UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2021
OR
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 000-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (ZIP Code) | ||||||||||
(Registrant’s telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant’s Common Stock, $0.10 par value per share, was 85,280,654 , on April 29, 2021.
GLOSSARY OF TERMS AND SELECTED ABBREVIATIONS
In order to aid the reader, we have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q below:
| Term/ Abbreviation | Definition | ||||
| AOCI | Accumulated other comprehensive income or loss | ||||
| CAG | Companion Animal Group, a reporting segment that provides veterinarians diagnostic products and services and information management solutions that enhance the health and well-being of pets. | ||||
| Credit Facility | Our $1 billion unsecured revolving credit facility, also referred to as line of credit. | ||||
| Clinical visits | The reason for the visit involves an interaction between a clinician and a pet, including wellness and non-wellness visit types. | ||||
| FASB | U.S. Financial Accounting Standards Board | ||||
| LPD | Livestock, Poultry and Dairy, a reporting segment that provides diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer efficiency. | ||||
| Non-wellness visits | Patient visits where the reason for the visit is sickness, procedure, or monitoring. | ||||
| OPTI Medical | OPTI Medical Systems, Inc., a wholly-owned subsidiary of IDEXX Laboratories Inc., located in Roswell, Georgia. This business provides point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable products) for the human medical diagnostics market, as well as COVID-19 testing products and services. The Roswell facility also manufactures electrolytes slides (instrument consumables) to run Catalyst One®, Catalyst Dx®, and blood gas analyzers and consumables for the veterinary market; also referred to as OPTI. | ||||
| Organic revenue growth | A non-GAAP financial measure and represents the percentage change in revenue, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. | ||||
| PCR | Polymerase chain reaction, a technique used to amplify small segments of DNA | ||||
| R&D | Research and Development | ||||
| Reported revenue growth | Represents the percentage change in revenue reported in accordance with U.S. GAAP, as compared to the same period in the prior year. | ||||
| SaaS | Software-as-a-service | ||||
| SEC | U.S. Securities and Exchange Commission | ||||
| Senior Note Agreements | Note purchase agreements for the private placement of senior notes, referred to as senior notes or long-term debt. | ||||
| U.S. GAAP | Accounting principles generally accepted in the United States of America | ||||
| Water | Water, a reporting segment that provides water microbiology testing products. | ||||
| Wellness visits | Patient visits where the reason for the visit is an annual exam, vaccination, or routine check-up. | ||||
IDEXX LABORATORIES, INC.
Quarterly Report on Form 10-Q
Table of Contents
| Item No. | Page | |||||||
| PART I—FINANCIAL INFORMATION | ||||||||
| PART II—OTHER INFORMATION | ||||||||
PART I— FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-Term Assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other long-term assets | |||||||||||
| Total long-term assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current portion of deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long-Term Liabilities: | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Long-term deferred revenue, net of current portion | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and Contingencies (Note 15) | |||||||||||
| Stockholders’ Equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Deferred stock units: Outstanding: | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Total IDEXX Laboratories, Inc. stockholders’ equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenue: | |||||||||||
| Product revenue | $ | $ | |||||||||
| Service revenue | |||||||||||
| Total revenue | |||||||||||
| Cost of Revenue: | |||||||||||
| Cost of product revenue | |||||||||||
| Cost of service revenue | |||||||||||
| Total cost of revenue | |||||||||||
| Gross profit | |||||||||||
| Expenses: | |||||||||||
| Sales and marketing | |||||||||||
| General and administrative | |||||||||||
| Research and development | |||||||||||
| Income from operations | |||||||||||
| Interest expense | ( | ( | |||||||||
| Interest income | |||||||||||
| Income before provision for income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | |||||||||||
| Less: Net income attributable to noncontrolling interest | |||||||||||
| Net income attributable to IDEXX Laboratories, Inc. stockholders | $ | $ | |||||||||
| Earnings per Share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted Average Shares Outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||
Unrealized gain on Euro-denominated notes, net of tax expense of $ | |||||||||||
Unrealized gain (loss) on investments, net of tax expense (benefit) of $ | ( | ||||||||||
| Unrealized gain (loss) on derivative instruments: | |||||||||||
Unrealized gain on foreign currency exchange contracts, net of tax expense of $ | |||||||||||
Unrealized gain on cross currency swaps, net of tax expense of $ | |||||||||||
Reclassification adjustment for loss (gain) included in net income, net of tax benefit (expense) of $ | ( | ||||||||||
| Unrealized gain on derivative instruments | |||||||||||
| Other comprehensive (loss), net of tax | ( | ( | |||||||||
| Comprehensive income | |||||||||||
| Less: Comprehensive income attributable to noncontrolling interest | |||||||||||
| Comprehensive income attributable to IDEXX Laboratories, Inc. | $ | $ | |||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
(Unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | $ | Additional Paid-in Capital | Deferred Stock Units | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Treasury Stock | Noncontrolling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock, net | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under stock plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting changes | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under stock plans | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
6
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for credit losses | |||||||||||
| Deferred income taxes | |||||||||||
| Share-based compensation expense | |||||||||||
| Other | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Deferred revenue | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Acquisition of intangible assets and equity investment | ( | ||||||||||
| Acquisitions of a business, net of cash acquired | ( | ||||||||||
| Net cash used by investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Borrowings on revolving credit facilities, net | |||||||||||
| Repurchases of common stock, net | ( | ( | |||||||||
| Proceeds from exercises of stock options and employee stock purchase plans | |||||||||||
| Shares withheld for statutory tax withholding on restricted stock | ( | ( | |||||||||
| Net cash (used) provided by financing activities | ( | ||||||||||
| Net effect of changes in exchange rates on cash | ( | ( | |||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental Cash Flow Information: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Unpaid property and equipment, reflected in accounts payable and accrued liabilities | $ | $ | |||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements of IDEXX Laboratories, Inc. and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of this Quarterly Report on Form 10-Q. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “IDEXX,” the “Company,” “we,” “our,” or “us” refer to IDEXX Laboratories, Inc. and its subsidiaries.
The accompanying unaudited condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries. We do not have any variable interest entities for which we are the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. All such adjustments are of a recurring nature. The consolidated balance sheet data at December 31, 2020, was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three months ended March 31, 2021, are not necessarily indicative of the results to be expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and our Annual Report on Form 10-K for the year ended December 31, 2020, (the “2020 Annual Report”) filed with the SEC.
The preparation of our condensed consolidated financial statements requires us to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments, and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenues and expenses.
We have included certain terms and abbreviations used throughout this Quarterly Report on Form 10-Q in the “Glossary of Terms and Selected Abbreviations.”
NOTE 2. ACCOUNTING POLICIES
Significant Accounting Policies
The significant accounting policies used in preparation of these unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021, are consistent with those discussed in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in our 2020 Annual Report, except as noted below.
New Accounting Pronouncements Adopted
Effective January 1, 2021, we adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new guidance is intended to simplify the accounting for income taxes by removing certain exceptions and by updating accounting requirements around goodwill recognized for tax purposes and the allocation of current and deferred tax expense among legal entities, among other minor changes. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The relief offered by this
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NOTE 3. REVENUE RECOGNITION
Our revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To accurately present the consideration received in exchange for promised products or services, we apply the five-step model outlined below:
1.Identification of a contract or agreement with a customer
2.Identification of our performance obligations in the contract or agreement
3.Determination of the transaction price
4.Allocation of the transaction price to the performance obligations
We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The timing of revenue recognition, billings, and cash collections results in accounts receivable, 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 unaudited condensed 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 recognized and invoiced when the customer obtains control of the products based on legal title transfer and we have the right to payment, which generally occurs at the time of installation and customer acceptance. Our instruments, software, and systems are often included in one of our significant customer programs, as further described below. For veterinary software systems that include multiple performance obligations, such as perpetual software licenses and computer hardware, we allocate revenue to each performance obligation based on estimates of the price that we would charge the customer for each promised product or service if it were sold on a standalone basis.
Lease Revenue. Revenues from instrument rental agreements and reagent rental programs are recognized either as operating leases on a ratable basis over the term of the agreement or as sales-type leases at the time of installation and customer acceptance. Customers typically pay for the right to use instruments under rental agreements in equal monthly amounts over the term of the rental agreement. Our reagent rental programs provide our customers the right to use our instruments upon entering into agreements to purchase specified amounts of consumables, which are considered embedded leases. For some agreements, the customers are provided with the right to purchase the instrument at the end of the lease term. Lease revenues from these agreements are presented in product revenue on our unaudited condensed consolidated income statement. Lease revenue was approximately $4.8 million for the three months ended March 31, 2021, as compared to $4.2 million for the three months ended March 31, 2020, including both operating leases and sales-type leases under ASC 842, Leases, for leases entered into after January 1, 2019, and ASC 840, Leases, for leases entered into prior to 2019. 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 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
9
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, 2020, our deferred revenue related to extended warranties and post-contract support was $35.1 million, of which approximately $14.9 million was recognized during the three months ended March 31, 2021. Furthermore, as a result of new agreements, our deferred revenue related to extended warranties and post-contract support was $33.8 million at March 31, 2021. 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 $19.3 million at March 31, 2021, of which approximately 36 %, 35 %, 19 %, 7 %, and 3 % are expected to be recognized during the remainder of 2021, the full years 2022, 2023, 2024, 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 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 consideration we expect to receive in exchange for the transferred goods or services. To the extent the transaction price includes variable consideration, such as volume rebates or expected price adjustments, we apply judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts.
