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 arrangements with an original expected duration of one year or less.
The following customer arrangements represent our most significant customer contracts that contain multiple performance obligations:
Customer Commitment Arrangements. We offer customers incentives upon entering into multi-year arrangements to purchase annual minimum amounts of products and services.
Deferred Extended Warranties and Post-Contract Support Revenue
On December 31, 2023, our deferred revenue related to extended warranties and post-contract support was $26.0 million, of which approximately $1.4 million and $18.9 million was recognized during the three and nine months ended September 30, 2024, respectively. Furthermore, as a result of new arrangements, our deferred revenue related to extended warranties and post-contract support was $25.8 million at September 30, 2024. 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 $9.1 million at September 30, 2024, of which approximately 11%, 39%, 26%, 13%, and 11% are expected to be recognized during the remainder of 2024, and the full years 2025, 2026, 2027, and thereafter, respectively. We have determined these arrangements do not include a significant financing component.
Costs to Obtain a Contract
On December 31, 2023, our deferred commission costs, included within other current and long-term assets, were $19.7 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, 2024, respectively. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $20.6 million at September 30, 2024. Impairments of deferred commission costs during the three and nine months ended September 30, 2024, respectively, were not material.
NOTE 4. ACQUISITIONS, ASSET PURCHASES AND INVESTMENTS
We believe that our acquisitions of businesses and other assets enhance our existing businesses by either expanding our geographic range, customer base, or existing product and service lines.
Business Combinations
On February 1, 2024, we acquired the assets of a privately-owned software and data platform business based in the U.S. that extends our practice management system cloud-native workflow and delivers strategic data solutions to our customers and their clients, for approximately $81.1 million, including an estimated contingent payment of $4.4 million. The fair values and the lives of the assets and liabilities acquired are as follows: completed technology of $17.1 million, with a life of 6 years; customer relationship intangibles of $12.5 million, with a life of 10 years; a non-compete agreement of $4.7 million, with a life of 5 years; and a trademark of $0.7 million, with a life of 10 years. We also recognized goodwill of $45.8 million, which represents synergies with our software business, and $0.3 million of net tangible assets, including accounts receivable. Goodwill related to this acquisition is expected to be deductible for tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our CAG segment since the acquisition date. The acquisition expenses were not significant.
13
NOTE 5. SHARE-BASED COMPENSATION
The fair value of options, restricted stock units, deferred stock units, performance-based restricted stock units, and employee stock purchase rights awarded during the three and nine months ended September 30, 2024, totaled $1.2 million and $71.4 million, respectively, as compared to $1.5 million and $62.1 million for the three and nine months ended September 30, 2023, respectively. The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding as of September 30, 2024, was $81.0 million, which will be recognized over a weighted average period of approximately 1.5 years. During the three and nine months ended September 30, 2024, we recognized share-based compensation expenses of $15.9 million and $46.0 million, respectively, as compared to $15.2 million and $44.5 million for the three and nine months ended September 30, 2023, respectively.
During the first quarter of 2024, we granted approximately $11.5 million of performance-based restricted stock units that are contingent upon our performance against pre-established financial performance metrics over a period beginning on January 1, 2024, and ending on December 31, 2026. Earned shares will vest on the later of the third anniversary of the grant date or the date of certification of our performance under the terms of the performance-based restricted stock units grant.
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,
2024
2023
Expected stock price volatility
32
%
32
%
Expected term, in years
7.0
6.7
Risk-free interest rate
4.3
%
3.7
%
Weighted average fair value of options granted
$
239.49
$
201.48
NOTE 6. CREDIT LOSSES
We are exposed to credit losses primarily through our sales of products and services to our customers. We maintain allowances for credit losses for potentially uncollectible receivables. We base our estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. Additionally, our estimates are developed based on historical credit loss experience, estimates of recoveries, current economic conditions, and future expectations.
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. We may require collateralized asset support or a prepayment to mitigate credit risk. 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 do not have any off-balance sheet credit exposure related to our customers.
14
Accounts Receivable
The allowance for credit losses associated with accounts receivable was $12.4 million and $9.5 million as of September 30, 2024, and December 31, 2023, respectively. The amount of accounts receivable reflected on the balance sheet is net of this allowance. Based on an aging analysis, as of September 30, 2024, approximately 83% of our accounts receivable had not yet reached the invoice due date, and approximately 17% was considered past due. As of December 31, 2023, approximately 83% of our accounts receivable had not yet reached the invoice due date, and approximately 17% was considered past due.
Contract Assets and Lease Receivables
The allowance for credit losses associated with contract assets and lease receivables was $7.0 million and $6.4 million as of September 30, 2024, and December 31, 2023, respectively. The assets reflected on the balance sheet are net of these allowances. Historically, we have experienced low credit loss rates on our customer commitment programs and lease receivables. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
NOTE 7. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.The components of inventories were as follows:
(in thousands)
September 30, 2024
December 31, 2023
Raw materials
$
106,858
$
106,392
Work-in-process
32,389
28,989
Finished goods
250,557
244,901
Inventories
$
389,804
$
380,282
NOTE 8. LEASES
Maturities of operating lease liabilities were as follows:
(in thousands)
September 30, 2024
2024 (remainder of year)
$
4,628
2025
28,421
2026
26,199
2027
20,731
2028
14,798
Thereafter
52,007
Total lease payments
146,784
Less imputed interest
(22,402)
Total
$
124,382
Total minimum future lease payments of approximately $0.8 million for a lease that has not commenced as of September 30, 2024, are not included in the condensed consolidated financial statements, as we do not have control of the underlying asset. This lease is expected to commence during 2024, with a lease term of approximately 5.0 years.
15
Supplemental cash flow information for leases was as follows:
(in thousands)
For the Nine Months Ended September 30,
2024
2023
Cash paid for amounts included in the measurement of operating lease liabilities
$
21,398
$
20,304
Right-of-use assets obtained in exchange for operating lease obligations, net of early
lease terminations (1)
$
22,331
$
18,219
(1)Additions for the nine months ended September 30, 2024, include $1.0 million of right-of-use assets obtained in connection with a business acquisition in the first quarter of 2024.
NOTE 9. OTHER CURRENT AND LONG-TERM ASSETS
Other Current Assets
Other current assets consisted of the following:
(in thousands)
September 30, 2024
December 31, 2023
Contract assets, net (1)
$
61,416
$
55,111
Consideration paid to customers
58,507
54,081
Prepaid expenses
57,222
48,370
Taxes receivable
14,405
16,972
Other assets
32,504
29,061
Other current assets
$
224,054
$
203,595
(1)Contract assets, net, are net of allowances for credit losses. Refer to "Note 6. Credit Losses."
Other Long-Term Assets
Other long-term assets consisted of the following:
(in thousands)
September 30, 2024
December 31, 2023
Contract assets, net (1)
$
185,863
$
167,963
Deferred income taxes
134,677
107,364
Consideration paid to customers
130,450
114,850
Equity investments
30,000
30,250
Investments in long-term product supply arrangements
25,228
25,943
Other assets
53,050
50,164
Other long-term assets
$
559,268
$
496,534
(1)Contract assets, net, are net of allowances for credit losses. Refer to "Note 6. Credit Losses."
16
NOTE 10. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accounts Payable - Supplier Financing Program
We have an agreement with a third party to provide a supplier finance program, which facilitates participating suppliers’ ability to finance payment obligations from us with a designated third-party financial institution. Participating suppliers may, at their sole discretion, make offers to finance one or more of our payment obligations prior to their scheduled due dates at a discounted price. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under these arrangements. The terms of payments are consistent with the terms of our trade payables. Activity related to the obligations is presented within operating activities on the unaudited consolidated statements of cash flows.The changes in our outstanding payment obligations under this arrangement, which are included in accounts payable on the unaudited condensed consolidated balance sheets, were as follows:
(in thousands)
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
Payment obligations outstanding at the beginning of the period
$
8,747
$
5,395
$
9,057
$
10,171
Payment obligation additions during the period
11,725
9,332
35,049
34,706
Payment obligations settled during the period
(14,968)
(6,876)
(38,602)
(37,026)
Payment obligations outstanding at the end of the period
$
5,504
$
7,851
$
5,504
$
7,851
Accrued Liabilities
Accrued liabilities consisted of the following:
(in thousands)
September 30, 2024
December 31, 2023
Accrued expenses
$
175,397
$
113,596
Accrued employee compensation and related expenses
158,985
174,375
Accrued taxes
80,073
86,553
Accrued customer incentives and refund obligations
75,630
84,386
Current lease liabilities
20,962
19,802
Accrued liabilities
$
511,047
$
478,712
Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
(in thousands)
September 30, 2024
December 31, 2023
Accrued taxes
$
30,504
$
39,642
Other accrued long-term expenses
32,375
25,884
Other long-term liabilities
$
62,879
$
65,526
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NOTE 11. DEBT
Credit Facility
At September 30, 2024, we had $250.0 million in outstanding borrowings under our Credit Facility, all of which is the $250.0 million Term Loan, with a weighted average effective interest rate of 6.3%, excluding any impact of our interest rate swap. At December 31, 2023, we had $250.0 million outstanding under our Credit Facility, all of which was the $250.0 million Term Loan, with a weighted average effective interest rate of 6.0%, excluding any impact of our interest rate swap. At September 30, 2024, we had remaining borrowing availability of $998.2 million under our $1.25 billion Credit Facility. The funds available under the Credit Facility reflect a reduction due to the issuance of letters of credit, which were primarily issued in connection with our workers’ compensation insurance policy, for $1.8 million.
The applicable interest rate for the Credit Facility is calculated at a per annum rate equal, at our option, to either (i) a prime rate plus a margin ranging from 0.0% to 0.375% based on our consolidated leverage ratio, (ii) 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 (iii) an adjusted daily simple SOFR rate, plus 0.10%, plus a margin ranging from 0.875% to 1.375% based on our consolidated leverage ratio. In March 2023, we entered into an interest rate swap contract to manage the economic effect of $250.0 million of variable interest borrowings under our Credit Facility. Refer to “Note 19. Hedging Instruments” for a discussion of our derivative instruments and hedging activity.
