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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 29, 2019
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 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 26, 2019:
66,759,444
 
 
 
WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page
 
PART I
 
FINANCIAL INFORMATION
   
 
Item 1.
     
 
     
3
 
     
4
 
     
5
 
     
6
 
     
7
 
     
8
 
     
9
 
     
10
 
Item 2.
     
32
 
Item 3.
     
42
 
Item 4.
     
42
 
             
PART II
     
 
Item 1.
     
43
 
Item 1A.
     
43
 
Item 2.
     
43
 
Item 6.
     
44
 
     
45
 
 
 
 
Item 1:
Financial Statements
 
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
               
 
June 29, 2019
 
December 31, 2018
 
 
 
(In thousands, except per share data)
 
ASSETS
 
Current assets:
 
 
Cash and cash equivalents
 
$
587,998
 
$
796,280
 
Investments
 
 
87,775
 
 
938,944
 
Accounts receivable, net
 
 
518,520
 
 
568,316
 
Inventories
 
 
351,552
 
 
291,569
 
Other current assets
 
 
74,556
 
 
68,054
 
   
 
   
 
 
 
Total current assets
 
 
1,620,401
 
 
2,663,163
 
Property, plant and equipment, net
 
 
368,878
 
 
343,083
 
Intangible assets, net
 
 
244,094
 
 
246,902
 
Goodwill
 
 
355,890
 
 
355,614
 
Operating lease assets
 
 
91,060
 
 
—  
 
Other assets
 
 
142,599
 
 
118,664
 
   
 
   
 
 
 
Total assets
 
$
2,822,922
 
$
3,727,426
 
   
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Notes payable and debt
 
$
100,295
 
$
178
 
Accounts payable
 
 
67,397
 
 
68,168
 
Accrued employee compensation
 
 
36,464
 
 
64,545
 
Deferred revenue and customer advances
 
 
220,711
 
 
164,965
 
Current operating lease liabilities
 
 
25,106
 
 
—  
 
Accrued treasury stock repurchases
 
 
9,874
 
 
23,005
 
Accrued income taxes
 
 
38,517
 
 
22,943
 
Accrued warranty
 
 
11,583
 
 
12,300
 
Other current liabilities
 
 
101,749
 
 
92,827
 
   
 
   
 
 
 
Total current liabilities
 
 
611,696
 
 
448,931
 
Long-term liabilities:
 
 
Long-term debt
 
 
1,048,394
 
 
1,148,172
 
Long-term income tax liabilities
 
 
393,297
 
 
430,866
 
Long-term operating lease liabilities
 
 
66,713
 
 
—  
 
Long-term portion of retirement benefits
 
 
55,825
 
 
55,853
 
Other long-term liabilities
 
 
90,752
 
 
76,346
 
   
 
   
 
 
 
Total long-term liabilities
 
 
1,654,981
 
 
1,711,237
 
   
 
   
 
 
 
Total liabilities
 
 
2,266,677
 
 
2,160,168
 
Commitments and contingencies (Notes 6, 7, 8 and 12)
 
 
 
 
 
 
   
 
   
 
 
 
Stockholders’ equity:
 
 
Preferred stock, par value $0.01 per share, 5,000 shares authorized,
no
ne issued at June 29, 2019 and December 31, 2018
 
 
  
 
 
—  
 
Common stock, par value $0.01 per share, 400,000 shares authorized, 160,841 and 160,472 shares issued, 67,620 and 73,115 shares outstanding at June 29, 2019 and December 31, 2018, respectively
 
 
1,608
 
 
1,605
 
Additional
paid-in
capital
 
 
1,883,958
 
 
1,834,741
 
Retained earnings
 
 
6,248,601
 
 
5,995,205
 
Treasury stock, at cost, 93,221 and 87,357 shares at June 29, 2019 and December 31, 2018, respectively
 
 
(7,462,826
)
 
(6,146,322
)
Accumulated other comprehensive loss
 
 
(115,096
)
 
(117,971
)
   
 
   
 
 
 
Total stockholders’ equity
 
 
556,245
 
 
1,567,258
 
   
 
   
 
 
 
Total liabilities and stockholders’ equity
 
$
2,822,922
 
$
3,727,426
 
   
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
3
 
 
 
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
                 
 
Three Months Ended
 
 
June 29, 2019
   
June 30, 2018
 
 
(In thousands, except per share data)
 
Revenues:
   
     
 
Product sales
  $
387,265
    $
388,869
 
Service sales
   
211,897
     
207,350
 
                 
Total net sales
   
599,162
     
596,219
 
Costs and operating expenses:
   
     
 
Cost of product sales
   
156,975
     
159,979
 
Cost of service sales
   
92,571
     
83,156
 
Selling and administrative expenses
   
133,208
     
136,645
 
Research and development expenses
   
36,490
     
35,644
 
Purchased intangibles amortization
   
2,264
     
1,602
 
                 
Total costs and operating expenses
   
421,508
     
417,026
 
                 
Operating income
   
177,654
     
179,193
 
Other expense
   
(342
)    
(1,828
)
Interest expense
   
(11,448
)    
(11,692
)
Interest income
   
5,871
     
8,888
 
                 
Income before income taxes
   
171,735
     
174,561
 
Provision for income taxes
   
27,325
     
18,884
 
                 
Net income
  $
144,410
    $
155,677
 
                 
Net income per basic common share
  $
2.09
   
$
2.00
 
Weighted-average number of basic common shares
 
 
68,989
 
 
 
77,833
 
Net income per diluted common share
 
$
2.08
 
 
$
1.98
 
Weighted-average number of diluted common shares and equivalents
 
 
69,494
 
 
 
78,438
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4
 
 
 
 
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
                 
 
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
 
 
(In thousands, except per share data)
 
Revenues:
   
     
 
Product sales
  $
707,768
    $
727,986
 
Service sales
   
405,256
     
398,903
 
                 
Total net sales
   
1,113,024
     
1,126,889
 
Costs and operating expenses:
   
     
 
Cost of product sales
   
289,365
     
300,445
 
Cost of service sales
   
181,212
     
164,111
 
Selling and administrative expenses
   
267,547
     
267,052
 
Research and development expenses
   
71,550
     
70,124
 
Purchased intangibles amortization
   
4,545
     
3,261
 
Litigation settlement
   
     
(1,672
)
                 
Total costs and operating expenses
   
814,219
     
803,321
 
                 
Operating income
   
298,805
     
323,568
 
Other expense
   
(867
)    
(1,482
)
Interest expense
   
(23,011
)    
(25,530
)
Interest income
   
14,186
     
18,554
 
                 
Income before income taxes
   
289,113
     
315,110
 
Provision for income taxes
   
35,717
     
47,482
 
                 
Net income
  $
253,396
    $
267,628
 
                 
Net income per basic common share
  $
3.60
    $
3.42
 
Weighted-average number of basic common shares
   
70,331
     
78,330
 
Net income per diluted common share
  $
3.57
    $
3.39
 
Weighted-average number of diluted common shares and equivalents
   
70,904
     
79,041
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
5
 
 
 
 
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29,
2019
   
June 30,
2018
   
June 29,
2019
   
June 30,
2018
 
 
(In thousands)
   
(In thousands)
 
Net income
 
$
144,410
   
$
155,677
   
$
253,396
   
$
267,628
 
Other comprehensive (loss) income:
   
     
     
     
 
Foreign currency translation
   
(7,031
)    
(47,159
)    
491
     
(23,246
)
Unrealized gains (losses) on investments before income taxes
   
710
     
1,453
     
3,054
     
(1,523
)
Income tax (expense) benefit
   
(157
)    
164
     
(704
)    
257
 
                                 
Unrealized gains (losses) on investments, net of tax
   
553
     
1,617
     
2,350
     
(1,266
)
Retirement liability adjustment before reclassifications
   
(41
)    
669
     
(102
)    
284
 
Amounts reclassified to other income
   
90
     
909
     
183
     
1,816
 
                                 
Retirement liability adjustment before income taxes
   
49
     
1,578
     
81
     
2,100
 
Income tax expense
   
(23
)    
(306
)    
(47
)    
(422
)
                                 
