IDEXX LABORATORIES INC /DE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10K. The discussion of our financial condition and results of operations and liquidity and capital resources for the year endedDecember 31, 2020 , and year-over-year comparisons between 2021 and 2020, is included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and is incorporated by reference herein.
We have included certain terms and abbreviations used throughout this Annual
Report on Form 10-K in the “Glossary of Terms and Selected Abbreviations.”
Description of Business Segments. We operate primarily through three business segments: diagnostic and information management-based products and services for the companion animal veterinary industry, which we refer to as theCompanion Animal Group ("CAG"); water quality products ("Water"); and diagnostic products and services for livestock and poultry health and to ensure the quality and safety of milk and improve producer efficiency, which we refer to as Livestock, Poultry and Dairy ("LPD"). Our Other operating segment combines and presents our human medical diagnostic products and services business ("OPTI Medical") with our out-licensing arrangements because they do not meet the quantitative or qualitative thresholds for reportable segments. Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 3. Revenue Recognition and Note 17. Segment Reporting" to the consolidated financial statements for the year endedDecember 31, 2022 , included in this Annual Report on Form 10-K for financial information about our segments, including our product and service categories, and our geographic areas.
The following is a discussion of the strategic and operating factors that we
believe have the most significant effect on the performance of our business.
Our strategy is to provide veterinarians with the highest quality diagnostic information, software products and services, and medical evidence to support more advanced medical care and information management solutions that help demonstrate the value of diagnostics to pet owners and enable efficient and effective practice management. By doing so, we are able to build a mutually successful relationship with our veterinarian customers based on healthy pets, loyal customers, staff efficiency, and expanding practice revenues.CAG Diagnostics . We provide diagnostic capabilities that meet veterinarians' diverse needs through a variety of modalities including in-clinic diagnostic solutions and outside reference laboratory services. Veterinarians that utilize our full line of diagnostic modalities obtain a single view of a patient's diagnostic results, which allows them to track and evaluate trends and achieve greater medical insight. Our diagnostic capabilities generate both recurring and non-recurring revenues. Revenues related to capital placements of our in-clinic IDEXX VetLab suite of instruments and our SNAP Pro Analyzer are non-recurring in nature in that they are sold to a particular customer only once. Revenues from the associatedIDEXX VetLab consumables, SNAP rapid assay test kits, reference laboratory and consulting services, and extended maintenance agreements and accessories related to our IDEXX VetLab instruments and our SNAP Pro Analyzer are recurring in nature, in that they are regularly purchased by our customers, typically as they perform diagnostic testing as part of ongoing veterinary care services. Our recurring revenues, most prominently IDEXX VetLab consumables and rapid assay test kits, have significantly higher gross margins than those provided by our instrument sales. Therefore, the mix of recurring and non-recurring revenues in a particular period will impact our gross margins. Diagnostic Capital Revenue. Revenues related to the placement of theIDEXX VetLab suite of instruments are non-recurring in nature, in that the customer will buy an instrument once over its respective product life cycle, but will purchase consumables for that instrument on a recurring basis as they use that instrument for testing purposes. During the early stage of an instrument's life cycle, we derive relatively greater revenues from instrument placements, while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placement revenues begin to decline. In the early stage of an instrument's life cycle, placements are made primarily through sales transactions. As the demand for the product matures, an increasing percentage of placements are made in transactions, sometimes referred to as 34 -------------------------------------------------------------------------------- volume commitments, such as ourIDEXX 360 program, or reagent rentals, in which instruments are placed at customer sites at little or no cost in exchange for a multi-year customer commitment to purchase recurring products and services.
Below is a table showing active installed base units of our premium diagnostic
instruments as of the years ended
(units in thousands) Installed Base
Instrument December 31, 2022 December 31, 2021 December 31, 2020
Catalyst 63.1 56.6 49.7
Premium Hematology 43.1 38.2 34.6
SediVue 15.6 13.2 10.7
Our long-term success in the continuing growth of our CAG recurring diagnostic
product and services is dependent upon: growing volumes at existing customers by
increasing their utilization of existing and new test offerings, acquiring new
customers, maintaining high customer loyalty and retention, and realizing modest
annual price increases based on our differentiated products and the growing
value of our diagnostic offering. We continuously seek opportunities to enhance
the care that veterinary professionals give to their patients and clients
through supporting the implementation of real-time care testing workflows, which
is performing tests and sharing test results with the client at the time of the
patient visit. Our latest generation of chemistry, hematology, and urinalysis
instruments demonstrates this commitment by offering enhanced ease of use,
faster time to results, broader test menu and connectivity to various
information technology platforms that enhance the value of the diagnostic
information generated by the instruments. In addition, we provide marketing
tools and customer support that help drive efficiencies in veterinary practice
processes and allow practices to increase the number of clients they see on a
daily basis.
With all of our instrument product lines, we seek to differentiate our products
from our competitors' products based on time-to-result, ease-of-use, throughput,
breadth of diagnostic menu, flexibility of menu selection, accuracy,
reliability, ability to handle compromised samples, analytical capability of
diagnostics software, integration with the IVLS and VetConnect PLUS, client
communications capabilities, education and training, and superior sales and
customer service. Our success depends, in part, on our ability to differentiate
our products in a way that justifies a premium price.
Recurring Diagnostic Revenue. Revenues from our IDEXX VetLab consumable
products, our SNAP rapid assay test kits, outside reference laboratory and
consulting services, and extended maintenance agreements and accessories related
to our CAG Diagnostics instruments are considered recurring in nature. For the
year ended December 31, 2022 , recurring diagnostic revenue, which is both highly
durable and profitable, accounted for approximately 79{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} of our
consolidated revenue.
Our in-clinic diagnostic solutions, consisting of our IDEXX VetLab consumable
products and SNAP rapid assay test kits, provide real-time reference lab quality
diagnostic results for a variety of companion animal diseases and health
conditions. Our outside reference laboratories provide veterinarians with the
benefits of a more comprehensive list of diagnostic tests and access to
consultations with board-certified veterinary specialists and pathologists,
combined with the benefit of same-day or next-day turnaround times.
We derive substantial revenues and margins from the sale of consumables that are
used in IDEXX VetLab instruments, and the multi-year consumable revenue stream
is significantly more valuable than the placement of the instrument. Our
strategy is to increase diagnostic testing within veterinary practices by
placing IDEXX VetLab instruments and increasing instrument utilization of
consumables. Utilization can increase due to a greater number of patient samples
being run or to an increase in the number of tests being run per patient sample.
Our strategy is to increase both drivers. To increase utilization, we seek to
educate veterinarians about best medical practices that emphasize the importance
of chemistry, hematology, and urinalysis testing for a variety of diagnostic
purposes, as well as by introducing new testing capabilities that were
previously not available to veterinarians.
Our in-clinic diagnostic solutions also include SNAP rapid assay tests that
address important medical needs for particular diseases prevalent in the
companion animal population. We seek to differentiate these tests from those of
other in-clinic test providers and reference laboratory diagnostic service
providers based on critically important sensitivity and specificity, as
demonstrated by peer-reviewed third-party research, as well as overall superior
performance and ease of use by providing our customers with combination tests
that test a single sample for up to six diseases at once, including the ability
to utilize our SNAP Pro Analyzer. We further augment our product development and
customer service efforts with sales and
35
--------------------------------------------------------------------------------
marketing programs that enhance medical awareness and understanding regarding
certain diseases and the importance of diagnostic testing.
