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. and its subsidiaries 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 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 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 producer 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 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 3. Revenue Recognition" for additional information regarding disaggregated revenue by segment and major product and service categories. See "Note 16. Segment Reporting " for additional information regarding our reportable operating segments and geographical areas.
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, 2019, 2018, and 2017.
(c) Inventories – See Note 6
(d) Property and Equipment – See Note 8
(e) Goodwill and Other Intangible Assets – See Note 10
(f) 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. The amount of warranty reserve during the years ended December 31, 2019 and 2018, was not material.
(g) Income Taxes – See Note 13
(h) 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.
(i) Revenue Recognition – See Note 3
(j) 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 research and development costs for capitalization after the technological feasibility has been established for software and products containing software to be sold, however no costs were capitalized during the years ended December 31, 2019, 2018 and 2017. Software developed to deliver hosted services to our customers has been designated as internal use and we capitalize certain costs incurred in connection with developing or obtaining software designated for internal use based on three distinct stages of development. See "Note 8. Property and Equipment, Net" for further information on internal use software.
(k) Advertising Costs
Advertising costs, which are recognized as sales and marketing expense in the period in which they are incurred, were $1.5 million, $1.8 million, and $1.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(l) Legal Costs
Legal costs are considered period costs and accordingly are expensed in the year services are provided.
(m) Share-Based Compensation – See Note 5
(n) Self-Insurance Accruals – See Note 15
(o) Leases – See Note 7
(p) Earnings per Share – See Note 14
(q) Foreign Currency
The functional currency of all but four 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 losses of $1.1 million, losses of $3.1 million, and gains of $1.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.
(r) Hedging Instruments – See Note 18
(s) Fair Value Measurements – See Note 17
(t) 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 hedges and the difference between the cost and the fair market value of investments in debt and equity securities, and forward currency exchange contracts, in the consolidated statements of comprehensive income. See "Note 20. Accumulated Other Comprehensive Income" for information about the effects on net income of significant amounts reclassified out of each component of AOCI for the years ended December 31, 2019, 2018 and 2017.
(u) 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 as well as certain components, raw materials and consumables used in or with our products are 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.
(v) New Accounting Pronouncements Adopted
We adopted ASU 2016-02, Leases (Topic 842) (the "New Leasing Standard"), as of January 1, 2019, using the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. In
addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The adoption of the New Leasing Standard resulted in the recording of operating lease liabilities of $86.7 million and right-of-use assets of $83.7 million. Prior to our adoption of the New Leasing Standard, rent prepayments of approximately $1.0 million were recorded within other current assets and the impact of recognizing rent expense on a straight-line basis of approximately $4.0 million was recorded within other current and long-term liabilities. Upon adoption of the New Leasing Standard, these rent prepayments and straight-line rent impacts are now recorded within operating lease right-of-use assets and represent the net differences between operating lease liabilities and right-of-use assets.
The New Leasing Standard requires us to classify certain reagent rental programs as sales-type leases and thus accelerate instrument revenue and cost recognition at the time of instrument placement. We did not change the historical lease classification for placements prior to January 1, 2019, therefore this change applied to certain new placements beginning on January 1, 2019. Under prior U.S. GAAP, instruments placed under our reagent rental programs were classified as operating leases and instrument revenue and cost was recognized over the term of the program. The New Leasing Standard did not have a material impact on our consolidated earnings and had no impact on cash flows for the year ended December 31, 2019.
Adoption of the New Leasing Standard impacted our consolidated balance sheet as follows:
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Consolidated Balance Sheet
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(in thousands)
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Previous U.S. GAAP
December 31, 2018
(Reported)
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New U.S. GAAP January 1, 2019
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Impact of the
New Leasing Standard
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ASSETS
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Other current assets
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$
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108,220
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$
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107,228
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$
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(992
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)
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Total current assets
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$
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654,172
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$
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653,180
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$
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(992
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)
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Operating lease right-of-use asset
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$
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—
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|
|
$
|
83,707
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$
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83,707
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Total long-term assets
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$
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883,177
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$
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966,884
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$
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83,707
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TOTAL ASSETS
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$
|
1,537,349
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|
|
$
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1,620,064
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|
|
$
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82,715
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LIABILITIES
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Accrued liabilities
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$
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260,683
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$
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274,459
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|
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$
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13,776
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Total current liabilities
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$
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770,444
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|
$
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784,220
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$
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13,776
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Long-term operating lease liability
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$
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—
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|
|
$
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68,939
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|
|
$
|
68,939
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Total long-term liabilities
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$
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776,138
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|
|
$
|
845,077
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|
|
$
|
68,939
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TOTAL LIABILITIES
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$
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1,546,582
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|
|
$
|
1,629,297
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|
|
$
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82,715
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We adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, on January 1, 2019. We elected not to reclassify the $1.7 million of stranded tax effects from the 2017 Tax Cuts and Job Act (the “2017 Tax Act”) enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings in the period of adoption.
(w) New Accounting Pronouncements Not Yet Adopted
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. Since then, the FASB has issued an update to ASU 2016-13. 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. The amendments in this update are effective for fiscal years beginning after December 15, 2019 and interim periods within those annual periods. We do not anticipate any material impact related to our allowance for doubtful accounts or otherwise from this amendment on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure
requirements of fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. The adoption of this guidance will not have a material impact on the consolidated financial statements.
NOTE 3. REVENUE RECOGNITION
Effective January 1, 2018, we adopted the New Revenue Standard using the modified retrospective method for all contracts not completed as of the date of adoption. We recognized the cumulative effect of initially applying the New Revenue Standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods presented.
Our revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To accurately present the consideration received in exchange for promised products or services, we apply the five-step model outlined below:
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1.
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Identification of a contract or agreement with a customer
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2.
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Identification of our performance obligations in the contract or agreement
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3.
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Determination of the transaction price
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4.
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Allocation of the transaction price to the performance obligations
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5.
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Recognition of revenue when, or as, we satisfy a performance obligation
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We enter into contracts that include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The timing of revenue recognition, billings, and cash collections results in accounts receivable, contract assets, and lease receivables as a result of revenue recognized in advance of billings (included within other assets), and contract liabilities or deferred revenue as a result of receiving consideration in advance of revenue recognition within our consolidated balance sheet. Our general payment terms range from 30 to 60 days, with exceptions in certain geographies. Below is a listing of our major categories of revenue for our products and services:
Diagnostic Products and Accessories. Diagnostic products and accessories revenues, including IDEXX VetLab® consumables and accessories, rapid assay, LPD, Water, and OPTI testing products, are predominantly recognized and invoiced at the time of shipment, which is when the customer obtains control of the product based on legal title transfer and we have the right to payment. Shipping costs reimbursed by the customer are included in revenue and cost of sales. As a practical expedient, we do not account for shipping activities as a separate performance obligation.
Reference Laboratory Diagnostic and Consulting Services. Reference laboratory revenues are recognized and invoiced when the laboratory diagnostic service is performed.
Instruments, Software and Systems. CAG Diagnostics capital instruments, veterinary software and diagnostic imaging systems revenues are generally recognized and invoiced when the customer obtains control of the products based on legal title transfer and we have the right to payment, which generally occurs at the time of installation and customer acceptance. Our instruments, software, and systems are often included in one of our significant customer programs, as further described below. For veterinary software systems that include multiple performance obligations, such as perpetual software licenses and computer hardware, we allocate revenue to each performance obligation based on estimates of the price that we would charge the customer for each promised product or service if it were sold on a standalone basis.
Lease Revenue. Revenues from instrument rental agreements and reagent rental programs are recognized either as operating leases on a ratable basis over the term of the agreement or as sales-type leases at the time of installation and customer acceptance. Customers typically pay for the right to use instruments under rental agreements in equal monthly amounts over the term of the rental agreement. Our reagent rental programs provide our customers the right to use our instruments upon entering into agreements to purchase specified amounts of consumables, which are considered embedded leases. For some agreements, the customers are provided with the right to purchase the instrument at the end of the lease term. Lease revenues from these agreements are presented in product revenue on our consolidated income statement. Lease revenue was approximately $20.8 million for the year ended December 31, 2019, as compared to $12.2 million for the year ended December 31, 2018, including both operating leases and sales-type leases under ASC 842, Leases, during 2019, and ASC 840, Leases, prior to 2019. See below for revenue recognition under our reagent rental programs.
Extended Warranties and Post-Contract Support. CAG Diagnostics capital instruments and diagnostic imaging systems extended warranties typically provide customers with continued coverage for a period of one to five years beyond the first-year standard warranty. Customers can either pay in full for the extended warranty at the time of instrument or system purchase or can be billed on a quarterly basis over the term of the contract. We recognize revenue associated with extended warranties over time on a ratable basis using a time elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.
Veterinary software post-contract support provides customers with access to technical support when and as needed through access to call centers and online customer assistance. Post-contract support contracts typically have a term of 12 months and customers are billed for post-contract support in equal quarterly amounts over the term. We recognize revenue for post-contract support services over time on a ratable basis using a time-elapsed measure of performance over the contract term, which approximates the expected timing in which applicable services are performed.
On December 31, 2018, our deferred revenue related to extended warranties and post-contract support was $40.7 million, of which approximately $21.0 million was recognized during the year ended December 31, 2019. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $38.0 million at December 31, 2019. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less and do not adjust for the effect of the financing components when the period between customer payment and revenue recognition is one year or less. Deferred revenue related to extended warranties and post-contract support with an original duration of more than one year was $24.4 million at December 31, 2019, of which approximately 37%, 31%, 20%, 9%, and 3% are expected to be recognized during 2020, 2021, 2022, 2023, and thereafter, respectively. Additionally, we have determined these agreements do not include a significant financing component.
SaaS Subscriptions. We offer a variety of veterinary software and diagnostic imaging SaaS subscriptions including IDEXX Neo®, Animana®, Pet Health Network® Pro, Petly® Plans, Web PACS, rVetLink®, and Smart Flow™. We recognize revenue for our SaaS subscriptions over time on a ratable basis over the contract term, beginning on the date our service is made available to the customer. Our subscription contracts vary in term from monthly to two years. Customers typically pay for our subscription contracts in equal monthly amounts over the term of the agreement. Deferred revenue related to our SaaS subscriptions is not material.
