Published: 2022-11-01 00:00:00 ET

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

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

The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The condensed consolidated balance sheet data as of December 31, 2021, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, and our Annual Report on Form 10-K for the year ended December 31, 2021, (the “2021 Annual Report”) filed with the SEC.

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

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

Significant Accounting Policies

The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022, are consistent with those discussed in “Note 2. Summary of Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report, and as updated below.

Investments in Companies Accounted for Using the Equity or Cost Method of Accounting

Investments where we have the ability to exercise significant influence, but do not control the entity, are accounted for under the equity method of accounting. Significant influence generally exists if we have a 20% to 50% ownership interest in the investee. Equity investments in entities for which we do not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost less impairment, if any, adjusted for changes resulting from qualifying observable price changes for the identical investment of the same issuer should they occur.

We evaluate our investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an investment is determined to be other than temporary, a loss is recorded in earnings in the current period.

As of September 30, 2022 and December 31, 2021, our equity investments of $30.3 million and $5.3 million, respectively, are recorded at cost in other long-term assets.

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New Accounting Pronouncements Adopted

None.

New Accounting Pronouncements Not Yet Adopted

In September 2022, the FASB issued ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” which adds certain disclosure requirements for a buyer in a supplier finance program. The amendments require a buyer that uses supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period, and associated roll-forward information. In interim reporting periods, the amount outstanding at the end of the period is required to be disclosed. The amendments are effective for all entities for fiscal years beginning after December 15, 2022 on a retrospective basis, including interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective prospectively for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are currently evaluating the impact of the new pronouncement, but do not expect this guidance will have a material impact on our consolidated financial statements.

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.

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

1.Identification of a contract or agreement with a customer

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

3.Determination of the transaction price

4.Allocation of the transaction price to the performance obligations

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

We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The timing of revenue recognition, billings, and cash collections results in accounts receivable, lease receivables, and contract assets as a result of revenue recognized in advance of billings (included within other assets), and contract liabilities or deferred revenue as a result of receiving consideration in advance of revenue recognition within our unaudited condensed consolidated balance sheet. Our payment terms generally range

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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 agreements are presented in product revenue on our unaudited condensed consolidated income statement. Lease revenues were approximately $5.6 million and $15.5 million for the three and nine months ended September 30, 2022, as compared to $6.3 million and $15.8 million for the three and nine months ended September 30, 2021, respectively, including both operating leases and sales-type leases under ASC 842, Leases, for leases entered into after January 1, 2019, and ASC 840, “Leases,” for leases entered into prior to 2019. Refer to below for revenue recognition under our reagent rental programs.

Extended Warranties and Post-Contract Support. CAG Diagnostics capital instruments and diagnostic imaging systems extended warranties typically provide customers with continued coverage for a period of one to five years beyond the first-year standard warranty. Customers can either pay in full for the extended warranty at the time of instrument or system purchase or can be billed on a quarterly basis over the term of the contract. We recognize revenue associated with extended warranties over time on a ratable basis using a time elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.

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

On December 31, 2021, our deferred revenue related to extended warranties and post-contract support was $30.0 million, of which approximately $2.2 million and $19.4 million were recognized during the three and nine months ended September 30, 2022, respectively. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $26.3 million as of September 30, 2022. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less and do not adjust for the effect of the financing components when the period between customer payment and revenue recognition is one year or less. Deferred revenue related to extended warranties and post-contract support with an original duration of more than one year was $11.7 million as of September 30, 2022, of which approximately 13%, 43%, 24%, 11%, and 9% 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.

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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.

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 $12.1 million and $37.3 million were recognized as a reduction of revenue during the three and nine months ended September 30, 2022, respectively. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $154.8 million as of September 30, 2022. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three and nine months ended September 30, 2022, were not material.

Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with a free or discounted instrument or system upon entering into multi-year agreements to purchase annual minimum amounts of products and services. We allocate total consideration,

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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 $9.6 million and $28.5 million were reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended September 30, 2022, respectively. Furthermore, as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our contract assets were $183.7 million as of September 30, 2022. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three and nine months ended September 30, 2022, were not material.

For our up-front customer loyalty and volume commitment programs, we estimate future revenues related to multi-year agreements to be approximately $3.0 billion, of which approximately 7%, 27%, 24%, 18%, and 24% are expected to be recognized during the remainder of 2022, the full years 2023, 2024, 2025, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied, for which customers have committed to purchase goods and services, net of the expected revenue reductions from customer acquisition costs and expected price adjustments, and, as a result, are lower than stated contractual commitments by our customers.