The prevalence of in-clinic testing, as opposed to outside reference laboratories such asIDEXX Reference Laboratories , may vary by region. We attempt to differentiate our reference laboratory testing services from those of competitive reference laboratories and competitive in-clinic offerings primarily on the basis of a differentiated test menu, technology employed, quality, turnaround time, customer service and tools such as VetConnect PLUS that demonstrate the complementary manner in which our laboratory services work with our in-clinic offerings. Profitability in our lab business is supported, in part, by our expanding business scale globally. Profit improvements also reflect benefits from price increases and our ability to achieve operational efficiencies. When possible, we utilize core reference laboratories to service samples from other states or countries, expanding our customer reach without an associated expansion in our reference laboratory footprint. New laboratories may operate at a loss until testing volumes achieve sufficient scale. Acquired laboratories frequently operate less profitably than our existing laboratories and acquired laboratories may not achieve the profitability of our existing laboratory network for several years until we complete the implementation of operating improvements and efficiencies. Therefore, in the short term, new and acquired reference laboratories generally may have a negative effect on our operating margin. Recurring reference lab revenue growth is achieved both through increased testing volumes with existing customers and through the acquisition of new customers, net of customer losses. We believe the increased number of customer visits by our sales professionals as a result of the growth in our field sales organization has led to increased reference laboratory opportunities with customers who already use one of our in-clinic diagnostic modalities. In recent years, recurring reference laboratory diagnostic and consulting revenues have also been increased through reference laboratory acquisitions, customer list acquisitions, the opening of new reference laboratories, including laboratories that are co-located with large practice customers, and as a result of our up-front customer loyalty programs and our volume commitment programs. Our up-front customer loyalty programs are associated with customer acquisitions and retention and provide incentives to customers in the form of cash payments or IDEXX Points upon entering multi-year contractual agreements to purchase annual minimum amounts of products or services, including reference laboratory services. Our volume commitment programs, such asIDEXX 360, 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.Veterinary Software , Services and Diagnostic Imaging Systems. Our portfolio of practice management offerings is designed to serve the full range of customers primarily within the North American, Australian,New Zealand , and European regions. Cornerstone, ezyVet, Animana, IDEXX Neo, and DVMAX practice management systems provide superior integrated information solutions, backed by exceptional customer support and education. These practice management systems allow the veterinarian to practice better medicine and achieve the practice's business objectives, including a quality client experience, staff efficiency and practice effectiveness and profitability. We market Cornerstone, ezyVet, IDEXX Neo, and DVMAX practice management systems to customers primarily inNorth America ,Australia, and New Zealand . We market our Animana offering to customers primarily throughoutEurope . Animana, ezyVet, and IDEXX Neo practice management systems are subscription-based SaaS offerings designed to provide flexible pricing and a durable, recurring revenue stream, while utilizing cloud technology instead of a client server platform. While we continue to support our licensed-based Cornerstone and DVMAX software, we are growing our installed base of subscription-based practice management offerings for new customers ofIDEXX practice management systems. We believe that once established, this subscription-based model will provide higher profitability as compared to the historical license-based placements. Our Cornerstone and DVMAX customer base continues to be an important driver of growth through enhanced diagnostic integrations and high value add-on subscription services, such asPet Health Network Pro, Petly Plans, and credit card processing, and we continue to make investments to enhance the customer experience of all of our license-based software offerings. We also offer rVetLink, a comprehensive referral management solution for specialty care hospitals that streamlines the referral process between primary care and specialty care veterinarians. rVetLink's cloud technology integrates with major specialty hospital management systems, includingCornerstone Software andDVMAX Software . We differentiate our practice management systems through enhanced functionality, ease of use, and embedded integration with in-clinic IDEXX VetLab instruments and outside reference laboratory test results. Our client communication services create more meaningful pet owner experiences through personalized communication. With our SmartFlow and Vet Radar cloud technology, we are able to improve overall patient management through coordination and tracking of every step in a patient workflow. Pet Health Network Pro online client communication and education service complements the entireIDEXX 36 --------------------------------------------------------------------------------
product offering by educating pet owners and building loyalty through engaging
the pet owner before, during and after the visit, thereby building client
loyalty and driving more patient visits.
Our diagnostic imaging systems offer a convenient radiographic solution that provides superior image quality and the ability to share images with clients virtually anywhere.IDEXX imaging software enables enhanced diagnostic features and streamlined integration with our other products and services. Our digital radiography systems, enables low-dose radiation image capture without sacrificing clear, high-quality diagnostic images, reducing the risk posed by excess radiation exposure for veterinary professionals. Placements of imaging systems are important to the growth of revenue streams that are recurring in nature, including extended maintenance agreements and IDEXX Web PACS, which is our cloud-based SaaS offering for viewing, accessing, storing, and sharing multi-modality diagnostic images. We derive relatively higher margins from our subscription-based products. IDEXX Web PACS is integrated with Cornerstone, ezyVet, IDEXX Neo, DVMAX, and IDEXX VetConnect PLUS to provide centralized access to diagnostic imaging results alongside patient diagnostic results from any internet connected device.
Water
Our strategy in the water testing business is to develop, manufacture, market and sell products that test primarily for the presence of microbial contamination in water matrices, including drinking water supplies, with superior performance, supported by exceptional customer service. Our customers primarily consist of water utilities, government laboratories and private certified laboratories that highly value strong relationships and customer support. We expect that future growth in this business will be partially dependent on our ability to increase international sales. Growth also will be dependent on our ability to enhance and broaden our product line. Most water microbiological testing is driven by regulation, and, in many countries, a test may not be used for compliance testing unless it has been approved by the applicable regulatory body and integrated into customers' testing protocols. As a result, we maintain an active regulatory program that involves applying for a growing number of regulatory approvals in a number of countries, primarily inEurope . Further, we seek to receive regulatory approvals from governing agencies as a means to differentiate our products from the competition.
Livestock, Poultry and Dairy
We develop, manufacture, market, and sell a broad range of tests and perform services for various livestock diseases and conditions, and have active research and development and in-licensing programs in this area. Our strategy is to offer differentiated tests with superior performance characteristics for use in government programs to control or eradicate disease and disease outbreaks and in livestock and poultry producers' disease, reproductive, and herd health and production management programs. Our Alertys Ruminant Pregnancy Test, Rapid Visual Pregnancy Test and Alertys On-Farm Pregnancy Test for cattle can detect pregnancy 28 days after breeding. These tests provide a quick and accurate identifier using whole blood samples. Disease outbreaks are episodic and unpredictable, and certain diseases that are prevalent at one time may be substantially contained or eradicated at a later time. In response to outbreaks, testing initiatives may lead to exceptional demand for certain products in certain periods. Conversely, successful eradication programs may result in significantly decreased demand for certain products. In addition, increases in government funding may lead to increased demand for certain products and budgetary constraints may lead to decreased demand for certain products. As result, the performance in certain sectors of this business can fluctuate. Our strategy in the dairy testing business is to develop, manufacture and sell antibiotic residue and contaminant testing products that satisfy applicable regulatory requirements or dairy processor standards for testing of milk and provide reliable field performance. The manufacture of these testing products leverages the SNAP platform and production assets that also support our rapid assay business, which also leverages the SNAP platform. The dairy SNAP products incorporate customized reagents for antibiotic and contaminant detection.
Other
OPTI Medical. Our strategy in the OPTI Medical business for the human market is
to develop, manufacture, and sell electrolyte and blood gas analyzers, and
related consumable products for the medical point-of-care diagnostics sector
worldwide, with a focus on small to mid-sized hospitals. We seek to
differentiate our products based on ease of use, convenience, international
distribution and service and instrument reliability. Similar to our veterinary
instruments and consumables strategy, a substantial portion of the revenues from
this product line is derived from the sale of consumables for use on the
installed base of electrolyte and blood gas analyzers. During the early stage of
an instrument's life cycle, relatively greater revenues are derived from
instrument placements, while consumable sales become relatively more significant
in later
37
--------------------------------------------------------------------------------
stages as the installed base of instruments increases and instrument placement
revenues begin to decline. Our long-term success in this area of our business is
dependent upon new customer acquisition, customer retention and increased
customer utilization of existing and new assays introduced on these instruments.
During 2020, we introduced the OPTI SARS-CoV-2 RT-PCR test kit for human
COVID-19 testing. A significant portion of the 2021 growth in our OPTI Medical
business was from revenue generated from the test kits and related laboratory
services. The amount of revenue from this product decreased in 2022, with less
demand for testing. We expect revenues from COVID-19 related testing products
and services to be inconsequential in 2023.
Our facility in Roswell, Georgia develops and manufactures the OPTI product
lines using the same or similar technology to support the electrolyte
requirements of certain CAG products. We leverage this facility's know-how,
intellectual property, and manufacturing capability to continue to expand the
menu and instrument capability of the VetStat and Catalyst platforms for
veterinary applications, while reducing our cost of consumables by leveraging
experience and economies of scale.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance withU.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. Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 2. Summary of Significant Accounting Policies" to the consolidated financial statements included in this Annual Report on Form 10-K for a description of the significant accounting policies used in preparation of these consolidated financial statements. We believe the following critical accounting estimates and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change.