Contracts with Multiple Performance Obligations. We enter into contracts with multiple performance obligations where customers purchase a combination of IDEXX products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires significant judgment. We determine the transaction price for a contract based on the total consideration we expect to receive in exchange for the transferred goods or services. To the extent the transaction price includes variable consideration, such as volume rebates or expected price adjustments, we apply judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts.
We allocate revenue to each performance obligation in proportion to the relative standalone selling prices and recognize revenue when control of the related goods or services is transferred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the performance obligation when sold separately. When standalone selling prices for our products or services are not directly observable we determine the standalone selling prices using relevant information available and apply suitable estimation methods including, but not limited to, the cost plus a margin approach. We recognize revenue as each performance obligation is satisfied, either at a point in time or over time, as described in the revenue categories above. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less.
The following customer programs represent our most significant customer contracts which contain multiple performance obligations:
Customer Commitment Programs. We offer customer incentives upon entering into multi-year agreements to purchase annual minimum amounts of products and services.
Up-Front Customer Loyalty Programs. Our up-front loyalty programs provide customers with incentives in the form of cash payments or IDEXX Points upon entering into multi-year agreements to purchase annual minimum amounts of future products or services. If a customer breaches 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. Up-front incentives to customers in the form of cash or IDEXX Points are not made in exchange for distinct goods or services and are capitalized as customer acquisition costs within other current and long-term assets, which are subsequently recognized as a reduction to revenue over the term of the customer agreement. If these up-front incentives are subsequently utilized to purchase instruments, we allocate total consideration, including future committed purchases less up-front incentives and estimates of expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.
On December 31, 2018, our capitalized customer acquisition costs were $124.4 million, of which approximately $34.6 million were recognized as a reduction of revenue during the year ended December 31, 2019. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $137.4 million at December 31, 2019. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the years ended December 31, 2019 and 2018, were not material.
Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with free or discounted instruments or systems upon entering into multi-year agreements to purchase annual minimum amounts of future products and services. We allocate total consideration, including future committed purchases and expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance in advance of billing the customer, which is also when the customer obtains control of the instrument based on legal title transfer. Our right to future consideration related to instrument revenue is recorded as a contract asset within other current and long-term assets. The contract asset is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. We have determined that these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.
On December 31, 2018, our volume commitment contract assets were $40.9 million, of which approximately $8.9 million were reclassified to accounts receivable when customers were billed for related products and services during the year ended December 31, 2019. Furthermore, as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable,
our contract assets were $83.9 million at December 31, 2019. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the years ended December 31, 2019 and 2018, were not material.
For our up-front customer loyalty and volume commitment programs, we estimate future revenues related to multi-year agreements to be approximately $1.9 billion, of which approximately 25%, 22%, 20%, 17%, and 16% are expected to be recognized during 2020, 2021, 2022, 2023, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied, for which customers have committed to purchase goods and services, net of the expected revenue reductions from customer acquisition costs and expected price adjustments, and as a result, are lower than stated contractual commitments by our customers.
Instrument Rebate Programs. Our instrument rebate programs, previously referred to as IDEXX Instrument Marketing Programs, require an instrument purchase and provide customers the opportunity to earn future rebates based on the volume of products and services they purchase over the term of the program. We account for the customer’s right to earn rebates on future purchases as a separate performance obligation and determine the standalone selling price based on an estimate of rebates the customer will earn over the term of the program. Total consideration allocated to identified performance obligations is limited to goods and services that the customer is presently obligated to purchase and does not include estimates of future purchases that are optional. We allocate total consideration to identified performance obligations, including the customer’s right to earn rebates on future purchases, which is deferred and recognized upon the purchase of future products and services, offsetting future rebates as they are earned.
On December 31, 2018, our deferred revenue related to instrument rebate programs was $57.4 million, of which approximately $18.1 million were recognized when customers purchased eligible products and services and earned rebates during the year ended December 31, 2019. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $49.1 million at December 31, 2019, of which approximately 33%, 27%, 19%, 12%, and 9% are expected to be recognized during 2020, 2021, 2022, 2023, and thereafter, respectively.
Reagent Rental Programs. Our reagent rental programs provide our customers the right to use our instruments upon entering into multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded lease for the right to use our instrument and we determine the amount of lease revenue allocated to the instrument based on relative standalone selling prices. We evaluate the terms of these embedded leases to determine classification as either a sales-type lease or an operating lease, as defined within the New Leasing Standard. We elected the package of practical expedients permitted under the transition guidance within the New Leasing Standard, which among other things, allowed us to carryforward our historical lease classification and therefore all reagent rental program placements prior to January 1, 2019 will continue to be classified as operating leases. We have not elected the practical expedient within the New Leasing Standard to combine lease and non-lease components.
Sales-type Reagent Rental Programs. Our reagent rental programs that effectively transfer control of instruments to our customers are classified as sales-type leases and we recognize instrument revenue and cost in advance of billing the customer, at the time of installation and customer acceptance. Our right to future consideration related to instrument revenue is recorded as a lease receivable within other current and long-term assets, and is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. As a result of new placements under reagent rental programs, our lease receivable assets were $7.2 million at December 31, 2019. The impacts of discounting and unearned income at December 31, 2019, were not material. Profit and loss recognized at the commencement date and interest income during the year ended December 31, 2019, were not material. We monitor customer purchases over the term of their agreement to assess the realizability of our lease receivable assets. Impairments during the year ended December 31, 2019, were not material.
Operating-type Reagent Rental Programs. Our reagent rental programs that do not effectively transfer control of instruments to our customers are classified as operating leases and we recognize instrument revenue and costs ratably over the term of the agreement. The cost of the instrument is capitalized within property and equipment. See "Note 8. Property and Equipment, Net," for amounts transferred from inventory to property and equipment.
We estimate future revenue to be recognized related to our reagent rental programs of approximately $31.6 million, of which approximately 39%, 29%, 18%, 8%, and 6% are expected to be recognized during 2020, 2021, 2022, 2023, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied for which customers have committed to future purchases, net of any expected price adjustments, and as a result, may be lower than stated contractual commitments by our customers.
Other Customer Incentive Programs. Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method, for incentives that are offered to individual customers, and the expected-value method, for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the years ended December 31, 2019 and 2018, were not material. Refund obligations related to customer incentive programs are recorded in accrued liabilities for the actual issuance of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future.
Program Combinations. At times, we combine elements of our significant customer programs within a single customer contract. We separate each significant program element and include the contract assets, customer acquisition costs, deferred revenues and estimated future revenues within the most relevant program disclosures above. Each customer contract is presented as a net contract asset or net contract liability on our consolidated balance sheet.
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 amounts of future customer purchases, customer rebates and other incentive payments, and price adjustments related to multi-year agreements. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.
IDEXX Points. IDEXX Points may be applied to trade receivables due to us, converted to cash, or applied against the purchase price of IDEXX products and services. We consider IDEXX Points equivalent to cash. IDEXX Points that have not yet been used by customers are included in accrued liabilities until utilized or expired. Breakage is not material because customers can apply IDEXX Points to trade receivables at any time.
Accounts Receivable. We recognize revenue when it is probable that we will collect substantially all of the consideration to which we will be entitled, based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. We 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 were to deteriorate, or a strengthening U.S. dollar impacts the ability of foreign customers to make payments to us on their U.S. dollar-denominated purchases. 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% of our consolidated revenues and we have no concentration of credit risk as of December 31, 2019.
Disaggregated Revenues. We present disaggregated revenue for our CAG segment based on major product and service categories. Our Water segment is comprised of a single major product category. Although our LPD segment does not meet the quantitative thresholds to be reported as a separate segment, we believe it is important to disaggregate these revenues as a major product and service category within our Other reportable segment given its distinct markets, and therefore we have elected to report LPD as a reportable segment.