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

On December 31, 2021, our deferred revenue related to instrument rebate programs was $33.0 million, of which approximately $2.9 million and $9.3 million were recognized when customers purchased eligible products and services and earned rebates during the three and nine months ended September 30, 2022, respectively. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $27.8 million as of September 30, 2022, of which approximately 11%, 33%, 23%, 16%, and 17% 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.

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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 $0.9 million and $2.6 million were reclassified to accounts receivable when customers were billed for related products and services during the three and nine months ended September 30, 2022, respectively. Furthermore, as a result of new placements under sales-type reagent rental programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our lease receivable assets were $16.4 million as of September 30, 2022. The impacts of discounting and unearned income as of September 30, 2022 were not material. Profit and loss recognized at the commencement date and interest income during the three and nine months ended September 30, 2022, were not material. We monitor customer purchases over the term of their agreement to assess the realizability of our lease receivable assets. Impairments during the three and nine months ended September 30, 2022 were not material.

Operating-type Reagent Rental Programs. Our reagent rental programs that do not effectively transfer control of instruments to our customers are classified as operating leases, and we recognize instrument revenue and costs ratably over the term of the agreement. The cost of the instrument is capitalized within property and equipment. During the three and nine months ended September 30, 2022, we transferred instruments of $5.0 million and $12.6 million, as compared to $2.8 million and $8.6 million for the three and nine months ended September 30, 2021, respectively, from inventory to property and equipment.

We estimate future revenue to be recognized related to our reagent rental programs of approximately $35.9 million, of which approximately 9%, 31%, 24%, 19%, and 17% are expected to be recognized during the remainder of 2022, the full years 2023, 2024, 2025, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied for which customers have committed to future purchases, net of any expected price adjustments, and, as a result, may be lower than stated contractual commitments by our customers.

Other Customer Incentive Programs. Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers and the expected-value method for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the three and nine months ended September 30, 2022, were not material. Refund obligations related to customer incentive programs are recorded in accrued liabilities for the actual issuance of incentives, incentives earned but not yet issued, and estimates of incentives to be earned in the future.

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

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

Accounts Receivable. We recognize revenue when it is probable that we will collect substantially all of the consideration to which we will be entitled, based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. We have no significant customers that accounted for greater than 10% of our consolidated revenues, and we have no concentration of credit risk as of September 30, 2022.

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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 September 30,												For the Nine Months Ended September 30,
			2022						2021						2022						2021
CAG segment revenue:
CAG Diagnostics recurring revenue:			$	667,309					$	638,358					$	2,017,532					$	1,916,938
IDEXX VetLab consumables			262,820						252,714						796,072						755,158
Rapid assay products			80,542						76,974						242,542						230,472
Reference laboratory diagnostic and consulting services			295,590						282,301						894,795						851,757
CAG Diagnostics services and accessories			28,357						26,369						84,123						79,551
CAG Diagnostics capital - instruments			35,176						39,401						108,400						105,645
Veterinary software, services and diagnostic imaging systems			62,505						54,736						184,329						148,274
CAG segment revenue			764,990						732,495						2,310,261						2,170,857
Water segment revenue			40,840						38,143						116,406						109,374
LPD segment revenue			28,452						29,126						89,211						101,920
Other segment revenue			7,379						10,657						22,878						32,119
Total revenue			$	841,661					$	810,421					$	2,538,756					$	2,414,270

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

(in thousands)			For the Three Months Ended September 30,												For the Nine Months Ended September 30,
			2022						2021						2022						2021
United States			$	560,292					$	514,343					$	1,646,023					$	1,502,219
Europe, the Middle East and Africa			152,235						167,956						488,036						510,759
Asia Pacific Region			76,799						78,239						240,760						246,645
Canada			33,642						32,813						108,407						105,608
Latin America & Caribbean			18,693						17,070						55,530						49,039
Total revenue			$	841,661					$	810,421					$	2,538,756					$	2,414,270

Costs to Obtain a Contract. We capitalize sales commissions, and the related fringe benefits earned by our sales force when considered incremental, and recoverable costs of obtaining a contract. Our contracts include performance obligations related to various goods and services, some of which are satisfied at a point in time and others over time. Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time, including extended warranties and SaaS subscriptions, are deferred and recognized on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates. We apply judgment in estimating the amortization period, which typically ranges from 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 $1.6 million and $5.0 million of commission expense was recognized during the three and nine months ended September 30, 2022, respectively. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $19.0 million as of September 30, 2022. Impairments of deferred commission costs during the three and nine months ended September 30, 2022, were not material.