Revenue Recognition
Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 3. Revenue Recognition" to the consolidated financial statements for the year endedDecember 31, 2022 , included in this Annual Report on Form 10-K for additional information about our revenue recognition policy and criteria for recognizing revenue. We enter into contracts where customers purchase combinations ofIDEXX products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires judgment. We determine the transaction price for a contract based on the total consideration we expect to receive in exchange for the transferred goods or services. To the extent the transaction price includes variable consideration, such as volume rebates or expected price adjustments, we apply judgment in constraining the estimated variable consideration due to factors that may cause reversal of revenue recognized. We evaluate constraints based on our historical and projected experience with similar customer contracts. We allocate revenue to each performance obligation in proportion to the relative standalone selling prices and recognize revenue when control of the related goods or services is transferred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the promised product or service 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. Our up-front loyalty programs provide customers with incentives in the form of cash payments or IDEXX Points upon entering into multi-year agreements to purchase annual minimum amounts of future products or services. If a customer breaches their agreement, they are required to refund all or a portion of the up-front cash or IDEXX Points, or make other repayments, remedial actions, or both. Up-front incentives to customers in the form of cash or IDEXX Points are not made in exchange for distinct goods or services and are capitalized as customer acquisition costs within other current and long-term assets, which are subsequently recognized as a reduction to revenue over the term of the customer agreement. If these up-front incentives are 38 -------------------------------------------------------------------------------- subsequently utilized to purchase instruments, we allocate total consideration, including future committed purchases less up-front incentives and estimates of expected price adjustments, based on relative standalone selling prices to identified performance obligations and recognize instrument revenue and cost at the time of installation and customer acceptance. We estimate, based on historical experience, and apply judgment to predict the amounts of future customer purchases and expected price adjustments related to these multi-year agreements. Differences between estimated and actual customer purchases may impact the timing and amount of revenue recognition during the term of the customer contract, and a 10{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} change in these estimates would have increased or reduced deferred revenue and cumulative revenue related to these programs by approximately$1.1 million atDecember 31, 2022 . Our volume commitment programs, such as ourIDEXX 360 program, provide customers with free or discounted instruments or systems 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 products and services over the term of the contract. We estimate, based on historical experience, and apply judgment to predict the amounts of future customer purchases and expected price adjustments related to these multi-year agreements. Differences between estimated and actual customer purchases may impact the timing and amount of revenue recognition during the term of the customer contract, and a 10{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} change in these estimates would have increased or reduced contract assets and cumulative revenue related to these programs by approximately$4.3 million atDecember 31, 2022 . 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 subsequently recognized upon the purchase of products and services, partly offsetting rebates as they are earned. We estimate, based on historical experience, and apply judgment to predict the amounts of future customer rebates related to these multi-year agreements. Differences between estimated and actual customer rebates may impact the timing and amount of revenue recognition during the term of the customer contract, and a 10{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} change in these estimates would have increased or reduced deferred revenue and cumulative revenue related to these programs by approximately$2.8 million atDecember 31, 2022 . Future market conditions and changes in product offerings may cause us to change marketing strategies to increase or decrease customer incentive offerings, possibly resulting in incremental reductions of revenue in future periods as compared to reductions in the current or prior periods. Additionally, certain customer programs require us to estimate, based on historical experience, and apply judgment to predict the amounts of future customer purchases, customer rebates and other incentive payments, and price adjustments related to multi-year agreements. Differences between estimated and actual customer purchases may impact the timing and amount of revenue recognition as described above.
Valuation of
A significant portion of the purchase price for acquired businesses is generally assigned to intangible assets. Intangible assets other than goodwill are initially valued at fair value. If a quoted price in an active market for the identical asset is not readily available at the measurement date, the fair value of the intangible asset is estimated based on discounted cash flows using market participant assumptions, which are assumptions that are not specific toIDEXX . The selection of appropriate valuation methodologies and the estimation of discounted cash flows require significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the useful lives of intangible assets. When significant, we typically utilize independent valuation experts to advise and assist us in determining the fair values of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets.Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be separately identified and recognized. We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and whenever events or circumstances indicate impairment may exist. An impairment charge is recorded for the amount, if any, by which the carrying 39 -------------------------------------------------------------------------------- amount of goodwill exceeds its implied fair value. Our reporting units are the individual product and service categories that comprise our CAG operating segment, our Water and LPD operating segments and goodwill remaining from the restructuring of our pharmaceutical business in the fourth quarter of 2008. A substantial portion of the goodwill remaining from the pharmaceutical business, included in our "Other Segment," is associated with intellectual property that has been, or may be, licensed to third parties. Realization of this goodwill is dependent upon the success of those third parties in developing and commercializing products, which will result in our receipt of royalties and other payments. As part of our goodwill testing process, we evaluate factors specific to a reporting unit as well as industry and macroeconomic factors that are reasonably likely to have a material impact on the fair value of a reporting unit. Examples of the factors considered in assessing the fair value of a reporting unit include: the results of the most recent impairment test; the competitive environment; the regulatory environment; the effects natural disasters; anticipated changes in product, supply chain, or labor costs; revenue and profitability trends and expectations; the consistency of cash flows; and current and long-range financial forecasts. The long-range financial forecasts of the reporting units, which are based upon management's long-term view of our markets, are used by senior management and the Board of Directors to evaluate operating performance. In the fourth quarter of 2022, we performed a qualitative assessment of goodwill impairment for all of our reporting units, except for Pharmaceutical Activities, and concluded that it is not more likely than not that the fair value of any of those reporting units is less than its carrying amount, including goodwill. We maintain approximately$6.5 million of goodwill associated with Pharmaceutical Activities, which comprises pharmaceutical intellectual property, out-licensing arrangements, and certain retained drug delivery technologies from which we earn royalty revenue. For our Pharmaceutical Activities, we performed a quantitative assessment and concluded that the estimated fair value approximates the carrying amount of the reporting unit. We estimated the fair value of the Pharmaceutical Activities using an income approach based on discounted forecasted cash flows, making assumptions about future cash flows and discount rates. These is no guarantee that we will be able to maintain revenues from our remaining Pharmaceutical Activities. No goodwill impairments were identified during the years endedDecember 31, 2022 , 2021, and 2020. A prolonged economic downturn in theU.S. or internationally resulting in lower long-term growth rates and reduced long-term profitability may reduce the fair value of our reporting units. Industry specific events or circumstances could have a negative impact on our reporting units and may also reduce the fair value of our reporting units. Should such events occur, and it becomes more likely than not that a reporting unit's fair value has fallen below its carrying value, we will perform an interim goodwill impairment test, in addition to the annual impairment test. Future impairment tests may result in an impairment of goodwill. An impairment of goodwill would be reported as a non-cash charge to earnings. We also assess the realizability of intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an impairment review is triggered, we evaluate the carrying value of intangible assets, other than goodwill, based on estimated undiscounted future cash flows over the remaining useful life of the primary asset of the asset group and compare that value to the carrying value of the asset group. The asset group is the lowest level for which identifiable cash flows associated with the intangible asset are largely independent. The cash flows that are used contain our best estimates, using appropriate and customary assumptions and projections at the time. If the net carrying value of the asset group exceeds the related estimated undiscounted future cash flows, an impairment loss to adjust the intangible asset to its fair value would be reported as a non-cash charge to earnings. If necessary, we would calculate the fair value of an intangible asset using the present value of the estimated future cash flows to be generated by the intangible asset and apply a risk-adjusted discount rate. We had no impairments of our intangible assets during the years endedDecember 31, 2022 and 2021. The amount of impairment for the year endedDecember 31, 2020 was immaterial.
Income Taxes
The provision for income taxes is determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the estimated future tax effects of temporary differences between book
and tax treatment of assets and liabilities and carryforwards to the extent they
are realizable.
We assess our current and projected earnings by jurisdiction to determine
whether or not our earnings during the periods when the temporary differences
become deductible will be sufficient to realize the related future tax benefits.
Should we determine that we would not be able to realize all or part of our net
deferred tax asset in a particular jurisdiction in the future, an adjustment to
the deferred tax asset would be charged to income in the period such
determination was made.