We allocate revenue to each performance obligation in proportion to the relative standalone selling prices and recognize revenue when transfer of the related goods or services has occurred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the performance obligation when sold separately. When standalone selling prices for our products or services are not directly observable, we determine the standalone selling prices using relevant information available and apply suitable estimation methods including, but not limited to, the cost plus a margin approach. We recognize revenue as each performance obligation is satisfied, either at a point in time or over time, as described in the revenue categories above. We do not disclose information about remaining performance obligations that are part of contracts with an original expected duration of one year or less.
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The following customer programs represent our most significant customer contracts which contain multiple performance obligations:
Customer Commitment Programs. We offer customer incentives upon entering into multi-year agreements to purchase annual minimum amounts of products and services.
Up-Front Customer Loyalty Programs. Our up-front loyalty programs provide customers with incentives in the form of cash payments or IDEXX Points upon entering into multi-year agreements to purchase annual minimum amounts of future products or services. If a customer breaches 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. To the extent invoiced instrument revenue exceeds recognized instrument revenue, we record deferred revenue as a contract liability, which is subsequently recognized upon the purchase of future products and services. 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, 2020, our capitalized customer acquisition costs were $148.1 million, of which approximately $11.5 million was recognized as a reduction of revenue during the three months ended March 31, 2021. Furthermore, as a result of new up-front customer loyalty payments, net of subsequent recognition, our capitalized customer acquisition costs were $152.6 million at March 31, 2021. We monitor customer purchases over the term of their agreement to assess the realizability of our capitalized customer acquisition costs and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three months ended March 31, 2021, were not material.
Volume Commitment Programs. Our volume commitment programs, such as our IDEXX 360 program, provide customers with a free or discounted instrument or system upon entering into multi-year agreements to purchase annual minimum amounts of products and services. We allocate total consideration, including future committed purchases and expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance in advance of billing the customer, which is also when the customer obtains control of the instrument based on legal title transfer. Our right to future consideration related to instrument revenue is recorded as a contract asset within other current and long-term assets. The contract asset is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. We have determined these agreements do not include a significant financing component. Differences between estimated and actual customer purchases may impact the amount and timing of revenue recognition.
On December 31, 2020, our volume commitment contract assets were $115.5 million, of which approximately $6.9 million was reclassified to accounts receivable when customers were billed for related products and services during the three months ended March 31, 2021. Furthermore, as a result of new placements under volume commitment programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our contract assets were $122.6 million at March 31, 2021. We monitor customer purchases over the term of their agreement to assess the realizability of our contract assets and review estimates of variable consideration. Impairments, revenue adjustments that relate to performance obligations satisfied in prior periods, and contract modifications during the three months ended March 31, 2021, 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 $2.3 billion, of which approximately 20 %, 24 %, 22 %, 17 %, and 17 % are expected to be recognized during the remainder of 2021, the full years 2022, 2023, 2024, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied, for which customers have committed to
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purchase goods and services, net of the expected revenue reductions from customer acquisition costs and expected price adjustments, and as a result, are lower than stated contractual commitments by our customers.
Instrument Rebate Programs. Our instrument rebate programs require an instrument purchase and provide customers the opportunity to earn future rebates based on the volume of products and services they purchase over the term of the program. We account for the customer’s right to earn rebates on future purchases as a separate performance obligation and determine the standalone selling price based on an estimate of rebates the customer will earn over the term of the program. Total consideration allocated to identified performance obligations is limited to goods and services that the customer is presently obligated to purchase and does not include estimates of future purchases that are optional. We allocate total consideration to identified performance obligations, including the customer’s right to earn rebates on future purchases, which is deferred and recognized upon the purchase of future products and services, offsetting future rebates as they are earned.
On December 31, 2020, our deferred revenue related to instrument rebate programs was $39.3 million, of which approximately $3.9 million was recognized when customers purchased eligible products and services and earned rebates during the three months ended March 31, 2021. Furthermore, as a result of new instrument purchases under rebate programs, net of subsequent recognition, our deferred revenue was $37.4 million at March 31, 2021, of which approximately 29 %, 29 %, 19 %, 12 %, and 11 % are expected to be recognized during the remainder of 2021, the full years 2022, 2023, 2024, and thereafter, respectively.
Reagent Rental Programs. Our reagent rental programs provide our customers the right to use our instruments upon entering into multi-year agreements to purchase annual minimum amounts of consumables. These types of agreements include an embedded lease for the right to use our instrument, and we determine the amount of lease revenue allocated to the instrument based on relative standalone selling prices. We evaluate the terms of these embedded leases to determine classification as either a sales-type lease or an operating lease.
Sales-type Reagent Rental Programs. Our reagent rental programs that effectively transfer control of instruments to our customers are classified as sales-type leases, and we recognize instrument revenue and cost in advance of billing the customer, at the time of installation and customer acceptance. Our right to future consideration related to instrument revenue is recorded as a lease receivable within other current and long-term assets, and is transferred to accounts receivable when customers are billed for future products and services over the term of the contract. On December 31, 2020, our lease receivable assets were $11.1 million, of which approximately $0.5 million was reclassified to accounts receivable when customers were billed for related products and services during the three months ended March 31, 2021. Furthermore, as a result of new placements under sales-type reagent rental programs, net of subsequent amounts reclassified to accounts receivable, and allowances established for credit losses, our lease receivable assets were $11.8 million at March 31, 2021. The impacts of discounting and unearned income at March 31, 2021, were not material. Profit and loss recognized at the commencement date and interest income during the three months ended March 31, 2021, were not material. We monitor customer purchases over the term of their agreement to assess the realizability of our lease receivable assets. Impairments, during the three months ended March 31, 2021, were not material.
Operating-type Reagent Rental Programs. Our reagent rental programs that do not effectively transfer control of instruments to our customers are classified as operating leases, and we recognize instrument revenue and costs ratably over the term of the agreement. The cost of the instrument is capitalized within property and equipment. During the three months ended March 31, 2021, we transferred instruments of $2.5 million as compared to $2.3 million for the three months ended March 31, 2020, from inventory to property and equipment.
We estimate future revenue to be recognized related to our reagent rental programs of approximately $37.9 million, of which approximately 27 %, 28 %, 21 %, 14 %, and 10 % are expected to be recognized during the remainder of 2021, the full years 2022, 2023, 2024, and thereafter, respectively. These future revenues relate to performance obligations not yet satisfied for which customers have committed to future purchases, net of any expected price adjustments, and as a result, may be lower than stated contractual commitments by our customers.
Other Customer Incentive Programs. Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive
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approach. We typically use the most-likely-amount method for incentives that are offered to individual customers and the expected-value method for programs that are offered to a broad group of customers. Revenue adjustments that relate to performance obligations satisfied in prior periods during the three months ended March 31, 2021, were not material. Refund obligations related to customer incentive programs are recorded in accrued liabilities for the actual issuance of incentives, incentives earned but not yet issued and estimates of incentives to be earned in the future.
Program Combinations. At times, we combine elements of our significant customer programs within a single customer contract. We separate each significant program element and include the contract assets, customer acquisition costs, deferred revenues and estimated future revenues within the most relevant program disclosures above. Each customer contract is presented as a net contract asset or net contract liability on our unaudited condensed consolidated balance sheet.
IDEXX Points. IDEXX Points may be applied to trade receivables due to us, converted to cash, or applied against the purchase price of IDEXX products and services. We consider IDEXX Points equivalent to cash. IDEXX Points that have not yet been used by customers are included in accrued liabilities until utilized or expired. Breakage is not material because customers can apply IDEXX Points to trade receivables at any time.
Accounts Receivable. We recognize revenue when it is probable that we will collect substantially all of the consideration to which we will be entitled, based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. We have no significant customers that accounted for greater than 10% of our consolidated revenues, and we have no concentration of credit risk as of March 31, 2021.
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 Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| CAG segment revenue: | |||||||||||
| CAG Diagnostics recurring revenue: | $ | $ | |||||||||
| IDEXX VetLab consumables | |||||||||||
| Rapid assay products | |||||||||||
| Reference laboratory diagnostic and consulting services | |||||||||||
| CAG Diagnostics services and accessories | |||||||||||
| CAG Diagnostics capital - instruments | |||||||||||
| Veterinary software, services and diagnostic imaging systems | |||||||||||
| CAG segment revenue | |||||||||||
| Water segment revenue | |||||||||||
| LPD segment revenue | |||||||||||
| Other segment revenue | |||||||||||
| Total revenue | $ | $ | |||||||||
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Revenue by principal geographic area, based on customers’ domiciles, was as follows:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| United States | $ | $ | |||||||||
| Europe, the Middle East and Africa | |||||||||||
| Asia Pacific Region | |||||||||||
| Canada | |||||||||||
| Latin America | |||||||||||
| Total | $ | $ | |||||||||
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 unaudited condensed consolidated statements of income. Deferred commission costs are periodically reviewed for impairment.
On December 31, 2020, our deferred commission costs, included within other assets, were $17.5 million, of which approximately $1.5 million of commission expense was recognized during the three months ended March 31, 2021. Furthermore, as a result of commissions related to new extended warranties and SaaS subscriptions, net of subsequent recognition, our deferred commission costs were $17.9 million at March 31, 2021. Impairments of deferred commission costs, during the three months ended March 31, 2021, were not material.
NOTE 4. ACQUISITIONS
We believe that our acquisitions of businesses and other assets enhance our existing businesses by either expanding our geographic range and customer base or expanding our existing product lines. From time to time we may acquire the assets of small reference labs that we account for as an asset purchase.