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

Asset Purchases and Investments

During 2022, we entered into two discrete arrangements to license intellectual property for which we paid $55.0 million and accrued $25.0 million in subsequent payments, all of which was charged to research and development expense. These two arrangements were treated as asset acquisitions under U.S. GAAP and resulted in the full amount being expensed to research and development expense as in-process research and development costs with no alternative future use. The acquisition of these licensing arrangements supports new instrument platform advancements. We also made a $10.0 million payment for a perpetual intellectual property license, which will be amortized over 10 years. The research and development expense and amortization expense were recorded in our CAG segment.

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

Business Combinations

During the third quarter of 2022, we acquired the assets of an international water testing company located in Canada for approximately $12.8 million in cash, including a holdback of approximately $1.3 million. This acquisition expands our product offering in the Water segment. The preliminary fair value of the assets and liabilities acquired consists of technology intangibles of approximately $3.4 million, with a life of 10 years; customer relationship intangibles of approximately $1.2 million, with a life of 10 years; approximately $6.7 million of goodwill, representing synergies with our Water testing portfolio; and approximately $1.5 million of new tangible assets, including inventory and accounts receivable. Goodwill related to this acquisition is expected to be deductible for tax purposes. The purchase price allocation is subject to revision as additional information becomes available from third-parties regarding valuation of intangibles, tax matters, and certain assets and liabilities. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our Water segment since the acquisition date. The acquisition expenses were not material.

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 third quarter of 2021, we acquired the assets of a teleradiology business for approximately $5.4 million, including a contingent payment of $0.3 million. This acquisition expands our current teleradiology capability. The acquired assets primarily consist of a customer relationship intangible of approximately $1.7 million, with a weighted average life of 10 years, and approximately $3.7 million in goodwill. Goodwill related to this acquisition is expected to be deductible for tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our CAG segment since the acquisition date. The acquisition expenses were not material.

During the second quarter of 2021, we acquired the assets of the ezyVet cloud-based veterinary software businesses and the shares of ezyVet US, Inc., as well as the Vet Radar business assets, for approximately $157.2 million, including an estimated contingent payment of $5.0 million. The acquired assets include the ezyVet cloud-native practice management system software and the Vet Radar cloud-based workflow management software. The acquisition expands our cloud-based software offerings to support our customers with technology solutions that raise the standards of care for patients and improve practice

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efficiency. The fair values of assets acquired were as follow: approximately $32.0 million in customer-related intangible with a weighted average life of 10 years; approximately $8.4 million in technology-related intangibles with a weighted average life of 6 years; approximately $2.4 million in trademarks with a weighted average life of 14 years; approximately $1.8 million in non-compete agreements with a weighted average life of 5 years; approximately $109.4 million in goodwill, representing synergies within our broader CAG portfolio; and approximately $3.2 million in net tangible assets. Goodwill has been allocated to multiple reporting units based upon the fair value of projected earnings as of the date of the acquisition. The goodwill was allocated as follows: approximately $23.4 million to IDEXX VetLab, approximately $27.0 million to Reference Laboratories, approximately $11.1 million to Rapid Assay, and approximately $47.9 million to Veterinary Software Services. Goodwill related to this acquisition is expected to be deductible for tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our CAG segment since the acquisition date. During the fourth quarter of 2021, we increased the contingent payable by $2.0 million, for a total expected payment of $7.0 million. This increase to the contingent payment was expensed as the adjustment was made after the measurement period. The acquisition expenses were approximately $2.2 million.

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.

The fair value of options, restricted stock units, deferred stock units, and employee stock purchase rights awarded during the three and nine months ended September 30, 2022, totaled $1.7 million and $57.1 million, respectively, as compared to $1.8 million and $50.1 million for the three and nine months ended September 30, 2021, respectively. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding as of September 30, 2022, was $75.7 million, which will be recognized over a weighted average period of approximately 1.5 years. During the three and nine months ended September 30, 2022, we recognized expenses of $12.9 million and $36.5 million, respectively, as compared to $9.5 million and $28.0 million for the three and nine months ended September 30, 2021, respectively, related to share-based compensation.