The following table presents disaggregated revenue by major product and service categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
CAG segment revenue:
|
|
|
|
|
|
|
|
|
|
|
CAG Diagnostics recurring revenue:
|
|
$
|
1,828,329
|
|
|
$
|
1,654,530
|
|
|
$
|
1,451,701
|
|
|
IDEXX VetLab consumables
|
|
693,360
|
|
|
617,237
|
|
|
518,774
|
|
|
Rapid assay products
|
|
232,149
|
|
|
217,541
|
|
|
205,309
|
|
|
Reference laboratory diagnostic and consulting services
|
|
822,497
|
|
|
746,794
|
|
|
660,142
|
|
|
CAG Diagnostics services and accessories
|
|
80,323
|
|
|
72,958
|
|
|
67,476
|
|
|
CAG Diagnostics capital - instruments
|
|
132,685
|
|
|
134,264
|
|
|
119,963
|
|
|
Veterinary software, services and diagnostic imaging systems
|
|
158,169
|
|
|
146,634
|
|
|
131,713
|
|
|
CAG segment revenue
|
|
2,119,183
|
|
|
1,935,428
|
|
|
1,703,377
|
|
|
|
|
|
|
|
|
|
|
Water segment revenue
|
|
132,850
|
|
|
125,198
|
|
|
114,395
|
|
|
LPD segment revenue
|
|
132,635
|
|
|
130,581
|
|
|
128,481
|
|
|
Other segment revenue
|
|
22,240
|
|
|
22,035
|
|
|
22,805
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,406,908
|
|
|
$
|
2,213,242
|
|
|
$
|
1,969,058
|
|
Revenue by principal geographic area, based on customers’ domiciles, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Americas
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,495,516
|
|
|
$
|
1,357,909
|
|
|
$
|
1,203,547
|
|
|
Canada
|
|
99,550
|
|
|
94,206
|
|
|
83,818
|
|
|
Latin America
|
|
56,515
|
|
|
50,969
|
|
|
46,893
|
|
|
|
|
1,651,581
|
|
|
1,503,084
|
|
|
1,334,258
|
|
|
|
|
|
|
|
|
|
|
Europe, the Middle East and Africa
|
|
|
|
|
|
|
|
Germany
|
|
104,081
|
|
|
100,459
|
|
|
88,328
|
|
|
United Kingdom
|
|
90,969
|
|
|
87,807
|
|
|
80,149
|
|
|
France
|
|
64,767
|
|
|
60,319
|
|
|
55,993
|
|
|
Italy
|
|
39,725
|
|
|
36,956
|
|
|
31,889
|
|
|
Spain
|
|
36,439
|
|
|
33,687
|
|
|
28,866
|
|
|
Switzerland
|
|
20,855
|
|
|
19,875
|
|
|
17,913
|
|
|
Netherlands
|
|
19,397
|
|
|
18,090
|
|
|
15,877
|
|
|
Other
|
|
122,206
|
|
|
114,877
|
|
|
100,409
|
|
|
|
|
498,439
|
|
|
472,070
|
|
|
419,424
|
|
|
Asia Pacific Region
|
|
|
|
|
|
|
|
Australia
|
|
71,069
|
|
|
63,386
|
|
|
56,994
|
|
|
Japan
|
|
67,246
|
|
|
60,213
|
|
|
53,344
|
|
|
China
|
|
57,518
|
|
|
57,621
|
|
|
55,810
|
|
|
Other
|
|
61,055
|
|
|
56,868
|
|
|
49,228
|
|
|
|
|
256,888
|
|
|
238,088
|
|
|
215,376
|
|
|
Total
|
|
$
|
2,406,908
|
|
|
$
|
2,213,242
|
|
|
$
|
1,969,058
|
|
Costs to Obtain a Contract. We capitalize sales commissions and the related fringe benefits earned by our sales force when considered incremental and recoverable costs of obtaining a contract. Our contracts include performance obligations related to various goods and services, some of which are satisfied at a point in time and others over time. Commission costs related to performance obligations satisfied at a point in time are expensed at the time of sale, which is when revenue is recognized. Commission costs related to long-term service contracts and performance obligations satisfied over time, including extended warranties and SaaS subscriptions, are deferred and recognized on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates. We apply judgment in estimating the amortization period, which ranges from 3 to 7 years, by taking into consideration our customer contract terms, history of renewals, expected length of customer relationship, as well as the useful life of the underlying technology and products. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of income. Deferred commission costs are periodically reviewed for impairment.
On December 31, 2018, our deferred commission costs, included within other assets, were $13.9 million, of which approximately $4.5 million of commission expense were recognized during the year ended December 31, 2019. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $15.6 million at December 31, 2019. Impairments of deferred commission costs during the years ended December 31, 2019 and 2018, were not material.
NOTE 4. ACQUISITIONS AND INVESTMENTS
We believe that our acquisitions of businesses and other assets enhance our existing businesses by either expanding our geographic range and customer base or expanding our existing product lines.
On October 7, 2019, we acquired the assets of a multi-site reference laboratory business in the mid-west of the U.S. for $50.0 million in cash. This acquisition expands our national reference laboratory presence in the U.S., and was accounted for as a business combination. The preliminary fair value of the assets acquired consists of $25.0 million in intangible assets, primarily for customer relationships, with a weighted average life of 10 years, $0.2 million of tangible assets, and $24.8 million of goodwill, representing synergies within our reference laboratory portfolio. The purchase price allocation is subject to change if additional information becomes available concerning the fair value of the assets acquired. Additional adjustments, if any, to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition. The
goodwill is expected to be deductible for income tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our CAG segment since the acquisition date. The acquisition expenses incurred were not material.
During the fourth quarter of 2018, we invested $5.0 million for a noncontrolling minority interest in a technology company. This equity investment has been accounted for under the cost method of accounting.
During the third quarter of 2018, we acquired substantially all of the assets of a software company for $25.0 million. This acquisition expands the IDEXX suite of veterinary software offerings and further underscores our commitment to investing in software innovations that advance the veterinary profession. This acquisition was accounted for as a business combination. The fair value of the assets acquired consist of $20.3 million of goodwill, representing synergies with our current software product offerings, $2.6 million in technology intangible assets, $2.4 million in customer relationship intangible assets, and $0.3 million of net liabilities. The goodwill is expected to be deductible for income tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our CAG segment since the acquisition date. The acquisition expenses incurred were not material.
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 $15.0 million consists of $12.0 million paid at closing and a $3.0 million contingent payment to be paid within 36 months if certain commercial goals are achieved, of which $1.0 million was paid in 2019 and in 2018, respectively. 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 the financial statements. The results of operations have been included in our CAG segment since the acquisition date. The acquisition expenses incurred were not material.
NOTE 5. 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 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 option exercise price set on the day of grant. An RSU is an agreement to issue shares of IDEXX stock at the time of vesting. A PBRSU is an agreement to issue 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, 2019, 2018 and 2017, nor were any restricted stock or stock appreciation rights outstanding as of those years ended.
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, 2019, 2018 and 2017. 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 2018 Stock Incentive Plan (the "2018 Stock Plan"). Our Board of Directors has authorized the issuance of 7.5 million shares of our common stock under the 2018 Stock 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 2.4 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 2018 Stock Plan. As of December 31, 2019, there were approximately 6.8 million remaining shares available for issuance under the 2018 Stock Plan.
Share-Based Compensation
Share-based compensation costs are classified in the 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in cost of revenue
|
|
$
|
2,681
|
|
|
$
|
2,816
|
|
|
$
|
2,675
|
|
|
Share-based compensation expense included in operating expenses
|
|
36,597
|
|
|
22,341
|
|
|
20,842
|
|
|
Total share-based compensation expense included in consolidated statements of income
|
|
39,278
|
|
|
25,157
|
|
|
23,517
|
|
|
Income tax benefit resulting from share-based compensation expense
|
|
(4,861
|
)
|
|
(4,190
|
)
|
|
(6,810
|
)
|
|
Net share-based compensation expense included in consolidated statements of income, excluding tax benefit from settlement of share-based awards
|
|
34,417
|
|
|
20,967
|
|
|
16,707
|
|
|
Income tax benefit resulting from settlement of share-based awards
|
|
(19,140
|
)
|
|
(21,496
|
)
|
|
(27,743
|
)
|
|
Net expense (benefit) related to share-based compensation arrangements included in consolidated statements of income
|
|
$
|
15,277
|
|
|
$
|
(529
|
)
|
|
$
|
(11,036
|
)
|
In connection with our CEO transition, we entered into a mutual separation agreement with our former CEO, pursuant to which Mr. Ayers’s outstanding stock options were modified. As a result of the modification of Mr. Ayers’s outstanding stock options, we recognized share-based compensation expense of approximately $10.9 million in the fourth quarter of 2019, primarily representing an acceleration of the cost of the equity awards, which was offset by a reduction to our provision for income taxes of approximately $0.8 million. Other than the modification to Mr. Ayers's stock options, as described above, there were no other material modifications to the terms of outstanding options, RSUs, PBRSUs, or DSUs during the years ended December 31, 2019, 2018 or 2017.
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.
The total unrecognized compensation expense, net of estimated forfeitures, for unvested share-based compensation awards at December 31, 2019, was $50.1 million, which will be recognized over a weighted average period of approximately 1.7 years.
Stock Options
Prior to December 4, 2019, all options granted to employees primarily vest ratably over five years on each anniversary of the date of grant. Options granted to non-employee directors vest fully on the first anniversary of the date of grant. Employee grants after December 4, 2019, will vest ratably over 4 years. Vesting of option awards issued is conditional based on continuous service. Options granted after May 8, 2013 have a contractual term of ten years and options granted between January 1, 2006 and May 8, 2013 have contractual terms of seven years. Upon any change in control of the company, 25% 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Share price at grant
|
|
$
|
218.66
|
|
|
$
|
179.56
|
|
|
$
|
142.89
|
|
|
Share exercise price
|
|
$
|
220.88
|
|
|
$
|
179.56
|
|
|
$
|
142.89
|
|
|
Expected stock price volatility
|
|
26
|
%
|
|
24
|
%
|
|
26
|
%
|
|
Expected term, in years
|
|
6.0
|
|
|
5.8
|
|
|
5.8
|
|
|
Risk-free interest rate
|
|
2.4
|
%
|
|
2.7
|
%
|
|
2.0
|
%
|
|
Weighted average fair value of options granted
|
|
$
|
65.53
|
|
|
$
|
52.99
|
|
|
$
|
40.83
|
|
A summary of the status of options granted under our share-based compensation plans at December 31, 2019, and changes during the year then ended, are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options (000)
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
2,449
|
|
|
$
|
91.64
|
|
|
|
|
|
|
Granted
|
|
351
|
|
|
$
|
220.88
|
|
|
|
|
|
|
Exercised
|
|
(445
|
)
|
|
$
|
58.32
|
|
|
|
|
|
|
Forfeited
|
|
(44
|
)
|
|
$
|
122.23
|
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
2,311
|
|
|
$
|
117.13
|
|
|
6.4
|
|
$
|
334,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested as of December 31, 2019
|
|
1,222
|
|
|
$
|
83.11
|
|
|
5.4
|
|
$
|
217,569
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and expected to vest as of December 31, 2019
|
|
2,277
|
|
|
$
|
116.52
|
|
|
6.4
|
|
$
|
330,606
|
|
The total fair value of options vested was $12.2 million, $10.5 million, and $9.2 million during the years ended December 31, 2019, 2018 and 2017, 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 $83.7 million, $87.1 million, and $78.3 million during the years ended December 31, 2019, 2018 and 2017, respectively.
