IDEXX LABORATORIES, INC.
2017 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
⌧
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 0-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation
or organization)
ONE IDEXX DRIVE, WESTBROOK, MAINE
(Address of principal executive offices)
01-0393723
(I.R.S. Employer Identification No.)
04092
(ZIP Code)
Registrant’s telephone number, including area code: 207-556-0300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.10 par value per share
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ⌧ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ⌧ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
⌧
(Do not check if a smaller reporting company) Smaller reporting company
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ⌧
Based on the closing sale price on June 30, 2017 of the registrant’s Common Stock, the last business day of the registrant’s most recently completed
second fiscal quarter, as reported by the NASDAQ Global Select Market, the aggregate market value of the voting stock held by non-affiliates of the
registrant was $ 14,011,555,111. For these purposes, the registrant considers its directors and executive officers to be its only affiliates.
The number of shares outstanding of the registrant’s Common Stock was 87,122,794 on February 6, 2018.
Part III—Specifically identified portions of the Company’s definitive Proxy Statement to be filed in connection with the Company’s 2018 annual meeting
of stockholders (the “2018 Annual Meeting”), to be held on May 9, 2018, are incorporated herein by reference.
DOCUMENTS INCORPORATED BY REFERENCE
Term/Abbreviation
2015 Amended Agreement
2021 Notes
2022 Notes
2023 Notes
2024 Notes
2025 Series B Notes
2025 Series C Notes
2026 Notes
2027 Notes
Adjusted operating income
AOAC RI
AOCI
APHIS
ASU 2014-09
ASU 2016-02
ASU 2016-09
ASU 2017-01
ASU 2017-09
BSE
CAG
cGMP
Credit Facility
EMA
EPA
EPS
EU
FASB
FDA
FDC Act
FeLV
FIV
FTC
IVLS
Kits and consumables
LPD
MEA
MetLife Agreement
Moss
NASDAQ Index
NCIMS
OCI
OPTI Medical
GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS
Definition
Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement executed in June
2015
$50 million of 3.32% Series A Senior Notes due July 21, 2021
$75 million of 3.25% Series A Senior Notes due February 12, 2022
$75 million of 3.94% Series A Senior Notes due December 11, 2023
$75 million of 3.76% Series B Senior Notes due July 21, 2024
$75 million of 4.04% Series B Senior Notes due December 11, 2025
€88.9 million of 1.785% Series C Senior Notes due June 18, 2025
$75 million of unsecured 3.72% Senior notes due September 4, 2026
$75 million of 3.72% Series B Senior Notes due February 12, 2027
A non-GAAP financial measure that represents total Company operating income adjusted for the 2015
software impairment charge. Adjusted operating income should be considered in addition to, and not as
a replacement for or as a superior measure to, operating income reported in accordance with U.S.
GAAP. Management believes that reporting adjusted operating income provides useful information to
investors by facilitating easier comparisons of our operating income performance with prior and future
periods and to the performance of our peers.
Association of Analytical Communities Research Institute
Accumulated other comprehensive income or loss
Animal and Plant Health Inspector Service
Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606),
also referred to as the “New Revenue Standard”
ASU 2016-02, Leases (Topic 842)
ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting
ASU 2017-01, Business Combinations (Topic 805): Clarify the Definition of a Business
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
Bovine spongiform encephalopathy
Companion Animal Group, a reporting segment that provides veterinarians diagnostic products and
services and information management solutions that enhance the health and well-being of pets
The FDA’s current Good Manufacturing Practice regulations
Our $850 million five-year unsecured revolving credit facility under an amended and restated credit
agreement that was executed in December 2015
Extended maintenance agreements
U.S. Environmental Protection Agency
Earnings per share, if not specifically stated, EPS refers to earnings per share on a diluted basis
European Union
U.S. Financial Accounting Standards Board
U.S. Food and Drug Administration
Food, Drug and Cosmetics Act
Feline leukemia virus
Feline immunodeficiency virus, similar to the virus that leads to AIDS in humans
U.S. Federal Trade Commission
IDEXX VetLab Station, connects and integrates the diagnostic information from all the IDEXX VetLab
analyzers and thus provides reference laboratory information management system capability
Rapid assay kits and IDEXX VetLab consumables
Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for
livestock and poultry health and to ensure the quality and safety of milk and food and improve bovine
reproductive efficiency
Multiple element arrangements, contracts with customers that include multiple deliverables
Multi-Currency Note Purchase and Private Shelf Agreement, entered into in December 2014
Moss Inc., a supplier of certain components used in our SNAP products and certain livestock and
poultry testing kits
The Total Return Index for the NASDAQ Stock Market (U.S. Companies) prepared by the Center for
Research in Security Prices
National Conference of Interstate Milk Shipments
Other comprehensive income or loss
OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., located in
Roswell, Georgia. This business manufactures and supplies blood gas analyzers and consumables
worldwide for the human point-of-care medical diagnostics market. The Roswell facility also
manufactures electrolytes slides (instrument consumables) to run Catalyst One® and Catalyst Dx®,
chemistry analyzers, and blood gas analyzers and consumables for the veterinary market. Also referred
to as OPTI
2
Organic revenue growth
Ortho
PACS
R&D
Reagent rentals
S&P
S&P 500 Health Care Index
S&P 500 Index
SaaS
SDMA
SEC
Senior Note Agreement
T4
Tax Act
TPE
U.S. GAAP
USDA
VSOE
Water
A non-GAAP financial measure and represents the percentage change in revenue, as compared to the
same period for the prior year, net of the effect of changes in foreign currency exchange rates,
acquisitions and divestitures. Organic revenue growth should be considered in addition to, and not as a
replacement for or as a superior measure to, revenues 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.
Ortho Clinical Diagnostics, Inc., a supplier of dry slide consumables used in our Catalyst Dx
Chemistry Analyzer, Catalyst One Chemistry Analyzer and the VetTest Chemistry Analyzer
Picture archiving and communication software, our software solution for accessing, storing and sharing
diagnostic images
Research and Development
Refers to instruments being placed at customer sites at little or no cost in exchange for a long-term
customer commitment to purchase instrument consumables.
Standard & Poor’s
The index for the S&P 500 Health Care (U.S. companies) measures the performance of companies that
are classified as members in the Global Industry Classification Standard of health care services sub-
industry
The S&P 500 Index is a U.S. stock market index based on the market capitalization of 500 large
companies having common stock listed on the New York Stock Exchange or NASDAQ, including
IDEXX
Software-as-a-service
Symmetrical dimethyl arginine, a biomarker that detects kidney disease
U.S. Securities and Exchange Commission
Private placement senior notes having an aggregate principal amount of approximately $600 million,
referred to as senior notes
Thyroxine, a hormone produced by the thyroid gland, tested to indicate thyroid health
The Tax Cuts and Jobs Act enacted on December 22, 2017, which has significant changes to the U.S.
corporate tax system
Third-party evidence, relevant in determining revenue recognition for multiple element arrangement
Accounting principles generally accepted in the United States of America
United States Department of Agriculture
Vendor-specific objective evidence, relevant in determining revenue recognition for multiple element
arrangements
Water, a reporting segment that provides water microbiology testing products around the world
3
IDEXX LABORATORIES, INC.
Annual Report on Form 10-K
Table of Contents
Item No.
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosure about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Item 16
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART IV
Financial Statements and Supplementary Data – Index to Consolidated Financial Statements
Exhibit Index
Signatures
Page No.
6
22
33
34
34
34
35
38
39
82
83
83
84
85
85
85
86
86
86
86
86
F-1
4
The terms “IDEXX,” “Company,” “registrant,” “we,” “us,” and “our” included in this Annual Report on
Form 10-K mean IDEXX Laboratories, Inc. and all subsidiaries that are consolidated under U.S. GAAP.
We have included certain terms and abbreviations used throughout this Annual Report on Form 10-K in the
"Glossary of Terms and Selected Abbreviations.”
Our name, logo and the following terms used in this Annual Report on Form 10-K are either registered
trademarks or trademarks of IDEXX Laboratories, Inc. in the United States and/or other countries: 4Dx®, Animana®
Veterinary Software, Catalyst Dx®, Catalyst One®, Coag Dx™, Colilert®, Colisure®, Cornerstone®, DVMAX®,
Enterolert®, Feline Triple®, Filta-Max®, Filta-Max xpress®, IDEXX I-Vision CR®, IDEXX I-Vision DR®, IDEXX I-
Vision Mobile™, IDEXX ImageBank™ , IDEXX Neo®, IDEXX-PACS™, IDEXX Petly® Plans, IDEXX SDMA®,
IDEXX VetLab®IDEXX VPM™, LaserCyte®, LaserCyte® Dx, OPTI®, OPTI LION™, PetChek®, PetDetect®, Pet
Health Network®, Practice Profile™, ProCyte Dx®Pseudalert®, Quanti-Tray®, SediVue Dx®, SimPlate®, IDEXX
SmartService™, SNAP®, SNAPduo®, SNAP Pro®, SNAP® cPL™, SNAP® fPL™, SNAPshot Dx®, IDEXX
VetAutoread™VetConnect®,IDEXXVetLab® UA™, VetLINK®, VetLyte®, VetStat®, VetTest® and VetVault®.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K for the year ended December 31, 2017, 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 future revenue growth rates, future tax
benefits; business trends, earnings and other measures of financial performance; the effect of economic downturns
on our business performance; projected impact of foreign currency exchange rates; demand for our products;
realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of
indebtedness and capital spending; interest expense; warranty expense; share-based compensation expense; the
adoption and projected impact of new accounting standards; future commercial efforts; future product launches; and
competition. 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 as more fully described under the
heading “Part I, Item 1A. Risk Factors” in this Annual Report on Form 10-K. Any forward-looking statements
represent our estimates only as of the day this Annual Report on Form 10-K was first filed with the Securities and
Exchange Commission (“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 risks 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.
5
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
IDEXX was incorporated in Delaware in 1983. We develop, manufacture, and distribute products and
provide services primarily for the companion animal veterinary, livestock and poultry, dairy and water testing
markets. We also sell a line of portable electrolytes and blood gas analyzers for the human point-of-care medical
diagnostics market. 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;
Biological materials testing, 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 used in the human point-of-care medical
diagnostics market.
Our purpose guides our strategy: to be a great company that creates exceptional long-term value for our
customers, employees, and shareholders by enhancing the health and well-being of pets, people, and livestock.
DESCRIPTION OF BUSINESS BY SEGMENT
We operate primarily through three business segments: diagnostic and information technology-based
products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”); water
quality products (“Water”); and diagnostic products and services for livestock and poultry health and to ensure the
quality and safety of milk and food, and improve bovine reproductive efficiency, which we refer to as Livestock,
Poultry and Dairy (“LPD”). Our Other operating segment combines and presents products for the human point-of-
care medical diagnostics market (“OPTI Medical”) with our pharmaceutical product line and our out-licensing
arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
The performance of our business is particularly subject to various risks that are associated with doing
business internationally. For the year ended December 31, 2017, sales of products and services to customers outside
the U.S. accounted for approximately 39 percent of our overall revenue. See “Part I, Item 1A. Risk Factors”, “Part
II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 to
the consolidated financial statements for the year ended December 31, 2017, included in this Annual Report on
Form 10-K for more information about our segments and revenue from customers outside of the U.S.
6
We believe that the breadth of our full diagnostic solution, including novel products and services developed
and made available only by IDEXX, as well as the seamless software integration of our offering, comprise a unique
competitive advantage, providing veterinarians with the tools and services to offer advanced veterinary medical
care. We believe that with the use of our products and services, veterinary practices significantly improve the quality
of veterinary care provided to their patients, increase staff efficiencies, and effectively communicate the value of this
medical care to the pet owner. We believe that these capabilities, enabled by the use of IDEXX products and
services, improve the financial health of the veterinary practice.
CAG Diagnostics
We provide diagnostic capabilities that meet veterinarians’ diverse needs through a variety of modalities,
including in-clinic diagnostic solutions and outside reference laboratory services. Regardless of modality utilized,
veterinarians are provided with clinically relevant data which is integrated within our information management
technologies. The result is a comprehensive view of patient diagnostic information that is easily accessible by both
the veterinarian and pet owner.
7
Integrated Diagnostic Information Management
VetConnect PLUS is a cloud-based technology that enables veterinarians to access and analyze patients’
data from all of IDEXX’s diagnostic modalities. These integrated diagnostic results provide the veterinarian with a
visualization of patient-specific testing results, allowing the veterinarian to easily see and trend diagnostic results,
enabling greater medical insight and enhanced decision making. In addition, VetConnect PLUS provides instant
mobile or browser-based access to results, which can be printed or emailed to pet owners and other veterinarians. In
this way, VetConnect PLUS can aid veterinarians and practice staff in engaging the pet owner in the patient’s care,
which can support greater compliance with medical recommendations or preventive care protocols. Customers have
activated VetConnect PLUS in over 80 countries.
In-Clinic Diagnostic Solutions
Our in-clinic diagnostic solutions are comprised of our IDEXX VetLab suite of in-clinic chemistry,
hematology, immunoassay, urinalysis, and coagulation analyzers, associated proprietary consumable products that
provide real-time reference lab quality diagnostic results and a broad range of single-use, handheld IDEXX SNAP
rapid assay test kits that provide quick, accurate, and convenient point-of-care diagnostic test results for a variety of
companion animal diseases and health conditions.
The IDEXX VetLab suite includes several instrument systems, as well as associated proprietary
consumable products, all of which are described below. Additionally, we offer extended maintenance agreements in
connection with the sale of our instruments.
Blood and Urine Chemistry. We sell three chemistry analyzers, the Catalyst One Chemistry
analyzer, the Catalyst Dx Chemistry analyzer, and the VetTest chemistry analyzer, that are used by
veterinarians to measure levels of certain enzymes and other substances in blood or urine for monitoring
health status and assisting in diagnosing physiologic conditions. These three instruments use consumables
manufactured for IDEXX by Ortho-Clinical Diagnostics, Inc. (“Ortho”) based on Ortho’s dry slide
technology. In addition, the Catalyst analyzers also use dry slide electrolyte consumables manufactured by
OPTI Medical Systems, Inc. (“OPTI Medical”), one of our wholly-owned subsidiaries, and other slides also
manufactured by IDEXX. Blood tests commonly run on these analyzers include glucose, alkaline
phosphatase, ALT (alanine aminotransferase), albumin, calcium, creatinine, blood urea nitrogen, total
protein, and many others. Tests are sold individually and in prepackaged panels. All three analyzers also
run a urine test called urine protein:creatinine ratio, which assists in the detection of renal disease.
The Catalyst analyzers provide significantly improved throughput, ease of use and test menu
relative to the VetTest analyzer (our original chemistry analyzer), including the ability to run electrolytes,
phenobarbital, fructosamine and total thyroxine (“T4”). Key ease-of-use features include the ability to run a
whole blood sample using an on-board centrifuge, the ability to run pre-packaged, multi-slide clips in
addition to single chemistry slides and an automated metering system. These analyzers also enable
automated dilutions, which is an ease-of-use feature both for certain blood chemistries and the test for urine
protein:creatinine ratio. The Catalyst Dx analyzer allows a veterinarian to run multiple patient samples
simultaneously and both the Catalyst Dx and Catalyst One run different sample types including whole
blood, plasma, serum, and urine. In addition, the Catalyst Dx and Catalyst One analyzers run a test to
measure phenobarbital levels in blood, allowing veterinarians to adjust anticonvulsant medication more
quickly and efficiently. Our fructosamine test helps veterinarians to diagnose and manage canine and feline
diabetes mellitus, helping to assess insulin treatments, and adjust insulin dosages. We launched our total T4
test globally for use on the Catalyst One analyzer during the first quarter of 2015 and for use on the
Catalyst Dx analyzer early in the third quarter of 2015. T4 testing is essential to assessing and managing
thyroid function and is an accepted standard for baseline testing for both sick pets and preventive care in
senior pets.
The Catalyst One analyzer, launched in November 2014, is engineered to deliver the same
laboratory-quality results and real-time work flow as the Catalyst Dx analyzer. The Catalyst One analyzer
currently offers all the same tests as the Catalyst Dx, plus an expanded menu of 30 tests, including tests for
thyroid disease, kidney disease, diabetes, and therapeutic drug monitoring.
8
In January 2018, we launched the Catalyst SDMA Test in North America, which allows our
customers to use the Catalyst One and Catalyst Dx to screen for SDMA. We expect to launch our Catalyst
SDMA Test outside of North America in 2018 as well.
We also have two other chemistry analyzers, the VetLyte Electrolyte analyzer and the VetStat
Electrolyte and Blood Gas analyzer. The VetStat analyzer runs single-use disposable cassettes that are
manufactured by OPTI Medical.
Sales of consumables to customers who use our chemistry analyzers provide the majority of our
instrument consumables revenues from our installed base of IDEXX VetLab instruments.
Hematology. We sell four hematology analyzers that assess the cellular components of blood,
including red blood cells, white blood cells and platelets (also called a complete blood count). These
analyzers include the ProCyte Dx hematology analyzer, the first and only in-house analyzer to combine
laser-flow cytometry, optical fluorescence, and laminar-flow impedance in its analysis; the original
LaserCyte hematology analyzer and the latest generation LaserCyte Dx hematology analyzer, launched in
2013, which both use laser-flow cytometry technology in their analysis; and the IDEXX VetAutoread
hematology analyzer, our original hematology analyzer. In addition, the ProCyte Dx hematology analyzer,
the LaserCyte Dx hematology analyzer, and the LaserCyte hematology analyzer each have the ability to
analyze the components of certain body fluids. We also sell the Coag Dx analyzer, which permits the
detection and diagnosis of blood clotting disorders.
The ProCyte Dx analyzer, our premier hematology analyzer, provides significantly improved
throughput and accuracy and more complete medical information relative to the LaserCyte, LaserCyte Dx
and VetAutoread hematology analyzers. The ProCyte Dx analyzer provides up to 26 different blood
parameters, including the ability to detect band neutrophils and nucleated red blood cells, for a more
complete picture of a patient’s health. The ProCyte Dx is validated for many animal species (canine, feline,
equine, bovine, ferret, rabbit, gerbil, pig, guinea pig, mini pig, llama, alpaca, camel, sheep, goat, dolphin,
and hamster) with research and development efforts focused on validating results for additional species.
Immunoassay Testing Instruments. During the first quarter of 2014, we launched the SNAP Pro
Mobile Device, which automatically activates a SNAP test, properly times the run, and captures an image
of the result. This device improves medical care by allowing veterinarians to share the test results on the
SNAP Pro Mobile screen, or via VetConnect PLUS. In addition, the SNAP Pro Mobile Device improves
staff efficiency and ensures that all SNAP test runs are captured and entered into the patient record for
customer billing. In January 2017, we launched ProRead for the SNAP Pro Mobile Device. ProRead is a
software upgrade that enables the SNAP Pro Mobile Device to interpret the test results.
With multiple-patient testing functionality, the SNAPshot Dx analyzer provides quantitative
measurements of total T4, cortisol and bile acids to assist in the evaluation of thyroid, adrenal and liver
function, respectively. The SNAPshot Dx analyzer also reads, interprets, and records the results of many
IDEXX rapid assay SNAP tests, including our canine SNAP 4Dx Plus test, feline SNAP FIV/FeLV Combo
test, canine SNAP cPL test, feline SNAP fPL test, SNAP Feline Triple test and canine SNAP Heartworm
RT test.
Urinalysis. In April 2016, we launched the SediVue Dx urine sediment analyzer in North America.
In the fourth quarter of 2016 we launched Sedivue Dx in the UK and Australia. During the first half of
2017, we continued our international launch of SediVue Dx to include other parts of Europe and New
Zealand. We plan to continue our international deployment in 2018 to include Switzerland, Poland, and
Japan. SediVue Dx is the first and only veterinary in-clinic urine sediment analyzer. It is designed to
provide automated real-time results in a fraction of the time of manual microscope analysis. SediVue Dx
brings automation, speed and consistency to urinalysis, a traditionally laborious and variable process. Its
leading-edge technology allows veterinary staff to perform a complete urinalysis in approximately 3
minutes. SediVue Dx uses proprietary image processing algorithms similar to facial recognition technology
to identify clinically relevant particles found in urine and to capture high-contrast digital images that
become part of the permanent patient record. The IDEXX VetLab UA analyzer provides rapid, automated
capture of semi-quantitative chemical urinalysis and is validated specifically for veterinary use.
9
IDEXX VetLab Station. The IDEXX VetLab Station (“IVLS”) connects and integrates the
diagnostic information from all the IDEXX VetLab analyzers and thus provides reference laboratory
information management system capability. IVLS securely connects to the internet, and in this way,
enables IDEXX to perform, through its SmartService Solutions wireless services, remote instrument
service and software updates to IVLS and certain connected instruments. IVLS also sends all results
created on connected instruments instantly to VetConnect PLUS. We sell IVLS as an integral component of
the Catalyst One, Catalyst Dx, LaserCyte Dx and ProCyte Dx analyzers, SNAP Pro Mobile Device,
SNAPshot Dx analyzer and also as a standalone hardware platform. The IVLS includes a touch screen user
interface to simplify laboratory work flow, connect with a practice management system and send
information to run the individual analyzers. IVLS also generates one integrated patient report incorporating
all of the lab work generated by the IDEXX VetLab suite, stores, retrieves and analyzes historical patient
diagnostics data, including SNAP test results, and sends and receives information from practice
management systems, including the IDEXX Cornerstone system, as well as a wide variety of third-party
systems.
The SNAP rapid assays are single-use, handheld test kits that can work without the use of instrumentation,
although many kits may also be read and recorded automatically by the SNAPshot Dx analyzer or activated and
captured automatically by the SNAP Pro Mobile Device and interpreted using ProRead, as discussed above. The
principal SNAP rapid assay tests are as follows:
Single-Use Canine Tests:
SNAP 4Dx Plus, which tests for the six vector-borne diseases; Lyme disease, Ehrlichia canis,
Ehrlichia ewingii, Anaplasma phagocytophilum and Anaplasma platys, and canine heartworm;
SNAP Heartworm RT, which tests for heartworm;
SNAP Parvo, which tests for parvovirus, a virus causing life-threatening damage to the immune system
and intestinal tract;
SNAP cPL, which tests for canine pancreatitis;
SNAP Giardia, which is a fecal test for soluble Giardia antigens, a common cause of waterborne
infection; and
SNAP Lepto, which tests for leptospirosis, a life-threatening bacterial infection spread through contact
with water or soil that has been contaminated by the urine of infected animals.
Sales of canine vector-borne disease tests, including SNAP 4Dx Plus and SNAP Heartworm RT, are greater
in the first half of our fiscal year due to seasonality of disease testing in the veterinary practice in the
Northern Hemisphere.
Single-Use Feline Tests:
SNAP Feline Triple, which tests for feline immunodeficiency virus (“FIV”) (which is similar to the
virus that leads to AIDS in humans), feline leukemia virus (“FeLV”) and feline heartworm;
SNAP FIV/FeLV Combo Test, which tests for FIV and FeLV;
SNAP fPL, which tests for feline pancreatitis;
SNAP Giardia, which is a fecal test for soluble Giardia antigens; and
SNAP Feline proBNP, which uses a cardiac biomarker (NT proBNP) to test for stretch and stress on
the heart.
10
Outside Reference Laboratory Diagnostic and Consulting Services
We offer commercial reference laboratory diagnostic and consulting services to veterinarians worldwide,
including customers in the U.S., Europe, Canada, Australia, Japan, New Zealand, South Africa, South Korea, and
Brazil. We have reference laboratories in Memphis, Tennessee and Leipzig, Germany that are strategically located
near large logistics hubs of major air cargo carriers. Customers use our services by submitting samples by courier or
overnight delivery to one of our facilities. Most test results have same-day or next-day turnaround times. Our
reference laboratories offer a large selection of tests and diagnostic panels to detect a number of disease states and
other conditions in animals, including all tests that can be run in-clinic at the veterinary practice with our
instruments or rapid assays. This menu of tests also includes a number of specialized and proprietary tests that we
have developed that allow practitioners to diagnose increasingly relevant diseases and conditions in dogs and cats,
including parasites, heart disease, allergies, pancreatitis, diabetes, and infectious diseases. Canine vector-borne
disease testing volumes are greater in the first half of our fiscal year due to seasonality of disease testing in the
veterinary practice in the Northern Hemisphere.
In the third quarter of 2015, we launched the IDEXX SDMA test in North America, a new proprietary
kidney test which detects the onset of canine and feline kidney disease months or years earlier than traditional
methods. Upon its introduction in North America, the IDEXX SDMA test was included in every chemistry panel
submitted by our customers at no incremental charge. During the first quarter of 2016, we launched the IDEXX
SDMA test in all of the major European countries and Australia, followed by a full international launch of the
IDEXX SDMA test during the remainder of 2016.
In the second quarter of 2015, we launched Hookworm and Roundworm antigen tests to all fecal panels
that already include the Whipworm antigen test. These new intestinal parasite panels detect the presence of intestinal
worms left undiagnosed by current methods, finding them earlier in the infection cycle and therefore enabling earlier
disease diagnosis and treatment intervention.
Additionally, we provide specialized veterinary consultation, telemedicine, and advisory services, including
radiology, cardiology, internal medicine, and ultrasound consulting. These services enable veterinarians to obtain
readings and interpretations of test results transmitted by telephone and over the internet.
Our diagnostic laboratory business also provides health monitoring and diagnostic testing services to
bioresearch customers in North America, Europe, and Asia.
Veterinary Software, Services and Diagnostic Imaging Systems
Veterinary Software and Services. We develop, market and sell practice management systems, including
hardware, software and services that run key functions of veterinary clinics, including managing patient electronic
health records, scheduling (including for boarding and grooming), client communication, billing, and inventory
management. Our principal practice management systems are Cornerstone, DVMAX, Animana and IDEXX Neo.
IDEXX Neo, which we launched in the United States during the third quarter of 2015, and IDEXX Animana are
cloud-based practice management systems available in the U.S., Europe, and Australia. We also support several
other practice management systems installed with our customers, including Better Choice, VPM, VetLINK and
BeeFree. Our practice management services include Payment Solutions, Data Backup & Recovery and PetDetect
boarding collars.
In addition, we offer client communication and preventive care plan management services designed to
strengthen the relationship between the veterinarian and the pet owner. We commercially launched Pet Health
Network Pro in 2013, which is a subscription-based service that permits veterinarians to provide online
communication and education to pet owners before, during and after each patient visit, thus strengthening the loyalty
between a practice and its clients. Further, veterinarians can share VetConnect PLUS testing results directly with pet
owners via Pet Health Network Pro. We also offer Pet Health Network 3D, an educational subscription-based
service that replaces cumbersome plastic anatomy models with engaging, three-dimension anatomical animations on
a desktop or mobile device. In September 2014, we acquired Petly Plans, a cloud-based software solution for
veterinary practices to customize, manage and monitor a range of monthly payment preventive care plans for their
pet owner clients. Petly Plans complements the Pet Health Network suite of client marketing services by making it
easier for practices to increase access to the best care and offer plans that spread the cost of that care, including
11
examinations, vaccines, and diagnostics, over the course of the year. Certain of our services are compatible with
non-IDEXX practice management systems.
With our acquisition of rVetLink in June 2017, we now also offer a comprehensive referral management
solution for specialty care hospitals that streamlines the referral process between primary care and specialty care
veterinarians. General practice veterinarians occasionally refer patients to board-certified specialists for advanced
care in areas such as cardiology, oncology, dermatology, ophthalmology, surgery, or internal medicine. rVetLink
automates the time-consuming process of sharing medical records and images, and sending notifications to facilitate
generalist-specialist collaboration in the delivery of care. rVetLink’s cloud technology integrates with our other
major specialty hospital management systems, including IDEXX Cornerstone Software and IDEXX DVMAX
Software.
Diagnostic Imaging Systems. Our diagnostic imaging systems capture radiographic images in digital form,
replacing traditional x-ray film and the film development process, which generally requires the use of hazardous
chemicals and darkrooms. We market and sell three diagnostic imaging systems primarily used in small animal
veterinary applications: the IDEXX ImageVue DR50, the IDEXX ImageVue DR40 and the IDEXX
ImageVue CR20.
Our newest radiography system, the IDEXX ImageVue DR50, was launched in June 2016 and enables low-
dose radiation image capture without sacrificing clear, high-quality images, a component in reducing the risk posed
by excess radiation exposure for veterinary professionals. The IDEXX ImageVue DR50 system also offers wireless
capabilities for flexibility in patient positioning.
Our diagnostic imaging systems employ picture archiving and communication system (“PACS”) software
called IDEXX-PACS, which facilitates radiographic image capture and review. IDEXX Web PACS is our cloud-
based software-as-a-service (“SaaS”) offering for viewing, accessing, storing, and sharing multi-modality diagnostic
images. IDEXX Web PACS is integrated with Cornerstone, IDEXX Neo and IDEXX VetConnect PLUS to provide
centralized access to diagnostic imaging results alongside patient diagnostic results from any internet connected
device. IDEXX Web PACS updates automatically and offers secure storage for an unlimited number of diagnostic
images. The new software features advanced radiology measurement tools as well as an interactive collaboration
feature that allows veterinarians to collaborate and consult remotely with other practitioners.
IDEXX I-Vision Mobile is a software application that allows veterinarians with IDEXX digital radiography
systems the ability to request, view and send images using an iPad® or an Android™ mobile tablet. This application
integrates with our IDEXX-PACS software.
12
Our principal products are the Colilert, Colilert-18 and Colisure tests, which simultaneously detect the
presence of total coliforms and E. coli in water. These organisms are broadly used as microbial indicators for
potential fecal contamination in water. These products utilize nutrient-indicators that produce a change in color or
fluorescence when metabolized by target microbes in the sample. Our water tests are used by government
laboratories, water utilities and private certified laboratories to test drinking water in compliance with regulatory
standards, including U.S. Environmental Protection Agency (“EPA”) standards. The tests also are used in evaluating
water used in production processes (for example, in beverage and pharmaceutical applications) and in evaluating
bottled water, recreational water, wastewater, and water from private wells.
Our Enterolert products detect the presence of enterococci in drinking, waste, and recreational waters.
Enterococci, bacteria normally found in human and animal waste, are organisms broadly used as microbial
indicators for potential fecal contamination in water. Our Pseudalert products detect the presence of Pseudomonas
aeruginosa in pool, spa, and bottled water. Pseudomonas aeruginosa is a pathogen that can cause “hot-tub rash,”
“swimmer’s ear” and potentially fatal infections in individuals with weakened immune systems. Our Filta-Max and
Filta-Max xpress products are used in the detection of Cryptosporidium and Giardia in water. Cryptosporidium and
Giardia are parasites that can cause potentially fatal gastrointestinal illness if ingested. We also distribute certain
water testing kits manufactured by Thermo Fisher Scientific, Inc. that complement our Cryptosporidium and
Giardia testing products.
13
In July 2016, we launched Legiolert, a simple culture method test for the detection of Legionella
pneumophila, the most common Legionella species in water and the primary cause of Legionnaires’ disease. The
Legiolert test is designed to be used on potable or non-potable water sources with results in seven days.
Our Quanti-Tray products, when used in conjunction with our Colilert, Colilert-18, Colisure, Enterolert,
Pseudalert or Heterotrophic Plate Count (HPC) products, provide users quantitative measurements of microbial
contamination rather than a presence/absence indication. In the second quarter of 2015, we launched the Quanti-
Tray Sealer PLUS, a next generation instrument of the previously available Quanti-Tray Sealer 2X. These
instruments are used with the Quanti-Tray products for the determination of bacterial density in water samples. Our
SimPlate for HPC product detects the total number of the most common bacteria in a water sample.
We also sell consumables, parts, and accessories to be used with many of our water testing products.
14
We sell diagnostic tests, services and related instrumentation 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 and
food. Our livestock and poultry diagnostic products are purchased by government and private laboratories that
provide testing services to livestock veterinarians, producers, and processors. Our herd health screening services are
offered to livestock veterinarians and producers. Our principal livestock and poultry diagnostic products include
tests for Bovine Viral Diarrhea Virus (“BVDV”) and Porcine Reproductive and Respiratory Syndrome (“PRRS”).
BVDV is a common and contagious viral infection that suppresses the immune system, making the animal
susceptible to a host of other infections, impacting beef and dairy production yields as a result. PRRS is a contagious
virus causing reproductive problems and respiratory diseases in swine, leading to increased piglet mortality, reduced
growth, and vulnerability to secondary infections.
Our principal dairy products use our SNAP test format and are used by dairy producers and processors
worldwide to detect antibiotic drug residue in milk. Our primary product lines are SNAP Beta-Lactam ST and
SNAPduo Beta-Tetra ST, which detect certain beta lactam and tetracycline antibiotic residues. We also sell SNAP
tests for the detection of certain other contaminants in milk, such as Aflatoxin M1.
In June 2016, we launched the Rapid Visual Pregnancy Test for cattle, which is a point-of-care test that
can detect pregnancy 28 days after breeding. This test provides a quick and accurate identifier using whole blood
samples that will enable veterinarians to optimize value-added medical consulting services while on farm visits.
15
OTHER
OPTI Medical
Through OPTI Medical, we sell point-of-care analyzers and related consumables for use in human medical
hospitals and clinics to measure electrolytes, blood gases, acid-base balance, glucose, lactate, blood urea nitrogen
and ionized calcium, and to calculate other parameters such as base excess and anion gap. These OPTI analyzers are
used primarily in emergency rooms, operating rooms, cardiac monitoring areas and other locations where time-
critical diagnostic testing is performed within the hospital setting. Our latest generation OPTI CCA-TS2 Blood Gas
and Electrolyte analyzer, which launched in 2013, contains many new features relative to previous generation blood
gas analyzers including customized work flows, faster time to result, improved communication and a multi-level
electronic control. Similar to our earlier generation OPTI CCA and OPTI Touch Electrolyte analyzers, the OPTI
CCA-TS2 runs whole blood, plasma, and serum samples on single-use disposable cassettes that contain various
configurations of analytes.
In addition, OPTI Medical manufactures our VetStat analyzer, an instrument and consumable system that is
a member of the IDEXX VetLab suite for the veterinary market, and provides the dry slides for electrolyte testing on
the Catalyst analyzers for our CAG segment.
Other Activities
We own certain drug delivery technology intellectual property, that we continue to seek to commercialize
through agreements with third parties, such as pharmaceutical companies, that are included in the Other segment.
MARKETING AND DISTRIBUTION
We market, sell, and service our products worldwide through our marketing, customer service, sales, and
technical service groups, as well as through independent distributors and other resellers. We maintain sales offices
outside the U.S. in all major regions including Africa, Asia Pacific, Canada, Europe, Middle East, and Latin
America.
Generally, we select the appropriate distribution channel for our products based on the type of product,
technical service requirements, number and concentration of customers, regulatory requirements, and other factors.
Effective January 1, 2015, we market our companion animal diagnostic products to veterinarians directly in the U.S.
Prior to January 1, 2015, we marketed our companion animal diagnostic products to veterinarians both directly and
through independent veterinary distributors in the U.S., with most instruments sold directly by IDEXX sales
personnel and rapid assay test kits and instrument consumables supplied primarily by distributors. Outside the U.S.,
we sell our companion animal diagnostic products through our direct sales force and, in certain countries, through
distributors and other resellers. We sell our veterinary reference laboratory diagnostic and consulting services
worldwide generally through our direct sales force. We market our diagnostic imaging products primarily through
our direct sales force in the U.S. and Canada. We market our software products primarily through our direct sales
force in the U.S., Canada, Europe, and Australia. We market our Water and LPD products primarily through our
direct sales force in the U.S. and Canada. Outside the U.S. and Canada, we market these products through selected
independent distributors and, in certain countries, through our direct sales force. We sell our OPTI electrolyte and
blood gas analyzers both directly and through independent human medical product distributors in the U.S. and we
sell most of the related consumables through the distribution channel. Outside the U.S., we sell our OPTI products
primarily through distributors and other resellers.
RESEARCH AND DEVELOPMENT
Our business includes the development and introduction of new products and services and may involve
entry into new business areas. We maintain active research and development programs in each of our business
segments. Our research and development expenses, which consist of salaries, employee benefits, materials and
external consulting and development costs, were $109.2 million for the year ended December 31, 2017, or 5.5
percent of our consolidated revenue, $101.1 million for the year ended December 31, 2016, or 5.7 percent of our
consolidated revenue and $99.7 million for the year ended December 31, 2015, or 6.2 percent of our consolidated
revenue.
16
PATENTS AND LICENSES
We actively seek to obtain patent protection in the U.S. and other countries for inventions covering our
products and technologies. We also license patents and technologies from third parties. Patents and licenses of
patents and technologies from third parties are considered important to the Company based on a variety of factors,
including providing protection for the Company’s inventions and other proprietary intellectual property, affording
protection from competitors in certain markets, enabling the use of more effective and efficient technologies in the
development and production of our products and offerings, strengthening our reputation and standing among
customers, employees and key suppliers, and acting as a deterrent against counterfeiters, imitators and other copiers
of technologies.
Important patents and licenses include:
An exclusive license from Tulane University to patents that expire in 2019 relating to reagents for the
detection of Lyme disease utilized in certain of our SNAP products and a reference laboratory
diagnostic test;
An exclusive license from Cornell University to patents covering methods for detecting BVDV that
started to expire in 2017 and will continue into 2022;
Patents relating to reagents and methods for the detection of Anaplasma phagocytophilum utilized in
certain of our SNAP products that started to expire in 2017 and will continue into 2022;
Patents relating to reagents and methods for the detection of Ehrlichia canis utilized in certain of our
SNAP products that expire beginning in 2019 and continuing into 2022;
A patent concerning LaserCyte consumables that expires in 2020;
Patents concerning Catalyst consumables that expire beginning in 2023 and continuing into 2029;
Patents concerning Catalyst instruments that expire beginning in 2026 and continuing into 2035;
Patents relating to reagents and methods for the detection of canine pancreatic lipase that expire in
2026; and
Patents relating to reagents and methods for the detection of SDMA that expire in 2029.
In addition, we have pending U.S. patent applications concerning reagents and methods for detecting
SDMA. If such applications are granted, we expect the associated patents would have expirations ranging from 2036
to 2038.
While we consider these proprietary technology rights to be important to us, a range of factors help to
mitigate the future effects of patent and license expiration on our results of operations and financial position. These
factors include our brand strength and reputation in the marketplace; the breadth, quality and integration of our
product offerings; our existing customer relationships and our customer support; our sales force; our online ordering
platform that enables direct ordering of (including establishing automatic reorder schedules for) our consumables,
tests and other products by our customers; the applicable regulatory approval status for certain products; our
continued investments in innovative product improvements that often result in new technologies and/or additional
patents; our investment in diagnostic innovations that results in new product offerings that often are patentable and
that expand the test menu for our in-house instruments and/or reference laboratory business; our significant know-
how, scale and investments related to manufacturing processes of associated product offerings and certain supply
arrangements for consumables that are compatible with our instruments. Although we have several patents and
licenses of patents and technologies from third parties that expired during 2017, and are expected to expire in 2018
and beyond, the expiration of these patents, individually or in the aggregate, is not expected to have a material effect
on the Company’s financial position or future operations. In addition, we already face notable competition in certain
areas as other companies have been successful in bringing competitive products to market, despite the protections
afforded by these proprietary technology rights.
To the extent some of our products may now, or in the future, embody technologies protected by patents,
copyrights, or trade secrets of others, we may be required to obtain licenses to such technologies in order to continue
to sell our products. These licenses may not be available on commercially reasonable terms or at all. Our failure to
obtain any such licenses may delay or prevent the sale of certain new or existing products. See “Part I, Item 1A.
Risk Factors.”
17
PRODUCTION AND SUPPLY
Many of the instruments that we sell are manufactured by third parties. We rely on third parties in our
supply chain to supply us, and our direct suppliers, with certain important components, raw materials and
consumables used in or with our products. In some cases, these third parties are sole or single source suppliers. From
time to time we seek to qualify alternative suppliers.
Instruments and consumables. Significant products supplied by sole and single source providers include
Catalyst Dx and Catalyst One consumables (other than electrolyte consumables and the Fructosamine, T4, CRP, and
SDMA slides), VetLyte consumables, LaserCyte and LaserCyte Dx consumables, VetTest, VetAutoread and
ProCyte Dx analyzers and consumables, SediVue Dx urinalysis instrument and consumables and components of our
SNAP Pro Mobile Device.
VetTest and Catalyst chemistry slides are supplied by Ortho under supply agreements that are currently set
to expire at the end of 2028. We are required to purchase all of our requirements for our current menu of VetTest
and Catalyst chemistry slides from Ortho to the extent Ortho is able to supply those requirements. The agreements
provide for pricing based on purchase volumes and a fixed annual inflationary adjustment. The agreements also
prohibit Ortho from promoting and selling these chemistry slides in the veterinary market, excluding the EU, other
than to IDEXX.
We purchase other analyzers and consumables under supply agreements with terms extending through
2032, which in some cases may be extended at our option. We have minimum purchase obligations under some of
these agreements, and our failure to satisfy these obligations may result in loss of some or all of our rights under
these agreements. See “Part I, Item 1A. Risk Factors.”
Other components. We purchase certain other products, raw materials, and components from sole and
single source suppliers. These products include certain diagnostic imaging systems and certain components used in
our SNAP rapid assay and dairy devices, livestock, and poultry testing kits and water testing products.
Certain components incorporated into our SNAP products and certain livestock and poultry testing kits are
supplied by Moss, Inc. (“Moss”) under a supply agreement that either party may terminate with 24 months prior
written notice. Pursuant to the terms of the supply agreement, Moss has escrowed its manufacturing information
relating to the components, which may be released to us upon certain triggering events that would render Moss
incapable of supplying the components to us. If such a triggering event occurs, we will make royalty payments to
Moss for the use of such information until Moss is able to again begin manufacturing.
We have been successful in ensuring an uninterrupted supply of products purchased from sole and single
source suppliers. However, there can be no assurance that uninterrupted supply can be maintained if these
agreements terminate for any reason or our suppliers otherwise are unable to satisfy our requirements for products.
See “Part I, Item 1A. Risk Factors.”
BACKLOG
We do not generally maintain significant backlog orders and believe that our backlog at any particular date
historically has not been indicative of future sales.
18
COMPETITION
We compete with many companies ranging from large human and animal health pharmaceutical and
medical diagnostics companies to small businesses focused on animal health. Our companion animal veterinary
diagnostic products and services compete with both reference laboratory service and in-clinic product providers. Our
competitors vary in our different markets. In some markets, academic institutions, governmental agencies, and other
public and private research organizations conduct research activities and may commercialize products or services
which could compete with our products, on their own or through joint ventures. Several of our direct and potential
competitors have substantially greater capital, manufacturing, marketing, and research and development resources
than we do.
Competitive factors in our different business areas are detailed below:
Companion animal diagnostic offerings. We compete primarily on the basis of ease of use and speed of
our products, diagnostic accuracy, product quality, breadth of our product line and services, unique
product innovations, fully integrated technology, information management capability, availability of
medical consultation, effectiveness of our sales and distribution channels, quality of our technical and
customer service and our pricing relative to the value of our products and services in comparison with
competitive products and services. Our major competitors in most geographic locations in North
America are Antech Diagnostics, a unit of VCA Inc., a division of Mars Inc., Abaxis, Inc., Heska
Corporation, Zoetis Inc., Samsung Electronics Co., Ltd. and FUJIFILM North America Corporation. In
2015, following our transition to an all-direct sales and distribution model in the U.S., certain of our
competitors began to sell products through our formerly exclusive U.S. distributors. See “Part II, Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results
of Operations and Trends” for more information. We also compete in certain international markets
with Fujifilm Holdings Corporation, Samsung Electronics, Arkray, Inc. and BioNote, Inc.
Water, livestock, poultry, and dairy testing products. We compete primarily on the basis of the ease of
use, speed, accuracy, product quality and other performance characteristics of our products and
services (including unique tests), the breadth of our product line and services, the effectiveness of our
sales and distribution channels, the quality of our technical and customer service, our ability to receive
regulatory approvals from governing agencies and our pricing relative to the value of our products in
comparison with competitive products and services. Our competitors include highly focused smaller
companies and multi-billion dollar companies with small livestock and poultry diagnostics and water
testing solution franchises.
