Idexx Laboratories Inc 10-Q for FY2022 Q1
Idexx Laboratories Inc (IDXX)
10-Q
2022-05-04
For: 2022-03-31
View Original
Added on
April 10, 2026
About this 10-Q
Idexx Laboratories Inc filed this 10-Q on May 4, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $836.55M
- up 7.6% from $777.71M a year earlier
- Net income
- $193.97M
- down 5.0% from net income of $204.26M a year earlier
- Diluted EPS
- $2.27
- down 3.4% from $2.35 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2022
OR
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 000-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (ZIP Code) | ||||||||||
(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 | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant’s Common Stock, $0.10 par value per share, was 84,007,233 , on April 29, 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 | ||||
| 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. | ||||
IDEXX LABORATORIES, INC.
Quarterly Report on Form 10-Q
Table of Contents
| Item No. | Page | |||||||
| PART I—FINANCIAL INFORMATION | ||||||||
| PART II—OTHER INFORMATION | ||||||||
PART I— FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-Term Assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total long-term assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Line of credit | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current portion of deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-Term Liabilities: | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Long-term deferred revenue, net of current portion | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and Contingencies (Note 16) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Deferred stock units: Outstanding: | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
3
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Product revenue | $ | $ | |||||||||
| Service revenue | |||||||||||
| Total revenue | |||||||||||
| Cost of Revenue: | |||||||||||
| Cost of product revenue | |||||||||||
| Cost of service revenue | |||||||||||
| Total cost of revenue | |||||||||||
| Gross profit | |||||||||||
| Expenses: | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Research and development | |||||||||||
| Income from operations | |||||||||||
| Interest expense | ( | ( | |||||||||
| Interest income | |||||||||||
| Income before provision for income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | |||||||||||
| Less: Net income attributable to noncontrolling interest | |||||||||||
| Net income attributable to IDEXX Laboratories, Inc. stockholders | $ | $ | |||||||||
| Earnings per Share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted Average Shares Outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
4
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
Unrealized gain (loss) on Euro-denominated notes, net of tax expense (benefit) of $ | |||||||||||
Unrealized gain (loss) on investments, net of tax expense (benefit) of $( | ( | ||||||||||
| Unrealized gain (loss) on derivative instruments: | |||||||||||
Unrealized gain on foreign currency exchange contracts, net of tax expense (benefit) of $ | |||||||||||
Unrealized gain on cross currency swaps, net of tax expense (benefit) of $ | |||||||||||
Reclassification adjustment for loss (gain) included in net income, net of tax benefit (expense) of $( | ( | ||||||||||
| Unrealized gain on derivative instruments | |||||||||||
| Other comprehensive gain (loss), net of tax | ( | ||||||||||
| Comprehensive income | |||||||||||
| Less: Comprehensive income attributable to noncontrolling interest | |||||||||||
| Comprehensive income attributable to IDEXX Laboratories, Inc. | $ | $ | |||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
5
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
(Unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | $ | Additional Paid-in Capital | Deferred Stock Units | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock, net | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under stock plans, including excess tax benefit | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock, net | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under stock plans, including excess tax benefit | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
6
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for credit losses | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Share-based compensation expense | |||||||||||
| Other | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Deferred revenue | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Acquisition of intangible assets | ( | ||||||||||
| Acquisitions of a business, net of cash acquired | ( | ||||||||||
| Net cash used by investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Borrowings under revolving credit facility, net | |||||||||||
| Payment of senior debt | ( | ||||||||||
| Repurchases of common stock, net | ( | ( | |||||||||
| Proceeds from exercises of stock options and employee stock purchase plans | |||||||||||
| Shares withheld for statutory tax withholding payments on restricted stock | ( | ( | |||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Net effect of changes in exchange rates on cash | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental Cash Flow Information: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Unpaid property and equipment, reflected in accounts payable and accrued liabilities | $ | $ | |||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
7
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “IDEXX,” the “Company,” “we,” “our,” or “us” refer to IDEXX Laboratories, Inc. and its subsidiaries.
The accompanying unaudited condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. We do not have any variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The 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 months ended March 31, 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 March 31, 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. ACCOUNTING POLICIES
Significant Accounting Policies
The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022, are consistent with those discussed in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in our 2021 Annual Report, except as noted below.
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.
8
NOTE 3. REVENUE RECOGNITION
Our revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To accurately present the consideration received in exchange for promised products or services, we apply the five-step model outlined below:
1.Identification of a contract or agreement with a customer
2.Identification of our performance obligations in the contract or agreement
3.Determination of the transaction price
4.Allocation of the transaction price to the performance obligations
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 30 to 60 days, with exceptions for certain individual customers and geographies. Below is a listing of our major categories of revenue for our products and services:
Diagnostic Products and Accessories. Diagnostic products and accessories revenues, including IDEXX VetLab® consumables and accessories, rapid assay, LPD, Water, and OPTI testing products, are predominantly recognized and invoiced at the time of shipment, which is when the customer obtains control of the product based on legal title transfer and we have the right to payment. We also provide customers with certain consumables that are recognized upon utilization by the customer, which is when we have the right to payment and the risks and rewards of ownership transfer. Shipping costs reimbursed by the customer are included in revenue and cost of sales. As a practical expedient, we do not account for shipping activities as a separate performance obligation.
Laboratory Diagnostic and Consulting Services. Laboratory diagnostic and consulting services revenues are recognized and invoiced when performed.
Instruments, Software and Systems. CAG Diagnostics capital instruments, veterinary software, and diagnostic imaging systems revenues are recognized and invoiced when the customer obtains control of the products based on legal title transfer and we have the right to payment, which generally occurs at the time of installation and customer acceptance. Our instruments, software, and systems are often included in one of our significant customer programs, as further described below. For veterinary software systems that include multiple performance obligations, such as perpetual software licenses and computer hardware, we allocate revenue to each performance obligation based on estimates of the price that we would charge the customer for each promised product or service if it were sold on a standalone basis.
Lease Revenue. Revenues from instrument rental agreements and reagent rental programs are recognized either as operating leases on a ratable basis over the term of the agreement or as sales-type leases at the time of installation and customer acceptance. Customers typically pay for the right to use instruments under rental agreements in equal monthly amounts over the term of the rental agreement. Our reagent rental programs provide our customers the right to use our instruments upon entering into agreements to purchase specified amounts of consumables, which are considered embedded leases. For some agreements, the customers are provided with the right to purchase the instrument at the end of the lease term. Lease revenues from these
9
agreements are presented in product revenue on our unaudited condensed consolidated income statement. Lease revenue was approximately $5.0 million for the three months ended March 31, 2022, as compared to $4.8 million for the three months ended March 31, 2021, including both operating leases and sales-type leases under ASC 842, Leases, for leases entered into after January 1, 2019, and ASC 840, Leases, for leases entered into prior to 2019. Refer to below for revenue recognition under our reagent rental programs.
Extended Warranties and Post-Contract Support. CAG Diagnostics capital instruments and diagnostic imaging systems extended warranties typically provide customers with continued coverage for a period of to five years beyond the first-year standard warranty. Customers can either pay in full for the extended warranty at the time of instrument or system purchase or can be billed on a quarterly basis over the term of the contract. We recognize revenue associated with extended warranties over time on a ratable basis using a time elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.
Veterinary software post-contract support provides customers with access to technical support when and as needed through access to call centers and online customer assistance. Post-contract support contracts typically have a term of 12 months and customers are billed for post-contract support in equal quarterly amounts over the term. We recognize revenue for post-contract support services over time on a ratable basis using a time elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.
On December 31, 2021, our deferred revenue related to extended warranties and post-contract support was $30.0 million, of which approximately $14.7 million was recognized during the three months ended March 31, 2022. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $28.9 million as of March 31, 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 $14.4 million as of March 31, 2022, of which approximately 38 %, 34 %, 17 %, 6 %, and 5 % 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 two years . Customers typically pay for our subscription contracts in equal monthly amounts over the term of the agreement. Deferred revenue related to our SaaS subscriptions is not material.
Contracts with Multiple Performance Obligations. We enter into contracts with multiple performance obligations where customers purchase a combination of IDEXX products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires significant judgment. We determine the transaction price for a contract based on the total consideration we expect to receive in exchange for the transferred goods or services. To the extent the transaction price includes variable consideration, such as volume rebates or expected price adjustments, we apply judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts.
We allocate revenue to each performance obligation in proportion to the relative standalone selling prices, and recognize revenue when transfer of the related goods or services has occurred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the 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.
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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 $158.3 million, of which approximately $12.7 million was recognized as a reduction of revenue during the three months ended March 31, 2022. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $157.0 million as of March 31, 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 months ended March 31, 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 $159.9 million, of which approximately $9.2 million was reclassified to accounts receivable when customers were billed for related products and services during the three months ended March 31, 2022. 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 $172.6 million as of March 31, 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 months ended March 31, 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 $3.0 billion, of which approximately 20 %, 25 %, 21 %, 16 %, and 18 % 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
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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 $33.0 million, of which approximately $3.4 million was recognized when customers purchased eligible products and services and earned rebates during the three months ended March 31, 2022. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $31.1 million as of March 31, 2022, of which approximately 28 %, 28 %, 19 %, 13 %, and 12 % 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 $15.3 million, of which approximately $0.8 million was reclassified to accounts receivable when customers were billed for related products and services during the three months ended March 31, 2022. 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 $16.1 million as of March 31, 2022. The impacts of discounting and unearned income as of March 31, 2022 were not material. Profit and loss recognized at the commencement date and interest income during the three months ended March 31, 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 months ended March 31, 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 months ended March 31, 2022, we transferred instruments of $3.0 million, as compared to $2.5 million for the three months ended March 31, 2021, from inventory to property and equipment.
We estimate future revenue to be recognized related to our reagent rental programs of approximately $37.2 million, of which approximately 25 %, 28 %, 22 %, 15 %, and 10 % 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
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approach. We typically use the most-likely-amount method for incentives that are offered to individual customers and the expected-value method for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the three months ended March 31, 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 March 31, 2022.