Restricted Stock Units
Prior to December 4, 2019, the majority of RSUs, including our PBRSUs, granted to employees vest ratably over five years on each anniversary of the date of grant. Employee grants after December 4, 2019, will vest ratably over 4 years. PBRSUs granted to employees vest based on meeting performance goals set on the day 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, 2019, and changes during the period then ended, are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units (000)
|
|
Weighted Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2018
|
|
306
|
|
|
$
|
113.87
|
|
|
Granted
|
|
80
|
|
|
$
|
209.39
|
|
|
Vested
|
|
(113
|
)
|
|
$
|
95.20
|
|
|
Forfeited
|
|
(15
|
)
|
|
$
|
134.89
|
|
|
Nonvested as of December 31, 2019
|
|
258
|
|
|
$
|
150.50
|
|
|
|
|
|
|
|
|
Expected to vest as of December 31, 2019
|
|
243
|
|
|
$
|
149.65
|
|
The total fair value of RSUs and PBRSUs vested was $23.8 million, $24.5 million, and $22.1 million during the years ended December 31, 2019, 2018 and 2017, respectively. The aggregate intrinsic value of nonvested RSUs and PBRSUs as of December 31, 2019, is equal to the fair value of IDEXX’s common stock as of December 31, 2019, multiplied by the number of nonvested units as of December 31, 2019.
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 143,000 and 162,000 vested DSUs outstanding under our share-based compensation plans as of December 31, 2019 and 2018, respectively. Unvested DSUs as of December 31, 2019 and 2018, 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% 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 47,000, 52,000, and 61,000 shares of common stock in connection with the Employee Stock Purchase Plan during the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, there were approximately 1.1 million remaining shares available for issuance under the 1997 Employee Stock Purchase Plan.
NOTE 6. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. 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 $39.5 million, $41.3 million, and $37.2 million at December 31, 2019, 2018 and 2017, respectively.
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
41,202
|
|
|
$
|
31,973
|
|
|
Work-in-process
|
|
20,077
|
|
|
17,009
|
|
|
Finished goods
|
|
133,740
|
|
|
124,321
|
|
|
Inventories
|
|
$
|
195,019
|
|
|
$
|
173,303
|
|
NOTE 7. LEASES
The majority of our facilities are occupied under operating lease arrangements with various expiration dates through 2067, some of which include options to extend the life of the lease, and some of which include options to terminate the lease within 1 year. In certain instances, 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 financing 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. Minimum lease payments include the fixed lease component of the agreement, as well as fixed rate increases that are initially measured at the lease commencement date. Variable lease payments based on an index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred. Consideration is allocated to the lease and non-lease components based on the estimated standalone prices.
We determine if an arrangement is a lease at its inception. Operating leases are included in operating lease right-of-use assets, accrued liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Our financing leases are not material to the financial statements.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities and right-of-use assets are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an explicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Rent expense for lease payments is recognized on a straight-line basis over the lease term. The operating lease right-of-use assets also includes any rent prepayments, lease incentives upon receipt, and straight-line rent expense impacts, which represent the differences between our operating lease liabilities and right-of-use assets.
Maturities of operating lease liabilities are as follows:
|
|
|
|
|
|
|
|
(in thousands, except lease term and discount rate)
|
December 31,
2019
|
|
|
|
|
|
2020
|
$
|
18,016
|
|
|
2021
|
17,424
|
|
|
2022
|
13,968
|
|
|
2023
|
9,358
|
|
|
2024
|
6,657
|
|
|
Thereafter
|
33,602
|
|
|
Total lease payments
|
99,025
|
|
|
Less imputed interest
|
(16,272
|
)
|
|
Total
|
$
|
82,753
|
|
|
|
|
|
Current operating lease liabilities, included in accrued liabilities
|
$
|
15,281
|
|
|
Long-term operating lease liabilities
|
$
|
67,472
|
|
|
|
|
|
Weighted average remaining lease term - operating leases
|
10.3 years
|
|
|
|
|
|
Weighted average discount rate - operating leases
|
3.5
|
%
|
Total minimum future lease payments of approximately $4.0 million for leases that have not commenced as of December 31, 2019 are not included in the consolidated financial statements, as we do not yet control the underlying assets. These leases are expected to commence between 2020 and 2021 with lease terms of approximately 4 years to 11 years.
Rent expense charged to operations under operating leases, excluding variable and short-term leases were approximately $21.1 million during the year ended December 31, 2019. Total rent expense, including variable rent and short-term leases, were approximately $23.8 million, $25.2 million, and $23.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Supplemental cash flow information for leases is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
For the Year Ended
December 31, 2019
|
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
20,008
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations
|
$
|
13,399
|
|
At December 31, 2018, under ASC 840, Leases, the minimum annual rental payments under our lease agreements were as follows: $19.4 million in 2019; $17.1 million in 2020; $14.5 million in 2021; $10.8 million in 2022; $8.5 million in 2023; and $36.5 million thereafter.
NOTE 8. 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 are 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 the consolidated statements of 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
|
|
15 to 20 years
|
|
Buildings and improvements
|
|
10 to 40 years
|
|
Leasehold improvements
|
|
Shorter of remaining lease term or useful life of improvements
|
|
Machinery and equipment
|
|
3 to 8 years
|
|
Office furniture and equipment
|
|
3 to 7 years
|
|
Computer hardware and software
|
|
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, 2019 and 2018 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 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.
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
8,725
|
|
|
$
|
8,701
|
|
|
Buildings and improvements
|
|
249,918
|
|
|
190,809
|
|
|
Leasehold improvements
|
|
74,602
|
|
|
66,917
|
|
|
Machinery and equipment
|
|
322,814
|
|
|
299,204
|
|
|
Office furniture and equipment
|
|
53,210
|
|
|
51,661
|
|
|
Computer hardware and software
|
|
240,406
|
|
|
218,150
|
|
|
Construction in progress
|
|
103,200
|
|
|
70,561
|
|
|
|
|
1,052,875
|
|
|
906,003
|
|
|
Less accumulated depreciation and amortization
|
|
519,030
|
|
|
468,733
|
|
|
Total property and equipment, net
|
|
$
|
533,845
|
|
|
$
|
437,270
|
|
Below are the amounts of depreciation and amortization of property and equipment, capitalized computer software for internal use, unpaid property and equipment reflected in accounts payable and accrued expenses, and rental and reagent rental program instruments transferred from inventory to property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
78,495
|
|
|
$
|
74,208
|
|
|
$
|
73,797
|
|
|
Capitalized computer software developed for internal use
|
|
$
|
20,130
|
|
|
$
|
17,115
|
|
|
$
|
16,131
|
|
|
Unpaid property and equipment, reflected in accounts payable and accrued liabilities
|
|
$
|
24,688
|
|
|
$
|
17,894
|
|
|
$
|
11,744
|
|
|
Rental and operating-type reagent rental program instruments transferred from inventory to property and equipment (Note 3)
|
|
$
|
14,498
|
|
|
$
|
20,360
|
|
|
$
|
16,313
|
|
NOTE 9. OTHER CURRENT AND LONG-TERM ASSETS
Other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
Customer acquisition costs
|
|
$
|
39,329
|
|
|
$
|
34,515
|
|
|
Prepaid expenses (Note 2)
|
|
31,992
|
|
|
30,314
|
|
|
Taxes receivable
|
|
20,516
|
|
|
14,098
|
|
|
Contract assets
|
|
17,659
|
|
|
9,670
|
|
|
Deferred sales commissions
|
|
5,202
|
|
|
4,464
|
|
|
Other
|
|
10,284
|
|
|
15,159
|
|
|
Other current assets
|
|
$
|
124,982
|
|
|
$
|
108,220
|
|
Other long-term assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
Customer acquisition costs
|
|
$
|
98,117
|
|
|
$
|
89,862
|
|
|
Contract assets
|
|
66,226
|
|
|
31,269
|
|
|
Taxes receivable
|
|
14,960
|
|
|
19,219
|
|
|
Investment in long-term product supply arrangements
|
|
13,657
|
|
|
10,894
|
|
|
Deferred sales commissions
|
|
10,442
|
|
|
9,470
|
|
|
Deferred income taxes
|
|
8,100
|
|
|
8,481
|
|
|
Other
|
|
28,690
|
|
|
20,398
|
|
|
Other long-term assets
|
|
$
|
240,192
|
|
|
$
|
189,593
|
|
NOTE 10. 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 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, 2019, 2018 and 2017. See "Note 4. Acquisitions and Investments" 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 goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50%. 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 assess the fair value of all of our reporting units and compare the fair value of the reporting unit to its carrying value to determine if the carrying value exceeds its fair value, and if a goodwill impairment loss should be recognized. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to assessing the fair value of all of our reporting units and compare the fair value of the reporting unit to carrying value to determine if any impairment is necessary. Doing so does not preclude us from performing the qualitative assessment in any subsequent period.
In the fourth quarter of 2019, we elected to bypass the qualitative approach that allows the assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and instead proceeded directly to assessing the fair value of all of our reporting units and comparing the fair values of the reporting units to the carrying values to determine if any impairment is necessary. 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 loss in a future period.
No goodwill impairments were identified during the years ended December 31, 2019, 2018 or 2017.
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 loss 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 years ended December 31, 2019, 2018, and 2017.