Veterinary Software, Services and Diagnostic Imaging Systems. We compete primarily on the basis of
functionality, connectivity to equipment and other systems, performance characteristics, effectiveness
of our implementation, training process and customer service, information handling capabilities,
advances in technologies and our pricing relative to the value of our products and services. We sell
these products primarily in North America and Europe. Our largest competitor is Henry Schein in
North America and the U.K., which offers several systems and leverages their animal health
distribution business in sales and service. We also compete with numerous focused smaller companies
throughout the markets in which we offer veterinary software.
Electrolyte and blood gas analyzers for the human point-of-care medical diagnostics market. We
compete primarily on the basis of the ease of use, menu, convenience, international distribution and
service, instrument reliability, and our pricing relative to the value of our products. We compete
primarily with large human medical diagnostics companies such as Radiometer A/S, Siemens Medical
Solutions Diagnostics, Instrumentation Laboratory Company, Abbott Diagnostics, a division of Abbott
Laboratories and Roche Diagnostics Corporation.
19
GOVERNMENT REGULATION
Many of our products are subject to comprehensive regulation by U.S. and foreign regulatory agencies that
relate to, among other things, product approvals, registrations, manufacturing, import, export, distribution,
marketing and promotion, labeling, recordkeeping, testing, quality, storage, and product disposal. The following is a
description of the principal regulations affecting our businesses.
Veterinary diagnostic products. Diagnostic tests for animal health infectious diseases, including most of our
livestock and poultry products and our rapid assay products, are regulated in the U.S. by the Center for Veterinary
Biologics within the United States Department of Agriculture (“USDA”) Animal and Plant Health Inspection
Service (“APHIS”). These products must be approved by APHIS before they may be sold in the U.S. The APHIS
regulatory approval process involves the submission of product performance data and manufacturing documentation.
Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for review
before release to customers. In addition, APHIS requires special approval to market products where test results are
used in part for government-mandated disease management programs. A number of foreign governments accept
APHIS approval, including for the purpose of obtaining product registration, as part of their separate regulatory
approvals. However, compliance with an extensive regulatory process is required in connection with importing and
marketing diagnostic products in Japan, Germany, Canada, Brazil, the Netherlands, and many other countries. We
are also required to have a facility license from APHIS to manufacture USDA-licensed products. We have a facility
license for our manufacturing facility in Westbrook, Maine and our distribution center in Memphis, Tennessee. Our
LPD manufacturing facility in Montpellier, France has been approved by APHIS and we have a permit to import
products manufactured in Montpellier, France to the U.S. for distribution.
Our veterinary diagnostic instrument systems are veterinary medical devices regulated by the FDA under
the Food, Drug and Cosmetics Act (the “FDC Act”). While the sale of these products does not require premarket
approval by the FDA and does not subject us to the FDA’s current Good Manufacturing Practices regulations
(“cGMP”), these products must not be adulterated, mislabeled, or misbranded under the FDC Act.
In the EU, our veterinary diagnostic instrument systems are not subject to regulation under the European
Medical Device Directive or the In Vitro Diagnostic Directive, which are both strictly applicable to human use
products. However, these systems are subject to the requirements of the Electromagnetic Compatibility Directive,
which applies to all electronic or electrical products capable of causing or being disturbed by electromagnetic
interference and requires European Conformity marking on our analyzers. In addition, we anticipate our analyzers
will be subject to the requirements of the Restriction of Hazardous Substances Directive, or RoHS, which regulates
and restricts certain hazardous substances in electrical and electronic equipment, beginning in July 2019.
Water testing products. Our water tests are not subject to formal premarket regulatory approval. However,
before a test can be used as part of a water quality monitoring program in the U.S. that is regulated by the EPA, the
test must first be approved by the EPA. The EPA approval process involves submission of extensive product
performance data in accordance with an EPA-approved protocol, evaluation of the data by the EPA and publication
for public comment of any proposed approval in the Federal Register before final approval. Our Colilert, Colilert-18,
Colisure, Quanti-Tray, Filta-Max xpress, Enterolert and SimPlate for heterotrophic plate counts products have been
approved by the EPA for use under various regulatory programs. Water testing products are subject to similarly
extensive regulatory processes in other countries around the world.
Dairy testing products. Dairy products used in National Conference on Interstate Milk Shipments
(“NCIMS”) milk-monitoring programs in the U.S. are regulated by the FDA as veterinary medical devices.
However, before products requiring FDA approval can be sold in the U.S., performance data must be submitted in
accordance with an FDA-approved protocol administered by an independent body, such as the Association of
Analytical Communities Research Institute (“AOAC RI”). Following approval of a product by the FDA, the product
must also be approved by NCIMS, an oversight body that includes state, federal and industry representatives. Our
SNAP Beta-Lactam antibiotic residue test product has been approved by the FDA, NCIMS and AOAC RI for sale in
the U.S. While some foreign countries accept AOAC RI approval as part of their regulatory approval process, many
countries have separate regulatory processes.
20
Human point-of-care electrolyte and blood gas analyzers. Our OPTI instrument systems are classified as
Class I and/or Class II medical devices, and their design, manufacture and marketing are regulated by the FDA.
Accordingly, we must comply with cGMP in the manufacture of our OPTI products. The FDA’s Quality System
regulations further set forth standards for product design and manufacturing processes, require the maintenance of
certain records and provide for inspections of our facilities by the FDA. New OPTI products fall into FDA
classifications that require notification of and review by the FDA before marketing, and which are submitted as a
510(k) application. OPTI Medical products are also subject to the European Medical Device Directives and
regulations governing the manufacture and marketing of medical devices in other countries in which they are sold.
The European Union regulates and restricts the use of certain substances that we currently use in our
products or processes. These requirements include the Biocidal Products Regulation, which may require the use of
approved biocides in our products prior to being used or sold in the European Union, the European Regulation for
Registration, Evaluation, Authorization and Restriction of Chemical Substances, or REACH, which regulates and
restricts the use of certain chemicals in the European Union, and the Restriction of Hazardous Substance or RoHS
which regulates and restricts certain hazardous substances in electrical and electronic equipment. Compliance with
these regulations (and similar regulations that may be adopted elsewhere) may require registration of the applicable
substances or the redesign or reformulation of our products.
In addition to the foregoing, our business is generally subject to various U.S. and foreign regulatory
authorities, including the U.S. Federal Trade Commission (the “FTC”) and other anti-competition authorities, and
we are also subject to anti-bribery and anti-corruption laws, such as the Foreign Corrupt Practices Act, import and
export laws and regulations, including U.S. import and export control and sanctions laws and laws and regulations
governing the collection, use, retention, sharing and security of data. Any acquisitions of new products and
technologies may subject us to additional areas of government regulation. These may involve, medical device,
water-quality and other regulations of the FDA, the EPA, the USDA, the FTC, and other federal agencies, as well as
state, local and foreign governments. See “Part I, Item 1A. Risk Factors.”
EMPLOYEES
As of February 6, 2018, we had approximately 7,600 employees.
AVAILABLE INFORMATION
Our principal executive offices are located at One IDEXX Drive, Westbrook, Maine 04092, our telephone
number is 207-556-0300, and our internet address is www.idexx.com. References to our website in this Annual
Report on Form 10-K are inactive textual references only and the content of our website should not be deemed
incorporated by reference for any purpose.
We make available free of charge at www.idexx.com our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file such information with, or
furnish it to, the SEC. In addition, copies of our reports filed electronically with the SEC may be accessed at
www.sec.gov. The public may also read and copy any materials filed with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330.
Our Corporate Governance Guidelines and our Code of Ethics are also available on our website
at www.idexx.com.
21
ITEM 1A.
RISK FACTORS
You should consider carefully the risks and uncertainties described below in addition to the
other information included or incorporated by reference in this Annual Report on Form 10-K in evaluating our
company and our business. Our future operating results involve a number of risks and uncertainties and actual
events or results may differ materially from those discussed in this Annual Report on Form 10-K. Factors that could
cause or contribute to such differences include, but are not limited to, the factors discussed below, as well as those
factors discussed elsewhere herein. Any of these factors, in whole or in part, could materially and adversely affect
our business, financial condition, operating results and stock price.
Because our business lines are highly attractive, they are also highly competitive. Our failure to
successfully execute certain strategies within this competitive environment could have a material
negative impact on our future growth and profitability
The companion animal healthcare industry is highly competitive, and we anticipate increasing levels of
competition from both existing competitors and new market entrants given our performance and the market’s strong
growth and returns. Our ability to maintain or enhance our growth rates and our profitability depends on our
successful execution of many elements of our strategy, including:
Developing, manufacturing and marketing innovative new or improved and cost competitive in-clinic
laboratory analyzers that drive sales of IDEXX VetLab instruments, grow our installed base of instruments
and increase demand for related recurring sales of consumable products, services, and accessories;
Developing and introducing new proprietary diagnostic tests and services for both our reference
laboratories and in-clinic applications that provide valuable medical information to our customers and
effectively differentiate our products and services from those of our competitors;
Increasing the value to our customers of our companion animal products and services by enhancing the
integration of the information and transactions of these products and the management of diagnostic
information derived from our products;
Maintaining premium pricing, including by effectively implementing price increases, for our differentiated
products and services through, among other things, effective communication and promotion of the value of
our products and services in an environment where many of our competitors promote, market and sell
lesser offerings at prices lower than ours;
Providing our veterinary customers with the medical and business tools, information, and resources that
enable them to grow their practices and the utilization of our diagnostic products and services, through
increased pet visits and enhanced practice of real-time care;
Achieving cost improvements in our worldwide network of reference laboratories by implementing global
best practices, including lean processing techniques, incorporating technological enhancements, including
laboratory automation and a global laboratory information management system, employing purchasing
strategies to maximize leverage of our global scale, increasing the leverage of existing infrastructure and
consolidating testing in high volume laboratory hubs;
Achieving cost improvements in the manufacture and service of our in-clinic laboratory analyzers by
employing the benefits of economies of scale in both negotiating supply contracts and leveraging
manufacturing overhead, and by improving reliability of our instruments;
Continuing to expand, develop, and advance the productivity of our companion animal diagnostic sales,
marketing, customer support and logistics organizations in the U.S. and international markets in support of,
among other things, our all-direct sales strategies;
Attracting, developing, and retaining key leadership and talent necessary to support all elements of our
strategy, which is challenging due to the increasingly competitive and tight labor markets in which we
operate;
22
Expanding our served market and growing our market share by strengthening our sales and marketing
activities both within the U.S. and in geographies outside of the U.S.;
Identifying, completing, and integrating acquisitions that enhance our existing businesses or create new
business or geographic areas for us;
Developing and implementing new technology and licensing strategies; and
Continuing to effectively manage our growth and expansion on a global scale through, among other things,
designing and implementing cost-effective improvements to our processes, procedures, and infrastructure.
If we are unsuccessful in implementing and executing on some or all of these strategies, our rate of growth
or profitability may be negatively impacted.
Our dependence on suppliers could limit our ability to sell certain products or negatively affect our
operating results
We rely on third-party suppliers to provide components in our products, manufacture products that we do
not manufacture ourselves and perform services that we do not provide ourselves, including package-delivery
services. Because these suppliers are independent third parties with their own financial objectives, actions taken by
them could have a materially negative effect on our results of operations. The risks of relying on suppliers include
our inability to enter into contracts with third-party suppliers on reasonable terms, breach, or termination by
suppliers of their contractual obligations, inconsistent or inadequate quality control, relocation of supplier facilities,
disruption to suppliers’ business, including work stoppages, suppliers’ failure to comply with complex and changing
regulations, and third party financial failure. Any problems with our suppliers and associated disruptions to our
supply chain could materially negatively impact our ability to supply the market, substantially decrease sales, lead to
higher costs, or damage our reputation with our customers, and any longer-term disruptions could potentially result
in the permanent loss of our customers, which could reduce our recurring revenues and long-term profitability.
Disruption to our supply chain could occur as a result of any number of events, including, but not limited to,
increases in wages that drive up prices; the imposition of regulations, quotas or embargoes on key components;
labor stoppages; transportation failures affecting the supply and shipment of materials and finished goods; the
unavailability of raw materials; severe weather conditions; natural disasters; civil unrest, geopolitical developments,
war or terrorism; computer viruses, physical or electronic breaches, or other information system disruptions or
security breaches; and disruptions in utility and other services. For more information regarding the risks presented
by natural and other disasters and system disruptions and security breaches from cyberattacks, see “Natural and
other disasters, information technology system failures and network disruptions and cybersecurity breaches and
attacks could adversely affect our business” below.
In addition, we currently purchase many products and materials from sole or single sources. Some of the
products that we purchase from these sources are proprietary and, therefore, cannot be readily or easily replaced by
alternative sources. These products include the majority of our Catalyst Dx and Catalyst One consumables; VetLyte
electrolyte consumables; ProCyte Dx hematology, IDEXX VetAutoread hematology, and VetTest chemistry
analyzers and related consumables and accessories; SediVue Dx urine sediment analyzer and consumables; image
capture plates used in our diagnostic imaging systems; and certain components and raw materials used in our SNAP
rapid assay kits and SNAP Pro Mobile Device, Catalyst One, LaserCyte and LaserCyte Dx hematology analyzers,
livestock and poultry diagnostic tests, dairy testing products, and water testing products. Even where products and
materials are available from alternate suppliers, if any becomes unavailable to us for any reason we likely would
incur added costs and delays in identifying or qualifying replacement materials and there can be no assurance that
replacements would be available to us on acceptable terms, or at all. In certain cases, we may be required to obtain
regulatory approval to use alternative suppliers, and this process of approval could delay production of our products
or development of product candidates indefinitely.
We seek to mitigate risks associated with sole and single source suppliers, when possible, by entering into
long-term contracts that provide for an uninterrupted supply of products at predictable prices. However, some
suppliers decline to enter into long-term contracts and we are thus required to purchase products via short-term
contracts or on a purchase order basis. There can be no assurance that suppliers with which we do not have long-
23
term contracts will continue to supply our requirements for products, that suppliers with which we do have contracts
will always fulfill their obligations under those contracts, or that any of our suppliers will not experience disruptions
in their ability to supply our requirements for products. In cases where we purchase sole and single source products
or components under purchase orders, we are more susceptible to unanticipated cost increases or changes in other
terms of supply. In addition, under some contracts with suppliers we have minimum purchase obligations, and our
failure to satisfy those obligations may result in loss of some or all of our rights under these contracts or require us
to compensate the supplier. If we are unable to obtain adequate quantities of products in the future from sole and
single source suppliers, or if such sole and single source suppliers are unable to obtain the components or other
materials required to manufacture the products, we may be unable to supply the market, which could have a material
adverse effect on our results of operations, and any longer-term disruptions could potentially result in the permanent
loss of customers, which could reduce our recurring revenues and long-term profitability.
Our biologic products are complex and difficult to manufacture, which could negatively affect our
ability to supply the market
Many of our rapid assay, livestock and poultry diagnostic, water and dairy products are biologic products,
which are products that include materials from living organisms, such as antibodies, cells, and sera. Manufacturing
biologic products is highly complex due to the inherent variability of biological input materials and the difficulty of
controlling the interactions of these materials with other components of the products, samples, and the environment.
There can be no assurance that we will be able to maintain adequate sources of biological materials or that we will
be able to consistently manufacture biologic products that satisfy applicable product release criteria and regulatory
requirements. Further, products that meet release criteria at the time of manufacture may fall out of specification
while in customer inventory, which could require us to incur expenses associated with recalling products and
providing customers with new products, either of which could damage customer relations. Our inability to produce
or obtain necessary biological materials or to successfully manufacture biologic products that incorporate such
materials could result in our inability to supply the market with these products, which would have an adverse effect
on our results of operations.
Risks associated with doing business internationally could negatively affect our operating results
For the years ended December 31, 2017, 2016 and 2015, approximately 39 percent of our revenue was
attributable to sales of products and services to customers outside the U.S. Although we intend to continue to expand
our international operations and business, we may not be able to successfully promote, market, import, export, sell
or distribute our products and services outside the U.S. Various risks associated with foreign operations may impact
our international sales, including, but not limited to, disruptions in transportation of our products or our supply
chain; fluctuations in oil prices; increased border protection and restriction on travel; the differing product and
service needs of foreign customers; difficulties in building, staffing and managing foreign operations (including a
geographically dispersed workforce); differing protection of intellectual property; trade protection measures, quotas,
embargoes, import/export restrictions, tariffs, duties, and regulatory and licensing requirements; natural and other
disasters; ongoing instability or changes in a country’s or region’s regulatory, economic or political conditions,
including as a result of the United Kingdom’s June 2016 vote and formal notice in March 2017 to leave the
European Union; other unfavorable geopolitical conditions; security concerns; and local business and cultural
factors that differ from our normal standards and practices, including business practices prohibited by the Foreign
Corrupt Practices Act and other anti-corruption laws and regulations.
Further, prices that we charge to foreign customers may be different than the prices we charge for the same
products in the U.S. due to competitive, market or other factors, or changes in foreign currency exchange rates. Our
results of operations are also susceptible to changes in foreign currency exchange rates. As a result, the mix of
domestic and international sales in a particular period could have an adverse impact on our results of operations for
that period.
24
Various U.S. and foreign government regulations could limit or delay our ability to market and sell
our products or otherwise negatively impact our business
As a global business, we sell products and services in more than 175 countries and operate in an
increasingly complex legal and regulatory environment. In the U.S., the manufacture and sale of certain of our
products are regulated by agencies such as the USDA, the FDA, or the EPA. Our diagnostic tests for animal health
applications that involve the detection of infectious diseases, including most rapid assay canine and feline SNAP
tests and livestock and poultry diagnostic tests, must be approved by the USDA prior to sale in the U.S. Our dairy
testing products as well as the manufacture and sale of our OPTI line of human point-of-care electrolytes and blood
gas analyzers require approval by the FDA before they may be sold commercially in the U.S. Our water testing
products must be approved by the EPA, as a part of a water quality monitoring program required by the EPA, before
they can be used by customers in the U.S. Delays in obtaining regulatory approvals for new products or product
upgrades could have a negative impact on our growth and profitability.
The manufacture, import, and sale of our products, as well as our research and development processes, are
subject to similar and sometimes more stringent laws in many foreign countries. For example, the European Union
regulates the use of certain substances that we currently use in our products or processes. These regulations include
the Biocidal Products Regulation, which may require approval for the use of certain biocides in our products prior to
being used or sold in the European Union, the European Regulation for Registration, Evaluation, Authorization and
Restriction of Chemical Substances, or REACH, which regulates and restricts the use of certain chemicals in the
European Union, and the Restriction of Hazardous Substances which regulates and restricts certain hazardous
substances in electrical and electronic equipment. Compliance with these regulations (and similar regulations that
may be adopted elsewhere) may require registration of the applicable substances or the redesign or reformulation of
our products and may reduce or eliminate the availability of certain parts and components used in our products and
services in the event our suppliers are unable to comply with the applicable regulations in a timely and cost-effective
manner. Any redesign or reformulation or restricted supply of parts and components may negatively affect the
availability or performance of our products and services, add testing lead-times for products and reformulated
products, reduce our margins, result in additional costs, or have other similar effects. In addition, the costs to comply
with these regulations may be significant. Any of these could adversely affect our business, financial condition, or
results of operations. These legal and regulatory requirements are complex and subject to change, and we continue
to evaluate their impact.
In addition, some foreign governments require us to register our products, and these product registration
requirements, which vary among the applicable jurisdictions and change from time to time, are often complex and
require us to engage in lengthy and costly processes. There can be no assurance that we will be able to obtain or
maintain any product registration required by one or more foreign governments. Any inability to obtain or maintain
a required product registration in a jurisdiction could adversely affect our ability to market and sell the applicable
product in that jurisdiction, which could have a negative effect on our business, financial condition and results of
operations.
We are also subject to a variety of federal, state, local, and international laws and regulations, as well as the
associated legal and political environments, concerning, among other things, the importation and exportation of
products; our business practices in the U.S. and abroad, such as anti-corruption, anti-money laundering, and anti-
competition laws; and immigration and travel restrictions. These legal, regulatory, and political requirements and
environments differ among jurisdictions around the world and are rapidly changing and increasingly complex. The
costs associated with compliance with these legal and regulatory requirements and adjusting to changing legal and
political environments are significant and likely to increase in the future.
Any failure by us to comply with applicable legal and regulatory requirements, or to adjust to changing
legal and political environments, could result in fines, penalties, and sanctions; product recalls; suspensions or
discontinuations of, or limitations or restrictions on, our ability to design, manufacture, market, import, export or sell
our products; and damage to our reputation. Any of these could negatively impact our business.
25
Increased competition from and technological advances by our competitors could negatively affect
our operating results
We face intense competition within the markets in which we sell our products and services, and we expect
that future competition may become even more intense as new products, services and technologies become available
and new competitors enter the market. Our competitors in the veterinary diagnostic market in the United States and
abroad include companies that develop, manufacture, and sell veterinary diagnostic tests and commercial veterinary
reference laboratories, certain large and well-funded animal health pharmaceutical companies, as well as corporate
hospital chains that operate reference laboratories that serve both their hospitals and unaffiliated hospitals, such as
the vertically integrated corporate hospital chain formed when Mars, Incorporated acquired VCA Inc. (formerly
named VCA Antech, Inc.) in 2017, which resulted in the combination of two large U.S. veterinary hospital chains.
While we believe that our reference laboratory service offerings are competitively differentiated due to our
proprietary products and services, such as the IDEXX SDMA test, there can be no assurance that increased
consolidation and reference laboratory vertical integration among our customers would not have a negative impact
on our ability to compete successfully. For more information regarding the risks presented by consolidation and
reference laboratory vertical integration among our customers, see “Consolidation in our customer base, including
through increased corporate hospital ownership, and prevalence of buying consortiums could negatively affect our
business” below.
Competition could negatively affect our sales and profitability in a number of ways. New competitors may
enter our markets through the development of innovative new technology, the acquisition of rights to use existing
technologies or the use of existing technologies when patents protecting such existing technologies expire. New or
existing competitors may introduce new, innovative, and competitive products and services, which could be
superior, or be perceived by our customers to be superior, to our products and services or lead to the obsolescence of
one or more of our products or services. While an important aspect of our strategy is to continue, on a cost-effective
and timely basis, to enhance our existing products and services and to develop and introduce new and innovative
products and services, there can be no assurance that we will be able to successfully develop such products and
services or that those products or services will be superior to our competitors’ products or service or otherwise
achieve market acceptance. Some of our competitors and potential competitors may choose to differentiate
themselves by offering products and services similar to ours at lower sales prices, which could have an adverse
effect on our results of operations through loss of market share or a decision to lower our own sales prices to remain
competitive. In addition, our ability to attract and retain customers depends on the effectiveness of our customer
marketing and incentive programs and multiple competitors could bundle product and service offerings through co-
marketing or other arrangements, which could enhance their ability to compete with our broad product and service
offering. Certain of our competitors and potential competitors, including large diagnostic and pharmaceutical
companies, also have substantially greater financial and managerial resources than us, as well as greater experience
in manufacturing, marketing, research and development, and obtaining regulatory approvals than we do.
Consolidation in our customer base, including through increased corporate hospital ownership, and
prevalence of buying consortiums could negatively affect our business
Veterinarians are our primary customers for our CAG products and services, and the veterinary services
industry in the U.S. and abroad has been consolidating in recent years. In the United States., the number of owners
of veterinary hospitals has been declining, and an increasing percentage of veterinary hospitals are owned by
corporations that are in the business of acquiring veterinary hospitals and/or opening new veterinary hospitals
nationally or regionally. Major corporate hospital owners in the U.S. include Mars, Incorporated (owner of Banfield
Pet Hospitals, Blue Pearl Veterinary Partners, Pet Partners and VCA Inc.), and National Veterinary Associates. A
similar trend exists in other regions such as Europe, and is developing in other international markets. Furthermore,
an increasing percentage of individually-owned veterinary hospitals in the U.S. are participating in buying
consortiums. Corporate owners of veterinary hospitals and buying consortiums often seek to improve profitability by
leveraging the buying power they derive from their scale to obtain favorable pricing from suppliers, which could
have a negative impact on our profitability and results of operations. While we have strong supplier relationships
with several corporate hospital groups and buying consortiums, decisions by larger corporate owners and buying
consortiums to shift their purchasing of products and services away from us and to a competitor would have a
negative impact on our results of operations. In addition, certain corporate owners also operate reference laboratories
that serve both their hospitals and unaffiliated hospitals. Any hospitals acquired by these companies generally shift
all or a large portion of their testing to the reference laboratories operated by these companies, and there can be no
26
assurance that hospitals that otherwise become affiliated with these companies would not shift all or a portion of
their testing to such reference laboratories. Furthermore, because these companies compete with us in the reference
laboratory services marketplace, hospitals acquired by these companies or those that establish other affiliations with
these companies may cease to be customers or potential customers of our other companion animal products and
services, which would cause our sales of these products and services to decline.
Changes in testing patterns could negatively affect our operating results
The market for our companion animal, livestock and poultry diagnostic tests and our dairy and water
testing products could be negatively impacted by a number of factors impacting testing practices. The introduction
or broad market acceptance of vaccines or preventatives for the diseases and conditions for which we sell diagnostic
tests and services could result in a decline in testing. Changes in accepted medical protocols regarding the diagnosis
of certain diseases and conditions could have a similar effect. Eradication or substantial declines in the prevalence of
certain diseases also could lead to a decline in diagnostic testing for such diseases. Our livestock and poultry
products business in particular is subject to fluctuations resulting from changes in disease prevalence. Changes in
government regulations or in the availability of government funds available for monitoring programs could
negatively affect sales of our products that are driven by compliance testing, such as our livestock and poultry, dairy
and water products. In addition, changes and trends in local dairy, poultry, or other food markets around the world
could negatively affect the related production markets resulting in a decline in demand for our testing products.
Declines in testing for any reason, including the reasons described above, along with lost opportunities associated
with a reduction in veterinary visits, could have an adverse effect on our results of operations.
Our success is heavily dependent upon proprietary technologies
We rely on a combination of patent, trade secret, trademark, and copyright laws to protect our proprietary
rights. We also license patents and technologies from third parties to enable the use of third-party technologies in the
development and production of our products and offerings. If we do not have adequate protection of our proprietary
rights or are unable to license third-party patents and technologies on reasonable terms, our business may be affected
by competitors who utilize substantially equivalent technologies that compete with us.
We cannot ensure that we will obtain issued patents, that any patents issued or licensed to us will remain
valid, or that any patents owned or licensed by us will provide protection against competitors with similar
technologies. Even if our patents cover products sold by our competitors, the time and expense of litigating to
enforce our patent rights could be substantial, and could have an adverse effect on our results of operations. In
addition, expiration of patent rights could result in substantial new competition in the markets for products
previously covered by those patent rights.
In the past, we have received notices claiming that our products infringe third-party patents and we may
receive such notices in the future. Patent litigation is complex and expensive, and the outcome of patent litigation
can be difficult to predict. We cannot ensure that we will win a patent litigation case or negotiate an acceptable
resolution of such a case. If we lose, we may be prohibited from selling certain products and/or we may be required
to pay damages and/or ongoing royalties as a result of the lawsuit. Any such result could have an adverse effect on
our results of operations.
Natural and other disasters, information technology system failures and network disruptions and
cybersecurity breaches and attacks could adversely affect our business
Our business and results of operations could be negatively affected by certain factors beyond our control,
such as natural disasters (such as hurricanes, earthquakes, fires, and floods); civil unrest; negative geopolitical
conditions and developments; war, terrorism or other man-made disasters; and information technology system
failures, network disruptions and cybersecurity breaches and attacks. Any of these events could result in, among
other things, damage to or the temporary closure of one or more of our manufacturing or distribution facilities or
reference laboratories (damage to one of our facilities or the manufacturing equipment we use could be costly and
may require substantial lead-time to repair or replace); damage to or closure of one or more facilities of our third-
party business partners or suppliers on which we rely; a temporary lack of an adequate work force in one or more
markets; an interruption in power supply; a temporary or long-term disruption in our supply chain (including a
disruption to our ability to obtain critical components for the manufacture of our products); a temporary disruption
27
in our ability to deliver (or delays in the delivery of) our products or services; and short- or long-term damage to our
customers’ businesses (which would adversely impact customer demand for our products and services). For more
information regarding the risks presented by disruption to our suppliers’ operations and supply chain, see “Our
dependence on suppliers could limit our ability to sell certain products or negatively affect our operating results”
above.
We manufacture many of our significant companion animal products, including our rapid assay devices and
certain instruments, many of our water testing products and certain of our livestock, poultry, and dairy testing
products, at a single facility in Westbrook, Maine. Certain of our companion animal products, as well as our human
point-of-care products, are manufactured in Roswell, Georgia. We also manufacture certain of our livestock and
poultry testing products in Bern, Switzerland and Montpellier, France. In addition, we maintain major distribution
facilities in North America and in the Netherlands and major reference laboratories in Memphis, Tennessee;
Ludwigsburg, Germany; Sacramento, California; Elmhurst, Illinois; North Grafton, Massachusetts; East Brisbane,
Australia; Markham, Ontario; Wetherby, U.K.; and Tokyo, Japan. Interruption of operations at any of these facilities
due to the occurrence of one or more of the events described above could have an adverse effect on our results of
operations.
We rely on several information systems throughout our company, as well as our third-party business
partners’ and suppliers’ information systems, to provide access to our web-based products and services, keep
financial records, analyze results of operations, process customer orders, manage inventory, process shipments to
customers, store confidential or proprietary information and operate other critical functions. Although we employ
system backup measures and engage in information system redundancy planning and processes, such measures,
planning and processes, as well as our current disaster recovery plan, may be ineffective or inadequate to address all
eventualities. Further, our information systems and our business partners’ and suppliers’ information systems may
be vulnerable to attacks by hackers and other security breaches, including computer viruses and malware, through
the Internet (including via devices and applications connected to the Internet), email attachments and persons with
access to these information systems, such as our employees or third parties with whom we do business. As
information systems and the use of software and related applications by us, our business partners, suppliers, and
customers become more cloud-based and connected to the “Internet of Things,” there has been an increase in global
cybersecurity vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a
risk to the security of our information systems and networks and the confidentiality, availability and integrity of data
and information. We process credit card payments electronically over secure networks and also offer products and
services that connect to and are part of the “Internet of Things,” such as our connected devices (e.g., IDEXX VetLab
instruments). Any such attack or breach could compromise our networks and the information stored thereon could
be accessed, publicly disclosed, lost, or stolen. While we have implemented network security and internal control
measures, especially for the purpose of protecting our connected products and services from cyberattacks, and
invested in our data and information technology infrastructure, there can be no assurance that these efforts will
prevent a system disruption, attack, or security breach and, as such, the risk of system disruptions and security
breaches from a cyberattack remains.
If we or our business partners or suppliers were to experience a system disruption, attack or security breach
that impacts any of our critical functions, or our customers were to experience a system disruption, attack or security
breach via any of our connected products and services, it could result in a period of shutdown of information
systems during which we (or our customers) may not be able to operate, the loss of sales and customers, financial
misstatement, potential liability for damages to our customers, reputational damage and significant incremental
costs, which could adversely affect our business, results of operations and profitability. Furthermore, any access to,
public disclosure of, or other loss of data or information (including any of our confidential or proprietary
information or personal data or information) as a result of an attack or security breach could result in governmental
actions or private claims or proceedings, which could damage our reputation, cause a loss of confidence in our
products and services, damage our ability to develop (and protect our rights to) our proprietary technologies and
adversely affect our business.
28
While we maintain plans to continue business under such circumstances, there can be no assurance that
such plans will be successful in fully or partially mitigating the effects of such events. We also maintain property
and business interruption insurance to insure against the financial impact of certain events of this nature. However,
this insurance may be insufficient to compensate us for the full amount of any losses that we may incur. In addition,
such insurance will not compensate us for the long-term competitive effects of being out of the market for the period
of any interruption in operations.
Our operations and reputation may be impaired if we, our products, or our services do not comply
with evolving laws and regulations regarding data privacy and protection
The privacy and security of personally identifiable information stored, maintained, received, or transmitted
electronically is a major issue in the United States and abroad. We offer products and services that collect and use
personal data provided by client practices and individuals, including practice management systems for veterinary
practices (e.g., Cornerstone and IDEXX Neo), online client communication tools and services (e.g., Pet Health
Network Pro), and cloud-based technology through VetConnect PLUS that enables veterinarians to access and
analyze patients’ diagnostic data from our in-clinic analyzers, our Rapid Assays and Reference Laboratories in one
place. Some of these products and services rely on third-party providers for cloud storage. We also engage in e-
commerce through various websites and collect contact and other personally identifiable information from our
customers and visitors to our websites.
Numerous federal and state laws and regulations govern the collection, use, retention, sharing and security
of personally identifiable information, including personal data that we receive from our employees, customers,
vendors and visitors to our websites and personal data collected by our customers and others when using our
products and services. We are also subject to laws and regulations in non-U.S. countries covering data privacy and
the protection of personal information. EU member states and other jurisdictions have adopted, or are considering
adopting, data protection laws and regulations, which impose significant compliance obligations. Laws and
regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, sharing and security of
personal information that identifies or may be used to identify an individual, such as names, contact information,
and sensitive personal data. These laws and regulations are subject to frequent revisions and differing
interpretations, and have generally become more stringent over time. In many cases, the federal, state and
international laws described above apply not only to third-party transactions, but also to transfers of information
between us and our subsidiaries, and among us, our subsidiaries, and other parties with which we have commercial
relations.
For example, in April 2016, the EU Parliament adopted the General Data Protection Regulation, or GDPR,
which, among other things, imposes more stringent operational requirements for processors and controllers of
personal data, including, for example, expanded disclosures about how personal information is to be used,
limitations on retention of information and mandatory data breach notification requirements. The GDPR is expected
to take effect in 2018.
The laws and regulations related to data privacy and protection continue to develop, are subject to differing
interpretations and may be applied inconsistently from jurisdiction to jurisdiction and may be inconsistent with our
current data protection and privacy policies and practices. Further, the costs associated with compliance with these
evolving legal and regulatory requirements are significant and likely to increase in the future and as a result may
cause us to incur substantial costs, require us to change our business practices in a manner adverse to our business or
limit our ability to use and share personal data. Any failure, or perceived failure, by us, the third parties with whom
we work or our products and services to protect employee, applicant, vendor, website visitor or customer personal
data (including as a result of a breach by or of a third-party provider) or to comply with any privacy-related laws,
government regulations or directives or industry self-regulatory principles or our posted privacy policies could result
in damage to our reputation or proceedings or actions against us by governmental entities or otherwise, which could
have an adverse effect on our business. In addition, concerns about our practices with regard to the collection, use,
disclosure, or security of personally identifiable information or other privacy-related matters, even if unfounded and
even if we are in compliance with applicable laws, could damage our reputation and harm our business. We have
and post on our website our own privacy policy concerning the collection, use and disclosure of user personal data.
29
Strengthening of the rate of exchange for the U.S. dollar has a negative effect on our business
We are a global business, with 39 percent of our revenue during the year ended December 31, 2017,
attributable to sales of products and services to customers outside of the U.S. Any strengthening of the rate of
exchange for the U.S. dollar against foreign currencies, and in particular the euro, British pound, Canadian dollar,
Chinese renminbi, Japanese yen, Australian dollar and Brazilian real, adversely affects our results, as it reduces the
dollar value of sales and profits that are made in those currencies. The strengthening of the U.S. dollar has a greater
adverse effect on the profits from products manufactured or sourced in U.S. dollars that are exported to international
markets and a lesser effect on profits from foreign sourced products and services due to a natural hedge from
international expenses denominated in the corresponding foreign currencies. For the year ended December 31, 2017,
approximately 21 percent of our consolidated revenue was derived from products manufactured or sourced in U.S.
dollars and sold internationally in local currencies, as compared to 21 percent and 20 percent for the years ended
December 31, 2016 and 2015, respectively. A strengthening U.S. dollar could also negatively impact the ability of
customers outside the U.S. to pay for purchases denominated in U.S. dollars as well as affect our overall
competitiveness in international markets. The accumulated impacts from any continued, longer-term growth in the
value of the U.S. dollar against foreign currencies may have a material adverse effect on our operating results. See
“Part II, Item 7A. Quantitative and Qualitative Disclosure About Market Risk” included in this Annual Report on
Form 10-K for additional information regarding currency impact.
Our foreign currency hedging activities (see Note 17 — Hedging Instruments in the accompanying Notes to
the consolidated financial statements), which are designed to minimize and delay, but not to eliminate, the effects of
foreign currency fluctuations, may not sufficiently offset the adverse financial effect of unfavorable movements in
foreign exchange rates on our financial results over the limited time the hedges are in place. In addition, our hedging
activities involve costs and risks, such as transactions costs and the risk that our hedging counterparties will default
on their obligations.
We primarily hedge intercompany product purchases and sales denominated in the euro, British pound,
Canadian dollar, Japanese yen, Australian dollar, and Swiss franc. Other foreign currency exposures related to
foreign sourced services and emerging markets may not be practical to hedge. In certain cases, these exposures are
not offset by foreign currency denominated costs. As we primarily use foreign currency exchange contracts with
durations of less than 24 months and enter into contracts to hedge incremental portions of anticipated foreign
currency transactions on a quarterly basis for the current and following year, the effectiveness of our foreign
currency hedging activities to offset longer-term appreciation in the value of the U.S. dollar against non-U.S.
currencies may be limited. Factors that could affect the effectiveness of our hedging activities include accuracy of
sales and other forecasts, volatility of currency markets, and the cost and availability of hedging instruments. Since
our hedging activities are designed to minimize volatility, they not only temporarily reduce the negative impact of a
stronger U.S. dollar, but they also temporarily reduce the positive impact of a weaker U.S. dollar. Our future
financial results could be significantly affected by a strengthening value of the U.S. dollar in relation to the foreign
currencies in which we conduct business. The degree to which our financial results are affected for any given time
period will depend in part upon our hedging activities.
A weak worldwide economy could result in reduced demand for our products and services or
increased customer credit risk
A substantial percentage of our sales are made worldwide to the companion animal veterinary market.
Demand for our companion animal diagnostic products and services is driven in part by the number of patient visits
to veterinary hospitals and the practices of veterinarians with respect to the recommendations for diagnostic testing,
as well as pet owner compliance with these recommendations. Economic weakness in our significant markets could
cause pet owners to forgo or defer visits to veterinary hospitals or affect their willingness to approve certain
diagnostic tests, comply with a treatment plan or, even more fundamentally, continue to own a pet. In addition,
concerns about the financial resources of pet owners could cause veterinarians to be less likely to recommend certain
diagnostic tests, and concerns about the economy may cause veterinarians to defer purchasing capital items such as
our instruments and systems. These conditions, if they continue, could result in a decrease in sales or decrease in
sales growth, of diagnostic products and services, which could have an adverse effect on our results of operations.
Demand for our water products is driven in part by the availability of funds at government laboratories,
water utilities and private certified laboratories that utilize our products. Availability of funds also affects demand by
30
government laboratories and cattle, swine and poultry producers that utilize our livestock and poultry diagnostic
products, and by users of our human point-of-care diagnostic instruments. Economic weakness in our markets has
caused and could continue to cause our customers to reduce their investment in such testing, which could have an
adverse effect on our results of operations.
In all of our markets, a weak economy may also cause deterioration in the financial condition of our
distributors and customers, which could inhibit their ability to pay us amounts owed for products delivered or
services provided in a timely fashion or at all.
We sell many products through distributors, which presents risks that could negatively affect our
operating results
Some of our product sales in international markets occur through distributors. As a result, we are dependent
on these distributors to promote and create demand for our products. Our distributors often offer products from
several different companies, and certain of our distributors may carry our competitors’ products and promote our
competitors’ products over our own products. We have limited ability, if any, to cause our distributors to devote
adequate resources to promoting, marketing, selling and supporting our products or to maintain certain inventory
levels, and changes in our distributors’ inventory levels, as compared to comparable prior periods, could negatively
impact our revenue growth rates. We cannot assure you that we will be successful in maintaining and strengthening
our relationships with our distributors or establishing relationships with new distributors who have the ability to
market, sell and support our products effectively. We may rely on one or more key distributors for a product or a
region, and the loss of these distributors could reduce our revenue. Distributors may face financial difficulties,
including bankruptcy, which could harm our collection of accounts receivable and financial results. In addition,
violations of anti-corruption or similar laws by our distributors could have a material impact on our business and
reputation, and any termination of a distributor relationship may result in increased competition in the applicable
jurisdiction. Failure to manage the risks associated with our use of distributors outside of the U.S. may reduce sales,
increase expenses, and weaken our competitive position, any of which could have a negative effect on our operating
results.
Future operating results could be negatively affected by changes in tax rates, the adoption of new
U.S. or international tax legislation or exposure to additional tax liabilities
The nature of our international operations subjects us to local, state, regional and federal tax laws in
jurisdictions around the world. Our future tax expense could be affected by changes in the mix of earnings in
countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or changes
in tax laws or their interpretation. Additionally, tax rules governing cross-border activities are continually subject to
modification as a result of both coordinated actions by governments and unilateral measures designed by individual
countries, both intended to tackle concerns over base erosion and profit shifting (BEPS) and perceived international
tax avoidance techniques.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. on December 22, 2017 and includes
significant changes to the U.S. corporate tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal
corporate tax rate from 35 percent to 21 percent, and transitioned from a worldwide tax system to a territorial tax
system. The Tax Act introduced new provisions including the Global Intangible Low-Taxed Income (“GILTI”),
Foreign Derived Intangible Income (“FDII”), Base Erosion Anti-Abuse Tax (“BEAT’), expanded bonus
depreciation and changed deductions for executive compensation and interest expense. We continue to assess the
impact of the new provisions which become effective beginning in 2018. See Note 12 – Income Taxes in the
accompanying Notes to the consolidated financial statements for more information regarding the impact of the Tax
Act.
We have received tax rulings from various governments that have jurisdictional authority over our
operations. If we are unable to meet the requirements of such agreements, or if they expire or are renewed on less
favorable terms, the result could negatively impact our future earnings. Additionally, the European Commission has
opened formal investigations into specific tax rulings granted by several countries to specific taxpayers. While we
believe that our rulings in the Netherlands and Switzerland are different than those being discussed, the ultimate
resolution of such activities cannot be predicted and could also have an adverse impact on future operating results.
31
Our income tax filings are regularly under audit by various tax authorities, and the final determination of
tax audits could be materially different than that which is reflected in historical income tax provisions and accruals.
Significant judgment is required in determining our worldwide provision for income taxes. We regularly assess our
exposures related to our worldwide provision for income taxes to determine the adequacy of our provision for taxes.
Any reduction in these contingent liabilities or additional assessments would increase or decrease income,
respectively, in the period such determination is made.
Our limited experience and small scale in the human point-of-care market could inhibit our success
in this market
We have limited experience in the human point-of-care medical diagnostics market and we operate at a
small scale in this market. This market differs in many respects from the veterinary diagnostic market. Significant
differences include the impact of third-party reimbursement on diagnostic testing, more extensive regulation, greater
product liability risks, larger competitors, a more segmented customer base and more rapid technological innovation.
Our limited experience and small scale in the human point-of-care medical diagnostics market could negatively
affect our ability to successfully manage the risks and features of this market that differ from the veterinary
diagnostic market. There can be no assurance that we will be successful in achieving growth and profitability in the
human point-of-care medical diagnostics market comparable to the results we have achieved in the veterinary
diagnostic market.
Restrictions in our debt agreements or our inability to obtain financing on favorable terms may limit
our activities
Our ability to make scheduled payments and satisfy our other obligations under our Credit Facility and
senior notes depends on our future operating performance and on economic, financial, competitive, and other factors
beyond our control. Our business may not generate sufficient cash flows to meet these obligations or generate
sufficient levels of earnings to satisfy the applicable affirmative, negative, and financial covenants. Our failure to
comply with these covenants and the other terms of the Credit Facility and senior notes could result in an event of
default and acceleration of our obligations under these agreements, which may require us to seek additional
financing or restructure existing debt on unfavorable terms. In addition, adverse changes in credit markets could
increase our cost of borrowing and make it more difficult for us to obtain financing.