Disaggregated Revenues. We present disaggregated revenue for our CAG segment based on major product and service categories. Our Water segment is comprised of a single major product category. Although our LPD segment does not meet the quantitative requirements to be reported as a separate segment, we believe it is important to disaggregate these revenues as a major product and service category separately from our Other reportable segment given its distinct markets, and therefore we have elected to report LPD as a reportable segment.
The following table presents disaggregated revenue by major product and service categories:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| CAG segment revenue: | |||||||||||
| CAG Diagnostics recurring revenue: | $ | $ | |||||||||
| IDEXX VetLab consumables | |||||||||||
| Rapid assay products | |||||||||||
| Reference laboratory diagnostic and consulting services | |||||||||||
| CAG Diagnostics services and accessories | |||||||||||
| CAG Diagnostics capital - instruments | |||||||||||
| Veterinary software, services and diagnostic imaging systems | |||||||||||
| CAG segment revenue | |||||||||||
| Water segment revenue | |||||||||||
| LPD segment revenue | |||||||||||
| Other segment revenue | |||||||||||
| Total revenue | $ | $ | |||||||||
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Revenue by principal geographic area, based on customers’ domiciles, was as follows:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| United States | $ | $ | |||||||||
| Europe, the Middle East and Africa | |||||||||||
| Asia Pacific Region | |||||||||||
| Canada | |||||||||||
| Latin America & Caribbean | |||||||||||
| Total revenue | $ | $ | |||||||||
Costs to Obtain a Contract. We capitalize sales commissions and the related fringe benefits earned by our sales force when considered incremental and recoverable costs of obtaining a contract. Our contracts include performance obligations related to various goods and services, some of which are satisfied at a point in time and others over time. Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time, including extended warranties and SaaS subscriptions, are deferred and recognized on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates. We apply judgment in estimating the amortization period, which ranges from 3 to 7 years, by taking into consideration our customer contract terms, history of renewals, expected length of customer relationship, 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 $19.5 million, of which approximately $1.7 million of commission expense was recognized during the three months ended March 31, 2022. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $19.4 million as of March 31, 2022. Impairments of deferred commission costs during the three months ended March 31, 2022, were not material.
NOTE 4. ACQUISITIONS 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.
During the first quarter we made a $10 million payment for a fully paid-up, perpetual intellectual property license, which will be amortized over 10 years. This amortization will be included in our CAG segment.
During the fourth quarter of 2021, we acquired the shares of a reference laboratory located in Finland for approximately $13.4 million in cash, including a holdback of approximately $1.4 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 $7.4 million, with a life of 10 years; a non-compete agreement of approximately $0.8 million, with a life of 3 years; approximately $6.9 million of goodwill, representing synergies within our broader CAG portfolio; and approximately $1.7 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 $5.5 million in cash, including holdback and contingent payments of approximately $1.1 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 $4.3 million in intangible assets, primarily for customer relationships, which will be amortized over 9 years, approximately $1.8 million for goodwill, representing synergies within our broader CAG portfolio, and approximately $0.6 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.
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NOTE 5. SHARE-BASED COMPENSATION
The fair value of options, restricted stock units, deferred stock units, and employee stock purchase rights awarded during the three months ended March 31, 2022, totaled $51.0 million as compared to $44.3 million for the three months ended March 31, 2021. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding as of March 31, 2022, was $98.7 million, which will be recognized over a weighted average period of approximately 1.9 years. During the three months ended March 31, 2022, we recognized expenses of $11.2 million, as compared to $8.9 million for the three months ended March 31, 2021, related to share-based compensation.
The weighted averages of the valuation assumptions used to determine the fair value of each option award on the date of grant and the weighted average estimated fair values were as follows:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Share price at grant | $ | $ | |||||||||
| Share price at exercise | $ | $ | |||||||||
| Expected stock price volatility | % | % | |||||||||
| Expected term, in years | |||||||||||
| Risk-free interest rate | % | % | |||||||||
| Weighted average fair value of options granted | $ | $ | |||||||||
NOTE 6. CREDIT LOSSES
We are exposed to credit losses primarily through our sales of products and services to our customers. We maintain allowances for credit losses for potentially uncollectible receivables. We base our estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current economic conditions.
Additional allowances may be required if either the financial condition of our customers were to deteriorate, or a strengthening U.S. dollar impacts the ability of foreign customers to make payments to us on their U.S. dollar-denominated purchases. We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We may require collateralized asset support or a prepayment to mitigate credit risk. We do not have any off-balance sheet credit exposure related to our customers.
Accounts Receivable
The allowance for credit losses associated with accounts receivable was $7.3 million and $5.7 million as of March 31, 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 March 31, 2022, approximately 94 % of our accounts receivable had not yet reached the invoice due date and approximately 6 % was considered past due, of which approximately 0.4 % was greater than 60 days past due. As of December 31, 2021, approximately 90 % of our accounts receivable had not yet reached the invoice due date and approximately 10 % was considered past due, of which approximately 1.8 % was greater than 60 days past due.
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Contract assets and lease receivables
The allowance for credit losses associated with the contract assets and lease receivables was $4.8 million and $4.4 million as of March 31, 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.
NOTE 7. INVENTORIES
| (in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Inventories | $ | $ | |||||||||
NOTE 8. LEASES
Maturities of operating lease liabilities were as follows:
| (in thousands, except lease term and discount rate) | March 31, 2022 | ||||
| 2022 (remainder of year) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | ( | ||||
| Total | $ | ||||
Total minimum future lease payments for leases that have not commenced as of March 31, 2022, are approximately $8.1 million, and will commence between 2022 and 2024.
Supplemental cash flow information for leases was as follows:
| (in thousands) | For the Three Months Ended March 31, 2022 | For the Three Months Ended March 31, 2021 | ||||||||||||
| Cash paid for amounts included in the measurement of operating leases liabilities | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations | $ | $ | ||||||||||||
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NOTE 9. OTHER CURRENT AND LONG-TERM ASSETS
Other current assets consisted of the following:
| (in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Customer acquisition costs | $ | $ | |||||||||
Contract assets, net (1) | |||||||||||
| Prepaid expenses | |||||||||||
| Taxes receivable | |||||||||||
| Deferred sales commissions | |||||||||||
| Other assets | |||||||||||
| Other current assets | $ | $ | |||||||||
(1) Contract assets, net, are net of allowances for credit loss. Refer to "Note 6. Credit Losses."
Other long-term assets consisted of the following:
| (in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
Contract assets, net (1) | $ | $ | |||||||||
| Customer acquisition costs | |||||||||||
| Deferred income taxes | |||||||||||
| Deferred sales commissions | |||||||||||
| Investment in long-term product supply arrangements | |||||||||||
| Taxes receivable | |||||||||||
| Other assets | |||||||||||
| Other long-term assets | $ | $ | |||||||||
NOTE 10. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| (in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Accrued expenses | $ | $ | |||||||||
| Accrued employee compensation and related expenses | |||||||||||
| Accrued taxes | |||||||||||
| Accrued customer incentives and refund obligations | |||||||||||
| Current lease liabilities | |||||||||||
| $ | $ | ||||||||||
Other long-term liabilities consisted of the following:
| (in thousands) | March 31, 2022 | December 31, 2021 | |||||||||
| Accrued taxes | $ | $ | |||||||||
| Other accrued long-term expenses | |||||||||||
| Other long-term liabilities | $ | $ | |||||||||
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NOTE 11. DEBT
Credit Facility
As of March 31, 2022, we had $400.0 million outstanding borrowings under our Credit Facility with a weighted average effective interest rate of 1.2 %. As of December 31, 2021, we had $73.5 million outstanding borrowings under our Credit Facility with a weighted average effective interest rate of 1.1 %. As of March 31, 2022, we had a remaining borrowing availability of $598.6 million under our $1 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 $1.4 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, and certain restrictive agreements. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed 3.5 -to-1. As of March 31, 2022, and December 31, 2021, we were in compliance with the covenants of the Credit Facility.
Senior Notes
| (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 | $ | % | NY Life 2013 Note Agreement | |||||||||||||||||||||||||||
| 12/11/2013 | 12/11/2025 | 2025 Series B Notes | $ | % | NY Life 2013 Note Agreement | |||||||||||||||||||||||||||
| 9/4/2014 | 9/4/2026 | 2026 Senior Notes | $ | % | NY Life 2014 Note Agreement | |||||||||||||||||||||||||||
| 7/21/2014 | 7/21/2024 | 2024 Series B Notes | $ | % | Prudential 2015 Amended Agreement | |||||||||||||||||||||||||||
| 6/18/2015 | 6/18/2025 | 2025 Series C Notes | € | % | Prudential 2015 Amended Agreement | |||||||||||||||||||||||||||
| 2/12/2015 | 2/12/2027 | 2027 Series B Notes | $ | % | MetLife 2014 Note Agreement | |||||||||||||||||||||||||||
| 3/14/2019 | 03/14/2029 | 2029 Series C Notes | $ | % | MetLife 2014 Note Agreement | |||||||||||||||||||||||||||
| 4/2/2020 | 04/02/2030 | MetLife 2030 Series D Notes | $ | % | MetLife 2014 Note Agreement | |||||||||||||||||||||||||||
| 4/14/2020 | 04/14/2030 | Prudential 2030 Series D Notes | $ | % | Prudential 2015 Amended Agreement | |||||||||||||||||||||||||||
On February 2022, we paid off our $75.0 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 3.5 -to-1. As of March 31, 2022, we were in compliance with the covenants of the Senior Note Agreements.
NOTE 12. REPURCHASES OF COMMON STOCK
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The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrender:
(in thousands, except per share amounts) | For the Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Shares repurchased in the open market | |||||||||||
| Shares acquired through employee surrender for statutory tax withholding | |||||||||||
| Total shares repurchased | |||||||||||
| Cost of shares repurchased in the open market | $ | $ | |||||||||
| Cost of shares for employee surrenders | |||||||||||
| Total cost of shares | $ | $ | |||||||||
| Average cost per share - open market repurchases | $ | $ | |||||||||
| Average cost per share - employee surrenders | $ | $ | |||||||||
| Average cost per share - total | $ | $ | |||||||||
NOTE 13. INCOME TAXES
Our effective income tax rate was 19.7 % for the three months ended March 31, 2022, as compared to 14.9 % for the three months ended March 31, 2021. The increase in our effective tax rate for the three months ended March 31, 2022, as compared to the same period in the prior year, was primarily driven by a decrease in the tax benefits from share-based compensation.
