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WATERS CORP /DE/ - Quarter Report: 2020 June (Form 10-Q)

Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
.
Commission File Number:
01-14010
 
 
Waters Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-3668640
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(508)
 478-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
WAT
 
New York Stock Exchange, Inc.
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
 12b-2
of the Act).    Yes  
    No  
Indicate the number of shares outstanding of the registrant’s common stock as of July 24, 2020: 61,925,972
 
 
 

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
 
 
 
  
Page
 
PART I
 
FINANCIAL INFORMATION
  
     
Item 1.
 
  
 
3
 
 
 
  
 
3
 
 
 
  
 
4
 
 
 
  
 
5
 
 
 
  
 
6
 
 
 
  
 
7
 
 
 
  
 
8
 
 
 
  
 
9
 
 
 
  
 
10
 
Item 2.
 
  
 
31
 
Item 3.
 
  
 
42
 
Item 4.
 
  
 
42
 
     
PART II
 
  
     
Item 1.
 
  
 
43
 
Item 1A.
 
  
 
43
 
Item 2.
 
  
 
44
 
Item 6.
 
  
 
45
 
 
 
  
 
46
 

Table of Contents
Item 1:
 Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
 
June 27, 2020
 
   
 
December 31, 2019
 
 
 
(In thousands, except per share data)
 
ASSETS
 
 
 
 
Current assets:
   
     
 
Cash and cash equivalents
  $
339,036
    $
335,715
 
Investments
   
16,720
     
1,429
 
Accounts receivable, net
   
496,276
     
587,734
 
Inventories
   
344,009
     
320,551
 
Other current assets
   
73,386
     
67,062
 
                 
Total current assets
   
1,269,427
     
1,312,491
 
Property, plant and equipment, net
   
459,173
     
417,342
 
Intangible assets, net
   
248,993
     
240,203
 
Goodwill
   
427,492
     
356,128
 
Operating lease assets
   
88,619
     
93,358
 
Other assets
   
154,598
     
137,533
 
                 
Total assets
  $
2,648,302
    $
2,557,055
 
                 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
Current liabilities:
   
     
 
Notes payable and debt
  $
150,000
    $
100,366
 
Accounts payable
   
50,325
     
49,001
 
Accrued employee compensation
   
33,329
     
43,467
 
Deferred revenue and customer advances
   
213,402
     
176,360
 
Current operating lease liabilities
   
26,862
     
27,125
 
Accrued income taxes
   
87,841
     
45,967
 
Accrued warranty
   
10,113
     
11,964
 
Other current liabilities
   
125,448
     
137,084
 
                 
Total current liabilities
   
697,320
     
591,334
 
Long-term liabilities:
   
     
 
Long-term debt
   
1,546,159
     
1,580,797
 
Long-term portion of retirement benefits
   
62,499
     
59,159
 
Long-term income tax liabilities
   
356,607
     
394,562
 
Long-term operating lease liabilities
   
63,828
     
66,881
 
Other long-term liabilities
   
113,631
     
80,603
 
                 
Total long-term liabilities
   
2,142,724
     
2,182,002
 
                 
Total liabilities
   
2,840,044
     
2,773,336
 
Commitments and contingencies (Notes 7, 8 and 12)
 
   
 
Stockholders’ deficit:
   
     
 
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued at June 27, 2020 and December 31, 2019
   
—  
     
 
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,273 and 161,030 shares issued, 61,916 and 62,587 shares outstanding at June 27, 2020 and December 31, 2019, respectively
   
1,613
     
1,610
 
Additional
paid-in
capital
   
1,959,498
     
1,926,753
 
Retained earnings
   
6,762,909
     
6,587,403
 
Treasury stock, at cost, 99,357 and 98,443 shares at June 27, 2020 and December 31, 2019, respectively
   
(8,788,872
)    
(8,612,576
)
Accumulated other comprehensive loss
   
(126,890
)    
(119,471
)
                 
Total stockholders’ deficit
   
(191,742
)    
(216,281
)
                 
Total liabilities and stockholders’ deficit
  $
2,648,302
    $
2,557,055
 
                 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
3

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
Three Months Ended
 
 
June 27, 2020
 
 
June 29, 2019
 
 
(In thousands, except per share data)
 
Revenues:
   
     
 
Product sales
  $
314,920
    $
387,265
 
 
 
 
 
 
 
 
 
 
Service sales
   
205,064
     
211,897
 
                 
Total net sales
   
519,984
     
599,162
 
Costs and operating expenses:
   
     
 
Cost of product sales
   
134,802
     
156,975
 
Cost of service sales
   
78,332
     
92,571
 
Selling and administrative expenses
   
117,449
     
133,208
 
Research and development expenses
   
31,155
     
36,490
 
Purchased intangibles amortization
   
2,618
     
2,264
 
Litigation provision
   
514
     
—  
 
                 
Total costs and operating expenses
   
364,870
     
421,508
 
                 
 
 
 
 
 
 
 
 
 
Operating income
   
155,114
     
177,654
 
Other expense
   
(736
)    
(342
)
 
 
 
 
 
 
 
 
 
Interest expense
   
(13,018
)    
(11,448
)
Interest income
   
4,003
     
5,871
 
                 
 
 
 
 
 
 
 
 
 
Income before income taxes
   
145,363
     
171,735
 
Provision for income taxes
   
22,434
     
27,325
 
                 
 
 
 
 
 
 
 
 
 
Net income
  $
122,929
    $
144,410
 
                 
 
 
 
 
 
 
 
 
 
Net income per basic common share
  $
1.98
    $
2.09
 
 
 
 
 
 
 
 
 
 
Weighted-average number of basic common shares
   
61,944
     
68,989
 
 
 
 
 
 
 
 
 
 
Net income per diluted common share
  $
1.98
    $
2.08
 
 
 
 
 
 
 
 
 
 
Weighted-average number of diluted common shares and equivalents
   
62,184
     
69,494
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
Six Months Ended
 
 
June 27, 2020
 
 
June 29, 2019
 
 
(In thousands, except per share data)
 
Revenues:
   
     
 
Product sales
  $
589,103
    $
707,768
 
Service sales
   
395,820
     
405,256
 
                 
Total net sales
   
984,923
     
1,113,024
 
Costs and operating expenses:
   
     
 
Cost of product sales
   
254,641
     
289,365
 
Cost of service sales
   
169,137
     
181,212
 
Selling and administrative expenses
   
265,184
     
267,547
 
Research and development expenses
   
66,144
     
71,550
 
Purchased intangibles amortization
   
5,243
     
4,545
 
Litigation provision
   
1,180
     
 
                 
Total costs and operating expenses
   
761,529
     
814,219
 
                 
Operating income
   
223,394
     
298,805
 
Other expense
   
(1,110
)    
(867
)
Interest expense
   
(27,097
)    
(23,011
)
Interest income
   
8,039
     
14,186
 
                 
Income before income taxes
   
203,226
     
289,113
 
Provision for income taxes
   
26,735
     
35,717
 
                 
Net income
  $
176,491
    $
253,396
 
                 
Net income per basic common share
  $
2.84
    $
3.60
 
Weighted-average number of basic common shares
   
62,085
     
70,331
 
Net income per diluted common share
  $
2.83
    $
3.57
 
Weighted-average number of diluted common shares and equivalents
   
62,404
     
70,904
 
The accompanying notes are an integral part of the interim consolidated financial statements.
5

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
    
Three Months Ended
   
Six Months Ended
 
    
June 27,
2020
   
June 29,
2019
   
June 27,
2020
   
June 29,
2019
 
 
(In thousands)
   
(In thousands)
 
Net income
  $
122,929
    $
144,410
    $
176,491
    $
253,396
 
Other comprehensive income (loss):
   
     
     
     
 
Foreign currency translation
   
11,587
     
(7,031
)    
(7,757
)    
491
 
Unrealized gains on investments before income taxes
   
—  
     
710
     
—  
     
3,054
 
Income tax expense
   
—  
     
(157
)    
—  
     
(704
)
                                 
Unrealized gains on investments, net of tax
   
—  
     
553
     
—  
     
2,350
 
Retirement liability adjustment before reclassifications
   
(522
)    
(41
)    
(226
   
(102
)
Amounts reclassified to other income
   
336
     
90
     
676
     
183
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment before income taxes
   
(186
)    
49
     
450
     
81
 
Income tax
benefit (
expense
)
   
126
     
(23
)    
(112
)    
(47
)
  
 
 
   
 
 
   
 
 
   
 
 
 
Retirement liability adjustment, net of tax
   
(60
)    
26
     
338
     
34
 
Other comprehensive income (loss)
   
11,527
     
(6,452
)    
(7,419
)    
2,875
 
                                 
Comprehensive income
  $
134,456
    $
137,958
    $
169,072
    $
256,271
 
                                 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Six Months Ended
 
    
June 27, 2020
   
June 29, 2019
 
 
 
 
    
(In thousands)
 
Cash flows from operating activities:
    
Net income
  $
176,491
    $
253,396
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Stock-based compensation
   
18,122
 
   
19,255
 
Deferred income taxes
   
(777
)
   
1,632
 
Depreciation
   
33,220
     
28,704
 
Amortization of intangibles
   
26,983
     
24,911
 
Change in operating assets and liabilities:
   
     
 
Decrease in accounts receivable
   
86,978
     
52,508
 
Increase in inventories
   
(27,089
   
(62,200
)
Increase in other current assets
   
(14,699
   
(11,627
)
Decrease (increase) in other assets
   
8,238
     
(15,060
)
Increase (decrease) in accounts payable and other current liabilities
   
34,714
     
(10,439
)
Increase in deferred revenue and customer advances
   
37,558
     
54,672
 
Effect of the 2017 Tax Cuts & Jobs Act
   
—  
     
(3,229
)
Decrease in other liabilities
   
(29,293
)    
(29,720
)
 
                 
Net cash provided by operating activities
   
350,446
     
302,803
 
Cash flows from investing activities:
   