For those jurisdictions where tax carryforwards are likely to expire unused or
the projected operating results indicate that realization is not more likely
than not, a valuation allowance is recorded to offset the deferred tax asset
within that
40
--------------------------------------------------------------------------------
jurisdiction. In assessing the need for a valuation allowance, we consider
future taxable income and ongoing prudent and feasible tax planning strategies.
In the event that we determine that we would be able to realize our deferred tax
assets in the future in excess of the net recorded amount, a reduction of the
valuation allowance would increase income in the period such determination was
made. Likewise, should we determine that we would not be able to realize all or
part of our net deferred tax asset in the future, a reduction to the deferred
tax asset would be charged against income in the period such determination was
made.
Our net taxable temporary differences and tax carryforwards are recorded using
the enacted tax rates expected to apply to taxable income in the periods in
which the deferred tax liability or asset is expected to be settled or realized.
Should the expected applicable tax rates change in the future, an adjustment to
our deferred taxes would be credited or charged, as appropriate, to income in
the period such determination was made.
We periodically assess our exposures related to our worldwide provision for
income taxes and believe that we have appropriately accrued taxes for
contingencies. Any reduction of these contingent liabilities or additional
assessment would increase or decrease income, respectively, in the period such
determination was made.
We record a liability for uncertain tax positions that do not meet the more likely than not standard as prescribed by the authoritative guidance for income tax accounting. We record tax benefits for only those positions that we believe will more likely than not be sustained. For positions that we believe that it is more likely than not that we will prevail, we record a benefit considering the amounts and probabilities that could be realized upon ultimate settlement. If our judgment as to the likely resolution of the uncertainty changes, if the uncertainty is ultimately settled or if the statute of limitation related to the uncertainty expires, the effects of the change would be recognized in the period in which the change, resolution or expiration occurs. Our net liability for uncertain tax positions was$25.8 million as ofDecember 31, 2022 , and$25.5 million as ofDecember 31, 2021 , which includes estimated interest expense and penalties. Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 14. Income Taxes" in the accompanying Notes to consolidated financial statements for more information.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to “Part II, Item 8. Financial Statements and Supplementary Data, Note 2.
Summary of Significant Accounting Policies (v) and (w)” to the consolidated
financial statements for the year ended
Annual Report on Form 10-K for a complete discussion of recent accounting
pronouncements adopted and not adopted.
RESULTS OF OPERATIONS AND TRENDS
Effects of Certain Factors on Results of Operations
CAG Trends. Global trends in companion animal healthcare, including growth in demand for clinical services, continue to support solid growth for companion animal diagnostic products and services across regions. In theU.S. , average diagnostics revenue per practice grew 6.9{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} on a same-store basis during 2022, faster than 5.1{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} growth in overall clinic revenues.U.S. same-store clinical visits at veterinary practices declined 2.3{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} in 2022, reflecting impacts this year from reductions in veterinary clinic capacity levels and comparison to high prior-year visit levels. Growth for pet healthcare including diagnostics remains elevated compared to pre-pandemic levels reflecting compound annual growth of 2.9{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} in clinical visits and 11.2{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} in same-store diagnostics revenues for theU.S. compared to 2019. Supply Chain and Logistics Challenges. We believe that building and maintaining a well-managed and disciplined infrastructure have helped minimize impacts of the current supply chain constraints, including product and component availability issues, logistics challenges, including extended shipping periods and delays, and inflationary pressures that are currently occurring worldwide. Our proactive approach to managing our operational processes, including forward planning with a focus on working closely with our suppliers and logistics partners, has enabled us to maintain continued high levels of product and service availability and customer service. We continue to monitor these supply chain and logistics challenges, including potential fuel rationing and shortages, and have implemented mitigation strategies to adjust for, among other things, delayed shipments of products and components. Although we expect these challenges to continue during 2023, we believe we are well-positioned to enable sustained high growth in our businesses going forward and to effectively manage the impacts of potentially relatively higher costs in certain areas to support these growth plans. However, there can be no assurance as to the duration or severity of the supply chain and logistics challenges or the effectiveness of our mitigating activities. 41 -------------------------------------------------------------------------------- War inUkraine / Russia Operations. Our operations in theRussia ,Belarus , andUkraine region are limited, with no manufacturing or significant supply arrangements. After significantly scaling back our operations inRussia in the first quarter of 2022, including suspending sales of veterinary diagnostic equipment; promotional, marketing, and hiring activities; and new business development and related investments, we decided inJune 2022 to wind down and liquidate our sole Russian subsidiary, as well as our direct Russian operations, which consisted of marketing and selling diagnostic products for veterinary clinics inRussia . We anticipate that only a limited number of our products, which are important for human or animal healthcare, will continue to be sold inRussia pursuant to ongoing third-party distribution agreements. Some of our products are also sold inBelarus pursuant to ongoing third-party distribution agreements. Historical revenues from theRussia ,Belarus , andUkraine region have been less than 1{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} of our total consolidated revenue. Distributor Purchasing and Inventories. When selling our products through distributors, changes in distributors' inventory levels can impact our reported sales, and these changes may be affected by many factors, which may not be directly related to underlying demand for our products by veterinary practices, which are the end users. If during the current year, distributors' inventories grew by less than those inventories grew in the comparable period of the prior year, then changes in distributors' inventories would have an unfavorable impact on our reported sales growth in the current period. Conversely, if during the current year, distributors' inventories grew by more than those inventories grew in the comparable period of the prior year, then changes in distributors' inventories would have a favorable impact on our reported sales growth in the current period.
In certain countries, we sell our products through third-party distributors and
may be unable to obtain data for sales to end users. We do not believe the
impact of changes in these distributors’ inventories had or would have a
material impact on our growth rates. Refer to “Part I, Item 1. Business,
Marketing and Distribution” included in this Annual Report on Form 10-K for
additional information regarding distribution channels.
Currency Impact. For the year endedDecember 31, 2022 , approximately 21{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} of our consolidated revenue was derived from products manufactured or sourced inU.S. dollars and sold internationally in local currencies, as compared to 23{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} for the year endedDecember 31, 2021 and 21{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} for the year endedDecember 31, 2020 . Strengthening of the rate of exchange for theU.S. dollar relative to other currencies has a negative impact on our revenues derived in currencies other than theU.S. dollar and on profits of products manufactured or purchased inU.S. dollars and sold internationally, and a weakening of theU.S. dollar has the opposite effect. Similarly, to the extent that theU.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated operating expenses and foreign currency denominated supply contracts partly offsets this exposure. Additionally, our designated hedges of intercompany inventory purchases and sales help delay the impact of certain exchange rate fluctuations on non-U.S. denominated revenues. Refer to "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" included in this Annual Report on Form 10-K for additional information regarding currency impact. Our future income tax expense could also be affected by changes in the mix of earnings, including as a result of changes in the rate of exchange for theU.S. dollar relative to currencies in countries with differing statutory tax rates. Refer to "Part I, Item 1A. Risk Factors" included in this Annual Report on Form 10-K for additional information regarding tax impacts. Effects of Economic Conditions. Demand for our products and services is vulnerable to changes in the economic environment, including slow economic growth, high unemployment, and credit availability. Negative or cautious consumer sentiment can lead to reduced or delayed consumer spending, resulting in a decreased number of patient visits to veterinary clinics. Unfavorable economic conditions can impact sales of instruments, diagnostic imaging, and practice management systems, which are larger capital purchases for veterinarians. Additionally, economic turmoil, fears of a global economic downturn or recession, and inflationary pressure can cause our customers to remain sensitive to the pricing of our products and services. In theU.S. , we monitor patient visits and clinic revenue data provided by a subset of our CAG customers. Although this data is a limited sample and susceptible to short-term impacts such as weather, which may affect the number of patient visits in a given period, we believe that this data provides a fair and meaningful long-term representation of the trend in patient visit activity in theU.S. , providing us insight regarding demand for our products and services. Economic conditions can also affect the purchasing decisions of our Water and LPD business customers. Water testing volumes may be susceptible to declines in discretionary testing for existing home and commercial sales and in mandated testing as a result of decreases in home and commercial construction. Testing volumes may also be impacted by severe weather conditions such as drought. In addition, fiscal difficulties can also reduce government funding for water and herd health screening services.
We believe that the diversity of our products and services and the geographic
diversity of our customers partially mitigate the potential effects of the
economic environment and negative consumer sentiment on our revenue growth
rates.
