Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

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 Ended							Variance Capitalization and				For the Year Ended				Adjusted
Gross Profit		December 31, 2015			Percent of				Subsequent Recognition				December 31, 2015				Percent of
(dollars in thousands)		As Previously Reported			Revenue				to the Operating 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 Ended							Variance Capitalization and				For the Year Ended				Adjusted
Gross Profit		December 31, 2014			Percent of				Subsequent Recognition				December 31, 2014				Percent of
(dollars in thousands)		As Previously Reported			Revenue				to the Operating 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
		For the Year Ended								Variance Capitalization and					For the Year Ended				Adjusted
Operating Income (Loss)		December 31, 2015				Percent of				Subsequent Recognition					December 31, 2015				Percent of
(dollars in thousands)		As Previously Reported				Revenue				to the Operating Segments					As 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
		For the Year Ended								Variance Capitalization and					For the Year Ended				Adjusted
Operating Income (Loss)		December 31, 2014				Percent of				Subsequent Recognition					December 31, 2014				Percent of
(dollars in thousands)		As Previously Reported				Revenue				to the Operating Segments					As 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%

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.

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.

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.

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.

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.

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.”

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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%

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.

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.

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%

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

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.

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%

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.

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.

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.

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.

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.

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 securities		For the Years Ended December 31,
(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 marketable securities held in U.S. dollars		$	285.8		$	239.2		$	211.1
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.

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

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.

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.

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.

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.

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 (in thousands)		Total				Less than 1 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.