9 million, of which approximately $i9.6
million and $i18.9 million was reclassified to accounts receivable when customers were billed for related products and services during the three and six months ended June 30, 2022, respectively.
11
Furthermore,
as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our contract assets were $i179.1 million as of June 30, 2022. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets
and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three and six months ended June 30, 2022, 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 $i3.0
billion, of which approximately i14%, i27%, i22%,
i17%, and i20% are expected to be recognized during the remainder of 2022, the full years 2023, 2024, 2025, and thereafter, respectively. These future revenues relate
to performance obligations not yet satisfied, for which customers have committed to purchase goods and services, net of the expected revenue reductions from customer acquisition costs and expected price adjustments, and, as a result, are lower than stated contractual commitments by our customers.
Instrument Rebate Programs. Our instrument rebate programs require an instrument purchase and provide customers the opportunity to earn future rebates based on the volume of products and services they purchase over the term of the program. We account for the customer’s right to earn rebates on future purchases as a separate performance obligation and determine the standalone selling price based on an estimate of rebates the customer will earn over the term of the program. Total consideration allocated to identified performance obligations is limited to goods and services that the
customer is presently obligated to purchase and does not include estimates of future purchases that are optional. We allocate total consideration to identified performance obligations, including the customer’s right to earn rebates on future purchases, which is deferred and recognized upon the purchase of future products and services, partially offsetting future rebates as they are earned.
On December 31, 2021, our deferred revenue related to instrument rebate programs was $i33.0
million, of which approximately $i3.1 million and $i6.5
million was recognized when customers purchased eligible products and services and earned rebates during the three and six months ended June 30, 2022, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $i29.4 million as of June 30, 2022, of which approximately i20%,
i31%, i21%, i14%,
and i14% are expected to be recognized during the remainder of 2022, the full years 2023, 2024, 2025, 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, 2021, our lease receivable assets were $i15.3 million, of which approximately $i0.9 million
and $i1.7 million was reclassified to accounts receivable when customers were billed for related products and services during the three and six months ended June 30, 2022, 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 $i15.8
million as of June 30, 2022. The impacts of discounting and unearned income as of June 30, 2022 were not material. Profit and loss recognized at the commencement date and interest income during the three and six months ended June 30, 2022, 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, 2022 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, 2022, we transferred instruments of $i4.6 million and $i7.6
million, as compared to $i3.3 million and $i5.8 million for the three and six months ended June
30, 2021, respectively, from inventory to property and equipment.
12
We estimate future revenue to be recognized related to our reagent rental programs of approximately $i35.9 million, of which approximately i17%,
i29%, i23%, i17%,
and i14% are expected to be recognized during the remainder of 2022, the full years 2023, 2024, 2025, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied for which customers have committed to future purchases, net of any expected price adjustments, and, as a result, may be lower than stated contractual commitments by our customers.
Other Customer Incentive Programs. Certain
agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers and the expected-value method for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the three and six months ended June 30, 2022, 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. We have no significant customers that accounted for greater than 10% of our consolidated revenues, and we have no concentration of credit risk as of June 30, 2022.
13
Disaggregated Revenues. We present disaggregated revenue for our CAG segment based on major product and service categories. Our Water segment is comprised of a single major product category. Although our LPD segment does not meet the quantitative 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.
i
The following table presents disaggregated revenue by major product and service categories:
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 typically ranges from i3 to i7
years, by taking into consideration our customer contract terms, history of renewals, expected length of customer relationship, and 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, 2021, our deferred commission costs, included within other assets, were $i19.5
million, of which approximately $i1.6 million and $i3.4 million of commission expense was recognized during the three and six months ended June
30, 2022, respectively. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $i19.3 million as of June 30, 2022. Impairments of deferred commission costs during the three and six months ended June 30, 2022, were not material.
14
NOTE
4. iACQUISITIONS, ASSET PURCHASES AND INVESTMENTS
We believe that our acquisitions of businesses and other assets enhance our existing businesses by either expanding our geographic range and customer base, or expanding our existing product lines. From time to time we may acquire small reference laboratory or radiology practices that we account for as either asset purchases or business combinations.
Asset Purchases and Investments
During the second quarter of 2022, we entered into itwo arrangements to license intellectual property for which we paid $i50.0 million
and accrued $i30.0 million in subsequent payments. The $i80.0 million in the aggregate was charged to research and development expense for these license rights. These
itwo 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. The expense was recorded in our CAG segment. We also purchased $i25.0 million
of preferred shares for a noncontrolling minority interest in one of these entities. We have elected to measure the investment as an equity security investment, under ASC 321, “Investment - Equity Securities,” and recorded the investment at cost. The investment is included in other long-term assets.
During the first quarter of 2022 we made a $i10.0 million payment for a perpetual intellectual property license, which will be amortized over i10
years and included in our CAG segment.
Business Combinations
During the fourth quarter of 2021, we acquired the shares of a reference laboratory located in Finland for approximately $i13.4 million in cash, including a holdback of approximately $i1.4
million. This acquisition expands our international reference laboratory presence and was accounted for as a business combination. The fair values of the assets acquired consist of customer relationship intangibles of approximately $i7.4 million, with a life of i10
years; a non-compete agreement of approximately $i0.8 million, with a life of i3
years; approximately $i6.9 million of goodwill, representing synergies within our broader CAG portfolio; and approximately $i1.7 million in net tangible liabilities, including deferred taxes associated with
the acquired intangible assets. Goodwill related to this acquisition is not 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 CAG segment since the acquisition date. The acquisition expenses were not material.
During the first quarter of 2021, we acquired the shares of a reference laboratory located in Switzerland for approximately $i5.5 million
in cash, including holdback and contingent payments of approximately $i1.1 million. This acquisition expands our international reference laboratory presence and was accounted for as a business combination. The fair value of the assets acquired consists of approximately $i4.3 million in
intangible assets, primarily for customer relationships, which will be amortized over i9 years; approximately $i1.8 million for goodwill, representing synergies within our broader CAG portfolio; and approximately
$i0.6 million of liabilities, including deferred taxes associated with the acquired intangible assets. Goodwill related to this acquisition is not 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 CAG segment since the acquisition date. The acquisition expenses were not material.
NOTE
5. iSHARE-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, 2022, totaled $i4.4
million and $i55.4 million, respectively, as compared to $i4.0
million and $i48.3 million for the three and six months ended June 30, 2021, respectively. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding as of June 30, 2022, was $i87.2
million, which will be recognized over a weighted average period of approximately i1.7 years. During the three and six months ended June 30, 2022, we recognized expenses of $i12.3
million and $i23.5 million, respectively, as compared to $i9.6 million and $i18.5
million for the three and six months ended June 30, 2021, respectively, related to share-based compensation.
iWe 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
15
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.
i
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:
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 $i8.0 million
and $i5.7 million as of June 30, 2022 and December 31, 2021, respectively. Accounts receivable reflected on the balance sheet is net of this reserve. Based on an aging analysis, as of June 30, 2022, approximately i92%
of our accounts receivable had not yet reached the invoice due date and approximately i8% was considered past due, of which approximately i0.2% was greater than i60
days past due. As of December 31, 2021, approximately i90% of our accounts receivable had not yet reached the invoice due date and approximately i10% was considered past due, of which
approximately i1.8% was greater than i60 days past due.
The allowance for credit losses associated with the contract assets and lease receivables was $i4.9 million and $i4.4 million
as of June 30, 2022 and December 31, 2021, 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.
16
NOTE 7. iINVENTORIES
iInventories 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.iThe
components of inventories were as follows:
Total
minimum future lease payments for leases that have not commenced as of June 30, 2022, are approximately $i8.1 million, and those leases will commence between 2022 and 2024.
i
Supplemental
cash flow information for leases was as follows:
As of June 30, 2022, we had $i611.0 million
outstanding borrowings under our Credit Facility with a year-to-date weighted average effective interest rate of i1.6%. As of December 31, 2021, we had $i73.5 million
outstanding borrowings under our Credit Facility with a weighted average effective interest rate of i1.1%. As of June 30, 2022, we had a remaining borrowing availability of $i387.6
million under our $i1 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 in connection with our workers’ compensation policy, for $i1.4 million.
The
Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements, and violations of laws and regulations. The 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 i3.5-to-1.
As of June 30, 2022 and December 31, 2021, we were in compliance with the covenants of the Credit Facility.
Senior Notes
iThe following describes all of our currently outstanding unsecured senior notes issued and sold in private placements (collectively, the “Senior Notes”) as of June 30, 2022:
(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
$
i75,000
i3.94
%
NY
Life 2013 Note Agreement
12/11/2013
12/11/2025
2025 Series B Notes
$
i75,000
i4.04
%
NY
Life 2013 Note Agreement
9/4/2014
9/4/2026
2026 Senior Notes
$
i75,000
i3.72
%
NY
Life 2014 Note Agreement
7/21/2014
7/21/2024
2024 Series B Notes
$
i75,000
i3.76
%
Prudential
2015 Amended Agreement
6/18/2015
6/18/2025
2025 Series C Notes
€
i88,857
i1.785
%
Prudential
2015 Amended Agreement
2/12/2015
2/12/2027
2027 Series B Notes
$
i75,000
i3.72
%
MetLife
2014 Note Agreement
3/14/2019
03/14/2029
2029 Series C Notes
$
i100,000
i4.19
%
MetLife
2014 Note Agreement
4/2/2020
04/02/2030
MetLife 2030 Series D Notes
$
i125,000
i2.50
%
MetLife
2014 Note Agreement
4/14/2020
04/14/2030
Prudential 2030 Series D Notes
$
i75,000
i2.50
%
Prudential
2015 Amended Agreement
/
In February 2022, we paid off our $i75.0 million 2022 Series A Notes with cash provided by operations and financing activities.
The Senior Note Agreements contain affirmative, negative, and financial covenants customary for agreements of this
type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, certain restrictive agreements, and violations of laws and regulations. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation, as defined in the Senior Note Agreements, not to exceed i3.5-to-1.