During the first quarter of 2021, we acquired the shares of a reference laboratory located in Switzerland for approximately $5.5 million in cash, including hold back and contingent payments of approximately $1.1 million. This acquisition expands our international reference laboratory presence and was accounted for as a business combination. The preliminary fair value of the assets acquired consists of approximately $4.3 million in intangible assets, primarily for customer relationships, which will be amortized over 9 years, approximately $1.8 million for goodwill, representing synergies within our broader CAG portfolio, and approximately $0.6 million of liabilities, including deferred taxes associated with the acquired intangible assets. The purchase price allocation is subject to revision as additional information becomes available from third-parties regarding tax related matters, contingencies, and certain assets and liabilities. Goodwill related to this acquisition is not deductible for tax purposes. Pro forma information has not been presented for this acquisition because such information is not material to the financial statements. The results of operations have been included in our CAG segment since the acquisition date. The acquisition expenses were not material.
NOTE 5. SHARE-BASED COMPENSATION
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The weighted averages of the valuation assumptions used to determine the fair value of each option award on the date of grant and the weighted average estimated fair values were as follows:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Share price at grant | $ | $ | |||||||||
| Share price at exercise | $ | $ | |||||||||
| Expected stock price volatility | % | % | |||||||||
| Expected term, in years | |||||||||||
| Risk-free interest rate | % | % | |||||||||
| Weighted average fair value of options granted | $ | $ | |||||||||
NOTE 6. CREDIT LOSSES
We are exposed to credit losses primarily through our sales of products and services to our customers. We maintain allowances for credit losses for potentially uncollectible receivables. We base our estimates on a detailed analysis of specific customer situations and a percentage of our accounts receivable by aging category. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current economic conditions.
Additional allowances may be required if either the financial condition of our customers were to deteriorate, or a strengthening U.S. dollar impacts the ability of foreign customers to make payments to us on their U.S. dollar-denominated purchases. We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliations, dispute resolution and payment confirmations. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.
Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We may require collateralized asset support or a prepayment to mitigate credit risk. We do not have any off-balance sheet credit exposure related to our customers.
Accounts Receivable
The allowance for credit losses associated with accounts receivable was $6.7 million and $6.8 million at March 31, 2021 and December 31, 2020, respectively. Accounts receivable reflected on the balance sheet is net of this reserve. Based on an aging analysis, at March 31, 2021, approximately 91 % of our accounts receivable had not yet reached the invoice due date and approximately 9 % was considered past due, of which approximately 1 % was greater than 60 days past due. At December 31, 2020, approximately 88 % of our accounts receivable had not yet reached the invoice due date and approximately 12 % was considered past due, of which approximately 1.5 % was greater than 60 days past due.
Contract assets and lease receivables
The allowance for credit losses associated with the contract assets and lease receivables was $3.8 million and $3.7 million at March 31, 2021 and December 31, 2020, respectively. The assets reflected on the balance sheet are net of these reserves. Historically, we have experienced low credit loss rates on our customer commitment programs and lease receivables. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
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NOTE 7. INVENTORIES
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Inventories | $ | $ | |||||||||
NOTE 8. LEASES
Maturities of operating lease liabilities were as follows:
| (in thousands, except lease term and discount rate) | March 31, 2021 | ||||
| 2021 (remainder of year) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | ( | ||||
| Total | $ | ||||
Total minimum future lease payments of approximately $7.2 million for leases that have not commenced as of March 31, 2021, are not included in the condensed consolidated financial statements, as we do not yet control the underlying assets. These leases are expected to commence in 2021 with lease terms of approximately 2 to 13 years.
Supplemental cash flow information for leases was as follows:
| (in thousands) | For the Three Months Ended March 31, 2021 | For the Three Months Ended March 31, 2020 | ||||||||||||
| Cash paid for amounts included in the measurement of operating leases liabilities | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations, net of early lease terminations | $ | $ | ||||||||||||
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NOTE 9. OTHER CURRENT AND LONG-TERM ASSETS
Other current assets consisted of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Customer acquisition costs | $ | $ | |||||||||
| Prepaid expenses | |||||||||||
| Contract assets, net | |||||||||||
| Taxes receivable | |||||||||||
| Deferred sales commissions | |||||||||||
| Other assets | |||||||||||
| Other current assets | $ | $ | |||||||||
Other long-term assets consisted of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Customer acquisition costs | $ | $ | |||||||||
| Contract assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Deferred sales commissions | |||||||||||
| Investment in long-term product supply arrangements | |||||||||||
| Taxes receivable | |||||||||||
| Other assets | |||||||||||
| Other long-term assets | $ | $ | |||||||||
NOTE 10. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Accrued expenses | $ | $ | |||||||||
| Accrued employee compensation and related expenses | |||||||||||
| Accrued customer incentives and refund obligations | |||||||||||
| Accrued taxes | |||||||||||
| Current lease liabilities | |||||||||||
| $ | $ | ||||||||||
Other long-term liabilities consisted of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Accrued taxes | $ | $ | |||||||||
| Other accrued long-term expenses | |||||||||||
| Other long-term liabilities | $ | $ | |||||||||
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NOTE 11. REPURCHASES OF COMMON STOCK
We primarily acquire shares by repurchases in the open market. However, we also acquire shares that are surrendered by employees in payment for the minimum required statutory withholding taxes due on the vesting of restricted stock units and the settlement of deferred stock units, otherwise referred to herein as employee surrenders. We issue shares of treasury stock upon the vesting of certain restricted stock units and upon the exercise of certain stock options. The number of shares of treasury stock issued during the three months ended March 31, 2021 and 2020 was not material.
The following is a summary of our open market common stock repurchases, reported on a trade date basis, and shares acquired through employee surrender:
(in thousands, except per share amounts) | For the Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Shares repurchased in the open market | |||||||||||
| Shares acquired through employee surrender for statutory tax withholding | |||||||||||
| Total shares repurchased | |||||||||||
| Cost of shares repurchased in the open market | $ | $ | |||||||||
| Cost of shares for employee surrenders | |||||||||||
| Total cost of shares | $ | $ | |||||||||
| Average cost per share - open market repurchases | $ | $ | |||||||||
| Average cost per share - employee surrenders | $ | $ | |||||||||
| Average cost per share - total | $ | $ | |||||||||
NOTE 12. INCOME TAXES
Our effective income tax rate was 14.9 % for the three months ended March 31, 2021, as compared to 18.2 % for the three months ended March 31, 2020, The decrease in our effective tax rate for the three months ended March 31, 2021, as compared to the same period in the prior year, was primarily driven by higher tax benefits from share-based compensation and regional earnings mix.
The effective tax rate for the three months ended March 31, 2021, differed from the U.S. statutory tax rate of 21% primarily due to tax benefits from share-based compensation.
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NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in AOCI, net of tax, consisted of the following:
| For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax | Unrealized (Loss) Gain on Net Investment Hedges, Net of Tax | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Unrealized Gain (Loss) on Investments, Net of Tax | Foreign Currency Exchange Contracts | Euro-Denominated Notes | Cross Currency Swaps | Cumulative Translation Adjustment | Total | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | ||||||||||||||||||||||||||||||||||||
| Loss reclassified from accumulated other comprehensive income | ||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| Unrealized Gain (Loss) on Cash Flow Hedges, Net of Tax | Unrealized 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, 2019 | $ | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Gain reclassified from accumulated other comprehensive income | ( | ( | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | ( | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||
The following tables present components and amounts reclassified out of AOCI to net income:
| (in thousands) | Affected Line Item in the Statements of Income | Amounts Reclassified from AOCI For the Three Months Ended March 31, | ||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Gain (loss) on derivative instruments classified as cash flow hedges included in net income: | ||||||||||||||||||||
| Foreign currency exchange contracts | Cost of revenue | $ | ( | $ | ||||||||||||||||
| Tax expense (benefit) | ( | |||||||||||||||||||
| Gain (loss), net of tax | $ | ( | $ | |||||||||||||||||
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NOTE 14. EARNINGS PER SHARE
The following is a reconciliation of weighted average shares outstanding for basic and diluted earnings per share:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Shares outstanding for basic earnings per share | |||||||||||
| Shares outstanding for diluted earnings per share: | |||||||||||
| Shares outstanding for basic earnings per share | |||||||||||
| Dilutive effect of share-based payment awards | |||||||||||
Certain awards and options to acquire shares have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. The following table presents information concerning those anti-dilutive awards and options:
| (in thousands) | For the Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Weighted average number of shares underlying anti-dilutive awards | |||||||||||
| Weighted average number of shares underlying anti-dilutive options | |||||||||||
NOTE 15. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
See “Note 8. Leases”, for more information regarding our lease commitments.
Contingencies and Guarantees
We are subject to claims that may arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. We accrue for loss contingencies when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. However, the results of legal actions cannot be predicted with certainty, and therefore our actual losses with respect to these contingencies could be higher and lower than our accruals. Except for the litigation matter described below, at March 31, 2021, our accruals with respect to actual and threatened litigation were not material.
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We are a defendant in an ongoing litigation matter involving an alleged breach of contract for underpayment of royalty payments made from 2004 through 2017 under an expired patent license agreement. The plaintiff has asserted a claim of approximately $50 million, inclusive of interest, alleging that the incorrect royalty provision was applied to certain licensed products and services throughout the agreement term and that royalties were also due on non-licensed diagnostic services that were provided concurrently with licensed services. The trial court has ruled in favor of the plaintiff in this matter and we are appealing the judgment and continue to vigorously defend ourselves against the plaintiff’s allegations. While we believe the claim is without merit, litigation is inherently unpredictable and there can be no assurance that we will prevail in this matter. During the third quarter of 2020. we established an accrual of $27.5 million related to this ongoing matter, which represents the amount of a possible loss that we have determined to be probable and estimable. We have not made any adjustments to this accrual since it was established. The actual cost of resolving this matter may be higher or lower than the amount we have accrued.