42 -------------------------------------------------------------------------------- Effects of Patent Expiration. Although we have several patents and licenses of patents and technologies from third parties that expired during 2022, and several that are expected to expire in 2023 and beyond, the expiration of these patents or licenses, individually or in the aggregate, is not expected to have a material effect on our financial position or future operations due to a range of factors as described in "Part I, Item 1. Business, Patents and Licenses." Non-GAAP Financial Measures. The following revenue analysis and discussion focuses on organic revenue growth, and references in this analysis and discussion to "revenue," "revenues" or "revenue growth" are references to "organic revenue growth." Organic revenue growth is a non-GAAP financial measure and represents the percentage change in revenue during the current year, as compared to the same period for the prior year, net of the effect of changes in foreign currency exchange rates, 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 withU.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 consider acquisitions to be a business when all three elements of inputs, processes and outputs are present, consistent with ASU 2017-01, "Business Combinations: (Topic 805) Clarifying the Definition of a Business." In a business combination, if substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, we do not consider these assets to be a business. A typical acquisition that we do not consider a business is a customer list asset acquisition, which does not have all elements necessary to operate a business, such as employees or infrastructure. We believe the efforts required to convert and retain these acquired customers are similar in nature to our existing customer base and therefore are included in organic revenue growth. We also use Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA ratio and net debt to Adjusted EBITDA ratio, all of which are non-GAAP financial measures that should be considered in addition to, and not as a replacement for, financial measures presented according toU.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility. Comparisons to Prior Periods. Our fiscal years end onDecember 31 . Unless otherwise stated, the analysis and discussion of our financial condition, results of operations and liquidity, including references to growth and organic growth and increases and decreases, are being compared to the equivalent prior year period. 43
--------------------------------------------------------------------------------
Twelve Months Ended
31, 2021
Total Company The following table presents revenue by operating segment byU.S. and non-U.S. , or international geographies: For the Years Ended December 31, Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue (dollars in thousands) 2022 2021 Dollar Change Growth (1) from Currency from Acquisitions Growth (1) CAG$ 3,058,793 $ 2,889,960 $ 168,833 5.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (3.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 8.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}United States 2,073,222 1,881,887 191,335 10.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} - 0.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 9.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} International 985,571 1,008,073 (22,502) (2.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) (9.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 6.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} Water $ 155,720$ 146,505 $ 9,215 6.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (4.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 9.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}United States 76,875 70,654 6,221 8.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} - - 8.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} International 78,845 75,851 2,994 3.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (7.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 1.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 10.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} LPD $ 122,607$ 135,887 $ (13,280) (9.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) (5.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) - (4.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})United States 16,633 15,626 1,007 6.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} - - 6.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} International 105,974 120,261 (14,287) (11.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) (6.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) - (5.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) Other $ 30,204$ 43,008 $ (12,804) (29.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} - (30.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})Total Company $ 3,367,324 $ 3,215,360 $ 151,964 4.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (3.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 7.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}United States 2,182,959 1,995,683 187,276 9.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} - 0.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 8.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} International 1,184,365 1,219,677 (35,312) (2.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) (8.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 5.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
(1)Reported revenue growth and organic revenue growth may not recalculate due to
rounding.
Total Company Revenue. The increase in organic revenue reflects higher realized prices and continued demand for companion animal diagnostics globally, supported by higherCAG Diagnostics recurring revenue, primarily in theU.S. Increases in our subscription-based veterinary software and diagnostic imaging services also contributed to higher revenue for the year. The higher revenue in our Water business was primarily due to the benefit of price increases and higher testing volumes. The decline in our LPD business was primarily due to lower demand in the first half of the year for swine testing inChina , compared to high prior year levels. The decrease in Other revenue reflects lower sales of OPTI COVID-19 PCR testing products. The impact of currency movements decreased total revenue growth by 3.4{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}, while the impact of acquisitions increased total revenue growth by 0.7{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. 44 --------------------------------------------------------------------------------
The following table presents our total Company results of operations:
For the Years Ended December 31, Change
Total Company - Results of
Operations Percent of Percent of
(dollars in thousands) 2022 Revenue 2021 Revenue Amount Percentage
Revenues $ 3,367,324 $ 3,215,360 $ 151,964 4.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Cost of revenue 1,362,986 1,325,928 37,058 2.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Gross profit 2,004,338 59.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 1,889,432 58.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 114,906 6.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Operating Expenses:
Sales and marketing 524,505 15.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 486,735 15.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 37,770 7.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
General and administrative 326,248 9.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 309,660 9.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 16,588 5.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Research and development 254,820 7.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 161,009 5.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 93,811 58.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Total operating expenses 1,105,573 32.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 957,404 29.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 148,169 15.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Income from operations $ 898,765 26.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ 932,028 29.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ (33,263) (3.6) {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Gross Profit. Gross profit increased due to higher sales volumes and
a 70 basis point increase in the gross profit margin. The impact from foreign
currency movements increased the gross profit margin by approximately 50 basis
points, primarily from the impact of hedge gains in the current year as compared
to hedge losses in the prior year. Excluding the impact of foreign currency
movements, the increase in the gross margin was primarily due to net price
gains, improved software services gross margins, and the benefit of our
reference laboratory productivity initiatives. These increases were partially
offset by higher freight and distribution costs; higher service costs, including
increases in labor and facility costs; and higher product costs.
Operating Expenses. Sales and marketing expense increased primarily due to
higher personnel-related and travel costs, including investments in our global
commercial capability. General and administrative expense increased primarily
due to higher personnel-related costs, increase in allowances for doubtful
accounts receivable, and increases in amortization and depreciation expense
related to business acquisitions and capital investments. General and
administrative expense increases were partially offset by a comparative decrease
due to acquisition-related costs incurred in the prior year. Research and
development expense increased primarily due to discrete investments for the
acquisition of rights to use certain licensed technology under intellectual
property licensing arrangements, project costs, and higher personnel-related
costs. The overall change in foreign currency exchange rates resulted in a
decrease in operating expenses growth by approximately 2{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
45
--------------------------------------------------------------------------------
The following table presents revenue by product and service category for CAG:
For the Years Ended December 31,
Net Revenue Reported Revenue Percentage Change Percentage Change Organic Revenue
(dollars in thousands) 2022 2021 Dollar Change Growth (1) from Currency from Acquisitions Growth (1)
CAG Diagnostics
recurring revenue: $ 2,660,280 $ 2,534,562 $ 125,718 5.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (3.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 8.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
IDEXX VetLab
consumables 1,057,236 1,006,781 50,455 5.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (4.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) - 9.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Rapid assay products 313,667 296,852 16,815 5.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (1.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) - 7.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Reference laboratory
diagnostic and
consulting services 1,178,113 1,123,656 54,457 4.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (2.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 7.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
CAG Diagnostics
services and
accessories 111,264 107,273 3,991 3.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (4.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) - 8.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
CAG Diagnostics
capital - instruments 147,326 149,140 (1,814) (1.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) (4.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) - 3.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Veterinary software,
services and
diagnostic imaging
systems 251,187 206,258 44,929 21.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (1.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 7.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 14.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Net CAG revenue $ 3,058,793 $ 2,889,960 $ 168,833 5.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (3.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}) 0.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 8.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
(1)Reported revenue growth and organic revenue growth may not recalculate due to
rounding.
CAG Diagnostics Recurring Revenue. The increase inCAG Diagnostics recurring revenue was primarily due to higher realized prices and increased volumes in IDEXX VetLab consumables, reference laboratory diagnostic services, and, to a lesser extent, rapid assay products. The impact of foreign currency movements decreasedCAG Diagnostics recurring revenue growth by 3.4{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. The increase in IDEXX VetLab consumables revenue was primarily due to higher price realization and higher sales volumes, primarily of our Catalyst consumables and, to a lesser extent,ProCyte consumables. These volume increases were supported by the expansion of our installed base of instruments, our expanded menu of available tests in certain regions, and high customer retention levels. The impact of currency movements decreased revenue growth by 4.3{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
The increase in rapid assay revenue resulted primarily from higher price
realization and higher clinic testing levels, primarily from SNAP 4Dx Plus. The
impact of currency movements decreased revenue growth by 1.7{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
The increase in reference laboratory diagnostic and consulting services revenue was primarily due to higher testing volumes and price realization in ourU.S. labs. Growth in other regions was primarily due to higher price realization, partially offset by moderately lower international volumes compared to strong prior period demand levels. Acquisitions increased revenue growth by 0.3{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. The impact of currency movements decreased revenue growth by 2.9{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
of the increase in our active installed base of instruments.