As of June 30, 2022 and December 31, 2021, we were in compliance with the covenants of the Senior Note Agreements.
19
NOTE 12. iREPURCHASES 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, 2022 and 2021 was not material.
i
The
following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrender:
Shares
acquired through employee surrender for statutory tax withholding
i—
i—
i21
i28
Total
shares repurchased
i809
i341
i1,332
i646
Cost
of shares repurchased in the open market
$
i313,455
$
i188,409
$
i576,238
$
i327,622
Cost
of shares for employee surrenders
i52
i3
i10,390
i14,986
Total
cost of shares
$
i313,507
$
i188,412
$
i586,628
$
i342,608
Average
cost per share - open market repurchases
$
i387.78
$
i552.08
$
i439.63
$
i529.45
Average
cost per share - employee surrenders
$
i369.63
$
i550.59
$
i504.60
$
i544.08
Average
cost per share - total
$
i387.78
$
i552.08
$
i440.63
$
i530.07
/
NOTE
13. iINCOME TAXES
Our effective income tax rate was i22.9% for the three months ended June
30, 2022, as compared to i19.5% for the three months ended June 30, 2021, the increase in the effective tax rate for the three months ended June 30, 2022, as compared to the same periods in the prior year, was primarily driven by higher taxes on international income and decreases in tax benefits related to share-based compensation.
Our effective income tax rate was i21.0%
for the six months ended June 30, 2022, as compared to i17.3% for the six months ended June 30, 2021. The increase in our effective tax rate for the six months ended June 30, 2022, as compared to the same periods in the prior year, was primarily driven by decreases in tax benefits related to share-based compensation and higher taxes on international income.
The
effective tax rate for the three months ended June 30, 2022, 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 tax benefits from share-based compensation.
The effective tax rate for the six months ended June 30, 2022, was equivalent to the U.S. federal statutory tax rate of 21%. The impact on the effective tax rate from U.S. state income taxes, net of federal benefit, was substantially offset by tax benefits from share-based compensation.
The effective tax rate for the three and six months ended June 30, 2021, differed from the U.S. statutory tax rate of 21% primarily
due to tax benefits from share-based compensation.
20
NOTE 14. iACCUMULATED OTHER COMPREHENSIVE INCOME
i
The
changes in AOCI, net of tax, consisted of the following:
The
following tables present components and amounts associated with pension reclassified out of AOCI to net income:
(in thousands)
Affected Line Item in the Statements of Income
Amounts
Reclassified from AOCI For the Three Months Ended June 30,
Amounts Reclassified from AOCI For the Six Months Ended June 30,
2022
2021
2022
2021
Gain (loss) on pension plans included in net income:
Pension
plans
Cost of revenue and operating expenses
$
(i311)
$
i—
$
(i311)
$
i—
Tax
benefit
(i51)
i—
(i51)
i—
Loss,
net of tax
$
(i260)
$
i—
$
(i260)
$
i—
/
NOTE
15. iEARNINGS PER SHARE
iBasic earnings per share is computed by dividing net income attributable to our stockholders by the weighted average number of shares of common stock and vested deferred
stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the total unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase our common stock at the average market price during the period. Vested deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed, and issuance is not
contingent. Refer to Note 5 to the consolidated financial statements in our 2021 Annual Report for additional information regarding deferred stock units.
i
The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share:
Shares
outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share
i83,922
i85,325
i84,164
i85,427
Dilutive
effect of share-based payment awards
i936
i1,329
i1,058
i1,367
i84,858
i86,654
i85,222
i86,794
/
22
Certain
awards and options to acquire shares have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. iThe following table presents information concerning those anti-dilutive awards and options:
Weighted
average number of shares underlying anti-dilutive awards
i79
i—
i40
i1
Weighted
average number of shares underlying anti-dilutive options
i284
i135
i248
i102
NOTE
16. iCOMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
Refer to “Note 8. Leases,” for more information regarding our lease commitments.
Contingencies
We are subject to claims that may arise in the ordinary course of business, including with respect to actual and threatened
litigation and other matters. We accrue for loss contingencies when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. However, the results of legal actions cannot be predicted with certainty, and therefore our actual losses with respect to these contingencies could be higher or lower than our accruals. Except for the litigation matter described below, as of June 30, 2022, our accruals with respect to actual and threatened litigation were not material.
We are a defendant in an ongoing litigation matter involving an alleged breach of contract for underpayment of royalty payments made from 2004 through 2017 under an expired patent license agreement. The plaintiff has asserted a claim of approximately $i50 million,
inclusive of interest through June 30, 2020, alleging that the incorrect royalty provision was applied to certain licensed products and services throughout the agreement term and that royalties were also due on non-licensed diagnostic services that were provided concurrently with licensed services. The trial court previously ruled in favor of the plaintiff in this matter and we are appealing the judgment and continue to vigorously defend ourselves against the plaintiff’s allegations. While we believe the claim is without merit, litigation is inherently unpredictable and there can be no assurance that we will prevail in this matter. During the third quarter of 2020, we established an accrual of $i27.5 million
related to this ongoing matter, which represents the amount of the contingent loss that we have determined to be probable and estimable. We have not made any adjustments to this accrual since it was established. The actual cost of resolving this matter may be higher or lower than the amount we have accrued.
From time to time, we have received notices alleging that our products infringe third party proprietary rights, although we are not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that we will prevail in any infringement proceedings that may be commenced against us. If we lose any such litigation, we may be stopped from selling certain products and/or we may be required to pay damages as a result of the litigation.
Guarantees
We
enter into agreements with third parties in the ordinary course of business under which we are obligated to indemnify such third parties for and against various risks and losses. The precise terms of such indemnities vary with the nature of the agreement. In many cases, we limit the maximum amount of our indemnification obligations, but in some cases, those obligations may be theoretically unlimited. We have not incurred material expenses in discharging any of these indemnification obligations and, based on our analysis of the nature of the risks involved, we believe that the fair value of potential indemnification under these agreements is minimal. Accordingly, we have recorded iino/
liabilities for these obligations as of June 30, 2022 and December 31, 2021.
23
NOTE 17. iSEGMENT REPORTING
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. Our reportable segments include diagnostic and information technology-based products and services for the veterinary sector, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”), and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Although our LPD segment does not meet the quantitative thresholds to be reported as a separate segment, we believe it is important to disaggregate these revenues as a major product and service category within our
Other reportable segment given its distinct markets, and therefore we have elected to report LPD as a reportable segment. Our Other operating segment combines and presents products and services for the human medical diagnostics sector with our out-licensing arrangements. Assets are not allocated to segments for internal reporting purposes.
24
i
The
following is a summary of segment performance:
(in
thousands)
For the Three Months Ended June 30,
CAG
Water
LPD
Other
Consolidated Total
2022
Revenue
$
i784,087
$
i39,195
$
i29,889
$
i7,375
$
i860,546
Income
from operations
$
i156,526
$
i17,920
$
i3,230
$
i1,390
$
i179,066
Interest
expense, net
(i7,983)
Income before provision for income taxes
i171,083
Provision
for income taxes
i39,104
Net income
i131,979
Less:
Net income attributable to noncontrolling interest
i—
Net income attributable to IDEXX Laboratories, Inc. stockholders
$
i131,979
2021
Revenue
$
i745,595
$
i37,191
$
i33,524
$
i9,832
$
i826,142
Income
from operations
$
i234,735
$
i17,228
$
i6,868
$
i422
$
i259,253
Interest
expense, net
(i7,522)
Income before provision for income taxes
i251,731
Provision
for income taxes
i49,125
Net income
i202,606
Less:
Net income attributable to noncontrolling interest
i24
Net income attributable to IDEXX Laboratories, Inc. stockholders
$
i202,582
/
25
(in
thousands)
For the Six Months ended June 30,
CAG
Water
LPD
Other
Consolidated Total
2022
Revenue
$
i1,545,271
$
i75,566
$
i60,759
$
i15,499
$
i1,697,095
Income
from operations
$
i379,651
$
i34,574
$
i9,967
$
i3,218
$
i427,410
Interest
expense, net
(i14,836)
Income before provision for income taxes
i412,574
Provision
for income taxes
i86,630
Net income
i325,944
Less:
Net income attributable to noncontrolling interest
i—
Net income attributable to IDEXX Laboratories, Inc. stockholders
$
i325,944
2021
Revenue
$
i1,438,362
$
i71,231
$
i72,794
$
i21,462
$
i1,603,849
Income
from operations
$
i447,945
$
i32,000
$
i20,676
$
i6,254
$
i506,875
Interest
expense, net
(i15,054)
Income before provision for income taxes
i491,821
Provision
for income taxes
i84,926
Net income
i406,895
Less:
Net income attributable to noncontrolling interest
i56
Net income attributable to IDEXX Laboratories, Inc. stockholders
$
i406,839
Refer
to “Note 3. Revenue Recognition” for a summary of disaggregated revenue by reportable segment and by major product and service category for the three and six months ended June 30, 2022 and 2021.
26
NOTE 18. iFAIR
VALUE MEASUREMENTS
i
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
We have certain financial assets and liabilities that
are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a non-recurring basis, and certain financial assets and liabilities that are not measured at fair value in our unaudited condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:
Level 1
Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level
2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers in or out of Level 3 of the fair value hierarchy during the three and six months ended June 30, 2022.
Our cross currency swap contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our cross currency swap contracts classified as derivative instruments using prevailing market conditions as of the close of business on each balance sheet date. The product of this calculation is then adjusted for counterparty risk.
Our
foreign currency exchange contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our foreign currency exchange contracts classified as derivative instruments using an income approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.