     
 
Additions to property, plant, equipment and software capitalization
   
(97,029
)    
(65,188
)
Business acquisitions, net of cash acquired
   
(76,664
)    
—  
 
Investment in unaffiliated companies
   
(3,350
)
   
(4,750
)
Purchases of investments
   
(16,828
)    
(35,523
)
Maturities and sales of investments
   
1,536
     
890,524
 
                 
Net cash (used in) provided by investing activities
   
(192,335
)    
785,063
 
Cash flows from financing activities:
   
     
 
Proceeds from debt issuances
   
315,000
     
363
 
Payments on debt
   
(300,366
)    
(245
)
Proceeds from stock plans
   
14,739
     
30,129
 
Purchases of treasury shares
   
(196,297
   
(1,329,635
)
Proceeds from derivative contracts
   
7,558
     
4,654
 
                 
Net cash used in financing activities
   
(159,366
   
(1,294,734
)
Effect of exchange rate changes on cash and cash equivalents
   
4,576
     
(1,414
)
                 
Increase (decrease) in cash and cash equivalents
   
3,321
     
(208,282
)
Cash and cash equivalents at beginning of period
   
335,715
     
796,280
 
                 
Cash and cash equivalents at end of period
  $
339,036
    $
587,998
 
                 
The accompanying notes are an integral part of the interim consolidated financial statements.
7

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
(DEFICIT)
(unaudited, in thousands)
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Equity
 
Balance March 30, 2019
   
160,825
    $
1,608
    $
1,872,216
    $
6,104,191
    $
(6,901,629
)   $
(108,644
)   $
967,742
 
Net income
   
—  
     
—  
     
—  
     
144,410
     
—  
     
—  
     
144,410
 
Other comprehensive loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
(6,452
)    
(6,452
)
Issuance of common stock for employees:
   
     
     
     
     
     
     
 
Employee Stock Purchase Plan
   
15
     
—  
     
2,498
     
—  
     
—  
     
—  
     
2,498
 
Treasury stock
   
—  
     
—  
     
—  
     
—  
     
(561,197
)    
—  
     
(561,197
)
 
Stock-based compensation
   
1
     
—  
     
9,244
     
—  
     
—  
     
—  
     
9,244
 
                                                         
Balance June 29, 2019
   
160,841
    $
1,608
    $
1,883,958
    $
6,248,601
    $
(7,462,826
)   $
(115,096
)   $
556,245
 
                                                         
                                           
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
    
Treasury
Stock
   
Accumulated
Other
Comprehensive
Incom
e
(
Loss
)
   
Total
Stockholders’
Deficit
 
Balance March 28, 2020
   
161,253
    $
1,613
    $
1,947,626
    $
6,639,980
    $
(8,788,801
)   $
(138,417
)   $
(337,999
)
Net income
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
122,929
 
 
 
—  
 
 
 
—  
 
 
 
122,929
 
Other comprehensive income
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
11,527
 
 
 
11,527
 
Issuance of common stock for employees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee Stock Purchase Plan
 
 
12
 
 
 
—  
 
 
 
2,216
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
2,216
 
Stock options exercised
 
 
6
 
 
 
—  
 
 
 
779
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
779
 
Treasury stock
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(71
)
 
 
—  
 
 
 
(71
)
Stock-based compensation
 
 
2
 
 
 
 
 
 
8,877
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
8,877
 
                                                         
Balance June 27, 2020
   
161,273
    $
1,613
    $
1,959,498
    $
6,762,909
    $
(8,788,872
)   $
(126,890
)   $
(191,742
)
                                                         
The accompanying notes are an integral part of the consolidated financial statements.
8

Table of Contents
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
Balance December 31, 2018
   
160,472
    $
1,605
    $
1,834,741
    $
5,995,205
    $
(6,146,322
)   $
(117,971
)   $
1,567,258
 
Net income
   
—  
     
—  
     
—  
     
253,396
     
—  
     
—  
     
253,396
 
Other comprehensive income
   
—  
     
—  
     
—  
     
—  
     
—  
     
2,875
     
2,875
 
Issuance of common stock for employees:
   
     
     
     
     
     
     
 
Employee Stock Purchase Plan
   
25
     
—  
     
4,168
     
—  
     
—  
     
—  
     
4,168
 
Stock options exercised
   
239
     
2
     
26,097
     
—  
     
—  
     
—  
     
26,099
 
Treasury stock
   
—  
     
—  
     
—  
     
—  
     
(1,316,504
)    
—  
     
(1,316,504
)
 
Stock-based compensation
   
105
     
1
     
18,952
     
—  
     
—  
     
—  
     
18,953
 
                                                         
Balance June 29, 2019
   
160,841
    $
1,608
    $
1,883,958
    $
6,248,601
    $
(7,462,826
)   $
(115,096
)   $
556,245
 
                                                         
                                           
    
Number
of
Common
Shares
    
Common
Stock
    
Additional
Paid-In

Capital
    
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Total
Stockholders’
Deficit
 
Balance December 31, 2019
   
161,030
    $
1,610
    $
1,926,753
    $
6,587,403
    $
(8,612,576
)   $
(119,471
)   $
(216,281
)
Net income
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
176,491
 
 
 
—  
 
 
 
—  
 
 
 
176,491
 
Adoption of new accounting pronouncement
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(985
)
 
 
—  
 
 
 
—  
 
 
 
(985
)
Other comprehensive loss
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(7,419
)
 
 
(7,419
)
Issuance of common stock for employees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee Stock Purchase Plan
 
 
21
 
 
 
 
 
 
3,952
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
3,952
 
Stock options exercised
 
 
87
 
 
 
1
 
 
 
10,904
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
10,905
 
Treasury stock
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(176,296
)
 
 
—  
 
 
 
(176,296
)
Stock-based compensation
 
 
135
 
 
 
2
 
 
 
17,889
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
17,891
 
                                                         
Balance June 27, 2020
   
161,273
    $
1,613
    $
1,959,498
    $
6,762,909
    $
(8,788,872
)   $
(126,890
)   $
(191,742
)
                                                         
The accompanying notes are an integral part of the consolidated financial statements.
9

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a
fundamental
underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and
,
together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s second fiscal quarters for 2020 and 2019 ended on June 27, 2020 and June 29, 2019, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 25, 2020.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus
(“COVID-19”)
and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared
COVID-19
a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump announced a National Emergency relating to the disease. Since then,
COVID-19
has continued to spread
10

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
throughout the U.S. and globally. The
COVID-19
pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic.
In the six months ended June 27, 2020 as compared to the six months ended June 29, 2019, the Company experienced a decline in net sales of 12% due in large part to the
COVID-19
pandemic and related economic uncertainty; however, through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.
For most of the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of June 27, 2020 and December 31, 2019, $288 million out of $356 million and $249 million out of $337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $204 million out of $356 million and $176 million out of $337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at June 27, 2020 and December 31, 2019, respectively.
Accounts Receivable and Allowance for Credit Losses
The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to the trade receivable balance as of January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as
relevant
11

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited) – (Continued)
available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.
Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish and
re-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.
Any recovery of amounts that were written off prior to adoption of the new CECL standard that are received after adoption are recorded in income in the period in which they are received.
The following is a summary of the activity of the Company’s allowance for doubtful accounts for the three and six months ended June 27, 2020 and June 29, 2019 (in thousands). The June 27, 2020 balance is calculated using the CECL method and the June 29, 2019 balance is calculated using the incurred loss method under legacy GAAP:
    
Balance at
Beginning

of Period
    
Impact of
CECL

Adoption
    
Additions
    
Deduction
   
Balance at
End of

Period
 
 
 
Allowance for Doubtful Accounts
   
     
     
     
     
 
June 27, 2020
  $
9,560
    $
985
    $
6,664
    $
(3,901
)   $
13,308
 
June 29, 2019
  $
7,663
    $
—  
    $
3,793
    $
(3,426
)   $
8,030
 
Other Investments
During the six months ended June 27, 2020 and June 29, 2019, the Company made investments in unaffiliated companies of $3 million and $5 million, respectively.
During the
three and
six months ended June 27, 2020, the Company recorded an unrealized loss on an equity security still held at the reporting date of approximately $1 
million within other expense on the income statement. This unrealized loss was recorded as a downward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of June 27, 2020 and December 31, 2019. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
12

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at June 27, 2020 (in thousands):
    
Total at
June 27,
2020
    
Quoted Prices
in Active
Markets
for Identical
Assets

(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs

(Level 3)
 
Assets:
   
     
     
     
 
Time deposits
  $
16,720
    $
—  
    $
16,720
    $
—  
 
Waters 401(k) Restoration Plan assets
   
33,453
     
33,453
     
—  
     
—  
 
Foreign currency exchange contracts
 
 
366
 
 
 
—  
 
 
 
366
 
 
 
—  
 
Interest rate cross-currency swap agreements
   
4,392
     
—  
     
4,392
     
—  
 
                                 
Total
  $
54,931
    $
33,453
    $
21,478
    $
—  
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
   
     
     
     
 
Contingent consideration
  $
2,787
    $
—  
    $
—  
    $
2,787
 
Foreign currency exchange contracts
   
733
     
—  
     
733
     
—  
 
                                 
Total
  $
3,520
    $
—  
    $
733
    $
2,787
 
                                 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):
    
Total at
December 31,
2019
    
Quoted Prices
in Active
Markets
for Identical
Assets

(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs

(Level 3)
 
Assets:
   
     
     
     
 
Time deposits
  $
1,642
    $
—  
    $
1,642
    $
—  
 
Waters 401(k) Restoration Plan assets
   
30,158
     
30,158
     
—  
     
—  
 
Foreign currency exchange contracts
   
16
     
—  
     
16
     
—  
 
Interest rate cross-currency swap agreements
   
4,485
     
     
4,485
     
 
                                 
Total
  $
36,301
    $
30,158
    $
6,143
    $
—  
 
                                 
Liabilities:
   