CAG Diagnostics Capital - Instrument Revenue. The impact of currency movements decreased revenue growth by 4.7{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. Excluding the impact of currency, the growth in instrument revenue was primarily due to higher premium instrument placements, primarily of the ProCyte One analyzer, to support increased diagnostic testing.
acquired business increased revenue growth by 7.9{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. Excluding the impact of the
acquisition, the increase in veterinary software and services revenue was
primarily due to higher realized prices on service offerings and higher
subscription-based service revenue supported by the expansion in our active
installed base. The increase in our diagnostic imaging systems revenue was
primarily due to increases in our active installed base resulting in higher
service revenue, as well as higher instrument and equipment placements and
higher realized prices.
46 --------------------------------------------------------------------------------
The following table presents the CAG segment results of operations:
For the Years Ended December 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2022 Revenue 2021 Revenue Amount Percentage
Revenues $ 3,058,793 $ 2,889,960 $ 168,833 5.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Cost of revenue 1,252,216 1,206,156 46,060 3.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Gross profit 1,806,577 59.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 1,683,804 58.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 122,773 7.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Operating Expenses:
Sales and marketing 480,655 15.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 444,694 15.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 35,961 8.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
General and administrative 288,746 9.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 274,470 9.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 14,276 5.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Research and development 236,227 7.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 140,618 4.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 95,609 68.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Total operating expenses 1,005,628 32.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 859,782 29.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 145,846 17.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Income from operations $ 800,949 26.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ 824,022 28.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ (23,073) (2.8) {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Gross Profit. Gross profit increased primarily due to higher sales volumes, as
well as an 80 basis point increase in the gross profit margin. The increase in
the gross profit margin was primarily due to recurring revenue net price gains,
improved software services gross margins, and the benefit of our reference
laboratory productivity initiatives. These increases were partially offset by
higher freight and distribution costs, higher product costs, and higher service
costs, including increases in labor and facility costs. The impact from foreign
currency movements increased the gross profit margin by approximately 30 basis
points, primarily from the impact of hedge gains in the current year as compared
to hedge losses in the prior year.
Operating Expenses. Sales and marketing expense increased primarily due to
higher personnel-related and travel costs, including investments in our global
commercial capability. General and administrative expense increased primarily
due to higher personnel-related costs, increases in amortization and
depreciation expense related to business acquisitions and capital investments,
and an increase in allowances for doubtful accounts receivable. General and
administrative expense increases were partially offset by a comparative decrease
due to acquisition-related costs incurred in the prior year. Research and
development expense increased primarily due to discrete investments for the
acquisition of rights to use certain licensed technology under intellectual
property licensing arrangements, project costs, and higher personnel-related
costs. The overall change in foreign currency exchange rates resulted in a
decrease in operating expenses growth by approximately 2{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
47
--------------------------------------------------------------------------------
Water
The following table presents the Water segment results of operations:
For the Years Ended December 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2022 Revenue 2021 Revenue Amount Percentage
Revenues $ 155,720 $ 146,505 $ 9,215 6.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Cost of revenue 45,861 45,561 300 0.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Gross profit 109,859 70.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 100,944 68.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 8,915 8.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Operating Expenses:
Sales and marketing 18,564 11.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 17,814 12.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 750 4.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
General and administrative 14,353 9.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 13,442 9.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 911 6.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Research and development 4,423 2.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 4,244 2.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 179 4.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Total operating expenses 37,340 24.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 35,500 24.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 1,840 5.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Income from operations $ 72,519 46.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ 65,444 44.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ 7,075 10.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Revenue. The increase in our Water business was due to higher realized prices
and testing volumes, primarily in our Colilert test products and related
accessories used in coliform and E. coli testing. The impact of currency
movements decreased revenue growth by 4.0{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. The impact of an acquisition
completed during the third quarter of 2022 increased revenue growth by 0.5{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
Gross Profit. Gross profit for Water increased due to higher sales volumes and a
160 basis point increase in the gross profit margin, which reflected a 210 basis
point increase due to foreign currency movements, primarily from the impact of
hedge gains in the current year compared to hedge losses in the prior year.
Decreases in the gross profit margin were primarily due to higher product costs
and higher distribution and freight costs, partially offset by higher realized
prices.
Operating Expenses. Sales and marketing expense increased primarily due to
higher personnel-related and travel costs. General and administrative expense
increased primarily due to higher third-party service costs, including
acquisition-related costs, personnel-related costs, and allowances for doubtful
accounts receivable. Research and development expense increased primarily due to
higher personnel-related costs. The overall change in foreign currency exchange
rates resulted in a decrease in operating expenses growth by approximately 2{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
48
--------------------------------------------------------------------------------
Livestock, Poultry and Dairy
The following table presents the LPD segment results of operations:
For the Years Ended December 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2022 Revenue 2021 Revenue Amount Percentage
Revenues $ 122,607 $ 135,887 $ (13,280) (9.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Cost of revenue 49,606 54,323 (4,717) (8.7 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Gross profit 73,001 59.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 81,564 60.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (8,563) (10.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Operating Expenses:
Sales and marketing 23,491 19.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 21,681 16.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 1,810 8.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
General and administrative 17,119 14.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 17,606 13.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (487) (2.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Research and development 12,582 10.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 13,641 10.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (1,059) (7.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Total operating expenses 53,192 43.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 52,928 39.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 264 0.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Income from operations $ 19,809 16.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ 28,636 21.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ (8,827) (30.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Revenue. The unfavorable impact of foreign currency movements decreased revenue
growth by 5.8{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. Excluding the impact of foreign currency, the decline in revenue
was primarily due to lower demand for diagnostic testing in China . Beginning
during the second quarter of 2021 and continuing through the first half of 2022,
we experienced lower livestock testing volumes in China , as changes in disease
management approaches, low pork prices, and changes in government requirements
related to the live animal imports and livestock infectious disease programs
impacted testing volumes, in comparison to high prior-year demand for African
Swine Fever testing. These declines were moderated during the second half of
2022, with modest volume increases in our swine testing market in China compared
to low prior year levels. The decrease in revenue was partially offset by higher
herd health screening in other Asia Pacific markets and higher price gains.
Gross Profit. The decrease in LPD gross profit was primarily due to lower sales
volumes and a 50 basis point decrease in the gross profit margin. The decrease
in the gross profit margin is primarily due to higher freight and distribution
costs, investments in our bovine laboratory services, the unfavorable overall
mix impacts largely from lower African Swine Fever testing, and higher product
costs. The decrease in the gross profit margin was partially offset by the
impact from foreign currency movements, which increased the gross profit margin
by approximately 360 basis points, primarily from the impact of hedge gains in
the current year compared to hedge losses in the prior year.
Operating Expenses. Sales and marketing expense increased primarily due to
increases in personnel-related and travel costs. General and administrative
decreased primarily due to lower personnel-related costs. Research and
development expenses decreased primarily due to lower personnel-related costs.
The overall change in foreign currency exchange rates resulted in a decrease in
operating expenses growth by approximately 4{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
49
--------------------------------------------------------------------------------
Other
The following table presents the Other results of operations:
For the Years Ended December 31, Change
Results of Operations Percent of Percent of
(dollars in thousands) 2022 Revenue 2021 Revenue Amount Percentage
Revenues $ 30,204 $ 43,008 $ (12,804) (29.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Cost of revenue 15,303 19,888 (4,585) (23.1 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Gross profit 14,901 49.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 23,120 53.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (8,219) (35.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Operating Expenses:
Sales and marketing 1,795 5.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 2,546 5.9 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (751) (29.5 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
General and administrative 6,030 20.0 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 4,142 9.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 1,888 45.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Research and development 1,588 5.3 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 2,506 5.8 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} (918) (36.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Total operating expenses 9,413 31.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 9,194 21.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} 219 2.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}
Income from operations $ 5,488 18.2 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ 13,926 32.4 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} $ (8,438) (60.6 {35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc})
Revenue. The decrease in Other revenue was primarily due to lower sales of OPTI
COVID-19 PCR testing products and services in the U.S. and, to a lesser extent,
lower OPTI Medical consumables revenue internationally. The impact of currency
movements increased revenues by 0.2{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}.