The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, and certain restrictive agreements. The sole financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation, which is defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed 3.5-to-1. As of September 30, 2024, 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, 2024:
(Principal Amount in thousands)
Issue Date
Due Date
Series
Principal Amount
Coupon Rate
Senior 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
6/18/2015
6/18/2025
2025 Series C Notes
€
88,857
1.785
%
Prudential 2015 Amended Agreement
2/12/2015
2/12/2027
2027 Series B Notes
$
75,000
3.72
%
MetLife 2014 Note Agreement
3/14/2019
3/14/2029
2029 Series C Notes
$
100,000
4.19
%
MetLife 2014 Note Agreement
4/2/2020
4/2/2030
MetLife 2030 Series D Notes
$
125,000
2.50
%
MetLife 2014 Note Agreement
4/14/2020
4/14/2030
Prudential 2030 Series D Notes
$
75,000
2.50
%
Prudential 2015 Amended Agreement
The Senior Note Agreements contain affirmative, negative, and financial covenants customary for agreements of this type. The negative covenants include restrictions on liens, indebtedness of our subsidiaries, priority indebtedness, fundamental changes, investments, transactions with affiliates, 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, 2024, we were in compliance with the covenants of the Senior Note Agreements.
18
NOTE 12. REPURCHASES OF COMMON STOCK
We primarily acquire shares of our common stock by repurchases in the open market. We also acquire shares that are surrendered by employees in payment for the 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, 2024, and 2023, was not material.
The Inflation Reduction Act of 2022 imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022, and is included in the cost of treasury stock acquired in open market repurchases.
The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrenders:
(in thousands, except per share amounts)
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
Shares repurchased in the open market
459
65
1,177
65
Shares acquired through employee surrenders for statutory tax withholding
1
1
19
20
Total shares repurchased
460
66
1,196
85
Cost of shares repurchased in the open market
$
224,945
$
35,070
$
600,216
$
35,070
Cost of shares for employee surrenders
218
231
10,486
9,907
Total cost of shares
$
225,163
$
35,301
$
610,702
$
44,977
Average cost per share - open market repurchases
$
490.23
$
536.03
$
509.81
$
536.03
Average cost per share - employee surrenders
$
465.27
$
506.74
$
557.64
$
503.43
Average cost per share - total
$
490.20
$
535.83
$
510.57
$
528.49
NOTE 13. INCOME TAXES
Our effective income tax rate was 22.1% for the three months ended September 30, 2024, compared to 20.8% for the three months ended September 30, 2023, and 21.3% for the nine months ended September 30, 2024, compared to 20.8% for the nine months ended September 30, 2023. The increase in our effective tax rate for the three and nine months ended September 30, 2024, compared to the same period during the prior year, was primarily due to lower tax benefits related to share-based compensation, partially offset by the tax impact of differences in geographical income mix.
The effective tax rate for the three and nine months ended September 30, 2024, was higher than the U.S. federal statutory tax rate of 21% due to U.S. state taxes, partially offset by tax benefits from share-based compensation.
Cash paid for income taxes, net of refunds, during the nine months ended September 30, 2024, and 2023, was $233.1 million and $160.9 million, respectively.
19
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in Accumulated Other Comprehensive Income (“AOCI”), net of tax, consisted of the following:
For the Nine Months Ended September 30, 2024
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
Interest Rate Swap
Euro-Denominated Notes
Cross Currency Swaps
Defined Benefit Plans, Net of Tax
Cumulative Translation Adjustment
Total
Balance as of December 31, 2023
$
(164)
$
(2,397)
$
1,106
$
2,346
$
1,428
$
(3,559)
$
(69,966)
$
(71,206)
Other comprehensive income (loss) before reclassifications
1
444
997
(732)
(370)
—
(1,261)
(921)
Reclassified from accumulated other comprehensive income
163
(2,144)
(2,132)
—
—
269
—
(3,844)
Balance as of September 30, 2024
$
—
$
(4,097)
$
(29)
$
1,614
$
1,058
$
(3,290)
$
(71,227)
$
(75,971)
For the Nine Months Ended September 30, 2023
Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax
Unrealized Gain (Loss) on Net Investment Hedges, Net of Tax
(in thousands)
Unrealized Loss on Investments, Net of Tax
Foreign Currency Exchange Contracts
Interest Rate Swap
Euro-Denominated Notes
Cross Currency Swaps
Defined Benefit Plans, Net of Tax
Cumulative Translation Adjustment
Total
Balance as of December 31, 2022
$
(172)
$
839
$
—
$
4,947
$
7,057
$
(2,776)
$
(87,691)
$
(77,796)
Other comprehensive income (loss) before reclassifications
6
7,305
5,254
488
(1,158)
—
(6,939)
4,956
Reclassified from accumulated other comprehensive income
—
(1,174)
(1,272)
—
—
395
—
(2,051)
Balance as of September 30, 2023
$
(166)
$
6,970
$
3,982
$
5,435
$
5,899
$
(2,381)
$
(94,630)
$
(74,891)
20
The following table presents components and amounts reclassified out of AOCI to net income:
(in thousands)
Affected Line Item in the Statements of Income
Amounts Reclassified from AOCI For the Three Months Ended September 30,
Amounts Reclassified from AOCI For the Nine Months Ended September 30,
2024
2023
2024
2023
Foreign currency exchange contracts
Cost of revenue
$
512
$
1,273
$
3,043
$
1,723
Tax expense
(176)
(372)
(899)
(549)
Gain, net of tax
$
336
$
901
$
2,144
$
1,174
Interest rate swap contracts
Interest expense
$
860
$
1,385
$
2,796
$
1,668
Tax expense
(204)
(329)
(664)
(396)
Gain, net of tax
$
656
$
1,056
$
2,132
$
1,272
Investments
General and administrative expense
$
—
$
—
$
(214)
$
—
Tax benefit
—
—
51
—
Loss, net of tax
$
—
$
—
$
(163)
$
—
Defined benefit plans
Cost of revenue and operating expenses
$
(143)
$
(119)
$
(319)
$
(470)
Tax benefit
21
21
50
75
Loss, net of tax
$
(122)
$
(98)
$
(269)
$
(395)
NOTE 15. EARNINGS PER SHARE
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. Share-Based Compensation” to the consolidated financial statements in our 2023 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,
2024
2023
2024
2023
Shares outstanding for basic earnings per share
82,304
83,097
82,675
83,058
Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share
82,304
83,097
82,675
83,058
Dilutive effect of share-based payment awards
752
896
803
932
83,056
83,993
83,478
83,990
21
Certain awards and options to acquire shares have been excluded from the calculation of weighted average 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,
2024
2023
2024
2023
Weighted average number of shares underlying anti-dilutive awards
39
—
40
1
Weighted average number of shares underlying anti-dilutive options
481
393
460
379
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
Refer to “Note 8. Leases” for more information regarding our lease commitments.
Contingencies
We are subject to claims that may arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. We accrue for loss contingencies when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. However, the results of legal actions cannot be predicted with certainty, and therefore our actual losses with respect to these contingencies could exceed our accruals. Except for the litigation matter described below, as of September 30, 2024, 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 asserted a claim of approximately $50.0 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 ruled in favor of the plaintiff in September 2020. The appellate court reversed the trial court’s decision regarding the royalty payments in August 2022, and the state supreme court granted the plaintiff’s petition for review. In June 2024, the state supreme court reversed the appellate court, reinstated the trial court decision regarding the royalty payments, and remanded the case to the appellate court to address the remaining issues, including issues related to applicable interest. We will continue to vigorously defend ourselves in this matter; however, litigation is inherently unpredictable, and we cannot predict with certainty the ultimate outcome, timing, or amount of actual loss for this matter. During the second quarter of 2024, we increased our previously established accrual of $27.5 million relating to this matter to $89.0 million, which represents our best estimate at this time of the amount of the probable loss, based on the current status of the case and associated estimated interest. The accrual is included in accrued expenses on the unaudited condensed consolidated balance sheet. The actual loss associated with this matter may be higher or lower than the amount we have accrued depending on the ultimate outcome of the case.
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.
22
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, 2024, and December 31, 2023.
NOTE 17. SEGMENT REPORTING
We operate primarily through three business segments: Companion Animal Group (“CAG”), water quality products (“Water”), and Livestock, Poultry and Dairy (“LPD”). CAG provides products and services for veterinarians and the biomedical research community, primarily related to diagnostics and information management. Water provides innovative testing solutions for the detection and quantification of various microbiological parameters in water. LPD provides diagnostic tests, services, and related instrumentation that are used to manage the health status of livestock and poultry, to improve producer efficiency, and to ensure the quality and safety of milk. Our Other operating segment combines and presents our human medical diagnostic business (“OPTI Medical”) with our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments. OPTI Medical develops, manufactures, and distributes human medical diagnostic products and services.
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 are CAG, Water, LPD, and Other. Assets are not allocated to segments for internal reporting purposes. Intersegment revenues, which are not included in the table below, were not material for the periods ended September 30, 2024, and 2023.
The following is a summary of segment performance:
(in thousands)
For the Three Months Ended September 30,
CAG
Water
LPD
Other
Consolidated Total
2024
Revenue
$
891,990
$
50,162
$
28,992
$
4,399
$
975,543
Income from operations
$
277,082
$
23,608
$
889
$
2,313
$
303,892
Interest expense, net
(4,983)
Income before provision for income taxes
298,909
Provision for income taxes
66,068
Net income
$
232,841
2023
Revenue
$
837,160
$
44,450
$
29,747
$
4,170
$
915,527
Income from operations
$
253,358
$
20,328
$
2,405
$
(808)
$
275,283
Interest expense, net
(7,392)
Income before provision for income taxes
267,891
Provision for income taxes
55,660
Net income
$
212,231
23
(in thousands)
For the Nine Months Ended September 30,
CAG
Water
LPD
Other
Consolidated Total
2024
Revenue
$
2,703,573
$
139,959
$
87,503
$
12,181
$
2,943,216
Income from operations
$
798,328
$
63,542
$
3,254
$
1,527
$
866,651
Interest expense, net
(13,207)
Income before provision for income taxes
853,444
Provision for income taxes
181,726
Net income
$
671,718
2023
Revenue
$
2,531,091
$
126,362
$
88,866
$
13,033
$
2,759,352
Income from operations
$
790,617
$
57,119
$
5,664
$
(1,574)
$
851,826
Interest expense, net
(30,318)
Income before provision for income taxes
821,508
Provision for income taxes
170,987
Net income
$
650,521
Refer to “Note 3. Revenue” for a summary of disaggregated revenue by reportable segment and by major product and service category for the three and nine months ended September 30, 2024, and 2023.