From time to time, we have received notices alleging that our products infringe third-party proprietary rights, although we are not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that we will prevail in any infringement proceedings that may be commenced against us. If we lose any such litigation, we may be stopped from selling certain products and/or we may be required to pay damages as a result of the litigation.
We have had no significant changes to our contingencies and guarantees discussed in Note 16 to the consolidated financial statements in our 2020 Annual Report.
NOTE 16. SEGMENT REPORTING
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The following is a summary of segment performance:
| (in thousands) | For the Three Months Ended March 31, | |||||||||||||||||||||||||||||||
| CAG | Water | LPD | Other | Consolidated Total | ||||||||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Income from operations | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest expense, net | ( | |||||||||||||||||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | ||||||||||||||||||||||||||||||||
| Net income attributable to IDEXX Laboratories, Inc. stockholders | $ | |||||||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Income from operations | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest expense, net | ( | |||||||||||||||||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | ||||||||||||||||||||||||||||||||
| Net income attributable to IDEXX Laboratories, Inc. stockholders | $ | |||||||||||||||||||||||||||||||
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 unaudited condensed consolidated balance sheets but for which we disclose the fair value. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:
| Level 1 | Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. | |||||||
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |||||||
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | |||||||
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement
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in its entirety requires judgment and considers factors specific to the asset or liability. We did not have any transfers in or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2021.
Our cross currency swap contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our cross currency swap contracts classified as derivative instruments using prevailing market conditions as of the close of business on each balance sheet date. The product of this calculation is then adjusted for counterparty risk.
Our foreign currency exchange contracts are measured at fair value on a recurring basis in our accompanying unaudited condensed consolidated balance sheets. We measure the fair value of our foreign currency exchange contracts classified as derivative instruments using an income approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.
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The following tables set forth our assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy:
| (in thousands) | ||||||||||||||||||||||||||
| As of March 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at March 31, 2021 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
Money market funds(1) | $ | $ | $ | $ | ||||||||||||||||||||||
Equity mutual funds(2) | $ | $ | $ | $ | ||||||||||||||||||||||
Cross currency swaps(3) | $ | $ | $ | $ | ||||||||||||||||||||||
Foreign currency exchange contracts(3) | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Foreign currency exchange contracts(3) | $ | $ | $ | $ | ||||||||||||||||||||||
Deferred compensation(4) | $ | $ | $ | $ | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| As of December 31, 2020 | 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, 2020 | ||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
Money market funds(1) | $ | $ | $ | $ | ||||||||||||||||||||||
Equity mutual funds(2) | $ | $ | $ | $ | ||||||||||||||||||||||
Foreign currency exchange contracts(3) | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
Cross currency swaps(3) | $ | $ | $ | $ | ||||||||||||||||||||||
Foreign currency exchange contracts(3) | $ | $ | $ | $ | ||||||||||||||||||||||
Deferred compensation(4) | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Money market funds with an original maturity of less than ninety days are included within cash and cash equivalents. The remaining balance of cash and cash equivalents as of March 31, 2021 and December 31, 2020, 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.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate carrying value due to their short maturity.
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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 the euro, British pound, Japanese yen, Canadian dollar, and Australian dollar. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with well-capitalized multinational financial institutions, and we do not hold or engage in transactions involving derivative instruments for purposes other than risk management. Our accounting policies for these contracts are based on the designation of such instruments as hedging transactions.
We recognize all hedging instruments on the balance sheet at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment must be recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See “Note 13. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on our unaudited condensed consolidated statements of income for the three months ended March 31, 2021 and 2020.
We enter into master netting arrangements with the counterparties to our derivative transactions which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.
Cash Flow Hedges
We did not de-designate any instruments from hedge accounting treatment during either the three months ended March 31, 2021 or 2020. At March 31, 2021, the estimated amount of net losses, net of tax, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is $4.1 million if exchange rates do not fluctuate from the levels at March 31, 2021.
We target to hedge approximately 85 % of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, and Australian dollar. We have additional unhedged foreign currency exposures related to foreign services and emerging markets where it is not practical to hedge. We primarily utilize foreign currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge
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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 $199.2 million and $202.7 million at March 31, 2021 and December 31, 2020, respectively.
The following tables present the effect of cash flow hedge accounting on our unaudited condensed consolidated statements of income and comprehensive income, and provide information regarding the location and amounts of pretax gains or losses of derivatives:
| (in thousands) | Three Months Ended March 31, | |||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Financial statement line items in which effects of cash flow hedges are recorded | Cost of revenue | $ | $ | |||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||
| Amount of (loss) gain reclassified from accumulated other comprehensive income into income | $ | ( | $ | |||||||||||||||||
Net Investment Hedges, Euro-Denominated Notes
In June 2015, we issued and sold through a private placement an aggregate principal amount of €88.9 million in euro-denominated 1.785 % Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded gains of $3.6 million, net of tax, within AOCI as a result of this net investment hedge for the three months ended March 31, 2021, and gains of $1.0 million for the three months ended March 31, 2020. The related cumulative unrealized gain recorded at March 31, 2021, will not be reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged foreign operations or a portion of the hedge no longer qualifies for hedge accounting treatment. See Note 13 to the consolidated financial statements included in our 2020 Annual Report for further information regarding the issuance of these euro-denominated notes.
Net Investment Hedges, Cross Currency Swaps
We have entered into several cross currency swap contracts as a hedge of our net investment in foreign operations to offset foreign currency translation gains and losses on the net investment. These cross currency swaps have maturity dates beginning on June 30, 2023, through June 18, 2025. At maturity of the cross currency swap contracts, we will deliver the notional amount of €90.0 million and will receive approximately $104.5 million from the counterparties on June 30, 2023, and we will deliver the notional amount of €15 million and will receive approximately $17.5 million from the counterparties on June 18, 2025. The 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 three months ended March 31, 2021, we recorded gains of $3.3 million, net of tax, within AOCI as a result of these net investment hedges, and gains of $4.0 million during the three months ended March 31, 2020. 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 $0.7 million related to the excluded component as a reduction of interest expense for the three months ended March 31, 2021, and $0.7 million for the three months ended March 31, 2020.
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Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets
The fair values of hedging instruments and their respective classification on our unaudited condensed consolidated balance sheets and amounts subject to offset under master netting arrangements consisted of the following derivative instruments, unless otherwise noted:
| (in thousands) | Hedging Assets | |||||||||||||||||||
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||
| Derivatives and non-derivatives designated as hedging instruments | Balance Sheet Classification | |||||||||||||||||||
| Foreign currency exchange contracts | Other current assets | $ | $ | |||||||||||||||||
| Cross currency swaps | Other long-term assets | |||||||||||||||||||
| Foreign currency exchange contracts | Other long-term assets | |||||||||||||||||||
| Total derivative instruments presented as hedge instruments on the balance sheet | ||||||||||||||||||||
| Gross amounts subject to master netting arrangements not offset on the balance sheet | ( | ( | ||||||||||||||||||
| Net amount | $ | $ | ||||||||||||||||||
| (in thousands) | Hedging Liabilities | |||||||||||||||||||
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||
| Derivatives and non-derivatives designated as hedging instruments | Balance Sheet Classification | |||||||||||||||||||
| Foreign currency exchange contracts | Accrued liabilities | $ | $ | |||||||||||||||||
| Cross currency swaps | Other long-term liabilities | |||||||||||||||||||
| Foreign currency exchange contracts | Other long-term liabilities | |||||||||||||||||||
| Total derivative instruments presented as cash flow hedges on the balance sheet | ||||||||||||||||||||
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet(1) | Long-term debt | |||||||||||||||||||
| Total hedging instruments presented on the balance sheet | ||||||||||||||||||||
| Gross amounts subject to master netting arrangements not offset on the balance sheet | ( | ( | ||||||||||||||||||
| Net amount | $ | $ | ||||||||||||||||||
(1) Amounts represent reported carrying amounts of our foreign currency denominated debt. See “Note 17. Fair Value Measurements” for information regarding the fair value of our long-term debt.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements.” Such forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), include statements relating to, among other things, the impact of the COVID-19 pandemic; future revenue growth rates; projected tax rates and the impact of tax legislation and regulatory action; business trends, earnings and other measures of financial performance; the effect of economic downturns on our business performance; projected impact of foreign currency exchange rates; demand for our products; realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness, capital spending and operating expenditures; the working capital and liquidity outlook; interest expense; warranty expense; share-based compensation expense; the adoption and projected impact of new accounting standards; critical accounting estimates; future commercial efforts; and competition. Forward-looking statements can be identified by the use of words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” “project,” and similar words and expressions. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including, among other things, the adverse impact, and the duration, of the effects of the ongoing COVID-19 pandemic on our business, results of operations, liquidity, financial condition, and stock price, as well as the other matters described under the headings “Business,” “Risk Factors,” “Legal Proceedings,” “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosure About Market Risk” in our 2020 Annual Report and in the corresponding sections of this Quarterly Report on Form 10-Q, as well as those described from time to time in our other periodic reports filed with the SEC.
Any forward-looking statements represent our estimates only as of the day this Quarterly Report on Form 10-Q was filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change.
You should read the following discussion and analysis in conjunction with our 2020 Annual Report that includes additional information about us, our results of operations, our financial position, and our cash flows, and with our unaudited condensed consolidated financial statements and related notes included in Part I. Item 1. of this Quarterly Report on Form 10-Q.
Our fiscal quarter ended on March 31. Unless otherwise stated, the analysis and discussion of our financial condition and results of operations below, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior-year periods.