The effective tax rate for the three months ended March 31, 2022, differed from the U.S. statutory tax rate of 21% primarily due to tax benefits from share-based compensation.
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in AOCI, net of tax, consisted of the following:
| For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax | Unrealized Gain (Loss) on Net Investment Hedges, Net of Tax | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Unrealized Gain (Loss) on Investments, Net of Tax | Foreign Currency Exchange Contracts | Euro-Denominated Notes | Cross Currency Swaps | Cumulative Translation Adjustment | Total | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | ( | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | |||||||||||||||||||||||||||||||||||||
| Loss reclassified from accumulated other comprehensive income | ( | ( | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | ( | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||
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| For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax | Unrealized Gain (Loss) on Net Investment Hedges, Net of Tax | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Unrealized (Loss) Gain on Investments, Net of Tax | Foreign Currency Exchange Contracts | Euro-Denominated Notes | Cross Currency Swaps | Cumulative Translation Adjustment | Total | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ||||||||||||||||||||||||||||||||||||
| Gain reclassified from accumulated other comprehensive income | ||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||
The following tables present components and amounts 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 March 31, | ||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Gain (loss) on derivative instruments classified as cash flow hedges included in net income: | ||||||||||||||||||||
| Foreign currency exchange contracts | Cost of revenue | $ | $ | ( | ||||||||||||||||
| Tax expense (benefit) | ( | |||||||||||||||||||
| Gain (loss), net of tax | $ | $ | ( | |||||||||||||||||
NOTE 15. EARNINGS PER SHARE
The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Shares outstanding for basic earnings per share | |||||||||||
| Shares outstanding for diluted earnings per share: | |||||||||||
| Shares outstanding for basic earnings per share | |||||||||||
| Dilutive effect of share-based payment awards | |||||||||||
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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. The following table presents information concerning those anti-dilutive awards and options:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Weighted average number of shares underlying anti-dilutive awards | |||||||||||
| Weighted average number of shares underlying anti-dilutive options | |||||||||||
NOTE 16. COMMITMENTS, 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 March 31, 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 $50 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 $27.5 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 no
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NOTE 17. SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. Our reportable segments include diagnostic and information technology-based products and services for the veterinary 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.
The following is a summary of segment performance:
| (in thousands) | For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| CAG | Water | LPD | Other | Consolidated Total | ||||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Income from operations | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest expense, net | ( | |||||||||||||||||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | ||||||||||||||||||||||||||||||||
| Net income attributable to IDEXX Laboratories, Inc. stockholders | $ | |||||||||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Income from operations | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest expense, net | ( | |||||||||||||||||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | ||||||||||||||||||||||||||||||||
| Net income attributable to IDEXX Laboratories, Inc. stockholders | $ | |||||||||||||||||||||||||||||||
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NOTE 18. FAIR VALUE MEASUREMENTS
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a non-recurring basis and certain financial assets and liabilities that are not measured at fair value in our unaudited condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:
| Level 1 | Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. | |||||||
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |||||||
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | |||||||
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers in or out of Level 3 of the fair value hierarchy during the three months ended March 31, 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.
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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:
| (in thousands) | ||||||||||||||||||||||||||
| As of March 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of March 31, 2022 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
Money market funds (1) | $ | $ | $ | $ | ||||||||||||||||||||||
Equity mutual funds (2) | $ | $ | $ | $ | ||||||||||||||||||||||
Cross currency swaps (3) | $ | $ | $ | $ | ||||||||||||||||||||||
Foreign currency exchange contracts (3) | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Foreign currency exchange contracts (3) | $ | $ | $ | $ | ||||||||||||||||||||||
Deferred compensation (4) | $ | $ | $ | $ | ||||||||||||||||||||||
| Contingent payments - acquisitions | $ | $ | $ | $ | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| As of December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance as of December 31, 2021 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
Money market funds (1) | $ | $ | $ | $ | ||||||||||||||||||||||
Equity mutual funds (2) | $ | $ | $ | $ | ||||||||||||||||||||||
Cross currency swaps (3) | $ | $ | $ | $ | ||||||||||||||||||||||
Foreign currency exchange contracts (3) | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Foreign currency exchange contracts (3) | $ | $ | $ | $ | ||||||||||||||||||||||
Deferred compensation (4) | $ | $ | $ | $ | ||||||||||||||||||||||
| Contingent payments - acquisitions | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of March 31, 2022 and December 31, 2021 consisted of demand deposits.
(2)Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount is included within other long-term assets. 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.
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.
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We record changes in the estimated fair value of contingent consideration in the condensed consolidated statements of income. Changes in contingent consideration liabilities are measured at fair value on a recurring basis using unobservable inputs (Level 3) and during the three months ended March 31, 2022, are as follows:
| (in thousands) | Fair Value | |||||||
| Contingent consideration as of December 31, 2021 | $ | |||||||
| Change in estimated fair value | ||||||||
| Contingent consideration as of March 31, 2022 | $ | |||||||
NOTE 19. HEDGING INSTRUMENTS
Disclosure within this note is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging instruments”), how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations and cash flows.
We are exposed to certain risks related to our ongoing business operations. The primary risk that we currently manage by using hedging instruments is foreign currency exchange risk. We may also enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with borrowings under our variable-rate Credit Facility.
Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts, cross currency swaps or foreign-denominated debt issuances to minimize the impact of 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 months ended March 31, 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.
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We did not de-designate any instruments from hedge accounting treatment during either the three months ended March 31, 2022 or 2021. As of March 31, 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 $5.6 million if exchange rates do not fluctuate from the levels as of March 31, 2022.
We target to hedge approximately 85 % 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 24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $274.6 million and $286.7 million as of March 31, 2022 and December 31, 2021, respectively.
The following tables present the effect of cash flow hedge accounting on our unaudited condensed consolidated statements of income and comprehensive income, and provide information regarding the location and amounts of pretax gains or losses of derivatives:
| (in thousands) | Three Months Ended March 31, | |||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Financial statement line items in which effects of cash flow hedges are recorded | Cost of revenue | $ | $ | |||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||
| Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | $ | ( | |||||||||||||||||
Net Investment Hedges, Euro-Denominated Notes
In June 2015, we issued and sold through a private placement an aggregate principal amount of €88.9 million in euro-denominated 1.785 % Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded gains of $1.4 million, net of tax, within AOCI as a result of this net investment hedge for the three months ended March 31, 2022, and gains of $3.6 million for the three months ended March 31, 2021. The related cumulative unrealized loss recorded as of March 31, 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 €90.0 million and will receive approximately $104.5 million from the counterparties on June 30, 2023, and we will deliver the notional amount of €15 million and will receive approximately $17.5 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 months ended March 31, 2022, we
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recorded gains of $1.0 million, net of tax, within AOCI as a result of these net investment hedges, and gains of $3.3 million during the three months ended March 31, 2021. 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 $0.7 million related to the excluded component as a reduction of interest expense for the three months ended March 31, 2022, and $0.7 million for the three months ended March 31, 2021.
Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets
The fair values of hedging instruments and their respective classification on our unaudited condensed consolidated balance sheets and amounts subject to offset under master netting arrangements consisted of the following derivative instruments, unless otherwise noted:
| (in thousands) | Hedging Assets | |||||||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||
| Derivatives and non-derivatives designated as hedging instruments | Balance Sheet Classification | |||||||||||||||||||
| Foreign currency exchange contracts | Other current assets | $ | $ | |||||||||||||||||
| Cross currency swaps | Other long-term assets | |||||||||||||||||||
| Total derivative instruments presented as hedge instruments on the balance sheet | ||||||||||||||||||||
| Gross amounts subject to master netting arrangements not offset on the balance sheet | ( | ( | ||||||||||||||||||
| Net amount | $ | $ | ||||||||||||||||||
| (in thousands) | Hedging Liabilities | |||||||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||
| Derivatives and non-derivatives designated as hedging instruments | Balance Sheet Classification | |||||||||||||||||||
| Foreign currency exchange contracts | Accrued liabilities | $ | $ | |||||||||||||||||
| Total derivative instruments presented as cash flow hedges on the balance sheet | ||||||||||||||||||||
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet (1) | Long-term debt | |||||||||||||||||||
| Total hedging instruments presented on the balance sheet | ||||||||||||||||||||
| Gross amounts subject to master netting arrangements not offset on the balance sheet | ( | ( | ||||||||||||||||||
| Net amount | $ | $ | ||||||||||||||||||
(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.
NOTE 20. SUBSEQUENT EVENT
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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 supply chain and logistics disruptions; 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 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 adoption and 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, 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 March 31. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior-year 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.
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
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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 Factors and Trends on Results of Operations
CAG Trends. 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 growth levels. U.S. same-store clinical visits at veterinary practices declined 2% in the first 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. Average same-store revenue growth at U.S. veterinary practices was 6% in the first quarter, compared to 16% growth levels in the first quarter of 2021, driven by high growth in healthcare services, including increased utilization of diagnostics.
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 COVID-19 pandemic-related 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 government lockdowns and other restrictions due to COVID-19, and have implemented mitigation strategies to adjust for delayed shipments of products and components. Although we expect the current supply chain and logistics 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. We have significantly scaled back operations in Russia including suspending sales of veterinary diagnostic equipment in the country. Our 2021 annual revenue was approximately $10 million in the Russia, Belarus and Ukraine region. We have no manufacturing or significant supply arrangement in the region. We anticipate revenues related to these geographies will be significantly limited for the remainder of 2022.
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.
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Critical Accounting Estimates and Assumptions
The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three months ended March 31, 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 months ended March 31, 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.
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.