Retirement liability adjustment, net of tax
   
26
     
1,272
     
34
     
1,678
 
Other comprehensive (loss) income
   
(6,452
)    
(44,270
)    
2,875
     
(22,834
)
                                 
Comprehensive income
 
$
137,958
   
$
111,407
   
$
256,271
   
$
244,794
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6
 
 
 
  
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
                 
 
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
 
 
(In thousands)
 
Cash flows from operating activities:
 
 
Net income
  $
253,396
    $
267,628
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
 
Stock-based compensation
   
19,255
     
18,971
 
Deferred income taxes
   
1,632
     
(2,992
)
Depreciation
   
28,704
     
30,585
 
Amortization of intangibles
   
24,911
     
25,251
 
Change in operating assets and liabilities:
   
     
 
Decrease in accounts receivable
   
52,508
     
36,591
 
Increase in inventories
   
(62,200
)    
(33,877
)
Increase in other current assets
   
(11,627
)    
(15,264
)
Increase in other assets
   
(15,060
)    
(2,857
)
Decrease in accounts payable and other current liabilities
   
(10,439
)    
(77,848
)
Increase in deferred revenue and customer advances
   
54,672
     
40,134
 
Effect of the 2017 Tax & Jobs Act
   
(3,229
)    
12,450
 
Decrease in other liabilities
   
(29,720
)    
(22,215
)
                 
Net cash provided by operating activities
   
302,803
     
276,557
 
Cash flows from investing activities:
   
     
 
Additions to property, plant, equipment and software capitalization
   
(65,188
)    
(36,831
)
Investment in unaffiliated companies
   
(4,750
)    
(3,215
)
Purchases of investments
   
(35,523
)    
(513,342
)
Maturities and sales of investments
   
890,524
     
1,759,770
 
                 
Net cash provided by investing activities
   
785,063
     
1,206,382
 
Cash flows from financing activities:
   
     
 
Proceeds from debt issuances
   
363
     
226
 
Payments on debt
   
(245
)    
(850,000
)
Proceeds from stock plans
   
30,129
     
34,845
 
Purchases of treasury shares
   
(1,329,635
)    
(553,144
)
Proceeds from (payments for) derivative contracts
   
4,654
     
(2,158
)
                 
Net cash used in financing activities
   
(1,294,734
)    
(1,370,231
)
Effect of exchange rate changes on cash and cash equivalents
   
(1,414
)    
(12,823
)
                 
(Decrease) increase in cash and cash equivalents
   
(208,282
)    
99,885
 
Cash and cash equivalents at beginning of period
   
796,280
     
642,319
 
                 
Cash and cash equivalents at end of period
  $
587,998
    $
742,204
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
7
 
 
 
 
 
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(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 March 31, 2018
   
160,200
    $
1,602
    $
1,779,142
    $
5,513,362
    $
(5,090,581
)   $
(88,631
  $
2,114,894
 
Net income
   
—  
     
—  
     
—  
     
155,677
     
—  
     
—  
     
155,677
 
Other comprehensive loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
(44,270
)    
(44,270
)
Issuance of common stock for employees:
   
     
     
     
     
     
     
 
Employee Stock Purchase Plan
   
14
     
—  
     
2,486
     
—  
     
—  
     
—  
     
2,486
 
Stock options exercised
   
83
     
1
     
8,071
     
—  
     
—  
     
—  
     
8,072
 
Treasury stock
   
—  
     
—  
     
—  
     
—  
     
(270,774
)    
—  
     
(270,774
)
Stock-based compensation
   
1
     
     
9,009
     
—  
     
—  
     
—  
     
9,009
 
                                                         
Balance June 30, 2018
   
160,298
    $
1,603
    $
1,798,708
    $
5,669,039
    $
(5,361,355
)   $
(132,901
)   $
1,975,094
 
                                                         
                                           
 
Number
of
Common
Shares
   
Common
Stock
   
Additional
Paid-In

Capital
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income (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
 
                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
8
 
 
  
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(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, 2017
   
159,845
    $
1,598
    $
1,745,088
    $
5,405,380
    $
(4,808,211
)   $
(110,067
)   $
2,233,788
 
Adoption of new accounting pronouncement
   
—  
     
—  
     
—  
     
(3,969
)    
—  
     
—  
     
(3,969
)
Net income
   
—  
     
—  
     
—  
     
267,628
     
—  
     
—  
     
267,628
 
Other comprehensive loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
(22,834
)    
(22,834
)
Issuance of common stock for employees:
   
     
     
     
     
     
     
 
Employee Stock Purchase Plan
   
24
     
—  
     
4,051
     
—  
     
—  
     
—  
     
4,051
 
Stock options exercised
   
305
     
3
     
30,778
     
—  
     
—  
     
—  
     
30,781
 
Treasury stock
   
—  
     
—  
     
—  
     
—  
     
(553,144
)    
—  
     
(553,144
)
Stock-based compensation
   
124
     
2
     
18,791
     
—  
     
—  
     
—  
     
18,793
 
                                                         
Balance June 30, 2018
   
160,298
    $
1,603
    $
1,798,708
    $
5,669,039
    $
(5,361,355
)   $
(132,901
)   $
1,975,094
 
                                                         
                                           
 
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
 
                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
9  
 
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 2019 and 2018 ended on June 29, 2019 and June 30, 2018, 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 (“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 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/A
for the year ended December 31, 2018, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2019.
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.
 
10
 
 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
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 29, 2019 and December 31, 2018, $421 million out of $676 million and $471 million out of $1,735 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $256 million out of $676 million and $251 million out of $1,735 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at June 29, 2019 and December 31, 2018, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
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 allowance for doubtful accounts is the best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on a number of factors, including historical experience and the customer’s credit-worthiness. The allowance for doubtful accounts is reviewed on at least a quarterly basis.
Past due balances over 90 days and over a specified amount are reviewed individually for collectibility.
Account balances are charged against the allowance when the Company determines it is probable that the receivable will not be recovered. The Company does not have any
off-balance
sheet credit exposure related to its customers. Historically, the Company has not experienced significant bad debt losses.
The following is a summary of the activity of the Company’s allowance for doubtful accounts for the three and six months ended June 29, 2019 and June 30, 2018 (in thousands):
                                 
 
Balance at
   
   
   
Balance at
 
 
Beginning
   
   
   
End of
 
 
of Period
   
Additions
   
Deduction
   
Period
 
Allowance for Doubtful Accounts
   
     
     
     
 
June 29, 2019
  $
7,663
    $
3,793
    $
(3,426
)   $
8,030
 
June 30, 2018
  $
6,109
    $
1,825
    $
(1,778
)   $
6,156
 
 
 
 
 
 
 
 
 
 
Other Investments
During the six months ended June 29, 2019 and June 30, 2018, the Company made investments in unaffiliated companies of
$5 
million and $
3
 million, respectively.
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 29, 2019 and December 31, 2018. 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.
 
11
 
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 29, 2019 (in thousands):
                                 
 
   
Quoted Prices
   
   
 
 
   
in Active
   
Significant
   
 
 
   
Markets
   
Other
   
Significant
 
 
Total at
   
for Identical
   
Observable
   
Unobservable
 
 
June 29,
   
Assets
   
Inputs
   
Inputs
 
 
2019
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
   
     
     
     
 
U.S. Treasury securities
  $
66,225
    $
    $
66,225
    $
 
Corporate debt securities
   
94,335
     
     
94,335
     
 
Time deposits
   
57,964
     
     
57,964
     
 
Waters 401(k) Restoration Plan assets
   
33,278
     
33,278
     
     
 
Foreign currency exchange contracts
   
164
     
     
164
     
 
Interest rate cross-currency swap agreements
   
1,098
     
     
1,098
     
 
                                 
Total
  $
253,064
    $
33,278
    $
219,786
    $
 
                                 
Liabilities:
   
     
     
     
 
Contingent consideration
  $
2,707
    $
    $
    $
2,707
 
Foreign currency exchange contracts
   
292
     
     
292
     
 
                                 
Total
  $
2,999
    $
    $
292
    $
2,707
 
                                 
 
 
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):
                                 
 
   
Quoted Prices
   
   
 
 
   
in Active
   
Significant
   
 
 