     
     
     
 
Contingent consideration
  $
2,557
    $
—  
    $
—  
    $
2,557
 
Foreign currency exchange contracts
   
1,028
     
—  
     
1,028
     
—  
 
                                 
Total
  $
3,585
    $
—  
    $
1,028
    $
2,557
 
                                 
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements
The fair values of the Company’s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and
liabilities
 
13

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be $3 million at both June 27, 2020 and December 31, 2019, based on the Company’s best estimate, as the earnout is based on future sales of certain products, some of which are currently in development, through 2034.
Fair Value of Other Financial Instruments
The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $910 million and $1.0 billion at June 27, 2020 and December 31, 2019, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $938 million and $1.0 billion at June 27, 2020 and December 31, 2019, respectively, using Level 2 inputs.
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.
The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.
14

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
Interest Rate Cross-Currency Swap Agreements
As of June 27, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency
 
exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ (deficit) equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
 
 
June 27, 2020
   
December 31, 2019
 
 
Notional Value
 
 
Fair Value
 
 
Notional Value
 
 
Fair Value
 
Foreign currency exchange contracts:
   
     
     
     
 
Other current assets
  $
29,735
    $
366
    $
119,576
    $
16
 
Other current liabilities
  $
91,393
    $
733
    $
29,495
    $
1,028
 
Interest rate cross-currency swap agreements:
   
     
     
     
 
Other assets
  $
560,000
    $
4,392
    $
560,000
    $
4,485
 
Accumulated other comprehensive income
   
    $
(4,392
)    
    $
(4,485
)
 
The following is a summary of the activity included in the statements of comprehensive income related to the foreign currency exchange contracts (in thousands):
 
 
Financial
 
Three Months Ended
   
Six Months Ended
 
 
Statement
 
June 27,
2020
 
 
June 29,
2019
 
 
June 27,
2020
 
 
June 29,
2019
 
 
Classification
Foreign currency exchange contracts:
   
     
     
     
 
Realized gains (losses) on closed contracts
 
Cost of sales
  $
1,823
    $
136
    $
(1,157
)   $
(407
)
Unrealized (losses) gains on open contracts
 
Cost of sales
   
(678
   
(3,044
   
646
     
(2,518
)
                                     
Cumulative net
pre-tax
gains (losses)
 
Cost of sales
  $
1,145
    $
(2,908
)   $
(511
)   $
(2,925
)
   
 
 
   
 
 
   
 
 
   
 
 
 
Interest rate cross-currency swap agreements:
   
     
     
     
 
Interest earned
 
Interest income
  $
3,784
    $
2,923
    $
7,498
    $
5,150
 
Unrealized (losses) gains on open contracts
 
Stockholders’ equity
  $
(5,615
  $
(6,022
)   $
(93
  $
1,098
 
Stockholders’ Equity
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This program replaced the remaining amounts available from the
pre-existing
program. During the six months ended June 27, 2020 and June 29, 2019, the Company repurchased 0.8 million and 5.9 million shares of the Company’s outstanding common stock at a cost of $167 million and $1.3 billion, respectively, under the January 2019 authorization and other previously announced programs. As of June 27, 2020, the Company had repurchased an aggregate of 11.1 million shares at a cost of $2.5 billion under the January 2019 repurchase program and had a total of $1.5 billion authorized for future repurchases. In addition, the Company repurchased $9 million and $8 million of common stock related to the vesting of restricted stock units during the six months ended June 27, 2020 and June 29, 2019, respectively.
While the Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
15

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The Company had $20 million of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. There were no unsettled treasury stock purchases as of June 27, 2020, while the Company had accrued $10 million for such purchases as of June 29, 2019, which settled in the subsequent quarter.
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Company’s accrued warranty liability for the six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
    
Balance at
Beginning
of Period
    
Accruals for
Warranties
    
Settlements
Made
    
Balance at
End of
Period
 
Accrued warranty liability:
   
     
     
     
 
June 27, 2020
  $
11,964
    $
3,577
    $
(5,428
)   $
10,113
 
June 29, 2019
  $
12,300
    $
3,571
    $
(4,288
)   $
11,583
 
Restructuring
In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3%
of the Company’s employees. During the three and six months ended June 27, 2020, the Company incurred
 
$
18
 
million and $3 million, respectively, of severance-related costs, lease termination costs and other related costs.
The Company expects to incur an additional $
6
 million of costs for the remainder of the year.
2 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
The following is a summary of the activity of the Company’s deferred revenue and customer advances for the six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
 
June 27, 2020
 
 
June 29, 2019
 
Balance at the beginning of the period
  $
213,695
    $
204,257
 
Recognition of revenue included in balance at beginning of the period
   
(141,297
)    
(172,949
)
 
Revenue deferred during the period, net of revenue recognized
   
195,444
     
229,162
 
                 
Balance at the end of the period
  $
267,842
    $
260,470
 
                 
The Company classified $54 million and $38 million of deferred revenue and customer advances in other long-term liabilities at June 27, 2020 and December 31, 2019, respectively.
16

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):
 
 
June 27, 2020
 
Deferred revenue and customer advances expected to be recognized in:
   
 
One year or less
 
$
213,402
 
13-24
months
   
34,151
 
25 months and beyond
   
20,289
 
         
Total
  $
267,842
 
         
3
Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
 
 
June 27, 2020
 
    
Amortized
Cost
    
Unrealized
Gain
    
Unrealized
Loss
    
Fair
Value
 
Time deposits
   
16,720
     
—  
     
—  
     
16,720
 
                                 
Total
  $
16,720
    $
—  
    $
—  
    $
16,720
 
                                 
Amounts included in:
   
     
     
     
 
Investments
   
16,720
     
—  
     
—  
     
16,720
 
                                 
Total
  $
16,720
    $
—  
    $
—  
    $
16,720
 
                                 
 
December 31, 2019
 
    
Amortized
Cost
    
Unrealized
Gain
    
Unrealized
Loss
    
Fair
Value
 
Time deposits
   
1,642
     
—  
     
—  
     
1,642
 
                                 
Total
  $
1,642
    $
—  
    $
—  
    $
1,642
 
                                 
Amounts included in:
   
     
     
     
 
Cash equivalents
  $
213
    $
—  
    $
—  
    $
213
 
Investments
   
1,429
     
—  
     
—  
     
1,429
 
                                 
Total
  $
1,642
    $
—  
    $
—  
    $
1,642
 
                                 
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
 
 
June 27, 2020
   
December 31, 2019
 
Due in one year or less
  $
16,720
    $
1,642
 
                 
Total
  $
16,720
    $
1,642
 
                 
17

Table of Contents
CONDENSED NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS (unaudited) – (Continued)
4
 Inventories
Inventories are classified as follows (in thousands):
 
 
June 27, 2020
   
December 31, 2019
 
Raw materials
  $
139,452
    $
126,850
 
Work in progress
   
15,878
     
15,457
 
Finished goods
   
188,679
     
178,244
 
                 
Total inventories
  $
344,009
    $
320,551
 
                 
5
 Acquisitions
On January 15, 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively, “Andrew Alliance”), for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration.
Andrew Alliance offers lab workflow automation solutions with the combination of its software platform and smart, connected laboratory equipment and accessories.
The Company allocated $7 million of the purchase price to intangible assets comprised of developed technology, trade name and customer relationships. The developed technology and customer relationships will be amortized over ten years and the trade name will be amortized over 3 years. The Company allocated $72 million of the purchase price to goodwill, which is not deductible for tax purposes. The principal factor that resulted in recognition of goodwill in the acquisition was that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with the Company’s products, which are higher than if the acquired companies’ technology, customer access or products were utilized on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset.
In addition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs.
The fair values of the assets and liabilities acquired were determined using various income-approach valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the acquisition date, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisition of Andrew Alliance (in thousands):
 
Cash
  $
713
 
Accounts receivable and current other assets
   
806
 
Inventory
   
669
 
Prepaid and other assets
   
611
 
Property, plant and equipment, net
   
757
 
Operating lease assets
   
847
 
Intangible assets
   
6,960
 
Goodwill
   
71,632
 
         
Total assets acquired
   
82,995
 
Accrued expenses and other liabilities
   
2,093
 
         
Total consideration
   
80,902
 
         
Fair value of minority investment
   
3,525
 
         
Cash consideration paid
 
$
77,377
 
         
 
18

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
The impact of the Andrew Alliance acquisition on the Company’s revenues and net income during the quarter was immaterial. The pro forma effect on the ongoing operations of the Company as though this acquisition had occurred at the beginning of the periods covered by this report was also immaterial
.
6
 Goodwill and Other Intangibles
The carrying amount of goodwill was $427 million and $356 million at June 27, 2020 and December 31, 2019, respectively. The acquisition of Andrew Alliance increased goodwill by $72 million while the effect of foreign currency translation decreased goodwill by $1 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
 
 
June 27, 2020
   
December 31, 2019
 
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Weighted-
Average
Amortization
Period
 
Capitalized software
  $
512,047
    $
356,036
     
5
 years
    $
481,986
    $
333,255
     
5
 years
 
Purchased intangibles
   
207,733
     
156,065
     
11
 years
     
200,523
     
151,722
     
11
 years
 
Trademarks and IPR&D
   
13,601
     
—  
     
—  
     
13,782
     
—  
     
—  
 
Licenses
   
5,483
     
5,195
     
6
 years
     
5,669
     
5,298
     
6
 years
 
Patents and other intangibles
   
84,453
     
57,028
     
8
 years
     
83,035
     
54,517
     
8
 years
 
                                                 
Total
  $
823,317
    $
574,324
     
7
 years
    $
784,995
    $
544,792
     
7
 years
 
                                                 
The gross carrying value of intangible assets and accumulated amortization for intangible assets
in
creased by $4 million and $3 million, respectively, in the six months ended June 27, 2020 due to the effects of foreign currency translation. Amortization expense for intangible assets was $14 million and $12 million for the three months ended June 27, 2020 and June 29, 2019, respectively. Amortization expense for intangible assets was $27 million
and $25 million
for the six months ended June 27, 2020 and June 29, 2019
, respectively.
Amortization expense for intangible assets is estimated to be $51 million per year for each of the next five years.
7
 Debt
In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan. The revolving facility and term loan both mature on November 30, 2022 and require no scheduled prepayments before that date.
The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2017 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2017 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
19