NOTE 18. FAIR VALUE MEASUREMENTS
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a non-recurring basis, and certain financial assets and liabilities that are not measured at fair value in our unaudited condensed consolidated balance sheets but for which we disclose the fair value.
The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:
Level 1
Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2, or transfers in or out of Level 3, of the fair value hierarchy during the three and nine months ended September 30, 2024.
Our cross currency swap contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets and are classified as derivative instruments. We measure the fair value of our cross currency swap contracts 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.
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Our foreign currency exchange contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets and are classified as derivative instruments. We measure the fair value of our foreign currency exchange contracts using an income approach, based on prevailing market forward exchange rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.
Our interest rate swap contract is measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets and are classified as derivative instruments. We measure the fair value of our interest rate swap contract using current market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk.
The amounts outstanding under our unsecured Credit Facility 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 $614.9 million and $624.1 million, respectively, as of September 30, 2024, and $670.0 million and $698.2 million, respectively, as of December 31, 2023.
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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, 2024
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, 2024
Assets
Money market funds (1)
$
172,461
$
—
$
—
$
172,461
Cross currency swaps (3)
$
—
$
694
$
—
$
694
Foreign currency exchange contracts (3)
$
—
$
988
$
—
$
988
Interest rate swap (4)
$
—
$
—
$
—
$
—
Liabilities
Cross currency swaps (3)
$
—
$
5,557
$
—
$
5,557
Foreign currency exchange contracts (3)
$
—
$
6,937
$
—
$
6,937
Interest rate swap (4)
$
—
$
38
$
—
$
38
Contingent consideration
$
—
$
—
$
4,400
$
4,400
(in thousands)
As of December 31, 2023
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, 2023
Assets
Money market funds (1)
$
290,807
$
—
$
—
$
290,807
Equity mutual funds (2)
$
99
$
—
$
—
$
99
Cross currency swaps (3)
$
—
$
664
$
—
$
664
Foreign currency exchange contracts (3)
$
—
$
1,783
$
—
$
1,783
Interest rate swap (4)
$
—
$
1,451
$
—
$
1,451
Liabilities
Cross currency swaps (3)
$
—
$
5,041
$
—
$
5,041
Foreign currency exchange contracts (3)
$
—
$
5,532
$
—
$
5,532
Deferred compensation (5)
$
99
$
—
$
—
$
99
(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 consists of demand deposits.
(2)Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount was included within other current assets. Refer to footnote (5) below for a discussion of the related deferred compensation liability. The obligations under the deferred compensation plan were completed in 2024.
(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)Interest rate swap is included within other long-term assets or other long-term liabilities.
(5)A deferred compensation plan assumed as part of a previous business combination was included within accrued 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 obligations under this plan were completed in 2024.
The estimated fair values of certain financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate their respective carrying values due to their short maturity.
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Contingent Consideration
We have classified our liabilities 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 include the achievements of future revenues. The contingent consideration is included within other short-term and long-term liabilities. Changes in the estimated fair values of contingent consideration are recorded in the unaudited condensed consolidated statements of income.
The fair values of liabilities for contingent consideration for the three and nine months ended September 30, 2024, and 2023, are as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2024
2023
2024
2023
Contingent consideration at the beginning of the period
$
4,400
$
120
$
—
$
120
Contingent consideration recorded from acquisition
—
—
4,400
—
Payment of contingent consideration
—
(99)
—
(99)
Realized gain
—
(21)
—
(21)
Contingent consideration at the end of the period
$
4,400
$
—
$
4,400
$
—
Contingent consideration associated with a software business acquired during the first quarter of 2024 is based on the achievement of certain future revenue milestones during each annual period following the acquisition date, over a three-year period, and a cumulative revenue target for the three-year period, up to a maximum of $30.0 million (undiscounted) payable in cash. The fair value of the contingent consideration liability for the 2024 acquisition was determined using a probability-weighted model. The balance at September 30, 2024, was recorded as a long-term liability. Future revenue results are uncertain by nature, and actual results may differ from estimates.
NOTE 19. HEDGING INSTRUMENTS
Disclosure within this note is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging instruments”), how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations, and cash flows.
We are exposed to certain risks related to our ongoing business operations. We utilize hedging instruments to manage a portion of our foreign currency exchange risk and interest rate risk.
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 large 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 our designation of such instruments as hedging transactions.
We recognize all hedging instrument assets and liabilities at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment are 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
27
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, 2024, and 2023.
We enter into master netting arrangements with the counterparties to our derivative transactions, which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.
Cash Flow Hedges
We have designated our foreign currency exchange contracts and our interest rate swap as cash flow hedges as these derivative instruments manage our exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange and to interest rates on variable interest obligations under the terms of our Credit Facility. 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 the three and nine months ended September 30, 2024, or 2023. As of September 30, 2024, the estimated amount of losses, net of tax, from our foreign exchange contracts which are expected to be reclassified out of AOCI and into earnings within the next 12 months is $3.1 million if exchange rates do not fluctuate from the levels as of September 30, 2024. As of September 30, 2024, the estimated amount of gains, net of tax, from our interest rate swap contract which are expected to be reclassified out of AOCI and into earnings within the next twelve months is $0.1 million if interest rates do not fluctuate from the levels as of September 30, 2024.
Foreign Currency Exchange Contracts: 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 intercompany foreign transactions 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 $367.1 million and $294.0 million as of September 30, 2024, and December 31, 2023, respectively.
Interest Rate Swap: We entered into an interest rate swap contract to manage the economic effect of variable interest obligations on amounts borrowed under the terms of the Credit Facility. Beginning on March 31, 2023, the variable interest rate associated with $250.0 million of borrowings outstanding under the Credit Facility became effectively fixed at 3.9% plus the applicable credit spread, through October 20, 2025.
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The following table presents the effect of cash flow hedge accounting on our unaudited condensed consolidated statements of income and comprehensive income, and provides information regarding the location and amounts of pretax gains or losses of derivatives:
(in thousands)
Financial statement line items in which effects of cash flow hedges are recorded
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Foreign exchange contracts
Cost of revenue
$
379,505
$
367,545
$
1,134,949
$
1,095,549
Amount of gain reclassified from accumulated other comprehensive income into net income
$
512
$
1,273
$
3,043
$
1,723
Interest rate swap contract
Interest expense
$
(7,697)
$
(8,647)
$
(23,707)
$
(32,316)
Amount of gain reclassified from accumulated other comprehensive income into net income
$
860
$
1,385
$
2,796
$
1,668
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 losses of $3.1 million and $0.7 million, net of tax, within AOCI as a result of this net investment hedge for the three and nine months ended September 30, 2024, respectively, and gains of $2.3 million and $0.5 million for the three and nine months ended September 30, 2023, respectively. The related cumulative unrealized loss recorded as of September 30, 2024, will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated or all or a portion of the hedge no longer qualifies for hedge accounting treatment. Refer to “Note 13. Debt” to the consolidated financial statements included in our 2023 Annual Report for further information regarding the issuance of these euro-denominated notes.
Net Investment Hedges, Cross Currency Swaps
We have entered into cross currency swap contracts as a hedge of our net investment in certain foreign operations to offset foreign currency translation gains and losses on the net investment. These cross currency swaps have maturity dates beginning on June 18, 2025, through June 29, 2029.
At maturity of the cross currency swap contracts we will deliver the notional amount of €15 million and will receive approximately $17.5 million from the counterparties on June 18, 2025; we will deliver the notional amount of €35 million and will receive $37.8 million from the counterparties on March 31, 2028; we will deliver the notional amount of €90 million and will receive $98.2 million from the counterparties on June 30, 2028; and we will deliver the notional amount of €20 million and will receive $21.3 million from the counterparties on June 29, 2029. 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 or all or a portion of the hedge no longer qualifies for hedge accounting treatment. During the three and nine months ended September 30, 2024, we recorded losses of $3.8 million and $0.4 million, net of tax, respectively, within AOCI as a result of these net investment hedges, and gains of $1.9 million and loss of $1.2 million during the three and nine months ended September 30, 2023, 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 $0.4 million and $1.1 million related to the excluded component as a reduction of interest expense for the three and nine months ended September 30, 2024, respectively, and $0.3 million and $1.8 million for the three and nine months ended September 30, 2023, respectively.
29
Fair Values of Derivative and Non-Derivative 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:
(in thousands)
Hedging Assets
September 30, 2024
December 31, 2023
Derivatives and non-derivatives designated as hedging instruments
Balance Sheet Classification
Foreign currency exchange contracts
Other current assets
$
978
$
1,783
Cross currency swaps
Other current assets
694
—
Interest rate swap contract
Other long-term assets
—
1,451
Foreign currency exchange contracts
Other long-term assets
10
—
Cross currency swaps
Other long-term assets
—
664
Total derivative instruments presented as hedging instruments on the balance sheet
1,682
3,898
Gross amounts subject to master netting arrangements not offset on the balance sheet
(988)
(1,783)
Net amount
$
694
$
2,115
(in thousands)
Hedging Liabilities
September 30, 2024
December 31, 2023
Derivatives and non-derivatives designated as hedging instruments
Balance Sheet Classification
Foreign currency exchange contracts
Accrued liabilities
$
5,621
$
5,532
Cross currency swaps
Other long-term liabilities
5,557
5,041
Interest rate swap contract
Other long-term liabilities
38
—
Foreign currency exchange contracts
Other long-term liabilities
1,316
—
Total derivative instruments presented as hedging instruments on the balance sheet
12,532
10,573
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet (1)
Long-term debt
99,147
98,187
Total hedging instruments presented on the balance sheet
111,679
108,760
Gross amounts subject to master netting arrangements not offset on the balance sheet
(988)
(1,783)
Net amount
$
110,691
$
106,977
(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.
