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IDEXX LABORATORIES : DE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/17/2017 | 10:48pm CET

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10­K.

We have included certain terms and abbreviations used throughout this Annual Report on Form 10-K in the "Glossary of Terms and Selected Abbreviations."




Description of Business Segments.  We operate primarily through three business
segments: diagnostic and information technology-based products and services for
the veterinary market, which we refer to as the Companion Animal Group ("CAG");
water quality products ("Water"); and diagnostic products and services for
livestock and poultry health and to ensure the quality and safety of milk and
food, which we refer to as Livestock, Poultry and Dairy ("LPD").  Our Other
operating segment combines and presents products for the human point-of-care
medical diagnostics market ("OPTI Medical") with our pharmaceutical product line
and our out-licensing arrangements because they do not meet the quantitative or
qualitative thresholds for reportable segments. See Note 15 to the consolidated
financial statements for the year ended December 31, 2016, 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.



During the second quarter of 2016, we renamed our customer information
management and diagnostic imaging systems line of business in the CAG segment to
veterinary software, services and diagnostic imaging systems. Financial results
were not adjusted as a result of this name change.



During the fourth quarter of 2016, we modified our management reporting to
rename IDEXX VetLab service and accessories to CAG Diagnostics service and
accessories and reclassified the location of SNAP Pro service plans previously
located in CAG Diagnostics capital - instruments to CAG Diagnostics service and
accessories. The amount of revenue reclassified was $0.5 million during the year
ended December 31, 2015, and $1.4 million during the year ended December 31,
2016. The amount reclassified was less than $0.1 million during the year ended
December 31, 2014.



Certain costs not allocated to our operating segments and are instead reported
under the caption "Unallocated Amounts". These costs include costs that do not
align with one of our existing operating segments or are cost prohibitive to
allocate, which primarily consist of our R&D function, regional or country
expenses, certain foreign currency revaluation gains and losses on monetary
balances in currencies other than our subsidiaries' functional currency and
unusual items. Corporate support function costs (such as information technology,
facilities, human resources, finance and legal), health benefits and incentive
compensation are charged to our business segments at pre-determined budgeted
amounts or rates. Differences from these pre-determined budgeted amounts or
rates are captured within Unallocated Amounts.



Effective January 1, 2016, we modified our management reporting to the Chief
Operating Decision Maker to provide a more comprehensive view of the performance
of our operating segments by including the capitalization and subsequent
recognition of variances between standard and actual manufacturing costs, which
adjusts the timing of cost recognition from when the variance is created to the
period in which the related inventory is sold. Prior to January 1, 2016, the
capitalization and subsequent recognition of these variances were not allocated
to our operating segments and were instead reported under the caption
"Unallocated Amounts".



                                       34


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The segment gross profit and income (loss) from operations within this Annual
Report on Form 10-K for the years ended December 31, 2015 and 2014, has been
retrospectively revised to reflect the changes to our segment performance
metrics described above. The following is a summary of revised segment gross
profit from operations for the years ended December 31, 2015 and 2014:


                                                                Net Impact of Standard
                                                                                  Cost
                             For the Year                                     Variance
                                    Ended                           Capitalization and       For the Year Ended             Adjusted
                             December 31,
Gross Profit                         2015          Percent of   Subsequent Recognition        December 31, 2015           Percent of
                            As Previously                             to the Operating
(dollars in thousands)           Reported             Revenue                 Segments              As Adjusted              Revenue

CAG                      $       727,626               53.6%    $               1,677    $             729,303                53.8%
Water                             68,785               71.0%                      168                   68,953                71.2%
LPD                               77,227               60.7%                    2,760                   79,987                62.9%
Other                             10,574               49.0%                     (293)                  10,281                47.6%
Unallocated Amounts                6,058                  N/A                  (4,312)                   1,746                   N/A
  Total Company          $       890,270               55.6%    $                    -   $             890,270                55.6%

                                                                Net Impact of Standard
                                                                                  Cost
                             For the Year                                     Variance
                                    Ended                           Capitalization and       For the Year Ended             Adjusted
                             December 31,
Gross Profit                         2014          Percent of   Subsequent Recognition        December 31, 2014           Percent of
                            As Previously                             to the Operating
(dollars in thousands)           Reported             Revenue                 Segments              As Adjusted              Revenue

CAG                      $       655,197               53.6%    $              (3,002)   $             652,195                53.3%
Water                             62,924               66.4%                     (348)                  62,576                66.1%
LPD                               89,519               63.4%                   (4,461)                  85,058                60.2%
Other                             14,236               53.0%                      178                   14,414                53.7%
Unallocated Amounts               (5,760)                 N/A                   7,633                    1,873                   N/A
  Total Company          $       816,116       54.9%            $                    -   $ 816,116                   54.9%





The following is a summary of revised segment operating income (loss) from operations for the years ended December 31, 2015 and 2014:






                                                                             Net Impact of
                                                                             Standard Cost
                                                                                  Variance                          For the
                             For the                                        Capitalization                             Year
                          Year Ended                                                   and                            Ended                Adjusted
                            December                                            Subsequent                         December
Operating Income (Loss)     31, 2015                   Percent of              Recognition                         31, 2015              Percent of
                                  As                                                to the
                          Previously                                             Operating                               As
(dollars in thousands)      Reported                      Revenue                 Segments                         Adjusted                 Revenue

CAG                       $                 231,642        17.1%            $                           1,677    $ 233,319                   17.2%
Water                                        44,584        46.0%                                          168       44,752                   46.2%
LPD                                          24,397        19.2%                                        2,760       27,157                   21.4%
Other                                           156         0.7%                                         (293)        (137)                  (0.6%)
Unallocated Amounts                            (867)          N/A                                      (4,312)      (5,179)                     N/A
  Total Company           $                 299,912        18.7%            $                                -   $ 299,912                   18.7%

                                                                             Net Impact of
                                                                             Standard Cost
                                                                                  Variance                          For the
                             For the                                        Capitalization                             Year
                          Year Ended                                                   and                            Ended                Adjusted
                            December                                            Subsequent                         December
Operating Income (Loss)     31, 2014                   Percent of              Recognition                         31, 2014              Percent of
                                  As                                                to the
                          Previously                                             Operating                               As
(dollars in thousands)      Reported                      Revenue                 Segments                         Adjusted                 Revenue

CAG                       $                 203,536        16.6%            $                          (3,002)   $ 200,534                   16.4%
Water                                        39,262        41.4%                                         (348)      38,914                   41.1%
LPD                                          33,788        23.9%                                       (4,461)      29,327                   20.8%
Other                                         2,479         9.2%                                          178        2,657                    9.9%
Unallocated Amounts                         (18,810)          N/A                                       7,633      (11,177)                     N/A
  Total Company           $                 260,255        17.5%            $                                -   $ 260,255                   17.5%


                                       35


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The following is a discussion of the strategic and operating factors that we believe have the most significant effect on the performance of our business.




Companion Animal Group



Our strategy is to provide veterinarians with both the highest quality
diagnostic information to support more advanced medical care and information
management solutions that help demonstrate the value of diagnostics to pet
owners and enable efficient practice management. By doing so, we are able to
build a mutually successful partnership with our veterinarian customers based on
healthy pets, loyal customers and expanding practice revenues.



CAG Diagnostics. We provide diagnostic capabilities that meet veterinarians'
diverse needs through a variety of modalities including in-clinic diagnostic
solutions and outside reference laboratory services. Veterinarians that utilize
our full line of diagnostic modalities obtain a single view of a patient's
diagnostic results, which allows them to track and evaluate trends and achieve
greater medical insight.



The breadth and complementary nature of our diagnostic solutions also provides
us scale in sales and distribution. To further increase our customer reach,
effective January 1, 2015, we transitioned to an all-direct sales strategy in
the U.S. and did not renew our annual contracts with our U.S. distribution
partners. Under this approach, we take orders, ship product, invoice and receive
payment for all rapid assay test kits and IDEXX VetLab consumables in the U.S.,
aligning with our direct model for instruments, reference laboratory services,
and other CAG products and services. We believe these changes will continue to
strengthen customer loyalty and help support growth of our diagnostic revenues
in North America.



Our diagnostic capabilities generate both recurring and non-recurring
revenues. Revenues related to capital placements of our in-clinic IDEXX VetLab
suite of instruments and our SNAP Pro Mobile Device are non-recurring in nature
in that they are sold to a particular customer only once. Revenues from the
associated proprietary IDEXX VetLab consumables, SNAP rapid assay test kits,
reference laboratory and consulting services, and extended maintenance
agreements and accessories related to our IDEXX VetLab instruments and our SNAP
Pro Mobile Device are recurring in nature, in that they are regularly purchased
by our customers, typically as they perform diagnostic testing as part of
ongoing veterinary care services. Our recurring revenues, most prominently IDEXX
VetLab consumables and rapid assay test kits, have significantly higher gross
margins than those provided by our instrument sales. Therefore, the mix of
recurring and non-recurring revenues in a particular period will impact our
gross margins.



Diagnostic Capital Revenue. Revenues related to the placement of the IDEXX
VetLab suite of instruments are non-recurring in nature, in that the customer
will buy an instrument once over its respective product life cycle, but will
purchase consumables for that instrument on a recurring basis as they use that
instrument for testing purposes. During the early stage of an instrument's life
cycle, we derive relatively greater revenues from instrument placements, while
consumable sales become relatively more significant in later stages as the
installed base of instruments increases and instrument placement revenues begin
to decline. In the early stage of an instrument's life cycle, placements are
made primarily through sales transactions.  As the market for the product
matures, an increasing percentage of placements are made in transactions,
sometimes referred to as "reagent rentals," in which instruments are placed at
customer sites at little or no cost in exchange for a long-term customer
commitment to purchase instrument consumables.



Prior to the Catalyst One instrument launch during November 2014, we pre-sold
the instrument under a customer marketing program through which customers
preordering a Catalyst One were initially provided with the right to use a
Catalyst Dx instrument. Under this marketing program, we deferred $7 million of
instrument revenue in 2014, which was fully recognized in 2015 upon delivery of
the Catalyst One instruments or customer election to keep the Catalyst Dx was
received.



                                       36


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We place our Catalyst chemistry analyzers through sales, leases, rental and
other programs. In addition, we continue to place VetTest instruments through
sales, lease, rental and other programs, with substantially all of our revenues
from that product line currently derived from consumable sales. As of December
31, 2016, these three chemistry analyzers provided for a combined active
installed base of approximately 43,000 units globally, as compared to 40,000
units globally in 2015.  Approximately 50 percent of 2016 Catalyst analyzer
placements were to customers that are new to IDEXX, including customers who had
been using instruments from one of our competitors, sometimes referred to as
competitive accounts. Generally, placement of an instrument with a new or
competitive account is more attractive as the entire consumable stream
associated with that placement represents incremental recurring revenue, whereas
the consumable stream associated with a Catalyst placement at a VetTest customer
substitutes a Catalyst consumable stream for a VetTest consumable stream. We
have found that the consumables revenues increase when a customer upgrades from
a VetTest analyzer to a Catalyst analyzer due to the superior test menu
capability, flexibility and ease of use of the Catalyst analyzers, which leads
to additional testing by the customer.



As we continue to experience growth in placements of Catalyst analyzers and in
sales of related consumables, we expect this growth to be partly offset by a
decline in placements of VetTest analyzers and in sales of related consumables.



The LaserCyte Dx analyzer is our latest generation hematology analyzer, which we
launched in 2013.  In addition, we sell the ProCyte Dx  LaserCyte and
VetAutoread analyzers. As of December 31, 2016, these four hematology analyzers
provided for a combined active installed base of approximately 31,000 units, as
compared to 29,000 units in 2015 and 27,000 units in 2014. A substantial portion
of ProCyte Dx analyzer placements continue to be made at veterinary clinics that
elect to upgrade from their LaserCyte analyzer to a ProCyte Dx analyzer. In
2016,  approximately 50 percent of ProCyte placements were made at competitive
accounts. We also continue to place a substantial number of LaserCyte Dx and
LaserCyte instruments, both new and recertified, as trade-ups from the
VetAutoread analyzer and at new and competitive accounts. As we continue to
experience growth in placements of ProCyte Dx analyzers and in sales of related
consumables, we expect this growth to be partly offset by a decline in
placements of LaserCyte and VetAutoread analyzers and a decrease in the
associated recurring revenue stream.



Our SediVue Dx instrument, which we launched in North America early in 2016 and
in the U.K. and Australia in the fourth quarter of 2016, is the first and only
in-clinic analyzer to provide urine sediment analysis. This instrument and
single-use consumable system provides an entirely new automated and highly
accurate way to automate the in-house process of examining urine under a
microscope. We provide customers with SediVue Dx consumables that are charged
upon utilization, which we refer to as pay-per-run, as compared to other
instruments where we charge upon shipment of consumables. We reported total
revenues of $24.2 million from SediVue Dx instrument and pay-per-run sales
during the year ended December 31, 2016.



We seek to enhance the attractiveness and customer loyalty of our SNAP rapid
assay tests,  by providing the SNAP Pro Mobile Device, which activates SNAP
tests, properly times the run, captures,  and saves images of the results
and, in conjunction with IVLS, records invoice charges in the patient
record. Beginning in January of 2017, with our ProRead software, the SNAP Pro
Mobile Device will interpret results. These features promote practice efficiency
by eliminating manual entry of test results in patient records and also helps
ensure that the services are recorded and accurately invoiced. In addition, SNAP
Pro Mobile Device results can be shared with pet owners on the SNAP Pro screen
or, in conjunction with IVLS, via VetConnect PLUS. We also sell the SNAPshot Dx,
which automatically reads certain SNAP test results and, in conjunction with
IVLS, records those results in the electronic medical record. We continue to
work on enhancing the functionality of our analyzers to read the results of
additional tests from our canine and feline family of rapid assay products.



Prior to 2014, the SNAPshot Dx was our primary in-clinic solution for screening
thyroid disease, cortisol, bile acids and interpreting SNAP rapid assay tests.
Upon the launch of the total thyroxine ("T4") slide for use with our Catalyst
analyzers during 2015, we experienced a decline in SNAPshot Dx placements. We
reported revenues of $1.1 million from SNAPshot DX placements during the year
ended December 31, 2016, which reflects approximately a $0.4 million decrease in
revenue relative to the prior year. We reported revenues of $1.5 million from
SNAPshot Dx during the year ended December 31, 2015, which reflects
approximately a $1 million decrease in revenue relative to the prior year. We
will continue to service the existing SNAPshot Dx install base.

                                       37



--------------------------------------------------------------------------------
Our long-term success in the continuing growth of our CAG recurring diagnostic
product and services is dependent upon new customer acquisition, customer
loyalty and retention of their recurring revenues, our ability to realize price
increases based on our differentiated products and customer utilization of
existing and new assays introduced for use on our analyzers. We continuously
seek opportunities to enhance the care that veterinary professionals give to
their patients and clients through supporting the implementation of real-time
care testing work flows, which is performing tests and sharing test results with
the client at the time of the patient visit. Our latest generation of chemistry
and hematology instruments demonstrates this commitment by offering enhanced
ease of use, faster time to results, broader test menu and connectivity to
various information technology platforms that enhance the value of the
diagnostic information generated by the instruments. In addition, we provide
marketing tools and customer support that help drive efficiencies in veterinary
practice processes and allow practices to increase the number of clients they
see on a daily basis.



With all of our instrument product lines, we seek to differentiate our products
from our competitors' products based on time-to-result, ease-of-use, throughput,
breadth of diagnostic menu, flexibility of menu selection, accuracy,
reliability, ability to handle compromised samples, analytical capability of
software, integration with the IDEXX VetLab Station and VetConnect PLUS, client
communications capabilities, education and training, and superior sales and
customer service. Our success depends, in part, on our ability to differentiate
our products in a way that justifies a premium price.



Recurring Diagnostic Revenue. Revenues from our proprietary IDEXX VetLab
consumable products, our SNAP rapid assay test kits, outside reference
laboratory and consulting services, and extended maintenance agreements and
accessories related to our CAG Diagnostics instruments are considered recurring
in nature. For the year ended December 31, 2016, recurring diagnostic revenue,
which is both highly durable and profitable, accounts for approximately 72
percent of our consolidated revenue.