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
As of June 27, 2020 and December 31, 2019, the Company had a total of $960 million and $1.1 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note.
In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.
The Company had the following outstanding debt at June 27, 2020 and December 31, 2019 (in thousands):
 
    
June 27, 2020
    
December 31, 2019
 
Foreign subsidiary lines of credit
  $
—  
    $
366
 
Senior unsecured notes
 
-
Series B
 -
5.00%, due February 2020
   
—  
     
100,000
 
Senior unsecured notes
 -
Series E
 -
3.97%, due March 2021
   
50,000
     
—  
 
Senior unsecured notes
 -
Series F
 -
3.40%, due June 2021
   
100,000
     
—  
 
                 
Total notes payable and debt, current
   
150,000
     
100,366
 
Senior unsecured notes
 -
Series E
 -
3.97%, due March 2021
   
—  
     
50,000
 
Senior unsecured notes
 -
Series F
 -
3.40%, due June 2021
   
—  
     
100,000
 
Senior unsecured notes
 -
Series G
 -
3.92%, due June 2024
   
50,000
     
50,000
 
Senior unsecured notes
 -
Series H
 -
floating rate*, due June 2024
   
50,000
     
50,000
 
Senior unsecured notes
 -
Series I
 -
3.13%, due May 2023
   
50,000
     
50,000
 
Senior unsecured notes
 -
Series K
 -
3.44%, due May 2026
   
160,000
     
160,000
 
Senior unsecured notes
 -
Series L
 -
3.31%, due September 2026
   
200,000
     
200,000
 
Senior unsecured notes
 -
Series M
 -
3.53%, due September 2029
   
300,000
     
300,000
 
Credit agreement
   
740,000
     
625,000
 
Unamortized debt issuance costs
   
(3,841
)    
(4,203
)
 
                 
Total long-term debt
   
1,546,159
     
1,580,797
 
                 
Total debt
  $
1,696,159
    $
1,681,163
 
                 
 
*
Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%.
As of June 27, 2020 and December 31, 2019, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.1 
b
illion and $1.2 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.62% and 3.39% at June 27, 2020 and December 31, 2019, respectively. As of June 27, 2020, the Company was in compliance with all debt
covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $105 million at each of June 27, 2020 and December 31, 2019, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest rate applicable to these short-term borrowings was 1.48% for December 31, 2019. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of June 27, 2020.
20

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
As of June 27, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
8 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of June 27, 2020. The Company has a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to meet. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the six months ended June 27, 2020 and June 29, 2019 by $7 million and $9 million, respectively, and increased the Company’s net income per diluted share by $0.11 and $0.13, respectively.
The Company’s effective tax rate for the three months ended June 27, 2020 and June 29, 2019 was 15.4% and 15.9%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the six months ended June 27, 2020 and June 29, 2019 was 13.2% and 12.4%, respectively. The effective tax rate for the six months ended June 27, 2020
includes a $5 million income tax benefit related to certain restructuring charges and a $2 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 2.4 percentage points and 1.2 percentage points for the six months ended June 27, 2020, respectively. The effective tax rate for the six months ended June 29, 2019
 
includes a $
3
 million income tax benefit related to the finalization of certain regulations relating to the Tax
Cuts a
nd Jobs
Act
 of 2017 and a $7 million
income tax benefit
related to stock-based compensation. These income tax benefits
decreased the effective tax rate by
1.0
percentage
 point and
 
2.3
percentage points for the six months ended June 29, 2019
, respectively
. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
    
June 27, 2020
    
June 29, 2019
 
Balance at the beginning of the period
  $
27,790
    $
26,108
 
Net reductions for lapse of statutes taken during the period
   
(252
)    
(105
)
Net additions for tax positions taken during the current period
   
536
     
801
 
                 
Balance at the end of the period
  $
28,074
    $
26,804
 
                 
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2014. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of June 27, 2020, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of less than $1 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.
 
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
9 Stock-Based Compensation
The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).
In May 2020, the Company’s s
tock
holders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of June 27, 2020, the 2020 Plan ha
d
 6.6 million shares available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of June 27, 2020, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding
 under t
he 2020 Plan
.
The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The consolidated statements of operations for the three and six months ended June 27, 2020 and June 29, 2019 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):
 
 
Three Months Ended
   
Six Months Ended
 
    
June 27, 2020
    
June 29, 2019
    
June 27, 2020
    
June 29, 2019
 
Cost of sales
  $
635
    $
567
    $
1,205
    $
1,142
 
Selling and administrative expenses
   
7,352
     
7,402
     
14,725
     
15,527
 
Research and development expenses
   
939
     
1,345
     
2,192
     
2,586
 
                                 
Total stock-based compensation
  $
8,926
    $
9,314
    $
18,122
    $
19,255
 
                                 
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Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Stock Options
In determining the fair value of the stock options, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected stock option lives. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on historical experience for the population of non-qualified stock option exercises. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the six months ended June 27, 2020 and June 29, 2019 are as follows:
 
Six Months Ended
 
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
  
June 27, 2020
   
June 29, 2019
 
Options issued in thousands
   
227
     
139
 
Risk-free interest rate
   
1.4
%    
2.5
%
 
Expected life in years
   
6
     
5
 
Expected volatility
   
26.5
%    
24.3
%
 
Expected dividends
   
—  
     
—  
 
 
Six Months Ended
 
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant
  
June 27, 2020
   
June 29, 2019
 
Exercise price
  $
216.08
 
 
  $
231.30
 
 
 
Fair value
  $
61.70
    $
61.85
 
The following table summarizes stock option activity for the plans for the six months ended June 27, 2020 (in thousands, except per share data):
    
Number of Shares
    
Exercise Price per Share
    
Weighted-Average

Exercise Price per

Share
 
Outstanding at December 31, 2019
   
1,455
    $
61.63
   
to
 
  $
238.52
    $
158.61
 
Granted
   
227
    $
203.37
   
to
 
  $
235.06
    $
216.08
 
Exercised
   
(87
)   $
61.63
   
to
 
  $
208.47
    $
125.50
 
Canceled
   
(148
)   $
128.93
   
to
 
  $
238.52
    $
172.91
 
                                     
Outstanding at June 27, 2020
   
1,447
    $
75.94
   
to
 
  $
238.52
    $
168.15
 
                                     
Restricted Stock
During the six months ended June 27, 2020, the Company granted four thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $235.06.
 
 
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the six months ended June 27, 2020 (in thousands, except per share data):
    
Shares
    
Weighted-Average

Grant Date Fair

Value per Share
 
Unvested at December 31, 2019
   
260
    $
184.70
 
Granted
   
105
    $
206.73
 
Vested
   
(86
)   $
161.84
 
Forfeited
   
(15
)   $
185.91
 
                 
Unvested at June 27, 2020
   
264
    $
200.84
 
                 
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
 
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Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care
Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the
grants mad
e in
2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
 
In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the six months ended June 27, 2020 and June 29, 2019 are as follows:
 
   
Six Months Ended
 
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values
 
June 27, 2020
   
June 29, 2019
 
Performance stock units issued (in thousands)
   
58
     
13
 
Risk-free interest rate
   
1.3
%    
2.4
%
 
Expected life in years
   
2.9
     
2.8
 
Expected volatility
   
25.1
%
 
 
 
23.5
%
Average volatility of peer companies
   
26.1
%    
26.2
%
Correlation coefficient
   
36.6
%    
34.2
%
Expected dividends
   
—  
     
—  
 
The following table summarizes the unvested performance stock unit award activity for the six months ended June 27, 2020 (in thousands, except per share data):
 
    
Shares
    
Weighted-Average

Fair Value per
Share
 
Unvested at December 31, 2019
   
105
    $
233.11
 
Granted
   
58
    $
190.45
 
Vested
   
(37
)   $
184.51
 
Forfeited
   
(24
)   $
233.31
 
                 
Unvested at June 27, 2020
   
102
    $
226.44
 
                 
24

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
10 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
Three Months Ended June 27, 2020
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
  $
122,929
     
61,944
    $
1.98
 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   
—  
     
240
     
—  
 
                         
Net income per diluted common share
  $
122,929
     
62,184
    $
1.98
 
                         
 
Three Months Ended June 29, 2019
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
  $
144,410
     
68,989
    $
2.09
 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   
—  
     
505
     
(0.01
)
                         
Net income per diluted common share
  $
144,410
     
69,494
    $
2.08
 
                         
 
Six Months Ended June 27, 2020
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
  $
176,491
     
62,085
    $
2.84
 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   
—  
     
319
     
(0.01
)
                         
Net income per diluted common share
  $
176,491
     
62,404
    $
2.83
 
                         
 
Six Months Ended June 29, 2019
 
    
Net Income
(Numerator)
    
Weighted-
Average Shares
(Denominator)
    
Per Share
Amount
 
Net income per basic common share
  $
253,396
     
70,331
    $
3.60
 
Effect of dilutive stock option, restricted stock, performance
s
to
ck unit and restricted stock unit securities
   
—  
     
573
     
(0.03
)
                         
Net income per diluted common share
  $
253,396
     
70,904
    $
3.57
 
                         
For the three and six months ended June 27, 2020, the Company had 0.7 million
and 0.4
million
stock options that were antidilutive due to having higher exercise prices than the Company’s average stock price during the period. For both the three and six months ended June 29, 2019, the Company had 0.1 million stock options that were antidilutive. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.​​​​​​​
 
25

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
11 Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (loss) are detailed as follows (in thousands):
    
Currency Translation
    
Unrealized Gain (Loss)
on Retirement Plans
    
Accumulated Other
Comprehensive Loss
 
Balance at December 31, 2019
  $
(104,066
)   $
(15,405
)   $
(119,471
)
Other comprehensive income (loss), net of tax
   
(7,757
   
338
     
(7,419
)
                         
Balance at June 27, 2020
  $
(111,822
  $
(15,067
  $
(126,890
)
                         
1
2
 Retirement Plans
The Company sponsors various retirement plans. The components of net periodic benefit cost other than the service cost component are included in other expense in the consolidated statements of operations. The summary of the components of net periodic pension costs for the plans for the three and six months ended June 27, 2020 and June 29, 2019 is as follows (in thousands):
 
Three Months Ended
 
 
June 27, 2020
   
June 29, 2019
 
    
U.S.
Pension
Plans
    
U.S. Retiree
Healthcare
Plan
   
Non-U.S.