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), include statements relating to, among other things, our expectations regarding revenue recognition timing and amounts; business trends, earnings and other measures of financial performance; projected impact of foreign currency exchange rates and hedging activities; realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending; the working capital and liquidity outlook; critical accounting estimates; deductibility of goodwill; inflation; an ongoing litigation matter; and timing of delivery of pre-ordered IDEXX inVue Dx Cellular Analyzers in the U.S. Forward-looking statements can be identified by the use of words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” “project,” and similar words and expressions. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including, among other things, the adverse impact, and the duration, of macroeconomic events, conditions, and uncertainties, such as geopolitical instability (including wars, terrorist attacks, and armed conflicts), general economic uncertainty, inflationary pressures, severe weather and other natural conditions, and supply chain challenges on our business, results of operations, liquidity, financial condition, and stock price, as well as the other matters described under the headings “Business,” “Risk Factors,” “Legal Proceedings,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosure About Market Risk” in our 2023 Annual Report and in the corresponding sections of this Quarterly Report on Form 10-Q, and the Quarterly Reports on Form 10-Q for the quarters ended June 30, 2024, and March 31, 2024, as well as those described from time to time in our other periodic reports filed with the SEC.
Any forward-looking statements represent our estimates only as of the day this Quarterly Report on Form 10-Q was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public, and they are subject to the risk and uncertainties described or cross-referenced in this section. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change.
You should read the following discussion and analysis in conjunction with our 2023 Annual Report that includes additional information about us, our results of operations, our financial position, and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Our fiscal quarter ended on September 30. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior-year periods.
Business Overview
We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing sectors. We also design, manufacture, and distribute point-of-care for the human medical diagnostics sector. Our primary products and services are:
•Point-of-care veterinary diagnostic products, comprising instruments, consumables, and rapid assay test kits;
•Veterinary reference laboratory diagnostic and consulting services;
•Practice management and diagnostic imaging systems and services used by veterinarians;
•Health monitoring, biological materials testing, and laboratory diagnostic instruments, and services used by the biomedical research community;
•Diagnostic, health-monitoring products for livestock, poultry, and dairy;
•Products that test water for certain microbiological contaminants; and
•Point-of-care electrolytes and blood gas analyzers.
Description of Business Segments. We operate primarily through three business segments: diagnostic and information management-based products and services for the companion animal veterinary industry, which we refer to as the Companion Animal Group (“CAG”); water quality products (“Water”); and diagnostic products and services for livestock and poultry
31
health and to ensure the quality and safety of milk and improve producer efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our Other operating segment combines and presents our human medical diagnostic products business (“OPTI Medical”) with our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
CAG develops, designs, manufactures, and distributes products and software, and performs services for veterinarians and the biomedical analytics sector, primarily related to diagnostics and information management. Water develops, designs, manufactures, and distributes a range of products used in the detection of various microbiological parameters in water. LPD develops, designs, manufactures, and distributes diagnostic tests and related software and performs services that are used to manage the health status of livestock and poultry, to improve bovine reproductive efficiency, and to ensure the quality and safety of milk. OPTI Medical develops, designs, manufactures, and distributes human medical diagnostics products.
Currency and Other Items
Currency Impact. Refer to “Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Quarterly Report on Form 10-Q for additional information regarding the impact of foreign currency exchange rates.
Other Items. Refer to “Part I, Item 1. Business - Patents and Licenses” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 Annual Report for additional information regarding trends in companion animal healthcare, distributor purchasing and inventories, economic conditions, and patent expiration.
Critical Accounting Estimates and Assumptions
The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2024, are consistent with those discussed in our 2023 Annual Report in the section under the heading “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Assumptions.”
Recent Accounting Pronouncements
For more information regarding the impact that recent accounting standards and amendments will have on our consolidated financial statements, refer to Note 2 to the unaudited condensed consolidated financial statements in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion to “revenue,” “revenues,” or “revenue growth” are references to “organic revenue growth.” Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three and nine months ended September 30, 2024, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions, and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for, or as a superior measure to, revenue growth reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers.
We exclude from organic revenue growth the effect of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under management’s control, are subject to volatility, and can obscure underlying business trends. We calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year period and the comparable prior-year period to foreign currency denominated revenues for the prior-year period.
32
We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size, and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and operating trends. We consider acquisitions to be a business when all three elements of inputs, processes, and outputs are present, consistent with ASU 2017-01, “Business Combinations: (Topic 805) Clarifying the Definition of a Business.” In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, we do not consider these assets to be a business. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth. The percentage change in revenue resulting from acquisitions represents revenues during the current year period, limited to the initial 12 months from the date of the acquisition, that are directly attributable to business acquisitions.
We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio, and net debt to Adjusted EBITDA ratio in this Quarterly Report on Form 10-Q, all of which are non-GAAP financial measures that should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
33
Results of Operations
Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 2023
Total Company. The following table presents total Company revenue by operating segment:
For the Three Months Ended September 30,
Net Revenue
(dollars in thousands)
2024
2023
Dollar Change
Reported Revenue Growth (1)
Percentage Change from Currency
Percentage Change from Acquisitions
Organic Revenue Growth (1)
CAG
$
891,990
$
837,160
$
54,830
6.5
%
0.1
%
0.4
%
6.0
%
United States
604,170
573,830
30,340
5.3
%
—
0.6
%
4.6
%
International
287,820
263,330
24,490
9.3
%
0.3
%
—
9.0
%
Water
$
50,162
$
44,450
$
5,712
12.9
%
(0.3
%)
—
13.2
%
United States
26,671
22,804
3,867
17.0
%
—
—
17.0
%
International
23,491
21,646
1,845
8.5
%
(0.6
%)
—
9.2
%
LPD
$
28,992
$
29,747
$
(755)
(2.5
%)
(0.2
%)
—
(2.4
%)
United States
5,561
5,040
521
10.3
%
—
—
10.3
%
International
23,431
24,707
(1,276)
(5.2
%)
(0.2
%)
—
(5.0
%)
Other
$
4,399
$
4,170
$
229
5.5
%
—
—
5.5
%
Total Company
$
975,543
$
915,527
$
60,016
6.6
%
0.1
%
0.4
%
6.1
%
United States
638,058
603,046
35,012
5.8
%
—
0.6
%
5.2
%
International
337,485
312,481
25,004
8.0
%
0.2
%
—
7.8
%
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in organic revenue reflects growth in CAG Diagnostics recurring revenue, including benefits from higher realized prices and, to a lesser extent, increased volumes, supported by new business gains and sustained high customer retention rates offsetting constraints from macroeconomic and sector headwinds. Increases in our recurring veterinary software, services, and diagnostic imaging revenue, supported by higher volumes and price gains, also contributed to increased revenue. Higher revenue in our Water business was primarily due to higher realized prices and increased volume in the U.S. and, to a lesser extent, Europe. The decrease in LPD revenue was primarily due to lower testing levels in Asia Pacific, partially offset by higher volumes in North America, and benefits from higher realized prices. During the current quarter, the comparative impact of equivalent days, related to a shipping-day benefit, increased overall revenue growth by approximately 1%.Acquisitions increased revenue growth by 0.4%. The change in foreign currency exchange rates increased revenue growth by 0.1%.
34
The following table presents total Company results of operations:
For the Three Months Ended September 30,
Change
Total Company - Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
975,543
$
915,527
$
60,016
6.6
%
Cost of revenue
379,505
367,545
11,960
3.3
%
Gross profit
596,038
61.1
%
547,982
59.9
%
48,056
8.8
%
Operating expenses:
Sales and marketing
146,281
15.0
%
135,698
14.8
%
10,583
7.8
%
General and administrative
91,887
9.4
%
89,034
9.7
%
2,853
3.2
%
Research and development
53,978
5.5
%
47,967
5.2
%
6,011
12.5
%
Total operating expenses
292,146
29.9
%
272,699
29.8
%
19,447
7.1
%
Income from operations
$
303,892
31.2
%
$
275,283
30.1
%
$
28,609
10.4
%
Gross Profit. Gross profit increased due to higher revenue and a 120 basis point increase in the gross profit margin. The increase in the gross profit margin reflected favorable business mix, lower instrument costs, recurring software and services gross margin gains, and the benefit from net price realization, offsetting inflationary cost impacts. The overall change in foreign currency exchange rates decreased the gross profit margin by approximately 20 basis points, including the impact of lower hedge gains during the current period compared to the prior period.
Operating Expenses. Sales and marketing expense increased primarily due to higher travel, meeting, and personnel-related costs. General and administrative expense increased primarily due to higher information technology, outside services, and acquisition-related costs. Research and development expense increased primarily due to higher project costs. The change in foreign currency exchange rates decreased operating expense growth by approximately 1.0%.