Our senior notes include provisions which stipulate a prepayment penalty for which we will be obligated in
the event that we elect to repay the notes prior to their stated maturity dates. Should we elect to repay some or all of
the outstanding principal balance on our senior notes, the prepayment penalty we incur could adversely affect our
results of operations and cash flows.
We fund our operations, capital purchase requirements and strategic growth needs through cash on hand,
funds generated from operations, amounts available under our Credit Facility and senior note financings. If we are
unable to obtain financing on favorable terms, we could face restrictions that would limit our ability to execute
certain strategies, which could have an adverse effect on our revenue growth and profitability.
We are subject to risks associated with fluctuations in the market values of our investment portfolio
We invest our surplus cash in a diversified portfolio of marketable securities, including corporate bonds,
commercial paper, and a short-term money market fund which invests in securities issued or sponsored by the U.S.
government. The value and liquidity of these marketable securities may fluctuate substantially, and could be
negatively affected by increases in interest rates, downgrades of the bonds and other securities included in our
portfolio, instability in the global financial markets, declines in the value of collateral underlying the securities
included in our portfolio, geopolitical events, or other factors. Any adverse changes in the financial markets and
resulting declines in the value of our portfolio could have an adverse impact on our financial condition and
operating results.
32
Fluctuations in our quarterly or annual results may cause our stock price to decline
Our prior operating results have fluctuated due to a number of factors, including seasonality of certain
product lines; changes in our accounting estimates; the impact of acquisitions; timing of distributor purchases
product launches, operating expenditures, customer marketing and incentive programs; changes in foreign currency
exchange rates; timing of regulatory approvals and licenses; litigation and claim-related expenditures; increase in the
number and type of competitors; changes in competitors’ product offerings; changes in our sales and distribution
model; changes in the economy affecting consumer spending; and other matters. Similarly, our future operating
results may vary significantly from quarter to quarter or year to year due to these and other factors, many of which
are beyond our control. If our operating results or projections of future operating results do not meet the expectations
of securities analysts or investors in future periods, our stock price may fall.
The market price of our common stock may be highly volatile, and you may not be able to resell your
shares at or above the price you paid
The trading price of our common stock may be volatile. Securities markets worldwide experience
significant price and volume fluctuations. This market volatility, as well as other general economic, market or
political conditions, could reduce the market price of our common stock in spite of our operating performance. The
following factors, in addition to other factors described in this “Risk Factors” section and elsewhere in this Form 10-
K, may have a significant impact on the market price of our common stock:
Changes in customer needs, expectations or trends and our ability to maintain relationships with key
customers;
Our ability to implement our business strategy;
Our stock repurchase program;
Changes in our capital structure, including the issuance of additional debt;
Public announcements (including the timing of these announcements) regarding our business, financial
performance and prospects or new products or services, product enhancements or technological advances
by our competitors or us;
Trading activity in our stock, including portfolio transactions in our stock by us, our executive officers and
directors, and significant stockholders or trading activity that results from the ordinary course rebalancing
of stock indices in which we may be included, such as the S&P 500 Index;
Investor perception of us and the industry and markets in which we operate;
Short-interest in our common stock, which could be significant from time to time;
Our inclusion in, or removal from, any stock indices;
Changes in earnings estimates or buy/sell recommendations by securities analysts;
Whether or not we meet earnings estimates of securities analysts who follow us; and
General financial, domestic, international, economic and market conditions, including overall fluctuations
in the U.S. equity markets.
In addition, broad market and industry factors may negatively affect the market price of our common stock,
regardless of our actual operating performance, and factors beyond our control may cause our stock price to decline
rapidly and unexpectedly. Furthermore, the stock market has experienced extreme volatility that, in some cases, has
been unrelated or disproportionate to the operating performance of particular companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
33
ITEM 2.
PROPERTIES
Our worldwide headquarters is located on a company-owned, 65-acre site in Westbrook, Maine where we
occupy a 647,000 square-foot building utilized for manufacturing, research and development, marketing, sales, and
general and administrative support functions.
Additional property ownership and leasing arrangements with approximate square footage, purpose and
location are as follows:
Additional Properties Owned:
34,200 square feet of laboratory space located in the U.S., used for our Reference Laboratory Diagnostic
and Consulting Services line of business of CAG
24,800 square feet of office and laboratory space located in the U.K., used for our Reference Laboratory
Diagnostic and Consulting Services line of business of CAG
3,100 square feet of laboratory space located in Canada, used for our Reference Laboratory Diagnostic and
Consulting Services line of business of CAG
Additional Properties Leased:
633,900 total square feet of laboratory, office and warehousing space located throughout the U.S., Europe,
Canada, Australia, New Zealand, Brazil, Asia, and South Africa, primarily used for our Reference
Laboratory Diagnostic and Consulting Services line of business of CAG
126,200 square feet of distribution, warehousing and office space in the Netherlands, which serves as our
European headquarters
114,400 square feet of industrial space in Tennessee for distribution and warehousing related to various
lines of business
84,300 square feet of office, manufacturing and warehousing space in Georgia related to our OPTI Medical
line of business
84,000 total square feet of office and manufacturing space in France, Switzerland, and Brazil related to our
Livestock, Poultry and Dairy line of business
69,300 square feet of office space in Wisconsin related to our Veterinary Software, Services and Diagnostic
Imaging Systems line of business of CAG
65,000 square feet of office space in Maine for corporate, customer service, and information technology
support services
8,100 square feet of manufacturing space in the U.K. related to our Water line of business
We believe that our owned and leased properties are generally in good condition, are well-maintained, and
are generally suitable and adequate to carry on our business.
ITEM 3.
LEGAL PROCEEDINGS
Due to the nature of our activities, we are at times subject to pending and threatened legal actions that arise
out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the
disposition of any such currently pending matters is not expected to have a material effect on our results of
operations, financial condition, or cash flows. However, the results of legal actions cannot be predicted with
certainty. Therefore, it is possible that our results of operations, financial condition or cash flows could be materially
adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
34
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Our common stock is quoted on the NASDAQ Global Select Market under the symbol IDXX. The
following table shows the quarterly range of high and low sale prices per share of our common stock as reported on
the NASDAQ Global Select Market for the years 2016 and 2017.
For the Quarter Ended
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
Holders of Common Stock
$
High
Low
79.03 $
92.87
115.06
121.77
63.48
76.55
92.52
102.45
155.65
173.01
171.37
168.66
113.92
153.24
148.80
146.09
As of February 6, 2018, there were 460 holders of record of our common stock. Because the majority of
our common stock is held by brokers and other institutions on behalf of stockholders, we are unable to estimate the
total number of stockholders represented by these record holders.
35
Purchases of Equity Securities by the Issuer
During the three months ended December 31, 2017, we repurchased shares of common stock as
described below:
1
Period
Total Number of
Shares Purchased
(a)
Average Price
Paid per Share
(b)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
(c)
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
(d)
October 1, 2017 to October 31, 2017
November 1, 2017 to November 30, 2017
December 1, 2017 to December 31, 2017
Total
$
106,900
140,343
105,463
352,706
(2) $
160.71
152.12
158.28
156.57
106,900
140,343
103,900
351,143
5,230,335
5,089,992
4,986,092
4,986,092
(1) As of December 31, 2017, our Board of Directors had approved the repurchase of up to 68 million shares
of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase
program. The program was approved and announced on August 13, 1999, and the maximum number of shares that
may be purchased under the program was subsequently increased on each of October 4, 1999, November 16, 1999,
July 21, 2000, October 20, 2003, October 12, 2004, October 12, 2005, February 14, 2007, February 13, 2008,
February 10, 2010, October 12, 2011, May 7, 2013, July 16, 2014, and June 15, 2015. Effective May 2, 2017, an
additional 3 million shares of our common stock was authorized for repurchase, increasing the total shares of
common stock authorized to be repurchased by the Company up from 65 million to 68 million shares. There is no
specified expiration date for this repurchase program. There were no other repurchase programs outstanding during
the three months ended December 31, 2017, and no repurchase programs expired during the period. Repurchases of
351,143 shares were made during the three months ended December 31, 2017, in transactions made pursuant to our
repurchase program.
(2) During the three months ended December 31, 2017, we received 1,563 shares of our common stock that
were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of
restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns
(a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be
purchased under the repurchase program.
During the year ended December 31, 2017, we repurchased 1,749,416 shares of our common stock in
transactions made pursuant to our repurchase program and received 56,638 shares of common stock that were
surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted
stock units and settlement of deferred stock units. See Note 18 to the consolidated financial statements for the year
ended December 31, 2017, included in this Annual Report on Form 10-K for further information.
Dividends
We have never declared or paid any cash dividends on our common stock. From time to time our Board of
Directors may consider the declaration of a dividend. However, we have no intention to declare or pay a dividend at
this time.
36
Stock Performance
This graph compares our total stockholder returns, the Total Return for the Standard & Poor’s (“S&P”) 500
Index, the Total Return for the S&P 500 Health Care Index, and the Total Return for the NASDAQ Stock Market
Index (U.S. Companies) prepared by the Center for Research in Security Prices (the “NASDAQ Index”). This graph
assumes the investment of $100 on December 31, 2012, in IDEXX’s common stock, the S&P 500 Index, the S&P
500 Health Care Index, and the NASDAQ Index and assumes dividends, if any, are reinvested. Measurement points
are the last trading days of the years ended December 2012 to 2017.
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
IDEXX Laboratories, Inc.
$
100.00
$
114.63
$
159.77
$
157.16
$
252.74
$
337.03
NASDAQ Index
S&P 500 Health Care Index
S&P 500 Index
100.00
100.00
100.00
140.12
141.46
132.39
160.78
177.30
150.51
171.97
189.52
152.59
187.22
184.42
170.84
242.71
225.13
208.14
37
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for each of the last five fiscal years. The
selected consolidated financial data presented below has been derived from our consolidated financial statements.
This financial data should be read in conjunction with the consolidated financial statements, related notes and other
financial information appearing elsewhere in this Annual Report on Form 10-K.
On May 6, 2015, we announced a two-for-one split of our outstanding shares of common stock which was
effected through a stock dividend that was paid through the issuance of treasury shares on June 15, 2015. All share
and per share amounts presented below, for periods prior to June 15, 2015, retroactively reflect the effect of the
stock split.
INCOME STATEMENT DATA:
Revenue
Cost of revenue
Gross profit
Expenses:
Sales and marketing
General and administrative
Research and development
Impairment charge
Income from operations
Interest expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income (loss) attributable to
noncontrolling interest
Net income attributable to IDEXX
Laboratories, Inc. stockholders
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
BALANCE SHEET DATA:
Cash and cash equivalents
Marketable securities(1)
$
$
$
$
For the Years Ended December 31,
(in thousands, except per share data)
2017
2016
2015
2014
2013
$
1,969,058 $
871,676
1,097,382
1,775,423 $
799,987
975,436
1,601,892 $
711,622
890,270
1,485,807 $
669,691
816,116
1,377,058
620,940
756,118
354,294
220,878
109,182
-
413,028
(31,971)
381,057
117,788
263,269
317,058
207,017
101,122
-
350,239
(28,393)
321,846
99,792
222,054
299,955
182,510
99,681
8,212
299,912
(26,771)
273,141
81,006
192,135
283,708
173,890
98,263
-
260,255
(13,700)
246,555
64,604
181,951
243,492
157,861
88,003
-
266,762
(3,501)
263,261
75,467
187,794
125
9
57
45
(6)
263,144 $
222,045 $
192,078 $
181,906 $
187,800
3.00 $
2.94 $
2.47 $
2.44 $
2.07 $
2.05 $
1.82 $
1.79 $
1.77
1.74
87,769
89,567
89,732
90,884
92,601
93,649
100,094
101,503
106,318
107,970
187,675 $
284,255
154,901 $
236,949
128,994 $
213,591
322,536 $
-
279,058
-
Cash and cash equivalents and marketable
securities
Working capital
Total assets
Total long-term debt(2)
Total stockholders' equity (deficit)
(1) See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our
marketable securities.
(2) See Note 11 to the consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our
senior notes.
391,850 $
(88,984) $
1,530,704 $
593,110 $
(108,213) $
342,585 $
(35,127) $
1,474,993 $
597,085 $
(83,995) $
471,930 $
(32,582) $
1,713,416 $
606,075 $
(53,842) $
322,536 $
(61,508) $
1,384,211 $
350,000 $
117,589 $
279,058
174,353
1,230,516
150,359
518,214
$
$
$
$
$
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report
on Form 10-K.
We have included certain terms and abbreviations used throughout this Annual Report on Form 10-K in the
"Glossary of Terms and Selected Abbreviations.”
Description of Business Segments. We operate primarily through three business segments: diagnostic and
information technology-based products and services for the veterinary market, which we refer to as the Companion
Animal Group (“CAG”); water quality products (“Water”); and diagnostic products and services for livestock and
poultry health and to ensure the quality and safety of milk and food, which we refer to as Livestock, Poultry and
Dairy (“LPD”). Our Other operating segment combines and presents products for the human point-of-care medical
diagnostics market (“OPTI Medical”) with our pharmaceutical product line and our out-licensing arrangements
because they do not meet the quantitative or qualitative thresholds for reportable segments. See Note 15 to the
consolidated financial statements for the year ended December 31, 2017, included in this Annual Report on Form
10-K for financial information about our segments, including our product and service categories, and our
geographic areas.
Certain costs are not allocated to our operating segments and are instead reported under the caption
“Unallocated Amounts”. These costs include costs that do not align with one of our existing operating segments or
are cost prohibitive to allocate, which primarily consist of our R&D function, regional or country expenses, certain
foreign currency revaluation gains and losses on monetary balances in currencies other than our subsidiaries’
functional currency and unusual items. Corporate support function costs (such as information technology, facilities,
human resources, finance and legal), health benefits and incentive compensation are charged to our business
segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or
rates are captured within Unallocated Amounts.
The following is a discussion of the strategic and operating factors that we believe have the most significant
effect on the performance of our business.
Companion Animal Group
Our strategy is to provide veterinarians with both the highest quality diagnostic information to support
more advanced medical care and information management solutions that help demonstrate the value of diagnostics
to pet owners and enable efficient practice management. By doing so, we are able to build a mutually successful
relationship with our veterinarian customers based on healthy pets, loyal customers and expanding practice
revenues.
CAG Diagnostics. We provide diagnostic capabilities that meet veterinarians’ diverse needs through a
variety of modalities including in-clinic diagnostic solutions and outside reference laboratory services. Veterinarians
that utilize our full line of diagnostic modalities obtain a single view of a patient’s diagnostic results, which allows
them to track and evaluate trends and achieve greater medical insight.
The breadth and complementary nature of our diagnostic solutions also provides us scale in sales and
distribution. To further increase our customer reach, effective January 1, 2015, we transitioned to an all-direct sales
strategy in the U.S. and did not renew our annual contracts with our U.S. distribution partners. Under this approach,
we take orders, ship product, invoice and receive payment for all rapid assay test kits and IDEXX VetLab
consumables in the U.S., aligning with our direct model for instruments, reference laboratory services, and other
CAG products and services. We believe these changes will continue to strengthen customer loyalty and help support
growth of our diagnostic revenues in North America.
39
Our diagnostic capabilities generate both recurring and non-recurring revenues. Revenues related to capital
placements of our in-clinic IDEXX VetLab suite of instruments and our SNAP Pro Mobile Device are non-recurring
in nature in that they are sold to a particular customer only once. Revenues from the associated proprietary IDEXX
VetLab consumables, SNAP rapid assay test kits, reference laboratory and consulting services, and extended
maintenance agreements and accessories related to our IDEXX VetLab instruments and our SNAP Pro Mobile
Device are recurring in nature, in that they are regularly purchased by our customers, typically as they perform
diagnostic testing as part of ongoing veterinary care services. Our recurring revenues, most prominently IDEXX
VetLab consumables and rapid assay test kits, have significantly higher gross margins than those provided by our
instrument sales. Therefore, the mix of recurring and non-recurring revenues in a particular period will impact our
gross margins.
Diagnostic Capital Revenue. Revenues related to the placement of the IDEXX VetLab suite of instruments
are non-recurring in nature, in that the customer will buy an instrument once over its respective product life cycle,
but will purchase consumables for that instrument on a recurring basis as they use that instrument for testing
purposes. During the early stage of an instrument’s life cycle, we derive relatively greater revenues from instrument
placements, while consumable sales become relatively more significant in later stages as the installed base of
instruments increases and instrument placement revenues begin to decline. In the early stage of an instrument’s life
cycle, placements are made primarily through sales transactions. As the market for the product matures, an
increasing percentage of placements are made in transactions, sometimes referred to as “reagent rentals,” in which
instruments are placed at customer sites at little or no cost in exchange for a multi-year customer commitment to
purchase instrument consumables.
Prior to the Catalyst One instrument launch during November 2014, we pre-sold the instrument under a
customer marketing program through which customers preordering a Catalyst One were initially provided with the
right to use a Catalyst Dx instrument. Under this marketing program, we deferred $7 million of instrument revenue
in 2014, which was fully recognized in 2015 upon delivery of the Catalyst One instruments or customer election to
keep the Catalyst Dx was received.
We place our Catalyst chemistry analyzers through sales, leases, rental and other programs. In addition, we
continue to place VetTest instruments through sales, lease, rental and other programs, with substantially all of our
revenues from that product line currently derived from consumable sales. As of December 31, 2017, these three
chemistry analyzers provided for a combined active installed base of approximately 47,000 units globally, as
compared to 43,000 units globally in 2016. Approximately 54 percent of 2017 Catalyst analyzer placements were to
customers that are new to IDEXX, including customers who had been using instruments from one of our
competitors, sometimes referred to as competitive accounts. Generally, placement of an instrument with a new or
competitive account is more attractive as the entire consumable stream associated with that placement represents
incremental recurring revenue, whereas the consumable stream associated with a Catalyst placement at a VetTest
customer substitutes a Catalyst consumable stream for a VetTest consumable stream. We have found that the
consumables revenues increase when a customer upgrades from a VetTest analyzer to a Catalyst analyzer due to the
superior test menu capability, flexibility, and ease of use of the Catalyst analyzers, which leads to additional testing
by the customer.
As we continue to experience growth in placements of Catalyst analyzers and in sales of related
consumables, we expect this growth to be partly offset by a decline in placements of VetTest analyzers and in sales
of related consumables.
The Procyte Dx analyzer is our latest generation hematology analyzer. In addition, we sell the LaserCyte Dx
and VetAutoread analyzers. As of December 31, 2017, these hematology analyzers provided for a combined active
installed base of approximately 33,400 units, as compared to 31,000 units in 2016 and 29,000 units in 2015. A
substantial portion of ProCyte Dx analyzer placements continue to be made at veterinary clinics that elect to upgrade
from their LaserCyte Dx analyzer to a ProCyte Dx analyzer. In 2017, approximately 60 percent of ProCyte
placements were made at competitive accounts. We also continue to place a substantial number of LaserCyte Dx
instruments, both new and recertified, as trade-ups from the VetAutoread analyzer and at new and competitive
accounts. As we continue to experience growth in placements of ProCyte Dx analyzers and in sales of related
consumables, we expect this growth to be partly offset by a decline in placements of LaserCyte Dx and VetAutoread
analyzers and a decrease in the associated recurring revenue stream.
40
Our SediVue Dx instrument was launched in North America early in 2016 and in the U.K. and Australia in
the fourth quarter of 2016. During 2017, we continued to launch Sedivue Dx internationally. Sedivue Dx is the first
veterinary in-clinic analyzer to provide urine sediment analysis. This instrument and single-use consumable system
provides a highly accurate way to automate the in-house process of examining urine under a microscope. We
provide customers with SediVue Dx consumables that are charged upon utilization, which we refer to as pay-per-
run, as compared to other instruments where we charge upon shipment of consumables.
We seek to enhance the attractiveness and customer loyalty of our SNAP rapid assay tests, by providing the
SNAP Pro Mobile Device, which activates SNAP tests, properly times the run, captures, and saves images of the
results and, in conjunction with IVLS, records invoice charges in the patient record. Beginning in January of 2017,
with our ProRead software, the SNAP Pro Mobile Device interprets results. These features promote practice
efficiency by eliminating manual entry of test results in patient records and also helps ensure that the services are
recorded and accurately invoiced. In addition, SNAP Pro Mobile Device results can be shared with pet owners on
the SNAP Pro screen or, in conjunction with IVLS, via VetConnect PLUS. We also sell the SNAPshot Dx, which
automatically reads certain SNAP test results and, in conjunction with IVLS, records those results in the electronic
medical record. We continue to work on enhancing the functionality of our analyzers to read the results of additional
tests from our canine and feline family of rapid assay products.
Our long-term success in the continuing growth of our CAG recurring diagnostic product and services is
dependent upon new customer acquisition, customer loyalty and retention of their recurring revenues, our ability to
realize price increases based on our differentiated products and customer utilization of existing and new assays
introduced for use on our analyzers. We continuously seek opportunities to enhance the care that veterinary
professionals give to their patients and clients through supporting the implementation of real-time care testing work
flows, which is performing tests and sharing test results with the client at the time of the patient visit. Our latest
generation of chemistry and hematology instruments demonstrates this commitment by offering enhanced ease of
use, faster time to results, broader test menu and connectivity to various information technology platforms that
enhance the value of the diagnostic information generated by the instruments. In addition, we provide marketing
tools and customer support that help drive efficiencies in veterinary practice processes and allow practices to
increase the number of clients they see on a daily basis.
With all of our instrument product lines, we seek to differentiate our products from our competitors’
products based on time-to-result, ease-of-use, throughput, breadth of diagnostic menu, flexibility of menu selection,
accuracy, reliability, ability to handle compromised samples, analytical capability of software, integration with the
IDEXX VetLab Station and VetConnect PLUS, client communications capabilities, education and training, and
superior sales and customer service. Our success depends, in part, on our ability to differentiate our products in a
way that justifies a premium price.
Recurring Diagnostic Revenue. Revenues from our proprietary IDEXX VetLab consumable products, our
SNAP rapid assay test kits, outside reference laboratory and consulting services, and extended maintenance
agreements and accessories related to our CAG Diagnostics instruments are considered recurring in nature. For the
year ended December 31, 2017, recurring diagnostic revenue, which is both highly durable and profitable, accounted
for approximately 74 percent of our consolidated revenue.
Our in-clinic diagnostic solutions, consisting of our IDEXX VetLab consumable products and SNAP rapid
assay test kits, provide real-time reference lab quality diagnostic results for a variety of companion animal diseases
and health conditions. Our outside reference laboratories provide veterinarians with the benefits of a more
comprehensive list of diagnostic tests and access to consultations with board-certified veterinary specialists and
pathologists, combined with the benefit of same-day or next-day turnaround times.
We derive substantial revenues and margins from the sale of consumables that are used in IDEXX VetLab
instruments and the multi-year consumable revenue stream is significantly more valuable than the placement of the
instrument. Our strategy is to increase diagnostic testing within veterinary practices by placing IDEXX VetLab
instruments and increasing instrument utilization of consumables. Utilization can increase due to a greater number
of patient samples being run or to an increase in the number of tests being run per patient sample. Our strategy is to
increase both drivers. To increase utilization, we seek to educate veterinarians about best medical practices that
emphasize the importance of chemistry, hematology and urinalysis testing for a variety of diagnostic purposes, as
well as by introducing new testing capabilities that were previously not available to veterinarians. Additionally, we
41
have found that veterinarian adoption of VetConnect PLUS drives utilization by spurring testing across all IDEXX
diagnostic modalities. In connection with the purchase of instruments, we also offer protocol-based rebate incentives
when customers utilize the broad testing functionality of our analyzers.
Our in-clinic diagnostic solutions also include SNAP rapid assay tests that address important medical needs
for particular diseases prevalent in the companion animal population. We seek to differentiate these tests from those
of other in-clinic test providers and reference laboratory diagnostic service providers based on critically important
sensitivity and specificity, as well as overall superior performance and ease of use by providing our customers with
combination tests that test a single sample for up to six diseases at once, including the ability to utilize our SNAP
Pro mobile device. We further augment our product development and customer service efforts with sales and
marketing programs that enhance medical awareness and understanding regarding certain diseases and the
importance of diagnostic testing.
The expiration of a third party’s U.S. lateral flow patent in early 2015 enabled competitors to launch single
use tests that competed with several of our early generation SNAP rapid assay products, including Heartworm RT,
FIV/FeLV Combo Test, Feline Triple, Parvo, and Giardia. These companies partnered with several of our former
national distributors to gain market share by competing primarily on price. In the second half of 2015, we stabilized
our market share on these products in part by communicating the significant superiority in test sensitivity for both
our Canine and Feline lines over competing tests using the lateral flow platform, and in part with more effective
marketing and promotion programs. Our higher sensitivity in the detection of infectious diseases is due in part to our
SNAP platform, which is unique in using enzyme-linked immunosorbent assays (“ELISA”) technology. Test
accuracy through specificity and sensitivity is a primary factor that customers value with these in-house tests, given
the importance of detecting the presence of serious infectious diseases in the practice.
We believe approximately half of all diagnostic testing by U.S. veterinarians is provided by outside
reference laboratories such as IDEXX Reference Laboratories. In several markets outside the U.S., in-clinic testing
is less prevalent and an even greater percentage of diagnostic testing is done in reference laboratories. We attempt to
differentiate our reference laboratory testing services from those of competitive reference laboratories and
competitive in-clinic offerings primarily on the basis of a unique and proprietary test menu, technology employed,
quality, turnaround time, customer service and tools such as VetConnect PLUS that demonstrate the complementary
manner in which our laboratory services work with our in-clinic offerings.
Profitability in our lab business is supported, in part, by our expanding business scale globally. Profit
improvements also reflect benefits from price increases and our ability to achieve efficiencies. When possible, we
utilize core reference laboratories to service samples from other states or countries, expanding our customer reach
without an associated expansion in our reference laboratory footprint. New laboratories that we open typically will
operate at a loss until testing volumes achieve sufficient scale. Acquired laboratories frequently operate less
profitably than our existing laboratories and acquired laboratories may not achieve the profitability of our existing
laboratory network for several years until we complete the implementation of operating improvements and
efficiencies. Therefore, in the short term, new and acquired reference laboratories generally will have a negative
effect on our operating margin. Recurring reference lab revenue growth is achieved both through increased sales to
existing customers and through the acquisition of new customers. We believe the increased number of customer
visits by our sales professionals as a result of the implementation of our all-direct sales strategy in the U.S. and the
subsequent growth in our field sales organization has led to increased reference laboratory opportunities with
customers who already use one of our in-clinic diagnostic modalities. In recent years, recurring reference laboratory
diagnostic and consulting revenues have also been increased through reference laboratory acquisitions, customer list
acquisitions, the opening of new reference laboratories, including laboratories that are co-located with large practice
customers, and as a result of our up-front customer loyalty programs. Our up-front customer loyalty programs
associated with customer acquisitions and retention provide incentives to customers in the form of cash payments or
IDEXX Points upon entering multi-year agreements to purchase annual minimum amounts of products or services,
including reference laboratory services.
Health Monitoring and Biological Materials Testing. We believe the acquisition of the research and
diagnostic laboratory business of the College of Veterinary Medicine from the University of Missouri has allowed
us to leverage our expertise in veterinary diagnostics and expand our integrated offering of reference laboratory
diagnostic and consulting services and in-clinic testing solutions in the adjacent bioresearch market.
42
Veterinary Software, Services and Diagnostic Imaging Systems. Our portfolio of practice management
offerings is designed to serve the full range of customers within the North American, Australian, and European
markets. Cornerstone, DVMAX, Animana and IDEXX Neo practice management systems provide superior
integrated information solutions, backed by exceptional customer support and education. These practice
management systems allow the veterinarian to practice better medicine and achieve the practice’s business
objectives, including a quality client experience, staff efficiency and practice profitability. We market Cornerstone,
DVMAX and IDEXX Neo practice management systems to customers primarily in North America and Australia.
We market our Animana offering to customers primarily throughout Europe.
Animana and IDEXX Neo practice management systems are subscription-based SaaS offerings designed to
provide flexible pricing and a durable, recurring revenue stream, while utilizing cloud technology instead of a client
server platform. While we continue to develop, sell, and support our licensed-based Cornerstone and DVMAX
software, we are growing our installed base of subscription-based practice management offerings for new customers
of IDEXX practice management systems. We believe that once established, this subscription-based model will
provide higher profitability as compared to the historical license-based placements. Our Cornerstone and DVMAX
customer base continues to be an important driver of growth through enhanced diagnostic integrations and high
value add-on subscription services, such as Pet Health Network Pro, Petly Plans, and credit card processing, and we
continue to make investments to enhance the customer experience of all of our license-based software offerings. We
also offer rVetLink, a comprehensive referral management solution for specialty care hospitals that streamlines the
referral process between primary care and specialty care veterinarians. rVetLink’s cloud technology integrates with
major specialty hospital management systems, including Cornerstone Software and DVMAX Software.
We differentiate our practice management systems through enhanced functionality, ease of use and
connectivity with in-clinic IDEXX VetLab instruments and outside reference laboratory test results. Our client
communication services create more meaningful pet owner experiences through personalized communication. Pet
Health Network Pro online client communication and education service complements the entire IDEXX product
offering by educating pet owners and building loyalty through engaging the pet owner before, during and after the
visit, thereby building client loyalty and driving more patient visits.
Our diagnostic imaging systems offer a convenient radiographic solution that provides superior image
quality and the ability to share images with clients virtually anywhere. IDEXX imaging software enables enhanced
diagnostic features and streamlined integration with our other products and services. Our newest digital radiography
systems, the ImageVue DR50 Digital Imaging System enables low-dose radiation image capture without sacrificing
clear, high-quality diagnostic images, reducing the risk posed by excess radiation exposure for veterinary
professionals. Placements of imaging systems are important to the growth of revenue streams that are recurring in
nature, including extended maintenance agreements and IDEXX Web PACS, which is our cloud-based SaaS
offering for viewing, accessing, storing, and sharing multi-modality diagnostic images. We derive relatively higher
margins from our subscription-based products. IDEXX Web PACS is integrated with Cornerstone, IDEXX Neo and
IDEXX VetConnect PLUS to provide centralized access to diagnostic imaging results alongside patient diagnostic
results from any internet connected device.
43
Water
Our strategy in the water testing business is to develop, manufacture, market and sell proprietary products
that test primarily for the presence of microbial contamination in water matrices, including drinking water supplies,
with superior performance, supported by exceptional customer service. Our customers primarily consist of water
utilities, government laboratories and private certified laboratories that highly value strong relationships and
customer support. We expect that future growth in this business will be significantly dependent on our ability to
increase international sales. Growth also will be dependent on our ability to enhance and broaden our product line.
Most water microbiological testing is driven by regulation, and, in many countries, a test may not be used for
compliance testing unless it has been approved by the applicable regulatory body and integrated into customers’
testing protocols. As a result, we maintain an active regulatory program that involves applying for a growing number
of regulatory approvals in a number of countries, primarily in Europe. Further, we seek to receive regulatory
approvals from governing agencies as a means to differentiate our products from the competition.
Livestock, Poultry and Dairy
We develop, manufacture, market and sell a broad range of tests and perform services for various livestock
diseases and conditions, and have active research and development and in-licensing programs in this area. Our
strategy is to offer proprietary tests with superior performance characteristics for use in government programs to
control or eradicate disease and disease outbreaks and in livestock and poultry producers’ disease, reproductive, and
herd health and production management programs. Disease outbreaks are episodic and unpredictable, and certain
diseases that are prevalent at one time may be substantially contained or eradicated at a later time. In response to
outbreaks, testing initiatives may lead to exceptional demand for certain products in certain periods. Conversely,
successful eradication programs may result in significantly decreased demand for certain products. In addition,
increases in government funding may lead to increased demand for certain products and budgetary constraints may
lead to decreased demand for certain products. As result, the performance in certain sectors of this business can
fluctuate.
Our strategy in the dairy testing business is to develop, manufacture and sell antibiotic residue and
contaminant testing products that satisfy applicable regulatory requirements or dairy processor standards for testing
of milk and provide reliable field performance. The manufacture of these testing products leverages the SNAP
platform and production assets that also support our rapid assay business, which also leverages the SNAP platform.
The dairy SNAP products, incorporate customized reagents for antibiotic and contaminant detection. To successfully
increase sales of dairy testing products, we believe that we need to increase penetration in dairy processors and
develop product line enhancements and extensions. Our Rapid Visual Pregnancy Test for cattle can detect
pregnancy 28 days after breeding. This test provides a quick and accurate identifier using whole blood samples.
The performance of the business is particularly subject to the various risks that are associated with doing
business internationally. See “Part I, Item 1A. Risk Factors.”
44
Other
OPTI Medical. Our strategy in the OPTI Medical business for the human market is to develop,
manufacture, and sell electrolyte and blood gas analyzers and related consumable products for the medical point-of-
care diagnostics market worldwide, with a focus on small to mid-sized hospitals. We seek to differentiate our
products based on ease of use, convenience, international distribution and service and instrument reliability. Similar
to our veterinary instruments and consumables strategy, a substantial portion of the revenues from this product line
is derived from the sale of consumables for use on the installed base of electrolyte and blood gas analyzers. During
the early stage of an instrument’s life cycle, relatively greater revenues are derived from instrument placements,
while consumable sales become relatively more significant in later stages as the installed base of instruments
increases and instrument placement revenues begin to decline. Our long-term success in this area of our business is
dependent upon new customer acquisition, customer retention and increased customer utilization of existing and
new assays introduced on these instruments.
Our facility in Roswell, Georgia develops and manufactures the OPTI product lines using the same or
similar technology to support the electrolyte needs of the veterinary market. We leverage this facility’s know-how,
intellectual property, and manufacturing capability to continue to expand the menu and instrument capability of the
VetStat and Catalyst platforms for veterinary applications while reducing our cost of consumables by leveraging
experience and economies of scale.
During the first half of 2016, management reviewed the OPTI Medical product offerings. As a result of this
review, in March 2016 we discontinued certain development activities in the human point-of-care medical
diagnostics market that were devoted to a new platform and focused our efforts on supporting our current generation
OPTI CCA-TS2 Blood Gas and Electrolyte analyzer.
The performance of the business is particularly subject to the various risks that are associated with doing
business internationally. See “Part I, Item 1A. Risk Factors.”
45
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations is based upon our
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. Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K
describes the significant accounting policies used in preparation of these consolidated financial statements.
We believe the following critical accounting estimates and assumptions may have a material impact on
reported financial condition and operating performance and involve significant levels of judgment to account for
highly uncertain matters or are susceptible to significant change.
Revenue Recognition
We recognize revenue when four criteria are met: (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv)
collectability is reasonably assured. See Note 2(j) to the consolidated financial statements for the year ended
December 31, 2017, included in this Annual Report on Form 10-K for additional information about our revenue
recognition policy and criteria for recognizing revenue.
Multiple Element Arrangements (“MEAs”). Arrangements to sell products to customers frequently include
multiple deliverables. Our most significant MEAs include the sale of one or more of the instruments from the
IDEXX VetLab suite of analyzers, diagnostic imaging systems or practice management software, combined with
one or more of the following products: extended maintenance agreements (“EMAs”), consumables, rapid assay kits
and reference laboratory diagnostic and consulting services. Practice management software is frequently sold with
post-contract customer support and implementation services. Delivery of the various products or performance of
services within the arrangement may or may not coincide. Delivery of our IDEXX VetLab instruments, diagnostic
imaging systems and practice management software generally occurs at the onset of the arrangement. EMAs,
consumables, rapid assay kits, and reference laboratory diagnostic and consulting services typically are delivered
over future periods, generally one to six years. In certain arrangements, revenue recognized is limited to the amount
invoiced or received that is not contingent on the delivery of products and services in the future.
We allocate revenue to each element based on the relative selling price and recognize revenue when the
elements have standalone value and the four criteria for revenue recognition, as discussed above, have been met for
each element. If available, we establish the selling price of each element based on vendor-specific objective
evidence (“VSOE”), which represents the price charged for a deliverable when it is sold separately. We use third-
party evidence (“TPE”) if VSOE is not available, or best estimate of selling price if neither VSOE nor TPE is
available. When these arrangements include a separately-priced EMA, we recognize revenue related to the EMA at
the stated contractual price on a straight-line basis over the life of the agreement to the extent the separately stated
price is substantive. If there is no stated contractual price for an EMA, or the separately stated price is not
substantive, we allocate revenue to each element based on the relative selling price and recognize revenue when the
elements have standalone value and the four criteria for revenue recognition, as discussed above, have been met for
each element.
46
When arrangements within the scope of software revenue recognition guidance include multiple elements,
we allocate revenue to each element based on relative fair value, when VSOE exists for all elements, or by using the
residual method when there is VSOE for the undelivered elements but no such evidence for the delivered elements.
Under the residual method, the fair value of the undelivered elements is deferred and the residual revenue is
allocated to the delivered elements. Revenue is recognized on any delivered elements when the four criteria for
revenue recognition have been met for each element. If VSOE does not exist for the undelivered element, all
revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE does exist or
all elements of the arrangement have been delivered. We determine fair value based on amounts charged separately
for the delivered and undelivered elements to similar customers in standalone sales of the specific elements.
Certain arrangements with customers include discounts on future sales of products and services. We apply
judgment in determining whether future discounts are significant and incremental. When the future discount offered
is not considered significant and incremental, we do not account for the discount as an element of the original
arrangement. If the future discount is significant and incremental, we recognize that discount as an element of the
original arrangement and allocate the discount to the other elements of the arrangement based on relative selling
price. To determine whether a discount is significant and incremental, we look to the discount provided in
comparison to standalone sales of the same product or service to similar customers, the level of discount provided on
other elements in the arrangement and the significance of the discount to the overall arrangement. If the discount in
the MEA approximates the discount typically provided in standalone sales, that discount is not considered
incremental.
Customer Programs. We record reductions to revenue related to customer marketing and incentive
programs, which include end-user rebates and other volume-based incentives. Incentives may be provided in the
form of IDEXX Points, credits or cash and are earned by end users upon achieving defined volume purchases or
utilization levels or upon entering an agreement to purchase products or services in future periods. The summary of
revenue reductions presented in the tables below reflects all revenue reductions recorded for the year for each
particular program. These amounts are presented on a net basis when applicable, which accounts for any differences
between estimates and actual incentives earned for the relevant customer marketing or incentive program. These
differences have been insignificant in all quarterly or annual periods. Our most significant customer programs are
categorized as follows:
Customer Loyalty Programs. Our customer loyalty programs offer customers the opportunity to earn
incentives on a variety of IDEXX products and services as those products and services are purchased and
utilized. Revenue reductions related to customer loyalty programs are recorded based on the actual issuance
of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future.
Up-Front Customer Loyalty Programs. Our up-front loyalty programs provide incentives to customers in
the form of cash payments or IDEXX Points upon entering multi-year agreements to purchase annual
minimum amounts of future products or services. We predominately offer up-front loyalty incentives in
response to competitive offerings. If a customer breaches its agreement, they are required to refund all or a
portion of the up-front cash or IDEXX Points, or make other repayments, remedial actions, or both. These
incentives are considered to be customer acquisition costs and are capitalized within other current assets
and other long-term assets and are subsequently recognized as a reduction to revenue over the term of the
customer agreement. If these up-front incentives are subsequently utilized to purchase IDEXX VetLab
instruments, diagnostic imaging systems or Cornerstone practice management systems, product revenue
and cost is deferred and recognized over the term of the customer agreement as products and services are
provided to the customer. We monitor customer purchases over the term of their agreement to assess the
realizability of our capitalized customer acquisition costs. For the years ended December 31, 2017, 2016
and 2015, impairments of customer acquisition costs were immaterial.
47
IDEXX Instrument Marketing Programs. Our instrument marketing programs require the customer to enroll
at the time of instrument purchase and offer customers the opportunity to earn incentives in future periods
based on the volume of the products they purchase and utilize over the term of the program. These
arrangements are considered MEAs in accordance with our revenue recognition policy stated above.
Revenue reductions related to instrument marketing programs are recorded based on an estimate of
customer purchase and utilization levels and the incentive the customer will earn over the term of the
program. Our estimates are based on historical experience and the specific terms and conditions of the
marketing program, requiring us to apply judgment to estimate future product purchases and utilization.
Differences between our estimates and actual incentives earned are accounted for as a change in estimate.
These differences were not material for the years ended December 31, 2017, 2016 and 2015. At December
31, 2017, a 5 percent change in our estimate of future customer utilization would increase or reduce
revenue by approximately $0.4 million.
Reagent Rental Programs. Our reagent rental programs provide customers the right to use our instruments
in consideration for multi-year agreements to purchase annual minimum amounts of consumables. No
instrument revenue is recognized at the time of instrument installation. We recognize a portion of the
revenue allocated to the instrument concurrent with the future sale of consumables. We determine the
amount of revenue allocated from the consumable to the instrument based on relative selling prices and
determine the rate of instrument revenue recognition in proportion to the customer’s minimum volume
commitment. The cost of the instrument is capitalized within property and equipment or deferred within
other assets, and is charged to the cost of product revenue on a straight-line basis over the term of the
minimum purchase agreement.
IDEXX Points are considered the same as cash and may be applied against the purchase price of IDEXX
products and services or applied to trade receivables due to us. IDEXX Points that have not yet been used by
customers are classified as a liability until use or expiration occurs. We estimate the amount of IDEXX Points
expected to expire, or breakage, based on historical expirations and we recognize the estimated benefit of breakage
in proportion to actual redemptions of IDEXX Points by customers. On November 30 of each year, unused IDEXX
Points earned before January 1 of the prior year generally expire and any variance from the breakage estimate is
accounted for as a change in estimate. This variance was not material for the years ended December 31, 2017, 2016
and 2015.
Future market conditions and changes in product offerings may cause us to change marketing strategies to
increase or decrease customer incentive offerings, possibly resulting in incremental reductions of revenue in future
periods as compared to reductions in the current or prior periods. Additionally, certain customer programs require us
to estimate, based on historical experience, and apply judgment to predict the number of customers who will actually
redeem the incentive. In determining estimated revenue reductions, we utilize data collected directly from end users,
which includes the volume of qualifying products purchased and the number of qualifying tests run as reported to us
by end users via IDEXX SmartService. Differences between estimated and actual customer participation in
programs may impact the amount and timing of revenue recognition.
48
Following is a summary of revenue reductions, net recorded in connection with our customer programs for
the years ended December 31, 2017, 2016 and 2015 (in thousands):
Revenue Reductions Recorded, Net
Customer Loyalty Programs, Net (1)
Up-Front Customer Loyalty Programs
IDEXX Instrument Marketing Programs, Net (1)
Other Customer Programs, Net (1)
Total revenue reductions, Net
For the Years Ended December 31,
2017
2016
2015
$
$
22,106
28,881
43,939
384
95,310
$
$
18,226
24,595
37,012
417
80,250
$
$
16,742
19,972
31,112
664
68,490
(1) Revenue reduction is provided on a net basis, which accounts for any differences between estimates and actual incentives earned.
Accrued customer programs are included within accrued liabilities and other long-term liabilities,
depending on the anticipated settlement date, in the consolidated balance sheets included in this Annual Report on
Form 10-K. Following is a summary of changes in the accrual for estimated revenue reductions attributable to
customer programs and the ending accrued customer programs balance for the years ended December 31, 2017 and
2016 (in thousands):
Accrued Customer Programs:
Balance, beginning of the year
Revenue reductions for Customer Loyalty Programs, Net (1)
Up-Front Customer Loyalty Program Awards issued as IDEXX Points
Revenue reductions for IDEXX Instrument Marketing Programs, Net (1)
Revenue reductions for Other Customer Programs, Net (1)
IDEXX Points redeemed and credits issued
Breakage
Exchange impact on balances denominated in foreign currency
Balance, end of the year
For the Years Ended December 31,
2016
2017
$
$
59,432
22,106
50,902
43,939
384
(107,867)
(471)
1,186
69,611
$
$
55,133
18,227
31,407
37,011
417
(81,733)
(722)
(308)
59,432
(1) Revenue reduction is provided on a net basis, which accounts for any differences between estimates and actual incentives earned.