Pension
Plans
   
U.S.
Pension
Plans
    
U.S. Retiree
Healthcare
Plan
   
Non-U.S.

Pension
Plans
 
Service cost
  $
—  
    $
151
    $
1,095
    $
—  
    $
108
    $
1,075
 
Interest cost
   
—  
     
177
     
338
     
10
     
230
     
430
 
Expected return on plan assets
   
—  
     
(220
)    
(454
)    
—  
     
(177
)    
(538
)
Net amortization:
   
     
     
     
     
     
 
Prior service credit
   
—  
     
(5
)    
(41
)    
—  
     
(5
)    
(37
)
Net actuarial loss
   
—  
     
—  
     
382
     
—  
     
—  
     
132
 
                                                 
Net periodic pension cost
  $
—  
    $
103
    $
1,320
    $
10
    $
156
    $
1,062
 
                                                 
 
Six Months Ended
 
 
June 27, 2020
   
June 29, 2019
 
    
U.S.
Pension
Plans
    
U.S. Retiree
Healthcare
Plan
   
Non-U.S.

Pension
Plans
   
U.S.
Pension
Plans
    
U.S. Retiree
Healthcare
Plan
   
Non-U.S.

Pension
Plans
 
Service cost
  $
—  
    $
302
    $
2,194
    $
—  
    $
250
    $
2,157
 
Interest cost
   
—  
     
353
     
683
     
23
     
389
     
864
 
Expected return on plan assets
   
—  
     
(439
)    
(910
)    
—  
     
(354
)    
(1,081
)
Net amortization:
   
     
     
     
     
     
 
Prior service credit
   
—  
     
(10
)    
(81
)    
—  
     
(10
)    
(74
)
Net actuarial loss
   
—  
     
—  
     
767
     
—  
     
—  
     
267
 
                                                 
Net periodic pension cost
  $
—  
    $
206
    $
2,653
    $
23
    $
275
    $
2,133
 
                                                 
In 2019, the Company completed the termination of the Waters Retirement Restoration Plan.
 
26

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
During fiscal year 2020, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.
1
3
 Business Segment Information
The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has two operating segments: Waters
TM
and TA
TM
.
The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.
Net sales for the Company’s products and services are as follows for the three and six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
 
Three Months Ended
   
Six Months Ended
 
    
June 27, 2020
    
June 29, 2019
    
June 27, 2020
    
June 29, 2019
 
Product net sales:
   
     
     
     
 
Waters instrument systems
  $
181,399
    $
238,777
    $
324,228
    $
423,389
 
Chemistry consumables
   
95,105
     
100,292
     
192,350
     
199,545
 
TA instrument systems
   
38,416
     
48,196
     
72,525
     
84,834
 
                                 
Total product sales
   
314,920
     
387,265
     
589,103
     
707,768
 
Service net sales:
   
     
     
     
 
Waters service
   
189,205
     
192,048
     
363,342
     
368,097
 
TA service
   
15,859
     
19,849
     
32,478
     
37,159
 
                                 
Total service sales
   
205,064
     
211,897
     
395,820
     
405,256
 
                                 
Total net sales
  $
519,984
    $
599,162
    $
984,923
    $
1,113,024
 
                                 
2
7

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (
Continued
)
Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three and six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
Three Months Ended
   
Six Months Ended
 
    
June 27, 2020
    
June 29, 2019
    
June 27, 2020
    
June 29, 2019
 
Net Sales:
   
     
     
     
 
Asia:
   
     
     
     
 
China
  $
89,816
    $
112,796
    $
137,047
    $
202,887
 
Japan
   
41,230
     
45,958
     
86,319
     
89,462
 
Asia Other
   
77,163
     
80,081
     
143,923
     
146,998
 
                                 
Total Asia
   
208,209
     
238,835
     
367,289
     
439,347
 
Americas:
   
     
     
     
 
United States
     148,928        173,940        292,826        323,097  
Americas Other
   
25,854
     
32,835
     
54,132
     
65,546
 
                                 
Total Americas
   
174,782
     
206,775
     
346,958
     
388,643
 
Europe
   
136,993
     
153,552
     
270,676
     
285,034
 
                                 
Total net sales
  $
519,984
    $
599,162
    $
984,923
    $
1,113,024
 
                                 
Net sales by customer class are as follows for the three and six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
Three Months Ended
   
Six Months Ended
 
    
June 27, 2020
    
June 29, 2019
    
June 27, 2020
    
June 29, 2019
 
Pharmaceutical
  $
311,018
    $
350,145
    $
583,581
    $
644,657
 
Industrial
   
152,110
     
176,109
     
295,464
     
331,327
 
Academic and governmental
   
56,856
     
72,908
     
105,878
     
137,040
 
                                 
Total net sales
  $
519,984
    $
599,162
    $
984,923
    $
1,113,024
 
                                 
Net sales for the Company recognized at a point in time versus over time are as follows for the three and six months ended June 27, 2020 and June 29, 2019 (in thousands):
 
Three Months Ended
   
Six Months Ended
 
    
June 27, 2020
    
June 29, 2019
    
June 27, 2020
    
June 29, 2019
 
Net sales recognized at a point in time:
   
     
     
     
 
Instrument systems
  $
219,815
    $
286,973
    $
396,753
    $
508,223
 
Chemistry consumables
   
95,105
     
100,292
     
192,350
     
199,545
 
Service sales recognized at a point in time (time & materials)
   
78,867
     
84,807
     
146,609
     
157,566
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total net sales recognized at a point in time
   
393,787
     
472,072
     
735,712
     
865,334
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Net sales recognized over time:
   
     
     
     
 
Service and software maintenance sales recognized over time (contracts)
   
126,197
     
127,090
     
249,211
     
247,690
 
                                 
Total net sales
  $
519,984
    $
599,162
    $
984,923
    $
1,113,024
 
                                 
1
4
Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
In June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases,
off-balance
sheet credit exposures, and other
28

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
financial assets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event has occurred. The new guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified as
available-for-sale.
When the fair value of an
available-for-sale
debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and
non-credit
components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2019. On January 1, 2020 the Company adopted this new standard using a modified retrospective method for all financial assets measured at amortized cost which only impacted the Company’s allowance on trade accounts receivable. The Company did not have any significant
off-balance
sheet credit exposures which would be impacted by the new guidance. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease of $1 million to stockholders’ deficit as of January 1, 2020 for the cumulative effect of adopting the new standard due to converting to the current expected credit loss model for the allowance recorded against trade accounts receivables. This accounting standard did not have an impact on the Company’s results of operations and cash flows.
In January 2017, accounting guidance was issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations and cash flows.
In August 2018, accounting guidance was issued that modifies the disclosure requirements of fair value measurements. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirements identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
Recently Issued Accounting Standards
In August 2018, accounting guidance was issued that modifies the disclosure requirements of retirement benefit plans. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirement identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance, including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
In January 2020, accounting guidance was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which should increase relevance and comparability of financial statement information. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
29

Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be adopted.
In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the
COVID-19
outbreak which, among other things, contains numerous income tax provisions. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s consolidated financial statements or related disclosures.
3
0

Table of Contents
Item 2:
 Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Business and Financial Overview
The Company has two operating segments: Waters
TM
and TA
TM
. Waters products and
services
primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.
Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus
(“COVID-19”)
and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The Company is actively managing its business to respond to the
COVID-19
impact; however, the Company cannot reasonably estimate the length or severity of the
COVID-19
pandemic or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.
To date, the
COVID-19
pandemic has not materially impacted our manufacturing facilities or those of the third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers. We have also not seen material disruptions or delays in shipments of certain materials or components of our products.
At every stage of the pandemic, we have taken decisive and appropriate actions, including a mandatory remote work policy for all employees with the exception of those in manufacturing, distribution, and certain laboratory environments, as well as bans on
non-essential
travel and visitors into our facilities. Early on, we engaged a medical advisor to guide our policy deployment, and we continue to take proactive measures to guard the health of our global employee base, and the safety of all customer interactions. We have implemented rigorous protocols to promote a safe work environment in all of our locations around the world and late in the quarter we began implementation of the first phase of a multi-phase process for the safe return of employees to our physical workplaces as social distancing requirements allow.
The vast majority of the markets we serve, most notably the pharmaceutical, biomedical research, food/environmental and clinical markets, have continued to operate at various levels, and we are working closely with these customers to facilitate their seamless operation. Over the last several years, we have executed on a digital workplace strategy focused on providing modern connectivity and collaboration tools to our employees. Our strategic technology investments have enabled us to swiftly meet remote working needs as the
COVID-19
situation has escalated and evolved. From a customer-facing perspective, we are leveraging digital demand generation activities, including virtual demos across all regions in which we operate, remote instrument installations, virtual sales seminars, online product training, and a rapid acceleration in
one-on-one
communications over emails, phone and video conferencing.
While we initially anticipated that the
COVID-19
pandemic would have the biggest impact on the Company’s financial results in the second quarter of 2020, and future quarters would improve as countries lifted their business restrictions, the new outbreaks of
COVID-19
in the U.S. and elsewhere have demonstrated that the
COVID-19
pandemic continues to be fluid with uncertainties and risks remaining across the global economy. The Company is taking a proactive approach to managing through this unpredictability and has implemented a series of cost reduction actions that include salary reductions, furloughs and reductions in
non-essential
spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. A significant portion of these cost reduction actions are expected to expire at the end of July 2020, and the Company’s costs of sales and operating expenses are expected to gradually increase to
pre-COVID-19
levels as we move through the remainder of 2020.
 