35
Companion Animal Group
The following table presents revenue by product and service category for CAG:
For the Three Months Ended September 30,
Net Revenue
(dollars in thousands)
2024
2023
Dollar Change
Reported Revenue Growth (1)
Percentage Change from Currency
Percentage Change from Acquisitions
Organic Revenue Growth (1)
CAG Diagnostics recurring revenue:
$
783,443
$
733,958
$
49,485
6.7
%
0.1
%
—
6.7
%
IDEXX VetLab consumables
329,128
296,042
33,086
11.2
%
0.1
%
—
11.1
%
Rapid assay products
92,774
87,562
5,212
6.0
%
(0.2
%)
—
6.2
%
Reference laboratory diagnostic and consulting services
328,383
320,294
8,089
2.5
%
0.1
%
—
2.4
%
CAG diagnostics services and accessories
33,158
30,060
3,098
10.3
%
0.1
%
—
10.2
%
CAG Diagnostics capital - instruments
$
29,528
$
32,254
$
(2,726)
(8.4
%)
0.3
%
—
(8.7
%)
Veterinary software, services and diagnostic imaging systems
$
79,019
$
70,948
$
8,071
11.4
%
0.1
%
5.2
%
6.1
%
Recurring revenue
64,644
54,607
10,037
18.4
%
0.1
%
6.8
%
11.5
%
Systems and hardware
14,375
16,341
(1,966)
(12.0
%)
—
—
(12.0
%)
Net CAG revenue
$
891,990
$
837,160
$
54,830
6.5
%
0.1
%
0.4
%
6.0
%
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding.
CAG Diagnostics Recurring Revenue. The increase in CAG Diagnostics recurring revenue was primarily due to higher realized prices and, to a lesser extent, increased volumes supported by new business gains and sustained high customer retention rates, offsetting constraints from macroeconomic and sector headwinds. The comparative impact of equivalent days, related to a shipping-day benefit in the current quarter, increased revenue growth by approximately 1%. The change in foreign currency exchange rates increased revenue growth by 0.1%.
The increase in IDEXX VetLab consumables revenue was primarily due to higher price realization and, to a lesser extent, volume increases, supported by the expansion of our installed base of instruments and our expanded menu of available tests, and a shipping-day benefit in the current quarter. The change in foreign currency exchange rates increased revenue growth by 0.1%.
The increase in rapid assay revenue resulted primarily from higher price realization and, to a lesser extent, a shipping-day benefit in the current quarter, partially offset by lower volumes. The change in foreign currency exchange rates decreased revenue growth by 0.2%.
The increase in reference laboratory diagnostic and consulting services revenue was due to higher global price realization and higher testing volumes, primarily in the U.S., and, to a lesser extent, in Asia Pacific and Europe. The change in foreign currency exchange rates increased revenue growth by 0.1%.
The increase in CAG Diagnostics services and accessories revenue was primarily a result of the 10% growth in our active installed base of premium instruments. The change in foreign currency exchange rates increased revenue growth by 0.1%.
36
CAG Diagnostics Capital – Instrument Revenue. The decrease in instrument revenue was primarily due to lower premium instruments placements and, to a lesser extent, program effects on pricing. The change in foreign currency exchange rates increased revenue growth by 0.3%. Instrument revenue does not include our IDEXX inVue DxTM Cellular Analyzer pre-orders, which will be recognized in revenue when the instruments are delivered, which is anticipated to begin in North America during the fourth quarter of 2024.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to higher recurring revenue from subscriptions and support revenue from an expanded SaaS installed base, and higher realized prices. The decrease in our systems and hardware revenue was due to lower system, accessories, and hardware sales. Acquisitions increased revenue growth by 5.2%. The change in foreign currency exchange rates increased revenue growth by 0.1%.
The following table presents the CAG segment results of operations:
For the Three Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
891,990
$
837,160
$
54,830
6.5
%
Cost of revenue
347,529
337,869
9,660
2.9
%
Gross profit
544,461
61.0
%
499,291
59.6
%
45,170
9.0
%
Operating expenses:
Sales and marketing
132,848
14.9
%
123,657
14.8
%
9,191
7.4
%
General and administrative
84,611
9.5
%
78,770
9.4
%
5,841
7.4
%
Research and development
49,920
5.6
%
43,506
5.2
%
6,414
14.7
%
Total operating expenses
267,379
30.0
%
245,933
29.4
%
21,446
8.7
%
Income from operations
$
277,082
31.1
%
$
253,358
30.3
%
$
23,724
9.4
%
Gross Profit. Gross profit increased due to higher revenue and a 140 basis point increase in the gross profit margin. The increase in the gross profit margin reflected favorable business mix, lower instrument costs, recurring software and services gross margin gains, and the benefit from net price realization, offsetting inflationary cost impacts. The overall change in foreign currency exchange rates decreased the gross profit margin by approximately 10 basis points, including the impact of lower hedge gains during the current period compared to the prior period.
Operating Expenses. Sales and marketing expense increased primarily due to higher travel, meeting, and personnel-related costs. General and administrative expense increased primarily due to higher information technology and outside services, as well as higher acquisition-related costs. Research and development expense increased primarily due to project costs. The change in foreign currency exchange rates was not significant to operating expense growth.
37
Water
The following table presents the Water segment results of operations:
For the Three Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
50,162
$
44,450
$
5,712
12.9
%
Cost of revenue
15,407
13,416
1,991
14.8
%
Gross profit
34,755
69.3
%
31,034
69.8
%
3,721
12.0
%
Operating expenses:
Sales and marketing
5,936
11.8
%
5,345
12.0
%
591
11.1
%
General and administrative
3,903
7.8
%
4,125
9.3
%
(222)
(5.4
%)
Research and development
1,308
2.6
%
1,236
2.8
%
72
5.8
%
Total operating expenses
11,147
22.2
%
10,706
24.1
%
441
4.1
%
Income from operations
$
23,608
47.1
%
$
20,328
45.7
%
$
3,280
16.1
%
Revenue. The increase in revenue was due to higher realized prices and higher volumes. The increase in volumes in the U.S. and, to a lesser extent, Europe, was primarily from our Colilert test products and related accessories used in coliform and E. coli testing. The change in foreign currency exchange rates decreased revenue by approximately 0.3%.
Gross Profit.Gross profit increased due to higher revenue, partially offset by a 50 basis point decrease in the gross profit margin. The decrease in the gross profit margin was primarily due to higher product costs, partially offset by higher realized prices. The overall change in foreign currency exchange rates decreased the gross profit margin by approximately 50 basis points, including the impact of hedge losses during the current period compared to hedge gains in the prior period.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs and marketing initiatives. General and administrative expense decreased primarily due to lower bad debt expense. Research and development expense increased primarily due to higher personnel-related cost. The change in foreign currency exchange rates decreased operating expense growth by less than 1.0%.
38
Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Three Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
28,992
$
29,747
$
(755)
(2.5
%)
Cost of revenue
14,365
13,911
454
3.3
%
Gross profit
14,627
50.5
%
15,836
53.2
%
(1,209)
(7.6
%)
Operating expenses:
Sales and marketing
7,210
24.9
%
6,253
21.0
%
957
15.3
%
General and administrative
3,933
13.6
%
4,199
14.1
%
(266)
(6.3
%)
Research and development
2,595
9.0
%
2,979
10.0
%
(384)
(12.9
%)
Total operating expenses
13,738
47.4
%
13,431
45.2
%
307
2.3
%
Income from operations
$
889
3.1
%
$
2,405
8.1
%
$
(1,516)
(63.0
%)
Revenue. The decrease in revenue was primarily due to lower testing levels in Asia Pacific, partially offset by higher volumes in North America and benefits from higher realized prices. The change in foreign currency exchange rates decreased revenue growth by 0.2%.
Gross Profit. The decrease in gross profit was primarily due to a 270 basis point decrease in the gross profit margin and lower revenue. The decrease in the gross profit margin was primarily due to higher product and distribution costs, partially offset by higher realized prices. The overall change in foreign currency exchange rates decreased the gross profit margin by approximately 70 basis points, including the impact of lower hedge gains during the current period compared to the prior period.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs. General and administrative expense decreased primarily due to lower bad debt expense. Research and development expense decreased primarily due to lower personnel-related and project costs. The change in foreign currency exchange rates was not significant to operating expense growth.
39
Other
The following table presents the Other results of operations:
For the Three Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
4,399
$
4,170
$
229
5.5
%
Cost of revenue
2,204
2,349
(145)
(6.2
%)
Gross profit
2,195
49.9
%
1,821
43.7
%
374
20.5
%
Operating expenses:
Sales and marketing
287
6.5
%
443
10.6
%
(156)
(35.2
%)
General and administrative
(560)
(12.7
%)
1,940
46.5
%
(2,500)
(128.9
%)
Research and development
155
3.5
%
246
5.9
%
(91)
(37.0
%)
Total operating expenses
(118)
(2.7
%)
2,629
63.0
%
(2,747)
(104.5
%)
Income from operations
$
2,313
52.6
%
$
(808)
(19.4
%)
$
3,121
(386.3
%)
Revenue.The increase in revenue was primarily due to higher realized prices of our OPTI Medical consumables, partially offset by lower consumables volumes.
Gross Profit. Gross profit increased primarily due to a 620 basis point increase in the gross profit margin. The increase in the gross profit margin was largely due to higher realized prices. The change in foreign currency exchange rates did not have a significant impact on the gross profit margin.
Operating Expenses. Sales and marketing expense decreased due to lower personnel-related costs. General and administrative expense decreased primarily due to foreign exchange gains on settlements of foreign currency denominated transactions compared to losses in the prior period. Foreign exchange gains and losses on settlements for all operating segments are reported within Other. Research and development expense decreased due to lower activities that were not attributable to our three primary business segments.
Non-Operating Items
Interest Expense and Income. Interest expense was $7.7 million for the three months ended September 30, 2024, as compared to $8.6 million for the same period during the prior year. The decrease in interest expense was primarily due to lower average debt levels and lower interest rates. Interest income was $2.7 million for the three months ended September 30, 2024, compared to $1.3 million for the same period during the prior year. This increase in interest income is primarily due to the increase in money market investments, as compared to the same period during the prior year.
Provision for Income Taxes.Our effective income tax rate was 22.1% for the three months ended September 30, 2024, compared to 20.8% for the three months ended September 30, 2023. The increase in our effective tax rate was primarily due to lower tax benefits related to share-based compensation, partially offset by the tax impact of differences in geographical income mix.