Our in-clinic diagnostic solutions, consisting of our IDEXX VetLab consumable
products and SNAP rapid assay test kits, provide real-time reference lab quality
diagnostic results for a variety of companion animal diseases and health
conditions. Our outside reference laboratories provide veterinarians with the
benefits of a more comprehensive list of diagnostic tests and access to
consultations with board-certified veterinary specialists and pathologists,
combined with the benefit of same-day or next-day turnaround times.



We derive substantial revenues and margins from the sale of consumables that are
used in IDEXX VetLab instruments and the multi-year consumable revenue stream is
significantly more valuable than the placement of the instrument. Our strategy
is to increase diagnostic testing within veterinary practices by placing IDEXX
VetLab instruments and increasing instrument utilization of
consumables. Utilization can increase due to a greater number of patient samples
being run or to an increase in the number of tests being run per patient sample.
Our strategy is to increase both drivers. To increase utilization, we seek to
educate veterinarians about best medical practices that emphasize the importance
of chemistry, hematology and urinalysis testing for a variety of diagnostic
purposes, as well as by introducing new testing capabilities that were
previously not available to veterinarians. Additionally, we have found that
veterinarian adoption of VetConnect PLUS drives utilization by spurring testing
across all IDEXX diagnostic modalities. In connection with the purchase of
instruments, we also offer protocol-based rebate incentives when customers
utilize the broad testing functionality of our analyzers.



Our in-clinic diagnostic solutions also include SNAP rapid assay tests that
address important medical needs for particular diseases prevalent in the
companion animal population. We seek to differentiate these tests from those of
other in-clinic test providers and reference laboratory diagnostic service
providers based on critically important sensitivity and specificity, as well as
overall superior performance and ease of use by providing our customers with
combination tests that test a single sample for up to six diseases at once,
including the ability to utilize our SNAP Pro mobile device. We further augment
our product development and customer service efforts with sales and marketing
programs that enhance medical awareness and understanding regarding certain
diseases and the importance of diagnostic testing.



                                       38


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The expiration of a third party's U.S. lateral flow patent in early 2015 enabled
competitors to launch single use tests that competed with several of our early
generation SNAP rapid assay products, including Heartworm RT, FIV/FeLV Combo
Test, Feline Triple, Parvo and Giardia. These companies partnered with several
of our former national distributors to gain market share by competing primarily
on price. In the second half of 2015, we stabilized our market share on these
products in part by communicating the significant superiority in test
sensitivity for both our Canine and Feline lines over competing tests using the
lateral flow platform, and in part with more effective marketing and promotion
programs. Our higher sensitivity in the detection of infectious diseases is due
in part to our SNAP platform, which is unique in using enzyme-linked
immunosorbent assays ("ELISA") technology. Test accuracy through specificity and
sensitivity is a primary factor that customers value with these in-house tests,
given the importance of detecting the presence of serious infectious diseases in
the practice.



We believe that more than half of all diagnostic testing by U.S. veterinarians
is provided by outside reference laboratories such as IDEXX Reference
Laboratories. In several markets outside the U.S., in-clinic testing is less
prevalent and an even greater percentage of diagnostic testing is done in
reference laboratories. We attempt to differentiate our reference laboratory
testing services from those of competitive reference laboratories and
competitive in-clinic offerings primarily on the basis of a unique and
proprietary test menu, technology employed, quality, turnaround time, customer
service and tools such as VetConnect PLUS that demonstrate the complementary
manner in which our laboratory services work with our in-clinic offerings.



Profitability in our lab business is supported, in part, by our expanding
business scale globally. Profit improvements also reflect benefits from price
increases and our ability to achieve efficiencies. When possible, we utilize
core reference laboratories to service samples from other states or countries,
expanding our customer reach without an associated expansion in our reference
laboratory footprint. New laboratories that we open typically will operate at a
loss until testing volumes achieve sufficient scale. Acquired laboratories
frequently operate less profitably than our existing laboratories and acquired
laboratories may not achieve the profitability of our existing laboratory
network for several years until we complete the implementation of operating
improvements and efficiencies. Therefore, in the short term, new and acquired
reference laboratories generally will have a negative effect on our operating
margin. Recurring reference lab revenue growth is achieved both through
increased sales to existing customers and through the acquisition of new
customers. We believe the increased number of customer visits by our sales
professionals as a result of the implementation of our all-direct sales strategy
in the U.S. and the subsequent growth in our field sales organization has led to
increased reference laboratory opportunities with customers who already use one
of our in-clinic diagnostic modalities. In recent years, recurring reference
laboratory diagnostic and consulting revenues have also been increased through
reference laboratory acquisitions, customer list acquisitions, the opening of
new reference laboratories, including laboratories that are co-located with
large practice customers, and as a result of our up-front customer loyalty
programs. Our up-front customer loyalty programs associated with customer
acquisitions provides incentives to customers in the form of cash payments or
IDEXX Points upon entering multi-year agreements to purchase annual minimum
amounts of products or services, including reference laboratory services.



Health Monitoring and Biological Materials Testing.  We believe the acquisition
of the research and diagnostic laboratory business of the College of Veterinary
Medicine from the University of Missouri has allowed us to leverage our
expertise in veterinary diagnostics and expand our integrated offering of
reference laboratory diagnostic and consulting services and in-clinic testing
solutions in the adjacent bioresearch market.



Veterinary Software, Services and Diagnostic Imaging Systems.  Our portfolio of
practice management offerings is designed to serve the full range of customers
within the North American, Australian and European markets. Cornerstone, DVMAX,
Animana and Neo practice management systems provide superior integrated
information solutions, backed by exceptional customer support and education.
These practice management systems allow the veterinarian to practice better
medicine and achieve the practice's business objectives, including a quality
client experience, staff efficiency and practice profitability. We market
Cornerstone, DVMAX and Neo to customers primarily in North America and
Australia. We market Animana to customers primarily throughout Europe.



                                       39


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Animana and Neo are subscription-based SaaS practice management offerings
designed to provide flexible pricing and a durable, recurring revenue stream,
while utilizing cloud technology instead of a client server platform. While we
continue to develop, sell and support our licensed-based Cornerstone and DVMAX
software, we are growing our installed base of subscription-based practice
management offerings for new customers of IDEXX practice management systems. In
time, we expect that demand for Neo, our subscription-based SaaS practice
management offering in North America, will moderate customer growth of
license-based Cornerstone placements. We also believe that once established,
this subscription-based model will provide higher profitability as compared to
the historical license-based placements. Our Cornerstone and DVMAX customer base
continues to be an important driver of growth through enhanced diagnostic
integrations and high value add-on subscription services, such as Pet Health
Network Pro, Petly Plans, and credit card processing, and we continue to make
investments to enhance the customer experience of all of our license-based
software offerings.



We differentiate our practice management systems through enhanced functionality,
ease of use and connectivity with in-clinic IDEXX VetLab instruments and outside
reference laboratory test results. Our client communication services create more
meaningful pet owner experiences through personalized communication. Pet Health
Network Pro online client communication and education service complements the
entire IDEXX product offering by educating pet owners and building loyalty
through engaging the pet owner before, during and after the visit, thereby
building client loyalty and driving more patient visits.



Our diagnostic imaging systems offer a convenient radiographic solution that
provides superior image quality and the ability to share images with clients
virtually anywhere. IDEXX imaging software enables enhanced diagnostic features
and streamlined integration with our other products and services. Our newest
digital radiography systems, the ImageVue DR50 Digital Imaging System enables
low-dose radiation image capture without sacrificing clear, high-quality
diagnostic images, reducing the risk posed by excess radiation exposure for
veterinary professionals. Placements of imaging systems are important to the
growth of revenue streams that are recurring in nature, including extended
maintenance agreements and IDEXX Web PACS, which is our cloud-based SaaS
offering for viewing, accessing, storing and sharing multi-modality diagnostic
images. We derive relatively higher margins from our subscription-based
products. IDEXX Web PACS is integrated with Cornerstone, Neo 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 proprietary products that test primarily for the presence of microbial
contamination in water matrices, including drinking water supplies, with
superior performance, supported by exceptional customer service. Our customers
primarily consist of water utilities, government laboratories and private
certified laboratories that highly value strong relationships and customer
support. We expect that future growth in this business will be significantly
dependent on our ability to increase international sales. Growth also will be
dependent on our ability to enhance and broaden our product line. Most water
microbiological testing is driven by regulation, and, in many countries, a test
may not be used for compliance testing unless it has been approved by the
applicable regulatory body and integrated into customers' testing protocols. As
a result, we maintain an active regulatory program that involves applying for a
growing number of regulatory approvals in a number of countries, primarily in
Europe. Further, we seek to receive regulatory approvals from governing agencies
as a means to differentiate our products from the competition.



                                       40


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Livestock, Poultry and Dairy



We develop, manufacture, market and sell a broad range of tests and perform
services for various livestock diseases and conditions, and have active research
and development and in-licensing programs in this area. Our strategy is to offer
proprietary tests with superior performance characteristics for use in
government programs to control or eradicate disease and disease outbreaks and in
livestock and poultry producers' disease and reproductive management programs.
Disease outbreaks are episodic and unpredictable, and certain diseases that are
prevalent at one time may be substantially contained or eradicated at a later
time. In response to outbreaks, testing initiatives may lead to exceptional
demand for certain products in certain periods. Conversely, successful
eradication programs may result in significantly decreased demand for certain
products. In addition, increases in government funding may lead to increased
demand for certain products and budgetary constraints may lead to decreased
demand for certain products. As result, the performance in certain sectors of
this business can fluctuate.



Our strategy in the dairy testing business is to develop, manufacture and sell
antibiotic residue and contaminant testing products that satisfy applicable
regulatory requirements or dairy processor standards for testing of milk and
provide reliable field performance. The manufacture of these testing products
leverages the SNAP platform and production assets that also support our rapid
assay business, which also leverages the SNAP platform. The dairy SNAP products,
incorporate customized reagents for antibiotic and contaminant detection. To
successfully increase sales of dairy testing products, we believe that we need
to increase penetration in dairy processors and develop product line
enhancements and extensions.



The performance of the business is particularly subject to the various risks
that are associated with doing business internationally.  See "Part I, Item 1A.
Risk Factors."



Other



OPTI Medical. Our strategy in the OPTI Medical business for the human market is
to develop, manufacture, and sell electrolyte and blood gas analyzers and
related consumable products for the medical point-of-care diagnostics market
worldwide, with a focus on small to mid-sized hospitals. We seek to
differentiate our products based on ease of use, convenience, international
distribution and service and instrument reliability. Similar to our veterinary
instruments and consumables strategy, a substantial portion of the revenues from
this product line is derived from the sale of consumables for use on the
installed base of electrolyte and blood gas analyzers. During the early stage of
an instrument's life cycle, relatively greater revenues are derived from
instrument placements, while consumable sales become relatively more significant
in later stages as the installed base of instruments increases and instrument
placement revenues begin to decline. Our long-term success in this area of our
business is dependent upon new customer acquisition, customer retention and
increased customer utilization of existing and new assays introduced on these
instruments.



Our facility in Roswell, Georgia develops and manufactures the OPTI product
lines using the same or similar technology to support the electrolyte needs of
the veterinary market. We leverage this facility's know-how, intellectual
property and manufacturing capability to continue to expand the menu and
instrument capability of the VetStat and Catalyst platforms for veterinary
applications while reducing our cost of consumables by leveraging experience and
economies of scale.



During the first half of 2016, management reviewed the OPTI Medical product
offerings. As a result of this review, in March 2016 we discontinued certain
development activities in the human point-of-care medical diagnostics market
that were devoted to a new platform and focused our efforts on supporting our
current generation OPTI CCA-TS2 Blood Gas and Electrolyte Analyzer.



The performance of the business is particularly subject to the various risks
that are associated with doing business internationally.  See "Part I, Item 1A.
Risk Factors."



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES




The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience and on various assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates. Note 2 to the consolidated financial statements included in this
Annual Report on Form 10-K describes the significant accounting policies used in
preparation of these consolidated financial statements.



We believe the following critical accounting estimates and assumptions may have
a material impact on reported financial condition and operating performance and
involve significant levels of judgment to account for highly uncertain matters
or are susceptible to significant change.



Revenue Recognition



We recognize revenue when four criteria are met: (i) persuasive evidence of an
arrangement exists; (ii) delivery has occurred or services have been rendered;
(iii) the sales price is fixed or determinable; and (iv) collectability is
reasonably assured. See Note 2(j) to the consolidated financial statements for
the year ended December 31, 2016, included in this Annual Report on Form 10-K
for additional information about our revenue recognition policy and criteria for
recognizing revenue.



Multiple Element Arrangements ("MEAs"). Arrangements to sell products to
customers frequently include multiple deliverables. Our most significant MEAs
include the sale of one or more of the instruments from the IDEXX VetLab suite
of analyzers, diagnostic imaging systems or practice management software,
combined with one or more of the following products: extended maintenance
agreements ("EMAs"), consumables, rapid assay kits and reference laboratory
diagnostic and consulting services. Practice management software is frequently
sold with post-contract customer support and implementation services. Delivery
of the various products or performance of services within the arrangement may or
may not coincide. Delivery of our IDEXX VetLab instruments, diagnostic imaging
systems and practice management software generally occurs at the onset of the
arrangement. EMAs, consumables, rapid assay kits and reference laboratory
diagnostic and consulting services typically are delivered over future periods,
generally one to six years. In certain arrangements, revenue recognized is
limited to the amount invoiced or received that is not contingent on the
delivery of products and services in the future.



We allocate revenue to each element based on the relative selling price and
recognize revenue when the elements have standalone value and the four criteria
for revenue recognition, as discussed above, have been met for each element. If
available, we establish the selling price of each element based on
vendor-specific objective evidence ("VSOE"), which represents the price charged
for a deliverable when it is sold separately. We use third-party evidence
("TPE") if VSOE is not available, or best estimate of selling price if neither
VSOE nor TPE is available. When these arrangements include a separately-priced
EMA, we recognize revenue related to the EMA at the stated contractual price on
a straight-line basis over the life of the agreement to the extent the
separately stated price is substantive. If there is no stated contractual price
for an EMA, or the separately stated price is not substantive, we allocate
revenue to each element based on the relative selling price and recognize
revenue when the elements have standalone value and the four criteria for
revenue recognition, as discussed above, have been met for each element.



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When arrangements within the scope of software revenue recognition guidance
include multiple elements, we allocate revenue to each element based on relative
fair value, when VSOE exists for all elements, or by using the residual method
when there is VSOE for the undelivered elements but no such evidence for the
delivered elements. Under the residual method, the fair value of the undelivered
elements is deferred and the residual revenue is allocated to the delivered
elements. Revenue is recognized on any delivered elements when the four criteria
for revenue recognition have been met for each element. If VSOE does not exist
for the undelivered element, all revenue from the arrangement is deferred until
the earlier of the point at which such sufficient VSOE does exist or all
elements of the arrangement have been delivered. We determine fair value based
on amounts charged separately for the delivered and undelivered elements to
similar customers in standalone sales of the specific elements.



Certain arrangements with customers include discounts on future sales of
products and services. We apply judgment in determining whether future discounts
are significant and incremental. When the future discount offered is not
considered significant and incremental, we do not account for the discount as an
element of the original arrangement. If the future discount is significant and
incremental, we recognize that discount as an element of the original
arrangement and allocate the discount to the other elements of the arrangement
based on relative selling price. To determine whether a discount is significant
and incremental, we look to the discount provided in comparison to standalone
sales of the same product or service to similar customers, the level of discount
provided on other elements in the arrangement and the significance of the
discount to the overall arrangement. If the discount in the MEA approximates the
discount typically provided in standalone sales, that discount is not
considered incremental.



Customer Programs. We record reductions to revenue related to customer marketing
and incentive programs, which include end-user rebates and other volume-based
incentives. Incentives may be provided in the form of IDEXX Points, credits or
cash and are earned by end users upon achieving defined volume purchases or
utilization levels or upon entering an agreement to purchase products or
services in future periods. The summary of revenue reductions presented below
reflects all revenue reductions recorded for the year for each particular
program. These amounts are presented on a net basis when applicable, which
accounts for any differences between estimates and actual incentives earned for
the relevant customer marketing or incentive program. These differences have
been insignificant in all quarterly or annual periods. Our most significant
customer programs are categorized as follows:



Customer Loyalty Programs. Our customer loyalty programs offer customers the
opportunity to earn incentives on a variety of IDEXX products and services as
those products and services are purchased and utilized. Revenue reductions
related to customer loyalty programs are recorded based on the actual issuance
of incentives, incentives earned but not yet issued and estimates of incentives
to be earned in the future.