These expected cost reductions reflect our core assumptions that the business moves through the recovery phase, and business conditions improve in the second half of 2020; however, our plan will be adjusted accordingly depending on the pace of the recovery.
 
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Table of Contents
The Company’s operating results are as follows for the three and six months ended June 27, 2020 and June 29, 2019 (dollars in thousands, except per share data):
 
    
Three Months Ended
   
Six Months Ended
 
    
June 27,
2020
   
June 29,
2019
   
% change
   
June 27,
2020
   
June 29,
2019
   
% change
 
Revenues:
            
Product sales
   $ 314,920     $ 387,265    
 
(19
%) 
  $ 589,103     $ 707,768    
 
(17
%) 
Service sales
     205,064       211,897    
 
(3
%) 
    395,820       405,256    
 
(2
%) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales
     519,984       599,162    
 
(13
%) 
    984,923       1,113,024    
 
(12
%) 
Costs and operating expenses:
            
Cost of sales
     213,134       249,546    
 
(15
%) 
    423,778       470,577    
 
(10
%) 
Selling and administrative expenses
     117,449       133,208    
 
(12
%) 
    265,184       267,547    
 
(1
%) 
Research and development expenses
     31,155       36,490    
 
(15
%) 
    66,144       71,550    
 
(8
%) 
Purchased intangibles amortization
     2,618       2,264    
 
16
    5,243       4,545    
 
15
Litigation provision
     514       —      
 
—  
 
    1,180       —      
 
—  
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Operating income
     155,114       177,654    
 
(13
%) 
    223,394       298,805    
 
(25
%) 
Operating income as a % of sales
  
 
29.8
 
 
29.7
   
 
22.7
 
 
26.8
 
Other expense
     (736     (342  
 
115
    (1,110     (867  
 
28
Interest expense, net
     (9,015     (5,577  
 
62
    (19,058     (8,825  
 
116
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Income before income taxes
     145,363       171,735    
 
(15
%) 
    203,226       289,113    
 
(30
%) 
Provision for income taxes
     22,434       27,325    
 
(18
%) 
    26,735       35,717    
 
(25
%) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income
   $ 122,929     $ 144,410    
 
(15
%) 
  $ 176,491     $ 253,396    
 
(30
%) 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net income per diluted common share
   $ 1.98     $ 2.08    
 
(5
%) 
  $ 2.83     $ 3.57    
 
(21
%) 
In the second quarter of 2020, the Company’s sales decreased 13% as compared to the second quarter of 2019 and decreased 12% for the first half of 2020 as compared to the first half of 2019. This decline in sales in the 2020 periods can be attributed to the interruption in business activities caused by the uncertainties from the
COVID-19
pandemic across the world. Foreign currency translation decreased sales by 1% for both the second quarter and first half of 2020. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.
Instrument system sales decreased 23% for the second quarter and 22% for the first half of 2020 as a result of weaker demand for our products by our customers due to interruption of business activities and the uncertainty caused by the
COVID-19
pandemic. Foreign currency translation decreased instrument system sales by 1% for the first half of 2020. Recurring revenues (combined sales of precision chemistry consumables and services) decreased 4% and 3% for the second quarter and first half of 2020, respectively, also as a result of interruption of business activities and the uncertainty caused by the
COVID-19
pandemic. Chemistry consumable sales decreased 5% and 4% in the second quarter and first half of 2020, respectively, while service sales declined 3% and 2% in the second quarter and first half of 2020, respectively. Recurring revenues were negatively impacted by foreign currency translation which lowered sales by 1% in both the second quarter and first half of 2020, as well as the first half of 2020 having one less calendar day as compared to the first half of 2019.
In both the second quarter and first half of 2020, the Company’s sales declined across all major geographies. The broad-based decline in sales was a result of the weaker demand and disruption of business activities caused be the
COVID-19
lockdowns. In the second quarter of 2020, the Company’s sales decreased 13% in Asia, 15% in the Americas, and 11% in Europe. For the first half of 2020, the Company’s sales decreased 16% in Asia, 11% in the Americas, and 5% in Europe. Foreign currency translation decreased Asia’s sales by 1% in both the second quarter and first half of 2020 and decreased Europe’s sales by 2% in both the second quarter and first half of 2020.
In the second quarter of 2020, the Company’s sales decreased 20% in China, 14% in the U.S., 4% in Asia Other, and 10% in Japan, with foreign currency translation negatively impacting Asia Other sales by 1% and benefiting Japan sales by 1%. In the first half of 2020, sales decreased 32% in China, 9% in the U.S., 2% in Asia Other and 4% in Japan, with foreign currency translation negatively impacting China sales by 1%, Asia Other sales by 2%, and benefiting Japan sales by 1%.
 
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Table of Contents
Sales in China declined 20% in the second quarter of 2020, improving from the 48% decline experienced in the first quarter of 2020, as the
COVID-19
business restrictions in China were slowly lifted. Excluding China, the Company’s sales in the first half of 2020 declined 7%, with foreign currency translation negatively impacting sales by 1%.
Sales to pharmaceutical customers decreased 11% for the second quarter and 9% for the first half of 2020, primarily due to the disruption in business activities caused by
COVID-19,
with the effect of foreign currency translation decreasing sales by 1% for both the second quarter and first half of 2020. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 14% in the second quarter and 11% in the first half of 2020, primarily due to lower demand caused by the
COVID-19
pandemic, with the effect of foreign currency translation decreasing sales by 1% for both the second quarter and first half of 2020. Similarly, TA sales declined 20% and 14% in the second quarter and first half of 2020, respectively. For the first half of 2020, the most significant decline in academic and governmental sales occurred in China where sales were 48% lower than the comparable 2019 period on mandated governmental spending reductions. Combined sales to academic and governmental customers decreased 22% and 23% in the second quarter and first half of 2020, respectively, as governmental customers adjusted their spending to mitigate the effects of the
COVID-19
pandemic. Foreign currency translation decreased academic and governmental sales by 1% for both the second quarter and first half of 2020. Sales to our academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.
Operating income decreased 13% and 25% for the second quarter and first half of 2020, respectively. The decreases were primarily a result of the decline in sales volumes caused by the
COVID-19
pandemic and were somewhat mitigated by a series of cost reduction actions that included salary reductions, furloughs and reductions in
non-essential
spending that increased operating income by approximately $60 million for the first half of 2020 versus our operating plan. In addition, operating income in the second quarter and first half of 2020 also included $3 million and $21 million, respectively, of severance-related costs in connection with a reduction in workforce and lease termination costs. The Company’s plan was to reduce its expenses by approximately $100 million compared to our internal operating plan during 2020 to improve its financial position and liquidity to mitigate the impact of the decline in sales caused by
COVID-19.
The Company was able to realize approximately 60% of the cost action and restructuring savings in the first half of 2020 and the Company anticipates the remaining 40% of this savings plan will be achieved in the second half of 2020 when the Company currently expects its spending to gradually return to
pre-COVID-19
levels. This plan reflects our core assumptions that the business moves through the recovery phase, and business conditions improve in the second half of 2020; however, our plan will be adjusted accordingly depending on the pace of the recovery.
The Company generated $350 million and $303 million of net cash flows from operations in the first half of 2020 and 2019, respectively. This increase in operating cash flow was primarily a result of the $54 million reduction in expense from the cost actions implemented during the second quarter of 2020.
Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $97 million and $65 million in the first half of 2020 and 2019, respectively. In January of 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively “Andrew Alliance”), for $80 million, net of cash acquired. The company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. This acquisition is not expected to have a material effect on the Company’s sales and expenses. The cash flows from investing activities in the first half of 2020 also included $43 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $123 million on this facility through the end of the first half of 2020 and anticipates spending a total of $215 million to build and equip this new
state-of-the-art
manufacturing facility. Due to the uncertain business conditions caused by the
COVID-19
pandemic, in the second quarter of 2020 the Company temporarily slowed down the remaining construction and buildout of this facility.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. During the first half of 2020 and 2019, the Company repurchased $167 million and $1.3 billion of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
 
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Table of Contents
Results of Operations
Sales by Geography
Geographic sales information is presented below for the three and six months ended June 27, 2020 and June 29, 2019 (dollars in thousands):
 
    
Three Months Ended
   
Six Months Ended
 
    
June 27,
2020
    
June 29,
2019
    
%
change
   
June 27,
2020
    
June 29,
2019
    
%
change
 
Net Sales:
                
Asia:
                
China
   $ 89,816      $ 112,796     
 
(20
%) 
  $ 137,047      $ 202,887     
 
(32
%) 
Japan
     41,230        45,958     
 
(10
%) 
    86,319        89,462     
 
(4
%) 
Asia Other
     77,163        80,081     
 
(4
%) 
    143,923        146,998     
 
(2
%) 
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Asia
     208,209        238,835     
 
(13
%) 
    367,289        439,347     
 
(16
%) 
Americas:
                
United States
     148,928        173,940     
 
(14
%) 
    292,826        323,097     
 
(9
%) 
Americas Other
     25,854        32,835     
 
(21
%) 
    54,132        65,546     
 
(17
%) 
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total Americas
     174,782        206,775     
 
(15
%) 
    346,958        388,643     
 
(11
%) 
Europe
     136,993        153,552     
 
(11
%) 
    270,676        285,034     
 
(5
%) 
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total net sales
   $ 519,984      $ 599,162     
 