New Revenue Standard. We will adopt ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
(the “New Revenue Standard”) in the first quarter of 2018 on a modified-retrospective basis. ASU 2014-09 will
replace most of the existing revenue recognition guidance within U.S. GAAP. See Note 2(x) to the consolidated
financial statements for the year ended December 31, 2017, included in this Annual Report on Form 10-K for
additional information about ASU 2014-09. While ASU 2014-09 will not impact the overall economics of our
products and services sold under customer marketing and incentive programs, we expect the New Revenue Standard
will require us to accelerate revenue recognition related to certain of our customer programs and to delay revenue
recognition for certain other customer programs. We expect to accelerate revenue recognition on instruments and
systems placed through programs where customers are committed to purchase future goods and services, including
our up-front customer loyalty and volume commitment programs. This change is the result of the New Revenue
Standard no longer limiting revenue recognition to the amount of customer consideration received upon placement.
Conversely, we expect to defer an increased portion of revenue related to instrument placements under programs
that provide rebate incentives on future purchases, including certain of our IDEXX instrument marketing programs.
Under the New Revenue Standard, future purchases that are optional and not subject to a customer commitment, are
not considered part of the customer arrangement, resulting in the instrument absorbing a higher relative allocation of
rebate incentives. We expect this change to result in lower instrument revenue upon placement and higher recurring
revenues over the term of the rebate incentive program. We believe these will be the most significant impacts related
to our adoption of the New Revenue Standard and we estimate a net increase in revenue of approximately $10
million for the year ending December 31, 2018, in connection with such adoption. The estimated net increase in
revenue is the result of anticipated earlier recognition on 2018 activity, which is expected to be partially offset by
the net impact of the modified-retrospective cumulative adjustments on 2018. These impacts are expected to
increase CAG Diagnostics recurring revenues related to the modified-retrospective cumulative adjustments, which is
expected to be partially offset by a net decrease in both CAG Diagnostics capital instrument revenue and Veterinary
software, services and imaging systems revenue. This assessment is based on the anticipated volume, mix and
design of our customer marketing and incentive programs, which may change in response to future customer and
49
competitive demands. Furthermore, the New Revenue Standard requires the deferral of incremental costs to obtain a
customer contract over the term of the customer arrangement, such as sales commissions. Based on the current
design of our sales commission plans, the impact of implementing this element of the New Revenue Standard is not
expected to be material to our results for the year ending December 31, 2018.
Inventory Valuation
We write down the carrying value of inventory for estimated obsolescence by an amount equal to the
difference between the cost of inventory and the estimated market value when warranted based on assumptions of
future demand, market conditions, remaining shelf life or product functionality. If actual market conditions or results
of estimated functionality are less favorable than those we estimated, additional inventory write-downs may be
required, which would have a negative effect on results of operations.
Valuation of Goodwill and Other Intangible Assets
A significant portion of the purchase price for acquired businesses is generally assigned to intangible
assets. Intangible assets other than goodwill are initially valued at fair value. If a quoted price in an active market for
the identical asset is not readily available at the measurement date, the fair value of the intangible asset is estimated
based on discounted cash flows using market participant assumptions, which are assumptions that are not specific to
IDEXX. The selection of appropriate valuation methodologies and the estimation of discounted cash flows require
significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the
useful lives of intangible assets. When material, we utilize independent valuation experts to advise and assist us in
determining the fair values of the identified intangible assets acquired in connection with a business acquisition and
in determining appropriate amortization methods and periods for those intangible assets. Goodwill is initially valued
based on the excess of the purchase price of a business combination over the fair value of acquired net assets
recognized and represents the future economic benefits arising from other assets acquired that could not be
individually identified and separately recognized.
We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and whenever
events or circumstances indicate impairment may exist. An impairment charge is recorded for the amount, if any, by
which the carrying amount of goodwill exceeds its implied fair value. Our reporting units are the individual product
and service categories that comprise our CAG operating segment, our Water and LPD operating segments and
goodwill remaining from the restructuring of our pharmaceutical business in the fourth quarter of 2008. A
substantial portion of the goodwill remaining from the pharmaceutical business, included in our “Other Segment”, is
associated with intellectual property that has been, or that we expect to be, licensed to third parties. Realization of
this goodwill is dependent upon the success of those third parties in developing and commercializing products,
which will result in our receipt of royalties and other payments.
In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine
whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis
for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not
threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or
circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, we would then perform step one of the two-step impairment test; otherwise, no further impairment
test would be required. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any
period and proceed directly to step one of the two-step impairment test. Doing so does not preclude us from
performing the qualitative assessment in any subsequent period.
As part of our goodwill testing process, we evaluate factors specific to a reporting unit as well as industry
and macroeconomic factors that are reasonably likely to have a material impact on the fair value of a reporting unit.
Examples of the factors considered in assessing the fair value of a reporting unit include: the results of the most
recent impairment test, the competitive environment, the regulatory environment, anticipated changes in product or
labor costs, revenue growth trends, the consistency of operating margins and cash flows and current and long-range
financial forecasts. The long-range financial forecasts of the reporting units, which are based upon management’s
long-term view of our markets, are used by senior management and the Board of Directors to evaluate
operating performance.
50
In the fourth quarters of 2017 and 2016, we elected to bypass the qualitative approach and instead
proceeded directly to step one of the two-step impairment test to assess the fair value of all of our reporting units.
As part of step one of the two-step impairment test, we estimate the fair values of applicable reporting units
using an income approach based on discounted forecasted cash flows. We make significant assumptions about the
extent and timing of future cash flows, growth rates and discount rates. Model assumptions are based on our
projections and best estimates, using appropriate and customary market participant assumptions. In addition, we
make certain assumptions in allocating shared assets and liabilities to individual reporting units in determining the
carrying value of each reporting unit. To validate the reasonableness of our reporting units' estimated fair values, we
reconcile the aggregate fair values of our reporting units to our total market capitalization. Valuation assumptions
reflect our projections and best estimates, based on significant assumptions about the extent and timing of future
cash flows, growth rates and discount rates.
We maintain approximately $6.5 million of goodwill associated with our remaining pharmaceutical
intellectual property, out-licensing arrangements, and certain retained drug delivery technologies (collectively
“Pharmaceutical Activities”) that we seek to commercialize through arrangements with third parties. Currently, our
primary support for the carrying value of this goodwill is royalty revenue associated with the commercialization of
certain intellectual property. There is no guarantee that we will be able to maintain or increase revenues from our
remaining Pharmaceutical Activities. The results of our goodwill impairment test for these Pharmaceutical Activities
indicate an excess of estimated fair value over the carrying amount of this reporting unit by approximately $3.1
million and 47 percent of the reporting unit’s carrying value. Excluding these Pharmaceutical Activities, the results
of our goodwill impairment test indicate an excess of estimated fair value over the carrying amount for each of our
reporting units with a minimum of 150 percent and an average of approximately 550 percent.
While we believe that the assumptions used to determine the estimated fair values of each of our reporting
units are reasonable, a change in assumptions underlying these estimates could result in a material negative effect on
the estimated fair value of the reporting units. Our fair value estimate assumes the achievement of future financial
results contemplated in our forecasted cash flows, and there can be no assurance that we will realize that value. We
use forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our
most recent views of the long-term outlooks for our reporting units. Actual results may differ from those assumed in
our forecasts. The discount rate is based on a weighted average cost of capital derived from industry peers. Changes
in market conditions, interest rates, growth rates, tax rates, costs, pricing, or the discount rate would affect the
estimated fair values of our reporting units and could result in a goodwill impairment charge in a future period. No
goodwill impairments were identified during the years ended December 31, 2017, 2016 or 2015.
A prolonged economic downturn in the U.S. or internationally resulting in lower long-term growth rates
and reduced long-term profitability may reduce the fair value of our reporting units. Industry specific events or
circumstances could have a negative impact on our reporting units and may also reduce the fair value of our
reporting units. Should such events occur and it becomes more likely than not that a reporting unit’s fair value has
fallen below its carrying value, we will perform an interim goodwill impairment test, in addition to the annual
impairment test. Future impairment tests may result in an impairment of goodwill, depending on the outcome of
future impairment tests. An impairment of goodwill would be reported as a non-cash charge to earnings.
We assess the realizability of intangible assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. If an impairment review is triggered, we evaluate the carrying value of
intangible assets based on estimated undiscounted future cash flows over the remaining useful life of the primary
asset of the asset group and compare that value to the carrying value of the asset group. The cash flows that are used
contain our best estimates, using appropriate and customary assumptions and projections at the time. If the net
carrying value of an intangible asset exceeds the related estimated undiscounted future cash flows, an impairment to
adjust the intangible asset to its fair value would be reported as a non-cash charge to earnings. If necessary, we
would calculate the fair value of an intangible asset using the present value of the estimated future cash flows to be
generated by the intangible asset and applying a risk-adjusted discount rate.
51
We had no impairments of our intangible assets during the year ended December 31, 2017. During the first
half of 2016, management reviewed our OPTI Medical product offering, which resulted in the discontinuance of our
instrument development activities in the human point-of-care medical diagnostics market and a decision to focus our
commercial and development efforts to support our latest generation OPTI CCA-TS2 Blood Gas and Electrolyte
analyzer. Management identified unfavorable trends in our OPTI Medical business resulting from this change in
strategy. We revised our forecasts downward, causing us to assess the realizability of the related tangible and
intangible assets and determined the expected future cash flows were less than the carrying value of the OPTI
Medical asset group. Non-cash intangible asset impairments of $2.2 million were recognized during the six months
ended June 30, 2016. The intangibles associated with our OPTI Medical human point-of-care medical diagnostics
market are fully written off. Intangible assets impairments during the years ended December 31, 2015 were not
material.
Our business combinations regularly include contingent consideration arrangements that require additional
consideration to be paid based on the achievement of established objectives, most commonly related to the retention
or growth of the customer base during the post-combination period. We assess contingent consideration to determine
if it is part of the business combination or if it should be accounted for separately from the business combination in
the post-combination period. Contingent consideration is recognized at its fair value on the acquisition date. A
liability resulting from contingent consideration is remeasured to fair value at each reporting date until the
contingency is resolved, with changes in fair value recognized in earnings. Changes in fair value of contingent
consideration and differences arising upon settlement were not material during the years ended December 31, 2017,
2016 and 2015. See Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K
for additional information regarding contingent consideration arising from business acquisitions.
Share-Based Compensation
Effective January 1, 2017, we adopted the FASB Accounting Standard Update (“ASU”) 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
which simplifies several aspects of the accounting for share-based payment transactions, including income tax
consequences, recognition of stock compensation award forfeitures, classification of awards as either equity or
liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows. The tax
benefits related to share-based payments reduced income tax expense by approximately $28 million for the year
ended December 31, 2017, primarily through a reduction in our effective income tax rate. We do not estimate that
the level of share-based payment activity in 2017 will continue in future periods. We believe that the historical range
of $11 million to $14 million of annual tax benefits reflects a reasonable estimate for 2018, based on current
settlement trends and stock price levels. These impacts may vary significantly based on the timing of actual
settlement activity. For more information regarding the adoption of the new share-based compensation guidance,
ASU 2016-09, see Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.
Our share-based compensation programs provide for grants of stock options, restricted stock units and
deferred stock units, along with the issuance of employee stock purchase rights. The total fair value of future awards
may vary significantly from past awards based on a number of factors, including our share-based award practices.
Therefore, share-based compensation expense is likely to fluctuate, possibly significantly, from year to year.
52
We use the Black-Scholes-Merton option-pricing model to determine the fair value of options granted.
Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price
volatility and the expected term of options. The risk-free interest rate is based on the U.S. Treasury yield for a
duration similar to the expected term at the date of grant. We have never paid any cash dividends on our common
stock and we have no intention to pay a dividend at this time; therefore, we assume that no dividends will be paid
over the expected terms of option awards. We determine the assumptions to be used in the valuation of option grants
as of the date of grant. As such, we use different assumptions during the year if we grant options at different dates.
Substantially all our options granted during the years ended December 31, 2017, 2016 and 2015 were granted in the
first quarter of each year. The weighted average of each of the valuation assumptions used to determine the fair
value of each option grant during each of the previous three years is as follows:
Expected stock price volatility
Expected term, in years (1)
Risk-free interest rate
(1) Options granted have a contractual term of ten years.
For the Years Ended December 31,
2017
26 %
5.8
2.0 %
2016
25 %
5.7
1.2 %
2015
23 %
5.6
1.5 %
Changes in these subjective assumptions, particularly for the expected stock price volatility and the
expected term of options, can materially affect the fair value estimate. Our expected stock price volatility
assumption is based on the historical volatility of our stock over a period similar to the expected term and other
relevant factors. Higher estimated volatility increases the fair value of a stock option, while lower estimated
volatility has the opposite effect. The total fair value of stock options granted during the year ended December 31,
2017, was $15.7 million. If the weighted average of the stock price volatility assumption was increased or decreased
by 1 percent, the total fair value of stock options awarded during the year ended December 31, 2017, would have
increased or decreased by approximately $0.5 million and the total expense recognized for the year ended December
31, 2017, for options awarded during the same period would have increased or decreased by less than $0.1 million.
We derive the expected term assumption for stock options based on historical experience and other relevant
factors concerning expected behavior with regard to option exercises. The expected term is determined using a
consistent method at each grant date. A longer expected term assumption increases the fair value of stock option
awards, while a shorter expected term assumption has the opposite effect. If the weighted average of the expected
term was increased or decreased by one year, the total fair value of stock options awarded during the year ended
December 31, 2017, would have increased or decreased by approximately $1.5 million, and the total expense
recognized for the year ended December 31, 2017, for options awarded during 2017 would have increased or
decreased by approximately $0.3 million.
For a significant majority of our awards, share-based compensation expense is recognized on a straight-line
basis over the requisite service period, which ranges from one to five years, depending on the award. Share-based
compensation expense is recognized on a grade-vesting methodology for performance-based restricted stock units.
Share-based compensation expense is based on the number of awards expected to vest and is, therefore, reduced for
an estimate of the number of awards that are expected to be forfeited. The forfeiture estimates are based on historical
data and other factors; share-based compensation expense is adjusted annually for actual results. Total share-based
compensation expense for the year ended December 31, 2017, was $23.5 million, which is net of a reduction of
approximately $2.2 million for actual and estimated forfeitures. Fluctuations in our overall employee turnover rate
may result in changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual
experience and, therefore could have a significant unanticipated impact on share-based compensation expense.
Modifications of the terms of outstanding awards may result in significant increases or decreases in share-
based compensation. There were no material modifications to the terms of outstanding options, restricted stock units
or deferred stock units during 2017, 2016 or 2015.
53
The fair value of stock options, restricted stock units, deferred stock units and employee stock purchase
rights issued totaled $31.4 million for the year ended December 31, 2017, $27.0 million for the year ended
December 31, 2016, and $25.6 million for the year ended December 31, 2015. The total unrecognized compensation
expense, net of estimated forfeitures, for unvested share-based compensation awards outstanding at December 31,
2017, was $45.2 million, which will be recognized over a weighted average period of approximately 1.6 years.
Income Taxes
The Tax Act was enacted on December 22, 2017, and includes significant changes to the U.S. corporate tax
system. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21
percent, and transitioned from a worldwide tax system to a territorial tax system, and eliminated or reduced certain
domestic deductions among other changes. The Tax Act introduced new provisions including the Global Intangible
Low-Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti-Abuse Tax
(“BEAT’), expanded bonus depreciation and changed deductions for executive compensation and interest expense.
We continue to assess the impact of the new provisions which become effective beginning in 2018. See Note 12 –
Income Taxes, in the accompanying Notes to the consolidated financial statements for more information regarding
the impact of the Tax Act.
We estimate our future effective tax rate will be reduced as a result of the corporate tax rate reduction and
the new provisions provided in the Tax Act. The outlook for our 2018 effective tax rate is 20 - 21 percent, which
includes the estimated impact of the Tax Act.
The provision for income taxes is determined using the asset and liability approach of accounting for
income taxes. Under this approach, deferred taxes represent the estimated future tax effects of temporary differences
between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable.
On a quarterly basis, we assess our current and projected earnings by jurisdiction to determine whether or
not our earnings during the periods when the temporary differences become deductible will be sufficient to realize
the related future tax benefits. Should we determine that we would not be able to realize all or part of our net
deferred tax asset in a particular jurisdiction in the future, an adjustment to the deferred tax asset would be charged
to income in the period such determination was made. A reduction of net income before taxes in each subsidiary
equal to 5 percent of revenue, compared to the corresponding reported amounts for the year ended December 31,
2017, would not result in the recognition of material incremental valuation allowances.
For those jurisdictions where tax carryforwards are likely to expire unused or the projected operating
results indicate that realization is not more likely than not, a valuation allowance is recorded to offset the deferred
tax asset within that jurisdiction. In assessing the need for a valuation allowance, we consider future taxable income
and ongoing prudent and feasible tax planning strategies. In the event that we determine that we would be able to
realize our deferred tax assets in the future in excess of the net recorded amount, a reduction of the valuation
allowance would increase income in the period such determination was made. Likewise, should we determine that
we would not be able to realize all or part of our net deferred tax asset in the future, a reduction to the deferred tax
asset would be charged to income in the period such determination was made.
Our net taxable temporary differences and tax carryforwards are recorded using the enacted tax rates
expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled
or realized. Should the expected applicable tax rates change in the future, an adjustment to our deferred taxes would
be credited or charged, as appropriate, to income in the period such determination was made. To illustrate the
impact, the reduction in the U.S. federal income tax rate from 35 percent to 21 percent from the passage of the Tax
Act resulted in a reduction to our net deferred tax liability of approximately $17 million. This decrease in the
deferred tax liability increased our net income in the fourth quarter of 2017.
We periodically assess our exposures related to our worldwide provision for income taxes and believe that
we have appropriately accrued taxes for contingencies. Any reduction of these contingent liabilities or additional
assessment would increase or decrease income, respectively, in the period such determination was made.
54
As a result of the Tax Act we are no longer asserting indefinite reversal under ASC 740-30-25 for
undistributed earnings of non-U.S. subsidiaries earned prior to December 31, 2017. We have recorded a provisional
amount of $48.8 million for the deemed repatriation tax liability related to these earnings. For operating earnings
generated after December 31, 2017, we are still analyzing the effects of the change in position as allowed under U.S.
GAAP.
We record a liability for uncertain tax positions that do not meet the more likely than not standard as
prescribed by the authoritative guidance for income tax accounting. We record tax benefits for only those positions
that we believe will more likely than not be sustained. For positions that we believe that it is more likely than not
that we will prevail, we record a benefit considering the amounts and probabilities that could be realized upon
ultimate settlement. If our judgment as to the likely resolution of the uncertainty changes, if the uncertainty is
ultimately settled or if the statute of limitation related to the uncertainty expires, the effects of the change would be
recognized in the period in which the change, resolution or expiration occurs. Our net liability for uncertain tax
positions was $21.8 million as of December 31, 2017, and $18.8 million as of December 31, 2016, which includes
estimated interest expense and penalties. See Note 12 – Income Taxes, in the accompanying Notes to the
consolidated financial statements for more information.
RECENT ACCOUNTING PRONOUNCEMENTS
In addition to the impacts from new accounting pronouncements included above, see Note 2(w) and (x) to
the consolidated financial statements for the year ended December 31, 2017, included in this Annual Report on
Form 10-K for a complete discussion of recent accounting pronouncement adopted and not adopted.
55
RESULTS OF OPERATIONS AND TRENDS
Effects of Certain Factors on Results of Operations
Distributor Purchasing and Inventories. When selling our products through distributors, changes in
distributors’ inventory levels can impact our reported sales, and these changes may be affected by many factors,
which may not be directly related to underlying demand for our products by veterinary practices, which are the end
users. Therefore, we believe it is important to track sales to end users in the relevant periods by our significant
distributors in order to distinguish between the impact of end-user demand and the impact of distributor purchasing
dynamics on our reported revenue in those periods. In addition, where growth rates are affected by changes in end-
user demand, we refer to this as the impact of practice-level sales on growth. Where growth rates are affected by
distributor purchasing dynamics, we refer to this as the impact of changes in distributors’ inventories on growth. If
during the current year, distributors’ inventories grew by less than those inventories grew in the comparable period
of the prior year, then changes in distributors’ inventories would have an unfavorable impact on our reported sales
growth in the current period. Conversely, if during the current year, distributors’ inventories grew by more than
those inventories grew in the comparable period of the prior year, then changes in distributors’ inventories would
have a favorable impact on our reported sales growth in the current period.
In the U.S., effective January 1, 2015, we fully transitioned to an all-direct sales strategy. Under this
approach, we take orders, ship product, invoice and receive payment for all rapid assay test kits and VetLab
consumables, instruments, reference laboratory services, and other CAG products and services. While changes in
prior year U.S. distributors’ inventory levels impacted 2015 reported growth results, distributor inventory levels had
an immaterial impact on our reported U.S. sales and growth results in later years. In certain other countries, we
continue to sell our products through third-party distributors. Although we are unable to obtain data for sales to end
users from certain less significant non-U.S. third party distributors, we do not believe the impact of changes in these
distributors’ inventories had or would have a material impact on our growth rates in the relevant periods.
Currency Impact. For the year ended December 31, 2017, approximately 21 percent of our consolidated
revenue was derived from products manufactured or sourced in U.S. dollars and sold internationally in local
currencies, as compared to 21 percent for the year ended December 31, 2016, and 20 percent for the year ended
December 31, 2015. Strengthening of the rate of exchange for the U.S. dollar 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 or purchased in U.S. dollars 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 operating expenses and foreign currency denominated supply contracts partly
offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay
the impact of certain exchange rate fluctuations on non-U.S. denominated revenues. See “Part II, Item 7A.
Quantitative and Qualitative Disclosure About Market Risks” included in this Annual Report on Form 10-K for
additional information regarding currency impact. Our future income tax expense could also be affected by changes
in the mix of earnings, including as a result of changes in the rate of exchange for the U.S. dollar relative to
currencies in countries with differing statutory tax rates. See “Part I, Item 1A. Risk Factors” included in this Annual
Report on Form 10-K for additional information regarding tax impacts.
Effects of Economic Conditions. Demand for our products and services is vulnerable to changes in the
economic environment, including slow economic growth, high unemployment, and credit availability. Negative or
cautious consumer sentiment can lead to reduced or delayed consumer spending, resulting in a decreased number of
patient visits to veterinary clinics. Unfavorable economic conditions can impact sales of instruments, diagnostic
imaging, and practice management systems, which are larger capital purchases for veterinarians. Additionally,
economic turmoil can cause our customers to remain sensitive to the pricing of our products and services. In the
U.S., we monitor patient visits and clinic revenue data provided by a subset of our CAG customers. Although this
data is a limited sample and susceptible to short-term impacts such as weather, which may affect the number of
patient visits in a given period, we believe that this data provides a fair and meaningful long-term representation of
the trend in patient visit activity in the U.S., providing us insight regarding demand for our products and services.
56
Economic conditions can also affect the purchasing decisions of our Water and LPD business customers.
Water testing volumes may be susceptible to declines in discretionary testing for existing home and commercial
sales and in mandated testing as a result of decreases in home and commercial construction. Testing volumes may
also be impacted by severe weather conditions such as drought. In addition, fiscal difficulties can also reduce
government funding for water and herd health screening services.
We believe that the diversity of our products and services and the geographic diversity of our markets
partially mitigate the potential effects of the economic environment and negative consumer sentiment on our
revenue growth rates.
Effects of Patent Expiration. Although we have several patents and licenses of patents and technologies
from third parties that expired during 2017, and several that are expected to expire in 2018 and beyond, the
expiration of these patents or licenses, individually or in the aggregate, is not expected to have a material effect on
our financial position or future operations due to a range of factors as described in Item 1. “Business - Patents and
Licenses”.
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 current year, as compared to the same period for the prior year, net of the
effect of changes in foreign currency exchange rates, 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, revenues
reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other
companies. Management believes that reporting organic revenue growth provides useful information to investors by
facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of
our peers.
We exclude from organic revenue growth the effect of changes in foreign currency exchange rates because
changes in foreign currency exchange rates are not under management’s control, are subject to volatility and can
obscure underlying business trends. We calculate the impact on revenue resulting from changes in foreign currency
exchange rates by applying the difference between the weighted average exchange rates during the current year
period and the comparable prior year period to foreign currency denominated revenues for the prior year period.
We also exclude from organic revenue growth the effect of business acquisitions and divestitures because
the nature, size and number of these transactions can vary dramatically from period to period, require or generate
cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and
operating trends.
We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to
Adjusted EBITDA ratio, 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.
Comparisons to Prior Periods. Our fiscal years end on December 31. Unless otherwise stated, the analysis
and discussion of our financial condition, results of operations and liquidity, including references to growth and
organic growth and increases and decreases, are being compared to the equivalent prior year period.
57
11.4%
10.5%
13.2%
10.2%
5.0%
15.6%
0.5%
6.5%
(0.2%)
0.5%
10.4%
10.3%
10.5%
Twelve Months Ended December 31, 2017, Compared to Twelve Months Ended December 31, 2016
Total Company
The following table presents revenue by operating segment by U.S. markets and non-U.S., or international
markets:
Net Revenue
(dollars in thousands)
CAG
United States
International
Water
United States
International
LPD
United States
International
For the Year
Ended
For the Year
Ended
December 31, December 31,
2016
2017
Dollar Percentage Change from Change from
Percentage
Percentage
Organic
Revenue
Currency Acquisitions Growth (1)
Change
Change
$
1,703,377 $
1,125,364
578,013
1,522,689 $
1,017,065
505,624
180,688
108,299
72,389
114,395
55,482
58,913
128,481
14,108
114,373
103,579
52,852
50,727
126,491
13,253
113,238
10,816
2,630
8,186
1,990
855
1,135
11.9%
10.6%
14.3%
10.4%
5.0%
16.1%
1.6%
6.5%
1.0%
0.3%
-
0.8%
0.3%
-
0.6%
1.1%
-
1.2%
0.2%
0.2%
0.4%
-
-
-
-
-
Other
22,805
22,664
141
0.6%
0.1%
Total Company
United States
International
$
1,969,058 $
1,203,547
765,511
1,775,423 $
1,089,595
685,828
193,635
113,952
79,683
10.9%
10.5%
11.6%
0.3%
-
0.8%
0.2%
0.2%
0.3%
(1) Amounts presented may not recalculate to organic revenue growth rates due to rounding.
U.S. and international organic revenue growth both reflect strong volume gains in CAG Diagnostics
recurring revenue, supported by our differentiated diagnostic technologies that are driving increased volumes from
new and existing customers in our reference laboratory business, and continued strong growth in CAG Diagnostics
instrument installed base, including growth in our SediVue analyzer installed base. International organic growth was
strong in Europe and Asia Pacific, reflecting the aforementioned CAG Diagnostics recurring volume-driven growth.
Our Water business also contributed to our international growth, primarily from higher sales volumes of our Colilert
test products and related accessories in Europe, the Asia-Pacific region, and increases from our go-direct initiative in
Brazil.
58
The following table presents our total Company results of operations:
Total Company - Results of Operations
(dollars in thousands)
Percent of
Revenue
2017
Percent of
2016 Revenue
Amount
Percentage
For the Year Ended December 31,
Change
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
$
1,969,058
871,676
1,097,382
$
55.7%
1,775,423
799,987
975,436
$
54.9%
193,635
71,689
121,946
354,294
220,878
109,182
684,354
413,028
18.0%
11.2%
5.5%
34.8%
21.0% $
317,058
207,017
101,122
625,197
350,239
17.9%
11.7%
5.7%
35.2%
19.7% $
37,236
13,861
8,060
59,157
62,789
$
10.9%
9.0%
12.5%
11.7%
6.7%
8.0%
9.5%
17.9%
Total Company gross profit increase was due to higher sales volumes and an 80 basis point increase in the
gross profit percentage. The increase in the gross profit percentage was supported by the net benefit of price
increases in our CAG Diagnostics recurring revenue portfolio, the favorable impact of lower product and
manufacturing costs, and favorable mix benefits from high growth CAG Diagnostic recurring revenues. These
favorable impacts were slightly offset by a reduction of approximately 20 basis points from currency movements,
including the combined impact of comparisons to hedge gains in the prior year and hedge losses in the current year.
The increase in total Company sales and marketing expense was due primarily to increases in personnel-
related costs as we continued to invest in and grow our global commercial infrastructure. The increase in general and
administrative expense resulted primarily from information technology investments, including ongoing depreciation
and maintenance associated with prior year projects and higher personnel-related costs, offset by a prior year non-
cash intangible asset impairment within our OPTI Medical business. Research and development expense increased
primarily due to higher personnel-related and consultant costs.
59
Companion Animal Group
The following table presents revenue by product and service category for CAG:
Net Revenue
(dollars in thousands)
CAG Diagnostics recurring
revenue:
IDEXX VetLab
consumables
Rapid assay products
Reference laboratory
diagnostic and
consulting services
CAG Diagnostics service
and accessories
CAG Diagnostics capital -
instruments
Veterinary software,
services and diagnostic
imaging systems
Net CAG revenue
For the Year
Ended
For the Year
Ended
December 31, December 31,
2016
2017
Dollar Percentage Change from Change from
Percentage
Percentage
Organic
Revenue
Currency Acquisitions Growth (1)
Change
Change
$
1,451,701 $
1,281,262 $
170,439
13.3%
518,774
205,309
451,456
189,122
67,318
16,187
14.9%
8.6%
660,142
581,067
79,075
13.6%
67,476
59,617
7,859
13.2%
119,963
121,191
(1,228)
(1.0%)
131,713
1,703,377 $
120,236
1,522,689 $
$
11,477
180,688
9.5%
11.9%
0.2%
0.3%
0.1%
0.2%
0.3%
0.6%
0.2%
0.3%
0.3%
-
-
0.6%
-
-
0.5%
0.2%
12.8%
14.6%
8.5%
12.8%
12.9%
(1.6%)
8.9%
11.4%
(1) Amounts presented may not recalculate to organic revenue growth rates due to rounding.
CAG Diagnostics Recurring Revenue. The increase in CAG Diagnostics recurring revenue was due
primarily to increased volumes in reference laboratory diagnostic services and IDEXX VetLab consumables and, to
a lesser extent, higher realized prices.
IDEXX VetLab consumables revenue growth was due primarily to higher sales volumes in the U.S.,
Europe, and the Asia-Pacific region from our Catalyst consumables and, to a lesser extent, ProCyte Dx consumables
and Sedivue Dx analyzer pay-per-run sales, resulting from growth in testing by existing and new customers, and an
expanded menu of available tests, as well as higher average unit sales prices.
The increase in rapid assay revenue resulted from higher sales volumes and average unit price of canine
SNAP 4Dx Plus tests and higher sales volumes of single analyte SNAP products.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the
impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S.,
resulting from increased testing from existing customers, supported by our differentiated diagnostic technologies,
such as IDEXX SDMA and fecal antigen testing. Additionally, the increase in revenue was the result of higher
average unit sales prices.
CAG Diagnostic services and accessories revenue growth was primarily a result of the increase in our
active installed base of instruments.
60
CAG Diagnostics Capital – Instruments Revenue. The decrease in CAG Diagnostics capital instruments
revenue reflects our shift to focus sales incentives on the long-term economic value of instrument placements during
2017, partially offset by our sales of SediVue Dx, introduced in the second quarter of 2016. Our focus on long-term
economic value continues to drive new and competitive Catalyst placements, which are the highest economic value
placements due to the incremental CAG Diagnostic recurring revenue. As part of this focus, we continue to see
declines in the lower relative long-term economic value second Catalyst placements, as well as growth of our
customer commitment programs, including up-front customer loyalty programs in the U.S. and reagent rental
programs internationally. These customer commitment programs result in lower up-front instrument revenue
recognized at the time of placement, and instead the recognition of revenue for these programs occurs over the term
of the customer agreement.
Veterinary Software, Services, and Diagnostic Imaging Systems Revenue. The increase in customer
information management and diagnostic imaging systems revenue was primarily due to increasing veterinary
subscription service revenue, growth in diagnostic imaging placements, and higher support revenue resulting from
an increase in our installed base. These favorable factors were partially offset by lower relative diagnostic imaging
system prices.
The following table presents the CAG segment results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2017
Percent of
2016 Revenue
Amount
Percentage
$
1,703,377
766,579
936,798
$
55.0%
1,522,689
702,367
820,322
$
53.9%
180,688
64,212
116,476
312,497
180,907
79,837
573,241
363,557
$
18.3%
10.6%
4.7%
33.7%
21.3% $
277,377
168,637
72,966
518,980
301,342
18.2%
11.1%
4.8%
34.1%
19.8% $
35,120
12,270
6,871
54,261
62,215
11.9%
9.1%
14.2%
12.7%
7.3%
9.4%
10.5%
20.6%
CAG Gross Profit. Gross profit for CAG increased due to higher sales volumes, along with a 110 basis
point increase in the gross profit percentage. The unfavorable impact of currency reduced the gross profit percentage
by approximately 20 basis points, resulting primarily from lower hedging gains in 2017. Excluding currency
impacts, the increase in gross margins was supported by the net benefit of price increases in our CAG Diagnostic
recurring portfolio, the favorable impact of lower product and manufacturing costs, and favorable mix benefits from
high growth in IDEXX VetLab consumables and rapid assay revenues, offset by incremental investments in
reference laboratory capacity and relatively lower IDEXX VetLab instrument prices reflecting strong international
growth.
CAG Operating Expenses. The increase in sales and marketing expense was due primarily to increased
personnel-related costs as we continue to invest in and grow our global commercial infrastructure. The increase in
general and administrative expense resulted primarily from information technology investments, including ongoing
depreciation and maintenance associated with prior year projects and higher personnel-related costs. The increase in
research and development expense was primarily due to increased personnel-related costs.
61
Water
The following table presents the Water segment results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2017
Percent of
2016 Revenue
Amount
Percentage
$
114,395
35,030
79,365
$
69.4%
103,579
31,701
71,878
$
69.4%
10,816
3,329
7,487
14,482
11,803
2,464
28,749
50,616
12.7%
10.3%
2.2%
25.1%
44.2% $
13,201
10,426
2,549
26,176
45,702
12.7%
10.1%
2.5%
25.3%
44.1% $
1,281
1,377
(85)
2,573
4,914
$
10.4%
10.5%
10.4%
9.7%
13.2%
(3.3%)
9.8%
10.8%
Revenue. The increase in Water revenue was attributable to higher sales volumes of our Colilert test
products and related accessories, used in coliform and E. coli testing in the Asia-Pacific region and North America,
and the benefits of price increases in Latin America. Revenue growth in Latin America was driven by our go-direct
initiative in Brazil, which contributed approximately 4 percent to revenue growth, including the impact of reductions
in distributor inventories in 2016 and the benefits of price increases in 2017. The favorable impact of currency
increased revenue by approximately 30 basis points.
Gross Profit. Gross profit for Water increased due to higher sale volumes. The gross profit percentage was
flat, year over year, primarily due to the net benefit of price increases, which were largely driven by our go-direct
initiative in Brazil, offset by higher manufacturing and distribution costs, and the overall change in currency
exchange rates which decreased the gross profit percentage by approximately 70 basis points. The change in
exchange rates was primarily due to lower relative hedge gains in 2017.
Operating Expenses. The increase in sales and marketing expense was primarily due to higher personnel-
related costs related to increased head count. The increase in general and administrative expense resulted primarily
from investments in Brazil and higher personnel-related costs. Research and development expense was lower
primarily due to allocation of project costs and certain higher project costs that were incurred in 2016, partially
offset by increases in personnel-related costs due to increased headcount.
62
Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2017
Percent of
2016 Revenue
Amount
Percentage
$
128,481
56,341
72,140
$
56.1%
126,491
52,690
73,801
$
58.3%
1,990
3,651
(1,661)
1.6%
6.9%
(2.3%)
24,801
18,723
12,152
55,676
16,464
19.3%
14.6%
9.5%
43.3%
12.8% $
22,723
20,193
11,971
54,887
18,914
18.0%
16.0%
9.5%
43.4%
15.0% $
2,078
(1,470)
181
789
(2,450)
9.1%
(7.3%)
1.5%
1.4%
(13.0%)
$
Revenue. The increase in LPD revenue resulted from an increase in swine testing, primarily in China,
expanded pregnancy testing primarily in Europe and North America, and moderate growth in European bovine
program revenues. These increases were partially offset by lower dairy producer demand for diagnostic testing
particularly in China and Brazil, and lower herd health screening, primarily driven by lower global milk prices. The
favorable impact of currency increased revenue 110 basis points.
Gross Profit. The decrease in LPD gross profit was due to higher sales volume offset by a 220 basis point
reduction in the gross profit percentage reflecting higher product costs. The overall change in currency exchange
rates had no impact on the gross profit percentage, primarily due to increased hedge losses in the current year
compared to the prior year.
Operating Expenses. Overall, LPD operating expenses increased by less than 2 percent. Sales and
marketing expenses were higher due to increases in commercial infrastructure investments in emerging markets.
General and administrative expenses were lower due to a lower LPD allocation of overall overhead costs reflecting
the higher relative growth in our CAG business as compared to LPD. Research and development expenses were
relatively consistent.
63
Other
The following table presents the Other results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2017
Percent of
2016 Revenue
Amount
Percentage
$
22,805
11,417
11,388
$
49.9%
2,093
3,359
1,099
6,551
4,837
9.2%
14.7%
4.8%
28.7%
21.2% $
$
22,664
11,103
11,561
2,870
4,908
2,899
10,677
884
$
51.0%
141
314
(173)
0.6%
2.8%
(1.5%)
12.7%
21.7%
12.8%
47.1%
3.9% $
(777)
(1,549)
(1,800)
(4,126)
3,953
(27.1%)
(31.6%)
(62.1%)
(38.6%)
447.2%
Revenue. The increase in Other was primarily due to higher realized prices on our OPTI Medical products
and services, partially offset by lower sales volumes of our OPTI Medical blood gas analyzers and related
consumables as a result of temporary product availability constraints during the first half of 2017.
Gross Profit. Gross profit for Other decreased due to a 110 basis point decrease in the gross profit
percentage as a result of higher manufacturing costs, partially offset by higher realized pricing on overall OPTI
Medical products and services. The overall change in currency exchange rates resulted in a decrease in the gross
profit percentage of less than 10 basis points.
Operating Expenses. The decrease in operating expense was due primarily to an intangible asset
impairment within our OPTI Medical business during the first half of 2016 and lower personnel cost in research and
development as a result of discontinuing certain product development activities in the human point-of-care medical
diagnostics market.
During the first half of 2016, management reviewed our OPTI Medical product offering, which resulted in
the discontinuance of our instrument development activities in the human point-of-care medical diagnostics
market and a decision to focus our commercial and development efforts to support our latest generation OPTI CCA-
TS2 Blood Gas and Electrolyte analyzer. Management identified unfavorable trends in our OPTI Medical business
resulting from this change in strategy. We revised our forecasts downward, causing us to assess the realizability of
the related tangible and intangible assets and determined the expected future cash flows were less than the carrying
value of the OPTI Medical asset group. Non-cash intangible asset impairments of $2.2 million were recognized
during the six months ended June 30, 2016.
64
Unallocated Amounts
We estimate certain personnel-related costs and allocate these budgeted expenses to the operating
segments. This allocation differs from actual expense and consequently yields a difference that is reported under the
caption “Unallocated Amounts.”
The following table presents the Unallocated Amounts results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
2017
-
2,309
(2,309)
421
6,086
13,630
20,137
(22,446)
$
$
2016
-
2,126
(2,126)
887
2,853
10,737
14,477
(16,603)
$
$
Amount
Percentage
$
-
183
(183)
N/A
8.6%
8.6%
(466)
3,233
2,893
5,660
(5,843)
(52.5%)
113.3%
26.9%
39.1%
35.2%
$
Gross Profit. Costs of revenues that were not allocated to segments were relatively consistent.
Operating Expenses. The increase in operating expenses was primarily due to higher than budgeted
corporate function spending in research and development, information technology, facilities management, human
resources, and higher than budgeted employee incentive costs. The overall increase in operating expenses
was partially offset by favorable foreign exchange gains on monetary assets, as compared to losses in the prior year,
as well as increased benefits from customer interest payments on overdue accounts.
Non-Operating Items
Interest Income. Interest income was $5.3 million for the year ended December 31, 2017, as compared to
$3.7 million for the same period in the prior year. The increase in interest income was due primarily to a larger
relative portfolio of marketable securities during the year ended December 31, 2017, and, to a lesser extent, higher
interest rates, as compared to the prior year.
Interest Expense. Interest expense was $37.2 million for the year ended December 31, 2017, as compared
to $32.0 million for the prior year. The increase in interest expense was due to higher outstanding balances
and higher floating interest rates on our Credit Facility. See Note 11 to the consolidated financial statements
included in this Annual Report on Form 10-K for additional information regarding our senior notes and Credit
Facility.
Provisions for Income Taxes. Our effective income tax rate was 30.9 percent for the year ended December
31, 2017, and 31.0 percent for the year ended December 31, 2016. Our effective income tax rate for the year ended
December 31, 2017, was lower as a result of the adoption of ASU 2016-09 related to share-based compensation,
which decreased our effective tax rate by approximately 7 percent (see Note 2 to the consolidated financial
statements included in this Annual Report on Form 10-K for more information regarding the adoption of ASU 2016-
09) and the utilization of foreign tax credits, which reduced our effective tax rate by approximately 1 percent. These
decreases were offset by the following non-recurring items: A deemed repatriation tax, net of the remeasurement of
our deferred tax assets and liabilities resulting from the Tax Act and a tax benefit related to state tax credit
carryforwards, which combined, increased our tax rate by approximately 8 percent.
65
12.6%
11.2%
15.5%
8.7%
8.6%
8.9%
1.1%
(5.6%)
1.9%
5.1%
11.4%
10.8%
12.0%
Twelve Months Ended December 31, 2016, Compared to Twelve Months Ended December 31, 2015
Total Company
The following table presents revenue by operating segment, by U.S. markets and non-U.S., or international
markets:
Net Revenue
(dollars in thousands)
CAG
$
United States
International
Water
United States
International
LPD
United States
International
For the Year
Ended
For the Year
Ended
December 31, December 31,
2015
2016
Dollar
Change
Percentage
Percentage Change from Change from
Percentage
Change
Currency Acquisitions
Organic
Revenue
Growth (1)
1,522,689 $
1,017,065
505,624
1,356,287 $
912,822
443,465
166,402
104,243
62,159
103,579
52,852
50,727
126,491
13,253
113,238
96,884
48,677
48,207
127,143
14,041
113,102
6,695
4,175
2,520
(652)
(788)
136
12.3%
11.4%
14.0%
6.9%
8.6%
5.2%
(0.5%)
(5.6%)
0.1%
(0.6%)
-
(2.0%)
(1.8%)
-
(3.7%)
-
(1.8%)
0.3%
0.2%
0.5%
-
-
-
-
Other
22,664
21,578
1,086
5.0%
(0.1%)
Total Company
United States
International
$
1,775,423 $
1,089,595
685,828
1,601,892 $
980,321
621,571
173,531
109,274
64,257
10.8%
11.1%
10.3%
(0.8%)
0.1%
(2.1%)
0.2%
0.2%
0.4%
(1) Amounts presented may not recalculate to organic revenue growth rates due to rounding.
U.S. and international organic revenue growth both reflect very strong volume gains in CAG Diagnostics
recurring revenue, supported by our differentiated diagnostic technologies that are driving increased volumes from
new and existing customers in our reference laboratory business, and continued strong growth in CAG Diagnostics
capital instrument placements that are driving IDEXX VetLab consumable volume growth. International organic
growth across Europe, Asia Pacific and Latin America outpaced U.S. growth, reflecting the aforementioned CAG
Diagnostics recurring volume driven growth, continued growth of Colilert testing products in our Water business
and LPD emerging market growth, offset by declines in LPD bovine disease eradication testing in Europe. To a
lesser extent, U.S. and international LPD organic growth also reflects pressure on our dairy testing business due to a
decline in worldwide milk prices.