30
Results of Operations
Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021
Total Company. The following table presents total Company revenue by operating segment by U.S. and non-U.S., or international geographies:
| For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 761,184 | $ | 692,767 | $ | 68,417 | 9.9 | % | (1.9 | %) | 1.6 | % | 10.2 | % | ||||||||||||||||||||||||||||||
| United States | 499,766 | 444,410 | 55,356 | 12.5 | % | — | 2.2 | % | 10.3 | % | ||||||||||||||||||||||||||||||||||
| International | 261,418 | 248,357 | 13,061 | 5.3 | % | (5.2 | %) | 0.5 | % | 10.0 | % | |||||||||||||||||||||||||||||||||
| Water | 36,371 | 34,040 | 2,331 | 6.8 | % | (1.6 | %) | — | 8.4 | % | ||||||||||||||||||||||||||||||||||
| United States | 17,831 | 16,568 | 1,263 | 7.6 | % | — | — | 7.6 | % | |||||||||||||||||||||||||||||||||||
| International | 18,540 | 17,472 | 1,068 | 6.1 | % | (3.1 | %) | — | 9.2 | % | ||||||||||||||||||||||||||||||||||
| LPD | 30,870 | 39,270 | (8,400) | (21.4 | %) | (2.3 | %) | — | (19.1 | %) | ||||||||||||||||||||||||||||||||||
| United States | 3,860 | 3,748 | 112 | 3.0 | % | — | — | 3.0 | % | |||||||||||||||||||||||||||||||||||
| International | 27,010 | 35,522 | (8,512) | (24.0 | %) | (2.4 | %) | — | (21.5 | %) | ||||||||||||||||||||||||||||||||||
| Other | 8,124 | 11,630 | (3,506) | (30.1 | %) | (0.2 | %) | — | (29.9 | %) | ||||||||||||||||||||||||||||||||||
| Total Company | $ | 836,549 | $ | 777,707 | $ | 58,842 | 7.6 | % | (1.9 | %) | 1.4 | % | 8.0 | % | ||||||||||||||||||||||||||||||
| United States | 525,906 | 472,638 | 53,268 | 11.3 | % | — | 2.1 | % | 9.2 | % | ||||||||||||||||||||||||||||||||||
| International | 310,643 | 305,069 | 5,574 | 1.8 | % | (4.7 | %) | 0.4 | % | 6.1 | % | |||||||||||||||||||||||||||||||||
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in both U.S. and international organic revenues was driven by volume gains in CAG Diagnostics recurring revenue, reflecting continued high demand for companion animal diagnostics, as well as higher realized prices. Our CAG Diagnostics instrument revenue reflects high placement volumes compared to the prior 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 the lower demand for swine testing in China. The impact of acquisitions increased total revenue growth by 1.4% while the impact of currency movements decreased total revenue growth by 1.9%.
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The following table presents total Company results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Total Company - Results of Operations (dollars in thousands) | 2022 | Percent of Revenue | 2021 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 836,549 | $ | 777,707 | $ | 58,842 | 7.6 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 337,796 | 306,925 | 30,871 | 10.1 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 498,753 | 59.6 | % | 470,782 | 60.5 | % | 27,971 | 5.9 | % | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 132,292 | 15.8 | % | 114,811 | 14.8 | % | 17,481 | 15.2 | % | |||||||||||||||||||||||||||||
| General and administrative | 77,949 | 9.3 | % | 70,770 | 9.1 | % | 7,179 | 10.1 | % | |||||||||||||||||||||||||||||
| Research and development | 40,168 | 4.8 | % | 37,579 | 4.8 | % | 2,589 | 6.9 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 250,409 | 29.9 | % | 223,160 | 28.7 | % | 27,249 | 12.2 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 248,344 | 29.7 | % | $ | 247,622 | 31.8 | % | $ | 722 | 0.3 | % | ||||||||||||||||||||||||||
Gross Profit. Gross profit increased due to higher sales volumes moderated by a 90 basis point decrease in the gross profit margin. The decrease in the gross profit margin was primarily due to the impact of product mix from lower LPD and higher CAG Diagnostic instrument revenue, as well as higher product and service costs and higher freight and distribution costs. These decreases were partially offset by recurring revenue net price gains and reference laboratory productivity initiatives, which helped to offset the effects of inflation on our gross profit margin. The impact from foreign currency movements increased the gross profit margin by approximately 30 basis points, including 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 and higher travel costs. General and administrative expense increased primarily due to higher personnel-related expense, as well as higher estimated bad debt expense and an increase in amortization and depreciation expense related to business acquisitions and capital investments. Research and development expense increased primarily due to higher project and third-party costs. The overall change in currency exchange rates decreased operating expenses growth by approximately 1%.
During the second quarter of 2022, we entered into two arrangements to license intellectual property. In connection with these arrangements, we estimate approximately $80.0 million in the aggregate will be charged to research and development expense during the second quarter. Refer to “Part I, Item 1. Note 20 - Subsequent Event” for more information.
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Companion Animal Group
The following table presents revenue by product and service category for CAG:
| For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||
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: | $ | 664,810 | $ | 617,280 | $ | 47,530 | 7.7 | % | (1.9 | %) | 0.2 | % | 9.4 | % | ||||||||||||||||||||||||||||||
| IDEXX VetLab consumables | 267,173 | 246,092 | 21,081 | 8.6 | % | (2.5 | %) | — | 11.1 | % | ||||||||||||||||||||||||||||||||||
| Rapid assay products | 74,519 | 69,611 | 4,908 | 7.1 | % | (1.1 | %) | — | 8.1 | % | ||||||||||||||||||||||||||||||||||
| Reference laboratory diagnostic and consulting services | 295,075 | 275,781 | 19,294 | 7.0 | % | (1.5 | %) | 0.5 | % | 8.0 | % | |||||||||||||||||||||||||||||||||
| CAG diagnostics services and accessories | 28,043 | 25,796 | 2,247 | 8.7 | % | (2.6 | %) | — | 11.3 | % | ||||||||||||||||||||||||||||||||||
| CAG Diagnostics capital - instruments | 36,997 | 31,190 | 5,807 | 18.6 | % | (3.5 | %) | — | 22.1 | % | ||||||||||||||||||||||||||||||||||
| Veterinary software, services and diagnostic imaging systems | 59,377 | 44,297 | 15,080 | 34.0 | % | (0.4 | %) | 21.2 | % | 13.2 | % | |||||||||||||||||||||||||||||||||
| Net CAG revenue | $ | 761,184 | $ | 692,767 | $ | 68,417 | 9.9 | % | (1.9 | %) | 1.6 | % | 10.2 | % | ||||||||||||||||||||||||||||||
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. The increase was driven by strong 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 1.9%.
The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes for our Catalyst consumables and, to a lesser extent, ProCyte consumables, as well as higher price realization. These increases were supported by an expansion of our instrument installed base, 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, primarily in the U.S., as well as higher realized prices. 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 21.2%. Excluding the impact of acquisitions, the increase in veterinary software and services revenue was primarily due to increases in our active installed base, higher realized prices on service offerings, and higher veterinary software system placements. 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.
33
The following table presents the CAG segment results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2022 | Percent of Revenue | 2021 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 761,184 | $ | 692,767 | $ | 68,417 | 9.9 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 312,085 | 279,893 | 32,192 | 11.5 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 449,099 | 59.0 | % | 412,874 | 59.6 | % | 36,225 | 8.8 | % | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 121,660 | 16.0 | % | 104,291 | 15.1 | % | 17,369 | 16.7 | % | |||||||||||||||||||||||||||||
| General and administrative | 68,881 | 9.0 | % | 62,904 | 9.1 | % | 5,977 | 9.5 | % | |||||||||||||||||||||||||||||
| Research and development | 35,433 | 4.7 | % | 32,469 | 4.7 | % | 2,964 | 9.1 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 225,974 | 29.7 | % | 199,664 | 28.8 | % | 26,310 | 13.2 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 223,125 | 29.3 | % | $ | 213,210 | 30.8 | % | $ | 9,915 | 4.7 | % | ||||||||||||||||||||||||||
Gross Profit. Gross profit increased primarily due to higher sales volume, moderated by a 60 basis point decrease in the gross profit margin. The decrease in the gross profit margin was primarily due to the impact of product mix with higher CAG Diagnostic instrument revenue, as well as higher product and service costs and higher freight and distributions costs. These decreases were partially offset by recurring revenue net price gains and reference laboratory productivity initiatives, which helped to offset the effects of inflation on our gross margins, as well as the benefits of growth from our recurring software revenues. The impact from foreign currency movements increased the gross profit margin by approximately 10 basis points, including 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 and higher travel costs. General and administrative expense increased primarily due to higher personnel-related expense, as well as an increase in amortization and depreciation expense related to business acquisitions and capital investments and higher estimated bad debt expense. Research and development expense increased primarily due to increased project and third-party costs. The overall change in currency exchange rates resulted in a decrease in operating expenses growth by approximately 1%.
During the second quarter of 2022, we entered into two arrangements to license intellectual property. In connection with these arrangements, we estimate approximately $80.0 million in the aggregate will be charged to research and development expense during the second quarter. Refer to “Part I, Item 1. Note 20 - Subsequent Event” for more information.
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| Water | ||
The following table presents the Water segment results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2022 | Percent of Revenue | 2021 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 36,371 | $ | 34,040 | $ | 2,331 | 6.8 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 10,634 | 10,575 | 59 | 0.6 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 25,737 | 70.8 | % | 23,465 | 68.9 | % | 2,272 | 9.7 | % | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 4,598 | 12.6 | % | 4,358 | 12.8 | % | 240 | 5.5 | % | |||||||||||||||||||||||||||||
| General and administrative | 3,282 | 9.0 | % | 3,236 | 9.5 | % | 46 | 1.4 | % | |||||||||||||||||||||||||||||
| Research and development | 1,203 | 3.3 | % | 1,099 | 3.2 | % | 104 | 9.5 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 9,083 | 25.0 | % | 8,693 | 25.5 | % | 390 | 4.5 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 16,654 | 45.8 | % | $ | 14,772 | 43.4 | % | $ | 1,882 | 12.7 | % | ||||||||||||||||||||||||||
Revenue. The increase in our Water business was primarily due to higher testing volume and higher realized prices in our Colilert test products and related accessories used in coliform and E. coli testing. The impact of currency movements decreased revenue growth by 1.6%.