We determine the assumptions used in the valuation of option awards as of the date of grant. Differences in the expected stock price volatility, expected term, or risk-free interest rate may necessitate distinct valuation assumptions at each grant date. As such, we may use different assumptions for options granted throughout the year. Option awards are granted with an exercise price equal to or greater than the closing market price of our common stock at the date of grant. We have never paid any cash dividends on our common stock, and we have no intention to pay such a dividend at this time; therefore, we assume that no dividends will be paid over the expected terms of option awards.

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

			For the Nine Months Ended September 30,
			2022						2021
Share price at grant			$	490.73					$	527.49
Share price at exercise			$	494.75					$	531.24
Expected stock price volatility			30		%				30		%
Expected term, in years			6.4						6.2
Risk-free interest rate			2.1		%				0.7		%
Weighted average fair value of options granted			$	166.30					$	169.13

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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 $8.8 million and $5.7 million as of September 30, 2022 and December 31, 2021, respectively. Accounts receivable reflected on the balance sheet is net of this reserve. Based on an aging analysis, as of September 30, 2022, approximately 91% of our accounts receivable had not yet reached the invoice due date and approximately 9% was considered past due, of which less than 1% 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 2% was greater than 60 days past due.

Contract assets and lease receivables

The allowance for credit losses associated with the contract assets and lease receivables was $5.1 million and $4.4 million as of September 30, 2022 and December 31, 2021, respectively. The assets reflected on the balance sheet are net of these reserves. Historically, we have experienced low credit loss rates on our customer commitment programs and lease receivables. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

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

(in thousands)			September 30, 2022						December 31, 2021
Raw materials			$	85,771					$	60,427
Work-in-process			30,730						26,397
Finished goods			238,474						182,206
Inventories			$	354,975					$	269,030

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Maturities of operating lease liabilities were as follows:

(in thousands)			September 30, 2022
2022 (remainder of year)			$	4,472
2023			23,458
2024			19,693
2025			15,629
2026			13,098
Thereafter			53,809
Total lease payments			130,159
Less imputed interest			(17,879)
Total			$	112,280

Total minimum future lease payments for leases that have not commenced as of September 30, 2022, are approximately $7.9 million, and those leases will commence between 2022 and 2024.

Supplemental cash flow information for leases was as follows:

(in thousands)						For the Nine Months Ended September 30, 2022						For the Nine Months Ended September 30, 2021
Cash paid for amounts included in the measurement of operating leases liabilities						$	17,715					$	17,232
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations						$	26,040					$	33,052

Other current assets consisted of the following:

(in thousands)			September 30, 2022						December 31, 2021
Customer acquisition costs			$	49,834					$	48,942
Contract assets, net (1)			42,255						37,772
Prepaid expenses			39,696						41,997
Taxes receivable			22,570						19,464
Foreign currency exchange contracts			22,331						6,512
Cross currency swap contracts			15,994						—
Deferred sales commissions			6,438						6,475
Other assets			17,518						12,661
Other current assets			$	216,636					$	173,823

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

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Other long-term assets consisted of the following:

(in thousands)			September 30, 2022						December 31, 2021
Contract assets, net (1)			$	141,492					$	122,160
Customer acquisition costs			104,997						109,392
Deferred income taxes			51,935						24,784
Equity investments			30,250						5,250
Investment in long-term product supply arrangements			21,510						13,348
Deferred sales commissions			12,586						13,019
Taxes receivable			539						1,806
Other assets			40,131						40,641
Other long-term assets			$	403,440					$	330,400

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

Accrued liabilities consisted of the following:

(in thousands)			September 30, 2022						December 31, 2021
Accrued expenses			$	145,935					$	133,978
Accrued employee compensation and related expenses			132,148						182,926
Accrued customer incentives and refund obligations			74,051						79,469
Accrued taxes			34,706						42,605
Current lease liabilities			19,152						19,931
Accrued liabilities			$	405,992					$	458,909

Other long-term liabilities consisted of the following:

(in thousands)			September 30, 2022						December 31, 2021
Accrued taxes			$	50,857					$	56,466
Other accrued long-term expenses			20,096						14,475
Other long-term liabilities			$	70,953					$	70,941

Credit Facility

As of September 30, 2022, we had $633.0 million outstanding borrowings under our Credit Facility with a year-to-date weighted average effective interest rate of 2.3%. 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 September 30, 2022, we had a remaining borrowing availability of $365.5 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 $1.5 million.

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The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements, and violations of laws and regulations. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed 3.5-to-1. As of September 30, 2022 and December 31, 2021, we were in compliance with the covenants of the Credit Facility.