40
Results of Operations
Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 30, 2023
Total Company. The following table presents total Company revenue by operating segment:
For the Nine Months Ended September 30,
Net Revenue
(dollars in thousands)
2024
2023
Dollar Change
Reported Revenue Growth (1)
Percentage Change from Currency
Percentage Change from Acquisitions
Organic Revenue Growth (1)
CAG
$
2,703,573
$
2,531,091
$
172,482
6.8
%
(0.2
%)
0.4
%
6.7
%
United States
1,835,049
1,732,752
102,297
5.9
%
—
0.5
%
5.4
%
International
868,524
798,339
70,185
8.8
%
(0.6
%)
—
9.4
%
Water
$
139,959
$
126,362
$
13,597
10.8
%
(0.4
%)
—
11.1
%
United States
73,331
63,932
9,399
14.7
%
—
—
14.7
%
International
66,628
62,430
4,198
6.7
%
(0.7
%)
—
7.5
%
LPD
$
87,503
$
88,866
$
(1,363)
(1.5
%)
(0.6
%)
—
(0.9
%)
United States
15,840
14,005
1,835
13.1
%
—
—
13.1
%
International
71,663
74,861
(3,198)
(4.3
%)
(0.7
%)
—
(3.6
%)
Other
$
12,181
$
13,033
$
(852)
(6.5
%)
—
—
(6.5
%)
Total Company
$
2,943,216
$
2,759,352
$
183,864
6.7
%
(0.2
%)
0.3
%
6.6
%
United States
1,929,213
1,815,066
114,147
6.3
%
—
0.5
%
5.8
%
International
1,014,003
944,286
69,717
7.4
%
(0.6
%)
—
8.0
%
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in organic revenue reflects growth in CAG Diagnostics recurring revenue, including benefits from higher realized prices and, to a lesser extent, increased volumes, supported by new business gains and sustained high customer retention rates offsetting constraints from macroeconomic and sector headwinds. Higher volumes and price gains in recurring veterinary software, services, and diagnostic imaging also contributed to increased revenue, supported by demand for subscription-based software. Higher revenue in our Water business was primarily due to the benefit of price increases and increased volume in the U.S. and Europe. The decrease in LPD revenue was primarily due to lower testing levels in Asia Pacific, partially offset by higher realized prices and volume growth in the U.S. and Europe. The decrease in Other revenue was primarily due to lower volumes of our OPTI Medical instruments and consumables. Acquisitions increased revenue growth by 0.3%.The change in foreign currency exchange rates decreased revenue growth by 0.2%.
41
The following table presents total Company results of operations:
For the Nine Months Ended September 30,
Change
Total Company - Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
2,943,216
$
2,759,352
$
183,864
6.7
%
Cost of revenue
1,134,949
1,095,549
39,400
3.6
%
Gross profit
1,808,267
61.4
%
1,663,803
60.3
%
144,464
8.7
%
Operating expenses:
Sales and marketing
438,399
14.9
%
424,034
15.4
%
14,365
3.4
%
General and administrative
341,154
11.6
%
248,804
9.0
%
92,350
37.1
%
Research and development
162,063
5.5
%
139,139
5.0
%
22,924
16.5
%
Total operating expenses
941,616
32.0
%
811,977
29.4
%
129,639
16.0
%
Income from operations
$
866,651
29.4
%
$
851,826
30.9
%
$
14,825
1.7
%
Gross Profit. Gross profit increased due to higher revenue and a 110 basis point increase in the gross profit margin. The increase in the gross profit margin reflected favorable business mix, lower instrument costs, recurring software and services gross margin gains, and the benefit from net price realization, offsetting inflationary cost impacts. The change in foreign currency exchange rates on the gross profit margin was not significant.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related, meeting, and travel costs. General and administrative expense increased primarily due to a $61.5 million expense related to an ongoing litigation matter, the comparison to the prior year benefit of a $16.0 million customer contract resolution gain, higher information technology and outside services, and acquisition-related costs. Research and development expense increased primarily due to higher project costs. The change in foreign currency exchange rates was not significant to operating expense growth.
42
Companion Animal Group
The following table presents revenue by product and service category for CAG:
For the Nine Months Ended September 30,
Net Revenue
(dollars in thousands)
2024
2023
Dollar Change
Reported Revenue Growth (1)
Percentage Change from Currency
Percentage Change from Acquisitions
Organic Revenue Growth (1)
CAG Diagnostics recurring revenue:
$
2,372,041
$
2,223,336
$
148,705
6.7
%
(0.2
%)
—
6.9
%
IDEXX VetLab consumables
971,405
890,891
80,514
9.0
%
(0.3
%)
—
9.3
%
Rapid assay products
282,379
266,934
15,445
5.8
%
(0.2
%)
—
6.0
%
Reference laboratory diagnostic and consulting services
1,020,094
973,580
46,514
4.8
%
(0.1
%)
—
4.9
%
CAG diagnostics services and accessories
98,163
91,931
6,232
6.8
%
(0.4
%)
—
7.2
%
CAG Diagnostics capital - instruments
$
98,912
$
99,452
$
(540)
(0.5
%)
(0.4
%)
—
(0.1
%)
Veterinary software, services and diagnostic imaging systems:
$
232,620
$
208,303
$
24,317
11.7
%
—
4.4
%
7.3
%
Recurring revenue
187,461
160,039
27,422
17.1
%
—
5.7
%
11.5
%
Systems and hardware
45,159
48,264
(3,105)
(6.4
%)
(0.1
%)
—
(6.4
%)
Net CAG revenue
$
2,703,573
$
2,531,091
$
172,482
6.8
%
(0.2
%)
0.4
%
6.7
%
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding.
CAG Diagnostics Recurring Revenue. The increase in CAG Diagnostics recurring revenue was primarily due to higher realized prices and, to a lesser extent, increased volumes, supported by new business gains and sustained high customer retention rates, offsetting constraints from macroeconomic and sector headwinds. The impact in foreign currency exchange rates decreased CAG Diagnostics recurring revenue growth by 0.2%.
The increase in IDEXX VetLab consumables revenue was primarily due to higher price realization and, to a lesser extent, volume increases, supported by the expansion of our installed base of instruments and our expanded menu of available tests. The change in foreign currency exchange ratesdecreased revenue growth by 0.3%.
The increase in rapid assay revenue resulted primarily from higher price realization, partially offset by lower volumes. The change in foreign currency exchange rates decreased revenue growth by 0.2%.
The increase in reference laboratory diagnostic and consulting services revenue was due to higher global price realization and higher testing volumes, primarily in the U.S. and, to a lesser extent, Asia Pacific and Europe. The change in foreign currency exchange rates decreased revenue growth by 0.1%.
The increase in CAG Diagnostics services and accessories revenue was primarily a result of the 10% growth in our active installed base of premium instruments. The change in foreign currency exchange rates decreased revenue growth by 0.4%.
CAG Diagnostics Capital – Instrument Revenue. The decrease in instrument revenue was primarily due to program effects on pricing, largely offset by higher premium instrument placements. The change in foreign currency exchange rates decreased revenue growth by 0.4%.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to higher realized prices and higher recurring revenue from subscription and support revenue from an expanded SaaS installed base. The decrease in our systems and hardware revenue was due to lower hardware sales associated with new software
43
placements, which are primarily cloud-based, and lower accessories sales. The change in foreign currency exchange rateswas not significant to revenue growth. Acquisitions increased revenue growth by 4.4%.
The following table presents the CAG segment results of operations:
For the Nine Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
2,703,573
$
2,531,091
$
172,482
6.8
%
Cost of revenue
1,043,805
1,007,334
36,471
3.6
%
Gross profit
1,659,768
61.4
%
1,523,757
60.2
%
136,011
8.9
%
Operating expenses:
Sales and marketing
399,186
14.8
%
387,695
15.3
%
11,491
3.0
%
General and administrative
313,442
11.6
%
219,758
8.7
%
93,684
42.6
%
Research and development
148,812
5.5
%
125,687
5.0
%
23,125
18.4
%
Total operating expenses
861,440
31.9
%
733,140
29.0
%
128,300
17.5
%
Income from operations
$
798,328
29.5
%
$
790,617
31.2
%
$
7,711
1.0
%
Gross Profit. Gross profit increased due to higher revenue and a 120 basis point increase in the gross profit margin. The increase in the gross profit margin reflected favorable business mix, lower instrument costs, recurring software and services gross margin gains, and the benefit from net price realization, offsetting inflationary cost impacts. The change in foreign currency exchange rates on the gross profit margin was not significant.
Operating Expenses. Sales and marketing expense increased primarily due to personnel-related, meeting, and travel costs. General and administrative expense increased primarily due to a $61.5 million expense related to an ongoing litigation matter, the comparison to the prior year benefit of a $16.0 million customer contract resolution gain, and higher information technology and outside services, as well as higher acquisition-related costs. Research and development expense increased primarily due to project costs. The change in foreign currency exchange rates was not significant to operating expense growth.
44
Water
The following table presents the Water segment results of operations:
For the Nine Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
139,959
$
126,362
$
13,597
10.8
%
Cost of revenue
42,633
37,741
4,892
13.0
%
Gross profit
97,326
69.5
%
88,621
70.1
%
8,705
9.8
%
Operating expenses:
Sales and marketing
17,423
12.4
%
15,814
12.5
%
1,609
10.2
%
General and administrative
12,534
9.0
%
12,054
9.5
%
480
4.0
%
Research and development
3,827
2.7
%
3,634
2.9
%
193
5.3
%
Total operating expenses
33,784
24.1
%
31,502
24.9
%
2,282
7.2
%
Income from operations
$
63,542
45.4
%
$
57,119
45.2
%
$
6,423
11.2
%
Revenue. The increase in revenue was due to higher realized prices and higher volumes. The increase in volumes in the U.S. and Europe was primarily from our Colilert test products and related accessories used in coliform and E. coli testing. The change in foreign currency exchange rates decreased revenue growth by 0.4%.