The amounts outstanding under our unsecured revolving credit facility (“Credit Facility” or “line of credit”) and senior notes (“long-term debt”) are measured
at carrying value in our unaudited condensed consolidated balance sheets though we disclose the fair value of these financial instruments. We determine the fair value of the amount outstanding under our Credit Facility and long-term debt using an income approach, utilizing a discounted cash flow analysis based on current market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk. Our Credit Facility and long-term debt are valued using Level 2 inputs. The estimated fair value of our Credit Facility approximates its carrying value. The estimated fair value and carrying value of our long-term debt were $i765.0
million and $i768.5 million, respectively, as of June 30, 2022, and $i916.3 million and $i850.7
million, respectively, as of December 31, 2021.
27
i
The following tables set forth our assets and liabilities that were measured at fair value on a recurring
basis by level within the fair value hierarchy:
(1)Money
market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of December 31, 2021 consisted of demand deposits. As of June 30, 2022, we did inot have any money market funds outstanding.
(2)Equity mutual funds relate to a deferred compensation plan that was assumed as part of a
previous business combination. This amount is included within other long-term assets. Refer to footnote (4) below for a discussion of the related deferred compensation liability.
(3)Cross currency swaps and foreign currency exchange contracts are included within other current assets, other long-term assets, accrued liabilities, or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.
/
(4)A deferred compensation plan assumed as part of a previous business combination is included within accrued liabilities and other
long-term liabilities. The fair value of our deferred compensation plan is indexed to the performance of the underlying equity mutual funds discussed in footnote (2) above.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate carrying value due to their short maturity.
Contingent Consideration
We have classified our liability for contingent consideration related to acquisitions within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which includes the achievements of future revenues. The contingent consideration is included within other short-term
liabilities.
28
We record changes in the estimated fair value of contingent consideration in the condensed consolidated statements of income. iChanges in contingent consideration liabilities are
measured at fair value on a recurring basis using unobservable inputs (Level 3) and during the six months ended June 30, 2022, are as follows:
During
the second quarter of 2022, we determined that the $i7.0 million contingent consideration associated with our ezyVet acquisition in the second quarter of 2021 would be earned based on revenue achievements obtained. The remainder of the contingent consideration is expected to be paid during the third quarter of 2022.
NOTE 19. iHEDGING
INSTRUMENTS
Disclosure within this note is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging instruments”), how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations, and cash flows.
i
We are exposed to certain risks related to our ongoing business
operations. The primary risk that we currently manage by using hedging instruments is foreign currency exchange risk. We may also enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with borrowings under our variable-rate Credit Facility.
Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts, cross currency swaps, or foreign-denominated debt issuances to minimize the impact
of foreign currency fluctuations associated with specific balance sheet exposures, including net investments in certain foreign subsidiaries.
The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions, including transactions denominated in the euro, British pound, Japanese yen, Canadian dollar, and Australian dollar. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with well-capitalized multinational financial institutions, and we do not hold or engage in transactions involving
derivative instruments for purposes other than risk management. Our accounting policies for these contracts are based on the designation of such instruments as hedging transactions.
We recognize all hedging instruments on the balance sheet at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment must be recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Refer to “Note 14. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on our unaudited condensed consolidated statements of income for the three and six months ended June 30, 2022 and 2021.
We
enter into master netting arrangements with the counterparties to our derivative transactions which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.
29
Cash
Flow Hedges
We have designated our foreign currency exchange contracts as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.
We did not de-designate any instruments from hedge accounting treatment during either the three and six months ended June 30, 2022 or 2021. As of June 30, 2022, the estimated amount of net gains, net of tax, which are expected to be reclassified out of AOCI and into earnings
within the next 12 months, is $i11.2 million if exchange rates do not fluctuate from the levels as of June 30, 2022.
We target to hedge approximately i75%
to i85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, and Australian dollar. We have additional unhedged foreign currency exposures related to foreign services and emerging markets where it is not practical to hedge. We primarily utilize foreign currency exchange contracts with durations
of less than i24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign
currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $i259.4 million and $i286.7
million as of June 30, 2022 and December 31, 2021, respectively.
i
The following tables present the effect of cash flow hedge accounting on our unaudited condensed consolidated statements of income and comprehensive income, and provide information regarding the location and amounts of pretax gains or losses of derivatives:
Amount of gain (loss) reclassified from accumulated other comprehensive income into income
$
i5,781
$
(i2,715)
$
i8,017
$
(i5,145)
/
Net
Investment Hedges, Euro-Denominated Notes
In June 2015, we issued and sold through a private placement an aggregate principal amount of €i88.9 million in euro-denominated i1.785%
Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded gains of $i4.1 million
and $i5.5 million, net of tax, within AOCI as a result of this net investment hedge for the three and six months ended June 30, 2022, respectively, and losses of $i1.0 million
and gains of $i2.7 million for the three and six months ended June 30, 2021, respectively. The related cumulative unrealized gain recorded as of June 30, 2022, will not be reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged foreign operations
or a portion of the hedge no longer qualifies for hedge accounting treatment. Refer to Note 13 to the consolidated financial statements included in our 2021 Annual Report for further information regarding the issuance of these euro-denominated notes.
Net Investment Hedges, Cross Currency Swaps
We have entered into several cross currency swap contracts as a hedge of our net investment in foreign operations to offset foreign currency translation gains and losses on the net investment. These cross currency swaps have maturity dates beginning on June 30, 2023, through June 18, 2025. At maturity of the cross currency swap contracts,
we will deliver the notional amount of €i90.0 million and will receive approximately $i104.5 million from the counterparties on June
30, 2023, and
30
we will deliver the notional amount of €i15 million and will receive approximately $i17.5 million
from the counterparties on June 18, 2025. The changes in fair value of the cross currency swap contracts are recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. During the three and six months ended June 30, 2022, we recorded gains of $i4.3
million and $i5.3 million, net of tax, respectively, within AOCI as a result of these net investment hedges, and losses of $i1.1
million and gains of $i2.2 million during the three and six months ended June 30, 2021, respectively. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swaps. This interest rate component is excluded from the assessment of hedge effectiveness and is recognized as a
reduction to interest expense over the life of the hedge instrument. We recognized approximately $i0.7 million and $i1.4
million related to the excluded component as a reduction of interest expense for the three and six months ended June 30, 2022, respectively, and $i0.7 million and $i1.4
million for the three and six months ended June 30, 2021, respectively.
Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets
i
The fair values of hedging instruments and their respective classification on our unaudited condensed consolidated balance sheets and amounts
subject to offset under master netting arrangements consisted of the following derivative instruments, unless otherwise noted:
Total
derivative instruments presented as cash flow hedges on the balance sheet
i5
i601
Non-derivative
foreign currency denominated debt designated as net investment hedge on the balance sheet (1)
Long-term debt
i93,451
i100,711
Total
hedging instruments presented on the balance sheet
i93,456
i101,312
Gross
amounts subject to master netting arrangements not offset on the balance sheet
(i5)
(i601)
Net
amount
$
i93,451
$
i100,711
(1) Amounts
represent reported carrying amounts of our foreign currency-denominated debt. Refer to “Note 18. Fair Value Measurements” for information regarding the fair value of our long-term debt.
/
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), include statements relating to, among other things, the impact of the COVID-19 pandemic; our expectations regarding LPD financial performance and supply chain and logistics challenges; our operations in Russia; future revenue growth rates; revenue recognition timing and amounts; business trends, earnings and other measures of financial performance; the effect of economic downturns on our business performance; projected impact of foreign currency exchange rates; demand for companion animal healthcare and our products;
realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending, the working capital and liquidity outlook; the projected impact of new accounting standards; critical accounting estimates; deductibility of goodwill; research and development expense estimate; and future commercial and operational efforts. Forward-looking statements can be identified by the use of words such as “expects,”“may,”“anticipates,”“intends,”“would,”“will,”“plans,”“believes,”“estimates,”“should,”“project,” and similar words and expressions. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described
in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including, among other things, the adverse impact, and the duration, of the effects of the current war in Ukraine and the ongoing COVID-19 pandemic on our business, results of operations, liquidity, financial condition, and stock price, supply chain and logistics delays and disruptions, as well as the other matters described under the headings “Business,”“Risk Factors,”“Legal Proceedings,”“Management's Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosure About Market Risk” in our 2021 Annual Report and in the corresponding sections of this Quarterly Report on Form 10-Q, and for the quarter ended March 31, 2022, as well as those described from time to time in our other periodic reports filed with the SEC.
Any
forward-looking statements represent our estimates only as of the day this Quarterly Report on Form 10-Q was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change.
You should read the following discussion and analysis in conjunction with our 2021 Annual Report that includes additional information about us, our results of operations, our financial position, and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in “Part I. Item 1. Financial Statements” of this Quarterly
Report on Form 10-Q.
Our fiscal quarter ended on June 30. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior-year periods.
Business Overview
We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing sectors. We also design, manufacture, and distribute point of care and laboratory diagnostics for the human medical diagnostics sector. Our primary products and services are:
•Point-of-care
veterinary diagnostic products, comprising instruments, consumables, and rapid assay test kits;
•Veterinary reference laboratory diagnostic and consulting services;
•Practice management and diagnostic imaging systems and services used by veterinarians;
•Health monitoring, biological materials testing, and laboratory diagnostic instruments and services used by the biomedical research community;
•Diagnostic, health-monitoring products for livestock, poultry, and dairy;
•Products that test water for certain microbiological contaminants; and
•Point-of-care electrolytes,
blood gas analyzers, and SARS-CoV-2 RT-PCR (COVID-19 test) used in the human diagnostics sector.
32
Operating Segments. We operate primarily through three business segments: diagnostic and information technology-based products and services for the veterinary sector, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”), and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other operating segment combines and presents products for the human medical diagnostics
sector with our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
CAG develops, designs, manufactures, and distributes products and software, and performs services for veterinarians and the biomedical analytics sector, primarily related to diagnostics and information management. Water develops, designs, manufactures, and distributes a range of products used in the detection of various microbiological parameters in water. LPD develops, designs, manufactures, and distributes diagnostic tests and related software and performs services that are used to manage the health status of livestock and poultry, to improve bovine reproductive efficiency, and to ensure the quality and safety of milk. OPTI Medical develops, designs, manufactures, and distributes point-of-care and laboratory diagnostics (including electrolyte and blood
gas analyzers, COVID-19 PCR test, and related consumable products) for the human medical diagnostics sector.