66
The following table presents the total Company results of operations:
Total Company - Results of Operations
(dollars in thousands)
Percent of
Revenue
2016
Percent of
2015 Revenue
Amount
Percentage
For the Year Ended December 31,
Change
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Impairment charge
Total operating expenses
Income from operations
$
1,775,423
799,987
975,436
$
54.9%
1,601,892
711,622
890,270
$
55.6%
173,531
88,365
85,166
317,058
207,017
101,122
-
625,197
350,239
17.9%
11.7%
5.7%
0.0%
35.2%
19.7% $
299,955
182,510
99,681
8,212
590,358
299,912
18.7%
11.4%
6.2%
0.5%
36.9%
18.7% $
17,103
24,507
1,441
(8,212)
34,839
50,327
$
10.8%
12.4%
9.6%
5.7%
13.4%
1.4%
N/A
5.9%
16.8%
Total Company gross profit increased due to higher sales volumes, partly offset by a 70 basis point
reduction in the gross profit percentage during the year ended December 31, 2016. Excluding currency impacts of
approximately 118 basis points, gross margins increased moderately, supported by improvements in our CAG
business.
During the year ended December 31, 2015, we recorded an $8.2 million impairment charge related to
internally-developed software not yet placed into service within Unallocated Amounts as a result of a strategic shift
to refocus our development efforts within our information management business. For the year ended December 31,
2015, adjusted operating income, which is total Company operating income adjusted for the aforementioned
software impairment charge was approximately $308.1 million and 19.2 percent of revenue. Adjusted operating
income increased by $42.1 million or 13.7 percent for the year ended December 31, 2016. Adjusted operating
income is a non-GAAP financial measure and should be considered in addition to, and not as a replacement for or as
a superior measure to, operating income reported in accordance with U.S. GAAP. Management believes that
reporting adjusted operating income provides useful information to investors by facilitating easier comparisons of
our operating income performance with prior and future periods and to the performance of our peers.
67
Companion Animal Group
The following table presents revenue by product and service category for CAG:
Net Revenue
(dollars in thousands)
CAG Diagnostics recurring
revenue:
For the Year
Ended
For the Year
Ended
December 31, December 31,
2015
2016
Dollar
Change
Percentage
Percentage Change from Change from
Percentage
Change
Currency Acquisitions
Organic
Revenue
Growth (1)
$
1,281,262 $
1,147,026 $
134,236
11.7%
(0.7%)
0.4%
12.0%
IDEXX VetLab
consumables
Rapid assay products
Reference laboratory
diagnostic and
consulting services
CAG Diagnostics service
and accessories
CAG Diagnostics capital
instruments
Veterinary software, services
and diagnostic imaging
systems
451,456
189,122
396,526
182,670
54,930
6,452
13.9%
3.5%
(0.8%)
-
-
-
14.7%
3.5%
581,067
512,155
68,912
13.5%
(0.9%)
0.8%
13.6%
59,617
55,675
3,942
7.1%
(0.3%)
121,191
98,502
22,689
23.0%
(0.7%)
-
-
-
0.3%
7.4%
23.7%
8.8%
12.6%
Net CAG revenue
$
1,522,689 $
1,356,287 $
166,402
120,236
110,759
9,477
8.6%
12.3%
(0.2%)
(0.6%)
(1) Amounts presented may not recalculate to organic revenue growth rates due to rounding.
CAG Diagnostics Recurring Revenue. The increase in CAG Diagnostics recurring revenue was due
primarily to higher sales of our IDEXX VetLab consumables and reference laboratory diagnostic and consulting
services resulting from increased volumes and, to a lesser extent, higher realized prices.
IDEXX VetLab consumables revenue growth was due primarily to higher sales volumes in the U.S.,
Europe, and the Asia-Pacific region from our Catalyst consumables and, to a lesser extent, ProCyte DX
consumables, resulting from growth in testing by existing customers, the acquisition of new customers and an
expanded menu of available tests. These favorable impacts were partly offset by lower consumables volumes from
our VetTest chemistry instrument due to customer upgrades from our previous generation VetTest to our Catalyst
analyzers. IDEXX VetLab consumables revenue also benefited from higher average unit sales prices.
The increase in rapid assay revenue resulted from higher average unit price and sales volumes of SNAP
4Dx and higher sales volumes of single analyte SNAP products. These favorable factors were partly offset by the
unfavorable impact of lower average unit sales prices in the U.S. for certain earlier generation rapid assay products.
The increase in reference laboratory diagnostic and consulting services revenue was due primarily to the
impact of higher testing volumes throughout our worldwide network of laboratories, most prominently in the U.S.,
resulting from increased testing from existing customers and the net acquisition of new customers, supported by our
differentiated diagnostic technologies, such as the IDEXX SDMA test. Also, revenue increased, to a lesser extent,
from higher average unit sales prices due to price increases. Testing volumes benefited slightly from favorable
weather trends experienced during the first quarter of 2016.
CAG Diagnostic services and accessories revenue growth was primarily a result of the increase in our
active installed base of instruments.
CAG Diagnostics Capital – Instruments Revenue. The increase in CAG Diagnostics capital instruments
revenue resulted from the launch of our SediVue Dx analyzer in the second quarter of 2016, which contributed
approximately 23 percent to reported and organic instrument revenue growth, and higher ProCyte Dx
revenues, partly offset by lower Catalyst revenues resulting from a shift in placements from our Catalyst Dx
68
analyzer to our lower priced Catalyst One analyzer and the prior year benefit of recognizing previously deferred
revenues associated with pre-orders of our Catalyst One analyzer in the U.S. in 2014.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in
veterinary software, services and diagnostic imaging systems revenue was due primarily to increasing diagnostic
imaging systems revenue, higher veterinary subscription service revenue, including increases in our Pet Health
Network Pro subscriber base and higher support revenue resulting from an increase in our active installed base of
diagnostic imaging and practice management systems. Revenues from diagnostic imaging systems were higher due
to the timing of revenue recognized from fewer deferred revenue placements under up-front customer loyalty
programs, and the recognition of previously deferred revenues. These favorable factors were partially offset by
fewer licensed-based Cornerstone placements as we evolve to a subscription-based model for new practice
management customer acquisitions, as well as lower average unit sale prices on diagnostic imaging system
placements.
The following table presents the CAG segment results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2016
Percent of
2015 Revenue
Amount
Percentage
$
1,522,689
702,367
820,322
$
53.9%
1,356,287
626,984
729,303
$
53.8%
166,402
75,383
91,019
277,377
168,637
72,966
518,980
301,342
18.2%
11.1%
4.8%
34.1%
19.8% $
263,907
159,851
72,226
495,984
233,319
19.5%
11.8%
5.3%
36.6%
17.2% $
13,470
8,786
740
22,996
68,023
$
12.3%
12.0%
12.5%
5.1%
5.5%
1.0%
4.6%
29.2%
CAG Gross Profit. Gross profit for CAG increased due to higher sales volumes, along with a 10 basis point
increase in the gross profit percentage. The unfavorable impact of currency reduced the gross profit percentage by
approximately 90 basis points, resulting primarily from lower hedging gains. Excluding currency impacts, gross
margins increased moderately, supported by the net benefit of price increases for our reference laboratory diagnostic
services and IDEXX VetLab consumables and profitability improvements from higher relative revenue of our
expanded subscription service offerings, and within our worldwide network of reference laboratories.
CAG Operating Expenses. The increase in sales and marketing expense was due primarily to increased
personnel-related costs, including investments in our global commercial infrastructure and sales performance
incentives, partly offset by the favorable impact of changes in foreign currency exchange rates. The increase in
general and administrative expense resulted primarily from information technology investments, including ongoing
depreciation and maintenance associated with prior year projects, and higher personnel-related costs. These
increases were partly offset by the favorable impact of changes in foreign currency exchange rates. Research and
development expense was generally consistent.
69
Water
The following table presents the Water segment results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2016
Percent of
2015 Revenue
Amount
Percentage
$
103,579
31,701
71,878
$
69.4%
13,201
10,426
2,549
26,176
45,702
12.7%
10.1%
2.5%
25.3%
44.1% $
$
96,884
27,931
68,953
12,204
9,058
2,939
24,201
44,752
$
71.2%
6,695
3,770
2,925
6.9%
13.5%
4.2%
12.6%
9.3%
3.0%
25.0%
46.2% $
997
1,368
(390)
1,975
950
8.2%
15.1%
(13.3%)
8.2%
2.1%
Revenue. The increase in Water revenue was attributable to all regions in which we operate, most notably
from strong performance in North America, Europe, and the Asia-Pacific region. Higher revenues resulted primarily
from increased sales volumes and price increases of our Colilert test products and related accessories used in
coliform and E. coli testing, placements of our Quanti-Tray Sealer PLUS instrument, which we launched in
June 2015, several large project orders during the first half of 2016, and to a lesser extent, from higher sales volumes
of our products designed to detect cryptosporidium related to an outbreak in the United Kingdom beginning in mid-
2015 through the first half of 2016. Testing volumes also benefited slightly from favorable weather trends
experienced during the first quarter of 2016.
Gross Profit. Gross profit for Water increased due to higher sales volumes, offset by a 180 basis point
reduction in the gross profit percentage. The unfavorable impact of currency reduced the gross profit percentage by
approximately 210 basis points, resulting from lower hedging gains and changes in foreign currency exchange rates.
Excluding currency impacts, the gross profit percentage increased slightly due to the net benefit of price increases
on our Colilert testing products and related accessories.
Operating Expenses. The increase in sales and marketing was due primarily to higher personnel-related
costs and increased advertising and marketing materials. The increase in general and administrative expense was due
primarily to higher personnel-related costs. The decrease in research and development expense was a result of lower
product development costs during the year ended December 31, 2016.
70
Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2016
Percent of
2015 Revenue
Amount
Percentage
$
126,491
52,690
73,801
$
58.3%
127,143
47,156
79,987
$
62.9%
(652)
5,534
(6,186)
(0.5%)
11.7%
(7.7%)
22,723
20,193
11,971
54,887
18,914
18.0%
16.0%
9.5%
43.4%
15.0% $
22,307
18,655
11,868
52,830
27,157
17.5%
14.7%
9.3%
41.6%
21.4% $
416
1,538
103
2,057
(8,243)
1.9%
8.2%
0.9%
3.9%
(30.4%)
$
Revenue. The overall change in exchange rates reduced revenue growth by approximately 160 basis points.
The increase in LPD organic revenue resulted from strong performance in emerging markets, most notably resulting
from higher sales volumes of swine, poultry and bovine pregnancy products and services in various regions. This
increase was partially offset by a decrease in sales volumes of bovine testing products within Western Europe in
large part due to the success of certain disease eradication programs in the region, as well as pressure on our dairy
testing business due to a decline in worldwide milk prices.
Gross Profit. Gross profit for LPD decreased due to a reduction in the gross profit percentage of 460 basis
points. The decrease in the gross profit percentage resulted primarily from approximately 360 basis points of
unfavorable currency impact, primarily due to lower relative hedging gains. Additionally, higher overall
manufacturing costs, which were partially offset by the expiration of royalties on certain of our swine testing
products, resulted in an overall lower gross profit.
Operating Expenses. The increase in sales and marketing expense for the year ended December 31,
2016, was due to higher commercial infrastructure investments within emerging markets. The increase in general
and administrative expense resulted primarily from higher investments in emerging markets including Brazil. The
increase in research and development expense resulted primarily from higher external product development and
material costs. All the increases above were partially offset by the favorable impact of changes in foreign currency
exchange rates.
71
Other
The following table presents the Other results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
Percent of
Revenue
2016
Percent of
2015 Revenue
Amount
Percentage
$
$
22,664
11,103
11,561
2,870
4,908
2,899
10,677
884
$
51.0%
12.7%
21.7%
12.8%
47.1%
3.9% $
21,578
11,297
10,281
3,466
3,326
3,626
10,418
(137)
$
47.6%
1,086
(194)
1,280
5.0%
(1.7%)
12.5%
16.1%
15.4%
16.8%
48.3%
(0.6%) $
(596)
1,582
(727)
259
1,021
(17.2%)
47.6%
(20.0%)
2.5%
(745.3%)
Revenue. The increase in Other revenue was due primarily to royalty revenue associated with the
commercialization of certain intellectual property related to our former pharmaceutical product line, partially offset
by lower sales volumes of our OPTI Medical blood gas analyzers and related consumables.
Gross Profit. Gross profit for Other increased due to higher sales and an increase in the gross profit
percentage of 340 basis points. The increase in the gross profit percentage resulted primarily from higher relative
royalty revenue associated with the commercialization of certain intellectual property related to our former
pharmaceutical product line, partly offset by an increase in overall OPTI Medical product costs.
Operating Expenses. Operating expenses for Other, which totaled $10.7 million for the year
ended December 31, 2016, increased $0.3 million, due primarily to intangible impairments within our OPTI Medical
business, partly offset by lower amortization expense on the aforementioned intangible assets and a reduction in
personnel-related costs.
During the first half of 2016, management reviewed the OPTI Medical product offerings. As a result of this
review, we discontinued our product development activities in the human point-of-care medical diagnostics
market during March 2016 and focused our commercial efforts in this market on supporting our latest generation
OPTI CCA-TS2 Blood Gas and Electrolyte analyzer. Management identified unfavorable trends in our OPTI
Medical line of business resulting from this change in strategy. We revised our forecasts downward, causing us to
assess the realizability of the related tangible and intangible assets and determined the expected future cash flows
were less than the carrying value of the OPTI Medical asset group. Non-cash intangible asset impairments of $2.2
million were recorded during the year ended December 31, 2016.
72
Unallocated Amounts
We estimate certain personnel-related costs and allocate these budgeted expenses to the operating
segments. This allocation differs from actual expense and consequently yields a difference that is reported under the
caption “Unallocated Amounts.”
The following table presents the Unallocated Amounts results of operations:
Results of Operations
(dollars in thousands)
Revenues
Cost of revenue
Gross profit
Operating Expenses:
Sales and marketing
General and administrative
Research and development
Impairment charge
Total operating expenses
Income from operations
For the Year Ended December 31,
Change
2016
-
2,126
(2,126)
887
2,853
10,737
-
14,477
(16,603)
$
$
2015
-
(1,746)
1,746
(1,929)
(8,380)
9,022
8,212
6,925
(5,179)
$
$
Amount
Percentage
$
-
3,872
(3,872)
N/A
(221.8%)
(221.8%)
2,816
11,233
1,715
(8,212)
7,552
(11,424)
(146.0%)
(134.0%)
19.0%
N/A
109.1%
220.6%
$
Gross Profit. Gross profit for Unallocated Amounts decreased due primarily to higher personnel-related
costs as compared to budget. The increase in personnel-related costs was due primarily to higher self-insured
healthcare costs and higher than budgeted employee incentives reported within Unallocated Amounts during the
year ended December 31, 2016.
Operating Expenses. Operating expenses that are not allocated to our operating segments increased $7.6
million to $14.5 million for the year ended December 31, 2016, due primarily to higher personnel-related costs as
compared to budget, reflecting increased employee incentives and higher self-insured health claim expenses, as well
as certain foreign exchange losses on monetary assets due to strengthening of the U.S. dollar. This compares to prior
period cost control initiatives that resulted in lower than budgeted costs. Partially offsetting these increases was the
aforementioned $8.2 million impairment charge recorded in 2015, related to internally-developed software not yet
placed into service as a result of a strategic shift to refocus our development efforts within our veterinary software
and services business.
73
Non-Operating Items
Interest Income. Interest income was $3.7 million for the year ended December 31, 2016, as compared to
$2.5 million for the prior year. The increase in interest income was due primarily to a larger relative portfolio of
marketable securities during the year ended December 31, 2016, and, to a lesser extent, higher interest rates.
Interest Expense. Interest expense was $32.0 million for the year ended December 31, 2016, as compared
to $29.2 million for the prior year. The increase in interest expense resulted from higher relative interest incurred in
2016 as a result of approximately $250 million in senior notes that we issued and sold through private placements
during the first half of 2015, for which fixed interest rates range from 1.785 percent to 3.72 percent. Additionally,
the increase in interest expense was due to higher relative interest rates on our Credit Facility. See Note 11 to the
consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding
our senior notes and Credit Facility.
Provision for Income Taxes. Our effective income tax rate was 31.0 percent for the year ended December
31, 2016, as compared to 29.7 percent for the year ended December 31, 2015. The increase in our effective tax rate
for the year ended December 31, 2016, as compared to the year ended December 31, 2015, was primarily related to
a change in earnings mix in 2016, with relatively higher earnings subject to domestic tax rates as opposed to lower
international tax rates including the impact of foreign currency exchange rates.
74
LIQUIDITY AND CAPITAL RESOURCES
We fund the capital needs of our business through cash on hand, funds generated from operations, and
amounts available under our Credit Facility. In addition, we issued $150 million of senior notes in February 2015
and €88.9 million of euro-denominated senior notes in June 2015. During the twelve months ended December 31,
2015, we purchased marketable debt securities using a portion of our cash balances. We generate cash primarily
through the payments made by customers for our diagnostic products and services, consumables, consulting
services, and other various systems and services provided to the animal veterinary, livestock, poultry, dairy, and
water testing markets. Our cash disbursements are primarily related to compensation and benefits for our employees,
inventory and supplies, taxes, research and development, capital expenditures, rents, occupancy-related charges,
interest expense, and acquisitions. At December 31, 2017, we had $471.9 million of cash, cash equivalents and
marketable securities, as compared to $391.8 million on December 31, 2016, and $342.6 million on December 31,
2015. Working capital, including our Credit Facility, totaled negative $32.6 million at December 31, 2017, as
compared to negative $89.0 million at December 31, 2016, and negative $35.1 million at December 31, 2015.
Additionally, at December 31, 2017, we had remaining borrowing availability of $194.0 million under our $850
million Credit Facility. We believe that, if necessary, we could obtain additional borrowings at similar rates to our
existing borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, our
portfolio of short-duration marketable securities, 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 on favorable terms will also be sufficient for the foreseeable future to fund our business as currently
conducted.
The Tax Act was enacted on December 22, 2017, and includes significant changes to the U.S. corporate tax
system. The Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent, effective as of
January 1, 2018, and transitioned the U.S. federal tax system from a worldwide tax system to a territorial tax system.
In converting to the new territorial tax system, a deemed repatriation tax on previously tax-deferred earnings of
certain foreign subsidiaries was required to be recognized as of December 31, 2017, and will be payable over eight
years.
As a result of the Tax Act, we are no longer asserting indefinite investment for undistributed earnings of
non-U.S. subsidiaries earned prior to December 31, 2017. We have recorded a provisional amount of $48.8 million
for the deemed repatriation tax liability related to these earnings which will be paid over eight years.
75
The following table presents cash, cash equivalents and marketable securities held domestically, and by our
foreign subsidiaries:
Cash, cash equivalents and marketable securities
(dollars in millions)
For the Years Ended December 31,
2017
2016
U.S.
Foreign
Total
Total cash, cash equivalents and marketable securities held in U.S.
dollars
$
$
$
5.9 $
466.0
471.9 $
4.8 $
387.0
391.8 $
334.3 $
285.8 $
2015
1.4
341.2
342.6
239.2
Percentage of total cash, cash equivalents and marketable securities held
in U.S. dollars
70.8%
72.9%
69.8%
During 2018, in connection with the passage of the Tax Act in the fourth quarter of 2017, we intend to
liquidate our marketable securities and use the cash to partially pay down our Credit Facility. We held marketable
securities with effective maturities of two years or less that had an average AA- credit rating as of December 31,
2017.
The following table presents marketable securities at fair value for the years ended December 31, 2017 and
2016:
Marketable securities
(dollars in millions)
Corporate bonds
Certificates of deposit
Commercial paper
Asset backed securities
U.S. government bonds
Agency bonds
Treasury bills
All other
Total marketable securities
For the Year
Ended
December 31,
2017
Percent of
Total
For the Year
Ended
December 31,
2016
$
$
140.9
58.5
29.2
22.2
15.6
10.9
7.0
-
284.3
49.6% $
20.6%
10.3%
7.8%
5.5%
3.8%
2.5%
0.0%
$
130.8
40.4
20.2
27.3
12.2
4.6
-
1.4
236.9
Percent of
Total
55.2%
17.1%
8.5%
11.5%
5.1%
1.9%
0.0%
0.6%
Of the $187.7 million of cash and cash equivalents held as of December 31, 2017, approximately 82
percent was held as bank deposits, approximately 18 percent was invested in money market funds restricted to U.S.
government and agency securities, and the remainder consisted of commercial paper and other securities with
original maturities of less than ninety days. Of the $154.9 million of cash and cash equivalents held as of December
31, 2016, 76 percent was held as bank deposits, 22 percent was invested in money market funds restricted to U.S.
government and agency securities, and the remainder consisted of commercial paper and other securities with
original maturities of less than ninety days.
Should we require more capital than is generated by our operations, for example to fund significant
discretionary activities, we could raise capital through debt or equity issuances. These alternatives could result in
increased interest expense and dilution of our earnings. We have borrowed funds domestically and continue to have
the ability to borrow funds domestically at reasonable interest rates.
76
The following table presents additional key information concerning working capital:
December 31, September 30,
2017
2017
June 30,
2017
March 31, December 31,
2016
2017
For the Three Months Ended
Days sales outstanding (1)
Inventory turns (2)
41.7
2.2
43.4
1.9
41.7
2.0
42.4
1.9
42.1
2.0
(1) Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue
for that quarter, the result of which is then multiplied by 91.25 days.
(2) Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the inventory
balance at the end of the quarter.
Sources and Uses of Cash
The following table presents cash provided (used):
(dollars in thousands)
Net cash provided by operating activities
Net cash used by investing activities
Net cash used by financing activities
Net effect of changes in exchange rates on cash
Net increase (decrease) in cash and cash equivalents
For the Years Ended December 31,
2017
2016
$
$
373,276
(138,688)
(208,016)
6,202
32,774
$
$
338,943
(90,786)
(222,196)
(54)
25,907
$
$
2015
221,802
(308,406)
(100,990)
(5,948)
(193,542)
Operating Activities. The increase in cash provided by operating activities of $34.3 million during 2017 as
compared to 2016 was primarily due to an increase in net income, including the impact of adopting the new
accounting guidance for share-based compensation. The increase in cash provided by operating activities of $117.1
million during 2016 as compared to 2015 was due primarily to changes in operating assets and liabilities, as well as
an increase in net income including increases in non-cash charges.
The following table presents cash flows from changes in operating assets and liabilities and the tax benefit
from share-based compensation arrangements for the years ended December 31, 2017, 2016 and 2015:
(dollars in thousands)
Accounts receivable
Inventories
Accounts payable
Deferred revenue
Other assets and liabilities
Tax benefit from share-based compensation arrangements
For the Years Ended December 31,
2017
2016
$
$
(24,918)
(19,062)
1,391
3,551
47,418
-
$
(22,554)
7,648
2,117
7,672
12,491
(14,702)
2015
(50,142)
(34,969)
(2,468)
(319)
23,525
(11,315)
Total change in cash due to changes in operating assets and liabilities and
the tax benefit from share-based compensation arrangements
$
8,380
$
(7,328)
$
(75,688)
The cash used by accounts receivable during 2017 as compared to 2016 was relatively consistent with
revenue growth. The reduction in cash used by accounts receivable during 2016 as compared to 2015 was primarily
due to the absence of the impacts related to our change in U.S. commercial strategy impacting the first quarter of
2015. The incremental cash used by accounts receivable for the year ended December 31, 2015, was primarily due
to our transition to an all-direct strategy in the U.S., including the establishment of accounts receivable directly with
our U.S. end-users that previously purchased from our U.S. distribution partners, which take a longer elapsed time to
collect. Additionally, accounts receivable was impacted by revenue growth for the years ended December 31, 2016
and 2015, relative to the respective prior periods, including the margin capture associated with the aforementioned
all-direct strategy.
The net incremental cash used by inventories during 2017 as compared to cash provided by inventories in
2016 was primarily due to our operational initiatives to optimize inventory levels that were implemented in the first
77
half of 2016, which followed a period of inventory growth to support new products and increasing demand. Cash
used by inventories for 2015 was primarily due to growth in our volume commitment rental programs in
international markets and relatively higher inventory levels to support new instrument and diagnostic test launches.
The decrease in cash provided by deferred revenue during 2017 as compared to 2016 was primarily due to
customer program mix. The increase in cash provided by deferred revenue during 2016 as compared to cash used by
deferred revenue for 2015 was primarily due to the recognition in 2015 of deferred revenues related to our 2014
Catalyst One introductory offer, where we pre-sold the instrument and provided customers with temporary use of a
Catalyst Dx instrument.
The increase in cash provided by other assets and liabilities during 2017 as compared to cash provided by
assets and liabilities during 2016 was primarily due to the deemed repatriation tax on foreign profits from the
enactment of the Tax Act, which was recorded in the fourth quarter of 2017 and is payable over eight years, as well
as higher relative employee incentive compensation payments. The decrease in cash provided by other assets and
liabilities during 2016 as compared to 2015 was the result of higher taxable income in 2015. Income tax payments
were lower during 2015 resulting from one-time impacts of implementing our U.S. all-direct strategy and the benefit
from the Tax Increase Prevention Act enactment late in the fourth quarter of 2014. The net incremental cash
provided by other assets and liabilities for 2015 was also due to the recognition of previously deferred Catalyst
instrument costs under the Catalyst One introductory offer during 2015.
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 and for the
annual period driven primarily by payments related to annual employee incentive programs in the first quarter
following the year for which the bonuses were earned and the seasonality of vector-borne disease testing, which has
historically resulted in significant increases in accounts receivable balances during the first quarter of the year.
Investing Activities. Cash used by investing activities was $138.7 million during 2017 as compared to
$90.8 million used during 2016, and $308.4 million used during 2015. The increase in cash used by investing
activities during 2017 as compared to 2016 was primarily due to the increase in net purchases of marketable
securities, as well as increases in acquisitions of businesses and intangible assets and capital spending. The decrease
in cash used by investing activities during 2016 as compared to 2015 was due primarily to the initial purchase of
marketable securities that began in 2015. During 2018, in connection with the passage of the Tax Act in the fourth
quarter of 2017, we intend to liquidate our marketable securities and use the cash to partially pay down our Credit
Facility.
Our total capital expenditure plan for 2018 is estimated to be approximately $140 million, which includes
the expansion of our headquarters, the relocation and expansion of our German core reference laboratory, other
capital investments in manufacturing and reference laboratory equipment, investments in internal use software and
information technology infrastructure, and the renovation and expansion of our facilities and reference laboratories.
Financing Activities. Cash used by financing activities was $208.0 million during 2017 as compared to
$222.2 million used during 2016, and $101.0 million used during 2015. The decrease in cash used by financing
activities during 2017 as compared to 2016 was primarily due to fewer repurchases of our common stock. The
increase in cash used by financing activities during 2016 as compared to 2015 was due to the issuance of senior
notes in 2015, as well as a decrease in cash used to repurchase our common stock.
In June 2015, we entered into an Amended and Restated Multi-Currency Note Purchase and Private Shelf
Agreement (the “2015 Amended Agreement”), among the Company, Prudential Investment Management, Inc.
(“Prudential”) and the accredited institutional purchasers named therein, which amends and restates the Note
Purchase and Private Shelf Agreement dated July 21, 2014. Pursuant to the 2015 Amended Agreement, we issued
and sold through a private placement a principal amount of €88.9 million of 1.785% Series C Senior Notes due
June 18, 2025 (the “2025 Series C Notes”). We used the net proceeds from this issuance and sale of the 2025 Series
C Notes for general corporate purposes, including repaying amounts outstanding under our Credit Facility.
In December 2014, we entered into a Multi-Currency Note Purchase and Private Shelf Agreement (the
“MetLife Agreement”) with accredited institutional purchasers named therein pursuant to which we agreed to issue
and sell $75 million of 3.25% Series A Senior Notes having a seven-year term (the “2022 Notes”) and $75 million
78
of 3.72% Series B Senior Notes having a twelve-year term (the “2027 Notes”). In February 2015, we issued and sold
the 2022 Notes and the 2027 Notes pursuant to the MetLife Agreement. We used the net proceeds from these
issuance and sales for general corporate purposes, including repaying amounts outstanding under our Credit Facility.
Cash used to repurchase shares of our common stock decreased by $21.5 million during the year ended
December 31, 2017, as compared to 2016. Cash used to repurchase shares of our common stock decreased by $97.9
million during the year ended December 31, 2016, as compared to 2015. From the inception of our share repurchase
program in August 1999 to December 31, 2017, we have repurchased 63.0 million shares. During the year ended
December 31, 2017, we purchased 1.75 million shares for an aggregate cost of $270.3 million, as compared to
purchases of 3.1 million shares for an aggregate cost of $313.1 million during 2016 and purchases of 5.7 million
shares for an aggregate cost of $406.4 million during 2015. We believe that the repurchase of our common stock is a
favorable means of returning value to our shareholders and we also repurchase our stock to offset the dilutive effect
of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level
of other investing activities and the share price. See Note 18 to the consolidated financial statements included in this
Annual Report on Form 10-K for additional information about our share repurchases.
As noted above, we refinanced our existing $700 million Credit Facility during December 2015, increasing
the principal amount thereunder to $850 million. The Credit Facility matures on December 4, 2020 and requires no
scheduled prepayments before that date. Although the Credit Facility does not mature until December 2020, all
amounts borrowed under the terms of the Credit Facility are reflected in the current liabilities section in the
accompanying consolidated balance sheets because the Credit Facility contains a subjective material adverse event
clause, which allows the debt holders to call the loans under the Credit Facility if we fail to notify the syndicate of
such an event. Applicable interest rates on borrowings under the Credit Facility generally range from 1.250 to 1.375
percentage points above the London interbank offered rate or the Canadian dollar-denominated bankers’ acceptance
rate, based on our leverage ratio, or the prevailing prime rate plus a maximum spread of up to 0.375 percent, based
on our leverage ratio.
Net borrowing and repayment activity under the Credit Facility resulted in more cash provided of $6.0
million during the year ended December 31, 2017, as compared to 2016. At December 31, 2017, we had $655.0
million outstanding under the Credit Facility. Net borrowing and repayment activity under the Credit Facility
resulted in more cash provided of $14.0 million during the year ended December 31, 2016, compared to 2015. At
December 31, 2016, we had $611.0 million outstanding under the Credit Facility. The general availability of funds
under the Credit Facility was further reduced by $1.0 million for a letter of credit that was issued in connection with
claims under our workers’ compensation policy. 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 and violations of laws and regulations. The 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 not to exceed 3.5-to-1. At December 31, 2017, we were in compliance with the covenants of the
Credit Facility. The obligations under the 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, the failure to pay specified
indebtedness, cross-acceleration to specified indebtedness and a change of control default.
Since December 2013, we have issued and sold through private placements senior notes having an
aggregate principal amount of approximately $600 million pursuant to certain note purchase agreements
(collectively, the “Senior Note Agreements”). 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. See Note 11 to the consolidated
financial statements included in this Annual Report on Form 10-K for additional information regarding our
senior notes.
Should we elect to prepay the 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
79
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 Agreement, 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 the Employee Retirement Income Security Act of 1974, the
failure to pay specified indebtedness and cross-acceleration to specified indebtedness.
Effect of currency translation on cash. The net effect of changes in foreign currency exchange rates are
related to changes in exchange rates between the U.S. dollar and the functional currencies of our foreign
subsidiaries. These changes will fluctuate each year as the value of the U.S. dollar relative to the value of the foreign
currencies change. A currency’s value depends on many factors, including interest rates, the country’s debt levels
and strength of economy.
Off Balance Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities
except for letters of credit and third party guarantees, as reflected in Note 11 and Note 14 to the consolidated
financial statements for the year ended December 31, 2017, included in this Annual Report on Form 10-K,
respectively.
Financial Covenant. The 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. At December 31, 2017, we were in compliance with the covenants
of the Senior Note Agreements. The following details our consolidated leverage ratio calculation as of December 31,
2017 (in thousands):
December
2017
263,144
37,225
117,788
83,140
23,517
524,814
December
2017
655,000
606,075
1,261,075
3,537
419
492
1,265,523
2.41
(187,675)
(284,255)
793,593
1.51
$
$
$
$
Trailing 12 Months Adjusted EBITDA:
Net income attributable to stockholders
Interest expense
Provision for income taxes
Depreciation and amortization
Share-based compensation expense
Adjusted EBITDA
Debt to Adjusted EBITDA Ratio:
Line of credit
Long-term debt
Total debt
Acquisition-related consideration payable
Capitalized leases
U.S. GAAP change - deferred financing costs
Gross debt
Gross debt to Adjusted EBITDA ratio
Cash and cash equivalents
Marketable securities
Net debt
Net debt to Adjusted EBITDA ratio
80
Other Commitments, Contingencies and Guarantees
Under our workers’ compensation insurance policies for U.S. employees, we have retained the first $0.3
million for the years ended December 31, 2017, 2016 and 2015, in claim liability per incident with aggregate
maximum claim liabilities per year of $2.5 million, $2.6 million, and $3.5 million for the years ended December 31,
2017, 2016 and 2015, respectively. Workers’ compensation expense recognized during the years ended December
31, 2017, 2016 and 2015 and our respective liability for such claims as of December 31, 2017, 2016 and 2015 was
not material. Claims incurred during the years ended December 31, 2017 and 2016, are relatively undeveloped as of
December 31, 2017. Therefore, it is possible that we could incur additional healthcare and wage indemnification
costs beyond those previously recognized up to our aggregate liability for each of the respective claim years. For the
years ended on or prior to December 31, 2015, based on our retained claim liability per incident and our aggregate
claim liability per year, our maximum liability in excess of the amounts deemed probable and previously
recognized, is not material as of December 31, 2017. As of December 31, 2017, we had outstanding letters of credit
totaling $1.0 million to the insurance companies as security for these claims in connection with these policies.
Under our current employee healthcare insurance policy for U.S. employees, we retained claims liability
risk per incident up to $1 million per year in 2017, $0.45 million per year in 2016 and $0.43 million per year in
2015. We recognized employee healthcare claim expense of $47.2 million during the year ended December 31,
2017, $40.4 million during the year ended December 31, 2016, and $34.6 million during the year ended December
31, 2015, which represents actual claims paid and an estimate of our liability for the uninsured portion of employee
healthcare obligations that have been incurred but not paid. Should employee health insurance claims exceed our
estimated liability, we would have further obligations. Our estimated liability for healthcare claims that have been
incurred but not paid were $4.2 million as of December 31, 2017, $4.0 million as of December 31, 2016, and $4.8
million as of December 31, 2015.
We have total acquisition-related contingent consideration liabilities outstanding primarily related to the
achievement of certain revenue milestones of $3.0 million at December 31, 2017, as compared to $0.9 million at
December 31, 2016, and $5.9 million at December 31, 2015. These contractual obligations are not reflected in the
table below.
We are contractually obligated to make the following payments in the years below:
Contractual obligations (in thousands)
Total Less than 1 year
1-3 years
3-5 years More than 5 years
Long-term debt obligations (1)
Operating leases
Purchase obligations (2)
Minimum royalty payments
U.S. deemed repatriation tax
Total contractual cash obligations
$
$
747,461 $
95,929
214,539
1,736
48,783
1,108,448 $
20,385 $
19,233
184,564
528
3,903
228,613 $
40,769 $
27,661
24,003
439
7,805
100,677 $
161,387 $
16,600
3,872
187
7,805
189,851 $
524,920
32,435
2,100
582
29,270
589,307
(1) Long-term debt amounts include interest payments associated with long-term debt.
(2) Purchase obligations include agreements and purchase orders to purchase goods or services that are enforceable and legally binding and that
specify all significant terms, including fixed or minimum quantities, pricing, and approximate timing of purchase transactions.
These commitments do not reflect unrecognized tax benefits of $21.4 million and $2.2 million of deferred
compensation liabilities as of December 31, 2017, as the timing of recognition is uncertain. See Note 12 to the
consolidated financial statements included in this Annual Report on Form 10-K for additional discussion of
unrecognized tax benefits.
Not reflected in the contractual obligation table above are agreements with third parties that we have
entered into 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 these
agreements is minimal. Accordingly, we did not record any liabilities for these obligations at December 31, 2017
and 2016, and do not anticipate any future payments for these guarantees.
81
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our market risk consists primarily of foreign currency exchange risk and interest rate risk. Our functional
currency is the U.S. dollar and our primary manufacturing operations and inventory supply contracts are in the U.S.
or in U.S. dollars, but we distribute our products worldwide both through direct export and through our foreign
subsidiaries. Our primary foreign currency transaction risk consists of intercompany purchases and sales of products
and we attempt to mitigate this risk through our hedging program described below. For the year ended December 31,
2017, approximately 21 percent of our consolidated revenue was derived from products manufactured or sourced in
U.S. dollars and sold internationally in local currencies, as compared to 21 percent for the year ended December 31,
2016, and 20 percent for the year ended December 31, 2015. The functional currency of most of our subsidiaries is
their local currency. For three of our subsidiaries located in the Netherlands, Singapore and Dubai, the functional
currency is the U.S. dollar.
Our foreign currency exchange impacts are comprised of three components: 1) local currency revenues and
expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are
denominated in a currency that is different from the functional currency used by each subsidiary. Based on projected
revenues and expenses for 2018, excluding the impact of intercompany and trade balances denominated in
currencies other than the functional subsidiary currencies, a 1 percent strengthening of the U.S. dollar would reduce
revenue by approximately $8 million and operating income by approximately $4 million. Additionally, our foreign
currency hedge contracts in place as of December 31, 2017, would provide incremental offsetting gains of
approximately $2 million. The impact of the intercompany and monetary balances referred to in the third component
above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably
forecast the impact that changes in exchange rates would have.
At our current foreign exchange rate assumptions, we anticipate that the effect of a weaker U.S. dollar will
have a favorable effect on our operating results by increasing our revenues, operating profit, and diluted earnings per
share in the year ending December 31, 2018, by approximately $46 million, $14 million, and $0.12 per share,
respectively. This favorable impact includes foreign currency hedging activity, which is expected to decrease total
company operating profit by approximately $7 million and diluted earnings per share by $0.06 in the year ending
December 31, 2018. 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 estimate assumes that the value
of the U.S. dollar relative to other currencies will reflect the euro at $1.22, the British pound at $1.40, the Canadian
dollar at $0.79, and the Australian dollar at $0.78; and the Japanese yen at ¥111, the Chinese renminbi at RMB 6.45,
and the Brazilian real at R$3.21 to the U.S. dollar for the full year of 2018.
The following table presents the foreign currency exchange impacts on our revenues, operating profit, and
diluted earnings per share for the years December 31, 2017, 2016 and 2015, as compared to the respective prior
periods:
(dollars in thousands)
Revenue impact
Operating profit impact, excluding hedge activity
Hedge gains - prior year
Hedge gains - current year
Hedging activity impact
Operating profit impact, including hedge activity
Diluted earnings per share impact, including hedge activity
For the Years Ended December 31,
2017
2016
2015
6,615 $
(14,105) $
(89,692)
2,542 $
(6,921) $
(38,286)
(3,620)
27
(3,593)
(1,051) $
(0.01) $
(20,879)
3,620
(17,259)
(24,180) $
(0.20) $
(3,821)
20,879
17,058
(21,228)
(0.16)
$
$
$
$
The primary purpose of our foreign currency hedging activities is to protect against the volatility associated
with foreign currency transactions. 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 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. If a hedging instrument qualifies
82
for hedge accounting, changes in the fair value of the derivative instrument from the effective portion of the hedge
are deferred in accumulated other comprehensive income, net of tax, and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. We immediately record in earnings the
extent to which a hedge instrument is not effective in achieving offsetting changes in fair value. We primarily utilize
foreign currency exchange contracts with durations of less than 24 months.
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 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. See Note 17 to the consolidated financial statements of this Annual Report on Form 10-
K for details regarding euro-denominated notes that we designated as a hedge of our euro net investment in certain
foreign subsidiaries.
Our foreign currency hedging strategy is consistent with prior periods and there were no material changes
in our market risk exposure during the year ended December 31, 2017. We enter into foreign currency exchange
contracts designated as cash flow hedges for amounts that are less than the full value of forecasted intercompany
purchases and sales and for amounts that are equivalent to, or less than, other significant transactions. As a result, no
significant ineffectiveness has resulted or been recorded through the statements of operations for the years ended
December 31, 2017, 2016 and 2015. Our hedging strategy related to intercompany inventory purchases and sales is
to employ the full amount of our hedges for the succeeding year at the conclusion of our budgeting process for that
year. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions
for the current and following year. Accordingly, our risk with respect to foreign currency exchange rate fluctuations
may vary throughout each annual cycle.
We enter into hedge agreements where we believe we have meaningful exposure to foreign currency
exchange risk, with the exception of certain emerging markets where it is not practical to hedge our exposure. We
hedge approximately 85 percent of the estimated exposure from intercompany product purchases and sales
denominated in the euro, British pound, Canadian dollar, Japanese yen, Australian dollar, and Swiss franc. We have
additional unhedged foreign currency exposures related to foreign services and emerging markets where it is not
practical to hedge. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany
purchases and sales totaled $176.5 million at December 31, 2017, and $175.9 million at December 31, 2016. At
December 31, 2017, we had $5.2 million of net unrealized losses on foreign currency exchange contracts recorded in
accumulated other comprehensive income, net of related tax expense.
We have a Credit Facility with a syndicate of multinational banks, which matures on December 4, 2020,
and requires no scheduled prepayments before that date. Although the Credit Facility does not mature until
December 4, 2020, all individual borrowings under the terms of the Credit Facility have a stated term between 30
and 180 days. Borrowings outstanding under the Credit Facility at December 31, 2017, were $655 million at a
weighted-average effective interest rate of 2.81 percent. Based on amounts outstanding under our Credit Facility as
of December 31, 2017, an increase in the LIBOR or the CDOR of 1 percent would increase interest expense by
approximately $6.6 million on an annualized basis.
During the year ended December 31, 2017, we purchased marketable debt securities, which are classified
as available-for-sale and carried at fair value in the accompanying consolidated balance sheet included in this
Annual Report on Form 10-K. The fair value of our cash equivalents and marketable securities is subject to changes
in market interest rates. As of December 31, 2017, we estimate that a 1 percent increase in market interest rates
would decrease the fair value of our marketable securities portfolio by approximately $1.5 million.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report commencing on page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
83
ITEM 9A. 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 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 is recorded, processed, summarized, and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls and procedures include 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 at December 31, 2017, our chief executive officer and chief financial officer
have concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the
reasonable assurance level.
Report of Management on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies
and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that
controls may become inadequate because of changes in conditions and that the degree of compliance with the
policies and procedures may deteriorate.
We conducted an evaluation of the effectiveness of internal control over financial reporting based on the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, we concluded that, at December 31, 2017,
our internal control over financial reporting was effective.
The effectiveness of the Company's internal control over financial reporting at December 31, 2017, has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which appears herein.
84
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 December 31, 2017, that materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting. During 2017, we
implemented internal controls to ensure we have adequately evaluated our contracts and properly assessed the
impact of the new accounting standard related to revenue recognition on our financial statements to facilitate the
adoption on January 1, 2018. Beyond these new implementation controls, we do not expect significant changes to
our internal controls over financial reporting due to the adoption of the new revenue recognition accounting
standard, as we plan to utilize our existing systems and similar processes and procedures in 2018.
Certifications
The certifications with respect to disclosure controls and procedures and internal control over financial
reporting of the Company’s chief executive officer and chief financial officer are attached as Exhibits 31.1 and 31.2
to this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to Directors, executive officers, compliance with
Section 16(a) of the Exchange Act, our code of ethics and corporate governance is omitted from this Annual Report
on Form 10-K and, pursuant to Regulation 14A of the Exchange Act, is incorporated herein by reference from the
sections entitled “Corporate Governance - Proposal One - Election of Directors,” “Executive Officers,” “Stock
Ownership Information - Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance –
Corporate Governance Guidelines and Code of Ethics” and “Corporate Governance –Board Committees” in the
Company’s definitive Proxy Statement with respect to its 2018 Annual Meeting, which Proxy Statement will be
filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to
Regulation 14A of the Exchange Act, is incorporated herein by reference from the sections entitled “Executive
Compensation – Compensation Discussion and Analysis,” “Executive Compensation – Executive Compensation
Tables,” “Executive Compensation – Potential Payments Upon Termination or Change-in-Control,” “Corporate
Governance –Board Committees – Compensation Committee – Compensation Committee Interlocks and Insider
Participation” and “Compensation Committee Report” in the Company’s definitive Proxy Statement with respect to
its 2018 Annual Meeting, which Proxy Statement will be filed with the SEC within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K.