Gross Profit. Gross profit decreased due to lower sales volume and a 450 basis
point decrease in the gross profit margin. The decrease in the gross profit
margin was primarily due to unfavorable product mix with lower OPTI Medical
consumables and higher freight, distribution, and product costs, partially
offset by lower service costs associated with lower disease testing services.
The overall change in foreign currency exchange rates had an immaterial impact
on gross profit.
Operating Expenses. Sales and marketing expense decreased primarily due to lower
personnel-related costs. General and administrative expense increased primarily
due to higher foreign exchange losses on settlements of foreign currency
denominated transactions, as compared to the prior year, as well as higher
allowances for doubtful accounts receivable. Foreign exchange losses on
settlements for all operating segments are reported within our Other segment.
Research and development expense decreased primarily due to lower project costs
compared to investments in the development of infectious disease tests during
the prior year.
Non-Operating Items
Interest Expense. Interest expense was
31, 2022
interest expense was primarily the result of higher average debt levels.
Our effective income tax rate was 21.0{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} for the year ended December 31, 2022 ,
and 17.5{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} for the year ended December 31, 2021 . The increase in our effective
tax rate was primarily driven by decreases in tax benefits related to
share-based compensation and higher taxes on international income. Our projected
effective tax rate for 2023 is approximately 22{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}. This projected 1{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} increase in
the effective tax rate, over the full year 2022 effective tax rate, is primarily
due to lower estimated tax benefits from share-based compensation.
50
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
We fund the capital needs of our business through cash on hand, funds generated from operations, proceeds from long-term senior note financings, and amounts available under our Credit Facility. We generate cash primarily through the payments made by customers for our companion animal veterinary, livestock, poultry, dairy, and water products and services, consulting services, and other various systems and services. Our cash disbursements are primarily related to compensation and benefits for our employees, inventory and supplies, taxes, research and development, capital expenditures, rents, occupancy-related charges, interest expense, and business acquisitions. AtDecember 31, 2022 , we had$112.5 million of cash and cash equivalents, as compared to$144.5 million onDecember 31, 2021 . Working capital, including our Credit Facility, totaled negative$134.3 million atDecember 31, 2022 , as compared to$192.1 million atDecember 31, 2021 . Additionally, atDecember 31, 2022 , we had a remaining borrowing availability of$669.5 million under our$1.25 billion Credit Facility with$579.0 million outstanding borrowing under the Credit Facility. The general availability of funds under our Credit Facility is reduced by$1.5 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 theU.S. than is generated by our operations, for example to fund significant discretionary activities, we could elect to raise capital in theU.S. through the incurrence of debt or equity issuances, which we may not be able to complete on favorable terms or at all. In addition, these alternatives could result in increased interest expense or other dilution of our earnings. We manage our worldwide cash requirements considering available funds among all of our subsidiaries. Our foreign cash and cash equivalents are generally available without restrictions to fund ordinary business operations outside theU.S.
The following table presents cash, cash equivalents and marketable securities
held domestically, and by our foreign subsidiaries:
For the Years Ended December 31,
Cash and cash equivalents
(in thousands) 2022 2021
U.S. $ 16,112 $ 2,632
Foreign 96,434 141,822
Total $ 112,546 $ 144,454
Total cash, cash equivalents and marketable securities held
in
$
6,647
As ofDecember 31, 2022 and 2021, more than 99{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} of the cash and cash equivalents held was as bank deposits. Cash and cash equivalents atDecember 31, 2022 , included approximately USD$2.9 million of cash held in countries with currency control restrictions, which limit our ability to transfer funds outside of the country in which they are held. The currency control restricted cash is generally available for use within the country where it is held. The following table presents additional key information concerning working capital: For the Three Months Ended December 31, September 30, June 30, March 31, December 31, 2022 2022 2022 2022 2021 Days sales outstanding (1) 43.4 43.4 43.2 42.0 42.4 Inventory turns (2) 1.3 1.3 1.5 1.6 2.0 (1) Days sales outstanding represents the average of the accounts receivable balances at the beginning and end of each quarter divided by revenue for that quarter, the result of which is then multiplied by 91.25 days. (2) Inventory turns represent inventory-related cost of product revenue for the 12 months preceding each quarter-end divided by the average inventory balances at the beginning and end of each quarter. 51 -------------------------------------------------------------------------------- The decrease in inventory turns over the current year was a result of larger inventory on-hand, as we have increased inventory to support demand and product availability, as well as new product launches.
Sources and Uses of Cash
The following table presents cash provided (used):
(in thousands)
For the Years Ended
2022 2021 Dollar Change
Net cash provided by operating activities $ 542,984 $ 755,546 $ (212,562)
Net cash used by investing activities (195,350) (292,967) 97,617
Net cash used by financing activities (370,936) (697,414) 326,478
Net effect of changes in exchange rates on cash (8,606) (4,639) (3,967)
Net change in cash and cash equivalents $ (31,908)
Operating Activities. The decrease in cash provided by operating activities of$212.6 million during 2022 as compared to 2021, was primarily due to the lower net income and changes in other assets and liabilities. During 2022, we entered into two discrete arrangements to license intellectual property for which we paid$65 million which was charged to research and development expense. We also had an increase in taxes paid during 2022, primarily due to changes imposed by the 2017 Tax Cuts and Jobs Act, including the relevant provision that requiresU.S. research and development expenditures incurred afterJanuary 1, 2022 , to be capitalized and amortized over a five-year period.
The following table presents cash flows (used) provided from changes in
operating assets and liabilities:
(in thousands)
For the Years Ended
2022 2021 Dollar Change
Accounts receivable $ (41,398) $ (33,141) $ (8,257)
Inventories (121,731) (52,919) (68,812)
Accounts payable 3,467 11,233 (7,766)
Deferred revenue (11,019) (7,551) (3,468)
Other assets and liabilities (102,849) (55,145) (47,704)
Total change in cash due to changes in operating
assets and liabilities $ (273,530) $ (137,523) $ (136,007)
Cash used due to changes in operating assets and liabilities during the year
ended December 31, 2022 , as compared to the same period in the prior year,
increased approximately $136.0 million . Cash used for inventory in the current
period, as compared to the prior period, was higher primarily due to planned
inventory growth to support demand and product availability. The increase of
cash used for other assets and liabilities was primarily due to lower non-cash
operating expenses recorded as accrued liabilities, primarily for
personnel-related costs, as compared to the same period in the prior year,
partially offset by accrued research and development investments in the current
year.
We have historically experienced proportionally lower net cash flows from
operating activities during the first quarter and proportionally higher cash
flows from operating activities for the remainder of the year and for the annual
period driven primarily by payments related to annual employee incentive
programs in the first quarter following the year for which the bonuses were
earned.
Investing Activities. Cash used by investing activities was $195.4 million
during 2022 as compared to $293.0 million used during 2021. The decrease in cash
used by investing activities during 2022 as compared to 2021 was primarily due
to the acquisition of ezyVet during the second quarter of 2021, partially offset
by an acquisition of an intangible asset during the first quarter of 2022, an
equity investment during the second quarter of 2022, and the acquisition of a
water testing business in the third quarter of 2022, as well as the increase in
purchases of property and equipment related to our new warehouse and
manufacturing site expansion.
Our total capital expenditure plan for 2023 is estimated to be approximately
operations facilities to support growth, as well as investments in
customer-facing software.