Effects of Certain Factorsand Trendson Results of Operations
CAG Trends. The continued growth in demand for companion animal healthcare supported solid gains for CAG diagnostic products and services across regions, compared to very strong prior year demand levels. Average diagnostics revenues grew 6% at U.S. veterinary practices on a same-store basis in the second quarter, ahead of 3% growth in overall clinic revenues, reflecting continued expansion of demand for pet healthcare services. U.S. same-store clinical visits at veterinary practices declined 3% in the second quarter compared to prior
year period clinical visit growth of 13%, which included benefits from increases in new pet ownership during the COVID-19 pandemic.
LPD Trends. Our LPD revenues, on a year-over-year comparison, declined due to the relaxation of local African Swine Fever disease management programs, as well as additional impacts in China from lower pork prices and changing government requirements related to live animal imports and livestock infectious disease programs, which began in the second quarter of 2021. The comparisons to prior year are expected to improve in the second half of 2022.
Supply Chain and Logistics Challenges. We believe that building and maintaining a well-managed and disciplined infrastructure have helped minimize impacts of the current supply chain
constraints, including product and component availability issues, logistics challenges, including extended shipping periods and delays, and inflationary pressures that are currently occurring worldwide. Our proactive approach to managing our operational processes, including forward planning with a focus on working closely with our suppliers and logistics partners, has enabled us to maintain continued high levels of product and service availability and customer service. We continue to monitor these supply chain and logistics challenges, including potential fuel rationing and shortages, and have implemented mitigation strategies to adjust for, among other things, delayed shipments of products and components. Although we expect these challenges to continue during 2022, we believe we are well positioned to enable sustained high growth in our businesses going forward and to effectively manage the impacts of potentially relatively higher costs in certain areas to support these
growth plans. However, there can be no assurance as to the duration or severity of the supply chain and logistics challenges or the effectiveness of our mitigating activities.
War in Ukraine / Russia Operations. Our operations in the Russia, Belarus and Ukraine region are limited. Our 2021 revenue from the region represented less than 1% of our 2021 consolidated revenue, and we have no manufacturing or significant supply arrangement in the region. After significantly scaling back our operations in Russia in the first quarter, including suspending sales of veterinary diagnostic equipment; promotional, marketing, and hiring activities; and new business development and related investments, we decided in June 2022, after careful consideration, to wind down and liquidate our sole Russian subsidiary, as well as our direct Russian operations, which consisted of marketing
and selling diagnostic products for veterinary clinics in Russia. After we conclude the wind-down of our direct Russian operations, we anticipate that only a limited number of our products, which are important for human or animal healthcare, will continue to be sold in Russia pursuant to ongoing third-party distribution agreements. Some of our products are also sold in Belarus pursuant to ongoing third-party distribution agreements.
33
Currency and Other Items
Currency Impact. Refer to “Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Quarterly
Report on Form 10-Q for additional information regarding the impact of foreign currency exchange rates.
Other Items. Refer to “Part I, Item 1. Business - Patents and Licenses” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2021 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration.
Critical Accounting Estimates and Assumptions
The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022, are consistent with those discussed in our 2021 Annual Report in the section under the heading “Part II. Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Assumptions.”
Recent Accounting Pronouncements
For more information regarding the impact that recent accounting standards and amendments will have on our consolidated financial statements, refer to Note 2 to the unaudited condensed consolidated financial statements in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion
to “revenue,”“revenues” or “revenue growth” are references to “organic revenue growth.” Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three and six months ended June 30, 2022, as compared to the same periods 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. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers.
We
exclude from organic revenue growth the effect of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under management’s control, are subject to volatility, and can obscure underlying business trends. We calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year period and the comparable prior-year period to foreign currency denominated revenues for the prior-year period.
We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying
business and operating trends. We exclude only acquisitions that are considered to be a business from organic revenue growth. In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single asset or group of similar assets, we do not consider these assets to be a business and include these acquisitions in organic revenue growth. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth. The percentage change in revenue resulting from acquisitions represents revenues during the current year period, limited to the initial 12 months from the date of the acquisition, that are directly attributable to business
acquisitions.
34
We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio, in this Quarterly Report on Form 10-Q, all of which are non-GAAP financial measures that should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Total Company. The following table presents total Company revenue by operating segment:
For
the Three Months Ended June 30,
Net Revenue
(dollars in thousands)
2022
2021
Dollar Change
Reported Revenue Growth (1)
Percentage Change
from Currency
Percentage Change from Acquisitions
Organic Revenue Growth (1)
CAG
$
784,087
$
745,595
$
38,492
5.2
%
(3.3
%)
1.1
%
7.3
%
United
States
532,626
486,252
46,374
9.5
%
—
1.5
%
8.1
%
International
251,461
259,343
(7,882)
(3.0
%)
(9.2
%)
0.4
%
5.7
%
Water
39,195
37,191
2,004
5.4
%
(3.5
%)
—
8.9
%
United
States
19,533
17,747
1,786
10.1
%
—
—
10.1
%
International
19,662
19,444
218
1.1
%
(6.7
%)
—
7.8
%
LPD
29,889
33,524
(3,635)
(10.8
%)
(5.8
%)
—
(5.0
%)
United
States
3,742
3,516
226
6.5
%
—
—
6.5
%
International
26,147
30,008
(3,861)
(12.9
%)
(6.4
%)
—
(6.4
%)
Other
7,375
9,832
(2,457)
(25.0
%)
1.9
%
—
(26.9
%)
Total
Company
$
860,546
$
826,142
$
34,404
4.2
%
(3.3
%)
1.0
%
6.5
%
United
States
559,825
515,238
44,587
8.7
%
—
1.4
%
7.3
%
International
300,721
310,904
(10,183)
(3.3
%)
(8.6
%)
0.3
%
5.0
%
(1)Reported
revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in organic revenue was driven by volume gains in CAG Diagnostics recurring revenue, primarily in the U.S. Overall growth reflects higher realized prices and expanding demand for companion animal diagnostics globally. Our CAG Diagnostics instrument revenue reflects high placement volume this quarter. The higher revenue in our Water business was primarily due to the benefit of price increases and higher testing volumes. The decline in our LPD business was primarily due to lower demand for swine testing in China. Other revenues reflects lower OPTI COVID-19 PCR testing products and services in the U.S. The impact of foreign currency movements decreased total revenue growth by 3.3%, while acquisitions increased
revenue growth by 1.0%.
36
The following table presents total Company results of operations:
For
the Three Months Ended June 30,
Change
Total Company - Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
860,546
$
826,142
$
34,404
4.2
%
Cost
of revenue
346,514
336,834
9,680
2.9
%
Gross profit
514,032
59.7
%
489,308
59.2
%
24,724
5.1
%
Operating
expenses:
Sales and marketing
130,257
15.1
%
119,032
14.4
%
11,225
9.4
%
General
and administrative
81,488
9.5
%
73,326
8.9
%
8,162
11.1
%
Research and development
123,221
14.3
%
37,697
4.6
%
85,524
226.9
%
Total
operating expenses
334,966
38.9
%
230,055
27.8
%
104,911
45.6
%
Income from operations
$
179,066
20.8
%
$
259,253
31.4
%
$
(80,187)
(30.9
%)
Gross
Profit. Gross profit increased due to higher sales volumes and a 50 basis point increase in the gross profit margin. The increase in the gross profit margin was primarily due to net price gains, the benefit of our reference laboratory productivity initiatives, and improved software services gross margins. The margin also increased due to comparisons to a prior year impairment charge related to rental assets in certain regions. These increases were offset by higher product, freight and distribution, and labor costs, including the impacts of inflation. The impact from foreign currency movements increased the gross profit margin by approximately 50 basis points, primarily from the impact of higher hedge gains in the current year as compared to hedge losses in the prior year.
Operating Expenses.
Sales and marketing expense increased primarily due to higher personnel-related costs, including investments in our global commercial capability. General and administrative expense increased primarily due to higher personnel-related expense and increases in amortization and depreciation expense related to business acquisitions and capital investments. Research and development expense increased primarily due to expenses totaling $80 million for acquiring rights to use certain licensed technology under two separate intellectual property licensing arrangements. These licenses are being used for future product development. The overall change in foreign currency exchange rates decreased operating expenses growth by approximately 2%.
37
Companion
Animal Group
The following table presents revenue by product and service category for CAG:
For
the Three Months Ended June 30,
Net Revenue
(dollars in thousands)
2022
2021
Dollar Change
Reported Revenue Growth(1)
Percentage Change from Currency
Percentage Change
from Acquisitions
Organic Revenue Growth(1)
CAG Diagnostics recurring revenue:
$
685,413
$
661,300
$
24,113
3.6
%
(3.3
%)
0.2
%
6.8
%
IDEXX
VetLab consumables
266,079
256,352
9,727
3.8
%
(4.1
%)
—
7.9
%
Rapid assay products
87,481
83,887
3,594
4.3
%
(1.6
%)
—
5.8
%
Reference
laboratory diagnostic and consulting services
304,130
293,675
10,455
3.6
%
(3.0
%)
0.4
%
6.1
%
CAG diagnostics
services and accessories
27,723
27,386
337
1.2
%
(4.4
%)
—
5.7
%
CAG Diagnostics capital - instruments
36,227
35,054
1,173
3.3
%
(4.9
%)
—
8.3
%
Veterinary
software, services and diagnostic imaging systems
62,447
49,241
13,206
26.8
%
(1.1
%)
13.8
%
14.0
%
Net CAG revenue
$
784,087
$
745,595
$
38,492
5.2
%
(3.3
%)
1.1
%
7.3
%
(1) Reported
revenue growth and organic revenue growth may not recalculate due to rounding.