Gross Profit. Gross profit increased due to higher sales volumes and a 190 basis point increase in the gross profit margin, which reflected an approximately 160 basis point increase due to foreign currency movements, including the impact of hedge gains in the current year compared to hedge losses in the prior year. The gross profit margin also increased due to higher realized prices and lower product costs, offset by higher distribution and freight costs.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs and higher travel expense. Research and development expense increased primarily due to third-party services. The overall change in currency exchange rates resulted in a decrease in operating expenses growth of less than 1%.
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Livestock, Poultry and Dairy | ||
The following table presents the LPD segment results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2022 | Percent of Revenue | 2021 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 30,870 | $ | 39,270 | $ | (8,400) | (21.4 | %) | ||||||||||||||||||||||||||||||
| Cost of revenue | 11,323 | 12,389 | (1,066) | (8.6 | %) | |||||||||||||||||||||||||||||||||
| Gross profit | 19,547 | 63.3 | % | 26,881 | 68.5 | % | (7,334) | (27.3) | % | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 5,568 | 18.0 | % | 5,538 | 14.1 | % | 30 | 0.5 | % | |||||||||||||||||||||||||||||
| General and administrative | 4,161 | 13.5 | % | 4,308 | 11.0 | % | (147) | (3.4 | %) | |||||||||||||||||||||||||||||
| Research and development | 3,081 | 10.0 | % | 3,227 | 8.2 | % | (146) | (4.5) | % | |||||||||||||||||||||||||||||
| Total operating expenses | 12,810 | 41.5 | % | 13,073 | 33.3 | % | (263) | (2.0 | %) | |||||||||||||||||||||||||||||
| Income from operations | $ | 6,737 | 21.8 | % | $ | 13,808 | 35.2 | % | $ | (7,071) | (51.2) | % | ||||||||||||||||||||||||||
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 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 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 moderate gains in other regions. The unfavorable impact of foreign currency movements decreased revenue growth by 2.3%.
Gross Profit. The decrease in gross profit was primarily due to lower sales volumes and a 520 basis point decrease in the gross profit margin. The decrease in the gross profit margin is primarily due to higher freight and distribution charges, investments in our bovine laboratory services, and the unfavorable overall mix impacts largely from lower ASF testing following changes in government requirements. The decrease in the gross profit margin was partially offset by the impact from foreign currency movements, which increased gross profit margin by approximately 200 basis points, including the impact of hedge gains in the current year compared to hedge losses in the prior year.
Operating Expenses. Sales and marketing expense were essentially flat, with higher marketing costs offset by lower personnel-related costs. General and administrative expenses decreased primarily due to lower personnel-related costs and lower bad debt expense. Research and development expense decreased primarily due to lower personnel-related costs, partially offset by lower costs in the prior year as we leveraged LPD personnel to support our human COVID-19 testing products. The overall change in currency exchange rates resulted in a decrease in operating expenses growth of approximately 2%.
36
Other
The following table presents the Other results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2022 | Percent of Revenue | 2021 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 8,124 | $ | 11,630 | $ | (3,506) | (30.1 | %) | ||||||||||||||||||||||||||||||
| Cost of revenue | 3,754 | 4,068 | (314) | (7.7 | %) | |||||||||||||||||||||||||||||||||
| Gross profit | 4,370 | 53.8 | % | 7,562 | 65.0 | % | (3,192) | (42.2 | %) | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 466 | 5.7 | % | 624 | 5.4 | % | (158) | (25.3 | %) | |||||||||||||||||||||||||||||
| General and administrative | 1,625 | 20.0 | % | 322 | 2.8 | % | 1,303 | 404.7 | % | |||||||||||||||||||||||||||||
| Research and development | 451 | 5.6 | % | 784 | 6.7 | % | (333) | (42.5 | %) | |||||||||||||||||||||||||||||
| Total operating expenses | 2,542 | 31.3 | % | 1,730 | 14.9 | % | 812 | 46.9 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 1,828 | 22.5 | % | $ | 5,832 | 50.1 | % | $ | (4,004) | (68.7 | %) | ||||||||||||||||||||||||||
Revenue. The decrease in revenue was primarily due to lower OPTI COVID-19 PCR testing products and services in the U.S., as well as lower OPTI Medical consumables revenue related to COVID-19 lockdowns in Asia.
Gross Profit. The decrease in gross profit was primarily due to lower sales volume and a gross profit margin decrease of 1,120 basis points. The decrease in the gross profit margin is primarily due to lower OPTI Medical volumes and higher distribution expense, partially offset by higher realized prices. The overall change in 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, for all operating segments, which are reported within our Other segment, as well as higher estimated bad debt expense. Research and development expense decreased primarily due to lower project costs compared to the prior year, which included COVID-19 related costs.
Non-Operating Items
Interest Expense. Interest expense was $7.0 million for the three months ended March 31, 2022, as compared to $7.6 million for the same period in the prior year. The decrease in interest expense was primarily due to the timing of Credit Facility borrowings during the first quarter of 2022, as well as a lower variable rate than the comparative fixed long-term debt.
Provision for Income Taxes. Our effective income tax rate was 19.7% for the three months ended March 31, 2022, as compared to 14.9% for the three months ended March 31, 2021. The increase in our effective tax rate, as compared to the same period in the prior year, was primarily driven by a decrease in the tax benefits from share-based compensation.
37
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 March 31, 2022, we had $204.6 million of cash and cash equivalents, as compared to $144.5 million as of December 31, 2021. Working capital totaled $118.4 million as of March 31, 2022, as compared to $192.1 million as of December 31, 2021. Additionally, as of March 31, 2022, we had borrowing availability of $598.6 million under our $1 billion Credit Facility, with $400.0 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:
Cash, cash equivalents and marketable securities (dollars in thousands) | March 31, 2022 | December 31, 2021 | ||||||||||||
| U.S. | $ | 30,538 | $ | 2,632 | ||||||||||
| Foreign | 174,080 | 141,822 | ||||||||||||
| Total | $ | 204,618 | $ | 144,454 | ||||||||||
| Total cash, cash equivalents, and marketable securities held in U.S. dollars by our foreign subsidiaries | $ | 38,791 | $ | 6,245 | ||||||||||
Of the $204.6 million of cash and cash equivalents held as of March 31, 2022, greater than 99% was held as bank deposits.
The following table presents additional key information concerning working capital:
| For the Three Months Ended | |||||||||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | |||||||||||||||||||||||||
Days sales outstanding (1) | 42.0 | 42.4 | 42.7 | 42.2 | 41.8 | ||||||||||||||||||||||||
Inventory turns (2) | 1.6 | 2.0 | 1.9 | 2.1 | 2.0 | ||||||||||||||||||||||||
(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.
38
Sources and Uses of Cash
The following table presents cash provided (used):
| For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2022 | 2021 | Dollar Change | |||||||||||||||||
| Net cash provided by operating activities | $ | 114,706 | $ | 124,422 | $ | (9,716) | ||||||||||||||
| Net cash used by investing activities | (41,838) | (24,587) | (17,251) | |||||||||||||||||
| Net cash used by financing activities | (13,480) | (129,651) | 116,171 | |||||||||||||||||
| Net effect of changes in exchange rates on cash | 776 | (2,949) | 3,725 | |||||||||||||||||
| Net change in cash and cash equivalents | $ | 60,164 | $ | (32,765) | $ | 92,929 | ||||||||||||||
Operating Activities. The decrease in cash provided by operating activities of $9.7 million was driven primarily by a decrease in net income and changes in inventory, partially offset by changes in accounts receivable. The following table presents cash flow impacts from changes in operating assets and liabilities:
| For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2022 | 2021 | Dollar Change | |||||||||||||||||
| Accounts receivable | $ | (37,531) | $ | (54,735) | $ | 17,204 | ||||||||||||||
| Inventories | (18,854) | (7,919) | (10,935) | |||||||||||||||||
| Accounts payable | (4,016) | 2,460 | (6,476) | |||||||||||||||||
| Deferred revenue | (937) | (2,287) | 1,350 | |||||||||||||||||
| Other assets and liabilities | (52,904) | (57,081) | 4,177 | |||||||||||||||||
| Total change in cash due to changes in operating assets and liabilities | $ | (114,242) | $ | (119,562) | $ | 5,320 | ||||||||||||||
Cash used due to changes in operating assets and liabilities during the three months ended March 31, 2022, as compared to the same period in the prior year, increased by approximately $5.3 million. The decrease in cash used by accounts receivable over the same prior-year period was due to the timing of revenue within the prior year, as sales volumes rebounded from the beginning of the COVID-19 pandemic. 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.
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 $30.0 million for an equity investment and license rights, with expected subsequent milestone payments of $20.0 million. The cash paid for these arrangements will be presented in operating and investing activities in the unaudited condensed consolidated statement of cash flows for the period in which cash is used. Refer to “Part I, Item 1. Note 20 - Subsequent Event” for more information.
Investing Activities. Cash used by investing activities was $41.8 million for the three months ended March 31, 2022, as compared to $24.6 million for the same period in the prior year. The increase in cash used by investing activities was primarily due to higher purchases of property and equipment and an acquisition of an intangible asset.
Our outlook for full year capital spending is approximately $180.0 million for 2022.
Financing Activities. Cash used by financing activities was $13.5 million for the three months ended March 31, 2022, as compared to $129.7 million of cash used for the same period in the prior year. The decrease in cash used by financing activities was due to a $326.5 million increase in borrowings under our Credit Facility, partially offset by $134.0 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.
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Cash used to repurchase shares of our common stock increased $134.0 million during the three months ended March 31, 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 three months ended March 31, 2022, as compared to the same period in the prior year, increased $326.5 million. As of March 31, 2022, we had $400.0 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 sanctions 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.