(13
%) 
  $ 984,923      $ 1,113,024     
 
(12
%) 
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
In the second quarter and first half of 2020, the
COVID-19
pandemic disrupted businesses throughout the world and negatively impacted the Company’s sales across all major geographies. Sales in China declined 20% and 32% in the second quarter and first half of 2020, respectively, and sales in the U.S. declined 14% and 9% in the second quarter and first half of 2020, respectively, due to the
COVID-19
pandemic.
Net sales by customer class are presented below for the three and six months ended June 27, 2020 and June 29, 2019 (dollars in thousands):
 
    
Three Months Ended
   
Six Months Ended
 
    
June 27,
2020
    
June 29,
2019
    
%
change
   
June 27,
2020
    
June 29,
2019
    
%
change
 
Pharmaceutical
   $ 311,018      $ 350,145     
 
(11
%) 
  $ 583,581      $ 644,657     
 
(9
%) 
Industrial
     152,110        176,109     
 
(14
%) 
    295,464        331,327     
 
(11
%) 
Academic and governmental
     56,856        72,908     
 
(22
%) 
    105,878        137,040     
 
(23
%) 
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total net sales
   $ 519,984      $ 599,162     
 
(13
%) 
  $ 984,923      $ 1,113,024     
 
(12
%) 
  
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
In the second quarter and first half of 2020, the decline in sales to pharmaceutical customers was primarily due to the disruption in business activities caused by
COVID-19,
despite increased demand for our products and services from certain pharmaceutical customers who are involved with
COVID-19
diagnostic testing and the development of new drugs and therapies. Foreign currency translation decreased sales to pharmaceutical customers by 1% in both the second quarter and first half of 2020. The decline in sales to industrial customers in the quarter was primarily due to the lower demand caused by
the COVID-19 pandemic.
Similarly, TA sales declined of 20% and 14% in the second quarter and first half of 2020, respectively. The decreases in sales to academic and governmental customers were broad-based across all product classes as governmental customers adjusted their spending to mitigate the effects of the
COVID-19 pandemic.
 
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Table of Contents
Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the three and six months ended June 27, 2020 and June 29, 2019 (dollars in thousands):
 
    
Three Months Ended
 
    
June 27, 2020
    
% of
Total
   
June 29, 2019
    
% of
Total
   
% change
 
Waters instrument systems
   $ 181,399     
 
39
  $ 238,777     
 
45
 
 
(24
%) 
Chemistry consumables
     95,105     
 
20
    100,292     
 
19
 
 
(5
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total Waters product sales
     276,504     
 
59
    339,069     
 
64
 
 
(18
%) 
Waters service
     189,205     
 
41
    192,048     
 
36
 
 
(1
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total Waters net sales
   $ 465,709     
 
100
  $ 531,117     
 
100
 
 
(12
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Six Months Ended
 
    
June 27, 2020
    
% of
Total
   
June 29, 2019
    
% of
Total
   
% change
 
Waters instrument systems
   $ 324,228     
 
37
  $ 423,389     
 
43
 
 
(23
%) 
Chemistry consumables
     192,350     
 
22
    199,545     
 
20
 
 
(4
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total Waters product sales
     516,578     
 
59
    622,934     
 
63
 
 
(17
%) 
Waters service
     363,342     
 
41
    368,097     
 
37
 
 
(1
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total Waters net sales
   $ 879,920     
 
100
  $ 991,031     
 
100
 
 
(11
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
The effect of foreign currency translation decreased Waters sales by 1% for the first half of 2020. Precision chemistry consumables sales decreased in the second quarter and first half of 2020, primarily driven by decreased sales in the U.S., as the demand for chemistry consumables was impacted by the disruption and uncertainty caused by
the COVID-19 pandemic,
while demand in China increased in the second quarter which resulted in 23% growth in the quarter and 5% growth for the first half of 2020. Waters service sales decreased on lower service demand billings due
to COVID-19 business
closures, particularly in Europe and India. Waters recurring revenues were also negatively impacted by one less calendar day in the first half of 2020 and the negative impact of foreign currency translation, which lowered sales by 1% in both the second quarter and first half of 2020. Waters instrument system sales (LC and MS technology-based) decreased in all geographical regions, primarily due to lower sales as a result of weaker demand for our products and services by our customers due to the disruption and uncertainty caused by
the COVID-19 pandemic.
In the second quarter of 2020, Waters sales decreased 8% in Europe, 13% in the U.S. and 21% in China due to the impact of the
COVID-19
pandemic. Waters sales in Europe and China were also negatively impacted by the effect of foreign currency translation by 2% and 1%, respectively. In the first half of 2020, Waters sales decreased 3% in Europe, 9% in the U.S. and 34% in China due to the impact of the
COVID-19
pandemic. Waters sales in Europe and China were also both negatively impacted by the effect of foreign currency translation by 2%.
 
35

Table of Contents
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the three and six months ended June 27, 2020 and June 29, 2019 (dollars in thousands):
 
    
Three Months Ended
 
    
June 27, 2020
    
% of
Total
   
June 29, 2019
    
% of
Total
   
% change
 
TA instrument systems
   $ 38,416     
 
71
  $ 48,196     
 
71
 
 
(20
%) 
TA service
     15,859     
 
29
    19,849     
 
29
 
 
(20
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total TA net sales
   $ 54,275     
 
100
  $ 68,045     
 
100
 
 
(20
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
 
    
Six Months Ended
 
    
June 27, 2020
    
% of
Total
   
June 29, 2019
    
% of
Total
   
% change
 
TA instrument systems
   $ 72,525     
 
69
  $ 84,834     
 
70
 
 
(15
%) 
TA service
     32,478     
 
31
    37,159     
 
30
 
 
(13
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total TA net sales
   $ 105,003     
 
100
  $ 121,993     
 
100
 
 
(14
%) 
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
The decline in TA instrument system and service sales in the second quarter and first half of 2020 was primarily due to lower customer demand due to the
COVID-19
pandemic. The effect of foreign currency translation had minimal impact on sales for the second quarter of 2020 and decreased TA sales 1% for the first half of 2020.
TA sales declined in all major regions of the world due to the impact from
COVID-19,
except for Asia Other, where sales grew over 10% in both the second quarter and first half of 2020.
Cost of Sales
Cost of sales for the second quarter and first half of 2020 decreased 15% and 10%, respectively, primarily due to a decrease in sales volume from lower customer demand caused by the
COVID-19
pandemic, which was mitigated by a $12 million reduction of planned expenses from salary reductions, furloughs and reductions in
non-essential
spending. In addition, cost of sales was also negatively impacted by foreign currency translation. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to negatively impact gross profit for the remainder of 2020. To date, the Company has not had significant issues with its supply chain; however, the prolonged impact of
COVID-19
on businesses could negatively impact our suppliers’ ability to deliver goods to us, as well as possibly increase the cost of those goods used in our manufacturing operations.
Selling and Administrative Expenses
Selling and administrative expenses decreased 12% and 1% for the second quarter and first half of 2020, respectively. Selling and administrative expenses decreased in these periods primarily from the $33 million reduction in expenses from salary reductions, furloughs and reductions in
non-essential
spending. These savings were partially offset by $3 million and $21 million for the second quarter and first half of 2020, respectively, of
one-time
severance-related costs in connection with a reduction in workforce and lease-terminations. Excluding these expenses, selling and administrative expenses declined 9%
year-to-date.
The Company anticipates incurring approximately $6 million of severance-related and lease termination expenses over the remainder of 2020. In addition, the effect of foreign currency translation decreased selling and administrative expenses by 1% for both the second quarter and first half of 2020.
As a percentage of net sales, selling and administrative expenses were 22.6% and 26.9% for the second quarter of 2020 and
year-to-date,
respectively, and 22.2% and 24.0% for the second quarter and first half of 2019, respectively. The increase in this percentage is attributable to the decline in sales and the $21 million
of one-time severance-related
and lease termination costs.
 
36

Table of Contents
Research and Development Expenses
Research and development expenses decreased 15% and 8% in the second quarter and first half of 2020, respectively. These expenses decreased in these periods primarily from the $9 million reduction in expenses from salary reductions, furloughs and reductions in
non-essential
spending in the second quarter of 2020.
Interest Expense, Net
The increases in net interest expense in the second quarter and first half of 2020 were primarily attributable to higher outstanding debt balances and lower interest income on lower cash, cash equivalents and investment balances.
Provision for Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of June 27, 2020. The Company has a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the half of 2020 and 2019 by $7 million and $9 million, respectively, and increased the Company’s net income per diluted share by $0.11 and $0.13, respectively.
The Company’s effective tax rate for the second quarter of 2020 and 2019 was 15.4% and 15.9%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts
of pre-tax income
recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the first half of 2020 and 2019 was 13.2% and 12.4%, respectively. The effective tax rate for the first half of 2020 included a $5 million income tax benefit related to certain restructuring charges and a $2 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 2.4 percentage points and 1.2 percentage points for the first half of 2020, respectively. The effective tax rate for the first half of 2019 included a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act of 2017 and a $7 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.0 percentage point and 2.3 percentage points for the first half of 2019, respectively. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
 
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Table of Contents
Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
 
    
Six Months Ended
 
    
June 27, 2020
    
June 29, 2019
 
Net income
   $ 176,491      $ 253,396  
Depreciation and amortization
     60,203        53,615  
Stock-based compensation
     18,122        19,255  
Deferred income taxes
     (777      1,632  
Change in accounts receivable
     86,978        52,508  
Change in inventories
     (27,089      (62,200
Change in accounts payable and other current liabilities
     34,714        (10,439
Change in deferred revenue and customer advances
     37,558        54,672  
Effect of the 2017 Tax Cuts & Jobs Act
     —          (3,229
Other changes
     (35,754      (56,407
  
 
 
    
 
 
 
Net cash provided by operating activities
     350,446        302,803  
Net cash (used in) provided by investing activities
     (192,335      785,063  
Net cash used in financing activities
     (159,366      (1,294,734
Effect of exchange rate changes on cash and cash equivalents
     4,576        (1,414
  
 
 
    
 
 
 
Increase (decrease) in cash and cash equivalents
   $ 3,321      $ (208,282
  
 
 
    
 
 
 
Cash Flow from Operating Activities
Net cash provided by operating activities was $350 million and $303 million during the six months ended June 27, 2020 and June 29, 2019, respectively. This increase in operating cash flow was primarily a result of the $54 million reduction in expense from the cost actions implemented in the second quarter of 2020. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:
 
   
The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding increased to 87 days at June 27, 2020 as compared to 79 days at June 29, 2019.
 