85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item with respect to Item 201(d) of Regulation S-K is omitted from this
Annual Report on Form 10-K and, pursuant to Regulation 14A of the Exchange Act, is incorporated herein by
reference from the section entitled “Equity Compensation Plan Information” in the Company’s definitive Proxy
Statement with respect to its 2018 Annual Meeting, which Proxy Statement will be filed with the SEC within 120
days after the end of the fiscal year covered by this Annual Report on Form 10-K. The information required by this
Item with respect to Item 403 of Regulation S-K is omitted from this Annual Report on Form 10-K and, pursuant to
Regulation 14A of the Exchange Act, is incorporated herein by reference from the sections entitled “Stock
Ownership Information” in the Company’s definitive Proxy Statement with respect to its 2018 Annual Meeting,
which Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to
Regulation 14A of the Exchange Act, is incorporated herein by reference from the sections entitled “Corporate
Governance – Related Person Transactions” and “Corporate Governance – Director Independence” in the
Company’s definitive Proxy Statement with respect to its 2018 Annual Meeting, which Proxy Statement will be
filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to
Regulation 14A of the Exchange Act, is incorporated herein by reference from the section entitled “Audit
Committee Matters - Independent Auditors’ Fees” in the Company’s definitive Proxy Statement with respect to its
2018 Annual Meeting, which Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal
year covered by this report.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Form 10-K:
PART IV
(a) (1) and (a)
(2)
The financial statements set forth in the Index to Consolidated Financial Statements and the
Consolidated Financial Statement Schedule are filed as a part of this Annual Report on Form 10-
K commencing on page F-1.
(a)(3) and (b)
The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on
Form 10-K and either filed herewith or incorporated by reference herein, as applicable.
ITEM 16. FORM 10-K SUMMARY
None.
86
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2017,
2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Schedule II
Valuation and Qualifying Accounts for the Years Ended December 31, 2017, 2016 and 2015
Page No.
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-49
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of IDEXX Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of IDEXX Laboratories, Inc. and its subsidiaries as
of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the
related notes and financial statement schedule listed in the accompanying index (collectively referred to as the
“consolidated financial statements”). We also have audited the Company's internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
Change in accounting principle
As noted in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts
for share-based compensation.
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the Report of Management on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
F-2
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2018
We have served as the Company’s auditor since 2002.
F-3
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
$
$
$
ASSETS
Current Assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of reserves of $4,576 in 2017 and $4,523 in 2016
Inventories
Other current assets
Total current assets
Long-Term Assets:
Property and equipment, net
Goodwill
Intangible assets, net
Other long-term assets
Total long-term assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable
Accrued liabilities
Line of credit
Current portion of deferred revenue
Total current liabilities
Long-Term Liabilities:
Deferred income tax liabilities
Long-term debt
Long-term deferred revenue, net of current portion
Other long-term liabilities
Total long-term liabilities
Total liabilities
Commitments and Contingencies (Note 14)
Stockholders’ Equity (Deficit):
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 104,275 shares in 2017 and
103,341 shares in 2016
Additional paid-in capital
Deferred stock units: Outstanding: 229 units in 2017 and 231 units in 2016
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost: 17,171 shares in 2017 and 15,367 shares in 2016
Total IDEXX Laboratories, Inc. stockholders’ equity (deficit)
Noncontrolling interest
Total stockholders’ equity (deficit)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2017
December 31,
2016
187,675
284,255
234,597
164,318
101,140
971,985
379,096
199,873
43,846
118,616
741,431
1,713,416
66,968
253,418
655,000
29,181
1,004,567
25,353
606,075
35,545
95,718
762,691
1,767,258
10,428
1,073,931
5,988
803,545
(36,470)
(1,911,528)
(54,106)
264
(53,842)
1,713,416
$
$
$
$
154,901
236,949
204,494
158,034
91,206
845,584
357,422
178,228
46,155
103,315
685,120
1,530,704
60,057
236,131
611,000
27,380
934,568
39,287
593,110
33,015
38,937
704,349
1,638,917
10,334
1,011,895
5,514
540,401
(43,053)
(1,633,443)
(108,352)
139
(108,213)
1,530,704
F-4
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
For the Years Ended December 31,
2017
2016
2015
$
$
1,176,115
792,943
1,969,058
1,070,973
704,450
1,775,423
$
974,933
626,959
1,601,892
446,449
425,227
871,676
1,097,382
354,294
220,878
109,182
-
413,028
(37,225)
5,254
381,057
117,788
263,269
125
263,144
3.00
2.94
87,769
89,567
$
$
$
416,810
383,177
799,987
975,436
317,058
207,017
101,122
-
350,239
(32,049)
3,656
321,846
99,792
222,054
9
222,045
2.47
2.44
89,732
90,884
$
$
$
360,208
351,414
711,622
890,270
299,955
182,510
99,681
8,212
299,912
(29,239)
2,468
273,141
81,006
192,135
57
192,078
2.07
2.05
92,601
93,649
Revenue:
Product revenue
Service revenue
Total revenue
Cost of Revenue:
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Expenses:
Sales and marketing
General and administrative
Research and development
Impairment charge
Income from operations
Interest expense
Interest income
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to IDEXX Laboratories, Inc. stockholders
$
Earnings per Share:
Basic
Diluted
Weighted Average Shares Outstanding:
Basic
Diluted
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31,
2017
2016
2015
$
263,269
$
222,054
$
192,135
25,107
(8,347)
(42)
(5,874)
2,142
245
(30,718)
1,894
(226)
(10,332)
4,950
8,839
197
(10,135)
6,583
269,852
125
269,727
(2,251)
2,699
(788)
221,266
9
221,257
(13,983)
(5,143)
(34,194)
157,941
57
157,884
$
$
Net income
Other comprehensive income, net of tax:
Foreign currency translation adjustments
Unrealized gain (loss) on net investment hedge
Unrealized gain (loss) on investments, net of tax expense (benefit) of $- in
2017, $113 in 2016 and ($93) in 2015
Unrealized gain (loss) on derivative instruments:
Unrealized (loss) gain, net of tax (benefit) expense of ($5,304) in
2017, $2,174 in 2016 and $3,736 in 2015
Less: reclassification adjustment for losses (gains) included in net
income, net of tax expense of $224 in 2017, $949 in 2016 and $5,853
in 2015
Unrealized gain (loss) on derivative instruments
Other comprehensive income (loss), net of tax
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to IDEXX Laboratories, Inc.
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
S
E
I
R
A
I
D
I
S
B
U
S
D
N
A
.
C
N
I
,
S
E
I
R
O
T
A
R
O
B
A
L
X
X
E
D
I
)
T
I
C
I
F
E
D
(
Y
T
I
U
Q
E
’
S
R
E
D
L
O
H
K
C
O
T
S
F
O
S
T
N
E
M
E
T
A
T
S
D
E
T
A
D
I
L
O
S
N
O
C
)
s
t
n
u
o
m
a
e
r
a
h
s
r
e
p
t
p
e
c
x
e
,
s
d
n
a
s
u
o
h
t
n
i
(
l
a
t
o
T
’
s
r
e
d
l
o
h
k
c
o
t
S
)
t
i
c
i
f
e
D
(
y
t
i
u
q
E
t
s
e
r
e
t
n
I
g
n
i
l
l
o
r
t
n
o
c
n
o
N
k
c
o
t
S
y
r
u
s
a
e
r
T
r
e
h
t
O
d
e
t
a
l
u
m
u
c
c
A
)
s
s
o
L
(
e
m
o
c
n
I
e
v
i
s
n
e
h
e
r
p
m
o
C
d
e
n
i
a
t
e
R
s
g
n
i
n
r
a
E
$
)
6
6
2
,
3
5
4
,
2
(
$
)
1
7
0
,
8
(
$
9
9
2
,
5
7
6
,
1
$
-
-
9
8
5
,
7
1
1
5
3
1
,
2
9
1
)
4
9
1
,
4
3
(
)
2
7
1
,
2
1
4
(
-
3
6
7
,
2
3
4
8
8
,
9
1
)
5
9
9
,
3
8
(
4
5
0
,
2
2
2
)
8
8
7
(
)
6
2
0
,
7
1
3
(
)
9
2
3
(
0
8
9
,
1
5
1
9
8
,
9
1
3
8
5
,
6
)
3
1
2
,
8
0
1
(
9
6
2
,
3
6
2
)
5
8
0
,
8
7
2
(
)
2
1
(
9
9
0
,
9
3
7
1
5
,
3
2
)
2
4
8
,
3
5
(
$
3
7
7
5
$
$
-
-
-
-
-
-
-
9
0
3
1
-
-
-
-
-
-
-
-
-
-
9
3
1
5
2
1
-
-
-
-
-
)
2
7
1
,
2
1
4
(
7
5
7
,
0
3
4
6
2
,
8
1
5
,
1
-
-
-
-
-
-
-
)
4
9
1
,
4
3
(
$
)
7
1
4
,
6
1
3
,
1
(
$
)
5
6
2
,
2
4
(
$
-
-
-
-
-
)
6
2
0
,
7
1
3
(
-
-
-
-
-
)
8
8
7
(
-
-
-
-
-
)
5
8
0
,
8
7
2
(
-
-
-
-
-
3
8
5
,
6
$
)
3
4
4
,
3
3
6
,
1
(
$
)
3
5
0
,
3
4
(
$
-
-
8
7
0
,
2
9
1
)
7
5
7
,
0
3
(
)
4
6
2
,
8
1
5
,
1
(
-
-
-
6
5
3
,
8
1
3
5
4
0
,
2
2
2
-
-
-
-
-
1
0
4
,
0
4
5
4
4
1
,
3
6
2
-
-
-
-
-
d
e
r
r
e
f
e
D
l
a
n
o
i
t
i
d
d
A
k
c
o
t
S
n
o
m
m
o
C
k
c
o
t
S
s
t
i
n
U
6
6
0
,
5
-
-
-
-
-
-
8
5
2
5
8
n
i
-
d
i
a
P
l
a
t
i
p
a
C
e
u
l
a
V
r
a
P
0
1
.
0
$
s
e
r
a
h
S
f
o
r
e
b
m
u
N
$
3
9
2
,
8
8
8
$
5
9
1
,
0
1
$
7
4
9
,
1
0
1
5
1
0
2
,
1
y
r
a
u
n
a
J
e
c
n
a
l
a
B
-
-
-
-
-
)
8
5
2
(
0
0
7
,
2
3
9
9
7
,
9
1
-
-
-
-
-
-
-
3
6
-
-
-
-
-
-
)
6
4
3
(
6
3
6
t
e
n
,
s
s
o
l
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
k
c
o
t
s
h
g
u
o
r
h
t
d
e
t
c
a
n
e
t
i
l
p
s
k
c
o
t
S
k
c
o
t
s
n
o
m
m
o
c
f
o
s
e
s
a
h
c
r
u
p
e
R
e
m
o
c
n
i
t
e
N
d
e
r
i
t
e
r
s
e
r
a
h
S
d
n
e
d
i
v
i
d
k
c
o
t
s
r
e
d
n
u
d
e
u
s
s
i
k
c
o
t
s
n
o
m
m
o
C
t
i
f
e
n
e
b
x
a
t
s
s
e
c
x
e
g
n
i
d
u
l
c
n
i
,
s
n
a
l
p
y
t
i
v
i
t
c
a
s
t
i
n
u
k
c
o
t
s
d
e
r
r
e
f
e
D
t
s
o
c
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
e
r
a
h
S
$
9
0
4
,
5
$
4
3
5
,
0
4
9
$
8
5
2
,
0
1
$
7
3
2
,
2
0
1
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
e
c
n
a
l
a
B
$
4
1
5
,
5
$
5
9
8
,
1
1
0
,
1
$
4
3
3
,
0
1
$
1
4
3
,
3
0
1
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
e
c
n
a
l
a
B
-
-
-
-
4
1
1
9
-
-
-
)
3
4
3
(
4
0
9
,
1
5
0
0
8
,
9
1
-
-
-
-
-
6
7
-
-
-
-
-
4
0
1
,
1
t
e
n
,
s
s
o
l
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
k
c
o
t
s
r
e
d
n
u
d
e
u
s
s
i
k
c
o
t
s
n
o
m
m
o
C
t
i
f
e
n
e
b
x
a
t
s
s
e
c
x
e
g
n
i
d
u
l
c
n
i
,
s
n
a
l
p
k
c
o
t
s
n
o
m
m
o
c
f
o
s
e
s
a
h
c
r
u
p
e
R
y
t
i
v
i
t
c
a
s
t
i
n
u
k
c
o
t
s
d
e
r
r
e
f
e
D
t
s
o
c
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
e
r
a
h
S
e
m
o
c
n
i
t
e
N
F-7
-
-
-
-
8
3
3
6
3
1
-
-
-
5
0
0
,
9
3
)
0
5
3
(
1
8
3
,
3
2
-
-
-
-
-
4
9
-
-
-
-
-
4
3
9
t
e
n
,
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
k
c
o
t
s
r
e
d
n
u
d
e
u
s
s
i
k
c
o
t
s
n
o
m
m
o
C
t
i
f
e
n
e
b
x
a
t
s
s
e
c
x
e
g
n
i
d
u
l
c
n
i
,
s
n
a
l
p
k
c
o
t
s
n
o
m
m
o
c
f
o
s
e
s
a
h
c
r
u
p
e
R
y
t
i
v
i
t
c
a
s
t
i
n
u
k
c
o
t
s
d
e
r
r
e
f
e
D
t
s
o
c
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
-
e
r
a
h
S
e
m
o
c
n
i
t
e
N
$
4
6
2
$
)
8
2
5
,
1
1
9
,
1
(
$
)
0
7
4
,
6
3
(
$
5
4
5
,
3
0
8
$
8
8
9
,
5
$
1
3
9
,
3
7
0
,
1
$
8
2
4
,
0
1
$
5
7
2
,
4
0
1
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
e
c
n
a
l
a
B
.
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
s
e
h
t
f
o
t
r
a
p
l
a
r
g
e
t
n
i
n
a
e
r
a
s
e
t
o
n
g
n
i
y
n
a
p
m
o
c
c
a
e
h
T
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization on marketable securities, net
Impairment charge
Provision for uncollectible accounts
Provision for deferred income taxes
Share-based compensation expense
Other
Tax benefit from share-based compensation arrangements
Changes in assets and liabilities:
Accounts receivable
Inventories
Accounts payable
Deferred revenue
Other assets and liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchases of property and equipment
Purchases of marketable securities
Proceeds from the sale and maturities of marketable securities
Acquisitions of intangible assets
Acquisitions of businesses, net of cash acquired
Net cash used by investing activities
Cash Flows from Financing Activities:
Borrowings on revolving credit facilities, net
Issuance of senior notes
Debt issue costs
Repurchases of common stock
Proceeds from exercises of stock options and employee stock purchase plans
Payment of acquisition-related contingent consideration
Shares withheld for statutory tax withholding on restricted stock (Note 2)
Tax benefit from share-based compensation arrangements
Net cash used by financing activities
Net effect of changes in exchange rates on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
The accompanying notes are an integral part of these consolidated financial statements.
For the Years Ended December 31,
2017
2016
2015
$
263,269 $
222,054 $
192,135
83,140
38
-
1,881
(7,918)
23,517
969
-
(24,918)
(19,062)
1,391
3,551
47,418
373,276
(74,384)
(334,164)
286,759
(2,320)
(14,579)
(138,688)
78,218
843
2,228
1,170
20,881
19,891
986
(14,702)
(22,554)
7,648
2,117
7,672
12,491
338,943
(64,787)
(227,894)
203,859
-
(1,964)
(90,786)
44,000
-
-
(282,565)
38,622
-
(8,073)
-
(208,016)
6,202
32,774
154,901
187,675 $
38,000
-
(56)
(304,086)
38,344
(4,728)
(4,372)
14,702
(222,196)
(54)
25,907
128,994
154,901 $
$
68,956
1,432
8,212
2,200
5,143
19,884
(472)
(11,315)
(50,142)
(34,969)
(2,468)
(319)
23,525
221,802
(82,921)
(271,958)
56,775
-
(10,302)
(308,406)
24,000
250,097
(1,380)
(401,981)
22,397
-
(5,438)
11,315
(100,990)
(5,948)
(193,542)
322,536
128,994
F-8
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
The accompanying consolidated financial statements of IDEXX Laboratories, Inc. have been prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with
the requirements of Regulation S-X.
These statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-
owned subsidiaries (“IDEXX,” the “Company,” “we” or “our”). We do not have any variable interest entities for
which we are the primary beneficiary. All intercompany transactions and balances have been eliminated
in consolidation.
We have included certain terms and abbreviations used throughout this Annual Report on Form 10-K in the
"Glossary of Terms and Selected Abbreviations.”
We develop, manufacture, and distribute products and provide services for the veterinary, bioresearch,
water, livestock, poultry, and dairy markets. We also sell a line of portable electrolytes and blood gas analyzers for
the human point-of-care medical diagnostics market. Our principal line of business, which we refer to as our
Companion Animal Group (“CAG”) operating segment, provides diagnostic capabilities and information
management solutions for the veterinary market as well as biological materials testing and services for the
bioresearch market. Our principal markets for these products and services are the United States (“U.S.”), Europe,
Japan, and Australia, but we also sell to customers and distributors in many other countries around the world. Our
Water operating segment provides innovative testing solutions for the quality and safety of water in our principal
markets of the U.S. and Europe, but we also sell to customers in many other countries around the world. Our
Livestock, Poultry and Dairy (“LPD”) operating segment provides diagnostic tests and related instrumentation 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 and food. Our principal markets for these products and
services are Europe, China, and Australia but we also sell to customers in many other countries around the world.
We also operate a smaller operating segment that comprises products for the human point-of-care medical
diagnostics market (“OPTI Medical”). Financial information about our OPTI Medical operating segment is
combined and presented with our pharmaceutical and out-licensing arrangements remaining from our
pharmaceutical business in an “Other” category because they do not meet the quantitative or qualitative thresholds
for reportable segments. See Note 15 for additional information regarding our reportable operating segments,
products and services and geographical areas.
Stock Split
On May 6, 2015, we announced a two-for-one split of our outstanding shares of common stock which was
effected through a stock dividend that was paid through the issuance of treasury shares. The stock split entitled each
stockholder of record at the close of business on May 18, 2015 to receive one additional share of common stock for
each outstanding share of common stock held. The additional shares of our common stock paid pursuant to the stock
split were distributed by our transfer agent on June 15, 2015. All share and per share amounts in the consolidated
balance sheets, consolidated statement of operations and notes to the consolidated financial statements retroactively
reflect the effect of the stock split unless otherwise noted.
F-9
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Estimates
The preparation of these consolidated financial statements in accordance with U.S. GAAP requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to
reserves for accounts receivable; goodwill and other intangible assets; income taxes; inventory valuation; revenue
recognition, product returns, customer programs and multiple element arrangements; share-based compensation;
warranty reserves; self-insurance reserves; fair value measurements and loss contingencies. We accrue contingent
liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably
estimated. We base our estimates on historical experience and on various other 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.
(b)
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of ninety days or less to be cash
equivalents. Cash and cash equivalents consist primarily of demand deposits, money market funds and short
duration agency bonds and commercial paper as described above. There is no restricted cash on our consolidated
balance sheet for the years ended December 31, 2017 and 2016.
(c)
(d)
(e)
(f)
(g)
Marketable Securities – See Note 5
Inventories – See Note 6
Property and Equipment – See Note 7
Goodwill and Other Intangible Assets – See Note 9
Warranty Reserves
We provide a standard twelve-month warranty on all instruments sold. We recognize the cost of instrument
warranties in cost of product revenue at the time revenue is recognized based on the estimated cost to repair the
instrument over its warranty period. Cost of product revenue reflects not only estimated warranty expense for
instruments sold in the current period, but also any changes in estimated warranty expense for the portion of the
aggregate installed base that is under warranty. Estimated warranty expense is based on a variety of inputs, including
historical instrument performance in the customers’ environment, historical and estimated costs incurred in servicing
instruments and projected instrument reliability. Should actual service rates or costs differ from our estimates,
revisions to the estimated warranty liability would be required. The liability for warranties is included in accrued
liabilities in the accompanying consolidated balance sheets.
(h)
Income Taxes – See Note 12
(i)
Taxes Remitted to Governmental Authorities by IDEXX on Behalf of Customer
We calculate, collect from our customers, and remit to governmental authorities sales, value-added and
excise taxes assessed by governmental authorities in connection with revenue-producing transactions with our
customers. We report these taxes on a net basis and do not include these tax amounts in revenue or cost of product or
service revenue.
F-10
(j)
Revenue Recognition
We recognize revenue when four criteria are met: (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv)
collectability is reasonably assured. Revenue generating transactions generally fall into one of the following
categories of revenue recognition:
We recognize revenue from the sales of consumables, rapid assay test kits and other diagnostic
products when the product is delivered to the customer, except as noted below.
We recognize revenue from the sales of instruments, non-cancelable software licenses and hardware
systems upon installation and the customer’s acceptance of the instrument or system as we have no
significant further obligations after this point in time.
We recognize service revenue at the time the service is performed.
We recognize revenue associated with extended maintenance agreements (“EMAs”) and our software-
as-a-service subscriptions over the life of the contracts using the straight-line method, which
approximates the expected timing in which applicable services are performed. Amounts collected in
advance of revenue recognition are recorded as current or long-term deferred revenue based on the
time from the balance sheet date to the future date of revenue recognition.
We recognize revenue on certain instrument systems under rental programs over the life of the rental
agreement using the straight-line method. Amounts collected in advance of revenue recognition are
recorded as current or long-term deferred revenue based on the time from the balance sheet date to the
future date of revenue recognition.
We recognize revenue on practice management systems sales, where the system includes software that
is considered more than incidental, either by allocating the revenue to each element of the sale based
on relative fair values of the elements, including post-contract support when fair value for all elements
is available, or by use of the residual method when only the fair value of the post-contract support is
available. We recognize revenue for the system upon installation and customer acceptance and
recognize revenue equal to the fair value of the post-contract support over the support period.
Shipping costs reimbursed by the customer are included in revenue. These same costs are also included
in cost of product revenue.
Multiple Element Arrangements (“MEAs”). Arrangements to sell products to customers frequently include
multiple deliverables. Our most significant MEAs include the sale of one or more of the instruments from the
IDEXX VetLab suite of analyzers, diagnostic imaging systems or practice management software, combined with
one or more of the following products: EMAs, consumables, rapid assay kits and reference laboratory diagnostic and
consulting services. Practice management software is frequently sold with post-contract customer support and
implementation services. Delivery of the various products or performance of services within the arrangement may or
may not coincide. Delivery of our IDEXX VetLab instruments, diagnostic imaging systems, and practice
management software generally occurs at the onset of the arrangement. EMAs, consumables, rapid assay kits, and
reference laboratory diagnostic and consulting services typically are delivered over future periods, generally one to
six years. In certain arrangements, revenue recognized is limited to the amount invoiced or received that is not
contingent on the delivery of products and services in the future.
F-11
We allocate revenue to each element based on the relative selling price and recognize revenue when the
elements have standalone value and the four criteria for revenue recognition, as discussed above, have been met for
each element. If available, we establish the selling price of each element based on vendor-specific objective
evidence (“VSOE”), which represents the price charged for a deliverable when it is sold separately. We use third-
party evidence (“TPE”) if VSOE is not available or best estimate of selling price if neither VSOE nor TPE is
available. When these arrangements include a separately-priced EMA, we recognize revenue related to the EMA at
the stated contractual price on a straight-line basis over the life of the agreement to the extent the separately stated
price is substantive. If there is no stated contractual price for an EMA, or the separately stated price is not
substantive, we allocate revenue to each element based on the relative selling price and recognize revenue when the
elements have standalone value and the four criteria for revenue recognition, as discussed above, have been met for
each element.
When arrangements within the scope of software revenue recognition guidance include multiple elements,
we allocate revenue to each element based on relative fair value, when VSOE exists for all elements, or by using the
residual method when there is VSOE for the undelivered elements but no such evidence for the delivered elements.
Under the residual method, the fair value of the undelivered elements is deferred and the residual revenue is
allocated to the delivered elements. Revenue is recognized on any delivered elements when the four criteria for
revenue recognition have been met for each element. If VSOE does not exist for the undelivered element, all
revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE does exist or
all elements of the arrangement have been delivered. We determine fair value based on amounts charged separately
for the delivered and undelivered elements to similar customers in standalone sales of the specific elements.
Certain arrangements with customers include discounts on future sales of products and services. We apply
judgment in determining whether future discounts are significant and incremental. When the future discount offered
is not considered significant and incremental, we do not account for the discount as an element of the original
arrangement. If the future discount is significant and incremental, we recognize that discount as an element of the
original arrangement and allocate the discount to the other elements of the arrangement based on relative selling
price. To determine whether a discount is significant and incremental, we look to the discount provided in
comparison to standalone sales of the same product or service to similar customers, the level of discount provided on
other elements in the arrangement, and the significance of the discount to the overall arrangement. If the discount in
the MEA approximates the discount typically provided in standalone sales, that discount is not considered
incremental.
Customer Programs. We record reductions to revenue related to customer marketing and incentive
programs, which include end-user rebates and other volume-based incentives. Incentives may be provided in the
form of IDEXX Points, credits or cash and are earned by end users upon achieving defined volume purchases or
utilization levels or upon entering an agreement to purchase products or services in future periods. These amounts
are presented on a net basis when applicable, which accounts for any differences between estimates and actual
incentives earned for the relevant customer marketing or incentive program. These differences have been
insignificant in all quarterly or annual periods. Our most significant customer programs are categorized as follows:
Customer Loyalty Programs. Our customer loyalty programs offer customers the opportunity to earn
incentives on a variety of IDEXX products and services as those products and services are purchased and
utilized. Revenue reductions related to customer loyalty programs are recorded based on the actual issuance
of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future.
Up-Front Customer Loyalty Programs. Our up-front loyalty programs provide incentives to customers in
the form of cash payments or IDEXX Points upon entering multi-year agreements to purchase annual
minimum amounts of future products or services. We predominately offer up-front loyalty incentives in
response to competitive offerings. If a customer breaches its agreement, they are required to refund all or a
portion of the up-front cash or IDEXX Points, or make other repayments, remedial actions, or both. These
incentives are considered to be customer acquisition costs and are capitalized within other current assets
and other long-term assets and are subsequently recognized as a reduction to revenue over the term of the
customer agreement. If these up-front incentives are subsequently utilized to purchase IDEXX VetLab
instruments, diagnostic imaging systems or Cornerstone practice management systems, product revenue
and cost is deferred and recognized over the term of the customer agreement as products and services are
provided to the customer. We monitor customer purchases over the term of their agreement to assess the
F-12
realizability of our capitalized customer acquisition costs. For the years ended December 31, 2017, 2016
and 2015, impairments of customer acquisition costs were immaterial.
IDEXX Instrument Marketing Programs. Our instrument marketing programs require the customer to enroll
at the time of instrument purchase and offer customers the opportunity to earn incentives in future periods
based on the volume of the products they purchase and utilize over the term of the program. These
arrangements are considered MEAs in accordance with our revenue recognition policy stated above.
Revenue reductions related to instrument marketing programs are recorded based on an estimate of
customer purchase and utilization levels and the incentive the customer will earn over the term of the
program. Our estimates are based on historical experience and the specific terms and conditions of the
marketing program, requiring us to apply judgment to estimate future product purchases and utilization.
Differences between our estimates and actual incentives earned are accounted for as a change in estimate.
These differences were not material for the years ended December 31, 2017, 2016 and 2015. At December
31, 2017, a 5 percent change in our estimate of future customer utilization would increase or reduce
revenue by approximately $0.4 million.
Reagent Rental Programs. Our reagent rental programs provide customers the right to use our instruments
in consideration for multi-year agreements to purchase annual minimum amounts of consumables. No
instrument revenue is recognized at the time of instrument installation. We recognize a portion of the
revenue allocated to the instrument concurrent with the future sale of consumables. We determine the
amount of revenue allocated from the consumable to the instrument based on relative selling prices and
determine the rate of instrument revenue recognition in proportion to the customer’s minimum volume
commitment. The cost of the instrument is capitalized within property and equipment or deferred within
other assets, and is charged to cost of product revenue on a straight-line basis over the term of the minimum
purchase agreement.
IDEXX Points are considered the same as cash and may be applied against the purchase price of IDEXX
products and services or applied to trade receivables due to us. IDEXX Points that have not yet been used by
customers are classified as a liability until use or expiration occurs. We estimate the amount of IDEXX Points
expected to expire, or breakage, based on historical expirations and we recognize the estimated benefit of breakage
in proportion to actual redemptions of IDEXX Points by customers. On November 30 of each year, unused IDEXX
Points earned before January 1 of the prior year generally expire and any variance from the breakage estimate is
accounted for as a change in estimate. This variance was not material for the years ended December 31, 2017, 2016
and 2015.
Future market conditions and changes in product offerings may cause us to change marketing strategies to
increase or decrease customer incentive offerings, possibly resulting in incremental reductions of revenue in future
periods as compared to reductions in the current or prior periods. Additionally, certain customer programs require us
to estimate, based on historical experience, and apply judgment to predict the number of customers who will actually
redeem the incentive. In determining estimated revenue reductions, we utilize data collected directly from end users,
which includes the volume of qualifying products purchased and the number of qualifying tests run as reported to us
by end users via IDEXX SmartService, a secure internet link that enables us to extract data and provide diagnostic
service and support for certain IDEXX VetLab instruments through remote access. Differences between estimated
and actual customer participation in programs may impact the amount and timing of revenue recognition.
Doubtful Accounts Receivable. We recognize revenue when collection from the customer is reasonably
assured. We maintain allowances for doubtful accounts 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. Additional allowances may be required if either the financial condition of our customers was to deteriorate
or a strengthening U.S. dollar impacts the ability of foreign customers to make payments to us on their U.S.
denominated purchases. 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. We
have no significant customers that accounted for greater than 10 percent of our consolidated revenues for the year
ended December 31, 2017. Similarly, we have no concentration of credit risk as of December 31, 2017.
F-13
(k)
Research and Development Costs
Research and development costs, which consist of salaries, employee benefits, materials and external
consulting and product development costs, are expensed as incurred. We evaluate our software research and
development costs for capitalization after the technological feasibility of software and products containing software
has been established. No costs were capitalized during the years ended December 31, 2017, 2016 and 2015.
(l)
Advertising Costs
Advertising costs, which are recognized as sales and marketing expense in the period in which they are
incurred, were $1.7 million, $2.1 million, and $1.2 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
(m)
Legal Costs
Legal costs are considered period costs and accordingly are expensed in the year services are provided.
(n)
(o)
Share-Based Compensation – See Note 4
Self-Insurance Accruals
We self-insure costs associated with health, workers’ compensation, and general welfare claims incurred by
our U.S. and Canadian employees up to certain limits. Insurance companies provide insurance for claims above
these limits. Claim liabilities are recorded for estimates of the loss that we will ultimately incur on reported claims,
as well as estimates of claims that have been incurred but not yet reported. Such liabilities are based on individual
coverage, the average time from when a claim is incurred to the time it is paid and judgments about the present and
expected levels of claim frequency and severity. Estimated claim liabilities could be significantly affected if future
occurrences and claims differ from these assumptions and historical trends. Estimated claim liabilities are included
in accrued liabilities in the accompanying consolidated balance sheets.
(p)
(q)
(r)
Leases – See Note 14
Earnings per Share – See Note 13
Foreign Currency
The functional currency of all but three of our subsidiaries is their local currency. Assets and liabilities of
these foreign subsidiaries are translated to the U.S. dollar using the exchange rate in effect at the balance sheet date.
Revenue and expense accounts are translated to the U.S. dollar using the exchange rate at the date which those
elements are recognized, and where it is impractical to do so, an average exchange rate in effect during the period is
used to translate those elements. Cumulative translation gains and losses are shown in the accompanying
consolidated balance sheets as a separate component of accumulated other comprehensive income (“AOCI”).
Revenues and expenses denominated in a currency other than the respective subsidiary’s functional
currency are recorded at the current exchange rate when the transaction is recognized. Monetary assets and liabilities
denominated in a currency other than the respective subsidiary’s functional currency are remeasured at each balance
sheet date using the exchange rate in effect at each balance sheet date. These foreign currency gains and losses are
included in general and administrative expenses. We recognized aggregate foreign currency gains of $1.1 million for
the year ended December 31, 2017, losses of $1.3 million for the year ended December 31, 2016, and losses of $0.2
million for the year ended December 31, 2015.
(s)
(t)
Hedging Instruments – See Note 17
Fair Value Measurements – See Note 16
F-14
(u)
Comprehensive Income
We report all changes in equity, including net income and transactions or other events and circumstances
from non-owner sources during the period in which they are recognized. We have chosen to present comprehensive
income, which encompasses net income, foreign currency translation adjustments, gains and losses on our net
investment hedge and the difference between the cost and the fair market value of investments in debt and equity
securities, forward currency exchange contracts and interest rate swap agreements, in the consolidated statements of
comprehensive income. See Note 19 for information about the effects on net income of significant amounts
reclassified out of each component of AOCI for the years ended December 31, 2017, 2016 and 2015.
(v)
Concentrations of Risk
Financial Instruments. Financial instruments that potentially subject us to concentrations of credit risk are
principally cash, cash equivalents, accounts receivable and derivatives. To mitigate such risk with respect to cash
and cash equivalents, we place our cash with highly-rated financial institutions, in non-interest bearing accounts that
are insured by the U.S. government and money market funds invested in government securities.
Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom we
make substantial sales. To reduce risk, we routinely assess the financial strength of our most significant customers
and monitor the amounts owed to us, taking appropriate action when necessary. As a result, we believe that accounts
receivable credit risk exposure is limited. We maintain an allowance for doubtful accounts, but historically have not
experienced any material losses related to an individual customer or group of customers in any particular industry or
geographic area.
To mitigate concentration of credit risk with respect to derivatives we enter into transactions with highly-
rated financial institutions, enter into master netting arrangements with counterparties to our derivative transactions
and frequently monitor the credit worthiness of our counterparties. Our master netting arrangements reduce our
exposure in that they permit outstanding receivables and payables with the counterparties to our derivative
transactions to be offset in the event of default. We have not incurred such losses and consider the risk of
counterparty default to be minimal.
Inventory. If we are unable to obtain adequate quantities of the inventory we need to sell our products, we
could face cost increases or delays or discontinuations in product shipments, which could have a material adverse
effect on our results of operations. Many of the third parties that provide us with the instruments we sell and certain
components, raw materials and consumables used in or with our products are obtained from sole or single source
suppliers. Some of the products that we purchase from these sources are proprietary or complex in nature, and,
therefore, cannot be readily or easily replaced by alternative sources.
(w)
New Accounting Pronouncements Adopted
Effective January 1, 2017, we adopted the FASB Accounting Standard Update (“ASU”) 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
which simplifies several aspects of the accounting for share-based payment transactions, including income tax
consequences, recognition of stock compensation award forfeitures, classification of awards as either equity or
liabilities, the calculation of diluted shares outstanding and classification on the statement of cash flows.
F-15
The following table summarizes the most significant impacts of the new accounting guidance for the years
ended December 31, 2017 and 2016, as applicable:
Description of Change:
Tax benefits related to share-based payments at
settlement are recorded through the income statement
instead of equity
Impact of Change:
Decrease in income tax expense by approximately $27.7
Adoption Method:
Prospective (required)
million for the year ended December 31, 2017
Calculation of diluted shares outstanding under the
treasury method will no longer assume that tax benefits
related to share-based payments are used to repurchase
common stock
An election can be made to reduce share-based
compensation expense for forfeitures as they occur
instead of estimating forfeitures that are expected to
occur
Increase in the weighted average diluted shares outstanding
Prospective (required)
by approximately 450,000 shares for the year ended
December 31, 2017
No change to share-based compensation expense, as we have
elected to continue to estimate forfeitures that are expected to
occur
N/A
Tax benefits related to share-based payments at
settlement are classified as operating cash flows instead
of financing cash flows
Increase in cash flow from operating activities and decreases
in cash flow from financing activities by approximately $27.7
million for the year ended December 31, 2017
Prospective (elected)
Cash payments to tax authorities for shares withheld to
meet employee tax withholding requirements on
restricted stock units are classified as financing cash
flow instead of operating cash flow
Increases in cash flow from operating activities and decreases
in cash flow from financing activities for the years ended
December 31, 2017, 2016 and 2015 by approximately $8.1
million, $4.4 million, and $5.4 million, respectively
Retrospective
(required)
Effective July 1, 2017, we adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business, which amended the definition of a business to be an integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower
costs, or other economic benefits directly to investors or other owners, members, or participants. In order to be
considered a business, the three elements of inputs, processes and outputs must be present. In a business acquisition,
if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group
of similar identifiable assets, the integrated set of assets and activities acquired is not considered a business. We
began using this guidance in analyzing acquisitions and disposals in the third quarter of 2017. This amendment may
impact the allocation of purchase price in future acquisitions that are determined to be asset acquisitions as opposed
to business combinations, however during the third and fourth quarters of 2017 there was no material impact on our
consolidated financial statements.
(x)
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (the
“New Revenue Standard”), which will replace most of the existing revenue recognition guidance within U.S.
GAAP. The FASB has also issued several updates to ASU 2014-09. The core principle of ASU 2014-09 is that an
entity should recognize revenue for the transfer of goods or services to customers in an amount that it expects to be
entitled to receive for those goods or services. In doing so, companies will be required to make certain judgments
and estimates, including identifying contract performance obligations, estimating the amount of variable
consideration to include in the transaction price and allocating the transaction price among separate performance
obligations. Additionally, disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, significant judgments reached in the application of the guidance and assets
recognized from the costs to obtain or fulfill a contract will be required. In July 2015, the FASB approved a one-
year deferral of the effective date to all annual and interim periods beginning after December 15, 2017. The new
guidance permits two methods of adoption: a full retrospective method to each prior reporting period presented or a
modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date
of initial application. We will adopt ASU 2014-09, as amended, in the first quarter of 2018 on a modified-
retrospective basis.
F-16
Since the issuance of ASU 2014-09, we have been preparing for the adoption of the New Revenue
Standard. We have been monitoring the activity of the FASB and the Transition Resource Group as it relates to
specific industry interpretive guidance and overall interpretations and clarifications. We developed a three-phase
adoption plan and have completed Phase I and Phase II. Phase I included activities such as establishing a transition
team and assessing significant revenue streams and representative contracts to determine potential changes to
existing accounting policies. Phase II of our adoption plan, in which we further determine the impact of adoption,
includes activities such as validating and concluding on changes to existing accounting policies, quantifying the
effects on our consolidated financial statements, evaluating expanded disclosure requirements and addressing the
impact on business processes, systems, and internal controls. Phase III of our adoption plan will complete our
adoption and implementation of the New Revenue Standard during the first quarter of 2018 and will include
activities such as running parallel reporting for impacted areas under the New Revenue Standard and the current
standard, recording the accounting adjustments that were identified in Phase II, evaluating and testing modified and
newly implemented internal controls over the New Revenue Standard, and revising our financial statements
disclosures.
While ASU 2014-09 will not impact the overall economics of our products and services sold under
customer marketing and incentive programs, we expect the New Revenue Standard will require us to accelerate
revenue recognition related to certain of our customer programs and to delay revenue recognition for certain other
customer programs. We expect to accelerate revenue recognition on instruments and systems placed through
programs where customers are committed to purchase future goods and services, including our up-front customer
loyalty and volume commitment programs. This change is the result of the New Revenue Standard no longer
limiting revenue recognition to the amount of customer consideration received upon placement. Conversely, we
expect to defer an increased portion of revenue related to instrument placements under programs that provide rebate
incentives on future purchases, including certain of our IDEXX instrument marketing programs. Under the New
Revenue Standard, future purchases that are optional and not subject to a customer commitment, are not considered
part of the customer arrangement, resulting in the instrument absorbing a higher relative allocation of rebate
incentives. We expect this change to result in lower instrument revenue upon placement and higher recurring
revenues over the terms of the rebate incentive programs. Additionally, adoption of the New Revenue Standard will
result in earlier recognition of consumables, rapid assay test kits and other diagnostic products due to revenue
recognition upon shipment, as compared to upon delivery to the customer. Furthermore, the New Revenue Standard
requires the deferral of incremental costs to obtain a customer contract over the term of the customer arrangement,
such as sales commissions. We are in the process of converting our financial statements in accordance with ASU
2014-09 and expect to record a charge to retained earnings of less than $10 million in the first quarter of 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and
comparability among organizations’ leasing arrangements. The FASB has also issued updates to ASU 2016-02. The
principal difference from previous guidance is that effective upon adoption, the lease assets and lease liabilities
arising from operating leases will be recognized in the balance sheet. For public business entities, the amendments in
this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption is permitted. In transition, we are required to recognize and measure leases at the
beginning of the earliest period presented using a modified retrospective approach, including the option to utilize a
number of practical expedients. We are in process of evaluating our lessee and lessor arrangements to determine the
impact of this amendment on the consolidated financial statements. This evaluation includes an extensive review of
revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease
arrangements for most of our facilities. We currently expect that most of our operating lease commitments will be
subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption,
which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which
require that financial assets measured at amortized cost be presented at the net amount expected to be collected. The
allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset
to present the net carrying value at the amount expected to be collected. The income statement reflects the
measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected
credit losses that have taken place during the period. The measurement of expected credit losses is based upon
historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the
reported amount. Credit losses relating to available-for-sale debt securities will be recorded through an allowance
for credit losses rather than as a direct write-down to the security. Credit losses on available-for-sale securities will
be required when the amortized cost is below the fair market value. During 2017, the amortized cost of our
F-17
available-for-sale securities was within $0.2 million of the fair value. The amendments in this update are effective
for fiscal years beginning after December 15, 2019 and interim periods within those annual periods. Early adoption
for fiscal year beginning after December 15, 2018 is permitted. During 2018, with the passage of the Tax Act in the
fourth quarter of 2017, we intend to liquidate our marketable securities which would result in no impact from this
amendment on our financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, which provide guidance on the statement of cash flows presentation of
certain transactions where diversity in practice exists on the classification of certain cash receipts and payments. The
effective date will be the first quarter of an entity’s fiscal year 2018. The amendment should be adopted using a
retrospective transition approach, but may be applied prospectively if retrospective application would be
impracticable. This amendment is not expected to have a material impact on our financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of
Assets Other Than Inventory, that requires an entity to recognize the income tax consequences of an intra-entity
transfer of an asset, other than inventory, when the transfer occurs, even though the pre-tax effects of that transaction
are eliminated in consolidation. The amendments are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2017. These amendments should be applied on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period adopted. We
will adopt ASU 2016-16 in the first quarter of 2018 and estimate the cumulative-effect adjustment charge to retained
earnings will be approximately $8 million.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash,
to add guidance on the classification and presentation of restricted cash. These amendments require that a statement
of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Amounts generally described as restricted
cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are
effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We do
not expect the adoption of the amendments to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), to
simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead,
an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill. The amendments are effective for annual or any interim goodwill impairment test in fiscal
years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. We will be early adopting ASU 2017-04 during the first
quarter of 2018. We do not expect the adoption to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting, which provides clarification on accounting for modifications in share-based payment
awards. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, with early adoption
permitted. The adoption of this guidance is not expected to have an impact on our consolidated financial statements
or related disclosures unless there are modifications to our share-based payment awards.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). The new standard
amends the hedge accounting recognition and presentation requirements. The ASU also simplifies the application of
the hedge accounting guidance. This ASU is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected
to have an impact on our consolidated financial statements or related disclosures.
F-18
NOTE 3. ACQUISITIONS
We believe that our acquisitions of businesses and other assets enhance our existing businesses by either
expanding our geographic range and customer base or expanding our existing product lines.
On July 1, 2017, we adopted ASU 2017-01, which amended the definition of a business. During the third
and fourth quarters of 2017, we acquired four reference laboratory customer lists in the United States for
approximately $2.3 million and recorded these transactions as asset acquisitions, with a majority of the acquisition
price valued as intangible assets. The results of operations for these reference laboratories have been included in our
CAG segment since the acquisition dates. In addition to the amount paid at time of purchase, these agreements
include contingent payments of up to $0.4 million, that will be recorded upon payment.