Up-Front Customer Loyalty Programs. Our up-front loyalty programs provide
incentives to customers in the form of cash payments or IDEXX Points upon
entering multi-year agreements to purchase annual minimum amounts of future
products or services. Our transition to an all-direct sales model in the U.S.
and the subsequent increase in competitive activity resulted in an increase in
the rate of new up-front customer loyalty incentives, predominantly in response
to competitive offerings during the fourth quarter of 2014 and in 2015.  We saw
a slowing in the rate of increase for new up-front customer loyalty incentives
beginning in the fourth quarter of 2015 and continuing through 2016.



If a customer breaches its agreement, it is required to refund all or a portion
of the up-front cash or IDEXX Points, or make other repayments, remedial actions
or both. These incentives are considered to be customer acquisition costs and
are capitalized within other current assets and other long-term assets and are
subsequently recognized as a reduction to revenue over the term of the customer
agreement. If these up-front incentives are subsequently utilized to purchase
IDEXX VetLab instruments, diagnostic imaging systems or Cornerstone practice
management systems, product revenue and cost is deferred and recognized over the
term of the customer agreement as products and services are provided to the
customer. We monitor customer purchases over the term of their agreement to
assess the realizability of our capitalized customer acquisition costs. For the
years ended December 31, 2016, 2015 and 2014, impairments of customer
acquisition costs were immaterial.



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IDEXX Instrument Marketing Programs. Our instrument marketing programs require
the customer to enroll at the time of instrument purchase and offer customers
the opportunity to earn incentives in future periods based on the volume of the
products they purchase and utilize over the term of the program. These
arrangements are considered MEAs in accordance with our revenue recognition
policy stated above. Revenue reductions related to instrument marketing programs
are recorded based on an estimate of customer purchase and utilization levels
and the incentive the customer will earn over the term of the program. Our
estimates are based on historical experience and the specific terms and
conditions of the marketing program, requiring us to apply judgment to estimate
future product purchases and utilization. Differences between our estimates and
actual incentives earned are accounted for as a change in estimate. These
differences were not material for the years ended December 31, 2016, 2015 and
2014. At December 31, 2016, a 5 percent change in our estimate of future
customer utilization would increase or reduce revenue by approximately $0.4
million.



Reagent Rental Programs. Our reagent rental programs provide our customers the
right to use our instruments in consideration for multi-year agreements to
purchase annual minimum amounts of consumables. No instrument revenue is
recognized at the time of instrument installation. We recognize a portion of the
revenue allocated to the instrument concurrent with the future sale of
consumables. We determine the amount of revenue allocated from the consumable to
the instrument based on relative selling prices and determine the rate of
instrument revenue recognition in proportion to the customer's minimum volume
commitment. The cost of the instrument is capitalized within property and
equipment or deferred within other assets, and is charged to cost of product
revenue on a straight-line basis over the term of the minimum
purchase agreement.



IDEXX Points may be applied against the purchase price of IDEXX products and
services or applied to trade receivables due to us. IDEXX Points that have not
yet been used by customers are classified as a liability until use or expiration
occurs. We estimate the amount of IDEXX Points expected to expire, or breakage,
based on historical expirations and we recognize the estimated benefit of
breakage in proportion to actual redemptions of IDEXX Points by customers. On
November 30 of each year, unused IDEXX Points earned before January 1 of the
prior year generally expire and any variance from the breakage estimate is
accounted for as a change in estimate. This variance was not material for the
years ended December 31, 2016, 2015 and 2014.



Future market conditions and changes in product offerings may cause us to change
marketing strategies to increase or decrease customer incentive offerings,
possibly resulting in incremental reductions of revenue in future periods as
compared to reductions in the current or prior periods. Additionally, certain
customer programs require us to estimate, based on historical experience, and
apply judgment to predict the number of customers who will actually redeem the
incentive. In determining estimated revenue reductions, we utilize data
collected directly from end users, which includes the volume of qualifying
products purchased and the number of qualifying tests run as reported to us by
end users via IDEXX SmartService.  Differences between estimated and actual
customer participation in programs may impact the amount and timing of revenue
recognition.



Following is a summary of revenue reductions, net recorded in connection with
our customer programs for the years ended December 31, 2016, 2015 and 2014  (in
thousands):




                                                   For the Years Ended December 31,
                                                      2016            2015        2014
Revenue Reductions Recorded, Net
Customer Loyalty Programs, net (1)             $    18,226     $    16,742    $ 14,800
Up-Front Customer Loyalty Programs                  24,595          19,972  

13,089

IDEXX Instrument Marketing Programs, net (1) 37,012 31,112

24,158

Other Customer Programs, net (1)                       417             664       2,796
Total revenue reductions, net                  $    80,250     $    68,490    $ 54,843




 (1)  Revenue reduction is provided on a net basis, which accounts for any
      differences between estimates and actual incentives earned.




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Accrued customer programs are included within accrued liabilities and other long-term liabilities, depending on the anticipated settlement date, in the consolidated balance sheets included in this Annual Report on Form 10-K. Following is a summary of changes in the accrual for estimated revenue reductions attributable to customer programs and the ending accrued customer programs balance for the years ended December 31, 2016, 2015 and 2014 (in thousands):





                                                   For the Years Ended December 31,
                                                      2016            2015           2014

Accrued Customer Programs:
Balance, beginning of the year                $     55,133    $     48,153    $    39,345
Revenue reductions for Customer Loyalty
Programs, net (1)                                   18,227          16,742  

14,800

Up-Front Customer Loyalty Program Awards
issued as IDEXX Points                              31,407          40,689  

20,315

Revenue reductions for IDEXX
Instrument Marketing Programs, net (1)              37,011          31,112  

24,158

Revenue reductions for Other Customer
Programs, net (1)                                      417             664  

2,796

IDEXX Points redeemed and credits issued           (81,733 )       (81,172 )      (52,035 )
Breakage                                              (722 )          (230 )         (421 )
Exchange impact on balances denominated in
foreign currency                                      (308 )          (825 )         (805 )
Balance, end of year                          $     59,432    $     55,133    $    48,153



 (1)  Revenue reduction is provided on a net basis, which accounts for any
      differences between estimates and actual incentives earned.




Inventory Valuation



We write down the carrying value of inventory for estimated obsolescence by an
amount equal to the difference between the cost of inventory and the estimated
market value when warranted based on assumptions of future demand, market
conditions, remaining shelf life or product functionality. If actual market
conditions or results of estimated functionality are less favorable than those
we estimated, additional inventory write-downs may be required, which would have
a negative effect on results of operations.



Valuation of Goodwill and Other Intangible Assets




A significant portion of the purchase price for acquired businesses is generally
assigned to intangible assets. Intangible assets other than goodwill are
initially valued at fair value. If a quoted price in an active market for the
identical asset is not readily available at the measurement date, the fair value
of the intangible asset is estimated based on discounted cash flows using market
participant assumptions, which are assumptions that are not specific to IDEXX.
The selection of appropriate valuation methodologies and the estimation of
discounted cash flows require significant assumptions about the timing and
amounts of future cash flows, risks, appropriate discount rates, and the useful
lives of intangible assets. When material, we utilize independent valuation
experts to advise and assist us in determining the fair values of the identified
intangible assets acquired in connection with a business acquisition and in
determining appropriate amortization methods and periods for those intangible
assets. Goodwill is initially valued based on the excess of the purchase price
of a business combination over the fair value of acquired net assets recognized
and represents the future economic benefits arising from other assets acquired
that could not be individually identified and separately recognized.



We assess goodwill for impairment annually, at the reporting unit level, in the
fourth quarter and whenever events or circumstances indicate impairment may
exist. An impairment charge is recorded for the amount, if any, by which the
carrying amount of goodwill exceeds its implied fair value. Our reporting units
are the individual product and service categories that comprise our CAG
operating segment, our Water and LPD operating segments and goodwill remaining
from the restructuring of our pharmaceutical business in the fourth quarter of
2008, referred to herein as the Technology reporting unit. A substantial portion
of the goodwill remaining from the pharmaceutical business, included in our
"Other Segment", is associated with products that have been, or that we expect
to be, licensed to third parties. Realization of this goodwill is dependent upon
the success of those third parties in developing and commercializing products,
which will result in our receipt of royalties and other payments.



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In evaluating goodwill for impairment, we have the option to first assess the
qualitative factors to determine whether it is more likely than not that the
fair value of the reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment
test. The more likely than not threshold is defined as having a likelihood of
more than 50 percent. If, after assessing the totality of events or
circumstances, we determine that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, we would then perform step
one of the two-step impairment test; otherwise, no further impairment test would
be required. In contrast, we can opt to bypass the qualitative assessment for
any reporting unit in any period and proceed directly to step one of the
two-step impairment test. Doing so does not preclude us from performing the
qualitative assessment in any subsequent period.



As part of our goodwill testing process, we evaluate factors specific to a
reporting unit as well as industry and macroeconomic factors that are reasonably
likely to have a material impact on the fair value of a reporting unit. Examples
of the factors considered in assessing the fair value of a reporting unit
include: the results of the most recent impairment test, the competitive
environment, the regulatory environment, anticipated changes in product or labor
costs, revenue growth trends, the consistency of operating margins and cash
flows and current and long-range financial forecasts. The long-range financial
forecasts of the reporting units, which are based upon management's long-term
view of our markets, are used by senior management and the Board of Directors to
evaluate operating performance.



In the fourth quarters of 2016 and 2015, we elected to bypass the qualitative
approach and instead proceeded directly to step one of the two-step impairment
test to assess the fair value of all of our reporting units.



As part of step one of the two-step impairment test, we estimate the fair values
of applicable reporting units using an income approach based on discounted
forecasted cash flows. We make significant assumptions about the extent and
timing of future cash flows, growth rates and discount rates. Model assumptions
are based on our projections and best estimates, using appropriate and customary
market participant assumptions. In addition, we make certain assumptions in
allocating shared assets and liabilities to individual reporting units in
determining the carrying value of each reporting unit. As of our fourth quarter
assessment, the total aggregate fair value of the reporting units approximated
the Company's market capitalization. Valuation assumptions reflect our
projections and best estimates, based on significant assumptions about the
extent and timing of future cash flows, growth rates and discount rates.



We maintain approximately $6.5 million of goodwill associated with our remaining
pharmaceutical product line, out-licensing arrangements and certain retained
drug delivery technologies (collectively "Pharmaceutical Activities") that we
seek to commercialize through arrangements with third parties. Currently, our
primary support for the carrying value of this goodwill is royalty revenue
associated with the commercialization of certain intellectual property under
licensing agreements that expire in 2025. There is no guarantee that we will be
able to maintain or increase revenues from our remaining Pharmaceutical
Activities. The results of our goodwill impairment test for these Pharmaceutical
Activities indicate an excess of estimated fair value over the carrying amount
of this reporting unit by approximately $7.6 million and 117 percent of the
reporting unit's carrying value. Excluding these Pharmaceutical Activities, the
results of our goodwill impairment test indicate an excess of estimated fair
value over the carrying amount for each of our reporting units by a range of
approximately $80.0 million to $2.0 billion and 260 percent to 1220 percent of
the reporting unit's carrying value.



While we believe that the assumptions used to determine the estimated fair
values of each of our reporting units are reasonable, a change in assumptions
underlying these estimates could result in a material negative effect on the
estimated fair value of the reporting units. Our fair value estimate assumes the
achievement of future financial results contemplated in our forecasted cash
flows, and there can be no assurance that we will realize that value. We use
forecasts to estimate future cash flows and include an estimate of long-term
future growth rates based on our most recent views of the long-term outlooks for
our reporting units. Actual results may differ from those assumed in our
forecasts. The discount rate is based on a weighted average cost of capital
derived from industry peers. Changes in market conditions, interest rates,
growth rates, tax rates, costs, pricing or the discount rate would affect the
estimated fair values of our reporting units and could result in a goodwill
impairment charge in a future period. No goodwill impairments were identified
during the years ended December 31, 2016, 2015 or 2014.



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A prolonged economic downturn in the U.S. or internationally resulting in lower
long-term growth rates and reduced long-term profitability may reduce the fair
value of our reporting units. Industry specific events or circumstances could
have a negative impact on our reporting units and may also reduce the fair value
of our reporting units. Should such events occur and it becomes more likely than
not that a reporting unit's fair value has fallen below its carrying value, we
will perform an interim goodwill impairment test, in addition to the annual
impairment test. Future impairment tests may result in an impairment of
goodwill, depending on the outcome of future impairment tests. An impairment of
goodwill would be reported as a non-cash charge to earnings.

We assess the realizability of intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If an
impairment review is triggered, we evaluate the carrying value of intangible
assets based on estimated undiscounted future cash flows over the remaining
useful life of the primary asset of the asset group and compare that value to
the carrying value of the asset group. The cash flows that are used contain our
best estimates, using appropriate and customary assumptions and projections at
the time. If the net carrying value of an intangible asset exceeds the related
estimated undiscounted future cash flows, an impairment to write the intangible
asset to its fair value would be reported as a non-cash charge to earnings. If
necessary, we would calculate the fair value of an intangible asset using the
present value of the estimated future cash flows to be generated by the
intangible asset and applying a risk-adjusted discount rate.



During 2016, management reviewed the OPTI Medical product offerings. As a result
of this review, we discontinued our product development activities in the human
point-of-care medical diagnostics market during and focused our commercial
efforts in this market on supporting our latest generation OPTI CCA-TS2 Blood
Gas and Electrolyte Analyzer. Management identified unfavorable trends in our
OPTI Medical line of business resulting from this change in strategy. Non-cash
intangible asset impairments of $2.2 million were recorded within our condensed
consolidated statement of operations within general and administration expenses
during 2016. The intangibles associated with our OPTI Medical human
point-of-care medical diagnostics market are fully written off.  Intangible
assets impairments during the years ended December 31, 2015 and 2014, were not
material.



Our business combinations regularly include contingent consideration
arrangements that require additional consideration to be paid based on the
achievement of established objectives, most commonly surrounding the retention
of customers during the post-combination period. We assess contingent
consideration to determine if it is part of the business combination or if it
should be accounted for separately from the business combination in the
post-combination period. Contingent consideration is recognized at its fair
value on the acquisition date. A liability resulting from contingent
consideration is remeasured to fair value at each reporting date until the
contingency is resolved, with changes in fair value recognized in
earnings. Changes in fair value of contingent consideration and differences
arising upon settlement were not material during the years ended December 31,
2016, 2015 and 2014. See Note 3 to the consolidated financial statements
included in this Annual Report on Form 10-K for additional information regarding
contingent consideration arising from business acquisitions.



Share-Based Compensation


Our share-based compensation programs provide for grants of stock options, restricted stock units and deferred stock units, along with the issuance of employee stock purchase rights. The total fair value of future awards may vary significantly from past awards based on a number of factors, including our share-based award practices. Therefore, share-based compensation expense is likely to fluctuate, possibly significantly, from year to year.



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We use the Black-Scholes-Merton option-pricing model to determine the fair value
of options granted. Option-pricing models require the input of highly subjective
assumptions, particularly for the expected stock price volatility and the
expected term of options. The risk-free interest rate is based on the U.S.
Treasury yield for a duration similar to the expected term at the date of grant.
We have never paid any cash dividends on our common stock and we have no
intention to pay a dividend at this time; therefore, we assume that no dividends
will be paid over the expected terms of option awards. We determine the
assumptions to be used in the valuation of option grants as of the date of
grant. As such, we use different assumptions during the year if we grant options
at different dates. Substantially all of our options granted during the years
ended December 31, 2016, 2015 and 2014 were granted in the first quarter of each
year. The weighted average of each of the valuation assumptions used to
determine the fair value of each option grant during each of the previous three
years is as follows:




                                      For the Years Ended December 31,
                                        2016           2015          2014

Expected stock price volatility 25 % 23 % 28 % Expected term, in years (1)

           5.7            5.6            5.7
Risk-free interest rate               1.2   %        1.5  %         1.5  %


 (1)  Options granted have a contractual term of ten years.