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
|
|
|
|
|
|
Customer-related intangible assets (1)
|
|
3 to 17 years
|
|
Product rights (2)
|
|
5 to 15 years
|
|
Noncompete agreements
|
|
3 to 5 years
|
|
|
|
|
(1)
|
Customer-related intangible assets are comprised of customer lists and customer relationships acquired from third parties.
|
|
|
|
|
(2)
|
Product rights comprise certain technologies, intellectual property, licenses, and trade names acquired from third parties.
|
Intangible assets other than goodwill consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Customer-related intangible assets (1)
|
|
$
|
99,301
|
|
|
$
|
46,801
|
|
|
$
|
52,500
|
|
|
$
|
77,015
|
|
|
$
|
43,352
|
|
|
$
|
33,663
|
|
|
Product rights (2)
|
|
16,130
|
|
|
10,214
|
|
|
5,916
|
|
|
27,060
|
|
|
19,153
|
|
|
7,907
|
|
|
Noncompete agreements
|
|
170
|
|
|
118
|
|
|
52
|
|
|
856
|
|
|
601
|
|
|
255
|
|
|
|
|
$
|
115,601
|
|
|
$
|
57,133
|
|
|
$
|
58,468
|
|
|
$
|
104,931
|
|
|
$
|
63,106
|
|
|
$
|
41,825
|
|
The above table excludes fully amortized intangible assets for the periods presented.
|
|
|
|
(1)
|
Customer-related intangible assets are comprised of customer lists and customer relationships acquired from third parties.
|
|
|
|
|
(2)
|
Product rights comprise certain technologies, intellectual property, licenses, and trade names acquired from third parties.
|
Amortization expense of intangible assets other than goodwill was $9.4 million, $8.9 million, and $9.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
At December 31, 2019, 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)
|
Amortization Expense
|
|
|
|
|
|
2020
|
$
|
9,782
|
|
|
2021
|
8,915
|
|
|
2022
|
7,697
|
|
|
2023
|
5,905
|
|
|
2024
|
4,917
|
|
|
Thereafter
|
21,252
|
|
|
|
$
|
58,468
|
|
The changes in the carrying amount of goodwill for the years ended December 31, 2019, 2018 and 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
CAG
|
|
Water
|
|
LPD
|
|
Other
|
|
Consolidated Total
|
|
Balance as of December 31, 2016
|
|
$
|
146,194
|
|
|
$
|
10,890
|
|
|
$
|
14,613
|
|
|
$
|
6,531
|
|
|
$
|
178,228
|
|
|
Business combinations
|
|
13,541
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,541
|
|
|
Impact of changes in foreign currency exchange rates
|
|
6,501
|
|
|
1,061
|
|
|
542
|
|
|
—
|
|
|
8,104
|
|
|
Balance as of December 31, 2017
|
|
$
|
166,236
|
|
|
$
|
11,951
|
|
|
$
|
15,155
|
|
|
$
|
6,531
|
|
|
$
|
199,873
|
|
|
Business combinations
|
|
20,282
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,282
|
|
|
Impact of changes in foreign currency exchange rates
|
|
(4,132
|
)
|
|
(730
|
)
|
|
(804
|
)
|
|
—
|
|
|
(5,666
|
)
|
|
Balance as of December 31, 2018
|
|
$
|
182,386
|
|
|
$
|
11,221
|
|
|
$
|
14,351
|
|
|
$
|
6,531
|
|
|
$
|
214,489
|
|
|
Business combinations
|
|
24,826
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,826
|
|
|
Impact of changes in foreign currency exchange rates
|
|
138
|
|
|
390
|
|
|
(119
|
)
|
|
—
|
|
|
409
|
|
|
Balance as of December 31, 2019
|
|
$
|
207,350
|
|
|
$
|
11,611
|
|
|
$
|
14,232
|
|
|
$
|
6,531
|
|
|
$
|
239,724
|
|
See "Note 4. Acquisitions and Investments" 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, 2019, 2018 and 2017.
NOTE 11. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
Accrued employee compensation and related expenses
|
|
$
|
127,174
|
|
|
$
|
109,488
|
|
|
Accrued expenses (Note 2)
|
|
86,296
|
|
|
65,212
|
|
|
Accrued customer incentives and refund obligations
|
|
63,079
|
|
|
59,374
|
|
|
Accrued taxes
|
|
31,108
|
|
|
26,609
|
|
|
Current lease liabilities (Notes 2 and 7)
|
|
15,281
|
|
|
—
|
|
|
Accrued liabilities
|
|
$
|
322,938
|
|
|
$
|
260,683
|
|
Other long-term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
Accrued taxes
|
|
$
|
67,463
|
|
|
$
|
66,767
|
|
|
Other accrued long-term expenses (Note 2)
|
|
13,701
|
|
|
18,059
|
|
|
Other long-term liabilities
|
|
$
|
81,164
|
|
|
$
|
84,826
|
|
NOTE 12. DEBT
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, (“Credit Facility”) 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. 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 has been reflected in the current liabilities section of our consolidated balance sheets. At December 31, 2019, we had $288.8 million outstanding under our Credit Facility with a weighted average effective interest rate of 2.78%. At December 31, 2018, we had $398.9 million outstanding under our Credit Facility with a weighted average effective interest rate 3.63%. The funds available under the Credit Facility at December 31, 2019, and December 31, 2018, reflect a further reduction due to the issuance of letters of credit for $1.4 million and $1.3 million, respectively, which were 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% (“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%, based on our leverage ratio. See "Note 18. Hedging Instruments" for a discussion of our derivative instruments and hedging activities. Under the Credit Facility, we pay quarterly commitment fees of 0.075% to 0.25%, 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, 2019, we were in compliance with the covenants of the Credit Facility.
Senior Notes
The following describes all of our currently outstanding unsecured senior notes issued and sold in private placements (collectively, the "Senior Notes"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Principal Amount in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue Date
|
|
Due Date
|
|
Series
|
|
Principal Amount
|
|
Coupon Rate
|
|
Senior Note Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/11/2013
|
|
12/11/2023
|
|
2023 Series A Notes
|
|
$
|
75,000
|
|
|
3.94
|
%
|
|
NY Life 2013 Note Agreement
|
|
12/11/2013
|
|
12/11/2025
|
|
2025 Series B Notes
|
|
$
|
75,000
|
|
|
4.04
|
%
|
|
NY Life 2013 Note Agreement
|
|
9/4/2014
|
|
9/4/2026
|
|
2026 Senior Notes
|
|
$
|
75,000
|
|
|
3.72
|
%
|
|
NY Life 2014 Note Agreement
|
|
7/21/2014
|
|
7/21/2021
|
|
2021 Series A Notes
|
|
$
|
50,000
|
|
|
3.32
|
%
|
|
Prudential 2015 Amended Agreement
|
|
7/21/2014
|
|
7/21/2024
|
|
2024 Series B Notes
|
|
$
|
75,000
|
|
|
3.76
|
%
|
|
Prudential 2015 Amended Agreement
|
|
6/18/2015
|
|
6/18/2025
|
|
2025 Series C Notes
|
|
€
|
88,857
|
|
|
1.785
|
%
|
|
Prudential 2015 Amended Agreement
|
|
2/12/2015
|
|
2/12/2022
|
|
2022 Series A Notes
|
|
$
|
75,000
|
|
|
3.25
|
%
|
|
MetLife 2014 Note Agreement, as Amended
|
|
2/12/2015
|
|
2/12/2027
|
|
2027 Series B Notes
|
|
$
|
75,000
|
|
|
3.72
|
%
|
|
MetLife 2014 Note Agreement, as Amended
|
|
3/14/2019
|
|
3/14/2029
|
|
2029 Series C Notes
|
|
$
|
100,000
|
|
|
4.19
|
%
|
|
MetLife 2014 Note Agreement, as Amended
|
The following narrative represents our Senior Note activity:
NY Life 2013 and 2014 Note Agreements
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 Series A Notes”) and $75 million of 4.04% Series B Senior Notes due December 11, 2025 (the “2025 Series B Notes”) under a Note Purchase Agreement among the Company, New York Life Insurance Company and the accredited institutional purchasers named therein (the “NY Life 2013 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 Senior 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 “NY Life 2014 Note Agreement”).
Prudential 2015 Amended 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 $50 million of 3.32% Series A Senior Notes due July 21, 2021 (the “2021 Series A Notes”) and $75 million of 3.76% Series B Senior Notes due July 21, 2024 (the “2024 Series B 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 “Prudential 2014 Note Agreement”).
In June 2015, we entered into an Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement (the “Prudential 2015 Amended Agreement"), among the Company, Prudential, and the accredited institutional purchasers named therein, which amends and restates the Prudential 2014 Note Agreement. Pursuant to the Prudential 2015 Amended Agreement, we issued and sold through an aggregated private placement an aggregate principal amount of €88.9 million of unsecured 1.785% Series C Senior Notes due June 18, 2025 (the “2025 Series C Notes”).
MetLife 2014 Note Agreement and Amendment
We entered into a Multicurrency Note Purchase and Private Shelf Agreement, dated as of December 19, 2014 (the "MetLife 2014 Note 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 an aggregate principal amount of $150 million of unsecured senior notes consisting of $75 million of our 3.25% Series A Senior Notes having a seven-year term (the
"2022 Series A Notes"), and $75 million of our 3.72% Series B Senior Notes having a twelve-year term ("2027 Series B Notes"). The issuance, sale and purchase of these notes occurred in February 2015.
On March 14, 2019, we amended the MetLife 2014 Note Agreement. Pursuant to the MetLife 2014 Note Agreement, as so amended, we issued and sold through a private placement an aggregate principal amount of $100 million of unsecured senior notes at a 4.19% per annum rate, due March 14, 2029 (the "2029 Series C Notes").
We refer to the MetLife 2014 Agreement, as so amended, together with the NY Life 2013 Note Agreement, NY Life 2014 Note Agreement, and Prudential 2015 Amended Note Agreement, collectively, as the "Senior Note Agreements."
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. 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, 2019, 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.
The MetLife 2014 Note Agreement, as amended on March 14, 2019, provides for an uncommitted shelf facility by which we may request until December 20, 2021, that MetLife purchase up to $50 million of additional senior notes of the Company at an interest rate to be determined at the time of purchase and with a maturity date not to exceed fifteen years.
We used the net proceeds from the issuances and sale of the Senior Notes for general corporate purposes. Total Company interest paid on all debt for the periods ended December 31, 2019, 2018 and 2017, was $29.7 million, $34.7 million, and $37.6 million, respectively.
Annual principal payments on long-term debt at December 31, 2019, are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
|
|
|
|
|
2020
|
|
$
|
—
|
|
|
2021
|
|
50,000
|
|
|
2022
|
|
75,000
|
|
|
2023
|
|
75,000
|
|
|
2024
|
|
75,000
|
|
|
Thereafter
|
|
424,422
|
|
|
|
|
$
|
699,422
|
|
NOTE 13. INCOME TAXES
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.