   
Markets
   
Other
   
Significant
 
 
Total at
   
for Identical
   
Observable
   
Unobservable
 
 
December 31,
   
Assets
   
Inputs
   
Inputs
 
 
2018
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
   
     
     
     
 
U.S. Treasury securities
  $
164,315
    $
—  
    $
164,315
    $
—  
 
Foreign government securities
   
3,463
     
—  
     
3,463
     
—  
 
Corporate debt securities
   
723,059
     
—  
     
723,059
     
—  
 
Time deposits
   
108,638
     
—  
     
108,638
     
—  
 
Waters 401(k) Restoration Plan assets
   
33,104
     
33,104
     
—  
     
—  
 
Foreign currency exchange contracts
   
503
     
—  
     
503
     
—  
 
Interest rate cross-currency swap agreements
   
1,093
     
     
1,093
     
 
                                 
Total
  $
1,034,175
    $
33,104
    $
1,001,071
    $
—  
 
                                 
Liabilities:
   
     
     
     
 
Contingent consideration
  $
2,476
    $
—  
    $
—  
    $
2,476
 
Foreign currency exchange contracts
   
224
     
—  
     
224
     
—  
 
                                 
Total
  $
2,700
    $
—  
    $
224
    $
2,476
 
                                 
 
 
 
 
12
 
 
  
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 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 and $2 million at June 29, 2019 and December 31, 2018, respectively, 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 $510 million at both June 29, 2019 and December 31, 2018, 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 $512 million and $502 million at June 29, 2019 and December 31, 2018, 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.
 
13
 
 
 
 
CONDENSED N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(unaudited) 
– (Continued)
 
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.
Interest Rate Cross-Currency Swap Agreements
In 2018, the Company entered into
three-year
interest rate cross-currency swap derivative agreements with an aggregate notional value of $300 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
In 2019, the Company entered into additional interest rate cross-currency swap derivative agreements with an aggregate notional value of $110 million and contract terms between one and three years. 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’ 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 29, 2019
   
December 31, 2018
 
 
Notional Value
   
Fair Value
   
Notional Value
   
Fair Value
 
Foreign currency exchange contracts:
   
     
     
     
 
Other current assets
  $
31,270
    $
164
    $
112,212
    $
503
 
Other current liabilities
  $
124,346
    $
292
    $
40,175
    $
224
 
Interest rate cross-currency swap agreements:
   
     
     
     
 
Other assets
  $
410,000
    $
1,098
    $
300,000
    $
1,093
 
Accumulated other comprehensive income
   
    $
(1,098
)    
    $
(1,093
)
 
 
 
 
 
 
 
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 29,
2019
   
June 30,
2018
   
June 29,
2019
   
June 30,
2018
 
 
 
Classification
 
Foreign currency exchange contracts:
 
 
 
     
     
     
   
Realized gains (losses) on closed contracts
 
 
Cost of sales
 
 
$
136
    $
(4,096
)   $
(407
)   $
(2,158
)
Unrealized losses on open contracts
 
 
Cost of sales
 
 
 
(3,044
)    
(105
)    
(2,518
)    
(1,092
)
 
 
 
   
 
                             
Cumulative net pre-tax losses
 
 
Cost of sales
 
 
$
(2,908
)   $
(4,201
)   $
(2,925
)   $
(3,250
)
 
 
 
   
 
                             
Interest rate cross-currency swap agreements:
 
 
 
     
     
     
   
Interest earned
 
 
Interest income
 
 
$
2,923
    $
—  
    $
5,150
    $
—  
 
Unrealized (losses) gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on open contracts
 
 
Stockholders’ equity
 
 
$
(6,022
)   $
—  
    $
1,098
    $
—  
 
 
 
 
 
 
 
 
 
14
 

 
CONDENSED N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(unaudited) 
– (Continued)
 
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 new program replaced the remaining amounts available from the
pre-existing
program. During the six months ended June 29, 2019 and June 30, 2018, the Company repurchased 5.9 million and 2.7 million shares of the Company’s outstanding common stock at a cost of $1.3 billion and $546 million, respectively, under the January 2019 authorization and other previously announced programs. As of June 29, 2019, the Company had repurchased an aggregate of 5.1 million shares at a cost of $1.2 billion under the January 2019 repurchase program and had a total of $2.8 billion authorized for future repurchases. In addition, the Company repurchased $8 million of common stock related to the vesting of restricted stock units during both the six months ended June 29, 2019 and June 30, 2018, respectively. 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.
As of June 29, 2019, the Company accrued $10 
million as a result of treasury stock purchases that were settled in the third quarter of 2019.
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 three and six months ended June 29, 2019 and June 30, 2018 (in thousands):
                                 
 
Balance at
   
   
   
Balance at
 
 
Beginning
   
Accruals for
   
Settlements
   
End of
 
 
of Period
   
Warranties
   
Made
   
Period
 
Accrued warranty liability:
   
     
     
     
 
June 29, 2019
  $
12,300
    $
3,571
    $
(4,288
)   $
11,583
 
June 30, 2018
  $
13,026
    $
3,588
    $
(4,115
)   $
12,499
 
 
 
 
 
 
 
 
Restructuring and Other Charges
In January 2019, the Company made organizational changes to better align our resources with our growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 1% of the Company’s employees. The Company recorded $1 
million and $
9
million of severance and related costs during the three and six months ended June 29, 2019, respectively.
2 Revenue Recognition
The Company recognizes revenue upon transfer of control of promised products and services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally enters into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and discounts.
The Company recognizes revenue on product sales at the time control of the product transfers to the customer. In substantially all of the Company’s arrangements, title of the product transfers at shipping point and, as a result, the Company determined control transfers at the point of shipment. In more limited cases, there are destination-based shipping terms and, thus, control is deemed to transfer when the products arrive at the customer site. All incremental costs of obtaining a contract are expensed as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less. Shipping and handling costs are included as a component of cost of
 
15
 

 
 
CONDENSED N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(unaudited) 
– (Continued)
 
sales. In situations where the control of the goods transfers prior to the completion of the Company’s obligation to ship the products to its customers, the Company has elected the practical expedient to account for the shipping services as a fulfillment cost. Accordingly, such costs are recognized when control of the related goods is transferred to the customer. In more rare situations, the Company has revenue associated with products that contain specific customer acceptance criteria and the related revenue is not recognized before the customer acceptance criteria are satisfied. The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions and collected by the Company from a customer
.
Generally, the Company’s contracts for products include a performance obligation related to installation. The Company has determined that the installation represents a distinct performance obligation and revenue is recognized separately upon the completion of installation. The Company determines the amount of the transaction price to allocate to the installation service based on the standalone selling price of the product and the service, which requires judgment. The Company determines relative standalone selling price of installation based upon a number of factors, including hourly service billing rates and estimated installation hours. In developing these estimates, the Company considers past history, competition, billing rates of current services and other factors.
The Company has sales from standalone software, which is included in instrument systems revenue. These arrangements typically include software licenses and maintenance contracts, both of which the Company has determined are distinct performance obligations. The Company determines the amount of the transaction price to allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a
when-and-if-available
basis.
Payment terms and conditions vary among the Company’s revenue streams, although terms generally include a requirement of payment within 30 to 60 days of product shipment. Prior to providing payment terms to customers, an evaluation of the customer’s credit risk is performed. Returns and customer credits are infrequent and insignificant and are recorded as a reduction to sales. Rights of return are not included in sales arrangements and, therefore, there is minimal variable consideration included in the transaction price of our products.
Service revenue includes (1) service and software maintenance contracts and (2) service calls (time and materials). Instrument service contracts and software maintenance contracts are typically annual contracts, which are billed at the beginning of the contract or maintenance period. The amount of the service and software maintenance contract is recognized on a straight-line basis to revenue over the maintenance service period, which is the contractual term of the contract, as a time-based measure of progress best reflects the Company’s performance in satisfying this obligation. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. Service calls are recognized to revenue at the time a service is performed.
The Company’s deferred revenue liabilities on the consolidated balance sheets consists 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 29, 2019 and June 30, 2018 (in thousands):
                 
 
June 29, 2019
   
June 30, 2018
 
Balance at the beginning of the period
  $
204,257
    $
192,590
 
Recognition of revenue included in balance at beginning of the period
   
(172,949
)    
(138,227
)
Revenue deferred during the period, net of revenue recognized
   
229,162
     
186,392
 
                 
Balance at the end of the period
  $
260,470
    $
240,755
 
                 
 
 
 
 
 
 
 
The Company classified
$40 
million and $
39
 million of deferred revenue and customer advances in other long-term liabilities at June 29, 2019 and December 31, 2018, respectively.
 