Business Overview
We develop, manufacture, and distribute products and provide services primarily for the companion animal veterinary, livestock, poultry and dairy, and water testing markets. We also design, manufacture, and distribute point of care and laboratory diagnostics for the human medical diagnostics market. Our primary products and services are:
•Point-of-care veterinary diagnostic products, comprising instruments, consumables, and rapid assay test kits;
•Veterinary reference laboratory diagnostic and consulting services;
•Practice management and diagnostic imaging systems and services used by veterinarians;
•Health monitoring, biological materials testing, laboratory diagnostic instruments and services used by the biomedical research community;
•Diagnostic, health-monitoring products for livestock, poultry, and dairy;
•Products that test water for certain microbiological contaminants; and
•Point-of-care electrolytes, blood gas analyzers, and SARS-CoV-2 RT-PCR (COVID-19 test) used in the human medical diagnostics market.
Operating Segments. We operate primarily through three business segments: diagnostic and information technology-based products and services for the veterinary market, which we refer to as the Companion Animal Group (“CAG”), water quality products (“Water”) and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve dairy reproductive efficiency, which we refer to as Livestock, Poultry and Dairy (“LPD”). Our
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Other operating segment combines and presents products for the human medical diagnostics market (“OPTI Medical”) with our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments.
CAG develops, designs, manufactures, and distributes products and 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 software and performs services that are used to manage the health status of livestock and poultry, to improve bovine reproductive efficiency, and to ensure the quality and safety of milk and food. OPTI Medical develops, designs, manufactures and distributes point-of-care and laboratory diagnostics (including electrolyte and blood gas analyzers and related consumable products) for the human medical diagnostics market.
Effects of Certain Factors and Trends on Results of Operations
CAG Market Trends. Companion animal healthcare markets continued to benefit in the first quarter from a step up in average clinical visits per week per practice that began in the second half of 2020, supported by high new patient growth. U.S. veterinary practices experienced strong clinical demand benefiting from high growth in both non-wellness and wellness clinical visits. Our analysis of companion animal practice data in the U.S. indicated same-store clinical visit growth reached 12% in the first quarter, including 9% growth in non-wellness visits and 16% growth in wellness visits. Clinical visits continued to benefit from an increase in new clinical patient visits. Revenue growth at U.S. veterinary practices was 15% in the first quarter, driven by a continued focus on expanded healthcare services, including increases in utilization of diagnostics.
While these CAG market and other trends are encouraging, potential effects related to ongoing COVID-19 case management efforts are challenging to predict and may pressure future revenues in CAG and our other segments should enhanced social distancing policies and higher infection rates impact our customers in certain regions.
Currency and Other Items
Currency Impact. See “Part I. Item 3. Quantitative and Qualitative Disclosures about Market Risk” included in this Quarterly Report on Form 10-Q for additional information regarding the impact of foreign currency exchange rates.
Other Items. See “Part I. Item 1. Business - Patents and Licenses” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Annual Report for additional information regarding distributor purchasing and inventories, economic conditions, and patent expiration.
Critical Accounting Estimates and Assumptions
The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The critical accounting policies and the significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements for the three months ended March 31, 2021, are consistent with those discussed in our 2020 Annual Report in the section under the heading “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Assumptions.”
Recent Accounting Pronouncements
For more information regarding the impact that recent accounting standards and amendments will have on our consolidated financial statements as described in Note 2 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion to “revenue,” “revenues” or “revenue growth” are references to “organic revenue growth.” Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the three months ended March 31,
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2021, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, certain business acquisitions, and divestitures. Organic revenue growth should be considered in addition to, and not as a replacement for, or as a superior measure to, revenues reported in accordance with U.S. GAAP, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting organic revenue growth provides useful information to investors by facilitating easier comparisons of our revenue performance with prior and future periods and to the performance of our peers.
We exclude from organic revenue growth the effect of changes in foreign currency exchange rates because changes in foreign currency exchange rates are not under management’s control, are subject to volatility, and can obscure underlying business trends. We calculate the impact on revenue resulting from changes in foreign currency exchange rates by applying the difference between the weighted average exchange rates during the current year period and the comparable prior-year period to foreign currency denominated revenues for the prior-year period.
We also exclude from organic revenue growth the effect of certain business acquisitions and divestitures because the nature, size and number of these transactions can vary dramatically from period to period, and because they either require or generate cash as an inherent consequence of the transaction, and therefore can also obscure underlying business and operating trends. We exclude only acquisitions that are considered to be a business from organic revenue growth. In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single asset or group of similar assets, we do not consider these assets to be a business and include these acquisitions in organic revenue growth. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth.
We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio, in this Quarterly Report on Form 10-Q, all of which are non-GAAP financial measures that should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
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Results of Operations
Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020
Total Company. The following table presents total Company revenue by operating segment:
| For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||
Net Revenue (dollars in thousands) | 2021 | 2020 | Dollar Change | Reported Revenue Growth (1) | Percentage Change from Currency | Percentage Change from Acquisitions | Organic Revenue Growth (1) | |||||||||||||||||||||||||||||||||||||
| CAG | $ | 692,767 | $ | 551,996 | $ | 140,771 | 25.5 | % | 2.9 | % | 0.1 | % | 22.4 | % | ||||||||||||||||||||||||||||||
| United States | 444,410 | 373,275 | 71,135 | 19.1 | % | — | 0.1 | % | 19.0 | % | ||||||||||||||||||||||||||||||||||
| International | 248,357 | 178,721 | 69,636 | 39.0 | % | 9.6 | % | 0.2 | % | 29.2 | % | |||||||||||||||||||||||||||||||||
| Water | 34,040 | 34,149 | (109) | (0.3 | %) | 2.3 | % | — | (2.6 | %) | ||||||||||||||||||||||||||||||||||
| United States | 16,568 | 16,941 | (373) | (2.2 | %) | — | — | (2.2 | %) | |||||||||||||||||||||||||||||||||||
| International | 17,472 | 17,208 | 264 | 1.5 | % | 4.6 | % | — | (3.1 | %) | ||||||||||||||||||||||||||||||||||
| LPD | 39,270 | 34,154 | 5,116 | 15.0 | % | 5.7 | % | — | 9.3 | % | ||||||||||||||||||||||||||||||||||
| United States | 3,748 | 3,777 | (29) | (0.8 | %) | — | — | (0.8 | %) | |||||||||||||||||||||||||||||||||||
| International | 35,522 | 30,377 | 5,145 | 16.9 | % | 6.5 | % | — | 10.5 | % | ||||||||||||||||||||||||||||||||||
| Other | 11,630 | 6,037 | 5,593 | 92.7 | % | — | — | 92.7 | % | |||||||||||||||||||||||||||||||||||
| Total Company | $ | 777,707 | $ | 626,336 | $ | 151,371 | 24.2 | % | 3.1 | % | 0.1 | % | 21.0 | % | ||||||||||||||||||||||||||||||
| United States | 472,638 | 396,783 | 75,855 | 19.1 | % | — | 0.1 | % | 19.0 | % | ||||||||||||||||||||||||||||||||||
| International | 305,069 | 229,553 | 75,516 | 32.9 | % | 8.6 | % | 0.2 | % | 24.2 | % | |||||||||||||||||||||||||||||||||
(1)Reported revenue growth and organic revenue growth may not recalculate due to rounding.
Total Company Revenue. The increase in both U.S. and international organic revenues was driven by strong gains in CAG Diagnostic recurring revenue reflecting a continued demand for companion animal diagnostics globally, supported by high growth in both non-wellness and wellness clinical visits. The growth in our LPD business was primarily due to the continued demand for swine testing in China and the benefits from the timing of distributor shipments in the current period, which was offset by the impact of prior year accelerated customer stocking orders in response to the onset of the COVID-19 pandemic. Water revenues declined primarily from the impact of prior year accelerated customer stocking orders in response to the onset of the COVID-19 pandemic. The impact of currency movements increased total revenue by 3.1%, while acquisitions increased revenue by 0.1%.
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The following table presents total Company results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Total Company - Results of Operations (dollars in thousands) | 2021 | Percent of Revenue | 2020 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 777,707 | $ | 626,336 | $ | 151,371 | 24.2 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 306,925 | 266,746 | 40,179 | 15.1 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 470,782 | 60.5 | % | 359,590 | 57.4 | % | 111,192 | 30.9 | % | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 114,811 | 14.8 | % | 116,143 | 18.5 | % | (1,332) | (1.1) | % | |||||||||||||||||||||||||||||
| General and administrative | 70,770 | 9.1 | % | 65,812 | 10.5 | % | 4,958 | 7.5 | % | |||||||||||||||||||||||||||||
| Research and development | 37,579 | 4.8 | % | 33,310 | 5.3 | % | 4,269 | 12.8 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 223,160 | 28.7 | % | 215,265 | 34.4 | % | 7,895 | 3.7 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 247,622 | 31.8 | % | $ | 144,325 | 23.0 | % | $ | 103,297 | 71.6 | % | ||||||||||||||||||||||||||
Gross Profit. Gross profit increased due to higher sales volumes, as well as a 310 basis point increase in the gross profit margin. The increase in the gross profit margin was primarily due to volume leverage in our reference laboratories and high growth in IDEXX VetLab® consumables, and the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio. The impact from foreign currency movements decreased the gross profit margin by approximately 10 basis points, including the impact of hedge gains in the current year compared to hedge losses in the prior year.