Changes in the subjective input assumptions, particularly for the expected stock
price volatility and the expected term of options, can materially affect the
fair value estimate. Our expected stock price volatility assumption is based on
the historical volatility of our stock over a period similar to the expected
term and other relevant factors. Higher estimated volatility increases the fair
value of a stock option, while lower estimated volatility has the opposite
effect. The total fair value of stock options granted during the year ended
December 31, 2016, was $13.3 million. If the weighted average of the stock price
volatility assumption was increased or decreased by 1 percent, the total fair
value of stock options awarded during the year ended December 31, 2016, would
have increased or decreased by approximately $0.4 million and the total expense
recognized for the year ended December 31, 2016, for options awarded during the
same period would have increased or decreased by less than $0.1 million.



We derive the expected term assumption for stock options based on historical
experience and other relevant factors concerning expected behavior with regard
to option exercises. The expected term is determined using a consistent method
at each grant date. A longer expected term assumption increases the fair value
of stock option awards, while a shorter expected term assumption has the
opposite effect. If the weighted average of the expected term was increased or
decreased by one year, the total fair value of stock options awarded during the
year ended December 31, 2016, would have increased or decreased by approximately
$1.2 million, and the total expense recognized for the year ended December 31,
2016, for options awarded during 2016 would have increased or decreased by
approximately $0.2 million.



Share-based compensation expense is recognized on a straight-line basis over the
requisite service period, which ranges from one to five years, depending on the
award. Share-based compensation expense is based on the number of awards
expected to vest and is, therefore, reduced for an estimate of the number of
awards that are expected to be forfeited. The forfeiture estimates are based on
historical data and other factors; share-based compensation expense is adjusted
annually for actual results. Total share-based compensation expense for the year
ended December 31, 2016, was $19.9 million, which is net of a reduction of $3.0
million for actual and estimated forfeitures. Fluctuations in our overall
employee turnover rate may result in changes in estimated forfeiture rates and
differences between estimated forfeiture rates and actual experience and,
therefore could have a significant unanticipated impact on share-based
compensation expense.



Modifications of the terms of outstanding awards may result in significant increases or decreases in share-based compensation. There were no material modifications to the terms of outstanding options, restricted stock units or deferred stock units during 2016, 2015 or 2014.




The fair value of stock options, restricted stock units, deferred stock units
and employee stock purchase rights issued totaled $27.0 million for the year
ended December 31, 2016, $25.6 million for the year ended December 31, 2015, and
$24.0 million for the year ended December 31, 2014. The total unrecognized
compensation expense, net of estimated forfeitures, for unvested share-based
compensation awards outstanding at December 31, 2016, was $38.0 million, which
will be recognized over a weighted average period of approximately 1.6 years.

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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.



On a quarterly basis, we assess our current and projected earnings by
jurisdiction to determine whether or not our earnings during the periods when
the temporary differences become deductible will be sufficient to realize the
related future tax benefits. Should we determine that we would not be able to
realize all or part of our net deferred tax asset in a particular jurisdiction
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. A reduction of net income
before taxes in each subsidiary equal to 5 percent of revenue, compared to the
corresponding reported amounts for the year ended December 31, 2016, would not
result in the recognition of material incremental valuation allowances.



For those jurisdictions where tax carryforwards are likely to expire unused or
the projected operating results indicate that realization is not more likely
than not, a valuation allowance is recorded to offset the deferred tax asset
within that jurisdiction. In assessing the need for a valuation allowance, we
consider future taxable income and ongoing prudent and feasible tax planning
strategies. Alternatively, in the event that we were to determine that we would
be able to realize our deferred tax assets in the future in excess of the net
recorded amount, a reduction of the valuation allowance would increase income in
the period such determination was made. Likewise, should we determine that we
would not be able to realize all or part of our net deferred tax asset in the
future, a reduction to the deferred tax asset would be charged to income in the
period such determination was made.



Our net taxable temporary differences and tax carryforwards are recorded using
the enacted tax rates expected to apply to taxable income in the periods in
which the deferred tax liability or asset is expected to be settled or realized.
Should the expected applicable tax rates change in the future, an adjustment to
the net deferred tax liability would be credited or charged, as appropriate, to
income in the period such determination was made. For example, an increase of
one percentage point in our anticipated U.S. state income tax rate would cause
us to decrease our net deferred tax liability balance by $0.3 million. This
decrease in the net deferred liability would increase net income in the period
that our rate was adjusted. Likewise, a decrease of one percentage point to our
anticipated U.S. state income tax rate would have the opposite effect.



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 consider the majority of the operating earnings of non-U.S. subsidiaries to
be indefinitely invested outside the U.S. At December 31, 2016, the cumulative
earnings of these subsidiaries were $546.7 million, of which approximately
$387.0 million was held in cash and cash equivalents. No provision has been made
for the payment of U.S. federal and state or international taxes that may result
from future remittances of these undistributed earnings of non-U.S.
subsidiaries. Should we repatriate these earnings in the future, we would have
to adjust the income tax provision in the period in which the decision to
repatriate earnings is made. A determination of the related tax liability that
would be paid on these undistributed earnings if repatriated is not practicable
for several reasons including the complexity of laws and regulations in the
various jurisdictions where we operate, the varying tax treatment of potential
repatriation scenarios and the timing of any future repatriation. For the
operating earnings not considered to be indefinitely invested outside the U.S.
we have accounted for the tax impact on a current basis.



                                       49


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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 $18.8 million as of December 31, 2016, and $7.4
million as of December 31, 2015, which includes estimated interest expense and
penalties. The increase in net liability is primarily related to two uncertain
tax positions taken during the year. The first relates to our claiming certain
tax deductions under a recent court case, but one that the IRS has vowed to
appeal. The second relates to certain changes we made in our transfer pricing
policies to better align statutory accounting with business operations. See Note
12 to the consolidated financial statements for the year ended December 31,
2016, included in this Annual Report on Form 10-K for more information.



Future changes in tax law could impact our provision for income taxes, the
amount of taxes payable, and our U.S. deferred tax liability balances. Any
enacted legislation to reduce the U.S. corporate tax rate would reduce our
income tax expense and payments in subsequent periods, but could also have a
one-time impact in the period of enactment. Potential one-time impacts could
include adjustments to our net U.S. deferred tax liability and increased tax
expense resulting from the taxation of operating earnings of non-U.S.
subsidiaries that have been indefinitely invested outside the U.S. and for which
we have not recorded a U.S. tax liability.



RESULTS OF OPERATIONS AND TRENDS

Effects of Certain Factors on Results of Operations




Distributor Purchasing and Inventories.  When selling our products through
distributors, changes in distributors' inventory levels can impact our reported
sales, and these changes may be affected by many factors, which may not be
directly related to underlying demand for our products by veterinary practices,
which are the end users. Therefore, we believe it is important to track sales to
end users in the relevant periods by our significant distributors in order to
distinguish between the impact of end-user demand and the impact of distributor
purchasing dynamics on our reported revenue in those periods. Effective January
1, 2015, we fully transitioned to an all-direct sales strategy in the U.S.,
however changes in prior year U.S. distributors' inventory levels impacted 2015
reported growth results. In certain countries internationally, we continue to
sell our products through third party distributors. Although we are unable to
obtain data for sales to end users from certain less significant non-U.S. third
party distributors, we do not believe the impact of changes in these
distributors' inventories had or would have a material impact on our growth
rates in the relevant periods. Following our transition to an all direct U.S.
distribution approach, we anticipate that changes in distributor inventory
levels will have an immaterial impact on our growth in future years.



Where growth rates are affected by changes in end-user demand, we refer to this
as the impact of practice-level sales on growth. Where growth rates are affected
by distributor purchasing dynamics, we refer to this as the impact of changes in
distributors' inventories on growth. If during the current year, distributors'
inventories grew by less than those inventories grew in the comparable period of
the prior year, then changes in distributors' inventories would have an
unfavorable impact on our reported sales growth in the current period.
Conversely, if during the current year, distributors' inventories grew by more
than those inventories grew in the comparable period of the prior year, then
changes in distributors' inventories would have a favorable impact on our
reported sales growth in the current period.



Effective January 1, 2015, we fully transitioned to an all-direct sales strategy
in the U.S. and did not renew our existing contracts with our former key U.S.
distribution partners after their expiration at the end of 2014. Under this
approach, we take orders, ship product, invoice and receive payment for all
rapid assay test kits and VetLab consumables in the U.S., aligning with our
direct model for instruments, reference laboratory services, and other CAG
products and services.



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We incurred transition costs to implement this all-direct sales strategy in the
U.S., including approximately $5 million in incremental expense during the year
ended December 31, 2014, resulting from the ramp up of sales and operating
resources. We also incurred $9.5 million in non-recurring expenses during the
year ended December 31, 2014, associated with project management and other
one-time costs required to implement this new strategy. Further, we incurred
one-time transitional impacts related to the drawdown of distributor inventory
in the fourth quarter of 2014, resulting in a reduction in revenue and operating
profit of $25 million and $21 million, respectively, in such period.



During the three months ended December 31, 2014, we began recognizing revenue on
rapid assay kits and VetLab consumables upon delivery to end users in the U.S.,
instead of at distribution. We also began to capture additional revenue that was
previously earned by our distribution partners, net of other changes related to
this all-direct strategy, such as free next-day shipping and a new returns
policy for expired product. We refer to this net additional revenue as
distributor margin capture. This net incremental revenue allowed us to expand
our sales, marketing and customer support resources, which we expect will drive
future revenue growth, and to build out our distribution capability.  We expect
investments in these areas will scale over time based on our expected future
growth rates and provide accretive benefits to operating profit. Also as a
result of the transition to an all-direct sales strategy in the U.S., we
incurred additional working capital demands, including inventory costs
previously borne by our distributors, and incremental accounts receivable
resulting from a longer elapsed time to collect our receivables.



Currency Impact. For the year ended December 31, 2016, approximately 21 percent
of our consolidated revenue was derived from products manufactured or sourced in
U.S. dollars and sold internationally in local currencies, as compared to 20
percent for the year ended December 31, 2015, and 22 percent  for the year ended
December 31, 2014.  Strengthening of the rate of exchange for the U.S. dollar
relative to other currencies has a negative impact on our revenues derived in
currencies other than the U.S. dollar and on profits of products manufactured or
purchased in U.S. dollars and sold internationally, and a weakening of the U.S.
dollar has the opposite effect. Similarly, to the extent that the U.S. dollar is
stronger in current or future periods relative to the exchange rates in effect
in the corresponding prior periods, our growth rate will be negatively affected.
The impact of foreign currency denominated operating expenses and foreign
currency denominated supply contracts partly offsets this exposure.
Additionally, our designated hedges of intercompany inventory purchases and
sales help delay the impact of certain exchange rate fluctuations on non-U.S.
denominated revenues. See "Part II, Item 7A. Quantitative and Qualitative
Disclosure About Market Risks" included in this Annual Report on Form 10-K for
additional information regarding currency impact. Our future income tax expense
could also be affected by changes in the mix of earnings, including as a result
of changes in the rate of exchange for the U.S. dollar relative to currencies in
countries with differing statutory tax rates.  See "Part I, Item 1A. Risk
Factors." included in this Annual Report on Form 10-K for additional information
regarding tax impacts.



The impact on revenue resulting from changes in foreign currency exchange rates
is not a measure defined by accounting principles generally accepted in the
United States of America ("U.S. GAAP"), otherwise referred to herein as
a non-GAAP financial measure. As exchange rates are an important factor in
understanding period-to-period comparisons, we believe the presentation of
results normalized for changes in currency in addition to reported results helps
improve investors' ability to understand our operating results and evaluate our
performance in comparison to prior periods.  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 previous year period to foreign currency denominated
revenues for the prior year period.



Effects of Economic Conditions.  Demand for our products and services is
vulnerable to changes in the economic environment, including slow economic
growth, high unemployment and credit availability. Negative or cautious consumer
sentiment can lead to reduced or delayed consumer spending, resulting in a
decreased number of patient visits to veterinary clinics. Unfavorable economic
conditions can impact sales of instruments, diagnostic imaging and practice
management systems, which are larger capital purchases for veterinarians.
Additionally, economic turmoil can cause our customers to remain sensitive to
the pricing of our products and services. In the U.S., we monitor patient visits
and clinic revenue data provided by a subset of our CAG customers. Although this
data is a limited sample and susceptible to short-term impacts such as weather,
which may affect the number of patient visits in a given period, we believe that
this data provides a fair and meaningful long-term representation of the trend
in patient visit activity in the U.S., providing us insight regarding demand for
our products and services.



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Economic conditions can also affect the purchasing decisions of our Water and
LPD business customers. Water testing volumes may be susceptible to declines in
discretionary testing for existing home and commercial sales and in mandated
testing as a result of decreases in home and commercial construction. Testing
volumes may also be impacted by severe weather conditions such as drought. In
addition, fiscal difficulties can also reduce government funding for water and
herd health screening services.



We believe that the diversity of our products and services and the geographic diversity of our markets partially mitigate the potential effects of the economic environment and negative consumer sentiment on our revenue growth rates.




Effects of Patent Expiration. Although we have several patents and licenses of
patents and technologies from third parties that expired during 2016 and are
expected to expire during 2017, the expiration of these patents or licenses,
individually or in the aggregate, is not expected to have a material effect on
our financial position or future operations due to a range of factors as
described in Item 1. "Patents and Licenses".



Twelve Months Ended December 31, 2016, Compared to Twelve Months Ended December 31, 2015




Revenue



The following revenue analysis and discussion focuses on organic revenue growth.
Organic revenue growth is a non-GAAP financial measure and represents the
percentage change in revenue during the twelve months ended December 31, 2016,
as compared to the same period for the prior year, net of the effect of changes
in foreign currency exchange rates, acquisitions and divestitures. Organic
revenue growth should be considered in addition to, and not as a replacement for
or as a superior measure to, revenues reported in accordance with U.S. GAAP, and
may not be comparable to similarly titled measures reported by other companies.
Management believes that reporting organic revenue growth provides useful
information to investors by facilitating easier comparisons of our revenue
performance with prior and future periods and to the performance of our peers.
We exclude 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 exclude
the effect of acquisitions and divestitures because the nature, size and number
of these transactions can vary dramatically from period to period, require or
generate cash as an inherent consequence of the transaction, and therefore can
also obscure underlying business and operating trends.



The percentage changes in revenue from foreign currency exchange rates and
acquisitions are non-GAAP financial measures. See the subsection above titled
"Effects of Certain Factors on Results of Operations - Currency Impact" for a
description of the calculation of the percentage change in revenue resulting
from changes in foreign currency exchange rates. The percentage change in
revenue resulting from acquisitions represents incremental revenues attributable
to acquisitions that have occurred since the beginning of the prior year period.

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Total Company. The following table presents revenue by operating segment by U.S. markets and non-U.S., or international markets:








                          For the Year    For the Year
                                 Ended           Ended                                  Percentage      Percentage       Organic
Net Revenue               December 31,    December 31,        Dollar     Percentage    Change from     Change from       Revenue
(dollars in thousands)           2016            2015         Change         Change       Currency    Acquisitions        Growth

CAG                      $  1,522,689    $  1,356,287    $  166,402          12.3%        (0.6%)           0.3%           12.6%
United States               1,017,065         912,822       104,243          11.4%             -           0.2%           11.2%
International                 505,624         443,465        62,159          14.0%        (2.0%)           0.5%           15.5%

Water                         103,579          96,884         6,695           6.9%        (1.8%)               -           8.7%
United States                  52,852          48,677         4,175           8.6%             -               -           8.6%
International                  50,727          48,207         2,520           5.2%        (3.7%)               -           8.9%

LPD                           126,491         127,143          (652)         (0.5%)       (1.6%)               -           1.1%
United States                  13,253          14,041          (788)         (5.6%)            -               -          (5.6%)
International                 113,238         113,102           136           0.1%        (1.8%)               -           1.9%

Other                          22,664          21,578         1,086           5.0%        (0.1%)               -           5.1%

Total Company            $  1,775,423    $  1,601,892    $  173,531          10.8%        (0.8%)           0.2%           11.4%
United States               1,089,595         980,321       109,274          11.1%         0.1%            0.2%           10.8%
International                 685,828         621,571        64,257          10.3%        (2.1%)           0.4%           12.0%




U.S. and international organic revenue growth both reflect very strong volume
gains in CAG Diagnostics recurring revenue, supported by our differentiated
diagnostic technologies that are driving increased volumes from new and existing
customers in our reference laboratory business, and continued strong growth in
CAG Diagnostics capital instrument placements that are driving IDEXX VetLab
consumable volume growth. International organic growth across Europe, Asia
Pacific and Latin America outpaced U.S. growth, reflecting the aforementioned
CAG Diagnostics recurring volume driven growth, continued growth of Colilert
testing products in our Water business and LPD emerging market growth, offset by
declines in LPD bovine disease eradication testing in Europe. To a lesser
extent, U.S. and international LPD organic growth also reflects pressure on our
dairy testing business due to a decline in worldwide milk prices.