The 2017 Tax Act was enacted on December 22, 2017, and includes significant changes to the U.S. corporate tax system. Effective January 1, 2018, the 2017 Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, 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 is payable over eight years.
Earnings before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
377,964
|
|
|
$
|
337,437
|
|
|
$
|
268,714
|
|
|
International
|
|
144,254
|
|
|
120,305
|
|
|
112,343
|
|
|
|
|
$
|
522,218
|
|
|
$
|
457,742
|
|
|
$
|
381,057
|
|
The provision (benefit) for income taxes comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
52,194
|
|
|
$
|
47,130
|
|
|
$
|
92,453
|
|
|
State
|
|
11,967
|
|
|
10,415
|
|
|
9,258
|
|
|
International
|
|
24,239
|
|
|
22,015
|
|
|
23,993
|
|
|
|
|
88,400
|
|
|
79,560
|
|
|
125,704
|
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
4,826
|
|
|
3,970
|
|
|
(1,201
|
)
|
|
State
|
|
269
|
|
|
(937
|
)
|
|
(4,102
|
)
|
|
International
|
|
931
|
|
|
(1,898
|
)
|
|
(2,613
|
)
|
|
|
|
6,026
|
|
|
1,135
|
|
|
(7,916
|
)
|
|
|
|
$
|
94,426
|
|
|
$
|
80,695
|
|
|
$
|
117,788
|
|
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,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
|
State income tax, net of federal tax benefit
|
|
2.3
|
|
|
2.6
|
|
|
1.9
|
|
|
Taxation on international earnings
|
|
(1.1
|
)
|
|
(0.8
|
)
|
|
(5.5
|
)
|
|
Foreign derived intangible income
|
|
(1.1
|
)
|
|
(1.3
|
)
|
|
—
|
|
|
Share-based compensation from settlements
|
|
(3.6
|
)
|
|
(4.7
|
)
|
|
(7.3
|
)
|
|
Domestic manufacturing exclusions
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
Research and development credit
|
|
(0.8
|
)
|
|
(0.9
|
)
|
|
(0.9
|
)
|
|
Impact of the 2017 Tax Act
|
|
—
|
|
|
0.5
|
|
|
9.4
|
|
|
State income tax carryforwards
|
|
—
|
|
|
(0.2
|
)
|
|
(1.4
|
)
|
|
Other, net
|
|
1.4
|
|
|
1.4
|
|
|
0.8
|
|
|
Effective tax rate
|
|
18.1
|
%
|
|
17.6
|
%
|
|
30.9
|
%
|
Our effective income tax rate was 18.1% for the year ended December 31, 2019, and 17.6% for the year ended December 31, 2018. Our effective income tax rate for the year ended December 31, 2019 was higher primarily due to lower tax benefits related to share-based compensation, partially offset by a nonrecurring item recorded in the first quarter of 2018, that resulted from the 2017 Tax Cut and Jobs Act.
Our effective income tax rate was 17.6% for the year ended December 31, 2018, and 30.9% for the year ended December 31, 2017. Our effective income tax rate for the year ended December 31, 2018, was lower primarily related to the reduction in the 2018 U.S. statutory tax rate to 21% from 35%, as well as the comparison to a nonrecurring charge resulting from the 2017 Tax Act for the year ended December 31, 2017. These favorable impacts were offset by lower tax benefits related to share-based compensation and the prior year utilization of foreign tax credits.
Income taxes paid, net of refunds received, for the periods ended December 31, 2019, 2018 and 2017 were $88.0 million, $69.7 million, and $81.2 million, respectively.
We have received a tax ruling from the Netherlands that documents our mutual understanding of how existing tax laws apply to our circumstances. This ruling expires as of December 31, 2022, and we have been informed that it will not be renewed due to changes to the advance ruling policy in the Netherlands. While the absence of an advance agreement does not preclude our ability to continue to apply existing tax laws in the same manner as allowed by the existing ruling, the lack of such agreement could create uncertainty as to our future tax rate. Primarily as a result of this tax ruling, our net income was higher by $13.7 million, $9.2 million, and $8.9 million for the years ended December 31, 2019, 2018, and 2017, 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, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
25,296
|
|
|
$
|
22,652
|
|
|
Accounts receivable reserves
|
|
617
|
|
|
776
|
|
|
Deferred revenue
|
|
6,073
|
|
|
7,637
|
|
|
Inventory basis differences
|
|
3,315
|
|
|
2,787
|
|
|
Property-based differences
|
|
3,113
|
|
|
1,652
|
|
|
Share-based compensation
|
|
10,593
|
|
|
9,267
|
|
|
Other
|
|
1,160
|
|
|
2,314
|
|
|
Net operating loss carryforwards
|
|
4,045
|
|
|
3,208
|
|
|
Tax credit carryforwards
|
|
12,276
|
|
|
10,226
|
|
|
Unrealized losses on foreign currency exchange contracts and investments
|
|
20
|
|
|
404
|
|
|
Total assets
|
|
66,508
|
|
|
60,923
|
|
|
Valuation allowance
|
|
(9,454
|
)
|
|
(6,212
|
)
|
|
Total assets, net of valuation allowance
|
|
57,054
|
|
|
54,711
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Customer acquisition costs
|
|
(28,519
|
)
|
|
(24,323
|
)
|
|
Property-based differences
|
|
(33,802
|
)
|
|
(32,494
|
)
|
|
Intangible asset basis differences
|
|
(14,513
|
)
|
|
(13,454
|
)
|
|
Other
|
|
(3,961
|
)
|
|
(3,319
|
)
|
|
Unrealized gains on foreign currency exchange contracts and investments
|
|
(1,183
|
)
|
|
(1,907
|
)
|
|
Total liabilities
|
|
(81,978
|
)
|
|
(75,497
|
)
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(24,924
|
)
|
|
$
|
(20,786
|
)
|
As of December 31, 2019, we have recorded a valuation allowance of $9.5 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.
As of December 31, 2019, we have NOL’s in certain state and international jurisdictions of approximately $17.0 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.
The following table summarizes the changes in unrecognized tax positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Total amounts of unrecognized tax benefits, beginning of period
|
|
$
|
24,247
|
|
|
$
|
21,417
|
|
|
$
|
18,463
|
|
|
Gross (decreases) increases in unrecognized tax positions as a result of tax positions taken during a prior period
|
|
(276
|
)
|
|
2,991
|
|
|
74
|
|
|
Gross increases in unrecognized tax positions as a result of tax positions taken in the current period
|
|
4,083
|
|
|
461
|
|
|
4,681
|
|
|
Decreases in unrecognized tax positions relating to settlements with taxing authorities
|
|
—
|
|
|
—
|
|
|
(713
|
)
|
|
Decreases in unrecognized tax positions as a result of a lapse of the applicable statutes of limitations
|
|
(1,213
|
)
|
|
(622
|
)
|
|
(1,088
|
)
|
|
Total amounts of unrecognized tax benefits, end of period
|
|
$
|
26,841
|
|
|
$
|
24,247
|
|
|
$
|
21,417
|
|
The total amount of unrecognized tax benefits at December 31, 2019 and December 31, 2018, was $26.8 million and $24.2 million, respectively. Of the total unrecognized tax benefits at December 31, 2019 and 2018, $21.2 million and $18.3 million, respectively, comprise unrecognized tax positions that would, if recognized, affect our effective tax rate.
During the years ended December 31, 2019, 2018 and 2017, we recorded interest expense and penalties of $1.8 million, $1.2 million, and $0.9 million, respectively, as income tax expense in our consolidated statement of income. At December 31, 2019 and 2018, we had $3.6 million and $2.1 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 in various jurisdictions. We anticipate that these examinations will be concluded within the next two years. With few exceptions, we are no longer subject to income tax examinations in any jurisdiction in which we conduct significant taxable activities for years before 2014.
NOTE 14. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to our stockholders by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and assumed issuance of unvested restricted stock units and unvested deferred stock units using the treasury stock method unless the effect is anti-dilutive. The treasury stock method assumes that proceeds, including cash received from the exercise of employee stock options and the total unrecognized compensation expense for unvested share-based compensation awards, would be used to purchase our common stock at the average market price during the period. Vested deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed and issuance is not contingent. See "Note 5. Share-Based Compensation" for additional information regarding deferred stock units.
The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share:
|
|
86,115
|
|
|
86,864
|
|
|
87,769
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding for diluted earnings per share:
|
|
|
|
|
|
|
|
Shares outstanding for basic earnings per share
|
|
86,115
|
|
|
86,864
|
|
|
87,769
|
|
|
Dilutive effect of share-based payment awards
|
|
1,427
|
|
|
1,606
|
|
|
1,798
|
|
|
|
|
87,542
|
|
|
88,470
|
|
|
89,567
|
|
Certain options to acquire shares have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. The following table presents information concerning those anti-dilutive options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares underlying anti-dilutive options
|
|
200
|
|
|
287
|
|
|
327
|
|
NOTE 15. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
See "Note 7. Leases", for more information regarding our lease commitments.
We are required to annually purchase a minimum amount of inventory from certain suppliers. Through 2025, we have a total of $5.3 million in minimum purchase commitments under these arrangements.
Contingencies
We are subject to claims that may arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. We accrue for loss contingencies when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. However, the results of legal actions cannot be predicted with certainty, and therefore our actual losses with respect to these contingencies could exceed our accruals. At December 31, 2019, our accruals with respect to actual and threatened litigation were not material.
We self-insure costs associated with health, workers’ compensation, auto, 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.
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 2019, 2018, and 2017. We recognized U.S. employee healthcare claim expense of $59.3 million, $52.7 million, and $47.2 million for the years ended December 31, 2019, 2018, and 2017, respectively, 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, 2019 and 2018, was approximately $5.0 million.