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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 March 31, 2022, we were in compliance with such covenant. The following details our consolidated leverage ratio calculation:
| (in thousands) | Twelve Months ended | ||||
| Trailing 12 Months Adjusted EBITDA: | March 31, 2022 | ||||
| Net income attributable to stockholders (as reported) | $ | 734,553 | |||
| Interest expense | 29,220 | ||||
| Provision for income taxes | 169,535 | ||||
| Depreciation and amortization | 106,050 | ||||
| Acquisition-related expense | 3,284 | ||||
| Share-based compensation expense | 40,053 | ||||
| Extraordinary and other non-recurring non-cash charges | 5,148 | ||||
| Adjusted EBITDA | $ | 1,087,843 | |||
| (in thousands) | |||||
| Debt to Adjusted EBITDA Ratio: | March 31, 2022 | ||||
| Line of credit | $ | 400,000 | |||
| Current and long-term portions of long-term debt | 773,381 | ||||
| Total debt | 1,173,381 | ||||
| Acquisition-related contingent consideration payable | 10,683 | ||||
| Financing leases | 11 | ||||
| Deferred financing costs | 481 | ||||
| Gross debt | $ | 1,184,556 | |||
| Gross debt to Adjusted EBITDA ratio | 1.09 | ||||
| Less: Cash and cash equivalents | $ | 204,618 | |||
| Net debt | $ | 979,938 | |||
| Net debt to Adjusted EBITDA ratio | 0.90 | ||||
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 March 31, 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.
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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 23% of our consolidated revenue was derived from products manufactured in the U.S. and sold internationally in local currencies for both the three months ended March 31, 2022 and 2021. 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 $9 million and operating income by approximately $5 million. Additionally, we project our foreign currency hedge contracts in place as of March 31, 2022, would result in incremental offsetting gains of approximately $2 million. 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 $77 million, $16 million, and $0.14 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 $22 million and $0.20 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 1.05, the British pound at 1.26, the Canadian dollar at 0.78, and the Australian dollar at 0.71; and the Japanese yen at ¥130, the Chinese renminbi at RMB 6.61, and the Brazilian real at R$4.97 relative to the U.S. dollar for the remainder of 2022.
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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 March 31, | ||||||||||||||
| (in thousands, except per share amounts) | 2022 | 2021 | ||||||||||||
| Revenue impact | $ | (15,064) | $ | 19,434 | ||||||||||
| Operating profit impact, excluding hedge activity and exchange impacts on settlement of foreign currency denominated transactions | $ | (7,939) | $ | 11,761 | ||||||||||
| Hedge gains (losses) - current period | 2,236 | (2,430) | ||||||||||||
| Exchange (losses) on settlements of foreign currency denominated transactions - current period | (775) | (70) | ||||||||||||
| Operating profit impact - current period | $ | (6,478) | $ | 9,261 | ||||||||||
| Hedge losses (gains) - prior period | 2,430 | (1,341) | ||||||||||||
| Exchange losses on settlement of foreign currency denominated transactions - prior period | 70 | 1,907 | ||||||||||||
| Operating profit impact - as compared to prior period | $ | (3,978) | $ | 9,827 | ||||||||||
| Diluted earnings per share impact - as compared to prior period | $ | (0.04) | $ | 0.09 | ||||||||||
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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 March 31, 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 March 31, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 this Quarterly Report on Form 10-Q and our 2021 Annual Report, as well as 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 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. While we have limited operations in Russia, and regional revenues represent a de minimis percentage of our total revenues, our regional operations have been affected by sanctions by a number of governments on the Russian financial sector, including the United States, the European Union, and the United Kingdom, as well as Russian counter-sanctions and other economic, financial and export restrictions. These sanctions and restrictions may disrupt our ability to collect outstanding accounts receivable and support our existing customers and employees in Russia.
We are actively monitoring the situation in Ukraine and Russia and assessing its impact on our business, including our employees, business partners and customers. The length of this war cannot be predicted, and it may escalate and/or expand in scope. 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, 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 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) (d) | ||||||||||||||||||||||
| January 1 to January 31, 2022 | 226,705 | $ | 523.94 | 226,705 | 4,765,526 | |||||||||||||||||||||
| February 1 to February 28, 2022 | 181,951 | $ | 515.77 | 161,502 | 4,604,024 | |||||||||||||||||||||
| March 1 to March 31, 2022 | 114,204 | $ | 529.73 | 114,204 | 4,489,820 | |||||||||||||||||||||
| Total | 522,860 | (2) | 502,411 | 4,489,820 | ||||||||||||||||||||||
(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 March 31, 2022, and no share repurchase programs expired during the period. There were 502,411 share repurchases made during the three months ended March 31, 2022, in transactions made pursuant to our share repurchase program.
(2)During the three months ended March 31, 2022, we received 20,449 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.
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Item 6. Exhibits
| Exhibit No. | Description | ||||
| 101 | The following financial and related information from IDEXX Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 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 March 31, 2022, formatted in Inline XBRL and contained in Exhibit 101. | ||||
| * | Indicates management contract or compensatory plan or arrangement. | ||||
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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.
| IDEXX LABORATORIES, INC. | |||||
| /s/ Brian P. McKeon | |||||
| Date: May 4, 2022 | Brian P. McKeon | ||||
| Executive Vice President, Chief Financial Officer and Treasurer | |||||
| (Principal Financial Officer) | |||||
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Exhibit 10.1
CONFIDENTIAL INFORMATION, WORK PRODUCT,
AND RESTRICTIVE COVENANT AGREEMENT
This Confidential Information, Work Product, and Restrictive Covenant Agreement (“Agreement”) is made by and between IDEXX Laboratories, Inc. and its parents, subsidiaries, affiliates, predecessors, successors and assigns (the “Company”) and the undersigned individual (“Employee”) (collectively, the “Parties” and individually a “Party”).
WHEREAS, the Company and Employee agree that the Company has a legitimate business interest in, among other things, its Confidential Information (defined below) and Trade Secrets (defined below), and in the significant time, money, training, team building and other efforts it expends to develop Employee’s skills to assist Employee in performing Employee’s duties for the Company, including with respect to establishing, developing and maintaining the goodwill and business relationships with the Company’s customers and employees, all of which Employee agrees are valuable assets of the Company to which it has devoted substantial resources;
WHEREAS, the Company and Employee agree that the Company’s Confidential Information and Trade Secrets, including key information about, and goodwill in, its customers and employees are not generally known to the public, were developed over time and at significant cost to the Company, and are the subject of reasonable efforts of protection by the Company against disclosure to unauthorized parties; and
WHEREAS, as part of performing Employee’s duties for the Company, Employee will have access to and/or will use the Company’s Confidential Information and Trade Secrets and will work with customers and employees; and
WHEREAS, the Company and Employee agree that this Agreement is reasonable to protect the Company against the irreparable harm it would suffer if Employee left the Company’s employment (for any reason) and used or disclosed its Confidential Information and Trade Secrets, and/or interfered with the goodwill and relationships the Company has in its customers and employees.
NOW, THEREFORE, for good and valuable consideration, to which Employee would not otherwise be entitled without entering into this Agreement, including: (a) the promises and covenants contained in this Agreement; (b) Employee’s employment or continued employment with the Company; (c) Employee’s access to and use of the Company’s Confidential Information and Trade Secrets, including key information about, and goodwill in, its customers and employees; (d) the specialized training the Company provides to Employee to allow Employee to perform Employee’s duties for the Company; and/or (e) other good and valuable monetary consideration, the Company and Employee agree as follows (including the foregoing recitals which are expressly incorporated in this Agreement):
1.Disclosures. In order to maintain Employee’s confidentiality obligations and to avoid conflicts of interest which may arise, Employee will disclose (and allow the Company to disclose) to any future prospective employers the existence of this Agreement and the nature of Employee’s confidentiality and restrictive covenant obligations arising from it before Employee accepts any new position of employment.
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2.Definitions.
2.1“Confidential Information” means information that is created and used in the Company’s business and which is not generally known by the public, including but not limited to: trade secrets, proprietary or customized software and databases (including, but not limited to, veterinary practice management platforms relating to issues such as patient scheduling and care, customer information and communications (including telemedicine), medication management and prescriptions, and business and/or personnel management and development); manufacturing processes and methods, product formulas, research and development used by or in development for use or sale by the Company (including, but not limited to those relating to the manufacture of laboratory products, instruments, equipment, and consumables used in veterinary and/or human medicine); new product plans; the Company’s confidential records pertaining to its existing or potential customers, including key customer contact information, contract terms and related information; confidential business opportunities; merger or acquisition activity (including targets, opportunities, or prospects); confidential information regarding suppliers or vendors, including key supplier or vendor contact information, contract terms and related information; strategies for advertising and marketing; confidential business processes and strategies, including training, policies and procedures; personnel composition (wages, specialization, etc.); financial and revenue data and reports, including pricing, quoting and billing methods; and any other business information that the Company maintains as confidential. Employee specifically understands and agrees that the term Confidential Information also includes all confidential information of a third party that may be communicated to, acquired by, learned of, or developed by Employee in the course of or as a result of Employee’s employment with the Company. Confidential Information does not include information that is or may become known to Employee or to the public from sources outside the Company and through means other than a breach of this Agreement or disclosed by Employee after written approval from the Company.
2.2“Competitive Product or Service” means any product, process, system or service (in existence or under development) of any person or organization other than the Company that is the same as, similar to, or competes with, a product, process, system or service (in existence or under development) upon which Employee worked or had responsibilities at the Company during the twenty-four (24) months prior to the Last Day (as defined below).
2.3“Competitor” means Employee or any other person or organization engaged in or about to become engaged in, research or development, production, marketing, leasing, selling, or servicing of a Competitive Product or Service.
2.4“Customer” means any person(s) or entity(ies) whom, within twenty-four (24) months prior to the Last Day, Employee, directly or Indirectly (e.g., through employees whom Employee supervised): (a) provided products or services in connection with the Company’s business; or (b) provided written proposals concerning receiving products or services from the Company.
2.5“Effective Date” means the date on which the provisions of this Agreement, or any of them, may be enforced by any Party.
2.5.1.1With respect to the Non-Competition restrictions set forth in Section 3.1 below, the Effective Date refers to the later of the date that occurs (a) one year after Employee’s commencement of employment with the Company or (b) six (6) months after Employee’s execution of this Agreement. Employees who (i) prior to September 19, 2019, executed an agreement with the Company that contains any non-competition restriction and (ii) have remained continuously employed by the Company since executing such an agreement shall remain bound by such restrictions until the Effective Date of the Non-Competition restrictions in Section 3.1 of this Agreement. Thereafter, the terms of this Agreement shall fully supersede such prior agreement(s).