During the second quarter of 2017, we acquired the assets of two software companies that expand our suite
of technology applications for the veterinary profession, specifically related to patient referral management and
other connectivity needs between practices and other parties. The combined purchase price of $15 million consists
of $12 million paid at closing and a $3 million contingent payment to be paid within 36 months if certain
commercial goals are achieved. We finalized the valuation of the acquired assets in the third quarter of 2017.
The fair value estimate of the assets acquired consists of $13.3 million of goodwill, representing synergies within
our broader CAG portfolio, $1.0 million of customer relationship intangibles and $0.6 million of technology
intangible assets. Goodwill related to these acquisitions is expected to be deductible for income tax purposes. The
amount of net tangible assets acquired was immaterial. Pro forma information has not been presented for these
acquisitions because such information is not material to our financial statements. The results of operations have been
included in our CAG segment since the acquisition date.
During the first quarter of 2017, we acquired a reference laboratory in Austria for approximately
€1.3 million, with the majority of the acquisition price valued as an intangible asset. The results of operations of this
reference laboratory have been included in our CAG segment since the acquisition date.
During the year ended December 31, 2016, we paid an aggregate of $3.5 million in cash and amounts
payable to acquire the assets of a veterinary reference laboratory testing business. We allocated the purchase price
and recognized customer related amortizable intangible assets and goodwill. The fair value of the fixed assets
acquired was immaterial. Goodwill is calculated as the consideration in excess of net assets recognized and
represents the future economic benefits arising from other assets acquired that could not be individually identified
and separately recognized. The goodwill recorded from the business acquisition is deductible for income tax
purposes. The results of operations have been included in our CAG segment since the acquisition date. Pro forma
information has not been presented for this business acquisition because such information is not material to the
financial statements.
During the year ended December 31, 2015, we paid an aggregate of $7.5 million in cash and recorded
contingent consideration of $3.2 million to acquire the assets of two reference laboratories, each accounted for as a
separate business combination. As part of these business acquisitions, we recognized $5.2 million in customer list
amortizable intangible assets, $5.0 million in goodwill, $1.1 million in working capital, $0.3 million in fixed assets
and a deferred tax liability of $0.9 million. The customer lists were each assigned useful lives of 15 years. Goodwill
is calculated as the consideration in excess of net assets recognized and represents the future economic benefits
arising from other assets acquired that could not be individually identified and separately recognized. The goodwill
recorded from these business acquisitions is not deductible for income tax purposes. The results of operations have
been included in our CAG segment since the acquisition date. The results of operations of these acquired businesses
have been included since the acquisition date. Pro forma information has not been presented for these business
acquisitions because such information is not material to the financial statements.
NOTE 4. SHARE-BASED COMPENSATION
We provide for various forms of share-based compensation awards to our employees and non-employee
directors. Our share-based compensation plans allow for the issuance of a mix of stock options, restricted stock,
stock appreciation rights, employee stock purchase rights and other stock unit awards. With the exception of stock
options, the fair value of our awards is equal to the closing stock price of IDEXX common stock on the date of
grant. We calculate the fair value of our stock option awards using the Black-Scholes-Merton option-pricing model.
For stock options, restricted stock units (“RSUs”), and “deferred stock units (DSUs”), share-based compensation
F-19
expense is recognized net of estimated forfeitures, on a straight-line basis over the requisite service period of the
award for stock options. For performance-based restricted stock units (PBRSUs”), share-based compensation
expense is recognized net of estimated forfeitures, on a grade-vesting methodology over the requisite service period.
Stock options permit a holder to buy IDEXX stock upon vesting at the stock’s price on the date the option
was granted. An RSU is an agreement to issue shares of IDEXX stock at the time of vesting. A PBRSUs is an
agreement to issues shares of IDEXX stock at the time of vesting upon successful completion of certain performance
goals. DSUs are granted under our Executive Deferred Compensation Plan (the “Executive Plan”) and non-
employee Director Deferred Compensation Plan (the “Director Plan”). DSUs may or may not have vesting
conditions depending on the plan under which they are issued. We did not issue any restricted stock or stock
appreciation rights during the years ended December 31, 2017, 2016 and 2015, nor were any restricted stock or
stock appreciation rights outstanding as of those years ended. There were no material modifications to the terms of
outstanding options, RSUs, PBRSUs, or DSUs during the years ended December 31, 2017, 2016 or 2015.
We primarily issue shares of common stock to satisfy stock option exercises and employee stock purchase
rights and to settle RSUs, PBRSUs, and DSUs. We issue shares of treasury stock to settle certain RSUs and upon the
exercise of certain stock options, which were not material for the years ended December 31, 2017, 2016 and 2015.
The number of shares of common stock and treasury stock issued are equivalent to the number of awards exercised
or settled.
With the exception of employee stock purchase rights, equity awards are issued to employees and non-
employee directors under the 2009 Stock Incentive Plan (the “2009 Stock Plan”). Our Board of Directors has
authorized the issuance of 19.9 million shares of our common stock under this share-based incentive plan. Any
shares that are subject to awards of stock options or stock appreciation rights will be counted against the share limit
as one share for every share granted. Any shares that are issued other than stock options and stock appreciation
rights will be counted against the share limit as two shares for every share granted. If any shares issued under our
prior plans are forfeited, settled for cash, or expire, these shares, to the extent of such forfeiture, cash settlement or
expiration, will again be available for issuance under the 2009 Stock Plan. As of December 31, 2017, there were
approximately 11.4 million remaining shares available for issuance under the 2009 Stock Plan.
Share-Based Compensation
Share-based compensation costs are classified in our consolidated financial statements consistent with the
classification of cash compensation paid to the employees receiving such share-based compensation. The following
is a summary of share-based compensation costs and related tax benefits recorded in our consolidated statements of
income for the years ended December 31, 2017, 2016 and 2015 (in thousands):
Share-based compensation expense included in cost of revenue
Share-based compensation expense included in operating expenses
$
2,675
20,842
$
2,305
17,586
$
For the Years Ended December 31,
2017
2016
Total share-based compensation expense included in consolidated
statements of income
Income tax benefit resulting from share-based compensation expense
Net share-based compensation expense included in consolidated
statements of income, excluding tax benefit from settlement of share-
based awards
Income tax benefit resulting from settlement of share-based awards (1)
Net (benefit) expense related to share-based compensation
arrangements included in consolidated statements of income
23,517
(6,810)
16,707
(27,743)
19,891
(6,143)
13,748
-
2015
2,138
17,746
19,884
(6,229)
13,655
-
$
(11,036)
$
13,748
$
13,655
(1)
See Note 1(w) for more information regarding the adoption of ASU 2016-09.
Share-based compensation expense is reduced for an estimate of the number of awards that are expected to
be forfeited. We use historical data and other factors to estimate expected employee terminations and to evaluate
whether particular groups of employees have significantly different forfeiture expectations.
F-20
The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based
compensation awards at December 31, 2017, was $45.2 million, which will be recognized over a weighted average
period of approximately 1.6 years.
Stock Options
Option awards are granted with an exercise price equal to the closing market price of our common stock on
the date of grant. Options granted to employees primarily vest ratably over five years on each anniversary of the date
of grant and options granted to non-employee directors vest fully on the first anniversary of the date of grant.
Vesting of option awards issued is conditional based on continuous service. Options granted after May 8, 2013 have
a contractual term of ten years, options granted between January 1, 2006 and May 8, 2013 have contractual terms of
seven years and options granted prior to January 1, 2006 had contractual terms of ten years. Upon any change in
control of the company, 25 percent of the unvested stock options then outstanding will vest and become exercisable.
However, if the acquiring entity does not assume outstanding options, then all options will vest immediately prior to
the change in control.
We use the Black-Scholes-Merton option-pricing model to determine the fair value of options granted.
Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price
volatility and the expected term of options. Changes in the subjective input assumptions can materially affect the fair
value estimate. Our expected stock price volatility assumptions are based on the historical volatility of our stock
over periods that are similar to the expected terms of grants and other relevant factors. We derive the expected term
based on historical experience and other relevant factors concerning expected employee behavior with regard to
option exercise. The risk-free interest rate is based on U.S. Treasury yields for a maturity approximating the
expected term calculated at the date of grant. We have never paid any cash dividends on our common stock and we
have no intention to pay a dividend at this time; therefore, we assume that no dividends will be paid over the
expected terms of option awards.
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 those grant dates. As such, we may use different assumptions for options granted throughout the
year. 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:
Share price at grant
Expected stock price volatility
Expected term, in years
Risk-free interest rate
For the Years Ended December 31,
2017
2016
$
142.89
$
69.07
$
26 %
5.8
2.0 %
25 %
5.7
1.2 %
2015
78.08
23 %
5.6
1.5 %
Weighted average fair value of options granted
$
40.83
$
17.87
$
19.72
F-21
A summary of the status of options granted under our share-based compensation plans at December 31,
2017, and changes during the year then ended, are presented in the table below:
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited
Outstanding as of December 31, 2017
Fully vested as of December 31, 2017
Fully vested and expected to vest as of
December 31, 2017
Number of
Options (000)
Weighted Average
Exercise Price
3,176
384
(716)
(117)
2,727
1,327
2,649
$
$
$
$
57.31
142.89
42.66
68.41
72.72
56.06
72.45
Weighted
Average
Remaining
Contractual
Term
Aggregate Intrinsic
Value ($000)
6.0
4.2
5.9
$
$
$
228,243
133,115
222,422
The total fair value of options vested was $9.2 million, $9.3 million, and $8.7 million during the years
ended December 31, 2017, 2016 and 2015, respectively.
Intrinsic value of stock options exercised represents the amount by which the market price of the common
stock exceeded the exercise price, before applicable income taxes. The total intrinsic value of stock options
exercised was $78.3 million, $51.0 million, and $35.1 million during the years ended December 31, 2017, 2016 and
2015, respectively.
Restricted Stock Units
The majority of RSUs, including our PBRSUs, granted to employees vest ratably over five years on each
anniversary of the date of grant. PBRSUs granted to employees vest based on meeting performance goals in the year
of grant. RSUs granted to non-employee directors vest fully on the first anniversary of the date of grant. Vesting as
it relates to RSUs and PBRSUs issued is conditional based on continuous service. Upon any change in control of the
company, 25 percent of the unvested RSUs and PBRSUs then outstanding will vest, provided, however, that if the
acquiring entity does not assume the RSUs and PBRSUs, then all such units will vest immediately prior to the
change in control. At time of grant, we assume all PBRSUs will meet performance goals to vest.
A summary of the status of RSUs and PBRSUs granted under our share-based compensation plans at
December 31, 2017, and changes during the period then ended, are presented in the table below:
Nonvested as of December 31, 2016
Granted
Vested
Forfeited
Nonvested as of December 31, 2017
Expected to vest as of December 31, 2017
Number of
Units (000)
Weighted Average
Grant-Date Fair
Value
468
97
(155)
(27)
383
357
$
$
$
64.88
142.27
59.63
76.56
85.74
85.23
The total fair value of RSUs and PBRSUs vested was $22.1 million, $12.4 million, and $15.3 million
during the years ended December 31, 2017, 2016 and 2015, respectively. The aggregate intrinsic value of nonvested
RSUs and PBRSUs as of December 31, 2017, is equal to the fair value of IDEXX’s common stock as of December
31, 2017, multiplied by the number of nonvested units as of December 31, 2017.
F-22
Deferred Stock Units
Under our Director Plan, non-employee directors may defer a portion of their cash fees in the form of
vested DSUs. Prior to 2014, certain members of our management could elect to defer a portion of their cash
compensation in the form of vested deferred stock units under our Executive Plan. Each DSU represents the right to
receive one unissued share of our common stock. These recipients receive a number of DSUs equal to the amount of
cash fees or compensation deferred divided by the closing sale price of the common stock on the date of deferral.
Also under the Director Plan, non-employee directors are awarded annual grants of DSUs that vest fully on the first
anniversary of the date of grant. Vesting for these annual DSU grants is conditional based on continuous service.
DSUs are exchanged for a fixed number of shares of common stock, upon vesting if vesting criteria apply, subject to
the limitations of the Director and Executive Plans and applicable law.
There were approximately 229,000 and 231,000 vested DSUs outstanding under our share-based
compensation plans as of December 31, 2017 and 2016, respectively. Unvested DSUs as of December 31, 2017 and
2016, were not material.
Employee Stock Purchase Rights
Employee stock purchase rights are issued under the 1997 Employee Stock Purchase Plan, under which we
reserved and may issue up to an aggregate of 4.7 million shares of common stock in periodic offerings. Under this
plan, stock is sold to employees at a 15 percent discount off the closing price of the stock on the last day of each
quarter. The dollar value of this discount is equal to the fair value of purchase rights recognized as share-based
compensation. We issued approximately 61,000, 85,000, and 105,000 shares of common stock in connection with
the Employee Stock Purchase Plan during the years ended December 31, 2017, 2016 and 2015, respectively. As of
December 31, 2017, there were approximately 1.2 million remaining shares available for issuance under the 1997
Employee Stock Purchase Plan.
NOTE 5. MARKETABLE SECURITIES
During the year ended December 31, 2017, we purchased marketable debt securities, which are classified
as available-for-sale and carried at fair value in the accompanying consolidated balance sheets on a trade date basis.
We have classified our investments with maturities beyond one year as short-term, based on their highly liquid
nature and because such marketable securities represent the investment of cash that is available for current
operations. Unrealized holding gains and losses are deferred within accumulated other comprehensive income
(“AOCI”), net of applicable taxes, except when an impairment is determined to be other-than-temporary or the
security is divested prior to maturity. Within the accompanying consolidated statements of operations, interest
earned and amortization of premiums or discounts on marketable securities are included in interest income, and
realized gains and losses on the sale of our marketable securities are included in other income.
F-23
The amortized cost and fair value of marketable securities were as follows (in thousands):
As of December 31, 2017
Corporate bonds
Certificates of deposit
Commercial paper
Asset backed securities
U.S. government bonds
Agency bonds
Treasury bills
Total marketable securities
As of December 31, 2016
Corporate bonds
Certificates of deposit
Asset backed securities
Commercial paper
U.S. government bonds
Agency bonds
Municipal bonds
Total marketable securities
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
140,969 $
58,510
29,171
22,206
15,619
10,990
6,964
284,429 $
96 $
-
-
4
11
9
-
120 $
(179) $
-
-
(43)
(19)
(52)
(1)
(294) $
Fair Value
140,886
58,510
29,171
22,167
15,611
10,947
6,963
284,255
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
130,833 $
40,400
27,290
20,228
12,244
4,600
1,400
236,995 $
40 $
-
25
-
1
4
-
70 $
(102) $
-
-
-
(14)
-
-
(116) $
130,771
40,400
27,315
20,228
12,231
4,604
1,400
236,949
As of December 31, 2017, unrealized losses on marketable securities that have been in a continuous loss
position for more than twelve months were not material. Our portfolio of marketable securities had an average AA-
credit rating as of December 31, 2017. There were no marketable securities that we consider to be other-than-
temporarily impaired as of December 31, 2017. Our investment strategy is to buy short-duration marketable
securities with a high credit rating. Some of our marketable securities have call features that can effectively shorten
the lifespan from the contractual maturity date. We use effective maturity date to measure the duration of the
marketable securities.
Remaining effective maturities of marketable securities were as follows (in thousands):
As of December 31, 2017
Due in one year or less
Due after one through three years
NOTE 6. INVENTORIES
Amortized Cost
Fair Value
$
$
175,849
108,580
284,429
$
$
175,780
108,475
284,255
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Net realizable value is
the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. We write down the carrying value of inventory for estimated obsolescence by an
amount equal to the difference between the cost of inventory and the estimated market value when warranted based
on assumptions of future demand, market conditions, remaining shelf life, or product functionality. If actual market
conditions or results of estimated functionality are less favorable than those we estimated, additional inventory
write-downs may be required, which would have a negative effect on results of operations.
Unpaid inventory reflected within accounts payable in our consolidated balance sheets was $37.2 million,
$32.7 million, and $30.1 million at December 31, 2017, 2016 and 2015, respectively.
F-24
The components of inventories are as follows (in thousands):
Raw materials
Work-in-process
Finished goods
Total inventories
December 31,
2017
December 31,
2016
$
$
32,994
17,786
113,538
164,318
$
$
27,561
14,998
115,475
158,034
NOTE 7. PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The costs of
additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred.
When an item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or
loss, if any, is recognized in the consolidated statements of income. We evaluate our property and equipment for
impairment periodically or as changes in circumstances or the occurrence of events suggest the remaining value is
not recoverable from future cash flows. If the carrying value of our property and equipment is impaired, an
impairment charge is recorded for the amount by which the carrying value of the property and equipment exceeds its
fair value. We provide for depreciation and amortization primarily using the straight-line method by charges to
income in amounts that allocate the cost of property and equipment over their estimated useful lives as follows:
Asset Classification
Estimated Useful Life
Land improvements
Buildings and improvements
Leasehold improvements
Machinery and equipment
Office furniture and equipment
Computer hardware and software
15 to 20 years
10 to 40 years
Shorter of remaining lease term or useful life of
improvements
3 to 8 years
3 to 7 years
3 to 7 years
We capitalize interest on the acquisition and construction of significant assets that require a substantial
period of time to be made ready for use. The capitalized interest is included in the cost of the completed asset and
depreciated over the asset’s estimated useful life. The amount of interest capitalized during the years ended
December 31, 2017 and 2016, was not material.
We capitalize certain costs incurred in connection with developing or obtaining software designated for
internal use based on three distinct stages of development. Qualifying costs incurred during the application
development stage, which consist primarily of internal payroll and direct fringe benefits and external direct project
costs, including labor and travel, are capitalized and amortized on a straight-line basis over the estimated useful life
of the asset. Costs incurred during the preliminary project and post-implementation and operation phases are
expensed as incurred. These costs are general and administrative in nature and relate primarily to the determination
of performance requirements, data conversion and training. Software developed to deliver hosted services to our
customers has been designated as internal use.
F-25
Property and equipment, net, consisted of the following (in thousands):
Land and improvements
Buildings and improvements
Leasehold improvements
Machinery and equipment
Office furniture and equipment
Computer hardware and software
Construction in progress
Less accumulated depreciation and amortization
Total property and equipment, net
December 31,
2017
December 31,
2016
$
$
7,323
180,185
52,227
284,375
47,476
206,580
33,470
811,636
432,540
379,096
$
$
7,255
171,455
44,568
262,718
42,124
189,327
25,145
742,592
385,170
357,422
Below are the amounts of depreciation and amortization of property and equipment, capitalized computer
software for internal use and unpaid property and equipment reflected in account payable and accrued expenses:
December 31,
2017
December 31,
2016
December 31,
2015
Depreciation and amortization expense
Capitalized computer software developed for internal use
Unpaid property and equipment, reflected in accounts payable and
accrued liabilities
$
$
73,797
16,131
11,744
63,537 $
15,590
10,601
57,029
19,081
8,534
We recorded an $8.2 million impairment charge related to internally-developed software not yet placed into
service within Unallocated Amounts operating expenses during the year ended December 31, 2015 as a result of a
strategic shift to refocus our development efforts within our information management business.
NOTE 8. OTHER CURRENT AND NONCURRENT ASSETS
Other current assets consisted of the following (in thousands):
December 31,
2017
December 31,
2016
Prepaid expenses
Taxes receivable
Customer acquisition costs, net
Other assets
Total other current assets
$
$
28,967
35,475
23,520
13,178
101,140
Other noncurrent assets consisted of the following (in thousands):
Investment in long-term product supply arrangements
Customer acquisition costs, net
Deferred income taxes
Other assets
Total other long-term assets
December 31,
2017
9,949
64,670
7,698
36,299
118,616
$
$
$
$
$
$
25,746
27,672
18,085
19,703
91,206
December 31,
2016
10,978
50,309
5,707
36,321
103,315
NOTE 9. GOODWILL AND INTANGIBLE ASSETS, NET
A significant portion of the purchase price for acquired businesses is generally assigned to intangible
assets. Intangible assets other than goodwill are initially valued at fair value. If a quoted price in an active market for
the identical asset is not readily available at the measurement date, the fair value of the intangible asset is estimated
based on discounted cash flows using market participant assumptions, which are assumptions that are not specific to
IDEXX. The selection of appropriate valuation methodologies and the estimation of discounted cash flows require
F-26
significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the
useful lives of intangible assets. When material, we utilize independent valuation experts to advise and assist us in
determining the fair values of the identified intangible assets acquired in connection with a business acquisition and
in determining appropriate amortization methods and periods for those intangible assets. Goodwill is initially valued
based on the excess of the purchase price of a business combination over the fair value of acquired net assets
recognized and represents the future economic benefits arising from other assets acquired that could not be
individually identified and separately recognized.
Our business combinations regularly include contingent consideration arrangements that require additional
consideration to be paid based on the achievement of established objectives, most commonly related to the retention
or growth of the customer base during the post-combination period. We assess contingent consideration to determine
if it is part of the business combination or if it should be accounted for separately from the business combination in
the post-combination period. Contingent consideration is recognized at its fair value on the acquisition date. A
liability resulting from contingent consideration is remeasured to fair value at each reporting date until the
contingency is resolved, with changes in fair value recognized in earnings. Changes in fair value of contingent
consideration and differences arising upon settlement were not material during the years ended December 31, 2017,
2016 and 2015. See Note 3 for additional information regarding contingent consideration arising from recent
business acquisitions.
We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and whenever
events or circumstances indicate impairment may exist. In evaluating goodwill for impairment, we have the option
to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting
unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50
percent. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, we would then perform step one of the two-step
impairment test; otherwise, no further impairment test would be required. In contrast, we can opt to bypass the
qualitative assessment for any reporting unit in any period and proceed directly to step one of the two-step
impairment test. Doing so does not preclude us from performing the qualitative assessment in any
subsequent period.
In the fourth quarter of 2017, we elected to bypass the qualitative approach and instead proceeded directly
to step one of the two-step impairment test to assess the fair value of all of our reporting units. As part of step one of
the two-step impairment test, we estimate the fair values of applicable reporting units using an income approach
based on discounted forecasted cash flows. We make significant assumptions about the extent and timing of future
cash flows, growth rates and discount rates. Model assumptions are based on our projections and best estimates,
using appropriate and customary market participant assumptions. In addition, we make certain assumptions in
allocating shared assets and liabilities to individual reporting units in determining the carrying value of each
reporting unit. Changes in forecasted cash flows or the discount rate would affect the estimated fair values of our
reporting units and could result in a goodwill impairment charge in a future period.
No goodwill impairments were identified during the years ended December 31, 2017, 2016 or 2015.
We assess the realizability of intangible assets other than goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If an impairment review is triggered, we
evaluate the carrying value of intangible assets based on estimated undiscounted future cash flows over the
remaining useful life of the primary asset of the asset group and compare that value to the carrying value of the asset
group. The cash flows that are used contain our best estimates, using appropriate and customary assumptions and
projections at the time. If the net carrying value of an intangible asset exceeds the related estimated undiscounted
future cash flows, an impairment to adjust the intangible asset to its fair value would be reported as a non-cash
charge to earnings. If necessary, we would calculate the fair value of an intangible asset using the present value of
the estimated future cash flows to be generated by the intangible asset, and applying a risk-adjusted discount rate.
We had no impairments of our intangible assets during the year ended December 31, 2017.
During the first half of 2016, management reviewed the OPTI Medical product offerings. As a result of this
review, we discontinued certain development activities in the human point-of-care medical diagnostics
market during March 2016 that was devoted to a new platform and focused our efforts in this market on supporting
our current generation OPTI CCA-TS2 Blood Gas and Electrolyte analyzer. Non-cash intangible asset impairments
F-27
of $2.2 million were recorded within our condensed consolidated statement of operations, within general and
administrative expenses, within our unallocated segment, during 2016. The intangibles associated with our OPTI
Medical human point-of-care medical diagnostics market are fully written off. Impairments of our intangible assets
during the year ended December 31, 2015, were not material.
We provide for amortization primarily using the straight-line method by charges to income in amounts that
allocate the intangible assets over their estimated useful lives as follows:
Asset Classification
Estimated Useful Life
Patents
Product rights(1)
Customer-related intangible assets(2)
Noncompete agreements
13 years
5 to 15 years
5 to 17 years
3 to 5 years
(1) Product rights comprise certain technologies, intellectual property, licenses, and trade names acquired from third parties.
(2) Customer-related intangible assets are comprised of customer lists and customer relationships acquired from third parties.
Intangible assets other than goodwill consisted of the following (in thousands):
Patents
Product rights (1)
Customer-related intangible assets (2)
Noncompete agreements
$
Cost
-
32,558
80,398
1,271
$ 114,227
$
December 31, 2017
Accumulated
Amortization
-
25,251
44,382
748
70,381
$
Net
-
7,307
36,016
523
43,846
$
$
$
Cost
2,192
29,748
74,922
1,111
$ 107,973
$
December 31, 2016
Accumulated
Amortization
2,075
20,877
38,190
676
61,818
$
Net
117
8,871
36,732
435
46,155
$
$
The above table excludes fully amortized intangible assets for the periods presented.
(1) Product rights comprise certain technologies, licenses and trade names acquired from third parties.
(2) Customer-related intangible assets are comprised of customer lists and customer relationships acquired from third parties.
Amortization expense of intangible assets other than goodwill was $9.0 million, $9.5 million, and $10.4
million for the years ended December 31, 2017, 2016 and 2015, respectively.
At December 31, 2017, the aggregate amortization expense associated with intangible assets is estimated to
be as follows for each of the next five years and thereafter (in thousands):
2018
2019
2020
2021
2022
Thereafter
Amortization Expense
$
$
8,142
7,283
5,857
5,053
4,027
13,484
43,846
The increase in goodwill during the twelve months ended December 31, 2017, resulted from changes in
foreign currency exchange rates, and additional goodwill recognized in connection with the acquisition of
businesses. The decrease in goodwill during the twelve months ended December 31, 2016, resulted from changes in
foreign currency exchange rates, partly offset by goodwill recognized in connection with the acquisition of
businesses. See Note 3 for information regarding goodwill and other intangible assets recognized in connection with
the acquisition of businesses and other assets during the years ended December 31, 2017, 2016 and 2015.
F-28
The changes in the carrying amount of goodwill for the years ended December 31, 2017, 2016 and 2015,
were as follows (in thousands):
Balance as of December 31, 2014
$
Business combinations
Impact of changes in foreign currency
exchange rates
Balance as of December 31, 2015
$
Business combinations
Impact of changes in foreign currency
exchange rates
Balance as of December 31, 2016
$
Business combinations
Impact of changes in foreign currency
exchange rates
Balance as of December 31, 2017
$
CAG
148,151
5,047
(8,007)
145,191
1,720
(717)
146,194
13,541
6,501
166,236
$
$
$
$
Water
13,689
-
(651)
13,038
-
(2,148)
10,890
-
1,061
11,951
$
$
$
$
LPD
16,079
-
(1,905)
14,174
-
439
14,613
-
542
15,155
$
$
$
$
Other
6,531
-
-
6,531
-
-
6,531
-
-
6,531
Consolidated
Total
184,450
5,047
(10,563)
178,934
1,720
(2,426)
178,228
13,541
8,104
199,873
$
$
$
$
NOTE 10. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consisted of the following (in thousands):
December 31,
2017
December 31,
2016
Accrued expenses
Accrued employee compensation and related expenses
Accrued taxes
Accrued customer programs
Total accrued liabilities
$
$
64,430
102,944
29,389
56,655
253,418
Other long-term liabilities consisted of the following (in thousands):
Accrued taxes
Accrued customer programs
Other accrued long-term expenses
Total other long-term liabilities
NOTE 11. DEBT
December 31,
2017
66,506
12,956
16,256
95,718
$
$
$
$
$
$
71,984
91,113
23,973
49,061
236,131
December 31,
2016
18,798
10,371
9,768
38,937
Effective January 1, 2016, we adopted FASB amendments that require debt issuance costs related to a
recognized debt liability be presented within the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. This reclassification of the presentation of deferred financing costs did
not have a material impact on other long-term assets or long-term debt amounts reported in our condensed
consolidated balance sheet and additionally would not have a material impact on such amounts reported in a prior
period. These amendments have been reflected prospectively from the date of inception; prior period amounts have
not been revised for the effects of this amendment. For line-of-credit arrangements, borrowers have the option of
presenting debt issuance costs as an asset which is subsequently amortized ratably over the term of the line-of-credit
arrangement, regardless of whether there are any related outstanding borrowings. As such, we continue to present
deferred financing costs associated with our unsecured revolving credit facility within other long-term assets in the
accompanying condensed consolidated balance sheets.
Credit Facility
In December 2015, we refinanced our existing $700 million unsecured revolving credit facility by entering
into a second amended and restated credit agreement relating to a five-year unsecured revolving credit facility in the
principal amount of $850 million with a syndicate of multinational banks, which matures on December 4, 2020 (the
new credit facility and the prior credit facility are referred to collectively as the “Credit Facility”) and requires no
F-29
scheduled prepayments before that date. Although the Credit Facility does not mature until December 4, 2020, all
individual borrowings under the terms of the Credit Facility have a stated term between 30 and 180 days. At the end
of each term, the obligation is either repaid or rolled over into a new borrowing. The Credit Facility contains a
subjective material adverse event clause, which allows the debt holders to call the loans under the Credit Facility if
we fail to provide prompt written notice to the syndicate of such an event. Based on the stated term and the existence
of the subjective material adverse event clause, this Credit Facility is reflected in the current liabilities section of our
consolidated balance sheets. At December 31, 2017, we had $655.0 million outstanding under our Credit Facility
with a weighted average effective interest rate of 2.81 percent. At December 31, 2016, we had $611.0 million
outstanding under our Credit Facility with a weighted average effective interest rate 1.95 percent. The funds
available under the Credit Facility at December 31, 2017, and December 31, 2016, reflect a further reduction due to
the issuance of a letter of credit for $1.0 million, which was issued in connection with our workers’
compensation policy.
Applicable interest rates on borrowings under the Credit Facility generally range from 0.875 to 1.375
percentage points (“Credit Spread”) above the London interbank offered rate, based on our leverage ratio, or the
prevailing prime rate plus a maximum spread of up to 0.375 percent, based on our leverage ratio. We previously
entered into forward fixed interest rate swap agreements to manage the economic effect of the first $80 million of
variable interest rate borrowings. We designated the interest rate swaps as cash flow hedges. See Note 17 for a
discussion of our derivative instruments and hedging activities. Under the Credit Facility, we pay quarterly
commitment fees of 0.075 percent to 0.25 percent, based on our leverage ratio, on any unused commitment.
The obligations under the 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, 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 sole financial covenant is a consolidated leverage
ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based
compensation defined as the consolidated leverage ratio under the terms of the Credit Facility, not to exceed 3.5-to-
1. At December 31, 2017, we were in compliance with the covenants of the Credit Facility.
Senior Notes
In December 2013, we issued and sold through a private placement an aggregate principal amount of $150
million of unsecured senior notes consisting of $75 million of 3.94% Series A Senior Notes due December 11, 2023
(the “2023 Notes”) and $75 million of 4.04% Series B Senior Notes due December 11, 2025 (the “2025 Series B
Notes” and together with the 2023 Notes, the “December Notes”) under a Note Purchase Agreement among the
Company, New York Life Insurance Company and the accredited institutional purchasers named therein (the
“December 2013 Note Agreement”).
In July 2014, we issued and sold through a private placement an aggregate principal amount of $125
million of unsecured senior notes consisting of $75 million of 3.76% Series B Senior Notes due July 21, 2024 (the
“2024 Notes”) and $50 million of 3.32% Series A Senior Notes due July 21, 2021 (the “2021 Notes” and together
with the 2024 Notes, the “Prudential Notes”) under a Note Purchase and Private Shelf Agreement among the
Company, Prudential Investment Management, Inc. (“Prudential”) and the accredited institutional purchasers named
therein (the “July 2014 Note Agreement”).
In September 2014, we issued and sold through a private placement an aggregate principal amount of $75
million of unsecured 3.72% senior notes due September 4, 2026 (the “2026 Notes”) under a Note Purchase
Agreement dated as of July 22, 2014, among the Company, New York Life Insurance Company and the accredited
institutional purchasers named therein (the “September 2014 Note Agreement”).
In December 2014, we entered into a Multi-Currency Note Purchase and Private Shelf Agreement among
the Company, Metropolitan Life Insurance Company (“MetLife”), and the accredited institutional purchasers named
therein pursuant to which we agreed to issue and sell $75 million of its unsecured 3.25% Series A Senior Notes
F-30
having a seven-year term, and $75 million of its unsecured 3.72% Series B Senior Notes having a twelve-year term.
The issuance, sale and purchase of these notes occurred in February 2015 (the “MetLife Notes”). The agreement (the
“December 2014 Note Agreement”) also provides for an uncommitted shelf facility by which we may request that
MetLife purchase, over the subsequent three years, up to $50 million of additional senior promissory notes of the
Company at a fixed interest rate to be determined at the time of purchase and with a maturity date not to exceed
fifteen years.
In June 2015, we entered into an Amended and Restated Multi-Currency Note Purchase and Private Shelf
Agreement (the “2015 Amended Agreement”), among the Company, Prudential Investment Management, Inc., and
the accredited institutional purchasers named therein, which amends and restates the Note Purchase and Private
Shelf Agreement dated July 21, 2014. We refer to the 2015 Amended Agreement together with the December 2013
Note Agreement, September 2014 Note Agreement, and December 2014 Note Agreement collectively as the “Senior
Note Agreements.”)
Pursuant to the 2015 Amended Agreement, we issued and sold through a private placement a principal
amount of €88.9 million of unsecured 1.785% Series C Senior Notes due June 18, 2025 (the “2025 Series C Notes”).
We refer to the 2025 Series C Notes together with the Prudential Notes, December Notes, MetLife Notes and the
2026 Notes, collectively, as the “Senior Notes”). We used the net proceeds from this issuance and sale of the 2025
Notes for general corporate purposes, including repaying amounts outstanding under our Credit Facility.
The 2015 Amended Agreement also provides for an uncommitted shelf facility by which we may request
that Prudential purchase, over the next three years, up to $75 million (or the foreign currency equivalent) of
additional senior promissory notes of the Company at a fixed interest rate and with a maturity date not to exceed
twelve years (the “Shelf Notes”). Prudential is under no obligation to purchase any of the Shelf Notes. The interest
rate of any series of Shelf Notes will be determined at the time of purchase. The proceeds of any series of Shelf
Notes are able to be used for general corporate purposes.
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. At December 31, 2017, we were in compliance with
the covenants of the Senior Note Agreements.
Should we elect to prepay the 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 Agreement, 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 the Employee Retirement Income Security Act of 1974, the
failure to pay specified indebtedness and cross-acceleration to specified indebtedness.
Interest paid for the periods ended December 31, 2017, 2016 and 2015, was $37.6 million, $31.8 million,
and $27.2 million, respectively.
F-31
Annual principal payments on long-term debt at December 31, 2017, are as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
NOTE 12. INCOME TAXES
Amount
-
-
-
50,000
75,000
481,567
606,567
$
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and includes significant
changes to the U.S. corporate tax system. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate
tax rate from 35 percent to 21 percent, and transitioned the U.S. federal tax system from a worldwide tax system to a
territorial tax system, and eliminated or reduced certain domestic deductions among other changes. In converting to
the new territorial tax system, a deemed repatriation tax on previously tax-deferred earnings of certain foreign
subsidiaries was required to be recognized as of December 31, 2017, and will be payable over eight years.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) that provides
additional guidance allowing companies to apply a measurement period of up to twelve months to account for the
impacts of the Tax Act in their financial statements.
As of December 31, 2017, we have accounted for the impacts of the Tax Act to the extent a reasonable
estimate could be made and we recognized provisional amounts related to the deemed repatriation tax, offset by the
remeasurement of our deferred tax assets and liabilities, and other adjustments. The provisional amounts are
included as a component of income tax expense from continuing operations as a reasonable estimate of the effects of
the Tax Act on our U.S. federal and state tax obligations. We will continue to refine our estimates throughout the
measurement period or until the accounting is complete as allowed under SAB 118.
As a result of the Tax Act we are no longer asserting indefinite reversal under ASC 740-30-25 for
undistributed earnings of non-U.S. subsidiaries as of December 31, 2017. We have recorded a provisional amount of
$48.8 million for the deemed repatriation tax liability related to these earnings.
The provision for income taxes is determined using the asset and liability approach of accounting for
income taxes. Under this approach, deferred taxes represent the estimated future tax effects of temporary differences
between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable. We
record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, in the event we determine that we would be able to realize our deferred
tax assets in the future in excess of the net recorded amount, a reduction of the valuation allowance would increase
income in the period such determination was made. Likewise, should we determine that we would not be able to
realize all or part of our net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to
income in the period such determination was made.
We record a liability for uncertain tax positions that do not meet the more likely than not standard as
prescribed by the authoritative guidance for income tax accounting. We record tax benefits for only those positions
that we believe will more likely than not be sustained. Unrecognized tax benefits are the differences between tax
positions taken, or expected to be taken, in tax returns, and the benefits recognized for accounting purposes. We
classify uncertain tax positions as long-term liabilities.
Significant judgment is required in determining our worldwide provision for income taxes and our income
tax filings are regularly under audit by tax authorities. Any audit result differing from amounts recorded would
increase or decrease income in the period that we determine such adjustment is likely. Interest expense and penalties
associated with the underpayment of income taxes are included in income tax expense.
F-32
Earnings before income taxes were as follows (in thousands):
Domestic
International
For the Years Ended December 31,
2017
268,714
112,343
381,057
$
$
$
$
2016
227,875
93,971
321,846
$
$
2015
187,200
85,941
273,141
The provision (benefit) for income taxes comprised the following (in thousands):
Current
Federal
State
International
Deferred
Federal
State
International
For the Years Ended December 31,
2017
92,453
9,258
23,993
125,704
(1,201)
(4,102)
(2,613)
(7,916)
117,788
$
$
$
$
2016
53,285
6,608
19,291
79,184
20,305
1,196
(893)
20,608
99,792
$
$
2015
52,966
5,353
17,681
76,000
5,762
526
(1,282)
5,006
81,006
The provision for income taxes differs from the amounts computed by applying the statutory federal
income tax rate as follows:
For the Years Ended December 31,
U.S. federal statutory rate
State income tax, net of federal tax benefit
International income taxes
Shares-based compensation from settlements (1)
Domestic manufacturing exclusions
Research and development credit
Impact of the Tax Cuts and Jobs Act
State income tax carryforwards
Other, net
Effective tax rate
2017
35.0 %
1.9
(5.5)
(6.7)
(1.1)
(0.9)
9.4
(1.4)
0.2
30.9 %
2016
35.0 %
1.8
(4.8)
-
(1.0)
(0.8)
-
-
0.8
31.0 %
2015
35.0 %
1.6
(5.3)
-
(1.5)
(1.2)
-
-
1.1
29.7 %
(1) See Note 2(w) for the impact of the adoption of ASU 2016-09.
Our effective income tax rate was 30.9 percent for the year ended December 31, 2017, and 31.0 percent for
the year ended December 31, 2016. Our effective income tax rate for the year ended December 31, 2017, was lower
as a result of the adoption of ASU 2016-09 related to share-based compensation, which decreased our effective tax
rate by approximately 7 percent (see Note 2 for more information regarding the adoption of ASU 2016-09) and the
utilization of foreign tax credits, which reduced our effective tax rate by approximately 1 percent. These decreases
were offset by the following non-recurring items: A deemed repatriation tax, net of the remeasurement of our
deferred tax assets and liabilities resulting from the Tax Act and a tax benefit related to state tax credit
carryforwards, which combined, increased our tax rate by approximately 8 percent.
Our effective income tax rate was 31.0 percent for the year ended December 31, 2016, and 29.7 percent for
the year ended December 31, 2015. The increase in our effective income tax rate for the year ended December 31,
2016, as compared to the year ended December 31, 2015, was primarily related to a change in earnings mix in 2016,
with relatively higher earnings subject to domestic tax rates as opposed to lower international tax rates including the
impact of foreign currency exchange rates.
Income taxes paid for the periods ended December 31, 2017, 2016 and 2015 was $81.2 million, $74.7
million, and $54.9 million, respectively.
F-33
We have business operations in Switzerland and the Netherlands and have been granted tax rulings by each
jurisdiction. Our Netherlands ruling is set to expire on December 31, 2022, and our Switzerland ruling remains in
effect as long as our business operations comply with the ruling requirements during the period or until Switzerland
adopts new international tax rules. As a result of the tax rulings, our net income was higher by $8.9 million, $7.8
million, and $8.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The benefit from
these tax rulings is reflected within the overall benefit received from international income taxes in the table above.
The components of the net deferred tax assets (liabilities) included in the accompanying consolidated
balance sheets are as follows (in thousands):
December 31, 2017
December 31, 2016
$
Assets
Accrued expenses
Accounts receivable reserves
Deferred revenue
Inventory basis differences
Property-based differences
Share-based compensation
Other
Net operating loss carryforwards
Tax credit carryforwards
Unrealized losses on foreign currency exchange contracts, interest
rate swaps and investments
Total assets
Valuation allowance
Total assets, net of valuation allowance
Liabilities
Deferred instrument costs
Property-based differences
Intangible asset basis differences
Other
Unrealized gains on foreign currency exchange contracts, interest rate
swaps and investments
Total liabilities
Net deferred tax assets (liabilities)
$
13,843
2,624
10,618
3,039
1,324
9,035
918
3,350
8,096
2,355
55,202
(6,211)
48,991
(20,399)
(31,859)
(13,574)
(656)
(158)
(66,646)
(17,655)
$
$
22,145
2,715
13,400
3,959
1,382
13,021
678
4,182
-
148
61,630
(4,891)
56,739
(24,142)
(43,159)
(17,672)
(771)
(4,575)
(90,319)
(33,580)
The passage of the Tax Act, which reduced the U.S. federal income tax rate from 35 percent to 21 percent,
resulted in a decrease to our net deferred tax liabilities by approximately $17 million.
As of December 31, 2017, we have recorded a valuation allowance of $6.2 million against certain deferred
tax assets related to temporary differences including net operating loss (“NOL”) and tax credit carryforwards, as it is
more likely than not that they will not be realized or utilized within the carryforward period. The increase in the
valuation allowance from the prior period primarily relates to recording a deferred tax asset for certain state tax
credits that we do not believe will be utilized due to insufficient taxable income in that jurisdiction. There was no
impact to income tax expense.
As of December 31, 2017, we have NOL’s in certain state and international jurisdictions of approximately
$13.1 million available to offset future taxable income. Most of these NOL’s will expire at various dates between
2021 and 2026 and the remainder have indefinite lives.
F-34
The following table summarizes the changes in unrecognized tax benefits during the years ended December
31, 2017, 2016 and 2015 (in thousands):
Total amounts of unrecognized tax benefits, beginning of period
Gross increases in unrecognized tax benefits as a result of tax
positions taken during a prior period
Gross increases in unrecognized tax benefits as a result of tax
positions taken in the current period
Decreases in unrecognized tax benefits relating to settlements with
taxing authorities
Decreases in unrecognized tax benefits as a result of a lapse of the
applicable statutes of limitations
Total amounts of unrecognized tax benefits, end of period
$
For the Years Ended December 31,
2017
2016
2015
$
18,463
$
7,204
$
5,942
74
4,681
(713)
(1,088)
21,417
$
75
12,657
(1,326)
(147)
18,463
$
47
1,569
-
(354)
7,204
The total amount of unrecognized tax benefits at December 31, 2017 and December 31, 2016, was $21.4
million and $18.5 million, respectively. Of the total unrecognized tax benefits at December 31, 2017 and 2016, $9.1
million and $5.9 million, respectively, comprise unrecognized tax positions that would, if recognized, affect our
effective tax rate. The increase in net liability primarily relates to an uncertain tax position taken during the year
related to the deemed repatriation tax provided in the Tax Act.
During the years ended December 31, 2017, 2016 and 2015, we recorded interest expense and penalties of
$0.9 million, $0.3 million, and $0.3 million, respectively, as income tax expense in our consolidated statement of
income. At December 31, 2017 and 2016, we had $1.0 million and $0.6 million, respectively, of estimated interest
expense and penalties accrued in our consolidated balance sheets.
In the ordinary course of our business, our income tax filings are regularly under audit by tax authorities.