Gross Profit. Gross profit increased due to higher revenue, partially offset by a 60 basis point decrease in the gross profit margin. The decrease in the gross profit margin was primarily due to higher product costs, partially offset by higher realized prices. The overall change in foreign currency exchange rates decreased the gross profit margin by approximately 10 basis points, including the impact of lower hedge gains during the current period compared to the prior period.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs and marketing initiatives. General and administrative expense increased primarily due to higher personnel-related costs and an increase in bad debt expense. Research and development expense increased primarily due to higher outside service costs. The change in foreign currency exchange rates was not significant to operating expense growth.
45
Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Nine Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
87,503
$
88,866
$
(1,363)
(1.5
%)
Cost of revenue
42,084
41,891
193
0.5
%
Gross profit
45,419
51.9
%
46,975
52.9
%
(1,556)
(3.3
%)
Operating expenses:
Sales and marketing
20,937
23.9
%
19,153
21.6
%
1,784
9.3
%
General and administrative
12,420
14.2
%
13,075
14.7
%
(655)
(5.0
%)
Research and development
8,808
10.1
%
9,083
10.2
%
(275)
(3.0
%)
Total operating expenses
42,165
48.2
%
41,311
46.5
%
854
2.1
%
Income from operations
$
3,254
3.7
%
$
5,664
6.4
%
$
(2,410)
(42.5
%)
Revenue. The decrease in revenue was primarily due to lower testing levels in Asia Pacific, partially offset by higher realized prices and volumes growth in the U.S. and Europe. The change in foreign currency exchange rates decreased revenue growth by 0.6%.
Gross Profit. The decrease in gross profit was primarily due to a 100 basis point decrease in the gross profit margin and lower revenue. The decrease in the gross profit margin was primarily due to higher product and distribution costs and unfavorable business mix, partially offset by higher realized prices. The overall change in foreign currency exchange ratesincreased the gross profit margin by approximately 20 basis points, including the impact of hedge gains during the current period compared to hedge losses during the prior period.
Operating Expenses. Sales and marketing expense increased primarily due to higher personnel-related costs. General and administrative expense decreased primarily due to lower bad debt expense and personnel-related costs. Research and development expense decreased primarily due to lower project costs. The change in foreign currency exchange rates was not significant to operating expense growth.
46
Other
The following table presents the Other results of operations:
For the Nine Months Ended September 30,
Change
Results of Operations
(dollars in thousands)
2024
Percent of Revenue
2023
Percent of Revenue
Amount
Percentage
Revenues
$
12,181
$
13,033
$
(852)
(6.5
%)
Cost of revenue
6,427
8,583
(2,156)
(25.1
%)
Gross profit
5,754
47.2
%
4,450
34.1
%
1,304
29.3
%
Operating expenses:
Sales and marketing
853
7.0
%
1,372
10.5
%
(519)
(37.8
%)
General and administrative
2,758
22.6
%
3,917
30.1
%
(1,159)
(29.6
%)
Research and development
616
5.1
%
735
5.6
%
(119)
(16.2
%)
Total operating expenses
4,227
34.7
%
6,024
46.2
%
(1,797)
(29.8
%)
Income from operations
$
1,527
12.5
%
$
(1,574)
(12.1
%)
$
3,101
(197.0
%)
Revenue.The decrease in revenue was primarily due to lower volumes of our OPTI Medical instruments and consumables, partially offset by higher realized prices.
Gross Profit. Gross profit increased due to a 1,310 basis point increase in the gross profit margin, which offset the impact from lower revenue. The increase in the gross profit margin was largely due to higher realized prices. The change in foreign currency exchange rates did not have a significant impact on the gross profit margin.
Operating Expenses. Sales and marketing expense decreased due to lower compensation costs. General and administrative expense decreased primarily due to lower foreign exchange losses on settlements of foreign currency denominated transactions compared to the prior period. Foreign exchange gains and losses on settlements for all operating segments are reported within Other. Research and development expense decreased due to lower activities that were not attributable to our three primary business segments.
Non-Operating Items
Interest Expense and Income. Interest expense was $23.7 million for the nine months ended September 30, 2024, as compared to $32.3 million for the same period during the prior year. The decrease in interest expense was primarily due to lower average debt levels and, to a lesser extent, lower interest rates. Interest income was $10.5 million for the nine months ended September 30, 2024, compared to $2.0 million for the same period during the prior year. This increase in interest income is primarily due to the increase in money market investments, as compared to the same period during the prior year.
Provision for Income Taxes.Our effective income tax rate was 21.3% for the nine months ended September 30, 2024, compared to 20.8% for the nine months ended September 30, 2023. The increase in our effective tax rate was primarily due to lower tax benefits related to share-based compensation, partially offset by the tax impact of differences in geographical income mix.
47
Liquidity and Capital Resources
We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings, and amounts available under our Credit Facility. We generate cash primarily through the payments made by customers for our companion animal veterinary, livestock, poultry, dairy, and water products and services, consulting services, and other various systems and services. Our cash disbursements are primarily related to compensation and benefits for our employees, inventory and supplies, repurchases of our common stock, taxes, research and development, capital expenditures, rents, occupancy-related charges, interest expense, and business acquisitions. As of September 30, 2024, we had $308.6 million of cash and cash equivalents, compared to $453.9 million as of December 31, 2023. Working capital totaled $424.5 million as of September 30, 2024, compared to $543.7 million as of December 31, 2023. As of September 30, 2024, we had a remaining borrowing availability of $998.2 million under our $1.25 billion Credit Facility, with $250.0 million in outstanding borrowings under the Credit Facility. The general availability of funds under our Credit Facility is reduced by $1.8 million for outstanding letters of credit. We believe that, if necessary, we could obtain additional borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in the U.S. than is generated by our operations, for example, to fund significant discretionary activities, we could elect to raise capital in the U.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings.
We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and cash equivalents are generally available without restrictions to fund ordinary business operations outside the U.S.
The following table presents cash and cash equivalents held domestically and by our foreign subsidiaries:
Cash and cash equivalents
(dollars in thousands)
September 30, 2024
December 31, 2023
U.S.
$
181,689
$
324,434
Foreign
126,947
129,498
Total
$
308,636
$
453,932
Total cash and cash equivalents held in U.S. dollars by our foreign subsidiaries
$
7,241
$
13,170
Of the $308.6 million of cash and cash equivalents held as of September 30, 2024, approximately $136.1 million was held as bank deposits at a diversified group of institutions, primarily systemically important banks, and $172.5 million was held in a U.S. government money market fund. As of December 31, 2023, of the $453.9 million of cash and cash equivalents held, $163.1 million was held as bank deposits at a diversified group of institutions, primarily systemically important banks, and $290.8 million was held in a U.S. government money market fund. Cash and cash equivalents as of September 30, 2024, included approximately $1.0 million in cash denominated in non-U.S. currencies held in a country with currency control restrictions, which limit our ability to transfer funds outside of the country in which they are held without incurring costs.
48
The following table presents additional key information concerning working capital:
For the Three Months Ended
September 30, 2024
June 30, 2024
March 31, 2024
December 31, 2023
September 30, 2023
Days sales outstanding (1)
48.9
47.3
45.7
46.1
45.6
Inventory turns (2)
1.3
1.4
1.3
1.3
1.3
(1)Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.
(2)Inventory turns are calculated as the ratio of four times our inventory-related cost of revenue for the quarter, divided by the average inventory balances at the beginning and end of each quarter.
Sources and Uses of Cash
The following table presents cash provided (used):
For the Nine Months Ended September 30,
(dollars in thousands)
2024
2023
Change
Net cash provided by operating activities
$
666,976
$
656,659
$
10,317
Net cash used by investing activities
(167,219)
(94,819)
(72,400)
Net cash used by financing activities
(645,291)
(340,152)
(305,139)
Net effect of changes in exchange rates on cash
238
(2,538)
2,776
Net change in cash and cash equivalents
$
(145,296)
$
219,150
$
(364,446)
Operating Activities.Cash provided by operating activities during the nine months ended September 30, 2024, increased $10.3 million, compared to the same period during the prior year, primarily due to higher net income, partially offset by higher income tax and annual employee incentive program payments during the current period. The following table presents cash flow impacts from changes in operating assets and liabilities:
For the Nine Months Ended September 30,
(dollars in thousands)
2024
2023
Change
Accounts receivable
$
(56,087)
$
(54,557)
$
(1,530)
Inventories
(24,756)
(31,647)
6,891
Accounts payable
2,347
(6,799)
9,146
Deferred revenue
(735)
(3,347)
2,612
Other assets and liabilities
(45,272)
(17,902)
(27,370)
Total change in cash due to changes in operating assets and liabilities
$
(124,503)
$
(114,252)
$
(10,251)
Cash provided by changes in operating assets and liabilities during the nine months ended September 30, 2024, increased $10.3 million, compared to the same period during the prior year. The $27.4 million increase in cash used for other assets and liabilities was primarily due to higher annual cash taxes paid, compared to the same period in the prior year, higher annual employee incentive program payments during the current period, a net increase in consideration paid to customers and a $10.0 million royalty prepayment in the current year. Uses of cash were partially offset by higher non-cash operating expenses recorded as accrued liabilities, including a $61.5 million accrual charge related to an ongoing litigation matter recorded in the second quarter of 2024, and by a comparative benefit from the use of cash during the prior year for a $15.0 million milestone payment to license intellectual property.
We have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally higher cash flows from operating activities for the remainder of the year driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned.
Investing Activities.Cash used by investing activities was $167.2 million during the nine months ended September 30, 2024, compared to $94.8 million for the same period during the prior year. The increase in cash used by investing activities was primarily due to the acquisition of a software business during the current year.
49
Our total capital expenditure outlook for 2024 is estimated to be approximately $160 million, which includes capital investments to support growth in manufacturing and operations facilities and in customer-facing software development.
Financing Activities.Cash used by financing activities was $645.3 million during the nine months ended September 30, 2024, compared to $340.2 million of cash used for the same period during the prior year. The increase in cash used was primarily due to $591.0 million of repurchases of our common stock during the current year, compared to $35.1 million of repurchases during the prior year, and due to the July 2024 repayment of our $75.0 million 2024 Series B Notes. This increase in cash used by financing was partially offset by no net borrowings or repayments under our Credit Facility during the current year, compared to repayments of $329.0 million under our Credit Facility during the prior year.