52 -------------------------------------------------------------------------------- Financing Activities. Cash used by financing activities was$370.9 million during 2022, as compared to$697.4 million used during 2021. The decrease in cash used by financing activities was due to a$432.0 million increase in borrowings under our Credit Facility, partially offset by$72.9 million in additional repurchases of our common stock in the current period as compared to the same period in the prior year. Cash was also used to pay off our$75 million 2022 Series A Notes when due and payable onFebruary 14, 2022 . Cash used to repurchase shares of our common stock increased by$72.9 million during 2022, as compared to 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. We primarily fund our share repurchases with cash generated from operations, as well as from various capital market activities, including the committed available financing through our Credit Facility. Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 20. Repurchases of Common Stock" to the consolidated financial statements included in this Annual Report on Form 10-K for additional information about our share repurchases. Under the$1.25 billion Credit Facility, the$1.0 billion unsecured credit line matures onDecember 9, 2026 and requires no scheduled prepayments before that date. OnOctober 20, 2022 , pursuant to the terms of the Credit Facility, the term lenders thereunder provided us, as borrower, an incremental term loan in an aggregate principal amount of$250 million (the "Term Loan"). The Term Loan matures onOctober 20, 2025 . The net proceeds of the Term Loan were used to repay previously incurred revolver borrowings under the Credit Facility. The Term Loan is subject to the same affirmative and negative covenants and events of default as the borrowings previously incurred pursuant to the Credit Facility. The applicable interest rate for the Term Loan is consistent with our line of credit, and is calculated at a per annum rate equal to either (at our option) (1) a prime rate plus a margin ranging from 0.0{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} to 0.375{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} based on our consolidated leverage ratio, (2) an adjusted term SOFR rate, plus 0.10{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}, plus a margin ranging from 0.875{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} to 1.375{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} based on our consolidated leverage ratio, or (3) an adjusted daily simple SOFR rate, plus 0.10{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}, plus a margin ranging from 0.875{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} to 1.375{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} based on our consolidated leverage ratio. Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 13, Debt" for additional information about our applicable interest rates on our Credit Facility. Under the Credit Facility, we also pay quarterly commitment fees ranging from 0.075{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc} to 0.25{35112b74ca1a6bc4decb6697edde3f9edcc1b44915f2ccb9995df8df6b4364bc}, based on our leverage ratio, on any unused commitment. Under the Credit Facility, the net repayment and borrowing activity resulted in increased cash used of$432.0 million during 2022, as compared to 2021. AtDecember 31, 2022 , we had$329.0 million outstanding on our line of credit and a$250.0 million Term Loan, for a total of$579 million outstanding under the Credit Facility. AtDecember 31, 2021 , we had$73.5 million in outstanding under the Credit Facility. The general availability of funds under the Credit Facility was further reduced by$1.5 million for letters of credit that were issued primarily in connection with our workers' compensation policy atDecember 31, 2022 and$1.4 million atDecember 31, 2021 . The Credit Facility contains affirmative, negative, and financial covenants customary for financings of this type. The negative covenants include restrictions on liens, indebtedness of subsidiaries of the Company, fundamental changes, investments, transactions with affiliates, and certain restrictive agreements and violations of laws and regulations. The financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation not to exceed 3.5-to-1. AtDecember 31, 2022 , we were in compliance with the covenants of the Credit Facility. The obligations under the Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, certain events related to employee pension benefit plans under the Employee Retirement Income Security Act of 1974, ("ERISA"), the failure to pay specified indebtedness, cross-acceleration to specified indebtedness and a change of control default. InFebruary 2022 , we paid off our$75 million 2022 Series A Notes with cash provided by operations and financing activity. OnJuly 21, 2021 , we repaid our$50 million 2021 Series A Notes in full with cash provided by operations. The aggregate principal amounts of our 2023 Series A Notes for$75 million will become due and payable onDecember 11, 2023 . We anticipate paying off our 2023 Series A Notes when due with cash provided by borrowings under our Credit Facility and cash provided by operations. Should we elect to prepay any of our senior notes, such aggregate prepayment will include the applicable make-whole amount(s), as defined within the applicable Senior Note Agreements. Additionally, in the event of a change in control of the Company or upon the disposition of certain assets of the Company, the proceeds of which are not reinvested (as defined in the Senior Note Agreements), we may be required to prepay all or a portion of the senior notes. The obligations under the senior notes may be accelerated upon the occurrence of an event of default under the applicable Senior Note Agreements, each of which includes customary events of default including payment defaults, defaults in the performance of the affirmative, negative and financial covenants, the inaccuracy of representations or warranties, 53 --------------------------------------------------------------------------------
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.
Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 13, Debt" for additional information about our Credit Facility, Senior Notes, and Senior Note Agreements. Effect of currency translation on cash. The net effect of changes in foreign currency exchange rates are related to changes in exchange rates between theU.S. dollar and the functional currencies of our foreign subsidiaries. These changes will fluctuate each year as the value of theU.S. dollar relative to the value of the foreign currencies change. The value of a currency depends on many factors, including interest rates, and the issuing governments' debt levels and strength of economy. Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements or variable interest entities except for letters of credit and third-party guarantees, as reflected in "Part II, Item 8. Financial Statements and Supplementary Data, Note 13 Debt" and "Part II, Item 8. Financial Statements and Supplementary Data. Note 16. Commitments, Contingencies and Guarantees" to the consolidated financial statements for the year endedDecember 31, 2022 , included in this Annual Report on Form 10-K, respectively. Financial Covenant. The financial covenant is a consolidated leverage ratio test that requires our ratio of debt to earnings before interest, taxes, depreciation, amortization, and share-based compensation, as defined in the Senior Note Agreements and Credit Facility, not to exceed 3.5-to-1. AtDecember 31, 2022 , we were in compliance with the covenants of the Senior Note Agreements. The following details our consolidated leverage ratio calculation: (in thousands) Twelve months
ended
Trailing 12 Months Adjusted EBITDA:December 31 ,
2022
Net income attributable to stockholders $ 679,089 Interest expense 39,858 Provision for income taxes 180,883 Depreciation and amortization 111,900 Acquisition-related expense 873 Share-based compensation expense
49,770
Extraordinary and other non-recurring non-cash charges - Adjusted EBITDA $ 1,062,373 (dollars in thousands) Twelve months ended Debt to Adjusted EBITDA Ratio: December 31,
2022
Line of credit $
579,000
Current and long-term portion of long-term debt
769,369
Total debt
1,348,369
Acquisition-related consideration payable 3,453
Financing leases 5
Deferred financing costs 407
Gross debt $ 1,352,234
Gross debt to Adjusted EBITDA ratio 1.27
Cash and cash equivalents $ (112,546)
Net debt $ 1,239,688
Net debt to Adjusted EBITDA ratio 1.17
54
--------------------------------------------------------------------------------
Commitments, Contingencies and Guarantees
For more information regarding our commitments, contingencies and guarantees, refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 16. Commitments, Contingencies and Guarantees." For more information on our future lease payments, refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 8. Leases" for our minimum lease payment schedule. The expected timing of payments of our leases may be different in future years, depending on decisions to extend lease terms and/or enter into additional leases in the preceding years. As ofDecember 31, 2022 , current liabilities include$579.0 million outstanding borrowing on our Credit Facility and the current portion of long-term debt of$75.0 million recorded as current liabilities. Refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 13. Debt for more information about our Credit Facility and for more information on our repayment of our Senior Notes. We also have purchase obligations that include agreements and purchase orders to purchase goods or services that are contractually enforceable and that specify all significant terms, including fixed or minimum quantities, pricing, and approximate timing of purchases. As ofDecember 31, 2022 , we had approximately$232.4 million in purchase obligations due in 2023. Our purchase obligations beyond 2023 are approximately$50.4 million . These purchase obligation amounts do not include amounts recorded in accounts payable as ofDecember 31, 2022 . The expected timing of payments of our purchase obligations is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. Additionally, we have agreements with third parties that we have entered into in the ordinary course of business under which we are obligated to indemnify such third parties for and against various risks and losses. The precise terms of such indemnities vary with the nature of the agreement. In many cases, we limit the maximum amount of our indemnification obligations, but in some cases those obligations may be theoretically unlimited. We have not incurred material expenses in discharging any of these indemnification obligations and, based on our analysis of the nature of the risks involved, we believe that the fair value of these agreements is minimal. Accordingly, we did not record any liabilities for these obligations atDecember 31, 2022 and 2021, and do not anticipate any future payments for these guarantees. As ofDecember 31, 2022 , our remaining obligation associated with the deemed repatriation tax resulting from the Tax Cut and Jobs Act of 2017 is$27.0 million . Our prior overpayments continued to satisfy our installment obligations through 2022. In 2023, our installment obligation will exceed our remaining overpayment and we will be required to remit the balance due on the installment. Our final installment will be paid in 2025. For information on our unrecognized tax benefits, refer to "Part II, Item 8. Financial Statements and Supplementary Data, Note 14. Income Taxes."
During the first quarter of 2023, we paid the
associated with an arrangement to license intellectual property, which was
expensed in 2022.
55
——————————————————————————–
© Edgar Online, source