While we believe we have appropriately provided for all uncertain tax positions, amounts asserted by taxing
authorities could be greater or less than our accrued position. Accordingly, additional provisions on income tax
matters, or reductions of previously accrued provisions, could be recorded in the future as we revise our estimates
due to changing facts and circumstances or the underlying matters are settled or otherwise resolved. We are
currently under tax examinations by various state and international tax authorities. We anticipate that these
examinations will be concluded within the next year. With few exceptions, we are no longer subject to income tax
examinations in any state and local, or international jurisdictions in which we conduct significant taxable activities
for years before 2013.
NOTE 13. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to IDEXX Laboratories, Inc.
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, the total unrecognized compensation expense for unvested share-based
compensation awards and, prior to the adoption of new accounting guidance related to share-based compensation on
January 1, 2017, the tax benefits resulting from share-based compensation tax deductions in excess of the related
expense recognized for financial reporting purposes, would be used to purchase our common stock at the average
market price during the period. For further discussion regarding the impact of the new accounting guidance related
to share-based compensation, see Note 2. 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. See
Note 4 for additional information regarding deferred stock units.
F-35
The following is a reconciliation of shares outstanding for basic and diluted earnings per share for the years
ended December 31, 2017, 2016 and 2015 (in thousands):
For the Years Ended December 31,
2017
2016
2015
Shares outstanding for basic earnings per share:
87,769
89,732
92,601
Shares outstanding for diluted earnings per share:
Shares outstanding for basic earnings per share
Dilutive effect of share-based payment awards
87,769
1,798
89,567
89,732
1,152
90,884
92,601
1,048
93,649
Certain options to acquire shares have been excluded from the calculation of shares outstanding for dilutive
earnings per share because they were anti-dilutive. The following table presents information concerning those anti-
dilutive options for the years ended December 31, 2017, 2016 and 2015 (in thousands):
Weighted average number of shares underlying anti-dilutive options
327
88
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Leases
For the Years Ended December 31,
2017
2016
2015
644
The majority of our facilities are occupied under operating lease arrangements with various expiration dates
through 2030. We are responsible for the real estate taxes and operating expenses related to these facilities.
Additionally, we enter into operating leases for certain vehicles and office equipment in the normal course of
business. We determine the expected term of any executed agreements using the non-cancelable lease term plus any
renewal options by which the failure to renew imposes a penalty in such amount that renewal is reasonably assured.
The derived expected term is then used in the determination of a capital or operating lease and in the calculation of
straight-line rent expense. Rent escalations are considered in the calculation of minimum lease payments in our
capital lease tests and in determining straight-line rent expense for operating leases.
Commitments
Rent expense charged to operations under operating leases was approximately $23.0 million, $22.7 million,
and $20.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Minimum annual rental payments under these agreements are estimated as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
$
Amount
19,233
15,687
11,974
9,461
7,139
32,435
95,929
We have various minimum royalty payments due through 2035 of $1.7 million. If these obligations are not
satisfied, the related license arrangements may be terminated, resulting in either a loss in exclusivity or the right to
use the technology.
We are required to annually purchase a minimum amount of inventory from certain suppliers. Through
2025, we have a total of $11.8 million in minimum purchase commitments under these arrangements.
F-36
Contingencies
Although we are not currently party to any material contingencies of which we are aware or have recorded
a reserve for, 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, our actual losses with
respect to these contingencies could exceed our accruals.
Under our current employee healthcare insurance policy for U.S. employees, we retain claims liability risk
per incident up to $1 million per year in 2017, $0.45 million per year in 2016, and $0.43 million per year in 2015.
We recognized employee healthcare claim expense of $47.2 million for the year ended December 31, 2017, $40.4
million for the year ended December 31, 2016 and $34.6 million during the year ended December 31, 2015, which
represents actual claims paid and an estimate of our liability for the uninsured portion of employee healthcare
obligations that have been incurred but not paid. Should employee health insurance claims exceed our estimated
liability, we would have further obligations. Our estimated liability for healthcare claims that have been incurred but
not paid as of December 31, 2017 and 2016, was $4.2 million and $4.0 million, respectively.
Under our workers’ compensation insurance policies for U.S. employees, we have retained the first $0.3
million for the years ended December 31, 2017, 2016 and 2015, in claim liability per incident with aggregate
maximum claim liabilities per year of $2.5 million, $2.6 million, and $3.5 million for the years ended December 31,
2017, 2016 and 2015, respectively. Workers’ compensation expense recognized during the years ended December
31, 2017, 2016 and 2015 and our respective liability for such claims as of December 31, 2017, 2016 and 2015 was
not material. Claims incurred during the years ended December 31, 2017 and 2016 are relatively undeveloped as of
December 31, 2017. Therefore, it is possible that we could incur additional healthcare and wage indemnification
costs beyond those previously recognized up to our aggregate liability for each of the respective claim years. For the
years ended on or prior to December 31, 2015, based on our retained claim liability per incident and our aggregate
claim liability per year, our maximum liability in excess of the amounts deemed probable and previously recognized
is not material as of December 31, 2017. As of December 31, 2017, we had outstanding letters of credit totaling $1.0
million to the insurance companies as security for these claims in connection with these policies.
We have entered into an employment agreement with our chief executive officer whereby payment may be
required if we terminate his employment without cause other than following a change in control. The amount
payable is based upon the executive’s salary at the time of termination and the cost to us of continuing to provide
certain benefits. Had this officer been terminated without cause at December 31, 2017, other than following a
change in control, we would have had an obligation for salaries and benefits of approximately $1.6 million under
such agreement. In addition, the agreement provides for continued vesting of his outstanding equity awards for a
period of two years.
We have entered into employment agreements with each of our officers that require us to make certain
payments in the event the officer’s employment is terminated under certain circumstances within a certain period
following a change in control. The amount payable by us under each of these agreements is based on the officer’s
salary and bonus history at the time of termination and the cost to us of continuing to provide certain benefits. Had
all of our officers been terminated in qualifying terminations following a change in control at December 31, 2017,
we would have had aggregate obligations of approximately $29.4 million under these agreements. These agreements
also provide for the acceleration of the vesting of all stock options and restricted stock units upon any qualifying
termination following a change in control. At this time, we believe the likelihood of terminations as a result of the
scenarios described is remote, and therefore, we have not accrued for such loss contingencies.
We have total acquisition-related contingent consideration liabilities outstanding of $3.0 million, primarily
related to the achievement of certain revenue milestones, recorded at December 31, 2017, and $0.9 million recorded
at December 31, 2016.
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.
F-37
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 these agreements is minimal. Accordingly, we have recorded no liabilities for these
obligations at December 31, 2017 and 2016.
When acquiring a business, we sometimes assume liability for certain events or occurrences that took place
prior to the date of acquisition. As of December 31, 2017 and 2016, we do not have any material pre-acquisition
liabilities recorded.
NOTE 15. SEGMENT REPORTING
We operate primarily through three business segments: diagnostic and information technology-based
products and services for the veterinary market, which we refer to as CAG; water quality products (“Water”); and
diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and
food, which we refer to as LPD. Our Other operating segment combines and presents products for the human point-
of-care medical diagnostics market with our pharmaceutical intellectual property and our out-licensing arrangements
because they do not meet the quantitative or qualitative thresholds for reportable segments.
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, or decision-making group, in deciding
how to allocate resources and in assessing performance. Our chief operating decision-maker is our Chief Executive
Officer. Our reportable segments include: CAG, Water, LPD, and Other. Assets are not allocated to segments for
internal reporting purposes.
CAG develops, designs, manufactures and distributes products and performs services for veterinarians and
the bioresearch market, 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 instrumentation 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 and food. OPTI Medical develops, designs, manufactures and
distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical
diagnostics market.
The accounting policies of our segments are the same as those described in the summary of significant
accounting policies in Note 2 except for inventories, as discussed below. Intersegment revenues, which are not
included in the table below, were not material for the years ended December 31, 2017, 2016 and 2015.
Certain costs are not allocated to our reportable segments and are instead reported under the caption
“Unallocated Amounts”. These costs include costs that do not align with one of our existing operating segments or
are cost prohibitive to allocate, which primarily consist of our R&D function, regional or country expenses, certain
foreign currency revaluation gains and losses on monetary balances in currencies other than our subsidiaries’
functional currency and unusual items. Corporate support function costs (such as information technology, facilities,
human resources, finance and legal), health benefits and incentive compensation are charged to our business
segments at pre-determined budgeted amounts or rates. Differences from these pre-determined budgeted amounts or
rates are captured within Unallocated Amounts.
Effective January 1, 2016, we modified our management reporting to the Chief Operating Decision Maker
to provide a more comprehensive view of the performance of our operating segments by including the capitalization
and subsequent recognition of variances between standard and actual manufacturing costs, which adjusts the timing
of cost recognition from when the variance is created to the period in which the related inventory is sold. Prior to
January 1, 2016, the capitalization and subsequent recognition of these variances were not allocated to our operating
segments and were instead reported under the caption “Unallocated Amounts”.
F-38
Below is our segment information (in thousands):
For the Years Ended December 31,
2017
Revenue
Income (loss) from operations
Interest expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling
interest
Net income attributable to IDEXX Laboratories, Inc.
stockholders
CAG
Water
LPD
Other
Unallocated
Amounts
Consolidated
Total
$
1,703,377 $
114,395 $
128,481 $
22,805 $
- $ 1,969,058
$
363,557 $
50,616 $
16,464 $
4,837 $
(22,446) $
413,028
(31,971)
381,057
117,788
263,269
125
$
263,144
Depreciation and amortization
Expenditures for long-lived assets (1)
$
$
71,835 $
64,759 $
2,856 $
2,573 $
5,052 $
$
3,021
3,397 $
$
4,031
- $
$
-
83,140
74,384
2016
Revenue
Income (loss) from operations
Interest expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling
interest
Net income attributable to IDEXX Laboratories, Inc.
stockholders
$
1,522,689 $
103,579 $
126,491 $
22,664 $
- $ 1,775,423
$
301,342 $
45,702 $
18,914 $
884 $
(16,603) $
350,239
(28,393)
321,846
99,792
222,054
9
$
222,045
Depreciation and amortization
Expenditures for long-lived assets (1)
$
$
64,878 $
56,329 $
3,098 $
2,102 $
5,543 $
$
4,824
4,699 $
$
1,532
- $
$
-
78,218
64,787
2015
Revenue
Income (loss) from operations
Interest expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net loss attributable to noncontrolling interest
Net income attributable to IDEXX Laboratories, Inc.
stockholders
$
1,356,287 $
96,884 $
127,143 $
21,578 $
- $ 1,601,892
$
233,319 $
44,752 $
27,157 $
(137) $
(5,179) $
299,912
(26,771)
273,141
81,006
192,135
57
$
192,078
Depreciation and amortization
Expenditures for long-lived assets (1)
__________
(1)Expenditures for long-lived assets exclude expenditures for intangible assets. See Note 3 for information regarding acquisitions of intangible
60,715 $
69,371 $
4,367 $
$
9,110
3,188 $
2,781 $
686 $
$
- $
$
-
1,659
68,956
82,921
$
$
assets during the years ended December 31, 2017, 2016 and 2015.
F-39
Revenue by product and service categories was as follows (in thousands):
CAG segment revenue:
CAG Diagnostics recurring revenue:
$
IDEXX VetLab consumables
Rapid assay products
Reference laboratory diagnostic and consulting services
CAG Diagnostics service and accessories
CAG Diagnostics capital - instruments
Veterinary software, services and diagnostic imaging systems
CAG segment revenue
Water segment revenue
LPD segment revenue
Other segment revenue
Total revenue
For the Years Ended December 31,
2017
2016
$
1,451,701
518,774
205,309
660,142
67,476
119,963
131,713
1,703,377
114,395
128,481
22,805
$
1,281,262
451,456
189,122
581,067
59,617
121,191
120,236
1,522,689
103,579
126,491
22,664
2015
1,147,026
396,526
182,670
512,155
55,675
98,502
110,759
1,356,287
96,884
127,143
21,578
$
1,969,058
$
1,775,423
$
1,601,892
Revenue by principal geographic area, based on customers’ domiciles, was as follows (in thousands):
Americas
United States
Canada
Latin America
Europe, the Middle East and Africa
Germany
United Kingdom
France
Italy
Spain
Switzerland
Netherlands
Other
Asia Pacific Region
Australia
China
Japan
Other
Total
For the Years Ended December 31,
2017
2016
2015
$
$
1,203,547
83,818
46,893
1,334,258
1,089,595
74,923
38,872
1,203,390
$
980,281
69,303
34,725
1,084,309
88,328
80,149
55,993
31,889
28,866
17,913
15,877
100,409
419,424
56,994
55,810
53,344
49,228
215,376
1,969,058
$
80,156
77,671
51,204
28,907
24,268
16,361
14,049
83,147
375,763
52,871
48,257
51,544
43,598
196,270
1,775,423
$
73,395
74,879
46,972
25,903
19,998
15,631
11,645
79,910
348,333
49,274
40,619
43,171
36,186
169,250
1,601,892
$
F-40
Net long-lived assets, consisting of net property and equipment, are subject to geographic risks because
they are generally difficult to move and to effectively utilize in another geographic area in a reasonable time period
and because they are relatively illiquid. Net long-lived assets by principal geographic areas were as follows (in
thousands):
Americas
United States
Brazil
Canada
Europe, the Middle East and Africa
United Kingdom
Germany
Netherlands
France
Switzerland
Other
Asia Pacific Region
Japan
Australia
Other
Total
December 31,
2017
December 31,
2016
310,696
17,030
2,238
329,964
11,528
7,522
8,225
2,305
1,755
3,838
35,173
4,065
4,426
5,468
13,959
379,096
$
$
298,944
17,910
1,977
318,831
9,127
5,040
5,948
2,428
2,450
3,490
28,483
2,469
4,185
3,454
10,108
357,422
$
$
NOTE 16. 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 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
Level 2
Quoted prices in active markets for identical assets or liabilities that the entity can access at
the measurement date.
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.
F-41
Our marketable debt securities are initially valued at the transaction price and are subsequently
remeasured to fair value as of the balance sheet date utilizing third-party pricing services. The pricing services
utilize industry standard valuation models, including both income and market-based approaches and observable
market inputs to determine value. Observable market inputs include reportable trades, benchmark yields, credit
spreads, broker/dealer quotes, bids, offers and other industry and economic events. We validate the prices provided
by our third-party pricing services by obtaining independent market values from other pricing sources and analyzing
pricing data in certain instances.
Our foreign currency exchange contracts are measured at fair value on a recurring basis in our
accompanying consolidated balance sheets. We measure the fair value of our foreign currency exchange contracts
classified as derivative instruments using an income approach, based on prevailing market forward rates less the
contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.
Our interest rate swap agreement in prior years were measured at fair value on a recurring basis in our
accompanying consolidated balance sheets. These interest rate swaps were classified as derivative instruments using
an income approach, utilizing a discounted cash flow analysis based on the terms of the contract and the interest rate
curve adjusted for counterparty risk.
The amount outstanding under our unsecured revolving credit facility and long-term debt are measured at
carrying value in our accompanying 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.
At December 31, 2017, the estimated fair value and carrying value of our long-term debt were $632.0 million and
$606.6 million, respectively. At December 31, 2016, the estimated fair value and carrying value of our long-term
debt were $609.5 million and $593.7 million, respectively.
The following table sets forth our assets and liabilities that were measured at fair value on a recurring basis
at December 31, 2017, and at December 31, 2016, by level within the fair value hierarchy (in thousands):
As of December 31, 2017
Assets
Money market funds(1)
Certificates of deposit(1)
Marketable securities
Corporate bonds
Certificates of deposit
Commercial paper
Asset backed securities
U.S. government bonds
Agency bonds
Treasury bills
Total marketable securities
Equity mutual funds(2)
Foreign currency exchange contracts(3)
Liabilities
Foreign currency exchange contracts(3)
Deferred compensation(4)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31, 2017
$
$
$
$
$
$
$
$
32,962
-
-
-
-
-
-
-
-
-
2,162
-
-
2,162
$
$
$
$
$
$
$
$
-
1,250
140,886
58,510
29,171
22,167
15,611
10,947
6,963
284,255
-
477
6,468
-
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
32,962
1,250
140,886
58,510
29,171
22,167
15,611
10,947
6,963
284,255
2,162
477
6,468
2,162
F-42
As of December 31, 2016
Assets
Money market funds(1)
Certificates of deposit(1)
Commercial paper(1)
Marketable securities
Corporate bonds
Certificates of deposit
Asset backed securities
Commercial paper
U.S. government bonds
Agency bonds
Municipal bonds
Total marketable securities
Equity mutual funds(2)
Foreign currency exchange contracts(3)
Liabilities
Foreign currency exchange contracts(3)
Deferred compensation(4)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31, 2016
$
$
$
$
$
$
$
$
$
34,208
-
-
-
-
-
-
-
-
-
-
2,182
-
-
2,182
$
$
$
$
$
$
$
$
$
-
1,500
898
130,771
40,400
27,315
20,228
12,231
4,604
1,400
236,949
-
8,926
1,081
-
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
34,208
1,500
898
130,771
40,400
27,315
20,228
12,231
4,604
1,400
236,949
2,182
8,926
1,081
2,182
__________
(1) Money market funds, certificates of deposit and commercial paper with an original maturity of less than ninety days are included within
cash and cash equivalents. The remaining balance of cash and cash equivalents as of December 31, 2017, and December 31, 2016, consisted
of demand deposits. Commercial paper and certificates of deposit with an original maturity of over ninety days are included within
marketable securities.
(2) Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount is
included within other long-term assets. See number (4) below for a discussion of the related deferred compensation liability.
(3) Foreign currency exchange contracts are included within other current assets; other long-term assets; accrued liabilities; or other long-term
liabilities depending on the gain (loss) position and anticipated settlement date.
(4) A deferred compensation plan assumed as part of a previous business combination is included within accrued liabilities and other long-term
liabilities. The fair value of our deferred compensation plan is indexed to the performance of the underlying equity mutual funds discussed
in number (2) above.
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 years ended December 31, 2017 and 2016.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable, approximate carrying value due to their short maturity.
NOTE 17. HEDGING INSTRUMENTS
We recognize all derivative and non-derivative instruments (collectively “hedging instruments”) on the
balance sheet at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment
must be recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net
investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on
hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging
instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings
the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-
designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring
becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through
maturity of the instrument is recognized in earnings. Any gain or loss in AOCI at the time of de-designation is
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
F-43
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
accompanying consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange
contracts and interest rate swaps are classified as operating cash flows, which is consistent with the cash flow
treatment of the underlying items being hedged.
Disclosure within this footnote is presented to provide transparency about how and why we use derivative
and non-derivative instruments (collectively “hedging instruments”) and how the hedging instruments and related
hedged items affect our financial position, results of operations, and cash flows. See Note 16 for additional
information regarding the fair value of our derivative instruments and Note 19 for additional information regarding
the effect of derivative instruments designated as cash flow hedges on the consolidated statement of operations.
We are exposed to certain risks related to our ongoing business operations. The primary risks that we
manage by using hedging instruments are 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 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. We may also enter into interest rate swaps to minimize the impact of interest rate fluctuations
associated with borrowings under our variable-rate Credit Facility.
The primary purpose of our foreign currency hedging activities is to protect against the volatility associated
with foreign currency transactions, including transactions denominated in euro, British pound, Japanese yen,
Canadian dollar, Australian dollar, and Swiss franc. We also utilize natural hedges to mitigate our transaction and
commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into
foreign currency exchange contracts with well-capitalized multinational financial institutions, and we do not hold or
engage in transactions involving hedging instruments for purposes other than risk management. Our accounting
policies for these contracts are based on our designation of such instruments as hedging transactions.
Cash Flow Hedges
We have designated our foreign currency exchange contracts and variable-to-fixed interest rate swaps as
cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted
transactions attributable to foreign currency exchange and interest rates. 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 years ended
December 31, 2017, 2016 and 2015. Gains or losses related to hedge ineffectiveness recognized in earnings during
the years ended December 31, 2017, 2016 and 2015 were not material. At December 31, 2017, the estimated amount
of net losses, net of income tax expense, which are expected to be reclassified out of AOCI and into earnings within
the next twelve months is $5.2 million if exchange and interest rates do not fluctuate from the levels at
December 31, 2017.
We hedge approximately 85 percent of the estimated exposure from intercompany product purchases and
sales denominated in the euro, British pound, Canadian dollar, Japanese yen, Australian dollar, and Swiss franc. We
have additional unhedged foreign currency exposures related to foreign services and emerging markets where it is
not practical to hedge. We primarily utilize foreign currency exchange contracts with durations of less than 24
months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions
for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations
and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the
currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign
currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $176.5 million,
and $175.9 million at December 31, 2017 and 2016, respectively.
F-44
We previously entered into forward fixed interest rate swap agreements to manage the economic effect of
variable interest obligations on amounts borrowed under the terms of our Credit Facility. Beginning on March 30,
2012, the variable interest rate associated with $40 million of borrowings outstanding under the Credit Facility
became effectively fixed at 1.36 percent plus the range of applicable interest rate fixed credit spreads (“Credit
Spread”) through June 30, 2016. Beginning on March 28, 2013, the variable interest rate associated with an
additional $40 million of borrowings outstanding under the Credit Facility became effectively fixed at 1.64 percent
plus the Credit Spread through June 30, 2016. Beginning July 1, 2016, we no longer have outstanding interest rate
swap agreements.
Net Investment Hedge
In June 2015, we issued and sold our 2025 Series C Notes through a private placement an aggregate
principal amount of €88.9 million. 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 an $8.3 million loss, net of income tax, within AOCI as a result of this net investment
hedge for the year ended December 31, 2017. This unrealized loss recorded at December 31, 2017, will not be
reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged
foreign operations or all or a portion of the hedge no longer qualifies for hedge accounting treatment. See Note 11 to
the consolidated financial statements included in this Annual Report on Form 10-K for further information regarding
the issuance of these 2025 Series C Notes.
Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets
The fair values of hedging instruments, and their respective classification on the consolidated balance
sheets and amounts subject to offset under master netting arrangements consisted of the following (in thousands):
Derivatives designated as hedging instruments
Foreign currency exchange contracts
Total derivative instruments presented as cash flow hedges on the balance sheet
Gross amounts subject to master netting arrangements not offset on the balance sheet
Net amount
Balance Sheet Classification
Other current assets
Derivatives designated as hedging instruments
Foreign currency exchange contracts
Total derivative instruments presented as cash flow hedges on the balance sheet
Foreign currency borrowings designated as net investment
hedge on the balance sheet
Total hedging instruments presented on the balance sheet
Gross amounts subject to master netting arrangements not offset on the balance sheet
Net amount
Long-term debt
Balance Sheet Classification
Accrued liabilities
Hedging Assets
December
2017
December
2016
477
477
477
-
$
$
8,926
8,926
679
8,247
Hedging Liabilities
December
2017
December
2016
6,468
6,468
106,567
113,035
477
112,558
$
$
1,081
1,081
93,664
94,745
679
94,066
$
$
$
$
F-45
The effect of derivative instruments designated as cash flow hedges on the consolidated balance sheets for
the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
Derivative instruments
Foreign currency exchange contracts, net of tax
Interest rate swaps, net of tax
Total derivative instruments, net of tax
Gain (Loss) Recognized in AOCI on Derivative Instruments
(Effective Portion)
For Year Ended December 31,
2017
(10,135)
-
(10,135)
$
$
$
$
2016
2,457
242
2,699
$
$
2015
(5,604)
461
(5,143)
NOTE 18. REPURCHASES OF COMMON STOCK
Our Board of Directors has authorized the repurchase of up to 68.0 million shares of our common stock in
the open market or in negotiated transactions pursuant to the Company’s share repurchase program. We believe that
the repurchase of our common stock is a favorable means of returning value to our shareholders, and we also
repurchase to offset the dilutive effect of our share-based compensation programs. Repurchases of our common
stock may vary depending upon the level of other investing activities and the share price. As of December 31, 2017,
there are approximately 5.0 million remaining shares available for repurchase under this authorization.
We primarily acquire shares by means of repurchases in the open market. However, we also acquire shares
that are surrendered by employees in payment for the minimum required withholding taxes due on the vesting of
restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders.
The following is a summary of our open market common stock repurchases and shares acquired through
employee surrender for the years ended December 31, 2017, 2016 and 2015 (in thousands, except per
share amounts):
Share repurchases during the period(1)
Shares acquired through employee surrender(1)
Total shares repurchased(1)
Cost of share repurchases during the period
Cost of employee surrenders
Total cost of shares repurchased
Average cost per share - open market repurchase
Average cost per share - employee surrenders
Average cost per share - total
For the Years Ended December 31,
2017
1,749
57
1,806
270,297
8,074
278,371
154.51
142.55
154.13
$
$
$
$
$
2016
3,071
60
3,131
313,072
4,372
317,444
101.96
73.04
101.40
$
$
$
$
$
2015
5,659
69
5,728
406,430
5,457
411,887
71.82
72.55
71.90
$
$
$
$
$
(1) Shares repurchased and acquired through employee surrender for payment of minimum required withholding taxes on and before June 15,
2015 and the associated average cost per share have been adjusted to reflect the June 2015 two-for-one stock split. Actual shares
repurchased were approximately 4.3 million for the year ended December 31, 2015.
F-46
NOTE 19. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income, net of tax, for the years ended December 31,
2017 and 2016 consisted of the following (in thousands):
Unrealized
Gain (Loss)
on
Investments,
Net of Tax
Unrealized
Gain (Loss)
on
Derivatives
Instruments,
Net of Tax
Unrealized
Gain on
Net
Investment
Hedge, Net
of Tax
Cumulative
Translation
Adjustment
Total
Balance as of December 31, 2015
$
(225) $
2,217 $
1,894 $
(46,151) $
(42,265)
Other comprehensive income (loss) before
reclassifications
Gains reclassified from accumulated other comprehensive
income
Balance as of December 31, 2016
Other comprehensive income (loss) before
reclassifications
Gains reclassified from accumulated other comprehensive
income
Balance as of December 31, 2017
245
4,950
2,142
(5,874)
1,463
-
20
(2,251)
4,916
-
4,036
-
(52,025)
(2,251)
(43,053)
(42)
(10,332)
(8,347)
25,107
6,386
$
-
(22) $
197
(5,219) $
-
(4,311) $
-
(26,918) $
197
(36,470)
The following is a summary of reclassifications out of accumulated other comprehensive income for the
years ended December 31, 2017, 2016 and 2015 (in thousands):
Details about Accumulated Other
Comprehensive Income Components
Gains (losses) on derivative instruments
included in net income:
Foreign currency exchange contracts
Interest rate swaps
Affected Line Item in the
Statement Where
Net Income is Presented
Amounts Reclassified from Accumulated Other
Comprehensive Income
For the Years Ended December 31,
2017
2016
2015
Cost of revenue
Interest expense
Total gains before tax
Tax expense
Gains, net of tax
$
$
27
-
27
224
(197)
$
$
3,621
(421)
3,200
949
2,251
$
$
20,878
(1,042)
19,836
5,853
13,983
NOTE 20. PREFERRED STOCK
Our Board of Directors is authorized, subject to any limitations prescribed by law, without further
stockholder approval, to issue from time to time up to 500,000 shares of Preferred Stock, $1.00 par value per share
(“Preferred Stock”), in one or more series. Each such series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be
determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption
and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. There are no shares of
Preferred Stock outstanding as of December 31, 2017.
NOTE 21. IDEXX RETIREMENT AND INCENTIVE SAVINGS PLAN
We have established the IDEXX Retirement and Incentive Savings Plan (the “401(k) Plan”). U.S.
employees eligible to participate in the 401(k) Plan may contribute specified percentages of their salaries. We match
a portion of these contributions, not to exceed 4 percent of participants’ eligible compensation. We matched $13.8
million, $12.5 million, and $11.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. In
addition, we may make contributions to the 401(k) Plan at the discretion of the Board of Directors. There were no
discretionary contributions in 2017, 2016 or 2015.
F-47
We also have established defined contribution plans for regional employees in Europe and in Canada. With
respect to these plans, our contributions over the past three years have not been material.
NOTE 22. SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data(1) follows (in thousands, except per share data):
2017
Revenue
Gross profit
Operating income
Net income attributable to IDEXX Laboratories, Inc.
stockholders
Earnings per share:
Basic
Diluted
2016
Revenue
Gross profit
Operating income
Net income attributable to IDEXX Laboratories, Inc.
stockholders
Earnings per share:
Basic
Diluted
For the Three Months Ended
March 31,
June 30,
September 30,
December 31,
$
$
$
$
$
$
462,021 $
258,191
92,243
69,019
508,940 $
292,715
122,564
85,357
491,976 $
274,002
100,413
70,511
506,121
272,474
97,808
38,257
0.78 $
0.77 $
0.97 $
0.95 $
0.81 $
0.79 $
0.44
0.43
417,550 $
227,537
73,793
46,019
466,569 $
260,543
104,162
67,202
448,308 $
246,730
88,459
56,455
442,996
240,626
83,825
52,369
0.51 $
0.51 $
0.75 $
0.74 $
0.63 $
0.62 $
0.59
0.58
(1) Amounts presented may not recalculate to full-year totals due to rounding.
F-48
SCHEDULE II
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
Beginning of
Year
Charges to
Costs and
Expenses
Write-
Offs/Cash
Payments
Foreign
Currency
Translation
Balance at
End of Year
Reserves for doubtful accounts receivable:
December 31, 2015
December 31, 2016
December 31, 2017
$
Valuation allowance for deferred tax assets:
December 31, 2015
$
December 31, 2016
December 31, 2017
4,306 $
5,128
4,523
4,678 $
4,446
4,891
$
$
2,200
822
591
634
885
1,789
(817) $
(531)
(1,660)
(561) $
(896)
1,122
(468) $
(816)
(679)
(398) $
376
210
5,128
4,523
4,576
4,446
4,891
6,211
F-49
Exhibit No. Description
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
Restated Certificate of Incorporation of the Company, as amended (filed as Exhibit No. 3(i) to
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-19271, and
incorporated herein by reference).
Amended and Restated By-Laws of the Company (filed as Exhibit No. 3.1 to Current Report on Form
8-K filed December 12, 2017, File No. 0-19271, and incorporated herein by reference).
Note Purchase Agreement, dated as of December 11, 2013, among the Company, as issuer, New York
Life Insurance Company, and New York Life Investment Management LLC, as investment manager
for New York Life Insurance and Annuity Corporation and New York Life Insurance and Annuity
Corporation Institutionally Owned Life Insurance Separate Account (BOLI 30C), as purchasers (filed
as Exhibit No. 99.1 to Current Report on Form 8-K filed December 12, 2013, File No. 0-19271, and
incorporated herein by reference).
Note Purchase and Private Shelf Agreement, dated as of July 21, 2014, among the Company, as
issuer, Prudential Investment Management, Inc., Pruco Life Insurance Company, The Prudential
Insurance Company of America, Prudential Investment Japan Co., Ltd., as investment manager, and
Prudential Investment Management, Inc., as sub-adviser for The Gibraltar Life Insurance Co., Ltd.,
Prudential Arizona Reinsurance Universal Company, as grantor, and Prudential Investment
Management, Inc., as investment manager for PAR U Hartford Life Insurance Comfort Trust,
Prudential Private Placement Investors, L.P., as investment advisor, and Prudential Private Placement
Investors, Inc., as general partner to each of, The Independent Order of Foresters, Zurich American
Insurance Company, Globe Life and Accident Insurance Company, Family Heritage Life Insurance
Company of America, MTL Insurance Company, The Lincoln National Life Insurance Company,
William Penn Life Insurance Company of New York, Farmers Insurance Exchange and Mid Century
Insurance Company, as purchasers (filed as Exhibit No. 99.1 to Current Report on Form 8-K Filed
July 25, 2014, File No. 0-19271, and incorporated herein by reference).
Note Purchase Agreement, dated as of July 22, 2014, among the Company, as issuer, New York Life
Insurance Company, and NYL Investors LLC, as investment manager for New York Life Insurance
and Annuity Corporation and New York Life Insurance and Annuity Corporation Institutionally
Owned Life Insurance Separate Account (BOLI 30C), as purchasers (filed as Exhibit No. 99.2 to
Current Report on Form 8-K file July 25, 2014, File No. 0-19271, and incorporated herein by
reference).
Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, dated as of June
18, 2015, among the Company, Prudential Investment Management, Inc., Pruco Life Insurance
Company, The Prudential Insurance Company of America, Prudential Investment Japan Co., Ltd., as
investment manager, and Prudential Investment Management, Inc., as sub-adviser for The Gibraltar
Life Insurance Co., Ltd., Prudential Arizona Reinsurance Universal Company, as grantor, and
Prudential Private Placement Investors, L.P., as investment advisor, and Prudential Private Placement
Investors, Inc., as general partner to each of, The Independent Order of Foresters, Zurich American
Insurance Company, Globe Life and Accident Insurance Company, Family Heritage Life Insurance
Company of America, MTL Insurance Company, The Lincoln National Life Insurance Company,
William Penn Life Insurance Company of New York, Farmers Insurance Exchange and Mid Century
Insurance Company, as purchasers. (filed as Exhibit No. 99.1 to Current Report on Form 8-K filed
June 24, 2015 and incorporated herein by reference).
10.1*
U.S. Supply Agreement, effective as of October 16, 2003, between the Company and Ortho-Clinical
Diagnostics, Inc. (“Ortho”) (filed as Exhibit No. 10.7 to Annual Report on Form 10-K for the year
ended December 31, 2003, File No. 0-19271 (“2003 Form 10-K”), and incorporated herein by
reference).
F-50
10.2*
10.3
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12
10.13*
10.14**
10.15**
10.16**
10.17**
Amendment No. 1 to U.S. Supply Agreement effective as of January 1, 2005, between the Company
and Ortho (filed as Exhibit No. 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30,
2005, File No. 0-19271 (“June 2005 Form 10-Q”), and incorporated herein by reference).
Amendment No. 2 to U.S. Supply Agreement effective as of October 15, 2006, between the Company
and Ortho (filed as Exhibit No. 10.4 to Annual Report on Form 10-K for the year ended December 31,
2007, File No. 0-19271 (“2007 Form 10-K”), and incorporated herein by reference).
Amendment No. 3 to U.S. Supply Agreement effective as of January 18, 2008, between the Company
and Ortho (filed as Exhibit No. 10.5 to 2007 Form 10-K, and incorporated herein by reference).
Amendment No. 4 to U.S. Supply Agreement effective as of December 28, 2011, between the
Company and Ortho (filed as Exhibit No. 10.5 to Annual Report on Form 10-K for the year ended
December 31, 2011, File No. 0-19271 (“2011 Form 10-K”), and incorporated herein by reference).
Amendment No. 5 to U.S. Supply Agreement effective as of December 9, 2013, between the
Company and Ortho (filed as Exhibit No. 10.6 to Annual Report on Form 10-K for the year ended
December 31, 2013, File No. 0-19271 (“2013 Form 10-K”), and incorporated herein by reference).
European Supply Agreement, effective as of October 17, 2003, between the Company and Ortho
(filed as Exhibit No. 10.8 to 2003 Form 10-K, and incorporated herein by reference).
Amendment No. 1 to European Supply Agreement effective as of January 1, 2005, between the
Company and Ortho (filed as Exhibit No. 10.2 to June 2005 10-Q, and incorporated herein by
reference).
Amendment No. 2 to European Supply Agreement effective as of January 18, 2008, between the
Company and Ortho (filed as Exhibit No. 10.8 to 2007 Form 10-K, and incorporated herein by
reference).
Amendment No. 3 to European Supply Agreement effective as of December 28, 2011, between the
Company and Ortho (filed as Exhibit No. 10.9 to 2011 Form 10-K, and incorporated herein by
reference).
Amendment No. 4 to European Supply Agreement effective as of December 9, 2013, between the
Company and Ortho (filed as Exhibit No. 10.11 to 2013 Form 10-K, and incorporated herein by
reference).
Amendment, Release and Settlement Agreement dated as of September 12, 2002, among the
Company, IDEXX Europe B.V., and Ortho (filed as Exhibit No. 10.1 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, File No. 0-19271, and incorporated herein by
reference).
Supply Agreement, effective as of May 7, 2007 between the Company and Moss, Inc. (filed as
Exhibit No. 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 0-
19271 (“June 2010 Form 10-Q”), and incorporated herein by reference).
Employment Agreement dated January 22, 2002, between the Company and Jonathan W. Ayers (filed
as Exhibit No. 10.13 to Annual Report on Form 10-K for the year ended December 31, 2001, File No.
0-19271, and incorporated herein by reference).
Amended and Restated Executive Employment Agreement dated May 26, 2013, between the Company
and Jonathan W. Ayers (filed as Exhibit No. 10.2 to July 23, 2013 Form 10-Q for the quarter ended June
30, 2013, File No. 0-19271 (“June 2013 Form 10-Q”), and incorporated herein by reference).
Form of Executive Employment Agreement dated May 26, 2013, between the Company and each of
the Company’s Executive Officers, other than the Chief Executive Officer (filed as Exhibit No. 10.3
to June 2013 Form 10-Q, and incorporated herein by reference).
Restated Director Deferred Compensation Plan, as amended (filed as Exhibit No. 10.1 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 2010, File No. 0-19271, and incorporated
herein by reference).
F-51
10.18**
10.19**
10.20**
10.21**
10.22**
10.23**
10.24**
10.25**
10.26
Restated Executive Deferred Compensation Plan, as amended (filed as Exhibit No. 10.3 to June 2010
Form 10-Q, and incorporated herein by reference).
Form of Director Stock Option Agreement, as amended pursuant to the 2009 Stock Incentive Plan
(filed as Exhibit No. 10.19 to Annual Report on Form 10-K for the year ended December 31, 2015,
File No. 0-19271 (“2015 Form 10-K”) and incorporated herein by reference).
Form of Employee Stock Option Agreement, as amended, pursuant to the 2009 Stock Incentive Plan
(filed herewith).
IDEXX Laboratories 1997 Employee Stock Purchase Plan, as amended (filed as Exhibit No. 10.2 to
the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 filed July 30, 2015
and incorporated herein by reference).
Form of Restricted Stock Unit Agreement, as amended pursuant to the 2009 Stock Incentive Plan
(filed as Exhibit No. 10.22 to the 2015 Form 10-K herein by reference).
2009 Stock Incentive Plan, as amended (filed as Exhibit No. 99.1 to Registration Statement on Form
S-8 filed December 30, 2013, File No. 333-193136, and incorporated herein by reference).
2014 Incentive Compensation Plan, (filed as Exhibit No. 10.2 to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2014, File No. 0-19271 (“June 2014 Form 10-Q”), and incorporated herein
by reference).
Form of Performance-Based Restricted Stock Unit Agreement, as amended, pursuant to the 2009 Stock
Incentive Plan (filed herewith).
Second Amended and Restated Credit Agreement, dated as of December 4, 2015, among the Company,
IDEXX Distribution, Inc., IDEXX Operations, Inc., OPTI Medical Systems, Inc., IDEXX Laboratories
Canada Corporation and IDEXX Europe B.V., as borrowers, the lenders party thereto, JPMorgan Chase
Bank, N.A., as administrative agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Toronto agent,
and J.P. Morgan Europe Limited, as London agent (filed as Exhibit No. 10.1 to the Current Report on
Form 8-K filed December 8, 2015 and incorporated herein by reference).
10.27*
Amendment No. 6 to U.S. Supply Agreement effective as of January 1, 2017, between the Company
and Ortho (filed herewith)
10.28**
Form of Employee Restricted Stock Unit Agreement pursuant to the 2009 Stock Incentive Plan (filed
herewith).
21.1
Subsidiaries of the Company (filed herewith).
23
31.1
31.2
32.1
32.2
Consent of PricewaterhouseCoopers LLP, an independent registered public accounting firm (filed
herewith).
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
F-52
101
*
**
eXtensible Business Reporting Language (XBRL) documents submitted electronically: 101.INS (XBRL
Instance Document), 101.SCH (XBRL Taxonomy Extension Schema Document), 101.CAL (XBRL
Calculation Linkbase Document), 101.LAB (XBRL Taxonomy Label Linkbase Document), 101.DEF
(XBRL Taxonomy Definition Linkbase Document) and 101.PRE (XBRL Taxonomy Presentation
Linkbase Document). The following financial information from IDEXX Laboratories Inc.’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2017 formatted in XBRL: (i) Consolidated
Statements of Income for the years ended December 31, 2017, 2016 and 2015; (ii) Consolidated Balance
Sheets at December 31, 2017 and 2016; (iii) Consolidated Statements of Changes in Equity for the years
ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the years
ended December 31, 2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements, tagged
as blocks of text.
Confidential treatment requested as to certain portions.
Management contract or compensatory arrangement required to be filed as an exhibit pursuant to Item
15(a)(3) of Form 10-K.
F-53
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 16, 2018
IDEXX LABORATORIES, INC.
By: /s/ Jonathan W. Ayers
Jonathan W. Ayers
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE
TITLE
DATE
/s/ Jonathan W. Ayers
Jonathan W. Ayers
President, Chief Executive Officer and Chairman of the
Board of Directors (Principal Executive Officer)
February 16, 2018
/s/ Brian P. McKeon
Brian P. McKeon
/s/ Bruce L. Claflin
Bruce L. Claflin
/s/ William T. End
William T. End
/s/ Stuart M. Essig, PhD
Stuart M. Essig, PhD
/s/Rebecca M. Henderson, PhD
Rebecca M. Henderson, PhD
/s/Daniel M. Junius
Daniel M. Junius
/s/ Lawrence D. Kingsley
Lawrence D. Kingsley
/s/ M. Anne Szostak
M. Anne Szostak
/s/ Sophie V. Vandebroek, PhD
Sophie V. Vandebroek, PhD
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
Director
Director
Director
Director
Director
Director
Director
Director
F-54
Form 10-K
A copy of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2017 (“2017 10-K”)
is included as part of this 2017 Annual Report, has
been furnished to all shareholders together with the
proxy statement for the 2018 Annual Meeting of
Shareholders, which is scheduled to be held on May
9, 2018, and is incorporated herein by reference.
Additionally, copies of the 2017 10-K are available
without charge on the internet by visiting the EDGAR
section of the Securities and Exchange Commission
(SEC) website (www.sec.gov/edgar.shtml) or the
Investors section of our website www.idexx.com. We
will also provide a copy of the 2017 10-K without
charge, upon written request from shareholders to
Investor Relations at the address provided below.
The copy of the 2017 10-K that is included as
part of this 2017 Annual Report is not
accompanied by the exhibits that were filed with
the SEC. These exhibits are accessible on the
internet by visiting the EDGAR section of the
SEC website (www.sec.gov/edgar.shtml) or the
Investors section of our website www.idexx.com.
We will furnish any printed copies of the exhibits to
those shareholders who request copies upon
payment to the Company of its reasonable expenses
in furnishing the exhibits. Requests for copies of the
exhibits should be made to Investor Relations at the
address provided below.
Investor Relations
IDEXX Laboratories, Inc.
One IDEXX Drive
Westbrook, Maine 04092
Tel: 207-556-8155
Email: investorrelations@idexx.com
Quarterly Reports and Proxy Statements
Our Quarterly Reports on Form 10-Q and proxy
statements can be obtained on the internet by
visiting the EDGAR section of the Securities and
Exchange Commission (SEC) website
(www.sec.gov/edgar.shtml) or via the Investors
section of our website www.idexx.com or by
contacting Investor Relations.
2018 Annual Meeting of Shareholders
May 9, 2018, 12:00 p.m., Eastern time
Virtual meeting only online via webcast at
www.virtualshareholdermeeting.com/IDXX2018
Common Stock Listing
NASDAQ Global Select Market
Trading Symbol: IDXX
Transfer Agent and Registrar
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
Tel: 800-937-5449
Outside U.S. and Canada: +1-718-921-8124
Email: info@amstock.com
Corporate Offices
IDEXX Laboratories, Inc.
One IDEXX Drive
Westbrook, Maine 04092
Tel: 207-556-0300
www.idexx.com
References to websites are inactive textual
references only and the contents of our website are
not incorporated by reference into this 2017 Annual
Report for any purpose.