16
 

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 29, 2019
 
Deferred revenue and customer advances expected to be recognized in:
   
 
One year or less
  $
220,711
 
13-24
months
   
21,962
 
25 months and beyond
   
17,797
 
         
Total
  $
260,470
 
         
 
 
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 29, 2019
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
Cost
   
Gain
   
Loss
   
Value
 
U.S. Treasury securities
  $
66,221
    $
4
    $
    $
66,225
 
Corporate debt securities
   
94,331
     
37
     
(33
)    
94,335
 
Time deposits
   
57,964
     
     
     
57,964
 
                                 
Total
  $
218,516
    $
41
    $
(33
)   $
218,524
 
                                 
Amounts included in:
   
     
     
     
 
Cash equivalents
  $
130,744
    $
5
    $
    $
130,749
 
Investments
   
87,772
     
36
     
(33
)    
87,775
 
                                 
Total
  $
218,516
    $
41
    $
(33
)   $
218,524
 
                                 
       
 
December 31, 2018
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
Cost
   
Gain
   
Loss
   
Value
 
U.S. Treasury securities
  $
164,619
    $
16
    $
(320
)   $
164,315
 
Foreign government securities
   
3,486
     
1
     
(24
)    
3,463
 
Corporate debt securities
   
725,778
     
41
     
(2,760
)    
723,059
 
Time deposits
   
108,638
     
—  
     
—  
     
108,638
 
                                 
Total
  $
1,002,521
    $
58
    $
(3,104
)   $
999,475
 
                                 
Amounts included in:
   
     
     
     
 
Cash equivalents
  $
60,532
    $
—  
    $
(1
)   $
60,531
 
Investments
   
941,989
     
58
     
(3,103
)    
938,944
 
                                 
Total
  $
1,002,521
    $
58
    $
(3,104
)   $
999,475
 
                                 
 
 
 
 
 
 
 
 
17
 

 
 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
 
June 29, 2019
   
December 31, 2018
 
Due in one year or less
 
$
211,124
   
$
797,649
 
Due after one year through three years
   
7,400
     
201,826
 
                 
Total
 
$
218,524
   
$
999,475
 
                 
4 Inventories
Inventories are classified as follows (in thousands):
 
June 29, 2019
   
December 31, 2018
 
Raw materials
 
$
120,601
   
$
111,641
 
Work in progress
   
17,283
     
15,552
 
Finished goods
   
213,668
     
164,376
 
                 
Total inventories
 
$
351,552
   
$
291,569
 
                 
5 Goodwill and Other Intangibles
The carrying amount of goodwill was $356 million at both June 29, 2019 and December 31, 2018.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
 
June 29, 2019
   
December 31, 2018
 
 
   
   
Weighted-
   
   
   
Weighted-
 
 
Gross
   
   
Average
   
Gross
   
   
Average
 
 
Carrying
   
Accumulated
   
Amortization
   
Carrying
   
Accumulated
   
Amortization
 
 
Amount
   
Amortization
   
Period
   
Amount
   
Amortization
   
Period
 
Capitalized software
  $
471,701
    $
323,030
     
5 years
    $
454,307
    $
307,634
     
5 years
 
Purchased intangibles
   
201,442
     
148,603
     
11 years
     
201,566
     
144,184
     
11 years
 
Trademarks and IPR&D
   
13,691
     
     
     
13,677
     
—  
     
—  
 
Licenses
   
5,581
     
5,118
     
6 years
     
5,568
     
4,875
     
6 years
 
Patents and other intangibles
   
79,483
     
51,053
     
8 years
     
77,753
     
49,276
     
8 years
 
                                                 
Total
  $
771,898
    $
527,804
     
7 years
    $
752,871
    $
505,969
     
7 years
 
                                                 
The gross carrying value of both intangible assets and accumulated amortization for intangible assets decreased
by $2 million in the six months ended June 29, 2019 due to the effects of foreign currency translation. Amortization expense for intangible assets was $
12
million for both the three months ended June 29, 2019 and June 30, 2018. Amortization expense for intangible assets was $
25
 million for both the six months ended June 29, 2019 and June 30, 2018. Amortization expense for intangible assets is estimated to be $50 million per year for each of the next five years.
 
18
 

  
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
6 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.
As of both June 29, 2019 and December 31, 2018, the Company had a total of $560 million 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 Series H and J senior unsecured notes. 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.
In 2018, the Company entered into
three-year
interest rate cross-currency swap derivative agreements with an aggregate notional value of $300 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. In 2019, the Company entered into
additional
 interest rate cross-currency swap derivative agreements with
an aggregate
notional value of $110 
million and contract terms between one and three years. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies.”
 
19
 

 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company had the following outstanding debt at June 29, 2019 and December 31, 2018 (in thousands):
 
June 29, 2019
   
December 31, 2018
 
Foreign subsidiary lines of credit
  $
295
    $
178
 
Senior unsecured notes - Series B - 5.00%, due February 2020
   
100,000
     
—  
 
                 
Total notes payable and debt, current
   
100,295
     
178
 
Senior unsecured notes - Series B - 5.00%, due February 2020
   
—  
     
100,000
 
Senior unsecured notes - Series E - 3.97%, due March 2021
   
50,000
     
50,000
 
Senior unsecured notes - Series F - 3.40%, due June 2021
   
100,000
     
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
 
Credit agreement
   
590,000
     
590,000
 
Unamortized debt issuance costs
   
(1,606
)    
(1,828
)
                 
Total long-term debt
   
1,048,394
     
1,148,172
 
                 
Total debt
  $
1,148,689
    $
1,148,350
 
                 
*
Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus
1.25
%.
As of both June 29, 2019 and December 31, 2018, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1,208 million after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.74% and 3.83% at June 29, 2019 and December 31, 2018, respectively. As of June 29, 2019, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $
106
million and $90 million at June 29, 2019 and December 31, 2018, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest rates applicable to these short-term borrowings were 1.48% and 1.88% for June 29, 2019 and December 31, 2018, respectively.
7 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 are 21%, 12.5%, 19% and 17%, respectively, as of June 29, 2019. 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 29, 2019 and June 30, 2018 by $9 million and $13 million, respectively, and increased the Company’s net income per diluted share by $0.13 and $0.17, respectively.
The Company’s effective tax rate for the three months ended June 29, 2019 and June 30, 2018 was 15.9% and 10.8%, respectively. 
The increase in the effective income tax rate can be attributed to a 
$
9
 
million reduction in the three months ended June 30, 2018 income tax expense related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act and an additional 
$
1
 million tax benefit related to stock-based compensation. This reduction in income tax expense decreased the effective tax rate by
5.6
percentage points for the three months ended June 
30
,
2018
. 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’s effective tax rate for the six months ended June 29, 2019 and June 30, 2018 was 12.4% and 15.1%, 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 and Jobs Act (the “2017 Tax Act”). This
 
20
 

  
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
income tax benefit decreased the effective tax rate by 1.0 percentage points for the six months ended June 29, 2019. The effective tax rate for the six months ended June 30, 2018 includes $4 million of additional income tax expense related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act. This additional income tax expense increased the effective tax rate by 1.3 percentage points for the six months ended June 30, 2018. 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 positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax positions on the presumption that all concerned tax authorities possess full knowledge of those tax positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those 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 uncertain tax positions for the three and six months ended June 29, 2019 and June 30, 2018 (in thousands):
 
June 29, 2019
   
June 30, 2018
 
Balance at the beginning of the period
  $
26,108
    $
5,843
 
Net reductions for lapse of statutes taken during the period
   
(105
)    
(191
)
Net additions for tax positions taken during the current period
   
801
     
408
 
                 
Balance at the end of the period
  $
26,804
    $
6,060
 
                 
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, 2013. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2014 may still be adjusted upon examination by tax authorities if the attributes are utilized. 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 29, 2019, the Company expects to record additional 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.
8 Leases
The Company adopted new accounting guidance regarding the accounting for leases as of January 1, 2019 using a modified retrospective transition approach that was applied to leases existing as of, or entered into after, January 1, 2019. The Company elected the package of transition provisions available for expired or existing contracts, which allowed the Company to carryforward historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Upon adoption, the Company recorded a
right-of-use
lease asset and lease liabilities in the amount $100 million as of January 1, 2019. The adoption of this standard did not have a material impact on the Company’s results of operations, cash flows and retained earnings.
 