Senior Notes

The following describes all of our currently outstanding unsecured senior notes issued and sold in private placements (collectively, the “Senior Notes”) as of September 30, 2022:

(Principal Amount in thousands)
Issue Date						Due Date						Series						Principal Amount						Coupon Rate						Senior Note Agreement
12/11/2013						12/11/2023						2023 Series A Notes						$	75,000					3.94		%				NY Life 2013 Note Agreement
12/11/2013						12/11/2025						2025 Series B Notes						$	75,000					4.04		%				NY Life 2013 Note Agreement
9/4/2014						9/4/2026						2026 Senior Notes						$	75,000					3.72		%				NY Life 2014 Note Agreement
7/21/2014						7/21/2024						2024 Series B Notes						$	75,000					3.76		%				Prudential 2015 Amended Agreement
6/18/2015						6/18/2025						2025 Series C Notes						€	88,857					1.785		%				Prudential 2015 Amended Agreement
2/12/2015						2/12/2027						2027 Series B Notes						$	75,000					3.72		%				MetLife 2014 Note Agreement
3/14/2019						03/14/2029						2029 Series C Notes						$	100,000					4.19		%				MetLife 2014 Note Agreement
4/2/2020						04/02/2030						MetLife 2030 Series D Notes						$	125,000					2.50		%				MetLife 2014 Note Agreement
4/14/2020						04/14/2030						Prudential 2030 Series D Notes						$	75,000					2.50		%				Prudential 2015 Amended Agreement

In February 2022, we paid off our $75.0 million 2022 Series A Notes with cash provided by operating 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 September 30, 2022 and December 31, 2021, we were in compliance with the covenants of the Senior Note Agreements.

Subsequent Event - Credit Facility

On October 20, 2022, we, along with IDEXX Distribution, Inc., IDEXX Operations, Inc., OPTI Medical Systems, Inc., IDEXX Laboratories Canada Corporation, IDEXX B.V., IDEXX Laboratories B.V., and IDEXX Laboratories GmbH, each a wholly-owned subsidiary (whether directly or indirectly held) (collectively, the “Borrowers”), together with the lenders party to that certain Existing Credit Agreement (as defined below), JPMorgan Chase Bank, N.A., as administrative agent (“Agent”), and the other parties thereto, entered into Amendment No. 1 (the “Amendment”), to that certain fourth amended and restated credit agreement, dated as of December 9, 2021, relating to a five-year unsecured revolving credit facility in the principal amount of $1 billion (the “Existing Credit Agreement”, and as amended by the Amendment, the “Credit Agreement”), among the Borrowers, the lenders, the Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Toronto agent, and the other parties thereto.

The Amendment amends the Existing Credit Agreement to (i) provide for a borrowing by us effective October 20, 2022, of an incremental term loan in an aggregate principal amount of $250 million, (ii) convert all existing borrowings, which have interest rates determined by reference to a LIBOR-based interest rate, to borrowings determined by reference to a SOFR-based interest rate, (iii) provide for an option by us to obtain incremental borrowings under the Credit Agreement of term loans and/or revolving credit commitments of up to an aggregate principal amount of $250 million, which would represent an aggregate maximum of up to $1.5 billion outstanding under the Credit Agreement, subject to the Borrowers obtaining

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commitments from existing or new lenders and satisfying other conditions specified in the Credit Agreement, and (iv) add certain implementing mechanics relating to the foregoing.

On October 20, 2022, pursuant to the terms of the Credit Agreement, the term lenders thereunder provided us, as borrower, an incremental term loan in an aggregate principal amount of $250 million (the “Term Loan”). The Term Loan matures on October 20, 2025. The net proceeds of the Term Loan were used to repay previously incurred revolver borrowings under the Existing Credit Agreement. The Term Loan is subject to the same affirmative and negative covenants and events of default as the borrowings previously incurred pursuant to the Existing Credit Agreement. The applicable interest rate for the Term Loan is calculated at a per annum rate equal to either (at our option) (1) a prime rate plus a margin ranging from 0.0% to 0.375% based on our consolidated leverage ratio, (2) an adjusted term SOFR rate, plus 0.10%, plus a margin ranging from 0.875% to 1.375% based on our consolidated leverage ratio, or (3) an adjusted daily simple SOFR rate, plus 0.10%, plus a margin ranging from 0.875% to 1.375% based on our consolidated leverage ratio.

We primarily acquire shares by repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required statutory withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders. We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock issued during the three and nine months ended September 30, 2022 and 2021 was not material.