Companion Animal Group.



The following table presents revenue by product and service category for CAG:






                     For the Year    For the Year
                            Ended           Ended                                  Percentage      Percentage       Organic
Net Revenue          December 31,    December 31,        Dollar     Percentage    Change from     Change from       Revenue
(dollars in
thousands)                  2016            2015         Change         Change       Currency    Acquisitions        Growth

CAG Diagnostics
recurring
revenue:            $  1,281,262    $  1,147,026    $  134,236          11.7%          (0.7%)         0.4%           12.0%
IDEXX VetLab
consumables              451,456         396,526        54,930          13.9%          (0.8%)             -          14.7%
Rapid assay
products                 189,122         182,670         6,452           3.5%          -                  -           3.5%
Reference
laboratory
diagnostic and
consulting
services                 581,067         512,155        68,912          13.5%          (0.9%)         0.8%           13.6%
CAG Diagnostics
service and
accessories               59,617          55,675         3,942           7.1%          (0.3%)             -           7.4%
CAG Diagnostics
capital -
instruments              121,191          98,502        22,689          23.0%          (0.7%)             -          23.7%
Veterinary
software,
services and
diagnostic
imaging systems          120,236         110,759         9,477           8.6%          (0.2%)             -           8.8%
  Net CAG revenue   $  1,522,689    $  1,356,287    $  166,402          12.3%          (0.6%)         0.3%           12.6%




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The increase in CAG Diagnostics recurring revenue was due primarily to higher
sales of our IDEXX VetLab consumables and reference laboratory diagnostic and
consulting services resulting from increased volumes and, to a lesser extent,
higher realized prices.



IDEXX VetLab consumables revenue growth was due primarily to higher sales
volumes in the U.S., Europe and the Asia-Pacific region from our Catalyst
consumables and, to a lesser extent, ProCyte DX consumables, resulting from
growth in testing by existing customers, the acquisition of new customers and an
expanded menu of available tests. These favorable impacts were partly offset by
lower consumables volumes from our VetTest chemistry instrument due to customer
upgrades from our previous generation VetTest to our Catalyst analyzers. IDEXX
VetLab consumables revenue also benefited from higher average unit sales prices.



The increase in rapid assay revenue resulted from higher average unit price and
sales volumes of SNAP 4Dx and higher sales volumes of single analyte
SNAP products. These favorable factors were partly offset by the unfavorable
impact of lower average unit sales prices in the U.S. for certain earlier
generation rapid assay products.



The increase in reference laboratory diagnostic and consulting services revenue
was due primarily to the impact of higher testing volumes throughout our
worldwide network of laboratories, most prominently in the U.S., resulting from
increased testing from existing customers and the net acquisition of new
customers, supported by our differentiated diagnostic technologies, such
as IDEXX SDMA. Also, revenue increased, to a lesser extent, from higher average
unit sales prices due to price increases. Testing volumes benefited slightly
from favorable weather trends experienced during the first quarter of 2016, as
compared to the same period of the prior year.



CAG Diagnostic services and accessories revenue growth was primarily a result of the increase in our active installed base of instruments.




 The increase in CAG Diagnostics capital instruments revenue resulted from our
newly launched SediVue Dx analyzer, which contributed approximately 23 percent
to reported and organic instrument revenue growth, and higher ProCyte Dx
revenues, partly offset by lower Catalyst revenues resulting from a shift in
placements from our Catalyst Dx analyzer to our lower priced Catalyst One
analyzer and the prior year benefit of recognizing previously deferred revenues
associated with pre-orders of our Catalyst One analyzer in the U.S. in 2014.



The increase in veterinary software, services and diagnostic imaging systems
revenue was due primarily to increasing diagnostic imaging systems revenue,
higher veterinary subscription service revenue, including increases in our Pet
Health Network Pro subscriber base and higher support revenue resulting from an
increase in our active installed base of diagnostic imaging and practice
management systems. Revenues from diagnostic imaging systems were higher due to
the timing of revenue recognized from fewer deferred revenue placements under
up-front customer loyalty programs, as compared to the same period in the prior
year, and the recognition of previously deferred revenues. These favorable
factors were partially offset by fewer licensed-based Cornerstone placements as
we evolve to a subscription-based model for new practice management customer
acquisitions, as well as lower average unit sale prices on diagnostic imaging
system placements.



Water. The increase in Water revenue, as compared to the same period in the
prior year, was attributable to all regions in which we operate, most notably
from strong performance in North America, Europe and the Asia-Pacific region.
Higher revenues resulted primarily from increased sales volumes and price
increases of our Colilert test products and related accessories used in coliform
and E. coli testing, placements of our Quanti-Tray Sealer PLUS instrument, which
we launched in June 2015, several large project orders during the first half of
2016, and to a lesser extent, from higher sales volumes of our products designed
to detect cryptosporidium related to an outbreak in the United Kingdom beginning
in mid-2015 through the first half of 2016. Testing volumes also benefited
slightly from favorable weather trends experienced during the first quarter of
2016, as compared to the same period of the prior year.



Livestock, Poultry and Dairy. The increase in LPD organic revenue resulted from
strong performance in emerging markets, most notably resulting from higher sales
volumes of swine, poultry and bovine pregnancy products and services in various
regions. This increase was partially offset by a decrease in sales volumes of
bovine testing products within Western Europe in large part due to the success
of certain disease eradication programs in the region, as well as pressure on
our dairy testing business due to a decline in worldwide milk prices.



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Other. The increase in Other revenue was due primarily to royalty revenue associated with the commercialization of certain intellectual property related to our former pharmaceutical product line, partially offset by lower sales volumes of our OPTI Medical blood gas analyzers and related consumables.



Gross Profit


Total Company. The following table presents gross profit and gross profit percentages by operating segment:





                           For the Year                    For the Year
                                  Ended                           Ended
Gross Profit               December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)            2016         Revenue            2015         Revenue          Change          Change

CAG                      $     820,322          53.9%    $     729,303          53.8%    $     91,019           12.5%
Water                           71,878          69.4%           68,953          71.2%           2,925            4.2%
LPD                             73,801          58.3%           79,987          62.9%          (6,186)          (7.7%)
Other                           11,561          51.0%           10,281          47.6%           1,280           12.5%
Unallocated amounts             (2,126)            N/A           1,746             N/A         (3,872)         221.8%
  Total Company          $     975,436          54.9%    $     890,270          55.6%    $     85,166            9.6%




Gross profit increased due to higher sales volumes, partly offset by a 70 basis
point reduction in the gross profit percentage during the year ended December
31, 2016, as compared to the same period of the prior year. Excluding currency
impacts of approximately 118 basis points, gross margins increased moderately,
supported by improvements in our CAG business.



Companion Animal Group. Gross profit for CAG increased due to higher sales
volumes, along with a 10 basis point increase in the gross profit percentage
during the year ended December 31, 2016, as compared to the same period in the
prior year. The unfavorable impact of currency during the year ended December
31, 2016, as compared to the same period of the prior year, reduced the gross
profit percentage by approximately 90 basis points, resulting primarily from
lower hedging gains. Excluding currency impacts, gross margins increased
moderately, supported by the net benefit of price increases for our reference
laboratory diagnostic services and IDEXX VetLab consumables and profitability
improvements from higher relative revenue of our expanded subscription service
offerings, and within our worldwide network of reference laboratories.



Water. Gross profit for Water increased due to higher sales volumes, offset by a
180 basis point reduction in the gross profit percentage. The unfavorable impact
of currency during the year ended December 31, 2016, as compared to the same
period in the prior year, reduced the gross profit percentage by approximately
210 basis points, resulting from lower hedging gains and changes in foreign
currency exchange rates. Excluding currency impacts, the gross profit percentage
increased slightly due to the net benefit of price increases on our Colilert
testing products and related accessories.



Livestock, Poultry and Dairy. Gross profit for LPD decreased due to a reduction
in the gross profit percentage of 460 basis points for the year ended December
31, 2016, as compared to the same period of the prior year. The decrease in the
gross profit percentage resulted primarily from approximately 360 basis points
of unfavorable currency impact, primarily due to lower relative hedging gains
during the year ended December 31, 2016, as compared to the same period of the
prior year. Additionally, higher overall manufacturing costs, which were
partially offset by the expiration of royalties on certain of our swine testing
products, resulted in an overall lower gross profit, as compared to the same
period in the prior year.



Other. Gross profit for Other increased due to higher sales and an increase in
the gross profit percentage of 340 basis points for the year ended December 31,
2016, as compared to the same period in the prior year. The increase in the
gross profit percentage resulted primarily from higher relative royalty revenue
associated with the commercialization of certain intellectual property related
to our former pharmaceutical product line, partly offset by an increase
in overall OPTI Medical product costs.



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Unallocated Amounts. Gross profit for Unallocated Amounts decreased due
primarily to higher personnel-related costs. We estimate certain
personnel-related costs and allocate the budgeted expenses to the operating
segments. This allocation differs from the actual expense and consequently
yields a difference that is reported under the caption "Unallocated Amounts."
The increase in personnel-related costs was due primarily to higher self-insured
healthcare costs and higher than budgeted employee incentives reported within
Unallocated Amounts during the year ended December 31, 2016, as compared to the
same period of the prior year.



Operating Expenses and Operating Income

Total Company. The following tables present operating expenses and operating income by operating segment:




                           For the Year                    For the Year
                                  Ended                           Ended
Operating Expenses         December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)            2016         Revenue            2015         Revenue          Change          Change

CAG                      $     518,980          34.1%    $     495,984          36.6%    $     22,996            4.6%
Water                           26,176          25.3%           24,201          25.0%           1,975            8.2%
LPD                             54,887          43.4%           52,830          41.6%           2,057            3.9%
Other                           10,677          47.1%           10,418          48.3%             259            2.5%
Unallocated amounts             14,477             N/A           6,925             N/A          7,552          109.1%
  Total Company          $     625,197          35.2%    $     590,358          36.9%    $     34,839            5.9%







                           For the Year                    For the Year
                                  Ended                           Ended
Operating Income           December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)            2016         Revenue            2015         Revenue          Change          Change

CAG                      $     301,342          19.8%    $     233,319          17.2%    $     68,023           29.2%
Water                           45,702          44.1%           44,752          46.2%             950            2.1%
LPD                             18,914          15.0%           27,157          21.4%          (8,243)         (30.4%)
Other                              884           3.9%             (137)         (0.6%)          1,021         (745.3%)
Unallocated amounts            (16,603)            N/A          (5,179)            N/A        (11,424)        (220.6%)
  Total Company          $     350,239          19.7%    $     299,912          18.7%    $     50,327           16.8%






During the year ended December 31, 2015, we recorded an $8.2 million impairment
charge related to internally-developed software not yet placed into service
within Unallocated Amounts as a result of a strategic shift to refocus our
development efforts within our information management business. For the year
ended December 31, 2015, adjusted operating income, which is total Company
operating income adjusted for the aforementioned software impairment charge was
approximately $308.1 million and 19.2 percent of revenue.  Adjusted operating
income increased by $42.1 million or 13.7 percent for the year ended December
31, 2016, as compared to the same period in the prior year. Adjusted operating
income is a non-GAAP financial measure and should be considered in addition to,
and not as a replacement for or as a superior measure to, operating income
reported in accordance with U.S. GAAP. Management believes that reporting
adjusted operating income provides useful information to investors by
facilitating easier comparisons of our operating income performance with prior
and future periods and to the performance of our peers.



Companion Animal Group. The following table presents CAG operating expenses by
functional area:






                               For the Year                    For the Year
                                      Ended                           Ended
Operating Expenses             December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)                2016         Revenue            2015  

Revenue Change Change

Sales and marketing $ 277,377 18.2% $ 263,907

         19.5%    $     13,470            5.1%

General and administrative 168,637 11.1% 159,851

         11.8%           8,786            5.5%
Research and development            72,966           4.8%           72,226           5.3%             740            1.0%
  Total operating expenses   $     518,980          34.1%    $     495,984          36.6%    $     22,996            4.6%




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The increase in sales and marketing expense was due primarily to increased
personnel-related costs, including investments in our global commercial
infrastructure and sales performance incentives, partly offset by the favorable
impact of changes in foreign currency exchange rates. The increase in general
and administrative expense resulted primarily from information technology
investments, including ongoing depreciation and maintenance associated with
prior year projects, and higher personnel-related costs. These increases were
partly offset by the favorable impact of changes in foreign currency exchange
rates. Research and development expense for the year ended December 31, 2016,
was generally consistent with the same period of the prior year.



Water. The following table presents Water operating expenses by functional area:




                               For the Year                    For the Year
                                      Ended                           Ended
Operating Expenses             December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)                2016         Revenue            2015         Revenue          Change          Change

Sales and marketing          $      13,201          12.7%    $      12,204          12.6%    $        997            8.2%
General and administrative          10,426          10.1%            9,058           9.3%           1,368           15.1%
Research and development             2,549           2.5%            2,939           3.0%            (390)         (13.3%)
  Total operating expenses   $      26,176          25.3%    $      24,201          25.0%    $      1,975            8.2%




The increase in sales and marketing expense was due primarily to
higher personnel-related costs and increased advertising and marketing
materials. The increase in general and administrative expense was due primarily
to higher personnel-related costs. The decrease in research and development
expense was a result of lower product development costs during the year ended
December 31, 2016, as compared to the same period in the prior year.



Livestock, Poultry and Dairy. The following table presents LPD operating expenses by functional area:




                               For the Year                    For the Year
                                      Ended                           Ended
Operating Expenses             December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)                2016         Revenue            2015  

Revenue Change Change

Sales and marketing $ 22,723 18.0% $ 22,307

         17.5%    $        416            1.9%
General and administrative          20,193          16.0%           18,655          14.7%           1,538            8.2%
Research and development            11,971           9.5%           11,868           9.3%             103            0.9%
  Total operating expenses   $      54,887          43.4%    $      52,830          41.6%    $      2,057            3.9%




The increase in sales and marketing expense for the year ended December 31,
2016, was due to higher commercial infrastructure investments within emerging
markets.  The increase in general and administrative expense resulted primarily
from higher investments in emerging markets including Brazil. The increase in
research and development expense resulted primarily from higher external product
development and material costs. All the increases above were partially offset by
the favorable impact of changes in foreign currency exchange rates.



Other. Operating expenses for Other, which totaled $10.7 million for the year
ended December 31, 2016, increased $0.3 million, as compared to the same period
of the prior year, due primarily to intangible impairments within our OPTI
Medical business, partly offset by lower amortization expense on the
aforementioned intangible assets and a reduction in personnel-related costs.



During the first half of 2016, management reviewed the OPTI Medical product
offerings. As a result of this review, we discontinued our product development
activities in the human point-of-care medical diagnostics market during March
2016 and focused our commercial efforts in this market on supporting our latest
generation OPTI CCA-TS2 Blood Gas and Electrolyte Analyzer. Management
identified unfavorable trends in our OPTI Medical line of business resulting
from this change in strategy. We revised our forecasts downward, causing us to
assess the realizability of the related tangible and intangible assets and
determined the expected future cash flows were less than the carrying value of
the OPTI Medical asset group. Non-cash intangible asset impairments of $2.2
million were recorded during the year ended December 31, 2016.



Unallocated Amounts. Operating expenses that are not allocated to our operating
segments increased $7.6 million to $14.5 million for the year ended December 31,
2016, due primarily to higher personnel-related costs as compared to budget,
reflecting increased employee incentives and higher self-insured health claim
expenses, as well as certain foreign exchange losses on monetary assets due to
strengthening of the U.S. dollar. This compares to prior

                                       57



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period cost control initiatives that resulted in lower than budgeted costs. We
estimate certain personnel-related costs and allocate these budgeted expenses to
the operating segments. This allocation differs from actual expense and
consequently yields a difference that is reported under the caption "Unallocated
Amounts." Partially offsetting these increases was the aforementioned $8.2
million impairment charge recorded in 2015, related to internally-developed
software not yet placed into service as a result of a strategic shift to refocus
our development efforts within our veterinary software and services business.