Prior to the adoption of the new lease accounting standard, undiscounted future minimum rents payable as of December 31, 2018 under non-cancelable leases with initial terms exceeding one year were as follows (in thousands):
2019
  $
28,417
 
2020
   
23,424
 
2021
   
16,032
 
2022
   
11,816
 
2023 and thereafter
   
23,269
 
         
Total future minimum lease payments
  $
102,958
 
         
 
21
 

 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company’s operating leases consist of property leases for sales, demonstration, laboratory, warehouse and office spaces, automotive leases for sales and service personnel and equipment leases, primarily used in our manufacturing and distribution operations. The lease policies described below were effective as of January 
1
,
2019
. For leases with terms greater than
12
months, the Company recorded the related
right-of-use
asset and lease liability obligation at the present value of lease payments over the term of the leases. Some of the Company’s leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments. A certain number of these leases contain rent escalation clauses, either fixed or adjusted periodically for inflation of market rates, that are factored into the Company’s determination of lease payments. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as common area maintenance and real estate taxes, which are recorded as variable costs when incurred.
In addition, the Company’s lease agreements that contain lease and non-lease components are generally accounted for as a single lease component. The Company has elected not to apply the recognition requirements of the new accounting guidance to leases with terms less than 12 months. For these leases, the Company recognizes lease payments in net income on a straight-line basis over the term of the lease. As of June 29, 2019 and December 31, 2018, the Company does not have leases that are classified as finance leases.
When available, the Company uses the rate implicit in the lease to discount lease payments to determine the present value of the lease liabilities; however, most of the leases do not provide a readily determinable implicit rate and, as required by the accounting guidance, the Company estimated its incremental secured borrowing rate to discount the lease payments based on information available at lease commencement (or, for the leases in existence on the adoption date, the January 1, 2019 information). The Company’s incremental borrowing rate reflects the estimated rate of interest that the Company would pay to borrow on a collateralized basis over a similar term to the lease payments in a similar economic environment.
 
As of June 29, 2019, the Company has lease agreements that expire at various dates through 2033, with a weighted-average remaining lease term of 4.9 years. Rental expense was $9 million 
for the three months ended June 29, 2019 under the new lease accounting standard 
and $8 
million for the three months ended June 30, 2018 under the previous lease accounting standard. Rental expense was $18 million for the six months ended June 29, 2019 under the new lease accounting standard and $15 million for the six months ended June 30, 2018 under the previous lease accounting standard. As of June 29, 2019, the weighted-average discount rate used to determine the present value of lease liabilities 
was 3.94%. 
Cash paid for amounts included in the measurement of lease liabilities in operating activities in the statement of cash flows was 
$
18
 million during the six months ended June 29, 2019.
 
The Company’s
right-of-use
lease assets and lease liabilities included in the consolidated balance sheets are classified as follows (in thousands):
               
 
Financial Statement Classification
 
 
June 29, 2019
 
Assets:
 
 
       
 
 
Property operating lease assets
 
Operating lease assets
 
 
$
61,646
 
Automobile operating lease assets
 
Operating lease assets
 
 
 
27,217
 
Equipment operating lease assets
 
Operating lease assets
 
 
 
2,197
 
       
 
     
Total lease assets
 
 
 
$
91,060
 
       
 
     
Liabilities:
 
 
 
 
 
Current operating lease liabilities
 
Current operating lease liabilities
 
 
$
25,106
 
Long-term operating lease liabilities
 
Long-term operating lease liabilities
 
 
 
66,713
 
       
 
     
Total lease liabilities
 
 
 
$
91,819
 
       
 
     
 
 
 
 
 
 
 
22
 

 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Undiscounted future minimum rents payable as of June 29, 2019 under
non-cancelable
leases with initial terms exceeding one year reconcile to lease liabilities included in the consolidated balance sheet as follows (in thousands):
2019 (remaining 6 months)
  $
14,291
 
2020
   
24,596
 
2021
   
16,296
 
2022
   
10,462
 
2023
   
5,875
 
2024 and thereafter
   
31,161
 
         
Total future minimum lease payments
   
102,681
 
Less: amount of lease payments representing interest
   
(10,862
)
         
Present value of future minimum lease payments
   
91,819
 
Less: current operating lease liabilities
   
(25,106
)
         
Long-term operating lease liabilities
  $
66,713
 
         
9 Stock-Based Compensation
The Company maintains various shareholder-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).
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 29, 2019 and June 30, 2018 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 29, 2019
   
June 30, 2018
   
June 29, 2019
   
June 30, 2018
 
Cost of sales
  $
567
    $
603
    $
1,142
    $
1,208
 
Selling and administrative expenses
   
7,402
     
7,639
     
15,527
     
16,123
 
Research and development expenses
   
1,345
     
837
     
2,586
     
1,640
 
                                 
Total stock-based compensation
  $
9,314
    $
9,079
    $
19,255
    $
18,971
 
                                 
  
23
 

 
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 29, 2019 and June 30, 2018 are as follows:
 
 
Six Months Ended
 
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
 
June 29, 2019
   
June 30, 2018
 
Options issued in thousands
   
139
     
140
 
Risk-free interest rate
   
2.5
%    
2.7
%
Expected life in years
   
5
     
6
 
Expected volatility
   
24.3
%    
23.2
%
Expected dividends
   
  
     
—  
 
 
Six Months Ended
 
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant
 
June 29, 2019
   
June 30, 2018
 
Exercise price
  $
231.30
    $
205.97
 
Fair value
  $
61.85
    $
58.26
 
The following table summarizes stock option activity for the plans for the six months ended June 29, 2019 (in thousands, except per share data):
 
Number of Shares
   
Exercise Price per Share
   
Weighted-Average

Exercise Price per
Share
   
Outstanding at December 31, 2018
   
1,790
    $
38.09
   
to
           $
208.47
    $
142.47
 
Granted
   
139
    $
183.41
   
to
  $
238.52
    $
231.30
 
Exercised
   
(239
)   $
38.09
   
to
  $
208.47
    $
110.07
 
Canceled
 
 
(56
)
 
$
113.36
 
 
to
 
$
194.26
 
 
$
153.14
 
                                     
Outstanding at June 29, 2019
   
1,634
    $
61.63
   
to
  $
238.52
    $
154.40
 
                                     
Restricted Stock
During the six months ended June 29, 2019, the Company granted five thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $183.41.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the six months ended June 29, 2019 (in thousands, except per share data):
 
Shares
   
Weighted-Average

Fair Value per
Share
 
Unvested at December 31, 2018
   
304
    $
153.31
 
Granted
   
83
    $
236.28
 
Vested
   
(103
)   $
138.61
 
Forfeited
   
(15
)   $
167.10
 
                 
Unvested at June 29, 2019
   
269
    $
183.77
 
                 
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
 
24
 

 
 
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.
 