We believe that the repurchase of our common stock is a favorable means of returning value to our stockholders, and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing and deployment activities, as well as share price and prevailing interest rates. Refer to Note 12 to the unaudited condensed consolidated financial statements in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information about our share repurchases.
As of September 30, 2024, we had $250.0 million in outstanding borrowings under the Credit Facility. The obligations under our Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974 (“ERISA”), the failure to pay specified indebtedness, cross-acceleration to specified indebtedness, and a change of control default. The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, and certain restrictive agreements. The financial covenant is a consolidated leverage ratio test.
We anticipate paying off the aggregate principal amounts of our €88.9 million 2025 Series C Notes, which will become due and payable on June 18, 2025, with available cash on hand at time of payment.
Should we elect to prepay any of our senior notes, such aggregate prepayment will include the applicable make-whole amount(s), as defined within the applicable Senior Note Agreements. Additionally, in the event of a change in control of the Company or upon the disposition of certain assets of the Company, the proceeds of which are not reinvested (as defined in the Senior Note Agreements), we may be required to prepay all or a portion of the senior notes. The obligations under the senior notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreements, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under ERISA, the failure to pay specified indebtedness, cross-acceleration to specified indebtedness, and a change of control default.
Effect of Currency Translation on Cash. The net effect of changes in foreign currency exchange rates is related to changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries. These changes will fluctuate for each period presented as the value of the U.S. dollar relative to the value of foreign currencies changes. A currency’s value depends on many factors, including interest rates and the issuing governments’ debt levels and strength of economy.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities, except for letters of credit and third-party guarantees.
50
Financial Covenant. The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization, non-recurring transaction expenses incurred in connection with acquisitions, share-based compensation expense, and certain other non-cash losses and charges (“Adjusted EBITDA”), as defined in the Senior Note Agreement and Credit Facility, not to exceed 3.5-to-1. As of September 30, 2024, we were in compliance with such covenant. The following details our consolidated leverage ratio calculation:
(dollars in thousands)
Twelve Months Ended
Trailing 12 Months Adjusted EBITDA:
September 30, 2024
Net income attributable to stockholders
$
866,239
Interest expense
32,972
Provision for income taxes
226,873
Depreciation and amortization
125,967
Acquisition-related expense
276
Share-based compensation expense
61,260
Extraordinary and other non-recurring non-cash charges
Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio, and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Other Commitments, Contingencies and Guarantees
Significant commitments, contingencies, and guarantees as of September 30, 2024, are described in Note 16 to the unaudited condensed consolidated financial statements in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
During the third quarter of 2024, we remitted our final payment of $21.8 million for the deemed repatriation tax imposed by the U.S. Tax Cut and Jobs Act of 2017.
51
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting us, refer to the section under the heading “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our 2023 Annual Report. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our 2023 Annual Report, except for the impact of foreign exchange rates, as discussed below.
Foreign Currency Exchange Impacts. Approximately 22% and 21% of our consolidated revenue was derived from products manufactured in the U.S. and sold internationally in local currencies for the three and nine months ended September 30, 2024, respectively, as compared to approximately 21% for both the three and nine months ended September 30, 2023. Strengthening of the U.S. dollar exchange rate relative to other currencies has a negative impact on our revenues derived in currencies other than the U.S. dollar and on profits of products manufactured in the U.S. and sold internationally, and a weakening of the U.S. dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated costs and expenses and foreign currency denominated supply contracts partially offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. dollar denominated revenues.
Our foreign currency exchange impacts on operating results are comprised of three components: 1) local currency revenues and expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary.
The following table presents the estimated foreign currency exchange impact on our revenues, operating profit, and diluted earnings per share for the current period compared to the respective prior-year period:
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
(in thousands, except per share amounts)
2024
2023
2024
2023
Revenue increase (decrease)
$
643
$
9,044
$
(6,219)
$
(13,481)
Operating profit (decrease) increase, excluding hedge activity and exchange impacts on settlement of foreign currency denominated transactions
$
(810)
$
4,541
$
(4,448)
$
(8,522)
Hedge gains - current period
512
1,273
3,043
1,723
Exchange gains (losses) on settlements of foreign currency denominated transactions - current period
1,381
(1,396)
(553)
(2,071)
Operating profit increase (decrease) - current period
$
1,083
$
4,418
$
(1,958)
$
(8,870)
Hedge gains - prior period
(1,273)
(8,635)
(1,723)
(16,652)
Exchange losses on settlement of foreign currency denominated transactions - prior period
1,396
3,036
2,071
4,643
Operating profit increase (decrease) - compared to prior period
$
1,206
$
(1,181)
$
(1,610)
$
(20,879)
Diluted earnings per share increase (decrease) - compared to prior period
$
0.01
$
(0.01)
$
(0.01)
$
(0.19)
At our current foreign exchange rate assumptions, we anticipate year-over-year changes for the remainder of the year, compared to the respective prior-year period, will increase our revenues by approximately $0.5 million, and reduce operating profit and diluted earnings per share by approximately $1 million and $0.01 per share, respectively. These unfavorable currency impacts to our operating profit and diluted earnings per share include net year-over-year impacts of foreign currency hedging activity, which is expected to decrease our total operating profit by approximately $1 million and $0.01 per share for the remainder of the year ending December 31, 2024. The actual impact of changes in the value of the U.S. dollar against foreign currencies in which we transact may materially differ from our expectations described above. The above estimates assume that the value of the U.S. dollar will reflect the euro at $1.08, the British pound at $1.29, the Canadian dollar at $0.72, and the Australian dollar at $0.66; and the Japanese yen at ¥152, the Chinese renminbi at RMB 7.18, and the Brazilian real at R$5.66 relative to the U.S. dollar for the remainder of 2024.
52
Based on projected revenues and expenses for the remainder of 2024, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, we project a 1% strengthening of the U.S. dollar would reduce revenue by approximately $3 million and operating income by approximately $1 million, net of hedge positions.
Interest Rate Risk and Effects of Inflation. We entered into an interest rate swap to manage the effect of variable interest obligations on amounts borrowed under the terms of the Credit Facility. Beginning on March 31, 2023, the variable interest rate associated with $250.0 million of borrowings outstanding under the Credit Facility became effectively fixed at 3.9%, plus the applicable credit spread, through October 20, 2025. Borrowings outstanding under the Credit Facility at September 30, 2024, were $250.0 million. We have designated the interest rate swap as a cash flow hedge. For more information regarding our interest rate swap, refer to “Part I, Item 1. Financial Statements, Note 19. Hedging Instruments.”
During the three and nine months ended September 30, 2024, we experienced inflationary pressure on our operating costs, and we expect to continue to face higher costs for labor, commodities, energy, and transportation, as well as increased prices from suppliers during the remainder of 2024. We may not be able to offset these higher costs through productivity initiatives and price increases, which may materially and adversely affect our business, results of operations, and financial condition. Any price increases we may impose may lead to declines in sales volume or loss of business, if competitors do not similarly adjust their prices, or customers refuse to purchase at the higher prices.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures, as defined by the SEC in its Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2024, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our activities, we are at times subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such currently pending or threatened matters is not expected to have a material effect on our results of operations, financial condition, or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our results of operations, financial condition, or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I. Item 1A. Risk Factors” in our 2023 Annual Report, which could materially affect our business, financial condition, or future results. There have been no material changes from the risk factors previously disclosed in the 2023 Annual Report. The risks described in our 2023 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2024, we repurchased shares of common stock as described below:
Period
Total Number of Shares Purchased (a)
Average Price Paid per Share (3)
(b)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(c)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(d)
July 1 to July 31, 2024
163,600
$
484.39
163,600
1,992,245
August 1 to August 31, 2024
160,346
$
487.23
160,059
1,832,186
September 1 to September 30, 2024
135,382
$
500.75
135,200
1,696,986
Total
459,328
(2)
458,859
1,696,986
(1)As of December 31, 2023, our Board of Directors had approved the repurchase of up to 73 million shares of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase program. The share repurchase program was approved and announced on August 13, 1999, and the maximum number of shares that may be purchased under the share repurchase program has been increased by the Board of Directors on numerous occasions. There is no specified expiration date for this share repurchase program. There were no other repurchase programs outstanding during the three months ended September 30, 2024, and no share repurchase programs expired during the period. There were 458,859 share repurchases made during the three months ended September 30, 2024, in transactions made pursuant to our share repurchase program.
(2)During the three months ended September 30, 2024, we received 469 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the share repurchase program.
(3)Includes the nondeductible 1% excise tax for shares repurchased in the open market.
The total shares repurchased include shares surrendered for employee statutory tax withholding. Refer to Note 12 to the unaudited condensed consolidated financial statements in “Part I. Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information about our share repurchases.
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Item 5. Other Information
Rule 10b5-1 Trading Plan Elections
On August 29, 2024, Jonathan W. Ayers, one of our independent directors, entered into a Rule 10b5-1 trading arrangement (the “plan’”) intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act. The plan provides for the sale during the duration of the plan and subject to certain price limits, of up to 95,540 shares of common stock underlying a non-qualified stock option equity award granted to Mr. Ayers on February 14, 2015. The plan will expire on February 11, 2025, subject to early termination in accordance with the terms of the plan.
Except for the plan described above, during the three months ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified, or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as such terms are defined in Item 408(a) of Regulation S-K of the Securities Act of 1933).
The following financial and related information from IDEXX Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline eXtensible Business Reportable Language (iXBRL) includes: (i) the Condensed Consolidated Balance Sheet; (ii) the Condensed Consolidated Statement of Income; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity; (v) the Condensed Consolidated Statement of Cash Flows; and, (vi) Notes to Consolidated Financial Statements.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL, and contained in Exhibit 101.
**
Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
IDEXX LABORATORIES, INC.
/s/ Brian P. McKeon
Date: October 31, 2024
Brian P. McKeon
Executive Vice President, Chief Financial Officer and Treasurer