Workers’ compensation and automobile claim expenses recognized during the years ended December 31, 2019, 2018 and 2017 and our respective liability for such claims as of December 31, 2019, 2018 and 2017 were not material. For the years ended on or prior to December 31, 2017, 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, 2019. As of December 31, 2019, we had outstanding letters of credit totaling $1.4 million to the insurance companies as security for the 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, 2019, other than following a change in control, we would have had an obligation for salaries and benefits of approximately $1.8 million under such agreement. In addition, the agreement provides for continued vesting of his outstanding equity awards for a period of two years, which would accelerate approximately $3.8 million of share-based compensation expense as of December 31, 2019.
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, 2019, we would have had aggregate obligations of approximately $30.7 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.
From time to time, we have received notices alleging that our products infringe third-party proprietary rights, although we are not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that we will prevail in any infringement proceedings that may be commenced against us. If we lose any such litigation, we may be stopped from selling certain products and/or we may be required to pay damages as a result of the litigation.
Guarantees
We enter into agreements with third parties in the ordinary course of business under which we are obligated to indemnify such third parties for and against various risks and losses. The precise terms of such indemnities vary with the nature of the agreement. In many cases, we limit the maximum amount of our indemnification obligations, but in some cases those obligations may be theoretically unlimited. We have not incurred material expenses in discharging any of these indemnification obligations, and based on our analysis of the nature of the risks involved, we believe that the fair value of potential indemnification under these agreements is minimal. Accordingly, we have recorded no liabilities for these obligations at December 31, 2019 and 2018.
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, 2019 and 2018, we do not have any material pre-acquisition liabilities recorded.
NOTE 16. 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 improve producer efficiency, 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 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 (the "CODM"), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. Our reportable segments include: 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 biomedical analytics 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 producer efficiency, and to ensure the quality and safety of milk and food. OPTI Medical manufactures and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.
Intersegment revenues, which are not included in the table below, were not material for the years ended December 31, 2019, 2018 and 2017.
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 which primarily consist of our R&D function, regional and country expenses, certain foreign currency revaluation and settlement 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 also captured within Unallocated Amounts.
The following is a summary of segment performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
CAG
|
|
Water
|
|
LPD
|
|
Other
|
|
Unallocated Amounts
|
|
Consolidated Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,119,183
|
|
|
$
|
132,850
|
|
|
$
|
132,635
|
|
|
$
|
22,240
|
|
|
$
|
—
|
|
|
$
|
2,406,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
491,602
|
|
|
$
|
62,435
|
|
|
$
|
25,374
|
|
|
$
|
4,940
|
|
|
$
|
(31,505
|
)
|
|
$
|
552,846
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(30,628
|
)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
522,218
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
94,426
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
427,792
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
$
|
427,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
77,620
|
|
|
$
|
2,794
|
|
|
$
|
4,007
|
|
|
$
|
3,590
|
|
|
$
|
—
|
|
|
$
|
88,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,935,428
|
|
|
$
|
125,198
|
|
|
$
|
130,581
|
|
|
$
|
22,035
|
|
|
$
|
—
|
|
|
$
|
2,213,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
429,483
|
|
|
$
|
56,607
|
|
|
$
|
19,412
|
|
|
$
|
3,729
|
|
|
$
|
(17,896
|
)
|
|
$
|
491,335
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(33,593
|
)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
457,742
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
80,695
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
377,047
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
$
|
377,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
72,789
|
|
|
$
|
2,592
|
|
|
$
|
4,094
|
|
|
$
|
3,703
|
|
|
$
|
—
|
|
|
$
|
83,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,703,377
|
|
|
$
|
114,395
|
|
|
$
|
128,481
|
|
|
$
|
22,805
|
|
|
$
|
—
|
|
|
$
|
1,969,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
363,557
|
|
|
$
|
50,616
|
|
|
$
|
16,464
|
|
|
$
|
4,837
|
|
|
$
|
(22,446
|
)
|
|
$
|
413,028
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(31,971
|
)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
381,057
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
117,788
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
263,269
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
$
|
263,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
71,835
|
|
|
$
|
2,856
|
|
|
$
|
5,052
|
|
|
$
|
3,397
|
|
|
$
|
—
|
|
|
$
|
83,140
|
|
See "Note 3. Revenue Recognition" for a summary of disaggregated revenue by reportable segment and by major product and service category for the years ended December 31, 2019, 2018 and 2017.
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)
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Americas
|
|
|
|
|
|
United States
|
|
$
|
401,248
|
|
|
$
|
348,240
|
|
|
Brazil
|
|
22,274
|
|
|
16,735
|
|
|
Canada
|
|
7,784
|
|
|
1,859
|
|
|
|
|
431,306
|
|
|
366,834
|
|
|
Europe, the Middle East and Africa
|
|
|
|
|
|
Germany
|
|
52,032
|
|
|
25,036
|
|
|
United Kingdom
|
|
12,114
|
|
|
11,517
|
|
|
Netherlands
|
|
13,586
|
|
|
10,273
|
|
|
France
|
|
2,061
|
|
|
2,130
|
|
|
Switzerland
|
|
3,508
|
|
|
2,742
|
|
|
Other
|
|
3,395
|
|
|
3,763
|
|
|
|
|
86,696
|
|
|
55,461
|
|
|
Asia Pacific Region
|
|
|
|
|
|
Japan
|
|
5,409
|
|
|
5,296
|
|
|
Australia
|
|
4,088
|
|
|
4,257
|
|
|
Other
|
|
6,346
|
|
|
5,422
|
|
|
|
|
15,843
|
|
|
14,975
|
|
|
Total
|
|
$
|
533,845
|
|
|
$
|
437,270
|
|
NOTE 17. 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
|
Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers between Level 1 and Level 2 or transfers in or out of Level 3 of the fair value hierarchy during the years ended December 31, 2019 and 2018.
Our cross currency swap contracts are measured at fair value on a recurring basis in our accompanying consolidated balance sheets. We measure the fair value of our cross currency swap contracts classified as derivative instruments using prevailing market conditions as of the close of business on each balance sheet date. The product of this calculation is then adjusted for counterparty risk.
Our foreign currency exchange contracts are measured at fair value on a recurring basis in our accompanying consolidated balance sheets. We measure the fair value of our foreign currency exchange contracts classified as derivative
instruments using an income approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.
The amounts outstanding under our unsecured revolving credit facility ("Credit Facility" or “line of credit”) and senior notes (“long-term debt”) are measured at carrying value in our 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, 2019, the estimated fair value and carrying value of our long-term debt were $753.6 million and $699.4 million, respectively. At December 31, 2018, the estimated fair value and carrying value of our long-term debt were $607.3 million and $601.8 million, respectively.
The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (1)
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
|
Equity mutual funds (2)
|
|
$
|
1,676
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,676
|
|
|
Cross currency swaps (3)
|
|
$
|
—
|
|
|
$
|
4,559
|
|
|
$
|
—
|
|
|
$
|
4,559
|
|
|
Foreign currency exchange contracts (3)
|
|
$
|
—
|
|
|
$
|
1,791
|
|
|
$
|
—
|
|
|
$
|
1,791
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts (3)
|
|
$
|
—
|
|
|
$
|
2,886
|
|
|
$
|
—
|
|
|
$
|
2,886
|
|
|
Deferred compensation (4)
|
|
$
|
1,676
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
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, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (1)
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250
|
|
|
Equity mutual funds (2)
|
|
$
|
1,673
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,673
|
|
|
Cross currency swaps (3)
|
|
$
|
—
|
|
|
$
|
1,789
|
|
|
$
|
—
|
|
|
$
|
1,789
|
|
|
Foreign currency exchange contracts (3)
|
|
$
|
—
|
|
|
$
|
8,163
|
|
|
$
|
—
|
|
|
$
|
8,163
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts (3)
|
|
$
|
—
|
|
|
$
|
603
|
|
|
$
|
—
|
|
|
$
|
603
|
|
|
Deferred compensation (4)
|
|
$
|
1,673
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,673
|
|
|
|
|
|
(1)
|
Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of December 31, 2019, and December 31, 2018, consisted of demand deposits.
|
|
|
|
|
(2)
|
Equity mutual funds relate to a deferred compensation plan that was assumed as part of a previous business combination. This amount is included within other long-term assets. See footnote (4) below for a discussion of the related deferred compensation liability.
|
|
|
|
|
(3)
|
Cross currency swaps and foreign currency exchange contracts are included within other current assets; other long-term assets; accrued liabilities; or other long-term liabilities depending on the gain (loss) position and anticipated settlement date.
|
|
|
|
|
(4)
|
A deferred compensation plan assumed as part of a previous business combination is included within accrued liabilities and other long-term liabilities. The fair value of our deferred compensation plan is indexed to the performance of the underlying equity mutual funds discussed in footnote (2) above.
|
The estimated fair values of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate carrying value due to their short maturity.
NOTE 18. HEDGING INSTRUMENTS
Disclosure within this note is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging instruments”), how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations and cash flows.
We are exposed to certain risks related to our ongoing business operations. The primary risk that we currently manage by using hedging instruments is foreign currency exchange risk. We may also enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with borrowings under our variable-rate Credit Facility.
Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts, cross currency swaps or foreign-denominated debt issuances to minimize the impact of foreign currency fluctuations associated with specific balance sheet exposures, including net investments in certain foreign subsidiaries.
The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions, including transactions denominated in euro, British pound, Japanese yen, Canadian dollar, and Australian dollar. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with well-capitalized multinational financial institutions, and we do not hold or engage in transactions involving 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.
We recognize all hedging instruments on the balance sheet at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment must be recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See “Note 20. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on the consolidated statements of income for the years ended December 31, 2019, 2018 and 2017.
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 are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.
See "Note 17. Fair Value Measurements" for additional information regarding the fair value of our derivative instruments and "Note 20. Accumulated Other Comprehensive Income" for additional information regarding the effect of derivative instruments designated as cash flow hedges on the consolidated statements of income.
Cash Flow Hedges
We have designated our foreign currency exchange contracts as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.
We did not de-designate any instruments from hedge accounting treatment during the years ended December 31, 2019, 2018 and 2017. Gains and losses related to hedge ineffectiveness recognized in earnings during the years ended December 31, 2019, 2018 and 2017 were not material. At December 31, 2019, the estimated amount of net losses, net of tax, which are
expected to be reclassified out of AOCI and into earnings within the next twelve months is $0.7 million if exchange rates do not fluctuate from the levels at December 31, 2019.