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 periodThe relevant data used to determine the value of the performance stock units granted during the six months ended June 29, 2019 and June 30, 2018 are as follows:
 
                 
   
Six Months Ended
 
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair
Values
 
June 29, 2019
   
June 30, 2018
 
Performance stock units issued (in thousands)
   
13
     
16
 
Risk-free interest rate
   
2.4
%    
2.0
%
Expected life in years
   
2.8
     
2.8
 
Expected volatility
   
23.5
%    
23.4
%
Average volatility of peer companies
   
26.2
%    
25.8
%
Correlation coefficient
   
34.2
%    
37.2
%
Expected dividends
   
  
     
  
 
 
 
 
 
 
 
 
 
The following table summarizes the unvested performance stock unit award activity for the six months ended June 29, 2019 (in thousands, except per share data):
                 
 
Shares
   
Weighted-Average
Fair Value per
Share
 
Unvested at December 31, 2018
   
100
    $
212.34
 
Granted
   
13
    $
372.68
 
Forfeited
 
 
(6
)
 
$
208.58
 
                 
Unvested at June 29, 2019
   
107
    $
232.79
 
                 
 
 
 
 
 
 
 
 
 
25
 

 
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 29, 2019
 
 
Net Income
   
Weighted-
Average Shares
   
Per Share
 
 
(Numerator)
   
(Denominator)
   
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
 
                         
       
 
Three Months Ended June 30, 2018
 
 
Net Income
   
Weighted-
Average Shares
   
Per Share
 
 
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $
155,677
     
77,833
    $
2.00
 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   
—  
     
605
     
(0.02
)
                         
Net income per diluted common share
  $
155,677
     
78,438
    $
1.98
 
                         
       
 
Six Months Ended June 29, 2019
 
 
Net Income
   
Weighted-
Average Shares
   
Per Share
 
 
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $
253,396
     
70,331
    $
3.60
 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   
—  
     
573
     
(0.03
)
                         
Net income per diluted common share
  $
253,396
     
70,904
    $
3.57
 
                         
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
Net Income
   
Weighted-
Average Shares
   
Per Share
 
 
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $
267,628
     
78,330
    $
3.42
 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   
—  
     
711
     
(0.03
)
                         
Net income per diluted common share
  $
267,628
     
79,041
    $
3.39
 
                         
 
 
For both the three and six months ended June 29, 2019 and the three and six months ended June 30, 2018, the Company had 0.1 million stock options that were antidilutive due to having higher exercise prices than the Company’s average stock price during the period. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
 
 
 
 
 
26
 

 
  
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
   
Unrealized Gain
(Loss) on
Investments
   
Accumulated
Other
Comprehensive
Income (Loss)
 
Balance at December 31, 2018
  $
(105,697
)   $
(9,869
)   $
(2,405
)   $
(117,971
)
Other comprehensive income, net of tax
   
491
     
34
     
2,350
     
2,875
 
                                 
Balance at June 29, 2019
  $
(105,206
)   $
(9,835
)   $
(55
)   $
(115,096
)
                                 
 
12 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 29, 2019 and June 30, 2018 is as follows (in thousands):
 
Three Months Ended
 
 
June 29, 2019
   
June 30, 2018
 
 
U.S.
   
U.S. Retiree
   
Non-U.S.
   
U.S.
   
U.S. Retiree
   
Non-U.S.
 
 
Pension
   
Healthcare
   
Pension
   
Pension
   
Healthcare
   
Pension
 
 
Plans
   
Plan
   
Plans
   
Plans
   
Plan
   
Plans
 
Service cost
  $
—  
    $
108
    $
1,075
    $
142
    $
151
    $
1,339
 
Interest cost
   
10
     
230
     
430
     
1,627
     
162
     
416
 
Expected return on plan assets
   
—  
     
(177
)    
(538
)    
(630
)    
(175
)    
(481
)
Net amortization:
   
     
     
     
     
     
 
Prior service credit
   
—  
     
(5
)    
(37
)    
—  
     
(2
)    
(32
)
Net actuarial loss
   
—  
     
—  
     
132
     
772
     
—  
     
171
 
                                                 
Net periodic pension cost
  $
10
    $
156
    $
1,062
    $
1,911
    $
136
    $
1,413
 
                                                 
 
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
 
 
U.S.
   
U.S. Retiree
   
Non-U.S.
   
U.S.
   
U.S. Retiree
   
Non-U.S.
 
 
Pension
   
Healthcare
   
Pension
   
Pension
   
Healthcare
   
Pension
 
 
Plans
   
Plan
   
Plans
   
Plans
   
Plan
   
Plans
 
Service cost
  $
—  
    $
250
    $
2,157
    $
284
    $
283
    $
2,713
 
Interest cost
   
23
     
389
     
864
     
3,246
     
318
     
844
 
Expected return on plan assets
   
—  
     
(354
)    
(1,081
)    
(3,415
)    
(353
)    
(974
)
Net amortization:
   
     
     
     
     
     
 
Prior service credit
   
—  
     
(10
)    
(74
)    
—  
     
(10
)    
(63
)
Net actuarial loss
   
—  
     
—  
     
267
     
1,541
     
—  
     
348
 
                                                 
Net periodic pension cost
  $
23
    $
275
    $
2,133
    $
1,656
    $
238
    $
2,868
 
                                                 
 
In 2018, the Company terminated and settled its frozen U.S. defined benefit pension plan, the Waters Retirement Plan, by making lump-sum cash payments and purchasing annuity contracts for participants to permanently extinguish the pension plan’s obligations. The Company also anticipates that it will settle the Waters Retirement Restoration Plan during 2019, and the Company may incur pension accounting charges in connection with the termination of this plan.
 
27
 

 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
 
 
 
 
 
 
 
 
 
During fiscal year 2019, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.
13 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.
 
28
 

 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Net sales for the Company’s products and services are as follows for the three and six months ended June 29, 2019 and June 30, 2018 (in thousands):
                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
   
June 29, 2019
   
June 30, 2018
 
Product net sales:
   
     
     
     
 
Waters instrument systems
  $
238,777
    $
239,928
    $
423,389
    $
438,031
 
Chemistry consumables
   
100,292
     
99,129
     
199,545
     
197,839
 
TA instrument systems
   
48,196
     
49,812
     
84,834
     
92,116
 
                                 
Total product sales
   
387,265
     
388,869
     
707,768
     
727,986
 
Service net sales:
   
     
     
     
 
Waters service
   
192,048
     
188,248
     
368,097
     
362,581
 
TA service
   
19,849
     
19,102
     
37,159
     
36,322
 
                                 
Total service sales
   
211,897
     
207,350
     
405,256
     
398,903
 
                                 
Total net sales
  $
599,162
    $
596,219
    $
1,113,024
    $
1,126,889
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 29, 2019 and June 30, 2018 (in thousands):
                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
   
June 29, 2019
   
June 30, 2018
 
Net Sales:
   
     
     
     
 
Asia:
   
     
     
     
 
China
  $
112,796
    $
109,709
    $
202,887
    $
203,537
 
Japan
   
45,958
     
43,183
     
89,462
     
85,948
 
Asia Other
   
80,081
     
84,013
     
146,998
     
147,700
 
                                 
Total Asia
   
238,835
     
236,905
     
439,347
     
437,185
 
Americas:
   
     
     
     
 
United States
   
173,940
     
161,485
     
323,097
     
308,306
 
Americas Other
   
32,835
     
36,641
     
65,546
     
71,530
 
                                 
Total Americas
   
206,775
     
198,126
     
388,643
     
379,836
 
Europe
   
153,552
     
161,188
     
285,034
     
309,868
 
                                 
Total net sales
  $
599,162
    $
596,219
    $
1,113,024
    $
1,126,889
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales by customer class are as follows for the three and six months ended June 29, 2019 and June 30, 2018 (in thousands):
                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
   
June 29, 2019
   
June 30, 2018
 
Pharmaceutical
  $
350,145
    $
338,354
    $
644,657
    $
643,682
 
Industrial
   
176,109
     
183,664
     
331,327
     
345,994
 
Academic and governmental
   
72,908
     
74,201
     
137,040
     
137,213
 
                                 
Total net sales
  $
599,162
    $
596,219
    $
1,113,024
    $
1,126,889
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
 

 
 
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
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 29, 2019 and June 30, 2018 (in thousands):
                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
   
June 29, 2019
   
June 30, 2018
 
Net sales recognized at a point in time:
   
     
     
     
 
Instrument systems
  $
286,973
    $
289,740
    $
508,223
    $
530,147
 
Chemistry consumables
   
100,292
     
99,129
     
199,545
     
197,839
 
Service sales recognized at a point in time (time & materials)
   