Operating Expenses. The decrease in sales and marketing expense was primarily due to decreases in travel, trade shows and in-person sales meetings, due to continued travel restrictions for the COVID-19 pandemic. This decrease was partially offset by higher project costs and increased personnel-related costs. The increase in general and administrative expense was primarily due to higher personnel-related costs, partially offset by an increase in the bad debt reserve during the first quarter of 2020 and lower travel costs. The increase in research and development expense is primarily due to higher personnel-related and project costs. The overall change in currency exchange rates increased operating expenses by less than 1%.
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Companion Animal Group
The following table presents revenue by product and service category for CAG:
| For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||
| Net Revenue (dollars in thousands) | 2021 | 2020 | Dollar Change | Reported Revenue Growth (1) | Percentage Change from Currency | Percentage Change from Acquisitions | Organic Revenue Growth (1) | |||||||||||||||||||||||||||||||||||||
| CAG Diagnostics recurring revenue: | $ | 617,280 | $ | 487,925 | $ | 129,355 | 26.5 | % | 3.1 | % | 0.1 | % | 23.3 | % | ||||||||||||||||||||||||||||||
| IDEXX VetLab consumables | 246,092 | 188,713 | 57,379 | 30.4 | % | 4.0 | % | — | 26.4 | % | ||||||||||||||||||||||||||||||||||
| Rapid assay products | 69,611 | 57,430 | 12,181 | 21.2 | % | 1.2 | % | — | 20.0 | % | ||||||||||||||||||||||||||||||||||
| Reference laboratory diagnostic and consulting services | 275,781 | 220,261 | 55,520 | 25.2 | % | 2.8 | % | 0.3 | % | 22.2 | % | |||||||||||||||||||||||||||||||||
| CAG diagnostics services and accessories | 25,796 | 21,521 | 4,275 | 19.9 | % | 3.8 | % | — | 16.0 | % | ||||||||||||||||||||||||||||||||||
| CAG Diagnostics capital - instruments | 31,190 | 23,833 | 7,357 | 30.9 | % | 3.9 | % | — | 27.0 | % | ||||||||||||||||||||||||||||||||||
| Veterinary software, services and diagnostic imaging systems | 44,297 | 40,238 | 4,059 | 10.1 | % | 0.9 | % | — | 9.2 | % | ||||||||||||||||||||||||||||||||||
| Net CAG revenue | $ | 692,767 | $ | 551,996 | $ | 140,771 | 25.5 | % | 2.9 | % | 0.1 | % | 22.4 | % | ||||||||||||||||||||||||||||||
(1) Reported revenue growth and organic revenue growth may not recalculate due to rounding
CAG Diagnostics Recurring Revenue. We continue to see strong market demand for companion animal diagnostics globally across modalities, including high levels of growth in testing volumes following the initial pandemic impacts, which constrained volumes beginning in mid-March 2020 through May 2020. This volume growth includes higher clinical visits related to new patients and an increase in diagnostic utilization per clinical visit. The increase in CAG Diagnostics recurring revenue was primarily due to increased volumes in IDEXX VetLab consumables, reference laboratory diagnostic services, and rapid assay products, and to a lesser extent, higher realized prices.
The increase in IDEXX VetLab consumables revenue was primarily due to higher sales volumes for our Catalyst consumables and, to a lesser extent, ProCyte Dx® consumables. These increases were supported by an expansion of our instrument installed base, growth in testing by new and existing customers, our expanded menu of available tests, and to a lesser extent, benefits from higher average unit sales prices.
The increase in rapid assay revenue resulted primarily from higher SNAP® 4Dx Plus sales volumes, as well as higher realized prices. Rapid assay testing is supported by high demand for wellness testing.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to the impact of higher testing volumes globally, as well as higher average unit sales prices.
The increase in CAG Diagnostics services and accessories revenue was primarily a result of the increase in our active installed base of instruments.
CAG Diagnostics Capital – Instruments Revenue. The increase in instrument revenue was primarily due to strong premium instrument placements globally, as compared to constrained placements in the first quarter of 2020, when certain customers deferred instrument orders and placements at the onset of the pandemic.
Veterinary Software, Services and Diagnostic Imaging Systems Revenue. The increase in revenue was primarily due to increased veterinary software and diagnostic imaging subscription-based services due to the increases in our active installed base, new veterinary software system placements, and to a lesser extent, higher realized prices on these service offerings. These favorable impacts were partially offset by a decrease in diagnostic imaging instrument revenue impacted by a reduction in earlier generation instrument platform sales.
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The following table presents the CAG segment results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2021 | Percent of Revenue | 2020 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 692,767 | $ | 551,996 | $ | 140,771 | 25.5 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 279,893 | 242,653 | 37,240 | 15.3 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 412,874 | 59.6 | % | 309,343 | 56.0 | % | 103,531 | 33.5 | % | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 104,291 | 15.1 | % | 106,002 | 19.2 | % | (1,711) | (1.6) | % | |||||||||||||||||||||||||||||
| General and administrative | 62,904 | 9.1 | % | 55,603 | 10.1 | % | 7,301 | 13.1 | % | |||||||||||||||||||||||||||||
| Research and development | 32,469 | 4.7 | % | 29,079 | 5.3 | % | 3,390 | 11.7 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 199,664 | 28.8 | % | 190,684 | 34.5 | % | 8,980 | 4.7 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 213,210 | 30.8 | % | $ | 118,659 | 21.5 | % | $ | 94,551 | 79.7 | % | ||||||||||||||||||||||||||
Gross Profit. Gross profit increased primarily due to higher sales volume, as well a 360 basis point increase in the gross profit margin. The increase in the gross profit margin was primarily due to volume leverage in our reference laboratories and high growth in VetLab consumables, and the net benefit of price increases in our CAG Diagnostics recurring revenue portfolio. These favorable factors were partially offset by incremental investments in reference laboratory capacity, including increased staffing and related personnel costs and systems. The impact from foreign currency movements increased the gross profit margin by less than 10 basis points, including the impact of hedge losses in the current year compared to hedge gains in the prior year.
Operating Expenses. The decrease in sales and marketing expense was primarily due to decreases in travel, trade shows, and in-person sales meetings due to continued travel restrictions from the COVID-19 pandemic, partially offset by higher personnel-related costs. The increase in general and administrative expense was primarily due to higher personnel-related costs, partially offset by an increase in the bad debt reserve during the first quarter of 2020 and lower travel costs. The increase in research and development expense was primarily due to increased personnel-related and project costs. The overall change in currency exchange rates resulted in an increase in operating expenses by approximately 1%.
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| Water | ||
The following table presents the Water segment results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2021 | Percent of Revenue | 2020 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 34,040 | $ | 34,149 | $ | (109) | (0.3) | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 10,575 | 9,400 | 1,175 | 12.5 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 23,465 | 68.9 | % | 24,749 | 72.5 | % | (1,284) | (5.2) | % | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 4,358 | 12.8 | % | 4,374 | 12.8 | % | (16) | (0.4 | %) | |||||||||||||||||||||||||||||
| General and administrative | 3,236 | 9.5 | % | 3,496 | 10.2 | % | (260) | (7.4) | % | |||||||||||||||||||||||||||||
| Research and development | 1,099 | 3.2 | % | 997 | 2.9 | % | 102 | 10.2 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 8,693 | 25.5 | % | 8,867 | 26.0 | % | (174) | (2.0) | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 14,772 | 43.4 | % | $ | 15,882 | 46.5 | % | $ | (1,110) | (7.0) | % | ||||||||||||||||||||||||||
Revenue. The decrease in revenue was primarily due to the impact of prior year accelerated customer stocking orders in response to the onset of the COVID-19 pandemic. This impact was partially offset by price increases in our Colilert test products and related accessories used in coliform and E. coli testing and improvement in non-compliance testing volume that has been constrained during the pandemic. The impact of currency movements also increased revenue by approximately 2.3%.
Gross Profit. Gross profit decreased due to a 360 basis point decrease in the gross profit margin, primarily due to higher distribution and freight costs and higher product costs, as well as a 130 basis point reduction from foreign currency movements including the impact of hedge losses in the current year compared to hedge gains the prior year. These reductions in the gross profit margin were partially offset by the net benefits of price increases.
Operating Expenses. Sales and marketing and research and development expenses were relatively flat. The decrease in general and administrative expenses was primarily due to an increase in the bad debt reserve during the first quarter of 2020. The overall change in currency exchange rates resulted in an increase in operating expenses of approximately 1%.
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Livestock, Poultry and Dairy | ||
The following table presents the LPD segment results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2021 | Percent of Revenue | 2020 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 39,270 | $ | 34,154 | $ | 5,116 | 15.0 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 12,389 | 11,842 | 547 | 4.6 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 26,881 | 68.5 | % | 22,312 | 65.3 | % | 4,569 | 20.5 | % | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 5,538 | 14.1 | % | 5,382 | 15.8 | % | 156 | 2.9 | % | |||||||||||||||||||||||||||||
| General and administrative | 4,308 | 11.0 | % | 4,489 | 13.1 | % | (181) | (4.0 | %) | |||||||||||||||||||||||||||||
| Research and development | 3,227 | 8.2 | % | 2,778 | 8.1 | % | 449 | 16.2 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 13,073 | 33.3 | % | 12,649 | 37.0 | % | 424 | 3.4 | % | |||||||||||||||||||||||||||||
| Income from operations | $ | 13,808 | 35.2 | % | $ | 9,663 | 28.3 | % | $ | 4,145 | 42.9 | % | ||||||||||||||||||||||||||
Revenue. Revenue increased primarily due to the continued demand for diagnostic testing in China supported by the rebuilding of the swine herd impacted by the African Swine Fever outbreaks, partially offset by lower realized prices and decreased herd health screening. The benefits from the timing of distributor shipments in the current period, offset the impact of prior year accelerated customer stocking orders in response to the onset of the COVID-19 pandemic. The favorable impact of foreign currency movements increased revenue by 5.7%.