Interest Income and Interest Expense




Interest income was $3.7 million for the year ended December 31, 2016, as
compared to $2.5 million for the same period in the prior year. The increase in
interest income was due primarily to a larger relative portfolio of marketable
securities during the year ended December 31, 2016, and, to a lesser extent,
higher interest rates, as compared to the same period of the prior year.



Interest expense was $32.0 million for the year ended December 31, 2016, as
compared to $29.2 million for the same period of the prior year. The increase in
interest expense resulted from higher relative interest incurred in 2016 as a
result of approximately $250 million in senior notes that we issued and sold
through private placements during the first half of 2015, for which fixed
interest rates range from 1.785 percent to 3.72 percent. Additionally, the
increase in interest expense was due to higher relative interest rates on our
Credit Facility. See Note 11 to the consolidated financial statements included
in this Annual Report on Form 10-K for additional information regarding our
senior notes and Credit Facility.



Provision for Income Taxes



Our effective income tax rate was 31.0 percent for the year ended December 31,
2016, as compared to 29.7 percent for the year ended December 31, 2015.  The
increase in our effective tax rate for the year ended December 31, 2016, as
compared to the year ended December 31, 2015, was primarily related to a change
in earnings mix in 2016, with relatively higher earnings subject to domestic tax
rates as opposed to lower international tax rates including the impact of
foreign currency exchange rates.



Twelve Months Ended December 31, 2015, Compared to Twelve Months Ended December 31, 2014




Revenue



The following revenue analysis and discussion focuses on organic revenue growth.
Organic revenue growth is a non-GAAP financial measure and represents the
percentage change in revenue during the year ended December 31, 2015, as
compared to the same period in 2014, net of the effect of changes in foreign
currency exchange rates, acquisitions and divestitures. Organic revenue growth
should be considered in addition to, and not as a replacement for or as a
superior measure to, revenues reported in accordance with U.S. GAAP, and may not
be comparable to similarly titled measures reported by other companies.
Management believes that reporting organic revenue growth provides useful
information to investors by facilitating easier comparisons of our revenue
performance with prior and future periods and to the performance of our peers.
We exclude 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 exclude
the effect of acquisitions and divestitures because the nature, size and number
of these transactions can vary dramatically from period to period, require or
generate cash as an inherent consequence of the transaction, and therefore can
also obscure underlying business and operating trends.



The percentage changes in revenue from foreign currency exchange rates and
acquisitions are non-GAAP financial measures. See the subsection above titled
"Effects of Certain Factors on Results of Operations - Currency Impact" for a
description of the calculation of the percentage change in revenue resulting
from changes in foreign currency exchange rates. The percentage change in
revenue resulting from acquisitions represents incremental revenues attributable
to acquisitions that have occurred since the beginning of the prior year period.

                                       58


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Total Company. The following table presents revenue by operating segment:




                          For the Year    For the Year
                                 Ended           Ended                                 Percentage      Percentage       Organic
Net Revenue               December 31,    December 31,       Dollar     Percentage    Change from     Change from       Revenue
(dollars in thousands)           2015            2014        Change         Change       Currency    Acquisitions        Growth

CAG                      $  1,356,287    $  1,223,064    $ 133,223          10.9%        (5.6%)           0.8%           15.7%
United States                 912,822         782,032      130,790          16.7%             -           0.2%           16.5%
International                 443,465         441,032        2,433           0.6%       (15.4%)           1.8%           14.2%

Water                          96,884          94,725        2,159           2.3%        (5.5%)               -           7.8%
United States                  48,677          45,551        3,126           6.9%             -               -           6.9%
International                  48,207          49,174         (967)         (2.0%)      (10.8%)               -           8.8%

LPD                           127,143         141,179      (14,036)         (9.9%)      (12.0%)               -           2.1%
United States                  14,041          13,291          750           5.6%             -               -           5.6%
International                 113,102         127,888      (14,786)        (11.6%)      (13.3%)               -           1.7%

Other                          21,578          26,839       (5,261)        (19.6%)       (0.8%)               -         (18.8%)

Total Company            $  1,601,892    $  1,485,807    $ 116,085           7.8%        (6.2%)           0.6%           13.4%
United States                 980,321         848,925      131,396          15.5%             -           0.3%           15.2%
International                 621,571         636,882      (15,311)         (2.4%)      (14.1%)           1.2%           10.5%




We transitioned to an all-direct sales strategy in the U.S. during the fourth
quarter of 2014, resulting in a drawdown of distributors' inventory levels which
reduced both reported CAG and total Company reported revenues by $25 million.
The impact of the 2014 changes in distributors' inventory levels increased 2015
reported CAG revenue growth by 2 percent, reported CAG U.S. revenue growth by 3
percent, total Company revenue growth by 2 percent and total U.S. revenue growth
by 3 percent.



U.S. and international organic revenue growth both reflect strong volume gains
in CAG Diagnostics recurring revenue, supported volume gains from new and
existing customers in our reference laboratory business and continued growth in
CAG Diagnostics capital instrument placements that are driving IDEXX VetLab
consumable volume growth. International organic growth in Europe and Asia
Pacific markets and, to a lesser extent, Latin America, reflects the
aforementioned CAG Diagnostics recurring volume driven growth, continued growth
of Colilert testing products in our Water business and LPD growth in bovine,
poultry and swine testing, offset by declines in LPD herd health screening in
the Asia-Pacific region. Changes in distributors' inventory levels increased
reported international revenue growth by less than 1 percent.



Companion Animal Group.



The following table presents revenue by product and service category for CAG:




                     For the Year    For the Year
                            Ended           Ended                                  Percentage       Percentage       Organic
Net Revenue          December 31,    December 31,       Dollar     Percentage     Change from      Change from       Revenue
(dollars in
thousands)                  2015            2014        Change         Change        Currency     Acquisitions        Growth

CAG Diagnostics
recurring
revenue:            $  1,147,026    $  1,039,252    $ 107,774          10.4%           (5.8%)            0.6%         15.6%
IDEXX VetLab
consumables              396,526         341,407       55,119          16.1%           (7.1%)         -               23.2%
Rapid assay
products                 182,670         165,647       17,023          10.3%           (3.0%)         -               13.3%
Reference
laboratory
diagnostic and
consulting
services                 512,155         479,192       32,963           6.9%           (5.8%)            1.3%         11.4%
CAG Diagnostics
service and
accessories               55,675          53,006        2,669           5.0%           (5.9%)         -               10.9%
CAG Diagnostics
capital
instruments               98,502          79,993       18,509          23.1%          (10.4%)         -               33.5%
Veterinary
software,
services and
diagnostic
imaging systems          110,759         103,819        6,940           6.7%           (0.9%)            2.6%          5.0%
  Net CAG revenue   $  1,356,287    $  1,223,064    $ 133,223          10.9%           (5.6%)            0.8%         15.7%




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The increase in CAG Diagnostics recurring revenue was due primarily to higher
sales of our VetLab consumables and our reference laboratory diagnostic services
resulting from both increased volumes as well as higher realized prices from
distributor margin capture relating to our transition to an all-direct sales
strategy in the U.S. The impact of the 2014 drawdown of distributors' inventory
levels increased reported CAG Diagnostics recurring revenue growth by 3 percent.



IDEXX VetLab consumables revenue growth was due primarily to higher sales
volumes resulting from growth in testing from existing customers and an expanded
menu of available tests, including our new T4 test. Additionally, we benefitted
from higher average unit sales prices, due primarily to distributor margin
capture relating to our transition to an all-direct sales strategy in the U.S.
The impact of the 2014 drawdown of distributors' inventory levels increased
reported consumables revenue growth by 5 percent.



The increase in rapid assay revenue was due primarily to impacts related to our
transition to an all-direct sales strategy in the U.S., including higher average
unit sales prices resulting from distributor margin capture and the impact of
the drawdown of inventory held by distributors during the fourth quarter of
2014, which increased 2015 reported revenue growth by 8 percent. To a lesser
extent, we also benefitted from higher canine SNAP 4Dx Plus sales volumes. These
favorable factors were partly offset by the impact of competitive losses on
certain earlier generation rapid assay products in the U.S in the first half of
2015.



The increase in reference laboratory diagnostic and consulting services revenue
was due primarily to the impact of higher testing volumes throughout our
worldwide network of laboratories, most prominently in the U.S., resulting from
increased testing from existing customers and the net acquisition of new
customers. Additionally, the increase in revenue was the result of higher
average unit sales prices due to price increases.



CAG Diagnostics service and accessories revenue growth was primarily a result of
the increase in our active installed base of instruments. CAG Diagnostics
service and accessories revenue also benefited from higher average unit sales
prices, resulting primarily from distributor margin capture relating to our
transition to an all-direct sales strategy in the U.S.



The increase in CAG Diagnostics capital instruments revenue was driven by sales
of our Catalyst One analyzer, resulting primarily from instrument placements in
Europe and the Asia-Pacific region and the recognition of previously deferred
revenue associated with 2014 U.S. preorders for our Catalyst One analyzer.
Additionally, we benefitted from increased ProCyte Dx instrument placements,
most notably in the U.S. These favorable factors were partly offset by lower
average unit sales prices realized on our instrument placements.



The increase in veterinary software, services and diagnostic imaging systems
revenue was due primarily to higher support revenue resulting from an increase
in our active installed base of diagnostic imaging and practice management
systems, and higher revenues from other customer information management services
and an increasing Pet Health Network Pro subscriber base. These favorable
factors were partly offset by fewer Cornerstone placements and the unfavorable
impact of increased diagnostic imaging system placements under up-front customer
loyalty programs for which the consideration and related revenue is deferred and
recognized over future periods, which resulted in an overall decrease in
diagnostic imaging system sales. During the third quarter of 2015, we launched
IDEXX Neo practice management software, a SaaS practice management system in
North America. Under this delivery model, we provide hosted software in the
cloud on a subscription basis.



 Water. The increase in Water revenue was distributed across all major regions
and resulted primarily from higher sales volumes of our Colilert and related
accessories used in our coliform and E. coli testing, placements of our
Quanti-Tray Sealer PLUS instrument, which we launched in June 2015, and
increased sales of our products designed to detect cryptosporidium.



Livestock, Poultry and Dairy. The increase in LPD organic revenue resulted
primarily from higher sales volumes of certain bovine tests, poultry and swine
tests, most prominently in the Asia-Pacific region and Europe and, to a lesser
degree, in the U.S. and Latin America. These favorable factors were partly
offset by a reduction in herd health screening in the Asia-Pacific region.



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Other. The decrease in Other revenue was due primarily to lower sales volumes of
our pharmaceutical product line, lower sales volumes of our OPTI Medical blood
gas analyzers, most prominently in the Asia-Pacific region, and lower average
unit sales prices on related OPTI Medical consumables.



Gross Profit


Total Company. The following table presents gross profit and gross profit percentages by operating segment:





                           For the Year                    For the Year
                                  Ended                           Ended
Gross Profit               December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)            2015         Revenue            2014         Revenue          Change          Change

CAG                      $     729,303          53.8%    $     652,195          53.3%    $     77,108           11.8%
Water                           68,953          71.2%           62,576          66.1%           6,377           10.2%
LPD                             79,987          62.9%           85,058          60.2%          (5,071)          (6.0%)
Other                           10,281          47.6%           14,414          53.7%          (4,133)         (28.7%)
Unallocated amounts              1,746             N/A           1,873             N/A           (127)          (6.8%)
  Total Company          $     890,270          55.6%    $     816,116          54.9%    $     74,154            9.1%




Gross profit increased due to higher sales volumes, due in part to the 2014
drawdown of distributors' inventory levels, and an increase in the gross profit
percentage to 56 percent from 55 percent. The increase in the gross profit
percentage resulted from the net benefit of higher CAG average unit prices,
primarily resulting from distributor margin capture, net of related freight and
distribution expenses relating to our transition within the U.S. to an
all-direct sales strategy for our rapid assay test kits and VetLab consumables,
and the positive net effect of currency. The positive net effect of currency
resulted from higher relative hedging gains during 2015 as compared to 2014,
which more than offset the unfavorable impact from changes in foreign currency
exchange rates. These overall favorable factors were partly offset by an
unfavorable product mix, resulting primarily from higher relative instrument
revenues which yield lower relative margins during 2015 as compared to 2014.



Companion Animal Group. Gross profit for CAG increased due to higher sales
volumes, due in part to the 2014 drawdown of distributors' inventory levels. The
gross profit percentage of 54 percent was 50 basis points higher than 2014 due
to the net benefit of higher average unit prices, primarily resulting from
distributor margin capture, net of related freight and distribution expenses
relating to our transition within the U.S. to an all-direct sales strategy for
our rapid assay test kits and VetLab consumables and the positive net effect of
currency of approximately 20 basis points. The positive net effect of currency
resulted from higher relative hedging gains during 2015 as compared to 2014,
which more than offset the unfavorable impact from changes in foreign currency
exchange rates. These increases were partially offset by the impact of
unfavorable product mix, resulting primarily from higher relative instrument
revenues which yield lower relative margins.



Water. Gross profit for Water increased due primarily to an increase in the
gross profit percentage from 66 percent to 71 percent and higher sales volumes.
The gross profit percentage was favorably impacted by approximately 120 basis
points of foreign currency exchanges during the year ended December 31, 2015.
The positive net effect of currency resulted from higher relative hedging gains
during 2015 as compared to 2014, which more than offset the unfavorable impact
from changes in foreign currency exchange rates. Additionally, the increase in
the gross profit percentage resulted from the expiration of certain royalties on
December 31, 2014. These overall favorable factors were partly offset by a less
favorable product mix, due primarily to higher relative instrument and
accessories sales which yield lower relative margins.



Livestock, Poultry and Dairy. Gross profit for LPD decreased due to lower sales
volumes and a decrease in the gross profit percentage from 63 percent to 60
percent. The gross profit percentage was favorably impacted by approximately 20
basis points of foreign currency exchanges during the year ended December 31,
2015. The positive net effect of currency resulted from higher relative hedging
gains during 2015 as compared to 2014, which more than offset the unfavorable
impact from changes in foreign currency exchange rates. The decrease in the
gross profit percentage reflects lower volume efficiencies resulting from a
decrease in our Asia-Pacific region livestock testing services revenue and
current year unfavorability from the absence of the one-time decrease in royalty
expense which occurred during the first quarter of 2014, resulting from a
settlement with a licensor of certain patents.

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Other. Gross profit for Other decreased due to lower sales and a decrease in the
gross profit percentage from 54 percent to 48 percent. The decrease in the gross
profit percentage was due primarily to our OPTI Medical business, including
lower average unit sales prices on consumables used by our blood gas analyzers
and, to a lesser extent, higher overall manufacturing costs and the unfavorable
impact from changes in foreign currency exchange rates. Additionally, the Other
gross profit percentage declined due to an unfavorable product mix resulting
from lower relative sales of our pharmaceutical product line.



Unallocated Amounts. Gross profit for Unallocated Amounts related to
budget-to-actual differences was consistent with the prior period. We estimate
certain personnel-related costs and allocate the budgeted expenses to the
operating segments. This allocation differs from the actual expense and
consequently yields a difference that is reported under the caption "Unallocated
Amounts."