84,807
     
80,397
     
157,566
     
152,915
 
                                 
Total net sales recognized at a point in time
   
472,072
     
469,266
     
865,334
     
880,901
 
Net sales recognized over time:
   
     
     
     
 
Service and software maintenance sales recognized over time (contracts)
   
127,090
     
126,953
     
247,690
     
245,988
 
                                 
Total net sales
  $
599,162
    $
596,219
    $
1,113,024
    $
1,126,889
 
                                 
 
 
 
14 Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
In February 2016, accounting guidance was issued regarding the accounting for leases. This new comprehensive lease standard amends various aspects of existing accounting guidance for leases. The core principle of the new guidance requires lessees to present the assets and liabilities that arise from leases on their balance sheets. This guidance was effective for annual and interim reporting periods beginning after December 15, 2018. The Company has adopted this standard using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. The adoption of this standard did have a material effect on the Company’s balance sheet by recording a
right-of-use
lease asset and lease liabilities in the amount $100 million as of January 1, 2019; however, it did not have a material impact on the Company’s results of operations, cash flows and retained earnings.
In March 2017, accounting guidance was issued to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amortization period for certain callable debt securities was shortened to end at the earliest call date. This guidance was effective for annual and interim periods beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
In February 2018, accounting guidance was issued to address the impact of the 2017 Tax Act on items recorded in accumulated other comprehensive income. Current accounting guidance requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect recorded in income from continuing operations, even if the related tax effects were originally recognized in other comprehensive income, the new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Act. This guidance was effective for annual and interim periods beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
In August 2018, accounting guidance was issued to address the capitalization of implementation costs associated with hosting arrangements that meet the definition of a service contract. The new guidance clarified that the internal-use software capitalization guidance should be used to determine when implementation costs are capitalizable. This guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company elected to prospectively adopt this guidance as of January 1, 2019 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
 
30
 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Recently Issued 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 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. The Company currently does not expect that the adoption of this standard will have a material effect on the Company’s financial position, 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 and early adoption is permitted. The Company currently does not expect that the adoption of this standard will 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 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 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.
 
31
 

 
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.
The Company’s operating results are as follows for the three and six months ended June 29, 2019 and June 30, 2018 (dollars in thousands, except per share data):
                                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29,
2019
   
June 30,
2018
   
% change
   
June 29,
2019
   
June 30,
2018
   
% change
 
Revenues:
   
     
     
     
     
     
 
Product sales
  $
387,265
    $
388,869
     
—  
    $
707,768
    $
727,986
     
(3
%)
Service sales
   
211,897
     
207,350
     
2
%
   
405,256
     
398,903
     
2
%
                                                 
Total net sales
   
599,162
     
596,219
     
—  
     
1,113,024
     
1,126,889
     
(1
%)
Costs and operating expenses:
   
     
     
     
     
     
 
Cost of sales
   
249,546
     
243,135
     
3
%
   
470,577
     
464,556
     
1
%
Selling and administrative expenses
   
133,208
     
136,645
     
(3
%)
   
267,547
     
267,052
     
—  
 
Research and development expenses
   
36,490
     
35,644
     
2
%
   
71,550
     
70,124
     
2
%
Purchased intangibles amortization
   
2,264
     
1,602
     
41
%
   
4,545
     
3,261
     
39
%
Litigation settlement
   
—  
     
—  
     
—  
     
—  
     
(1,672
)    
100
%
                                                 
Operating income
   
177,654
     
179,193
     
(1
%)
   
298,805
     
323,568
     
(8
%)
Operating income as a % of sales
   
29.7
%
   
30.1
%
   
     
26.8
%
   
28.7
%
   
 
                                                 
Other expense
   
(342
)    
(1,828
)    
(81
%)
   
(867
)    
(1,482
)    
(41
%)
Interest expense, net
   
(5,577
)    
(2,804
)    
99
%
   
(8,825
)    
(6,976
)    
27
%
                                                 
Income before income taxes
   
171,735
     
174,561
     
(2
%)
   
289,113
     
315,110
     
(8
%)
Provision for income taxes
   
27,325
     
18,884
     
45
%
   
35,717
     
47,482
     
(25
%)
                                                 
Net income
  $
144,410
    $
155,677
     
(7
%)
  $
253,396
    $
267,628
     
(5
%)
                                                 
Net income per diluted common share
  $
2.08
    $
1.98
     
5
%
  $
3.57
    $
3.39
     
5
%
 
 
 
The Company’s sales were flat for the second quarter of 2019 as compared to the second quarter of 2018 and decreased 1% for the first half of 2019 as compared to the first half of 2018. Foreign currency translation decreased sales growth by 2% for both the second quarter and first half of 2019. Recent acquisitions did not have an impact on sales growth in either the second quarter or first half of 2019. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.
Instrument system sales decreased 1% and 4% for the second quarter and first half of 2019, respectively, as a result of weaker demand for our products by our customers due to uncertainty caused by macroeconomic impacts relating to Brexit and governmental policy changes in certain regions. Foreign currency translation decreased instrument system sales by 1% and 2% for the second quarter and first half of 2019, respectively. Recurring revenues (combined sales of precision chemistry consumables and services) increased 2% and 1% for the second quarter and first half of 2019, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. In the second quarter and first half of 2019, recurring revenues were negatively impacted by foreign currency translation which lowered sales by 2% and 3%, respectively, as well as one less calendar day as compared to the first half of 2018.
 
32
 

In the second quarter of 2019, the Company’s sales increased 4% in the Americas and 1% in Asia, while sales decreased 5% in Europe. For the first half of 2019, the Company’s sales increased 2% in the Americas, were flat in Asia and decreased 8% in Europe. Sales growth in the Americas was driven by increases in the U.S. of 8% and 5% for the second quarter and first half of 2019, respectively, which were partially offset by declines in Latin America of 14% and 13%, respectively, due to lower levels of customer spending. Sales growth in Asia was driven by sales growth in Japan of 6% and 4% for the second quarter and first half of 2019, respectively, which were offset by declines in India in both the second quarter and first half of 2019, primarily caused by the effect of foreign currency translation. China sales increased 3% in the second quarter of 2019, but were flat for the first half due to economic uncertainty in the first quarter of 2019 stemming from governmental policy in our food and pharmaceutical markets. Sales in Europe were impacted by weak demand in Eastern Europe and the effect of foreign currency translation, which reduced the sales growth rate by 3% and 5% for the second quarter and first half of 2019, respectively.
Sales to pharmaceutical customers increased 3% for the second quarter of 2019 and were flat for the first half of 2019, with the effect of foreign currency translation decreasing sales growth by 2% and 3%, respectively. Sales to pharmaceutical customers were driven by an increasing need for global access to prescription drugs and testing of newer and more complex biologic drugs. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 4% for both the second quarter and first half of 2019, with the effect of foreign currency translation decreasing sales growth by 1% for both the second quarter and first half of 2019. Sales to our industrial customers have been negatively impacted by lower customer demand for our LC, MS and TA instrument systems. Combined sales to academic and governmental customers decreased 2% in the second quarter of 2019 and were flat for the first half of 2019, primarily due to the timing of the release of funds by governments and the negative effect of foreign currency translation, which decreased sales growth by 2% for both the second quarter and first half of 2019.
Operating income decreased 1% and 8% for the second quarter and first half of 2019, respectively. These decreases were primarily a result of the unfavorable effect of foreign currency translation, as well as $1 million and $9 million of severance-related costs in connection with a reduction in workforce in the second quarter and first half of 2019, respectively. In addition, operating income in the first half of 2018 included the benefit of a $2 million litigation settlement.
The Company generated $303 million and $277 million of net cash flows from operations in the first half of 2019 and 2018, respectively. This increase in operating cash flow was primarily a result of a $15 million litigation settlement payment in 2018 that did not recur.
Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $65 million and $37 million in the first half of 2019 and 2018, respectively. The first half of 2019 includes $33 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $48 million on this facility through the end of the first half of 2019 and anticipates spending a total of $215 million to build and equip this new
state-of-the-art
manufacturing facility. During the first half of 2019 and 2018, the Company made $5 million and $3 million of investments in unaffiliated companies, respectively.
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 six months of 2019 and 2018, the Company repurchased $1.3 billion and $546 million of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. 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.
 