Gross Profit. The increase in gross profit was primarily due to higher sales volumes and a 320 basis point increase in the gross profit margin. The increase in the gross profit margin is primarily due to favorable product mix and from volume leverage, offset by lower realized prices and the impact from foreign currency movements, which decreased gross profit margin by approximately 100 basis points, including the impact of hedge losses in the current year compared to hedge gains in the prior year.
Operating Expenses. The increase in sales and marketing was primarily due to higher personnel-related costs, offset by reduced travel costs. The decrease in general and administrative expenses was primarily due to an increase in the bad debt reserve during the first quarter of 2020, partially offset by higher personnel-related costs. The increase in research and development expense is primarily due to higher personnel-related costs and third-party development costs, partially offset by leveraging LPD personnel to support our human COVID testing products. The overall change in currency exchange rates resulted in an increase in operating expenses of approximately 3%.
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Other
The following table presents the Other results of operations:
| For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||
Results of Operations (dollars in thousands) | 2021 | Percent of Revenue | 2020 | Percent of Revenue | Amount | Percentage | ||||||||||||||||||||||||||||||||
| Revenues | $ | 11,630 | $ | 6,037 | $ | 5,593 | 92.7 | % | ||||||||||||||||||||||||||||||
| Cost of revenue | 4,068 | 2,851 | 1,217 | 42.7 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 7,562 | 65.0 | % | 3,186 | 52.8 | % | 4,376 | 137.4 | % | |||||||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 624 | 5.4 | % | 385 | 6.4 | % | 239 | 62.1 | % | |||||||||||||||||||||||||||||
| General and administrative | 322 | 2.8 | % | 2,224 | 36.8 | % | (1,902) | (85.5 | %) | |||||||||||||||||||||||||||||
| Research and development | 784 | 6.7 | % | 456 | 7.6 | % | 328 | 71.9 | % | |||||||||||||||||||||||||||||
| Total operating expenses | 1,730 | 14.9 | % | 3,065 | 50.8 | % | (1,335) | (43.6 | %) | |||||||||||||||||||||||||||||
| Income from operations | $ | 5,832 | 50.1 | % | $ | 121 | 2.0 | % | $ | 5,711 | 4,719.8 | % | ||||||||||||||||||||||||||
Revenue. The increase in revenue was primarily due to our OPTI COVID-19 PCR testing products and services, which were introduced in the second quarter of 2020. The future demand for this product is difficult to project given the uncertain nature of the COVID-19 pandemic, including the availability of vaccines, available PCR testing capacity, and alternative suppliers, we currently anticipate lower revenues in the second half of 2021, as compared to the prior year. The impact of currency movements on revenue was immaterial.
Gross Profit. The increase in gross profit was primarily due to sales volumes of our OPTI COVID-19 PCR testing products and services. The gross profit margin increased 1,220 basis points primarily due to favorable product mix from OPTI COVID-19 PCR testing, partially offset by higher product costs in our other OPTI products. The overall change in currency exchange rates had an immaterial impact on gross profit.
Operating Expenses. The increase in sales and marketing expense was primarily due to higher personnel-related costs associated with our OPTI COVID-19 PCR product and services. The decrease in general and administrative expense was primarily due to lower foreign exchange losses on settlements of foreign currency denominated transactions, as compared to the prior year, for all operating segments, which are reported within our Other segment. The increase in research and development cost was primarily due to higher personnel-related and project costs associated with the OPTI COVID-19 PCR test.
Non-Operating Items
Interest Expense. Interest expense was $7.6 million for the three months ended March 31, 2021, as compared to $7.7 million for the same period in the prior year.
Provision for Income Taxes. Our effective income tax rate was 14.9% for the three months ended March 31, 2021, as compared to 18.2% for the three months ended March 31, 2020. The decrease in our effective tax rate as compared to the same period in the prior year, was primarily driven by higher tax benefits from share-based compensation and regional earnings mix.
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Liquidity and Capital Resources
We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings, and amounts available under our Credit Facility. At March 31, 2021, we had $351.2 million of cash and cash equivalents, as compared to $383.9 million on December 31, 2020. Working capital totaled $477.1 million at March 31, 2021, as compared to $480.0 million at December 31, 2020. Additionally, at March 31, 2021, we had remaining borrowing availability of $998.6 million under our $1 billion Credit Facility, with no outstanding borrowings on the Credit Facility. The general availability of funds under our Credit Facility is reduced by $1.4 million for outstanding letters of credit. We believe that, if necessary, we could obtain additional borrowings to fund our growth objectives. We further believe that current cash and cash equivalents, funds generated from operations, and committed borrowing availability will be sufficient to fund our operations, capital purchase requirements, and anticipated growth needs for the next twelve months. We believe that these resources, coupled with our ability, as needed, to obtain additional financing, will also be sufficient to fund our business as currently conducted for the foreseeable future. We may enter into new financing arrangements or refinance or retire existing debt in the future depending on market conditions. Should we require more capital in the U.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in the U.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings.
We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and marketable securities are generally available without restrictions to fund ordinary business operations outside the U.S.
The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries:
Cash, cash equivalents and marketable securities (dollars in millions) | March 31, 2021 | December 31, 2020 | ||||||||||||
| U.S. | $ | 204.2 | $ | 248.4 | ||||||||||
| Foreign | 147.0 | 135.5 | ||||||||||||
| Total | $ | 351.2 | $ | 383.9 | ||||||||||
| Total cash, cash equivalents and marketable securities held in U.S. dollars by our foreign subsidiaries | $ | 32.3 | $ | 18.0 | ||||||||||
Of the $351.2 million of cash and cash equivalents held as of March 31, 2021, greater than 99% was held as bank deposits.
The following table presents additional key information concerning working capital:
| For the Three Months Ended | |||||||||||||||||||||||||||||
| March 31, 2021 | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | |||||||||||||||||||||||||
Days sales outstanding(1) | 41.8 | 42.2 | 41.5 | 44.4 | 41.5 | ||||||||||||||||||||||||
Inventory turns(2) | 2.0 | 2.1 | 1.9 | 1.6 | 1.9 | ||||||||||||||||||||||||
(1) Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days.
(2) Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the average inventory balances at the beginning and end of each quarter.
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Sources and Uses of Cash
The following table presents cash provided (used):
| For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2021 | 2020 | Dollar Change | |||||||||||||||||
| Net cash provided by operating activities | $ | 124,422 | $ | 27,871 | $ | 96,551 | ||||||||||||||
| Net cash used by investing activities | (24,587) | (49,670) | 25,083 | |||||||||||||||||
| Net cash (used) provided by financing activities | (129,651) | 16,901 | (146,552) | |||||||||||||||||
| Net effect of changes in exchange rates on cash | (2,949) | (4,033) | 1,084 | |||||||||||||||||
| Net change in cash and cash equivalents | $ | (32,765) | $ | (8,931) | $ | (23,834) | ||||||||||||||
Operating Activities. The increase in cash provided by operating activities of $96.6 million was driven primarily by an increase in net income. The following table presents cash flow impacts from changes in operating assets and liabilities:
| For the Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands) | 2021 | 2020 | Dollar Change | |||||||||||||||||
| Accounts receivable | $ | (54,735) | $ | (38,062) | $ | (16,673) | ||||||||||||||
| Inventories | (7,919) | (14,434) | 6,515 | |||||||||||||||||
| Accounts payable | 2,460 | (1,755) | 4,215 | |||||||||||||||||
| Deferred revenue | (2,287) | (2,410) | 123 | |||||||||||||||||
| Other assets and liabilities | (57,081) | (64,881) | 7,800 | |||||||||||||||||
| Total change in cash due to changes in operating assets and liabilities | $ | (119,562) | $ | (121,542) | $ | 1,980 | ||||||||||||||
Cash used due to changes in operating assets and liabilities during the three months ended March 31, 2021, as compared to the same period in the prior year, decreased by approximately $2.0 million. The change in other assets and liabilities was due to favorable timing of payroll, as well as higher non-cash operating expenses recorded as accrued liabilities, including annual employee incentive programs, partially offset by higher incentive payments in 2021, as compared to 2020. Additionally, lower inventory growth due to high demand in the current year contributed to lower cash used as compared to the same period in the prior year, which was impacted by the onset of the COVID-19 pandemic. These factors were partially offset by an increase in accounts receivable related to revenue growth compared to the same period in the prior year, which was impacted by the onset of the COVID-19 pandemic.
We have historically experienced proportionally lower net cash flows from operating activities during the first quarter and proportionally higher cash flows from operating activities for the remainder of the year driven primarily by payments related to annual employee incentive programs in the first quarter following the year for which the bonuses were earned.
Investing Activities. Cash used by investing activities was $24.6 million for the three months ended March 31, 2021, as compared to $49.7 million for the same period in the prior year. The decrease in cash used by investing activities was primarily due to the completion of our long-term major facilities projects during 2020.
Financing Activities. Cash used by financing activities was $129.7 million for the three months ended March 31, 2021, as compared to $16.9 million of cash provided for the same period in the prior year. The increase in cash used by financing activities was due to lower borrowings on our Credit Facility compared to the first quarter of 2020, partially offset by using less cash to repurchase shares of our common stock during the first quarter of 2021, as compared to the same period in the prior year.
Cash used to repurchase shares of our common stock decreased $50.6 million during the three months ended March 31, 2021. We believe that the repurchase of our common stock is a favorable means of returning value to our stockholders, and we also repurchase our stock to offset the dilutive effect of our share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing activities and the share price. See Note 11 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our share repurchases.