2.5.1.2With respect to all provisions of this Agreement other than Section 3.1, Effective Date refers to the date on which Employee executes this Agreement.
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2.6“Indirectly” means (including as defined in Section 2.4) that Employee will not assist others in performing business activities that Employee is prohibited from engaging in directly under this Agreement.
2.7“Last Day” means Employee’s last day of employment with the Company regardless of the reason for Employee’s separation, including with or without cause, voluntary or involuntary. It does not encompass Employee’s continuous employment between Company entities. As referenced below, such movement shall be deemed as unbroken and continued employment under this Agreement and these covenants.
2.8“Restricted Geographic Area” means the territory (i.e.: (i) country(ies) (ii) state(s), (iii) county(ies), or (iv) city(ies)) in which, during the twenty-four (24) months prior to the Last Day: (a) Employee provided services on behalf of the Company; (b) Employee solicited Customers or otherwise sold products or services on behalf of the Company; (c) the Company sold products or services and Employee had Confidential Information about (i) the Company’s business in the territory and/or (ii) the products or services sold in the territory; and/or (d) individuals supervised by Employee provided services, solicited Customers, or otherwise sold products or services on behalf of the Company.
2.9“Restricted Period” means the period of Employee’s employment with the Company and a period of twenty-four (24) months after the Last Day. Employee recognizes that this durational term is reasonably and narrowly tailored to the Company’s legitimate business interest and need for protection with each position Employee holds at the Company.
2.10“Trade Secret” means information defined as a trade secret under applicable state law or the Defend Trade Secrets Act of 2016.
3.Restrictive Covenants. To protect the Company’s legitimate business interests, including with respect to Employee’s access to and use of the Company’s Confidential Information and Trade Secrets, including key information about, and goodwill in, its referral sources, customers and employees, Employee agrees that:
3.1Non-Competition. Prior to the Effective Date, if the Employee is subject to an agreement effective before September 19, 2019, the Employee shall remain bound by any such prior agreement(s). Following the Effective Date, during the Restricted Period and within the Restricted Geographic Area, Employee will not, directly or Indirectly, perform the same or similar responsibilities Employee performed for the Company in connection with a Competitive Product or Service. Notwithstanding the foregoing, Employee may accept employment with a Competitor whose business is diversified, provided that: (a) Employee will not be engaged in working on or providing Competitive Products or Services or otherwise use or disclose Confidential Information or Trade Secrets; and (b) the Company receives prior written assurances from the Competitor and Employee that are satisfactory to the Company that Employee will not work on or provide Competitive Products or Services, or otherwise use or disclose Confidential Information or Trade Secrets. In addition, nothing in this Agreement is intended to prevent Employee from investing Employee’s funds in securities of a person engaged in a business that is directly competitive with the Company if the securities of such a person are listed for trading on a registered securities exchange or actively traded in an over-the-counter market and Employee’s holdings represent less than one percent (1%) of the total number of outstanding shares or principal amount of the securities of such a person.
3.2Non-Solicitation and Non-Inducement of Customers. During the Restricted Period and in connection with a Competitive Product or Service, Employee shall not directly or Indirectly: (a) solicit or attempt to solicit any Customer; or (b) induce or encourage any Customer to
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terminate a relationship with the Company or otherwise to cease accepting services or products from the Company.
3.3Non-Solicitation and Non-Inducement of Employees. During the Restricted Period, Employee shall not directly or Indirectly: (a) solicit, recruit, encourage (or attempt to solicit, recruit or encourage), or by assisting others in soliciting, recruiting or encouraging, any Company employees or former employees with whom Employee worked, had business contact, or about whom Employee gained non-public or Confidential Information (“Employees or Former Employees”); (b) contact or communicate with Employees or Former Employees for the purpose of inducing, assisting, encouraging and/or facilitating them to terminate their employment with the Company or find employment or work with another person or entity; (c) provide or pass along to any person or entity the name, contact and/or background information about any Employees or Former Employees or provide references or any other information about them; (d) provide or pass along to Employees or Former Employees any information regarding potential jobs or entities or persons for which to work, including but not limited to job openings, job postings, or the names or contact information of individuals or companies hiring people or accepting job applications; and/or (e) offer employment or work to any Employees or Former Employees. For purposes of this covenant, “Former Employees” shall refer to employees who are not employed by the Company at the time of the attempted recruiting or hiring, but were employed by, or working for the Company in the three (3) months prior to the time of the attempted recruiting or hiring and/or interference.
3.4Covenants are Reasonable. Employee acknowledges and agrees that: the covenants in this section are necessary and essential to protect the Company’s Confidential Information, Trade Secrets and the goodwill in its customers and employees; the area, duration and scope of the covenants in this section are reasonable and necessary to protect the Company; they do not unduly oppress or restrict Employee’s ability to earn a livelihood in Employee’s chosen profession; they are not an undue restraint on Employee’s trade or any of the public interests that may be involved; good and valuable consideration exists for Employee’s agreement to be bound by such covenants; and the Company has a legitimate business purpose in requiring Employee to abide by the covenants set forth in this section.
4.Confidential Information and Trade Secrets.
4.1Access and Use. Employee expressly acknowledges and agrees that, by virtue of Employee’s employment with the Company and exercise of Employee’s duties for the Company, Employee will have access to and will use certain Confidential Information and Trade Secrets, and that such Confidential Information and Trade Secrets constitute confidential and proprietary business information and/or Trade Secrets of the Company, all of which is the Company’s exclusive property. Accordingly, Employee agrees that Employee will not, and will not permit any other person or entity to, directly or Indirectly, without the prior written consent of the Company: (a) use Confidential Information or Trade Secrets for the benefit of any person or entity other than the Company; (b) remove, copy, duplicate or otherwise reproduce any document or tangible item embodying or pertaining to any of the Confidential Information or Trade Secrets, except as required to perform responsibilities for Company; and (c) while employed and thereafter, publish, release, disclose, deliver or otherwise make available to any third party any Confidential Information or Trade Secrets by any communication, including oral, documentary, electronic or magnetic information transmittal device or media.
4.2Duration of Confidential Information and Trade Secrets. This obligation of non-disclosure and non-use shall last so long as the information remains confidential. Employee, however, understands that, if Employee primarily lives and works in any state requiring a temporal limit on non-disclosure clauses, Confidential Information shall be protected for no less than two (2) years following the Last Day. Employee also understands that Trade Secrets are protected by statute and are not subject to any time limits. Employee also agrees to contact the Company before using, disclosing, or distributing
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any Confidential Information or Trade Secrets if Employee has any questions about whether such information is protected information.
4.3Immunity under the Defend Trade Secrets Act of 2016. Employee shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a Trade Secret that: (a) is made (i) in confidence to a Federal, State, or local government official, either directly or Indirectly, or to an attorney, and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Disclosures to attorneys, made under seal, or pursuant to court order are also protected in certain circumstances under said Act.
4.4Additional Legal Exceptions to Non-Disclosure Obligations. Nothing in this Agreement shall be construed to prevent disclosure of Confidential Information as may be required by applicable law or regulation; especially with respect to a federal or state administrative agency (e.g., EEOC, equivalent state employment agency, etc.), or pursuant to the valid order of a court of competent jurisdiction or an authorized government agency, provided that the disclosure does not exceed the extent of disclosure required by such law, regulation, or order. With respect to an order of a court of competent jurisdiction, Employee will promptly provide the General Counsel of the Company with written notice of any such order. If the Company chooses to seek a protective order or other remedy, Employee will cooperate fully with the Company. If the Company does not obtain a protective order or other remedy or waives compliance with certain provisions of this Agreement, Employee will furnish only that portion of the Confidential Information which, in the written opinion of counsel, is legally required to be disclosed and will use its best efforts to obtain assurances that confidential treatment will be accorded to such disclosed Confidential Information. In addition, nothing in this Agreement in any way prohibits or is intended to restrict or impede, and shall not be interpreted or understood as restricting or impeding, Employee from exercising Employee’s rights under Section 7 of the National Labor Relations Act (NLRA) or otherwise disclosing information as permitted by law.
5.Return of Company Property and Information. Employee agrees that upon the Last Day (or earlier if requested by the Company) to immediately return to the Company all property and information belonging to the Company (in electronic or hard-copy form). Employee shall also disclose to the Company any passwords for Employee’s computer or other access codes for anything associated with Employee’s employment with the Company, and shall not delete or modify or alter any property prior to its return to the Company. Employee also shall provide the Company with access to any personal computer, tablet, phone, external hard drives, flash drives, cloud-based storage platforms, or any other personal device or storage location with Company information, whether or not such information is designated as confidential or proprietary, so that the Company may remove or delete any Company information.
6.Assignment of Inventions and Original Works.
6.1Prior Inventions and Creative Works. Employee understands Employee’s obligation (on or before the date Employee executes this Agreement) to identify to the Company in writing any of Employee’s Prior Inventions or Creative Works. Employee’s failure to do so means that no such Prior Inventions or Creative Works exist. Employee agrees not to incorporate, or permit to be incorporated, any Prior Invention or Creative Works owned by Employee, or in which Employee has an interest, into a Company product, process, program, or machine, including any software code created or developed on the Company’s behalf or in which the Company has an ownership interest pursuant to the terms of this Agreement, without the Company’s prior written consent. “Prior Inventions” means all Inventions that were made by Employee prior to Employee’s employment with the Company, that belong to Employee and which relate to the Company’s current or proposed business, products, services, or
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research and development, and are not presently assigned by Employee under this Agreement. “Creative Works” means any and all works of authorship including, for example, written documents, spreadsheets, graphics, designs, trademarks, service marks, algorithms, computer programs and code, protocols, formulas, mask works, brochures, presentations, photographs, music or compositions, manuals, reports, and compilations of various elements.