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

(in thousands, except per share amounts)			For the Three Months Ended September 30,												For the Nine Months Ended September 30,
			2022						2021						2022						2021
Shares repurchased in the open market			453						274						1,764						892
Shares acquired through employee surrender for statutory tax withholding			—						1						21						29
Total shares repurchased			453						275						1,785						921
Cost of shares repurchased in the open market			$	166,423					$	183,315					$	742,661					$	510,937
Cost of shares for employee surrenders			162						515						10,552						15,501
Total cost of shares			$	166,585					$	183,830					$	753,213					$	526,438
Average cost per share - open market repurchases			$	367.55					$	668.33					$	421.12					$	572.10
Average cost per share - employee surrenders			$	387.07					$	688.35					$	502.26					$	547.90
Average cost per share - total			$	367.56					$	668.38					$	422.07					$	571.36

Our effective income tax rate was 22.7% for the three months ended September 30, 2022, as compared to 20.0% for the three months ended September 30, 2021 and 21.6% for the nine months ended September 30, 2022, as compared to 18.1% for the nine months ended September 30, 2021. The increase in our effective tax rate for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year, was primarily driven by decreases in tax benefits related to share-based compensation and higher taxes on international income.

The effective tax rate for the three and nine months ended September 30, 2022, differed from the U.S. federal statutory tax rate of 21% primarily due to U.S. state income taxes, net of federal benefit, partially offset by tax benefits from share-based compensation.

The effective tax rate for the three and nine months ended September 30, 2021, differed from the U.S. statutory tax rate of 21% primarily due to tax benefits from share-based compensation.

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

						For the Nine Months Ended September 30, 2022
												Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax						Unrealized Gain (Loss) on Net Investment Hedges, Net of Tax
(in thousands)						Unrealized Gain (Loss) on Investments, Net of Tax						Foreign Currency Exchange Contracts						Euro-Denominated Notes						Cross Currency Swaps						Benefit Plans, Net of Tax						Cumulative Translation Adjustment						Total
Balance as of December 31, 2021						$	(126)					$	4,979					$	422					$	3,240					$	—					$	(61,999)					$	(53,484)
Other comprehensive income (loss) before reclassifications						(52)						26,930						11,028						10,597						(5,056)						(59,024)						(15,577)
Reclassified from accumulated other comprehensive income						—						(12,211)						—						—						378						—						(11,833)
Balance as of September 30, 2022						$	(178)					$	19,698					$	11,450					$	13,837					$	(4,678)					$	(121,023)					$	(80,894)

						For the Nine Months Ended September 30, 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						Benefit Plans, Net of Tax						Cumulative Translation Adjustment						Total
Balance as of December 31, 2020						$	(272)					$	(9,934)					$	(5,982)					$	(2,159)					$	—					$	(35,268)					$	(53,615)
Other comprehensive income (loss) before reclassifications						153						7,300						4,235						4,561						—						(20,213)						(3,964)
Reclassified from accumulated other comprehensive income						—						5,522						—						—						—						—						5,522
Balance as of September 30, 2021						$	(119)					$	2,888					$	(1,747)					$	2,402					$	—					$	(55,481)					$	(52,057)

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The following tables present components and amounts associated with cash flow hedges 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 September 30,												Amounts Reclassified from AOCI For the Nine Months Ended September 30,
												2022						2021						2022						2021
Gain (loss) on derivative instruments classified as cash flow hedges included in net income:
Foreign currency exchange contracts						Cost of revenue						$	8,635					$	(1,583)					$	16,652					$	(6,728)
						Tax expense (benefit)						2,254						(330)						4,441						(1,206)
						Gain (loss), net of tax						$	6,381					$	(1,253)					$	12,211					$	(5,522)

The following tables present components and amounts associated with pension reclassified out of AOCI to net income:

(in thousands)						Affected Line Item in the Statements of Income						Amounts Reclassified from AOCI For the Three Months Ended September 30,												Amounts Reclassified from AOCI For the Nine Months Ended September 30,
												2022						2021						2022						2021
Gain (loss) on pension plans included in net income:
Pension plans						Cost of revenue and operating expenses						$	(141)					$	—					$	(452)					$	—
						Tax benefit						(23)						—						(74)						—
						Loss, net of tax						$	(118)					$	—					$	(378)					$	—

Basic earnings per share is computed by dividing net income attributable to our stockholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the total unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase our common stock at the average market price during the period. Vested deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed, and issuance is not contingent. Refer to Note 5 to the consolidated financial statements in our 2021 Annual Report for additional information regarding deferred stock units.