We hedge approximately 85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, Australian dollar, and, in prior years, the 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 $210.9 million, and $190.9 million at December 31, 2019 and 2018, respectively.
The following table presents the effect of cash flow hedge accounting on our consolidated statements of income and comprehensive income, and provides information regarding the location and amounts of pretax gains or losses of derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Financial statement line items in which effects of cash flow hedges are recorded
|
|
Cost of revenue
|
|
$
|
1,041,359
|
|
|
$
|
971,700
|
|
|
$
|
871,676
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive income into income
|
|
|
|
$
|
10,628
|
|
|
$
|
(976
|
)
|
|
$
|
27
|
|
Net Investment Hedges, Euro-Denominated Notes
In June 2015, we issued and sold through a private placement an aggregate principal amount of €88.9 million in euro-denominated 1.785% Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded gains of $1.8 million and $3.9 million, and a loss of $8.3 million, net of tax, within AOCI as a result of this net investment hedge for the years ended December 31, 2019, 2018, and 2017, respectively. The related cumulative unrealized gain recorded at December 31, 2019, 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 12. Debt" to the consolidated financial statements included in this Annual Report on Form 10-K for further information regarding the issuance of these euro-denominated notes.
Net Investment Hedges, Cross Currency Swaps
During May 2018, January 2019, March 2019, and November 2019, we entered into cross currency swap contracts as a hedge of our net investment in foreign operations to offset foreign currency translation gains and losses on the net investment. The cross currency swaps have a maturity date of June 30, 2023. At maturity of the cross currency swap contracts, we will deliver the notional amount of €90.0 million and will receive approximately $104.5 million from the counterparties. The change in fair value of the cross currency swap contracts are recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. During the years ended December 31, 2019 and 2018, we recorded gains of $2.1 million and $1.4 million, net of tax, within AOCI as a result of these net investment hedges, respectively. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swaps. This interest rate component is excluded from the assessment of hedge effectiveness and, thus is recognized as a reduction to interest expense over the life of the hedge instrument. We recognized approximately $2.4 million and $1.0 million related to the excluded component as a reduction of interest expense for the years ended December 31, 2019 and 2018, respectively.
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 derivative instruments, unless otherwise noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Hedging Assets
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Derivatives and non-derivatives designated as hedging instruments
|
|
Balance Sheet Classification
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other current assets
|
|
$
|
1,791
|
|
|
$
|
8,163
|
|
|
Cross currency swaps
|
|
Other long-term assets
|
|
4,559
|
|
|
1,789
|
|
|
Total derivative instruments presented as hedge instruments on the balance sheet
|
|
|
|
6,350
|
|
|
9,952
|
|
|
Gross amounts subject to master netting arrangements not offset on the balance sheet
|
|
|
|
(1,354
|
)
|
|
(603
|
)
|
|
Net amount
|
|
|
|
$
|
4,996
|
|
|
$
|
9,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Hedging Liabilities
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Derivatives and non-derivatives designated as hedging instruments
|
|
Balance Sheet Classification
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Accrued liabilities
|
|
$
|
2,886
|
|
|
$
|
603
|
|
|
Total derivative instruments presented as cash flow hedges on the balance sheet
|
|
|
|
2,886
|
|
|
603
|
|
|
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet (1)
|
|
Long-term debt
|
|
99,422
|
|
|
101,777
|
|
|
Total hedging instruments presented on the balance sheet
|
|
102,308
|
|
|
102,380
|
|
|
Gross amounts subject to master netting arrangements not offset on the balance sheet
|
|
|
|
(1,354
|
)
|
|
(603
|
)
|
|
Net amount
|
|
|
|
$
|
100,954
|
|
|
$
|
101,777
|
|
|
|
|
|
(1)
|
Amounts represent reported carrying amounts of our foreign currency denominated debt. See "Note 17. Fair Value Measurements" for information regarding the fair value of our long-term debt.
|
NOTE 19. REPURCHASES OF COMMON STOCK
As of December 31, 2019, 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 stockholders, 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, 2019, there are approximately 2.0 million remaining shares available for repurchase under this authorization.
We primarily acquire shares by repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required statutory withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders. We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock issued during the years ended December 31, 2019, 2018 and 2017, was not material.
The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrenders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased in the open market
|
|
1,215
|
|
|
1,773
|
|
|
1,749
|
|
|
Shares acquired through employee surrenders for statutory tax withholding
|
|
39
|
|
|
52
|
|
|
57
|
|
|
Total shares repurchased
|
|
1,254
|
|
|
1,825
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
Cost of shares repurchased in the open market
|
|
$
|
303,838
|
|
|
$
|
368,691
|
|
|
$
|
270,297
|
|
|
Cost of shares for employee surrenders
|
|
8,054
|
|
|
9,375
|
|
|
8,074
|
|
|
Total cost of shares
|
|
$
|
311,892
|
|
|
$
|
378,066
|
|
|
$
|
278,371
|
|
|
|
|
|
|
|
|
|
|
Average cost per share - open market repurchases
|
|
$
|
249.84
|
|
|
$
|
207.92
|
|
|
$
|
154.51
|
|
|
Average cost per share - employee surrenders
|
|
$
|
210.10
|
|
|
$
|
182.18
|
|
|
$
|
142.55
|
|
|
Average cost per share - total
|
|
$
|
248.62
|
|
|
$
|
207.19
|
|
|
$
|
154.13
|
|
NOTE 20. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in AOCI, net of tax, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, 2019 and 2018
|
|
|
|
|
|
Unrealized (Loss) Gain on Cash Flow Hedges, Net of Tax
|
|
Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax
|
|
|
|
|
|
(in thousands)
|
|
Unrealized (Loss) Gain on Investments, Net of Tax
|
|
Foreign Currency Exchange Contracts
|
|
Euro-Denominated Notes
|
|
Cross Currency Swaps
|
|
Cumulative Translation Adjustment
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
(22
|
)
|
|
$
|
(5,219
|
)
|
|
$
|
(4,311
|
)
|
|
$
|
—
|
|
|
$
|
(26,918
|
)
|
|
$
|
(36,470
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
|
(135
|
)
|
|
10,659
|
|
|
3,917
|
|
|
1,360
|
|
|
(21,911
|
)
|
|
(6,110
|
)
|
|
Losses reclassified from accumulated other comprehensive income
|
|
—
|
|
|
789
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
789
|
|
|
Balance as of December 31, 2018
|
|
(157
|
)
|
|
6,229
|
|
|
(394
|
)
|
|
1,360
|
|
|
(48,829
|
)
|
|
(41,791
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
267
|
|
|
1,196
|
|
|
1,790
|
|
|
2,107
|
|
|
(1,590
|
)
|
|
3,770
|
|
|
Gains reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(8,161
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,161
|
)
|
|
Balance as of December 31, 2019
|
|
$
|
110
|
|
|
$
|
(736
|
)
|
|
$
|
1,396
|
|
|
$
|
3,467
|
|
|
$
|
(50,419
|
)
|
|
$
|
(46,182
|
)
|
The following table presents components and amounts reclassified out of AOCI to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Affected Line Item in the Statements of Income
|
|
Amounts Reclassified from AOCI for the Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative instruments included in net income:
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Cost of revenue
|
|
$
|
10,628
|
|
|
$
|
(976
|
)
|
|
$
|
27
|
|
|
|
|
Tax expense (benefit)
|
|
2,467
|
|
|
(187
|
)
|
|
224
|
|
|
|
|
Gains (losses), net of tax
|
|
$
|
8,161
|
|
|
$
|
(789
|
)
|
|
$
|
(197
|
)
|
NOTE 21. 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, 2019 and 2018.
NOTE 22. 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. Beginning January 1, 2018, we matched a portion of these contributions, not to exceed 5% of participants’ eligible compensation. Prior to January 1, 2018, we matched a portion of these contributions, not to exceed 4% of participants' eligible compensation. We matched $21.1 million, $19.0 million, and $13.8 million for the years ended December 31, 2019, 2018 and 2017, 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 2019, 2018 or 2017.
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 23. SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data (1) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
576,056
|
|
|
$
|
620,103
|
|
|
$
|
605,303
|
|
|
$
|
605,446
|
|
|
Gross profit
|
|
$
|
331,597
|
|
|
$
|
357,853
|
|
|
$
|
344,950
|
|
|
$
|
331,149
|
|
|
Operating income
|
|
$
|
133,138
|
|
|
$
|
164,275
|
|
|
$
|
139,802
|
|
|
$
|
115,631
|
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
$
|
102,681
|
|
|
$
|
125,706
|
|
|
$
|
108,837
|
|
|
$
|
90,496
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.19
|
|
|
$
|
1.46
|
|
|
$
|
1.26
|
|
|
$
|
1.05
|
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
1.43
|
|
|
$
|
1.24
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
537,656
|
|
|
$
|
580,752
|
|
|
$
|
545,448
|
|
|
$
|
549,386
|
|
|
Gross profit
|
|
$
|
303,099
|
|
|
$
|
332,439
|
|
|
$
|
305,643
|
|
|
$
|
300,361
|
|
|
Operating income
|
|
$
|
113,044
|
|
|
$
|
145,594
|
|
|
$
|
117,350
|
|
|
$
|
115,347
|
|
|
Net income attributable to IDEXX Laboratories, Inc. stockholders
|
|
$
|
89,451
|
|
|
$
|
108,691
|
|
|
$
|
93,251
|
|
|
$
|
85,638
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.02
|
|
|
$
|
1.25
|
|
|
$
|
1.07
|
|
|
$
|
0.99
|
|
|
Diluted
|
|
$
|
1.01
|
|
|
$
|
1.23
|
|
|
$
|
1.05
|
|
|
$
|
0.98
|
|
|
|
|
|
(1)
|
Amounts presented may not recalculate to full-year totals due to rounding.
|