Operating Expenses and Operating Income

Total Company. The following tables present operating expenses and operating income by operating segment:




                           For the Year                    For the Year
                                  Ended                           Ended
Operating Expenses         December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)            2015         Revenue            2014         Revenue          Change          Change

CAG                      $     495,984          36.6%    $     451,661          36.9%    $     44,323            9.8%
Water                           24,201          25.0%           23,662          25.0%             539            2.3%
LPD                             52,830          41.6%           55,731          39.5%          (2,901)          (5.2%)
Other                           10,418          48.3%           11,757          43.8%          (1,339)         (11.4%)
Unallocated amounts              6,925             N/A          13,050             N/A         (6,125)         (46.9%)
  Total Company          $     590,358          36.9%    $     555,861          37.4%    $     34,497            6.2%





                           For the Year                    For the Year
                                  Ended                           Ended
Operating Income           December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)            2015         Revenue            2014         Revenue          Change          Change

CAG                      $     233,319          17.2%    $     200,534          16.4%    $     32,785           16.3%
Water                           44,752          46.2%           38,914          41.1%           5,838           15.0%
LPD                             27,157          21.4%           29,327          20.8%          (2,170)          (7.4%)
Other                             (137)         (0.6%)           2,657           9.9%          (2,794)        (105.2%)
Unallocated amounts             (5,179)            N/A         (11,177)            N/A          5,998           53.7%
  Total Company          $     299,912          18.7%    $     260,255          17.5%    $     39,657           15.2%




During the year ended December 31, 2015, we recorded an $8.2 million impairment
charge related to internally-developed software not yet placed into service
within Unallocated Amounts as a result of a strategic shift to refocus our
development efforts within our information management business. During the year
ended December 31, 2014, the transition to an all-direct sales strategy in the
U.S. within our CAG segment reduced operating profit by $35.3 million. Our
all-direct transition impacts consisted of a one-time reduction in operating
profit related to the drawdown of inventory held by our U.S. distributors, which
reduced operating income by $20.8 million, $5.0 million in incremental expenses
related to the ramp up of sales and operating resources and approximately $9.5
million of non-recurring expenses during the year ended December 31, 2014.



For the year ended December 31, 2015, adjusted operating income, which is total
Company operating income adjusted for the aforementioned software impairment
charge, was approximately $308.1 million and 19.2 percent of revenue, which
represents an increase in adjusted operating income of $12.6 million and 4.3
percent, as compared to the year ended December 31, 2014, which is adjusted for
the aforementioned all-direct sales strategy transition impacts. Adjusted
operating income is a non-GAAP financial measure and should be considered in
addition to, and not as a replacement for or as a superior measure to, operating
income reported in accordance with U.S. GAAP. Management believes that reporting
adjusted operating income provides useful information to investors by
facilitating easier comparisons of our operating income performance with prior
and future periods and to the performance of our peers.



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See the subsection above titled "Effects of Certain Factors on Results of
Operations - Distributor Purchasing and Inventories" for details regarding
transitional costs related to moving to an all-direct sales strategy for VetLab
consumables and rapid assay products and services within our CAG segment in the
U.S.



Companion Animal Group. The following table presents CAG operating expenses by
functional area:




                               For the Year                    For the Year
                                      Ended                           Ended
Operating Expenses             December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)                2015         Revenue            2014  

Revenue Change Change

Sales and marketing $ 263,907 19.5% $ 244,190

         20.0%    $     19,717            8.1%

General and administrative 159,851 11.8% 137,192

         11.2%          22,659           16.5%
Research and development            72,226           5.3%           70,279           5.5%           1,947            2.8%
  Total operating expenses   $     495,984          36.6%    $     451,661          36.9%    $     44,323            9.8%




The increase in sales and marketing expense was due primarily to increased
personnel-related costs, resulting primarily from our transition to an
all-direct sales strategy in the U.S. as well as increases in global commercial
resources, and incremental information technology costs to support the
all-direct sales strategy. These unfavorable factors were partly offset by the
favorable impact from changes in foreign currency exchange rates and the absence
of $9.5 million in non-recurring transition costs to implement this all-direct
sales strategy. The increase in general and administrative expense resulted
primarily from higher personnel-related costs and, to a lesser extent,
incremental credit card fees associated with our transition to an all-direct
sales strategy in the U.S. partly offset by the favorable impact from changes in
foreign currency exchange rates. The increase in research and development
expense resulted primarily from higher personnel-related costs, partly offset by
lower external development and materials costs.



Water. The following table presents Water operating expenses by functional area:




                               For the Year                    For the Year
                                      Ended                           Ended
Operating Expenses             December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)                2015         Revenue            2014         Revenue          Change          Change

Sales and marketing          $      12,204          12.6%    $      11,494          12.1%    $        710            6.2%
General and administrative           9,058           9.3%            9,226           9.7%            (168)          (1.8%)
Research and development             2,939           3.0%            2,942           3.1%              (3)          (0.1%)
  Total operating expenses   $      24,201          25.0%    $      23,662          25.0%    $        539            2.3%




The increase in sales and marketing expense was due primarily to higher
personnel-related costs and increased spending on promotional activities, partly
offset by the favorable impact of changes in foreign currency exchange rates.
General and administrative expense for the year ended December 31, 2015 was
generally consistent with 2014 as the favorable impact from changes in foreign
currency exchange rates was almost entirely offset by increased
personnel-related costs. Research and development expense was also generally
consistent with 2014.


Livestock, Poultry and Dairy. The following table presents LPD operating expenses by functional area:




                               For the Year                    For the Year
                                      Ended                           Ended
Operating Expenses             December 31,     Percent of     December 31,     Percent of          Dollar      Percentage
(dollars in thousands)                2015         Revenue            2014  

Revenue Change Change

Sales and marketing $ 22,307 17.5% $ 25,367

         18.0%    $     (3,060)         (12.1%)
General and administrative          18,655          14.7%           17,354          12.3%           1,301            7.5%
Research and development            11,868           9.3%           13,010           9.2%          (1,142)          (8.8%)
  Total operating expenses   $      52,830          41.6%    $      55,731          39.5%    $     (2,901)          (5.2%)




The decrease in sales and marketing expense was due primarily to the favorable
impact from changes in foreign currency exchange rates. The increase in general
and administrative expense resulted from higher personnel-related costs, partly
offset by the favorable impact from changes in foreign currency exchange rates.
The decrease in research and development expense was due primarily to lower
personnel-related costs and the favorable impact from changes in foreign
currency exchange rates.



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Other. Operating expenses for Other, which totaled $10.4 million for the year
ended December 31, 2015, decreased $1.3 million as compared to 2014, due
primarily to a reduction in OPTI Medical spending for external product
development and the favorable impact of changes in foreign currency exchange
rates, partly offset by higher personnel-related costs.



Unallocated Amounts. Operating expenses that are not allocated to our operating
segments decreased by $6.1 million to $6.9 million for the year ended December
31, 2015, due primarily to budget-to-actual differences in personnel-related
costs due to cost control initiatives, as well as the absence of certain foreign
currency losses on monetary assets, partly offset by the impairment of
internal-use software recorded during 2015. We estimate certain
personnel-related costs and allocate these budgeted expenses to the operating
segments. This allocation differs from actual expense and consequently yields a
difference that is reported under the caption "Unallocated Amounts."



Interest Income and Interest Expense

Interest income was $2.5 million for the year ended December 31, 2015, as compared to $1.7 million for the year ended December 31, 2014. The increase in interest income was due primarily to higher yields from our portfolio of marketable securities that we purchased during 2015.




Interest expense was $29.2 million for the year ended December 31, 2015, as
compared to $15.4 million for 2014. The increase in interest expense was due
primarily to approximately $450 million in senior notes that we issued and sold
through private placements between July 2014 and June 2015, for which fixed
interest rates range from 1.785 percent to 3.76 percent. See Note 11 to the
consolidated financial statements included in this Annual Report on Form 10-K
for additional information regarding our senior notes. In addition, increased
interest expense resulted from the impact of higher average borrowings
outstanding on our revolving Credit Facility.



Provision for Income Taxes



Our effective income tax rate was 29.7 percent for the year ended December 31,
2015 and 26.2 percent for the year ended December 31, 2014. The increase in our
effective income tax rate for the year ended December 31, 2015, as compared to
the year ended December 31, 2014, was related to lower relative earnings subject
to international tax rates that are lower than domestic tax rates, including the
impact of foreign currency exchange rates, as well as a non-recurring benefit
recognized during the period ended December 31, 2014 related to the deferral of
intercompany profits that were included in tax provisions prior to 2014 in
error, which is not material to prior interim or annual periods.



On December 18, 2015 the Protecting Americans from Tax Hikes Act of 2015 was
passed (2015 PATH Act). The 2015 PATH Act provided a retroactive and permanent
extension of the U.S. research and development ("R&D") tax credit.  As a result,
we recorded the entire 2015 tax benefit during the three months ended December
31, 2015. As the R&D tax credit was available for both the years ended December
31, 2015 and 2014, it did not have a significant impact on changes in our
full-year effective tax rate.



RECENT ACCOUNTING PRONOUNCEMENTS




A discussion of recent accounting pronouncements is included in Note 2 to the
consolidated financial statements for the year ended December 31, 2016 included
in this Annual Report on Form 10-K.



                                       64


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LIQUIDITY AND CAPITAL RESOURCES




We fund the capital needs of our business through cash on hand, funds generated
from operations, and amounts available on our $850 million five-year unsecured
revolving credit facility under an amended and restated credit agreement that we
executed in December 2015 (the "Credit Facility"). In addition, we issued $150
million of senior notes in February 2015 and €88.9 million of euro-denominated
senior notes in June 2015. During the twelve months ended December 31, 2015, we
purchased marketable debt securities using a portion of our cash balances. At
December 31, 2016 we had $391.8 million of cash,  cash equivalents and
marketable securities, as compared to $342.6 million on December 31, 2015, and
$322.5 million on December 31, 2014. Working capital, including our Credit
Facility, totaled negative $89.0 million at December 31, 2016, as compared to
negative $35.1 million at December 31, 2015, and negative $61.5 million at
December 31, 2014. Additionally, at December 31, 2016, we had remaining
borrowing availability of $238 million under our $850 million Credit Facility.
We believe that, if necessary, we could obtain additional borrowings at similar
rates to our existing borrowings to fund our growth objectives. We further
believe that current cash and cash equivalents, our portfolio of short-duration
marketable securities, funds generated from operations, and committed borrowing
availability will be sufficient to fund our operations, capital purchase
requirements, and anticipated growth needs for the next twelve months. We
believe that these resources, coupled with our ability, as needed, to obtain
additional financing on favorable terms will also be sufficient for the
foreseeable future to fund our business as currently conducted.



We consider the majority of the operating earnings of certain of our non-U.S.
subsidiaries to be indefinitely invested outside the U.S. No provision has been
made for the payment of U.S. federal and state or international taxes that may
result from future remittances of these undistributed earnings of our non-U.S.
subsidiaries. Changes to this position could have adverse tax consequences. A
determination of the related tax liability that would be paid on these
undistributed earnings if repatriated is not practicable for several reasons
including the complexity of laws and regulations in the various jurisdictions
where we operate, the varying tax treatment of potential repatriation scenarios
and the timing of any future repatriation. We manage our worldwide cash
requirements considering available funds among all of our subsidiaries. Our
foreign cash and marketable securities are generally available without
restrictions to fund ordinary business operations outside the U.S.



The following table presents cash, cash equivalents and marketable securities held domestically and by our foreign subsidiaries:

Cash, cash equivalents and marketable            For the Years Ended December 31,
securities
(dollars in millions)                              2016             2015           2014

U.S.                                       $        4.8     $        1.4    $       1.1
Foreign                                           387.0            341.2          321.4
Total                                      $      391.8            342.6          322.5

Total cash, cash equivalents and           $      285.8     $      239.2    $     211.1
marketable securities held in U.S.
dollars

Percentage of total cash, cash
equivalents and marketable securities
held in U.S. dollars                              72.9%            69.8%          65.5%





These foreign held amounts are subject to material repatriation tax effects. We
held marketable securities with effective maturities of two years or less that
had an average AA- credit rating as of December 31, 2016.

                                       65



--------------------------------------------------------------------------------

The following table presents marketable securities at fair value for the years ended December 31, 2016 and 2015:




                                  For the Year                     For the Year
                                         Ended                            Ended
Marketable securities             December 31,      Percent of     December 31,      Percent of
(dollars in thousands)                   2016            Total            2015            Total

Corporate bonds                 $     130,771           55.2%    $     177,613           83.2%
Certificates of deposit                40,400           17.1%            3,500            1.6%
U.S. government bonds                  12,231            5.2%           12,871            6.0%
Agency bonds                            4,604            1.9%           12,065            5.6%
Asset backed securities                27,315           11.5%                 -           0.0%
Commercial paper                       20,228            8.5%            3,491            1.6%
All other                               1,400            0.6%            4,051            1.9%
  Total marketable securities   $     236,949                    $     213,591



We did not have any marketable securities in 2014.




Of the $154.9 million of cash and cash equivalents held as of December 31, 2016,
76 percent was held as bank deposits, 22 percent was invested in money market
funds restricted to U.S. government and agency securities, and the remainder
consisted of commercial paper and other securities with original maturities of
less than ninety days. Of the $129.0 million of cash and cash equivalents held
as of December 31, 2015, 85 percent was held as bank deposits, 6 percent was
invested in money market funds restricted to U.S. government and agency
securities, 6 percent was invested in money market funds invested in highly
liquid investment-grade fixed-income securities and the remainder consisted of
commercial paper and agency bonds with original maturities of less than ninety
days.



Should we require more capital in the U.S. than is generated by our operations
domestically, for example to fund significant discretionary activities, we could
elect to repatriate future earnings from foreign jurisdictions or raise capital
in the U.S. through debt or equity issuances. These alternatives could result in
higher effective tax rates or increased interest expense and other dilution of
our earnings. We have borrowed funds domestically and continue to have the
ability to borrow funds domestically at reasonable interest rates.



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,
                                       2016              2016         2016          2016            2015

Days sales outstanding (1)             42.1              42.4         41.5          43.7            43.3
Inventory turns (2)                     2.0               1.8          1.7           1.6             1.5




(1) Days sales outstanding represents the average of the accounts receivable
balances at the beginning and end of each quarter divided by revenue for that
quarter, the result of which is then multiplied by 91.25 days.

(2) Inventory turns represent inventory-related cost of product revenue for the
12 months preceding each quarter-end divided by the inventory balance at the end
of the quarter.



Sources and Uses of Cash


The following table presents cash provided (used):




                                                For the Years Ended December 31,
(dollars in thousands)                            2016          2015          2014

Net cash provided by operating activities   $  334,571    $  216,364    $  235,846
Net cash used by investing activities          (90,786)     (308,406)      (80,413)
Net cash used by financing activities         (217,824)      (95,552)     (103,438)
Net effect of changes in exchange rates
on cash                                            (54)       (5,948)       

(8,517)

Net increase in cash and cash equivalents $ 25,907 $ (193,542) $ 43,478




                                       66


--------------------------------------------------------------------------------
Operating Activities. The increase in cash provided by operating activities of
$118.2 million for the year ended December 31, 2016, as compared to the prior
year period, was due primarily to changes in operating assets and liabilities,
as well as an increase in net income including increases in non-cash charges,
primarily related to deferred taxes and depreciation and amortization. The
decrease in cash provided by operating activities of $19.5 million for the year
ended December 31, 2015, as compared to the prior year period, was due primarily
to changes in operating assets and liabilities, offset by an increase in net
income including increases in non-cash charges, primarily related to
depreciation and amortization and an impairment charge in 2015.



The following table presents cash flows from changes in operating assets and
liabilities and the tax benefit from share-based compensation arrangements for
the years ended December 31, 2016, 2015 and 2014:




                                                For the Years Ended December 31,
(dollars in thousands)                             2016         2015         2014

Accounts receivable                         $   (22,554)   $ (50,142)   $  (3,626)
Inventories                                       7,648      (34,969)     (38,310)
Accounts payable                                  2,117       (2,468)       6,703
Deferred revenue                                  7,672         (319)      14,195
Other assets and liabilities                      8,119       18,087       11,319
Tax benefit from share-based compensation
arrangements                                    (14,702)     (11,315)     

(16,078)

Total change in cash due to changes in
operating assets and liabilities and the
tax benefit from share-based compensation
arrangements                                $   (11,700)   $ (81,126)   $ (25,797)




The reduction in cash used by accounts receivable for the year ended December
31, 2016, was primarily due to the absence of the impacts related to our change
in U.S. commercial strategy impacting the first quarter of 2015. The incremental
cash used by accounts receivable for the year ended December 31, 2015, was
primarily due to our transition to an all-direct strategy in the U.S., including
the establishment of accounts receivable directly with our U.S. end-users that
previously purchased from our U.S. distribution partners, which take a longer
elapsed time to collect. Additionally, accounts receivable is impacted by
increasing revenues for the years ended December 31, 2016 and 2015, relative to
the prior periods, including the margin capture associated with the
aforementioned all-direct strategy. In contrast, we received the benefit of
collecting the final accounts receivable from our U.S. distribution partners
during December 2014.