   
The changes in inventory were primarily attributable to the reduction in the inventory build plan to adjust inventory levels for lower anticipated sales volume due to the
COVID-19
pandemic.
 
   
The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation.
 
   
Net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts.
 
   
Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities.
Cash Flow from Investing Activities
Net cash used in investing activities totaled $192 million in the six months ended June 27, 2020 compared to net cash provided by investing activities that totaled $785 million in the six months ended June 29, 2019. Additions to fixed assets and capitalized software were $97 million and $65 million in the six months ended June 27, 2020 and June 29, 2019, respectively. In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in the U.S. The Company anticipates spending an estimated $215 million to build and equip this new
state-of-the-art
manufacturing facility, which will be paid for with existing cash, investments and debt capacity. The Company incurred $38 million of costs associated with the construction of this facility during the six months ended June 27, 2020. The Company has incurred $123 million on this facility through the end of the second quarter of 2020. Due to the uncertain business conditions caused by the
COVID-19
pandemic, the Company temporarily slowed down the completion of the remaining construction and buildout of this facility.
 
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During the six months ended June 27, 2020 and June 29, 2019, the Company purchased $17 million and $36 million of investments, respectively, while $2 million and $891 million of investments matured, respectively, and were used for financing activities described below.
On January 15, 2020, the Company acquired all of the outstanding stock of Andrew Alliance, for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration.
Cash Flow from Financing Activities
During the six months ended June 27, 2020, the Company’s net debt borrowings increased by $15 million while they remained flat during the six months ended June 29, 2019. During the six months ended June 29, 2019, the Company reduced its outstanding debt using cash repatriated under the 2017 Tax Act. As of June 27, 2020, the Company had a total of $1.7 billion in outstanding debt, which consisted of $960 million in outstanding senior unsecured notes and $740 million borrowed under a term loan under the credit agreement dated November 2017 (“2017 Credit Agreement”). As of June 27, 2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.1 billion after outstanding letters of credit. As of June 27, 2020, the Company was in compliance with all debt covenants.
In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.
In 2018 and 2019, the Company entered into a total of $560 million of
U.S.-to-Euro
interest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $12 million annually over the three-year term of the agreements.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This new program replaced the remaining amounts available from the
pre-existing
program. During the first half of 2020 and 2019, the Company repurchased $167 million and $1.3 billion, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $9 million and $8 million of common stock related to the vesting of restricted stock units during both the six months ended June 27, 2020 and June 29, 2019, respectively.
The Company received $15 million and $30 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during the six months ended June 27, 2020 and June 29, 2019, respectively.
The Company had cash and cash equivalents of $356 million as of June 27, 2020. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $288 million held by foreign subsidiaries at June 27, 2020, of which $204 million was held in currencies other than U.S. dollars. While the Company believes it has sufficient levels of cash flow and access to its existing cash and cash equivalents, as well as the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program in the U.S., we have temporarily suspended our share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
Management believes, despite the impact of
COVID-19
on our business, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months.
 
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Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends
A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020. The Company reviewed its contractual obligations and commercial commitments as of June 27, 2020 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form
10-K.
From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
During fiscal year 2020, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans, excluding the U.S. defined benefit pension plans.
The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.
Off-Balance
Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or
off-balance
sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
Critical Accounting Policies and Estimates
In the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation, pension and other postretirement benefit obligations, stock-based compensation and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the six months ended June 27, 2020. The Company did not make any changes in those policies during the six months ended June 27, 2020.
New Accounting Pronouncements
Please refer to Note 14, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
 
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Special Note Regarding Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form
10-Q,
including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of the ongoing
COVID-19
pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the 2017 Tax Act in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form
10-Q.
Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:
 
 
Risks related to the effects of the
COVID-19
pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases and volatility in demand for our products.
 
 
Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its
non-U.S.
operations, especially when a currency weakens against the U.S. dollar.
 
 
Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of the
COVID-19
pandemic; new or proposed tariffs or trade regulations or changes in the interpretation or enforcement of existing regulations; the U.K. voting to exit the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors or geographies, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service.
 
 
Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain
end-markets;
ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.
 
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Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives.
 
 
Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.
 
 
The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.
Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form
10-Q
and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.
Item 3:
 Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of June 27, 2020, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.
The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of June 27, 2020 and December 31, 2019, $288 million out of $356 million and $249 million out of $337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $204 million out of $356 million and $176 million out of $337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at June 27, 2020 and December 31, 2019, respectively. As of June 27, 2020, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.
Assuming a hypothetical adverse change of 10% in
year-end
exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of June 27, 2020 would decrease by approximately $18 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ (deficit) equity.
There have been no other material changes in the Company’s market risk during the six months ended June 27, 2020. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.
Item 4:
 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form
10-Q.
Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 27, 2020 (1) to ensure that information required to be disclosed by the
 
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Company, including its consolidated subsidiaries, in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, to allow timely decisions regarding the required disclosure and (2) to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
No change was identified in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended June 27, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II: 
Other Information
Item 1:
 Legal Proceedings
There have been no material changes in the Company’s legal proceedings during the three months ended June 27, 2020 as described in Item 3 of Part I of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.
Item 1A:
 Risk Factors
Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020. The Company reviewed its risk factors as of June 27, 2020 and determined that there were no material changes from the ones set forth in the Form
10-K,
other than those included below. Note, however, the discussion under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form
10-Q.
These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.
The Company’s business has been and may continue to be negatively affected by outbreaks of disease, such as epidemics or pandemics, including the ongoing
COVID-19
pandemic
.
Outbreaks of disease, such as epidemics or pandemics, have and could continue to negatively affect the Company’s business. Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global
COVID-19
pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared
COVID-19
a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump announced a National Emergency relating to the disease. Since then,
COVID-19
has continued to spread throughout the U.S. and globally. The
COVID-19
pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic. Many countries, including the U.S. have implemented measures such as quarantine,
shelter-in-place,
curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations. Such measures have had and are expected to continue to have adverse impacts on the U.S. and foreign economies of uncertain severity and duration and have had and may continue to have a negative impact on the Company’s operations, including the Company’s sales, supply chain and cash flow. Additionally, the widespread pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce the Company’s ability to access capital.
The
COVID-19
pandemic also has the potential to significantly impact our supply chain if our manufacturing facilities or those of third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. We may also see disruptions or delays in shipments of certain materials or components of our products.
As a result of the ongoing
COVID-19
pandemic, the Company has transitioned the majority of its workforce to a temporary remote working model, which may result in the Company experiencing lower workforce efficiency and productivity, which in turn may adversely affect the Company’s business, results of operations and financial condition.
 
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As Company employees work from home and access the Company’s system remotely, the Company may be subject to heightened security risks, including the risks of cyber attacks. Additionally, if any of the Company’s key management employees are unable to perform their duties for a period of time, including as the result of illness, the Company’s business, results of operations and financial condition could be adversely affected.
The Company cannot reasonably estimate the length or severity of the
COVID-19
pandemic or the related response, or the extent to which the disruption may continue to impact the Company’s business, financial position, results of operations and cash flows. Ultimately, the
COVID-19
pandemic could have a material adverse impact on the Company’s business, financial positions, results of operations and cash flows.
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company during the three months ended June 27, 2020 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):
 
Period
  
Total Number
of Shares
Purchased (1)
    
Average
Price Paid
per Share
    
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs
    
Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under
the Programs (2)
 
March 29, 2020 to April 25, 2020
     —        $ —          —        $ 1,524,905  
April 26, 2020 to May 23, 2020
     —        $ —          —        $ 1,524,905  
May 24, 2020 to June 27, 2020
     —        $ —          —        $ 1,524,905  
  
 
 
       
 
 
    
Total
     —        $ —          —        $ 1,524,905  
     
 
 
       
 
 
    
 
(1)
The Company repurchased less than one thousand shares of common stock at a cost of less than $1 million related to the vesting of restricted stock during the three months ended June 27, 2020.
(2)
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a
two-year
period. This new program replaced the remaining amounts available under the
pre-existing
authorization. During the second quarter of 2020, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
 
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Item 6:
 Exhibits
 
Exhibit
Number
  
Description of Document
10.1    Chief Executive Officer Transition and Separation Agreement.
10.2    President and Chief Executive Employment Agreement.
10.3    Change of Control/Severance Agreement, dated July 14, 2020 between Waters Corporation and Udit Batra.
10.4    Employee Form of Stock Option Award Agreement under the Waters Corporation 2020 Equity Incentive Plan.
10.5    Director Form of Stock Option Award Agreement under the Waters Corporation 2020 Equity Incentive Plan.
10.6    Form of RSU Agreement under the Waters Corporation 2020 Equity Incentive Plan.
10.7    CEO Form of PSU Agreement under the Waters Corporation 2020 Equity Incentive Plan.
10.8    Employee (non-CEO) Form of PSU Agreement under the Waters Corporation 2020 Equity Incentive Plan.
10.9    Director Form of RSA Agreement under the Waters Corporation 2020 Equity Incentive Plan.
10.10    Waters Corporation 2020 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company’s Form S-8 dated June 8, 2020 (File No. 333-239020)).
31.1    Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
32.2    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
101    The following materials from Waters Corporation’s Quarterly Report on Form
10-Q
for the quarter ended June 27, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).
104    Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).
 
(*)
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference.
 
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
WATERS CORPORATION
/s/     Sherry L. Buck        
Sherry L. Buck
Senior Vice President and
Chief Financial Officer
Date: July 29, 2020
 
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