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There was no activity under our Credit Facility during the three months ended March 31, 2021, as compared to $198.1 million of net borrowings in the same period of the prior year. At March 31, 2021, we had no outstanding borrowings under the Credit Facility. The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and violations of laws and regulations. The obligations under our Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974 (“ERISA”), the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default.
The Credit Agreement contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, certain restrictive agreements and sanctions laws and regulations. The financial covenant is a consolidated leverage ratio test.
On July 21, 2021, our 2021 Series A Notes for $50 million becomes due, and we anticipate paying the Series A Notes with cash provided by operations. 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 Agreements, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency-related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under ERISA, the failure to pay specified indebtedness and cross-acceleration to specified indebtedness.
Effect of Currency Translation on Cash. The net effect of changes in foreign currency exchange rates is related to changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries. These changes will fluctuate for each period presented as the value of the U.S. dollar relative to the value of the foreign currencies changes. A currency’s value depends on many factors, including interest rates and the country’s debt levels and strength of economy.
Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities, except for letters of credit and third-party guarantees.
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Financial Covenant. The sole financial covenant of our Credit Facility and Senior Note Agreements is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation and amortization, non-recurring transaction expenses incurred in connection with acquisitions, share-based compensation expense, and certain other non-cash losses and charges (“Adjusted EBITDA”) not to exceed 3.5-to-1. At March 31, 2021, we were in compliance with such covenant. The following details our consolidated leverage ratio calculation:
| (in thousands) | Twelve months ended | ||||
| Trailing 12 Months Adjusted EBITDA: | March 31, 2021 | ||||
| Net income attributable to stockholders (as reported) | $ | 674,206 | |||
| Interest expense | 33,017 | ||||
| Provision for income taxes | 90,738 | ||||
| Depreciation and amortization | 97,851 | ||||
| Acquisition-related expense | 773 | ||||
| Share-based compensation expense | 32,542 | ||||
| Extraordinary and other non-recurring non-cash charges | 2,501 | ||||
| Adjusted EBITDA | $ | 931,628 | |||
| (in thousands) | |||||
| Debt to Adjusted EBITDA Ratio: | March 31, 2021 | ||||
| Line of credit | $ | — | |||
| Current and long-term portions of long-term debt | 903,718 | ||||
| Total debt | 903,718 | ||||
| Acquisition-related contingent consideration payable | 2,608 | ||||
| Financing leases | 22 | ||||
| Deferred financing costs | 609 | ||||
| Gross debt | $ | 906,957 | |||
| Gross debt to Adjusted EBITDA ratio | 0.97 | ||||
| Less: Cash and cash equivalents | $ | (351,163) | |||
| Net debt | $ | 555,794 | |||
| Net debt to Adjusted EBITDA ratio | 0.60 | ||||
Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which should be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.
Other Commitments, Contingencies and Guarantees
Significant commitments, contingencies and guarantees at March 31, 2021, are described in Note 15 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting us, see the section under the heading “Part II. Item 7A. Quantitative and Qualitative Disclosure About Market Risk” of our 2020 Annual Report. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our 2020 Annual Report, except for the impact of foreign exchange rates, as discussed below.
Foreign Currency Exchange Impacts. Approximately 23% of our consolidated revenue was derived from products manufactured in the U.S. and sold internationally in local currencies for the three months ended March 31, 2021, as compared to 21% for the three months ended March 31, 2020. Strengthening of the U.S. dollar exchange rate relative to other currencies has a negative impact on our revenues derived in currencies other than the U.S. dollar and on profits of products manufactured in the U.S. and sold internationally, and a weakening of the U.S. dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated costs and expenses and foreign currency denominated supply contracts partly offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. dollar denominated revenues.
Our foreign currency exchange impacts are comprised of three components: 1) local currency revenues and expenses; 2) the impact of hedge contracts; and 3) intercompany and monetary balances for our subsidiaries that are denominated in a currency that is different from the functional currency used by each subsidiary. Based on projected revenues and expenses for the remainder of 2021, excluding the impact of intercompany and trade balances denominated in currencies other than the functional subsidiary currencies, we project a 1% strengthening of the U.S. dollar would reduce revenue by approximately $8 million and operating income by approximately $4 million. Additionally, we project our foreign currency hedge contracts in place as of March 31, 2021, would result in incremental offsetting gains of approximately $1.5 million. The impact of the intercompany and trade balances, and monetary balances referred to in the third component above have been excluded, as they are transacted at multiple times during the year and we are not able to reliably forecast the impact that changes in exchange rates would have on such balances.
At our current foreign currency exchange rate assumptions, we anticipate the effect of a weaker U.S. dollar for the remainder of the year will have an favorable impact on our operating results by increasing our revenues, operating profit, and diluted earnings per share for the remainder of the year ending December 31, 2021, by approximately $21 million, $6.5 million, and $0.06 per share, respectively. This favorable currency impact includes foreign currency hedging activity, which is expected to decrease total Company operating profit by approximately $2 million and diluted earnings per share by $0.03 for the remainder of the year ended December 31, 2021. The actual impact of changes in the value of the U.S. dollar against foreign currencies in which we transact may materially differ from our expectations described above. The above estimates assume that the value of the U.S. dollar will reflect the euro at 1.17, the British pound at 1.36, the Canadian dollar at 0.79, and the Australian dollar at 0.75; and the Japanese yen at ¥111, the Chinese renminbi at RMB 6.64 and the Brazilian real at R$5.75 relative to the U.S. dollar for the remainder of 2021.
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The following table presents the estimated foreign currency exchange impact on our revenues, operating profit, and diluted earnings per share for the current period and as compared to the respective prior-year period:
| For the Three Months Ended March 31, | |||||||||||
| (in thousands, except per share amounts) | 2021 | 2020 | |||||||||
| Revenue impact | $ | 19,434 | $ | (6,557) | |||||||
| Operating profit impact, excluding hedge activity and exchange impacts on settlement of foreign currency denominated transactions | $ | 11,761 | $ | (2,334) | |||||||
| Hedge (losses) gains - current period | (2,430) | 1,341 | |||||||||
| Exchange (losses) on settlements of foreign currency denominated transactions - current period | (70) | (1,907) | |||||||||
| Operating profit impact - current period | $ | 9,261 | $ | (2,900) | |||||||
| Hedge (gains) - prior period | (1,341) | (1,411) | |||||||||
| Exchange losses on settlement of foreign currency denominated transactions - prior period | 1,907 | 223 | |||||||||
| Operating profit impact - as compared to prior period | $ | 9,827 | $ | (4,088) | |||||||
| Diluted earnings per share impact - as compared to prior period | $ | 0.09 | $ | (0.04) | |||||||
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures, as defined by the SEC in its Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures at March 31, 2021, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our activities, we are at times subject to pending and threatened legal actions that arise out of the ordinary course of business. In the opinion of management, based in part upon advice of legal counsel, the disposition of any such currently pending matters is not expected to have a material effect on our results of operations, financial condition, or cash flows. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that our results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I. Item 1A. Risk Factors” in our 2020 Annual Report, which could materially affect our business, financial condition, or future results. There have been no material changes from the risk factors previously disclosed in the 2020 Annual Report. The risks described in our 2020 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2021, we repurchased shares of common stock as described below:
| Period | Total Number of Shares Purchased (a) | Average Price Paid per Share (b) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) (c) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) (d) | ||||||||||||||||||||||
| January 1 to January 31, 2021 | 43,550 | $ | 488.24 | 43,550 | 6,232,362 | |||||||||||||||||||||
| February 1 to February 28, 2021 | 98,568 | $ | 531.66 | 71,029 | 6,161,333 | |||||||||||||||||||||
| March 1 to March 31, 2021 | 162,950 | $ | 494.19 | 162,950 | 5,998,383 | |||||||||||||||||||||
| Total | 305,068 | (2) | $ | 505.45 | 277,529 | 5,998,383 | ||||||||||||||||||||
The total shares repurchased include shares surrendered for employee statutory tax withholding. See Note 11 to the unaudited condensed consolidated financial statements in Part I. Item 1. of this Quarterly Report on Form 10-Q for additional information about our share repurchases.
(1)On August 13, 1999, our Board of Directors approved and announced the repurchase of our common stock in the open market or in negotiated transactions pursuant to the Company’s share repurchase program. The authorization has been increased by the Board of Directors on numerous occasions; most recently, on February 12, 2020, the maximum level of shares that may be repurchased under the program was increased from 68 million to 73 million shares. There is no specified expiration date for this share repurchase program. There were no other repurchase programs outstanding during the three months ended March 31, 2021, and no share repurchase programs expired during the period. There were 277,529 share repurchases made during the three months ended March 31, 2021, in transactions made pursuant to our share repurchase program.
(2)During the three months ended March 31, 2021, we received 27,539 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the share repurchase program.
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Item 6. Exhibits
| Exhibit No. | Description | ||||
| 101 | The following financial and related information from IDEXX Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline eXtensible Business Reportable Language (iXBRL) includes: (i) the Condensed Consolidated Balance Sheet; (ii) the Condensed Consolidated Statement of Income; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity; (v) the Condensed Consolidated Statement of Cash Flows; and, (vi) Notes to Consolidated Financial Statements. | ||||
| 104 | The cover page from the Company's Quarterly Report of Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL and contained in Exhibit 101. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IDEXX LABORATORIES, INC. | |||||
| /s/ Brian P. McKeon | |||||
| Date: May 4, 2021 | Brian P. McKeon | ||||
| Executive Vice President, Chief Financial Officer and Treasurer | |||||
| (Principal Financial Officer) | |||||
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