6.2Assignment of Inventions. Employee agrees to promptly make full written disclosure to the Company of, to hold in trust for the sole right and benefit of the Company, and presently assign to the Company (or its designees), without any additional consideration, all of Employee’s right, title, and interest in and to any and all Inventions that Employee Invents during Employee’s employment or for a period of one (1) year following the Last Day. Employee understands that the obligations under this section do not apply to any Invention for which no equipment, supplies, facility, or Confidential Information or Trade Secrets of the Company was used and which was developed entirely on Employee’s own time, unless (a) the Invention relates (i) to the business of the Company, or (ii) to the Company’s actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by Employee for the Company. “Invention(s)” means inventions, developments, concepts, improvements, designs, discoveries, devices, apparatus, processes, practices, compositions, formulas, machines, articles of manufacture, methods (including business methods), inventive ideas, algorithms, computer software code and programs, protocols, formulas, mask works, compositions, trademarks, service marks, or trade secrets, whether or not reduced to practice, patentable, or registrable under patent, copyright, trademark, or similar laws, which Employee Invents, either solely or jointly, during normal working hours or when Employee is expected to be working, or that relate to the business of the Company or to the Company’s actual or demonstrably anticipated research or development, or that are substantially aided by Employee’s use of the Company’s equipment, supplies, facilities, or Confidential Information or Trade Secrets, or contains any of the Company’s Confidential Information or Trade Secrets, or that are the direct or substantial result of any work performed by Employee for the Company. “Invent,” “Invents,” and “Invented” means to conceive of, develop, reduce to practice, or otherwise invent (as that term is commonly understood) and is not limited to its general usage under U.S. or foreign patent law.
6.3Works Made for Hire. Employee acknowledges that all Creative Works that are made by Employee (solely or jointly with others) within the scope of and during the period of Employee’s employment with the Company and which are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act (17 U.S.C. § 101) and are deemed specially ordered by the Company under the U.S. Copyright law. In the event that any Creative Work is determined not to be a “work made for hire,” this Agreement shall operate as an irrevocable assignment by Employee to the Company of all applicable state, federal, and international copyrights, trademarks, service marks, or other similar rights in the Creative Work, including all right, title, and interest.
6.4Patent and Copyright Registrations. Employee agrees (both during and after employment) to: assist the Company (or its designees), at the Company’s expense, but without additional compensation to Employee, to secure the Company’s rights, as well as the rights of any government entities or third parties to which the Company directs any assignment, in any Inventions, copyrights, or other intellectual property rights in any and all countries. If the Company is unable for any reason whatsoever, including the Company’s inability after expending reasonable efforts to locate Employee or the Employee’s mental or physical incapacity, to secure Employee’s signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations or other intellectual property rights (or on any document transferring ownership thereof) covering Inventions, Prior Inventions, or Creative Works assigned to the Company under this Agreement, Employee hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Employee’s agent and attorney-in-fact to act for and on Employee’s behalf and in Employee’s stead to execute and file any such applications and documents and to do all other lawfully permitted acts to further the prosecution and issuance of patents or copyright registrations or transfers thereof with the same legal
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force and effect as if executed by Employee. This appointment is coupled with an interest in and to the Inventions and Creative Works and shall survive Employee’s death or disability.
6.5Duty to Disclose Information and Maintain Records. Employee agrees that while employed and for two (2) years following the Last Day, to promptly disclose to the Company in writing all Inventions and Creative Works authored or conceived by Employee, alone or jointly with others, along with all attempts to register, patent, or otherwise claim ownership over or alienate such Inventions and Creative Works.
6.6Moral Rights. To the maximum extent allowed by law, the assignment of rights in this Section 6 includes all rights of paternity, integrity, disclosure, and withdrawal and any other rights that may be known as or referred to as “moral rights,” “artist’s rights,” “droit moral” or the like (collectively, “Moral Rights”). To the extent that Employee retains any such Moral Rights under applicable law, Employee hereby ratifies and consents to (and provides all necessary ratifications and consents to) any action that may be taken with respect to such Moral Rights by (or authorized by) the Company, and Employee agrees not to assert any Moral Rights with respect thereto. Employee will confirm any such ratifications, consents and agreements from time to time as requested by the Company.
7.At-Will. Employee acknowledges and agrees that nothing in this Agreement is a guarantee or assurance of employment for any specific period of time. Employee understands that Employee is an at-will employee and that either Employee or Company may terminate this at-will employment relationship at any time for any reason not prohibited by law.
8.Severability and Reformation. Employee and the Company agree if any particular paragraphs, subparagraphs, phrases, words, or other portions of this Agreement are determined by an appropriate court to be invalid or unenforceable as written, they shall be modified as necessary to comport with the reasonable intent and expectations of the parties and in favor of providing reasonable protection to all of the Company’s legitimate business interests, and such modification shall not affect the remaining provisions of this Agreement, or if any provision(s) cannot be modified to be made valid or enforceable, then they shall be severed from this Agreement, and all remaining terms and provisions shall remain enforceable.
9.Tolling. The Company reserves the right to request, and Employee will not object, that a court of competent jurisdiction extend the Restricted Period for any period of time that Employee is in breach of this Agreement as a form of equitable relief so that the Company receives the full benefit of Employee’s promises in the restrictive covenants.
10.Relief, Remedies and Enforcement. Employee acknowledges and agrees that a breach of any provision of this Agreement by Employee will cause serious and irreparable injury to the Company that will be difficult to quantify and that money damages alone will not adequately compensate the Company. In the event of a breach or threatened or intended breach of this Agreement by Employee, the Company shall be entitled to injunctive relief, both temporary and final, enjoining and restraining such breach or threatened or intended breach. Employee further agrees that should Employee breach this Agreement, the Company will be entitled to any and all other legal or equitable remedies available to it, including the recovery and return of any amount paid to Employee to enter into this Agreement, the disgorgement of any profits, commissions, or fees realized by Employee, any subsequent employers, any business owned or operated by Employee, or any of Employee’s agents, heirs, or assigns. Employee shall also pay the Company all reasonable costs and attorneys’ fees the Company incurred because of Employee’s breach of any provisions of this Agreement.
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11.Entire Agreement, Amendments. Employee agrees that this Agreement constitutes the entire agreement and understanding between the parties and, except as specifically described in Sections 2.5.1 and 3.1 above, or otherwise agreed to in a writing signed by Employee and the General Counsel of the Company, this Agreement supersedes any prior agreements, either oral or in writing, between Employee and the Company with respect to all matters within the scope of this Agreement. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by Employee and the General Counsel of the Company. This Agreement shall be enforced in accordance with its terms and shall not be construed against either party.
12.No Conflicts. Employee represents and warrants that Employee’s performance of all the terms of this Agreement, and the performance of Employee’s duties as an employee of the Company or the fact of Employee’s employment with the Company, do not and will not breach any agreement between Employee and any other person, including any prior employer.
13.Survival. The obligations Employee has undertaken in this Agreement shall survive the Last Day and no dispute regarding any other provisions of this Agreement or regarding Employee’s employment or the termination of Employee’s employment shall prevent the operation and enforcement of these obligations.
14.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and all of which shall constitute one instrument. A signature made on a .PDF or facsimile copy of this Agreement or a signature to this Agreement transmitted by .PDF or facsimile shall have the same effect as an original signature.
15.Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties and their respective successors and permitted assigns. Employee may not assign Employee’s rights and obligations under this Agreement without prior written consent of the Company. The Company may assign this Agreement and/or its rights or obligations under this Agreement. Any and all rights and remedies of the Company under this Agreement shall inure to the benefit of and be enforceable by any successor or assignee of the Company.
16.Governing Law/Venue/Waiver. This Agreement shall be construed and enforced in accordance with the laws of the State of Maine without reference to principles of conflicts of laws. The parties stipulate that the exclusive venue for any legal proceeding arising out of this Agreement is the state and federal courts sitting in Portland, Maine (Cumberland County), and waives any defense, whether asserted by motion or pleading, that the venue specified by this section is an improper or inconvenient venue; provided that the Company may commence a legal proceeding in any other relevant jurisdiction for the purpose of enforcing its rights under this Agreement. The parties further agree that any disputes between them, whether relating to this Agreement or any other conflict, claim or dispute, shall be tried by a judge. The parties waive their rights to a jury trial of any dispute between them.
17.Electronic Signature. Employee agrees that the Company may enforce this Agreement with a copy for which Employee has provided an electronic signature, and that such electronic signature may be satisfied by procedures that the Company or a third party designated by the Company has established or may establish for an electronic signature system, and Employee’s electronic signature shall be the same as, and shall have the same force and effect as, Employee’s written signature. By electronically accepting this Agreement, Employee agrees to the following: “This electronic contract contains my electronic signature, which I have executed with the intent to sign this Agreement.”
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IN WITNESS WHEREOF, the undersigned Employee has executed this Agreement freely and voluntarily with the intention of being legally bound by it.
Signature:
Name:
Dated:
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Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jonathan J. Mazelsky, certify that:
1)I have reviewed this report on Form 10-Q for the quarter ended March 31, 2022 of IDEXX Laboratories, Inc.;
2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 4, 2022 | /s/ Jonathan J. Mazelsky | ||||
| Jonathan J. Mazelsky | |||||
| President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian P. McKeon, certify that:
1)I have reviewed this report on Form 10-Q for the quarter ended March 31, 2022 of IDEXX Laboratories, Inc.;
2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 4, 2022 | /s/ Brian P. McKeon | ||||
| Brian P. McKeon | |||||
| Executive Vice President, Chief Financial Officer and Treasurer | |||||
| (Principal Financial Officer) | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-Q of IDEXX Laboratories, Inc. (the “Company”) for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Jonathan J. Mazelsky | |||||
| May 4, 2022 | Jonathan J. Mazelsky President and Chief Executive Officer | ||||
A signed original of this written statement required by Section 906, has been provided to IDEXX Laboratories, Inc. and will be retained by IDEXX Laboratories, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-Q of IDEXX Laboratories, Inc. (the “Company”) for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Brian P. McKeon | |||||
| May 4, 2022 | Brian P. McKeon Executive Vice President, Chief Financial Officer and Treasurer | ||||
A signed original of this written statement required by Section 906, has been provided to IDEXX Laboratories, Inc. and will be retained by IDEXX Laboratories, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.