CAG Diagnostics Recurring Revenue. The increase was driven by higher demand for companion animal diagnostics globally across modalities. The increase in CAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, and higher realized prices. The impact of foreign currency movements decreased revenue growth by 3.3%. The impact of acquisitions increased revenue growth by 1.1%.
The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes, primarily of our Catalyst consumables and, to a lesser extent, ProCyte consumables, and higher price realization.
These volume increases were supported by the expansion of our installed base of instruments, our expanded menu of available tests in certain regions, and high customer retention levels.
The increase in rapid assay revenue resulted from higher testing volume levels in the U.S., primarily from SNAP® 4Dx Plus, and higher price realization.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to higher testing volumes and price realization in our U.S. labs. Growth in other regions was moderately lower, with volume growth pressured by comparison to strong prior period demand levels, offset by higher realized prices.
The
increase in CAG Diagnostics services and accessories revenue was primarily a result of the expansion of our active installed base of instruments.
CAG Diagnostics Capital – Instrument Revenue. The increase in instrument revenue was primarily due to strong premium instrument placements globally, including the successful global launch of the ProCyte One analyzer, to support increased diagnostic testing.
38
Veterinary Software, Services and Diagnostic Imaging Systems Revenue. Acquisitions increased revenue 13.8% as compared to the second quarter of 2021, with the purchase
of ezyVet in June 2021. Excluding the impact of acquisitions, the increase in veterinary software and services revenue was primarily due to higher veterinary software system placements to continue the expansion in our active installed base, and higher realized prices on service offerings. The increase in our diagnostic imaging systems revenues was primarily due to increases in our active installed base resulting in higher service revenue, as well as higher realized prices.
The following table presents the CAG segment results of operations:
For
the Three Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
784,087
$
745,595
$
38,492
5.2
%
Cost
of revenues
317,833
304,809
13,024
4.3
%
Gross profit
466,254
59.5
%
440,786
59.1
%
25,468
5.8
%
Operating
expenses:
Sales and marketing
118,899
15.2
%
109,151
14.6
%
9,748
8.9
%
General
and administrative
72,079
9.2
%
64,134
8.6
%
7,945
12.4
%
Research and development
118,750
15.1
%
32,766
4.4
%
85,984
262.4
%
Total
operating expenses
309,728
39.5
%
206,051
27.6
%
103,677
50.3
%
Income from operations
$
156,526
20.0
%
$
234,735
31.5
%
$
(78,209)
(33.3
%)
Gross
Profit. Gross profit increased primarily due to higher sales volume and a 40 basis point increase in the gross profit margin. The increase in the gross profit margin was primarily due to net price gains, the benefit of our reference laboratory productivity initiatives, and improved software services gross margins. The margin also increased due to comparisons to a prior year impairment charge related to rental assets in certain regions. These increases were offset by increases in product, freight and distribution, and labor costs, including the impacts of inflation. The impact from foreign currency movements increased the gross profit margin by approximately 30 basis points, primarily from the impact of hedge gains in the current year as compared to hedge losses in the prior year.
Operating Expenses. Sales and marketing expense increased
primarily due to higher personnel-related costs, including investments in our global commercial capability. General and administrative expense increased primarily due to higher personnel-related expense and increases in amortization and depreciation expense related to business acquisitions and capital investments. Research and development expense increased primarily due to expenses totaling $80 million for acquiring rights to use certain licensed technology under two separate intellectual property licensing arrangements. These licenses are being used for future product development. The overall change in foreign currency exchange rates decreased operating expenses by 2%.
39
Water
The
following table presents the Water segment results of operations:
For
the Three Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
39,195
$
37,191
$
2,004
5.4
%
Cost
of revenue
11,836
11,444
392
3.4
%
Gross profit
27,359
69.8
%
25,747
69.2
%
1,612
6.3
%
Operating
expenses:
Sales and marketing
4,711
12.0
%
4,099
11.0
%
612
14.9
%
General
and administrative
3,623
9.2
%
3,384
9.1
%
239
7.1
%
Research and development
1,105
2.8
%
1,036
2.8
%
69
6.7
%
Total
operating expenses
9,439
24.1
%
8,519
22.9
%
920
10.8
%
Income from operations
$
17,920
45.7
%
$
17,228
46.3
%
$
692
4.0
%
Revenue.
The increase in revenue was due to higher realized prices andtesting volumes, primarily in our Colilert test products and related accessories used in coliform and E. coli testing. Testing volumes were lower in the Asia-Pacific region largely due to COVID restrictions. The impact of foreign currency movements decreased revenue by approximately 3.5%.
Gross Profit.Gross profit increased due to higher sales volumes and a 60 basis point increase in the gross profit margin, which reflected a 230 basis point increase due to foreign currency movements, primarily from the impact of hedge gains in the current year compared to hedge losses
in the prior year. The gross profit margin was decreased by higher freight and distribution costs and, to a lesser extent, higher product costs, partially offset by the net benefit of price gains.
Operating Expenses. Sales and marketing and research and development expenses increased primarily due to higher personnel-related costs. General and administrative expense increased primarily due to personnel-related cost and third-party services. The overall change in foreign currency exchange rates resulted in a decrease in operating expenses of approximately 2%.
40
Livestock,
Poultry and Dairy
The following table presents the LPD segment results of operations:
For
the Three Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
29,889
$
33,524
$
(3,635)
(10.8
%)
Cost
of revenue
12,893
13,998
(1,105)
(7.9
%)
Gross profit
16,996
56.9
%
19,526
58.2
%
(2,530)
(13.0
%)
Operating
expenses:
Sales and marketing
6,216
20.8
%
5,142
15.3
%
1,074
20.9
%
General
and administrative
4,532
15.2
%
4,271
12.7
%
261
6.1
%
Research and development
3,018
10.1
%
3,245
9.7
%
(227)
(7.0
%)
Total
operating expenses
13,766
46.1
%
12,658
37.8
%
1,108
8.8
%
Income from operations
$
3,230
10.8
%
$
6,868
20.5
%
$
(3,638)
(53.0
%)
Revenue.
The decrease in LPD revenues was primarily due to lower demand for diagnostic testing in China. Beginning during the second quarter of 2021, and continuing through the second quarter of 2022, we experienced lower livestock testing volumes in China, as changes in disease management approaches, low pork prices, and changes in government requirements related to live animal imports and livestock infectious disease programs unfavorably impacted testing volumes, in comparison to high prior-year demand for African Swine Fever testing. The decrease in revenue was partially offset by moderate growth, including benefits from higher price gains in other regions. The unfavorable impact of foreign currency movements decreased revenues by 5.8%.
Gross Profit. Gross profit decreased
due to lower sales volumes and a 130 basis point decrease in the gross profit margin. The gross profit margin decreased as a result of higher distribution and freight charges, higher product costs, and investments in our bovine laboratory services. The decrease in the gross profit margin was partially offset by the impact from foreign currency movements, which increased the gross profit margin by approximately 400 basis points, primarily from the impact of hedge gains in the current year compared to hedge losses in the prior year.
Operating Expenses. Sales and marketing expense increased primarily due to increases in personnel-related costs and product marketing costs. General and administrative expenses increased primarily due to higher bad debt expense and higher personnel-related costs. Research and development expense decreased
primarily due to lower personnel-related costs. The overall change in foreign currency exchange rates resulted in a decrease in operating expenses of approximately 4%.
41
Other
The following table presents the Other results of operations:
For
the Three Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
7,375
$
9,832
$
(2,457)
(25.0
%)
Cost
of revenue
3,952
6,583
(2,631)
(40.0
%)
Gross profit
3,423
46.4
%
3,249
33.0
%
174
5.4
%
Operating
expenses:
Sales and marketing
431
5.8
%
640
6.5
%
(209)
(32.7
%)
General
and administrative
1,254
17.0
%
1,537
15.6
%
(283)
(18.4
%)
Research and development
348
4.7
%
650
6.6
%
(302)
(46.5
%)
Total
operating expenses
2,033
27.6
%
2,827
28.8
%
(794)
(28.1
%)
Income from operations
$
1,390
18.8
%
$
422
4.3
%
$
968
229.4
%
Revenue.The
decrease in revenue was primarily due to lower OPTI COVID-19 PCR testing products and services in the U.S., and lower OPTI Medical consumables revenue due to COVID-19 restrictions in Asia and Latin America. The impact of foreign currency movements increased revenue by 1.9%.
Gross Profit. The increase in gross profit and the 1,340 basis point increase in the gross profit margin were primarily due to lower costs of our testing products and services, including the benefit from the comparison to write-downs of excess COVID-19 testing inventory in the prior period. This increase was partially offset by higher freight and distribution costs. The overall change in foreign currency exchange rates had an immaterial impact on gross profit.
Operating
Expenses. Sales and marketing expense decreased primarily due to lower personnel-related costs. General and administrative expense decreased primarily due to lower bad debt expense. Research and development expense decreased primarily due to lower project costs compared to investments in the development of the OPTI COVID-19 PCR test during the prior year.
Non-Operating Items
Interest Expense. Interest expense was $8.3 million for the three months ended June 30, 2022, as compared to $7.6 million for the same period in the prior year. The increase in interest expense was primarily the result of higher average debt levels.
Provision for Income Taxes.Our effective income tax rate was 22.9% for the three months ended June 30, 2022, as compared to 19.5% for the three months ended June 30, 2021. The increase in our effective tax rate was primarily driven by higher taxes on international income and decreases in tax benefits related to share-based compensation.