The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share:

(in thousands)			For the Three Months Ended September 30,												For the Nine Months Ended September 30,
			2022						2021						2022						2021
Shares outstanding for basic earnings per share			83,247						85,123						83,855						85,325
Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share			83,247						85,123						83,855						85,325
Dilutive effect of share-based payment awards			866						1,388						1,003						1,387
			84,113						86,511						84,858						86,712

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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 September 30,												For the Nine Months Ended September 30,
			2022						2021						2022						2021
Weighted average number of shares underlying anti-dilutive awards			78						—						44						—
Weighted average number of shares underlying anti-dilutive options			287						129						258						114

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 September 30, 2022, our accruals with respect to actual and threatened litigation were not material.

We are a defendant in an ongoing litigation matter involving an alleged breach of contract for underpayment of royalty payments made from 2004 through 2017 under an expired patent license agreement. The plaintiff has asserted a claim of approximately $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. The appellate court reversed the trial court’s decision, and the plaintiff has petitioned the state supreme court for review. While we believe the claim is without merit and continue to vigorously defend ourselves against the plaintiff’s allegations, 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 liabilities for these obligations as of September 30, 2022 and December 31, 2021.

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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 September 30,
						CAG						Water						LPD						Other						Consolidated Total
2022
Revenue						$	764,990					$	40,840					$	28,452					$	7,379					$	841,661
Income from operations						$	221,454					$	19,924					$	4,480					$	(1,030)					$	244,828
Interest expense, net																														(10,645)
Income before provision for income taxes																														234,183
Provision for income taxes																														53,245
Net income																														180,938
Less: Net income attributable to noncontrolling interest																														—
Net income attributable to IDEXX Laboratories, Inc. stockholders																														$	180,938
2021
Revenue						$	732,495					$	38,143					$	29,126					$	10,657					$	810,421
Income from operations						$	201,947					$	17,599					$	3,600					$	2,816					$	225,962
Interest expense, net																														(7,012)
Income before provision for income taxes																														218,950
Provision for income taxes																														43,772
Net income																														175,178
Less: Net income attributable to noncontrolling interest																														(57)
Net income attributable to IDEXX Laboratories, Inc. stockholders																														$	175,235

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

We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a non-recurring basis, and certain financial assets and liabilities that are not measured at fair value in our unaudited condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows: 

Level 1						Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2						Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3						Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers in or out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2022.

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

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

The amounts outstanding under our unsecured revolving credit facility (“Credit Facility” or “line of credit”) and senior notes (“long-term debt”) are measured at carrying value in our unaudited condensed consolidated balance sheets though we disclose the fair value of these financial instruments. We determine the fair value of the amount outstanding under our Credit Facility and long-term debt using an income approach, utilizing a discounted cash flow analysis based on current market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk. Our Credit Facility and long-term debt are valued using Level 2 inputs. The estimated fair value of our Credit Facility approximates its carrying value. The estimated fair value and carrying value of our long-term debt were $725.7 million and $761.2 million, respectively, as of September 30, 2022, and $916.3 million and $850.7 million, respectively, as of December 31, 2021.

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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 September 30, 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 September 30, 2022
Assets
Equity mutual funds (2)						$	473					$	—					$	—					$	473
Cross currency swaps (3)						$	—					$	18,156					$	—					$	18,156
Foreign currency exchange contracts (3)						$	—					$	26,251					$	—					$	26,251
Liabilities
Deferred compensation (4)						$	473					$	—					$	—					$	473
Contingent payments - acquisitions						$	—					$	—					$	120					$	120

(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)						$	76					$	—					$	—					$	76
Equity mutual funds (2)						$	826					$	—					$	—					$	826
Cross currency swaps (3)						$	—					$	4,256					$	—					$	4,256
Foreign currency exchange contracts (3)						$	—					$	6,512					$	—					$	6,512
Liabilities
Foreign currency exchange contracts (3)						$	—					$	601					$	—					$	601
Deferred compensation (4)						$	826					$	—					$	—					$	826
Contingent payments - acquisitions						$	—					$	—					$	7,230					$	7,230

(1)Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of December 31, 2021 consisted of demand deposits. As of September 30, 2022, we did not have any money market funds outstanding.

(2)Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount is included within other long-term assets. Refer to footnote (4) below for a discussion of the related deferred compensation liability. 

(3)Cross currency swaps and foreign currency exchange contracts are included within other current assets, other long-term assets, accrued liabilities, or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.  