The net incremental cash provided by inventories for 2016 was primarily due to
operational initiatives to optimize inventory levels following a period of
inventory growth to support new products and increasing demand. Cash used by
inventories for 2015 and 2014 were primarily due to growth in our volume
commitment rental programs in international markets and relatively higher
inventory levels to support new instrument and diagnostic test launches.



The cash provided by deferred revenue for the year ended December 31, 2016, as
compared to cash used for the same period in 2015, was primarily due to sales
under our Catalyst One introductory offer, that was introduced in 2014 and
increased cash provided by deferred revenue during 2014. The amount of deferred
revenue for 2015 and 2016 returned to typical operating levels. Prior to the
Catalyst One instrument launch during November 2014, we pre-sold the instrument
under a customer marketing program through which customers preordering a
Catalyst One were initially provided with the right to use a Catalyst Dx
instrument. Under this marketing program, we deferred $7 million of instrument
revenue in 2014, which was fully recognized in 2015 upon delivery of the
Catalyst One instruments or customer election to keep the Catalyst Dx was
received.



The decrease in cash provided by other assets and liabilities for the year ended
December 31, 2016, was the result of higher taxable income in 2015, as compared
to the same period in the prior year. Income tax payments were lower during
2015 resulting from one-time impacts of implementing our U.S. all-direct
strategy and the benefit from the Tax Increase Prevention Act enactment late in
the fourth quarter of 2014. The net incremental cash provided by other assets
and liabilities for 2015 was also due to the recognition of previously deferred
Catalyst instrument costs under the Catalyst One introductory offer during 2015.
These factors were partly offset by the incremental cash used for
personnel-related accruals, including higher relative payments related to
employee incentive programs and higher payments for other accruals due to
increases in expenses for the year ended December 31, 2015, as compared to 2014.



                                       67


--------------------------------------------------------------------------------
Tax benefits from share-based compensation arrangements is the result of taxes
from the vesting of restricted stock units and exercises of stock-options. This
amount will fluctuate based on stock price, as compared to the strike prices of
stock options, as well as employees timing of exercises.



 We have historically experienced proportionally lower net cash flows from
operating activities during the first quarter and proportionally higher cash
flows from operating activities for the remainder of the year and for the annual
period driven primarily by payments related to annual employee incentive
programs in the first quarter following the year for which the bonuses were
earned and the seasonality of vector-borne disease testing, which has
historically resulted in significant increases in accounts receivable balances
during the first quarter of the year.



Investing Activities.  Cash used by investing activities was $90.8 million for
the year ended December 31, 2016, as compared to $308.4 million used for the
year ended December 31, 2015, and $80.4 million used for the year ended December
31, 2014. The decrease in cash used by investing activities for the year ended
December 31, 2016, as well as the increase in cash used for the year ended
December 31, 2015, was due primarily to the purchase of marketable securities in
2015.



Our total capital expenditure plan for 2017 is estimated to be approximately $90
million, which includes capital investments in manufacturing and reference
laboratory equipment, investments in internal use software and information
technology infrastructure and the renovation and expansion of our facilities and
reference laboratories.



Financing Activities. Cash used by financing activities was $217.8 million, for
the year ended December 31, 2016, as compared to $95.6 million used for the year
ended December 31, 2015, and $103.4 million used for the year ended December 31,
2014. The increase in cash used by financing activities for the year ended
December 31, 2016, as compared to the same period in 2015 was due to the
issuance of senior notes in 2015, as well as a decrease in cash used to
repurchase our common stock. The decrease in cash used by financing activities
for year ended December 31, 2015, as compared to the same period in 2014 was due
to a decrease in cash used to repurchase our common stock, the aggregate
issuance of approximately $250 million of senior notes during the year ended
December 31, 2015, as compared to $200 million of senior notes issued during the
same period in 2014, as well as lower relative net borrowings under the Credit
Facility during the year ended December 31, 2015, as compared to the same period
in 2014.



In June 2015, we entered into an Amended and Restated Multi-Currency Note
Purchase and Private Shelf Agreement (the "2015 Amended Agreement"), among the
Company, Prudential Investment Management, Inc. ("Prudential") and the
accredited institutional purchasers named therein, which amends and restates the
Note Purchase and Private Shelf Agreement dated July 21, 2014. Pursuant to the
2015 Amended Agreement, we issued and sold through a private placement a
principal amount of €88.9 million of 1.785% Series C Senior Notes due June 18,
2025 (the "2025 Series C Notes"). We used the net proceeds from this issuance
and sale of the 2025 Series C Notes for general corporate purposes, including
repaying amounts outstanding under our Credit Facility.



In December 2014, we entered into a Multi-Currency Note Purchase and Private
Shelf Agreement (the "MetLife Agreement") with accredited institutional
purchasers named therein pursuant to which we agreed to issue and sell $75
million of 3.25% Series A Senior Notes having a seven-year term (the "2022
Notes") and $75 million of 3.72% Series B Senior Notes having a twelve-year term
(the "2027 Notes"). In February 2015, we issued and sold the 2022 Notes and the
2027 Notes pursuant to the MetLife Agreement. We used the net proceeds from
these issuance and sales for general corporate purposes, including repaying
amounts outstanding under our Credit Facility.



                                       68


--------------------------------------------------------------------------------
Cash used to repurchase shares of our common stock decreased by $97.9 million
during the year ended December 31, 2016, as compared to the same period in 2015.
Cash used to repurchase shares of our common stock decreased by $216.2 million
during the year ended December 31, 2015, as compared to the same period in 2014.
From the inception of our share repurchase program in August 1999 to December
31, 2016, we have repurchased 61.3 million shares. During the year ended
December 31, 2016, we purchased 3.1 million shares for an aggregate cost of
$313.1 million, as compared to purchases of 5.7 million shares for an aggregate
cost of $406.4 million during 2015 and purchases of 9.8 million shares for an
aggregate cost of $618.2 million during 2014. We believe that the repurchase of
our common stock is a favorable means of returning value to our shareholders and
we also repurchase our stock to offset the dilutive effect of our share-based
compensation programs. Repurchases of our common stock may vary depending upon
the level of other investing activities and the share price. See Note 18 to the
consolidated financial statements included in this Annual Report on Form 10-K
for additional information about our share repurchases.



As noted above, we refinanced our existing $700 million Credit Facility during
December 2015, increasing the principal amount there under to $850 million. The
Credit Facility matures on December 4, 2020 and requires no scheduled
prepayments before that date. Although the Credit Facility does not mature until
December 2020, all amounts borrowed under the terms of the Credit Facility are
reflected in the current liabilities section in the accompanying consolidated
balance sheets because the Credit Facility contains a subjective material
adverse event clause, which allows the debt holders to call the loans under the
Credit Facility if we fail to notify the syndicate of such an event. Applicable
interest rates on borrowings under the Credit Facility generally range from
1.250 to 1.375 percentage points above the London interbank offered rate or the
Canadian Dollar-denominated bankers' acceptance rate, based on our leverage
ratio, or the prevailing prime rate plus a maximum spread of up to 0.375
percent, based on our leverage ratio.



Net borrowing and repayment activity under the Credit Facility resulted in more
cash provided of $14.0 million during the year ended December 31, 2016, as
compared to the same period in 2015. At December 31, 2016, we had $611.0 million
outstanding under the Credit Facility. Net borrowing and repayment activity
under the Credit Facility resulted in less cash provided of $248.0 million
during the twelve months ended December 31, 2015, as compared to the same period
of the prior year. At December 31, 2015, we had $573.0 million outstanding under
the Credit Facility. The general availability of funds under the Credit Facility
was further reduced by $1.0 million for a letter of credit that was issued in
connection with claims under our workers' compensation policy. The Credit
Facility contains affirmative, negative and financial covenants customary for
financings of this type. The negative covenants include restrictions on liens,
indebtedness of subsidiaries of the Company, fundamental changes, investments,
transactions with affiliates, and certain restrictive agreements and violations
of laws and regulations. The financial covenant is a consolidated leverage ratio
test that requires our ratio of debt to earnings before interest, taxes,
depreciation, amortization and share-based compensation not to exceed 3.5-to-1.
At December 31, 2016, we were in compliance with the covenants of the Credit
Facility. The obligations under the Credit Facility may be accelerated upon the
occurrence of an event of default under the Credit Facility, which includes
customary events of default including payment defaults, defaults in the
performance of the affirmative, negative and financial covenants, the inaccuracy
of representations or warranties, bankruptcy and insolvency related defaults,
defaults relating to judgments, certain events related to employee pension
benefit plans under the Employee Retirement Income Security Act of 1974, the
failure to pay specified indebtedness, cross-acceleration to specified
indebtedness and a change of control default.



Since December 2013, we have issued and sold through private placements senior
notes having an aggregate principal amount of approximately $600 million
pursuant to certain note purchase agreements (collectively, the "Senior Note
Agreements"). The Senior Note Agreements contain affirmative, negative and
financial covenants customary for agreements of this type. The negative
covenants include restrictions on liens, indebtedness of our subsidiaries,
priority indebtedness, fundamental changes, investments, transactions with
affiliates, certain restrictive agreements and violations of laws and
regulations. See Note 11 to the consolidated financial statements included in
this Annual Report on Form 10-K for additional information regarding our
senior notes.



                                       69


--------------------------------------------------------------------------------
Should we elect to prepay the Senior Notes, such aggregate prepayment will
include the applicable make-whole amount(s), as defined within the applicable
Senior Note Agreements. Additionally, in the event of a change in control of the
Company, or upon the disposition of certain assets of the Company the proceeds
of which are not reinvested (as defined in the Senior Note Agreements), we may
be required to prepay all or a portion of the Senior Notes. The obligations
under the Senior Notes may be accelerated upon the occurrence of an event of
default under the applicable Senior Note Agreement, each of which includes
customary events of default including payment defaults, defaults in the
performance of the affirmative, negative and financial covenants, the inaccuracy
of representations or warranties, bankruptcy and insolvency related defaults,
defaults relating to judgments, certain events related to employee pension
benefit plans under the Employee Retirement Income Security Act of 1974, the
failure to pay specified indebtedness and cross-acceleration to specified
indebtedness.



The financial covenant is a consolidated leverage ratio test that requires our
ratio of debt to earnings before interest, taxes, depreciation, amortization and
share-based compensation, as defined in the Senior Note Agreements, not to
exceed 3.5-to-1. At December 31, 2016, we were in compliance with the covenants
of the Senior Note Agreements. The following details our consolidated leverage
ratio calculation as of December 31, 2016 (in thousands):




                                                             December
Trailing 12 Months Adjusted EBITDA:                             2016

Net income attributable to stockholders                  $   222,045
Interest expense                                              32,049
Provision for income taxes                                    99,792
Depreciation and amortization                                 78,218
Share-based compensation expense                              19,891

Extraordinary and other non-recurring non-cash charges 2,228 Adjusted EBITDA

                                          $   454,223


                                                             December
Debt to Adjusted EBITDA Ratio:                                  2016

Line of credit                                           $   611,000
Long-term debt                                               593,110
Total debt                                                 1,204,110
Acquisition-related consideration payable                      2,435
Capitalized leases                                               581
U.S. GAAP change - deferred financing costs                      554
Gross debt                                                 1,207,680
Gross debt to Adjusted EBITDA ratio                             2.66

Cash and cash equivalents                                   (154,901)
Marketable securities                                       (236,949)
Net debt                                                 $   815,830
Net debt to Adjusted EBITDA ratio                               1.80




Adjusted EBITDA, gross debt, net debt, gross debt to Adjusted EBITDA and net debt to Adjusted EBITDA ratio are non-GAAP financial measures which should

be considered in addition to, and not as a replacement for, financial measures presented according to U.S. GAAP. Management believes that reporting these non-GAAP financial measures provides supplemental analysis to help investors further evaluate our business performance and available borrowing capacity under our Credit Facility.



                                       70


--------------------------------------------------------------------------------

Other Commitments, Contingencies and Guarantees




Under our workers' compensation insurance policies for U.S. employees, we have
retained the first $300,000 for the years ended December 31, 2016, 2015 and
2014, in claim liability per incident with aggregate maximum claim liabilities
per year of $2.6 million for the year ended December 31, 2016, $3.5 million for
the year ended December 31, 2015, and $2.3 million for the year ended December
31, 2014. Workers' compensation expense recognized during the years ended
December 31, 2016, 2015 and 2014 and our respective liability for such claims as
of December 31, 2016, 2015, and 2014 was not material. Claims incurred during
the years ended December 31, 2016 and 2015, are relatively undeveloped as of
December 31, 2016. Therefore, it is possible that we could incur additional
healthcare and wage indemnification costs beyond those previously recognized up
to our aggregate liability for each of the respective claim years. For the years
ended on or prior to December 31, 2014, based on our retained claim liability
per incident and our aggregate claim liability per year, our maximum liability
in excess of the amounts deemed probable and previously recognized, is not
material as of December 31, 2016. As of December 31, 2016, we had outstanding
letters of credit totaling $1.3 million to the insurance companies as security
for these claims in connection with these policies, of which, $1.0 million
reduces our availability under our Credit Facility.



Under our current employee healthcare insurance policy for U.S. employees, we
retain claims liability risk per incident up to $450,000 per year in 2016,
$425,000 per year in 2015 and $375,000 per year in 2014. We recognized employee
healthcare claim expense of $40.4 million during the year ended December 31,
2016, $34.6 million during the year ended December 31, 2015, and $32.0 million
during the year ended December 31, 2014, which represents actual claims paid and
an estimate of our liability for the uninsured portion of employee healthcare
obligations that have been incurred but not paid. Should employee health
insurance claims exceed our estimated liability, we would have further
obligations. Our estimated liability for healthcare claims that have been
incurred but not paid were $4.0 million as of December 31, 2016, $4.8 million as
of December 31, 2015, and $4.1 million as of December 31, 2014.



We have total acquisition-related contingent consideration liabilities
outstanding of up to $6.4 million primarily related to the achievement of
certain revenue milestones. We have recorded $0.9 million at December 31, 2016,
$5.9 million at December 31, 2015, and $6.3 million at December 31, 2014, of
contingent consideration liabilities on our consolidated balance sheets. We have
not accrued for $5.5 million of contingent consideration liabilities, related to
the acquisition of an intangible asset in 2008, as we do not deem the
achievement of associated revenue milestones to be probable of occurring as of
December 31, 2016.



We are contractually obligated to make the following payments in the years
below:




Contractual obligations                   Less than 1
(in thousands)                  Total            year      1-3 years                3-5 years          More than 5 years

Long-term debt
obligations (1)            $ 752,985      $   20,154      $  40,309      $            89,617      $             602,905
Operating leases              57,861          15,724         20,829                   12,258                      9,050
Purchase obligations (2)     179,221         153,265         16,497                    5,817                      3,642
Minimum royalty payments       1,565             554            371                      221                        419
Total contractual cash
obligations                $ 991,632      $  189,697      $  78,006      $           107,913      $             616,016


(1) Long-term debt amounts include interest payments associated with long-term

debt.

(2) Purchase obligations include agreements and purchase orders to purchase goods

      or services that are enforceable and legally binding and that specify all
      significant terms, including fixed or minimum quantities, pricing, and
      approximate timing of purchase transactions.




These commitments do not reflect unrecognized tax benefits of $18.5 million and
$2.2 million of deferred compensation liabilities as of December 31, 2016, as
the timing of recognition is uncertain. Refer to Note 12 of the consolidated
financial statements for the year ended December 31, 2016, included in this
Annual Report on Form 10-K for additional discussion of unrecognized tax
benefits.







                                       71


--------------------------------------------------------------------------------

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Financials ($)
Sales 2017 1 924 M
EBIT 2017 390 M
Net income 2017 261 M
Debt 2017 586 M
Yield 2017 -
P/E ratio 2017 48,57
P/E ratio 2018 42,47
EV / Sales 2017 6,81x
EV / Sales 2018 6,18x
Capitalization 12 517 M
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Number of Analysts 10
Average target price 124 $
Spread / Average Target -13%
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NameTitle
Jonathan W. Ayers Chairman, President & Chief Executive Officer
Brian P. McKeon Chief Financial Officer, Treasurer & Executive VP
Rebecca M. Henderson Independent Director
Thomas Craig Independent Director
Barry C. Johnson Independent Director
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