Total Company. The following table presents total Company revenue by operating segment:
For
the Six Months Ended June 30,
Net Revenue
(dollars in thousands)
2022
2021
Dollar Change
Reported Revenue Growth (1)
Percentage Change
from Currency
Percentage Change from Acquisitions
Organic Revenue Growth (1)
CAG
$
1,545,271
$
1,438,362
$
106,909
7.4
%
(2.6
%)
1.3
%
8.7
%
United
States
1,032,392
930,662
101,730
10.9
%
—
1.8
%
9.1
%
International
512,879
507,700
5,179
1.0
%
(7.3
%)
0.4
%
7.9
%
Water
75,566
71,231
4,335
6.1
%
(2.6
%)
—
8.7
%
United
States
37,364
34,315
3,049
8.9
%
—
—
8.9
%
International
38,202
36,916
1,286
3.5
%
(5.0
%)
—
8.5
%
LPD
60,759
72,794
(12,035)
(16.5
%)
(3.8
%)
—
(12.7
%)
United
States
7,602
7,264
338
4.7
%
—
—
4.7
%
International
53,157
65,530
(12,373)
(18.9
%)
(4.1
%)
—
(14.8
%)
Other
15,499
21,462
(5,963)
(27.8
%)
0.7
%
—
(28.5
%)
Total
Company
$
1,697,095
$
1,603,849
$
93,246
5.8
%
(2.6
%)
1.2
%
7.2
%
United
States
1,085,731
987,876
97,855
9.9
%
—
1.7
%
8.2
%
International
611,364
615,973
(4,609)
(0.7
%)
(6.7
%)
0.3
%
5.6
%
(1)Reported
revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in organic revenues was driven by solid volume gains in CAG Diagnostics recurring revenue, primarily in the U.S. Overall growth reflects continued demand for companion animal diagnostics globally, as well as higher realized prices. Our CAG Diagnostics instrument revenue reflects strong placement volume for the first half of the year. The higher revenue in our Water business was primarily due to the benefit of price increases and higher testing volumes. The decline in our LPD business was primarily due to lower demand for swine testing in China. Other revenues reflect lower OPTI COVID-19 PCR testing products. The impact of acquisitions
increased total revenue growth by 1.2% while the impact of currency movements decreased total revenue growth by 2.6%.
43
The following table presents total Company results of operations:
For
the Six Months Ended June 30,
Change
Total Company - Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
1,697,095
$
1,603,849
$
93,246
5.8
%
Cost
of revenue
684,310
643,759
40,551
6.3
%
Gross profit
1,012,785
59.7
%
960,090
59.9
%
52,695
5.5
%
Operating
expenses:
Sales and marketing
262,549
15.5
%
233,843
14.6
%
28,706
12.3
%
General
and administrative
159,437
9.4
%
144,096
9.0
%
15,341
10.6
%
Research and development
163,389
9.6
%
75,276
4.7
%
88,113
117.1
%
Total
operating expenses
585,375
34.5
%
453,215
28.3
%
132,160
29.2
%
Income from operations
$
427,410
25.2
%
$
506,875
31.6
%
$
(79,465)
(15.7
%)
Gross
Profit. Gross profit increased due to higher sales volumes, moderated by a 20 basis point decrease in the gross profit margin. The decrease in the gross profit margin reflects higher product, freight and distribution, and labor costs across our segments. These decreases were partially offset by net price gains and the improved software services gross margins, as well as the benefit of our reference laboratory productivity initiatives, which helped to offset the effects of inflation on our gross margins. The margin also benefited due to comparisons to a prior year impairment charge related to rental assets in certain regions. The impact from foreign currency movements increased the gross profit margin by approximately 40 basis points, primarily from the impact of hedge gains in the current year as compared to hedge losses in the prior year.
Operating Expenses.
Sales and marketing expense increased primarily due to higher personnel-related costs, including investments in our global commercial capability, as well as travel costs. General and administrative expense increased primarily due to higher personnel-related expense, increases in amortization and depreciation expense related to business acquisitions and capital investments. Research and development expense increased primarily due to expenses totaling $80 million for acquiring rights to use certain licensed technology under two separate intellectual property licensing arrangements. The overall change in foreign currency exchange rates decreased operating expenses growth by approximately 2%.
44
Companion
Animal Group
The following table presents revenue by product and service category for CAG:
For
the Six Months Ended June 30,
Net Revenue
(dollars in thousands)
2022
2021
Dollar Change
Reported Revenue Growth(1)
Percentage Change from Currency
Percentage Change from
Acquisitions
Organic Revenue Growth(1)
CAG Diagnostics recurring revenue:
$
1,350,223
$
1,278,580
$
71,643
5.6
%
(2.6
%)
0.2
%
8.0
%
IDEXX
VetLab consumables
533,252
502,444
30,808
6.1
%
(3.3
%)
—
9.5
%
Rapid assay products
162,000
153,498
8,502
5.5
%
(1.3
%)
—
6.9
%
Reference
laboratory diagnostic and consulting services
599,205
569,456
29,749
5.2
%
(2.3
%)
0.5
%
7.0
%
CAG diagnostics
services and accessories
55,766
53,182
2,584
4.9
%
(3.6
%)
—
8.4
%
CAG Diagnostics capital - instruments
73,224
66,244
6,980
10.5
%
(4.3
%)
—
14.8
%
Veterinary
software, services and diagnostic imaging systems
121,824
93,538
28,286
30.2
%
(0.8
%)
17.3
%
13.7
%
Net CAG revenue
$
1,545,271
$
1,438,362
$
106,909
7.4
%
(2.6
%)
1.3
%
8.7
%
(1) Reported
revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. The increase was driven by expanding demand for companion animal diagnostics globally across modalities. The increase in CAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables and reference laboratory diagnostic services, and higher realized prices. The impact of currency movements decreased revenue growth by 2.6%.
The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes, primarily of our Catalyst consumables and, to a lesser extent, ProCyte consumables, and higher price realization. These volume increases were supported by the expansion of our installed
base of instruments, our expanded menu of available tests in certain regions, and high customer retention levels.
The increase in rapid assay revenue resulted primarily from higher price realization and higher clinic testing levels, primarily from SNAP® 4Dx Plus.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to higher testing volumes and price realization in our U.S. labs. Growth in other regions was primarily due to higher price realization, partially offset by moderately lower international volumes as compared to strong prior period growth levels. Acquisitions increased revenue growth by 0.5%.
The increase in CAG Diagnostics services
and accessories revenue was primarily a result of the increase in our active installed base of instruments.
CAG Diagnostics Capital – Instrument Revenue. The increase in instrument revenue was primarily due to strong premium instrument placements globally, including the successful global launch of the ProCyte One analyzer, to support increased diagnostic testing.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue. Acquisitions increased revenue growth by 17.3%. Excluding the impact of acquisitions, the increase in veterinary software and services revenue was primarily due to higher veterinary software system placements to continue the expansion of our active installed base, and higher realized prices on service offerings. The increase in our diagnostic
imaging systems revenues was primarily due to increases in our active installed base resulting in higher service revenue, as well as higher realized prices.
45
The following table presents the CAG segment results of operations:
For
the Six Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
1,545,271
$
1,438,362
$
106,909
7.4
%
Cost
of revenue
629,918
584,702
45,216
7.7
%
Gross profit
915,353
59.2
%
853,660
59.3
%
61,693
7.2
%
Operating
expenses:
Sales and marketing
240,559
15.6
%
213,442
14.8
%
27,117
12.7
%
General
and administrative
140,960
9.1
%
127,038
8.8
%
13,922
11.0
%
Research and development
154,183
10.0
%
65,235
4.5
%
88,948
136.4
%
Total
operating expenses
535,702
34.7
%
405,715
28.2
%
129,987
32.0
%
Income from operations
$
379,651
24.6
%
$
447,945
31.1
%
$
(68,294)
(15.2
%)
Gross
Profit. Gross profit increased primarily due to higher sales volume, moderated by a 10 basis point decrease in the gross profit margin. The decrease in the gross profit margin reflects higher product and service costs and higher freight and distribution costs. These decreases were partially offset by recurring revenue net price gains and improved software services gross margins, as well as the benefit of our reference laboratory productivity initiatives, which helped to offset the effects of inflation on our gross margins. The margin also benefited from comparisons to a prior year impairment charge related to rental assets in certain regions. The impact from foreign currency movements increased the gross profit margin by approximately 20 basis points, primarily from the impact of hedge gains in the current year as compared to hedge losses in the prior year.
Operating
Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs, including investments in our global commercial capability, as well as travel costs. General and administrative expense increased primarily due to higher personnel-related expense and increases in amortization and depreciation expense related to business acquisitions and capital investments. Research and development expense increased primarily due to expenses totaling $80 million for acquiring rights to use certain licensed technology under two separate intellectual property licensing arrangements. The overall change in foreign currency exchange rates resulted in a decrease in operating expenses growth by approximately 2%.
46
Water
The
following table presents the Water segment results of operations:
For
the Six Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
75,566
$
71,231
$
4,335
6.1
%
Cost
of revenue
22,470
22,019
451
2.0
%
Gross profit
53,096
70.3
%
49,212
69.1
%
3,884
7.9
%
Operating
expenses:
Sales and marketing
9,309
12.3
%
8,457
11.9
%
852
10.1
%
General
and administrative
6,905
9.1
%
6,620
9.3
%
285
4.3
%
Research and development
2,308
3.1
%
2,135
3.0
%
173
8.1
%
Total
operating expenses
18,522
24.5
%
17,212
24.2
%
1,310
7.6
%
Income from operations
$
34,574
45.8
%
$
32,000
44.9
%
$
2,574
8.0
%
Revenue.
The increase in our Water business reflects higher realized prices andtesting volumes, primarily in our Colilert test products and related accessories used in coliform and E. coli testing. Testing volumes were lower in the Asia-Pacific region primarily due to COVID restrictions. The impact of currency movements decreased revenue growth by 2.6%.
Gross Profit. Gross profit increased due to higher sales volumes and a 120 basis point increase in the gross profit margin, which reflected an approximately 190 basis point increase due to foreign currency movements, primarily from the impact of hedge gains in the current year compared to hedge losses in the prior year. The gross profit margin decreased primarily due to higher distribution and
freight costs, partially offset by higher realized prices.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs and higher travel expense. General and administrative expense increased primarily due to higher personnel-related costs and third-party services. Research and development expense increased primarily due to third-party services. The overall change in foreign currency exchange rates resulted in a decrease in operating expenses growth of less than 2%.