(4)A deferred compensation plan assumed as part of a previous business combination is included within accrued liabilities and other long-term liabilities. The fair value of our deferred compensation plan is indexed to the performance of the underlying equity mutual funds discussed in footnote (2) above.  

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

Contingent Consideration

We have classified our liability for contingent consideration related to acquisitions within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which includes the achievements of future revenues. The contingent consideration is included within other short-term liabilities.

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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 nine months ended September 30, 2022, are as follows:

(in thousands)						Fair Value
Contingent consideration as of December 31, 2021						$	7,230
Payment of contingent consideration						(7,110)
Contingent consideration as of September 30, 2022						$	120

During the second quarter of 2022, we determined that the $7.0 million contingent consideration associated with our ezyVet acquisition in the second quarter of 2021 would be earned based on revenue achievements obtained. This amount was paid out during the second and third quarters of 2022. During the third quarter of 2022, we also issued a contingent payment related to a separate acquisition for approximately $0.1 million.

 

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 and nine months ended September 30, 2022 and 2021.

We enter into master netting arrangements with the counterparties to our derivative transactions which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance

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sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged. 

Cash Flow Hedges 

We have designated our foreign currency exchange contracts as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.  

We did not de-designate any instruments from hedge accounting treatment during either the three and nine months ended September 30, 2022 or 2021. As of September 30, 2022, the estimated amount of net gains, net of tax, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is $16.8 million if exchange rates do not fluctuate from the levels as of September 30, 2022. 

We target to hedge approximately 75% to 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 $250.6 million and $286.7 million as of September 30, 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 September 30,												Nine Months Ended September 30,
												2022						2021						2022						2021
Financial statement line items in which effects of cash flow hedges are recorded						Cost of revenue						$	335,035					$	337,500					$	1,019,345					$	981,259
Foreign exchange contracts
Amount of gain (loss) reclassified from accumulated other comprehensive income into income												$	8,635					$	(1,583)					$	16,652					$	(6,728)

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 $5.5 million and $11.0 million, net of tax, within AOCI as a result of this net investment hedge for the three and nine months ended September 30, 2022, respectively, and gains of $1.6 million and $4.2 million for the three and nine months ended September 30, 2021, respectively. The related cumulative unrealized gain recorded as of September 30, 2022, will not be reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged foreign operations or a portion of the hedge no longer qualifies for hedge accounting treatment. Refer to Note 13 to the consolidated financial statements included in our 2021 Annual Report for further information regarding the issuance of these euro-denominated notes.

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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 and nine months ended September 30, 2022, we recorded gains of $5.3 million and $10.6 million, net of tax, respectively, within AOCI as a result of these net investment hedges, and gains of $2.4 million and $4.6 million during the three and nine months ended September 30, 2021, respectively. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swaps. This interest rate component is excluded from the assessment of hedge effectiveness and is recognized as a reduction to interest expense over the life of the hedge instrument. We recognized approximately $0.7 million and $2.1 million related to the excluded component as a reduction of interest expense for the three and nine months ended September 30, 2022, respectively, and $0.7 million and $2.1 million for the three and nine months ended September 30, 2021, respectively.

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
												September 30, 2022						December 31, 2021
Derivatives and non-derivatives designated as hedging instruments						Balance Sheet Classification
Foreign currency exchange contracts						Other current assets						$	22,331					$	6,512
Cross currency swaps						Other current assets						15,994						—
Foreign currency exchange contracts						Other long-term assets						3,920						—
Cross currency swaps						Other long-term assets						2,162						4,256
Total derivative instruments presented as hedge instruments on the balance sheet												44,407						10,768
Gross amounts subject to master netting arrangements not offset on the balance sheet												—						(601)
Net amount												$	44,407					$	10,167

(in thousands)												Hedging Liabilities
												September 30, 2022						December 31, 2021
Derivatives and non-derivatives designated as hedging instruments						Balance Sheet Classification
Foreign currency exchange contracts						Accrued liabilities						$	—					$	601
Total derivative instruments presented as cash flow hedges on the balance sheet												—						601
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet (1)						Long-term debt						86,245						100,711
Total hedging instruments presented on the balance sheet												86,245						101,312
Gross amounts subject to master netting arrangements not offset on the balance sheet												—						(601)
Net amount												$	86,245					$	100,711

(1) Amounts represent reported carrying amounts of our foreign currency-denominated debt. Refer to “Note 18. Fair Value Measurements” for information regarding the fair value of our long-term debt.

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