47
Livestock,
Poultry and Dairy
The following table presents the LPD segment results of operations:
For
the Six Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
60,759
$
72,794
$
(12,035)
(16.5
%)
Cost
of revenue
24,216
26,387
(2,171)
(8.2
%)
Gross profit
36,543
60.1
%
46,407
63.8
%
(9,864)
(21.3
%)
Operating
expenses:
Sales and marketing
11,784
19.4
%
10,680
14.7
%
1,104
10.3
%
General
and administrative
8,693
14.3
%
8,579
11.8
%
114
1.3
%
Research and development
6,099
10.0
%
6,472
8.9
%
(373)
(5.8
%)
Total
operating expenses
26,576
43.7
%
25,731
35.3
%
845
3.3
%
Income from operations
$
9,967
16.4
%
$
20,676
28.4
%
$
(10,709)
(51.8
%)
Revenue.
Revenues decreased primarily due to lower demand for diagnostic testing in China. Beginning during the second quarter of 2021, and continuing through the first half of 2022, we experienced lower livestock testing volumes in China, as changes in disease management approaches, low pork prices, and changes in government requirements related to the live animal imports and livestock infectious disease programs impacted testing volumes, in comparison to high prior-year demand for African Swine Fever testing. The decrease in revenue was partially offset by moderately higher price gains in other regions. The unfavorable impact of foreign currency movements decreased revenue growth by 3.8%.
Gross Profit. The decrease in gross profit was primarily due to lower sales volumes and a 370 basis point decrease
in the gross profit margin. The decrease in the gross profit margin is primarily due to higher freight and distribution charges, higher product costs, investments in our bovine laboratory services, and the unfavorable overall mix impacts largely from lower African Swine Fever testing. The decrease in the gross profit margin was partially offset by the impact from foreign currency movements, which increased gross profit margin by approximately 310 basis points, primarily from the impact of hedge gains in the current year compared to hedge losses in the prior year.
Operating Expenses. Sales and marketing expense increased primarily due to increases in product marketing costs, personnel-related costs, and travel costs. Research and development expense decreased primarily due to lower
personnel-related costs. The overall change in foreign currency exchange rates resulted in a decrease in operating expenses growth of approximately 3%.
48
Other
The following table presents the Other results of operations:
For
the Six Months Ended June 30,
Change
Results of Operations
(dollars in thousands)
2022
Percent of Revenue
2021
Percent of Revenue
Amount
Percentage
Revenues
$
15,499
$
21,462
$
(5,963)
(27.8
%)
Cost
of revenue
7,706
10,651
(2,945)
(27.6
%)
Gross profit
7,793
50.3
%
10,811
50.4
%
(3,018)
(27.9
%)
Operating
expenses:
Sales and marketing
897
5.8
%
1,264
5.9
%
(367)
(29.0
%)
General
and administrative
2,879
18.6
%
1,859
8.7
%
1,020
54.9
%
Research and development
799
5.2
%
1,434
6.7
%
(635)
(44.3
%)
Total
operating expenses
4,575
29.5
%
4,557
21.2
%
18
0.4
%
Income from operations
$
3,218
20.8
%
$
6,254
29.1
%
$
(3,036)
(48.5
%)
Revenue.The
decrease in revenue was primarily due to lower OPTI COVID-19 PCR testing products and services in the U.S. and lower OPTI Medical consumables revenue related to COVID-19 restrictions in Asia and Latin America. The impact of foreign currency movements increased revenue by 0.7%.
Gross Profit. The decrease in gross profit was primarily due to lower sales volume and a gross profit margin decrease of 10 basis points, primarily due to higher freight and distribution costs, partially offset by lower costs for our testing products and services, including the benefit from the comparison to write-downs of excess COVID-19 testing inventory in the prior period. The overall change in foreign currency exchange rates had an immaterial impact on gross profit.
Operating
Expenses. Sales and marketing expense decreased primarily due to lower personnel-related costs. General and administrative expense increased primarily due to higher foreign exchange losses on settlements of foreign currency denominated transactions, as compared to the prior year, as well as higher estimated bad debt expense. Foreign exchange losses on settlements for all operating segments are reported within our Other segment. Research and development expense decreased primarily due to lower COVID-19 related project costs compared to the prior year.
Non-Operating Items
Interest Expense. Interest expense was $15.3
million for the six months ended June 30, 2022, as compared to $15.2 million for the same period in the prior year.
Provision for Income Taxes.Our effective income tax rate was 21.0% for the six months ended June 30, 2022, as compared to 17.3% for the six months ended June 30, 2021. The increase in our effective tax rate, as compared to the same period in the prior year, was primarily driven by decreases in tax benefits related to share-based compensation and higher taxes on international income.
49
Liquidity
and Capital Resources
We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings, and amounts available under our Credit Facility. As of June 30, 2022, we had $114.4 million of cash and cash equivalents, as compared to $144.5 million as of December 31, 2021. Working capital totaled negative $123.7 million as of June 30, 2022, as compared to $192.1 million as of December 31, 2021. The change in working capital is primarily due to the borrowings under our Credit Facility. As of June 30, 2022, we had borrowing availability of $387.6 million under our
$1 billion Credit Facility, with $611.0 million outstanding borrowings on the Credit Facility. The general availability of funds under our Credit Facility is reduced by $1.4 million for outstanding letters of credit. We believe that, if necessary, we could obtain additional borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for at least the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in the U.S. than is generated by our operations,
for example to fund significant discretionary activities, we could elect to raise capital in the U.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings.
We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside the U.S.
The following table presents cash, cash equivalents, and marketable securities held domestically and by our foreign subsidiaries:
Total
cash, cash equivalents, and marketable securities held in U.S. dollars by our foreign subsidiaries
$
8,558
$
6,245
Of the $114.4 million of cash and cash equivalents held as of June 30, 2022, greater than 99% was held as bank deposits. Cash and cash equivalents at June 30, 2022, included approximately USD $4.8 million of cash held in countries with currency control restrictions, which limit our ability to
transfer funds outside of the country in which they are held. The currency control restricted cash is generally available for use within the country where it is held.
During the second quarter of 2022, we decided to wind down and liquidate our sole Russian subsidiary, as well as its direct Russian operations, which consisted of marketing and selling diagnostic products for veterinary clinics in Russia. As a result of this decision, we adopted the liquidation basis of accounting for this subsidiary. Substantially all assets other than cash were fully impaired because we believe the carrying amounts are not recoverable. We also accrued estimated costs that we expect to incur through the end of liquidation. These adjustments are not material to our balance sheet and are recorded as operating activities in our unaudited condensed consolidated statements of cash flow. Our direct Russian operations
were not material to our financial statements and are not considered discontinued operations.
50
The following table presents additional key information concerning working capital:
(1)Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.
(2)Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the average inventory balances at the beginning and end of each quarter.
The decrease in inventory turns over the current year is a result of larger inventory on-hand, as we have increased inventory to sustain levels of product availability, as well as higher inventory related to our new ProCyte One analyzer.
Sources and Uses of Cash
The
following table presents cash provided (used):
For the Six Months Ended June 30,
(in thousands)
2022
2021
Dollar
Change
Net cash provided by operating activities
$
180,556
$
358,377
$
(177,821)
Net cash used by investing activities
(96,924)
(199,250)
102,326
Net
cash used by financing activities
(105,387)
(309,868)
204,481
Net effect of changes in exchange rates on cash
(8,337)
(1,053)
(7,284)
Net change in cash and cash equivalents
$
(30,092)
$
(151,794)
$
121,702
Operating
Activities.The decrease in cash provided by operating activities of $177.8 million was driven primarily by a decrease in net income as a result of research and development investments, and changes in other assets and liabilities, as well as inventory. The following table presents cash flow impacts from changes in operating assets and liabilities:
For
the Six Months Ended June 30,
(in thousands)
2022
2021
Dollar Change
Accounts receivable
$
(53,794)
$
(50,721)
$
(3,073)
Inventories
(49,349)
(20,412)
(28,937)
Accounts
payable
(6,735)
3,812
(10,547)
Deferred revenue
(2,344)
(5,037)
2,693
Other assets and liabilities
(94,729)
(55,162)
(39,567)
Total
change in cash due to changes in operating assets and liabilities
$
(206,951)
$
(127,520)
$
(79,431)
Cash used increased due to changes in operating assets and liabilities during the six months ended June 30, 2022, as compared to the same period in the prior year, by approximately $79.4 million. Cash used for inventory in the current period, as compared to the prior period, was higher primarily to support increasing demand,
and to mitigate potential supply-chain impacts. The increase of cash used for other asset and liabilities was primarily due to payroll timing and lower non-cash operating expenses recorded as accrued liabilities, as compared to the same period in the prior year.
We have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally higher cash flows from operating activities for the remainder of the year driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned.
During the second quarter of 2022, we entered into two arrangements to license intellectual property. Under one arrangement we paid $45.0 million and expect to issue subsequent milestone
payments during 2022 of $10.0 million. Under the second arrangement, we paid $25.0 million for an equity investment and $5.0 million for license rights, with expected
51
subsequent milestone payments of $20.0 million. The $25 million paid for the equity investment is reflected in investing activities, while the $50 million paid during the quarter to license intellectual property is reflected in operating activities.
Investing Activities.Cash used by investing activities was $96.9 million for the six months ended June 30, 2022, as compared to $199.3 million for the same period in the
prior year. The decrease in cash used by investing activities was primarily due to the acquisition of ezyVet in the prior year, partially offset by an equity investment and the acquisition of an intangible asset during the second quarter of 2022.
Our outlook for full year capital spending is approximately $180.0 million for 2022.
Financing Activities.Cash used by financing activities was $105.4 million for the six months ended June 30, 2022, as compared to $309.9 million of cash used for the same period in the prior year. The decrease in cash used by financing activities was due to a $537.5 million increase in borrowings under our Credit Facility, partially offset by $252.3 million in
additional repurchases of our common stock in the current period as compared to the same period in the prior year. Cash was also used to pay off our $75.0 million 2022 Series A Notes when due and payable on February 14, 2022.
Cash used to repurchase shares of our common stock increased $252.3 million during the six months ended June 30, 2022. We believe that the repurchase of our common stock is a favorable means of returning value to our stockholders, and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing activities and the share price. Refer to Note 12 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form
10-Q for additional information about our share repurchases.
Under our Credit Facility, the net borrowing activity during the six months ended June 30, 2022, as compared to the same period in the prior year, increased $537.5 million. As of June 30, 2022, we had $611.0 million outstanding borrowings under the Credit Facility. The obligations under our Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee
Retirement Income Security Act of 1974 (“ERISA”), the failure to pay specified indebtedness, cross-acceleration to specified indebtedness, and a change of control default.
The Credit Agreement contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements, and violations of laws and regulations. The financial covenant is a consolidated leverage ratio test.
On February 2022, we paid off our $75.0 million 2022 Series A Notes
with cash provided by operations and financing activity. Should we elect to prepay any of our senior notes, such aggregate prepayment will include the applicable make-whole amount(s), as defined within the applicable Senior Note Agreements. Additionally, in the event of a change in control of the Company or upon the disposition of certain assets of the Company the proceeds of which are not reinvested (as defined in the Senior Note Agreements), we may be required to prepay all or a portion of the senior notes. The obligations under the senior notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreements, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial
covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under ERISA, the failure to pay specified indebtedness, and cross-acceleration to specified indebtedness.
Effect of Currency Translation on Cash. The net effect of changes in foreign currency exchange rates is related to changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries. These changes will fluctuate for each period presented as the value of the U.S. dollar relative to the value of foreign currencies changes. A currency’s value depends on many factors, including interest rates and the country’s debt levels and strength of economy.
Off-Balance
Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities, except for letters of credit and third party guarantees.
52
Financial Covenant. The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization, non-recurring transaction expenses incurred in connection with acquisitions, share-based compensation expense, and certain other non-cash losses and charges (“Adjusted EBITDA”) not to exceed 3.5-to-1. As of June 30, 2022, we were in compliance with such covenant. The
following details our consolidated leverage ratio calculation:
Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio, and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Other Commitments, Contingencies and Guarantees
Significant
commitments, contingencies, and guarantees as of June 30, 2022, are described in Note 16 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q.
53
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting us, refer to the section under the heading “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our 2021 Annual Report.
As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our 2021 Annual Report, except for the impact of foreign exchange rates, as discussed below.
Foreign Currency Exchange Impacts. Approximately 21% and 22% of our consolidated revenue was derived from products manufactured in the U.S. and sold internationally in local currencies for the three and six months ended June 30, 2022, respectively, as compared to 22% and 23% for the three and six months ended June 30, 2021, respectively. Strengthening of the U.S. dollar exchange rate relative to other currencies has a negative impact on our revenues derived
in currencies other than the U.S. dollar and on profits of products manufactured in the U.S. and sold internationally, and a weakening of the U.S. dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated costs and expenses and foreign currency denominated supply contracts partly offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. dollar denominated revenues.
Our foreign currency exchange impacts are comprised of three components: 1) local currency revenues
and expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary. Based on projected revenues and expenses for the remainder of 2022, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, we project a 1% strengthening of the U.S. dollar would reduce revenue by approximately $5 million and operating income by approximately $3 million. Additionally, we project our foreign currency hedge contracts in place as of June 30, 2022, would
result in incremental offsetting gains of approximately $1 million in operating income. The impact of the intercompany and trade balances, and monetary balances referred to in the third component above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably forecast the impact that changes in exchange rates would have on such balances.
At our current foreign currency exchange rate assumptions, we anticipate the effect of a stronger U.S. dollar for the remainder of the year, as compared to the respective prior-year period, will have a unfavorable impact on our operating results by decreasing our revenues, operating profit, and diluted earnings per share for the remainder of the year ending December 31, 2022, by approximately $69 million, $13 million, and $0.12 per share, respectively.
This unfavorable year-over-year currency impact includes foreign currency hedging activity, which is expected to increase our total operating profit by approximately $20 million and $0.18 per share for the remainder of the year ended December 31, 2022. The actual impact of changes in the value of the U.S. dollar against foreign currencies in which we transact may materially differ from our expectations described above. The above estimates assume that the value of the U.S. dollar will reflect the euro at $1.00, the British pound at $1.18, the Canadian dollar at $0.76, and the Australian dollar at $0.67; and the Japanese yen at ¥139, the Chinese renminbi at RMB 6.79, and the Brazilian real at R$5.40 relative to the U.S. dollar for the remainder of 2022.
54
The
following table presents the estimated foreign currency exchange impact on our revenues, operating profit, and diluted earnings per share for the current period and as compared to the respective prior-year period:
For the Three Months Ended June 30,
For
the Six Months Ended June 30,
(in thousands, except per share amounts)
2022
2021
2022
2021
Revenue impact
$
(27,597)
$
25,280
$
(42,661)
$
44,714
Operating
profit impact, excluding hedge activity and exchange impacts on settlement of foreign currency denominated transactions
$
(14,769)
$
14,169
$
(22,708)
$
25,930
Hedge gains (losses) - current period
5,781
(2,715)
8,017
(5,145)
Exchange
(losses) on settlements of foreign currency denominated transactions - current period
(832)
(854)
(1,607)
(924)
Operating profit impact - current period
$
(9,820)
$
10,600
$
(16,298)
$
19,861
Hedge
losses (gains) - prior period
2,715
(1,812)
5,145
(3,153)
Exchange losses (gains) on settlement of foreign currency denominated transactions - prior period
854
(799)
924
1,108
Operating
profit impact - as compared to prior period
$
(6,251)
$
7,989
$
(10,229)
$
17,816
Diluted
earnings per share impact - as compared to prior period
$
(0.06)
$
0.07
$
(0.10)
$
0.16
55
Item
4. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures, as defined by the SEC in its Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
56
PART
II — OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our activities, we are at times subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such currently pending matters is not expected to have a material effect on our results of operations, financial condition, or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our results of operations, financial condition, or cash flows could be materially adversely affected in any particular period by the unfavorable resolution
of one or more legal actions.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I. Item 1A. Risk Factors” in our 2021 Annual Report, and the risk factor below, which supplements and should be read in conjunction with the risk factors disclosed in our 2021 Annual Report, any and all of which could materially affect our business, financial condition, or future results. Except as described below in this Item 1A., there have been no material changes from the risk factors previously disclosed in the 2021 Annual Report. The risks described below and in our 2021 Annual
Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.
The current war in Ukraine may adversely affect our business, financial condition, and results of operations
Since our business is global in nature, political, economic, and other conditions in foreign countries and regions, including geopolitical risks, such as the current war between Russia and Ukraine, may adversely affect our business, financial condition, and results of operations.
Our operations in the Russia,
Belarus and Ukraine region are limited. Our 2021 revenue from the region represented less than 1% of our 2021 consolidated revenue, and we have no manufacturing or significant supply arrangement in the region. After significantly scaling back our operations in Russia in the first quarter, including suspending sales of veterinary diagnostic equipment; promotional, marketing, and hiring activities; and new business development and related investments, we decided in June 2022, after careful consideration, to wind down and liquidate our sole Russian subsidiary, as well as our direct Russian operations, which consisted of marketing and selling diagnostic products for veterinary clinics in Russia.
After we conclude the wind-down of our direct Russian operations, we anticipate that only a limited number of our products, which are important for human or animal healthcare, will continue to be
sold in Russia pursuant to ongoing third-party distribution agreements. Some of our products are also sold in Belarus pursuant to ongoing third-party distribution agreements. These limited operations in the region have been affected by sanctions and other economic, financial and export restrictions imposed by various governments. The broader consequences of this war, which may include further sanctions, embargoes, regional instability, potential retaliatory action by sanctioned governments against companies (including us), increased tensions between the United States and countries in which we operate, and the extent of the war’s effect on our business and results of operations, as well as the global economy, cannot be predicted.
In addition, this war may also heighten other risks disclosed in our 2021 Annual Report, any of which could materially and adversely affect our business, financial
condition, and results of operations. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, supply chain disruptions, fuel supply shortages and/or rationing, increased cyberattack and cybersecurity risks, adverse changes in international trade policies and relations, regulatory enforcement, our ability to implement and execute our business strategy, our exposure to foreign currency fluctuations, reputational risk, and volatility or disruption in the capital markets.
57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During
the three months ended June 30, 2022, we repurchased shares of common stock as described below:
Period
Total Number of Shares Purchased (a)
Average
Price Paid per Share (b)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(c)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(1)On
August 13, 1999, our Board of Directors approved and announced the repurchase of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase program. The authorization has been increased by the Board of Directors on numerous occasions; most recently, on February 12, 2020, the maximum level of shares that may be repurchased under the program was increased from 68 million to 73 million shares. There is no specified expiration date for this share repurchase program. There were no other repurchase programs outstanding during the three months ended June 30, 2022, and no share repurchase programs expired during the period. There were 808,337 share repurchases made during the three months ended
June 30, 2022, in transactions made pursuant to our share repurchase program.
(2)During the three months ended June 30, 2022, we received 141 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the share repurchase program.
The total shares repurchased include shares surrendered for employee statutory tax withholding. Refer to Note 12 to the unaudited condensed
consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our share repurchases.
The following financial and related information from IDEXX Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline eXtensible Business Reportable Language (iXBRL) includes: (i) the Condensed Consolidated Balance Sheet; (ii) the Condensed Consolidated Statement of Income; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity; (v) the Condensed Consolidated Statement of Cash Flows; and, (vi) Notes to Consolidated Financial Statements.
104
The
cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL and contained in Exhibit 101.
59
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