33
 

Results of Operations
Sales by Geography
Geographic sales information is presented below for the three and six months ended June 29, 2019 and June 30, 2018 (dollars in thousands):
                                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29,
2019
   
June 30,
2018
   
% change
   
June 29,
2019
   
June 30,
2018
   
% change
 
Net Sales:
   
     
     
     
     
     
 
Asia:
   
     
     
     
     
     
 
China
  $
112,796
    $
109,709
     
3
%
  $
202,887
    $
203,537
     
—  
 
Japan
   
45,958
     
43,183
     
6
%
   
89,462
     
85,948
     
4
%
Asia Other
   
80,081
     
84,013
     
(5
%)
   
146,998
     
147,700
     
—  
 
                                                 
Total Asia
   
238,835
     
236,905
     
1
%
   
439,347
     
437,185
     
—  
 
Americas:
   
     
     
     
     
     
 
United States
   
173,940
     
161,485
     
8
%
   
323,097
     
308,306
     
5
%
Americas Other
   
32,835
     
36,641
     
(10
%)
   
65,546
     
71,530
     
(8
%)
                                                 
Total Americas
   
206,775
     
198,126
     
4
%
   
388,643
     
379,836
     
2
%
Europe
   
153,552
     
161,188
     
(5
%)
   
285,034
     
309,868
     
(8
%)
                                                 
Total net sales
  $
599,162
    $
596,219
     
—  
    $
1,113,024
    $
1,126,889
     
(1
%)
                                                 
 
 
 
In the second quarter and first half of 2019, sales in China were negatively impacted by economic uncertainty caused by certain regulatory changes in our food and pharmaceutical markets. The increase in sales in Japan was driven by double-digit growth in TA products and services, as well as strong performance by Waters products and services. Sales in Asia Other were driven by
LC-MS
instrument systems, primarily to academic and governmental customers. Sales growth in the U.S. was broad-based across all product and customer classes, while sales declines in the rest of the Americas and Europe were broad-based across all product and customer classes due to macroeconomic conditions. Sales in Europe were also negatively impacted by the effect of foreign currency translation, which decreased sales 3% and 5% for the second quarter and first half of 2019, respectively.
Net sales by customer class are presented below for the three and six months ended June 29, 2019 and June 30, 2018 (dollars in thousands):
                                                 
 
Three Months Ended
   
Six Months Ended
 
 
June 29,
2019
   
June 30,
2018
   
% change
   
June 29,
2019
   
June 30,
2018
   
% change
 
Pharmaceutical
  $
350,145
    $
338,354
     
3
%
  $
644,657
    $
643,682
     
0
%
Industrial
   
176,109
     
183,664
     
(4
%)
   
331,327
     
345,994
     
(4
%)
Academic and governmental
   
72,908
     
74,201
     
(2
%)
   
137,040
     
137,213
     
0
%
                                                 
Total net sales
  $
599,162
    $
596,219
     
0
%
  $
1,113,024
    $
1,126,889
     
(1
%)
                                                 
 
 
 
In the second quarter and first half of 2019, sales to pharmaceutical customers were negatively impacted by the effect of foreign currency translation, which decreased sales to pharmaceutical customers by 2% and 3%, respectively, as well as a slower release of capital budgets by our customers due to uncertain macroeconomic conditions due to Brexit, particularly in Europe, and regulatory changes in our food and pharmaceutical markets in China. The decline in sales to industrial customers in the second quarter was primarily due to weaker demand for our
LC-MS
instruments, while the decline in the first half of 2019 was primarily due to a 5% decline in TA sales. The decrease in sales to academic and governmental customers was broad-based across all product classes, with increases in North America and Asia Other being offset by declines in other regions.
 
34
 

Waters Products and Services Net Sales
Net sales for Waters products and services are as follows for the three and six months ended June 29, 2019 and June 30, 2018 (dollars in thousands):
                                         
 
Three Months Ended
 
 
June 29, 2019
   
% of
Total
   
June 30, 2018
   
% of
Total
   
% change
 
Waters instrument systems
  $
238,777
     
45
%
  $
239,928
     
46
%
   
—  
 
Chemistry consumables
   
100,292
     
19
%
   
99,129
     
18
%
   
1
%
                                         
Total Waters product sales
   
339,069
     
64
%
   
339,057
     
64
%
   
—  
 
Waters service
   
192,048
     
36
%
   
188,248
     
36
%
   
2
%
                                         
Total Waters net sales
  $
531,117
     
100
%
  $
527,305
     
100
%
   
1
%
                                         
 
 
 
                                         
 
Six Months Ended
 
 
June 29, 2019
   
% of
Total
   
June 30, 2018
   
% of
Total
   
% change
 
   
Waters instrument systems
  $
423,389
     
43
%
  $
438,031
     
44
%
   
(3
%)
Chemistry consumables
   
199,545
     
20
%
   
197,839
     
20
%
   
1
%
                                         
Total Waters product sales
   
622,934
     
63
%
   
635,870
     
64
%
   
(2
%)
Waters service
   
368,097
     
37
%
   
362,581
     
36
%
   
2
%
                                         
Total Waters net sales
  $
991,031
     
100
%
  $
998,451
     
100
%
   
(1
%)
                                         
 
 
 
The effect of foreign currency translation decreased Waters sales by 2% for both the second quarter and first half of 2019. Waters service sales benefited from increased sales of service plans and higher service demand billings to a higher installed base of customers. Precision chemistry consumables sales increased on the uptake in columns and application-specific testing kits and were driven by sales in the U.S. and China primarily to pharmaceutical customers. Waters recurring revenues were also negatively impacted by the negative impact of foreign currency translation which lowered sales by 3% in both the second quarter and first half of 2019 as compared to the second quarter and first half of 2018, as well as one less calendar day in the first half of 2019. Waters instrument system sales (LC and MS technology-based) decreased in all major geographical regions, primarily due to lower sales to pharmaceutical and industrial customers due to uncertainty caused by macroeconomic conditions relating to Brexit and other regulatory changes in certain regions.
In the second quarter of 2019, Waters sales increased 4% in the Americas, 2% in Asia and decreased 4% in Europe, where the effect of foreign currency decreased sales by 3%. Within Asia, Waters sales increased 2% and 5% in China and Japan, respectively, and were flat in the rest of Asia. In the first half of 2019, Waters sales increased 2% in the Americas, 1% in Asia and decreased 7% in Europe, where the effect of foreign currency decreased sales by 5%. Within Asia, Waters sales were flat in China and increased 2% in both Japan and the rest of Asia.
 
35
 

TA Product and Services Net Sales
Net sales for TA products and services are as follows for the three and six months ended June 29, 2019 and June 30, 2018 (dollars in thousands):
                                         
 
Three Months Ended
 
 
June 29, 2019
   
% of
Total
   
June 30, 2018
   
% of
Total
   
% change
 
   
TA instrument systems
  $
48,196
     
71
%
  $
49,812
     
72
%
   
(3
%)
TA service
   
19,849
     
29
%
   
19,102
     
28
%
   
4
%
                                         
Total TA net sales
  $
68,045
     
100
%
  $
68,914
     
100
%
   
(1
%)
                                         
       
 
Six Months Ended
 
 
June 29, 2019
   
% of
Total
   
June 30, 2018
   
% of
Total
   
% change
 
   
TA instrument systems
  $
84,834
     
70
%
  $
92,116
     
72
%
   
(8
%)
TA service
   
37,159
     
30
%
   
36,322
     
28
%
   
2
%
                                         
Total TA net sales
  $
121,993
     
100
%
  $
128,438
     
100
%
   
(5
%)
                                         
 
 
 
The decline in TA instrument system sales was primarily due to lower customer demand resulting from macroeconomic conditions, tariff posturing and political instability. TA service sales increased due to sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation decreased TA sales 1% for both the second quarter and first half of 2019.
In the second quarter of 2019, TA sales increased 9% in the Americas, but decreased 10% in Europe and 7% in Asia. For the first half of 2019, TA sales increased 2% in the Americas, but decreased 19% in Europe and 4% in Asia. TA’s sales in the U.S. increased 12% and 4% in the second quarter and first half of 2019, respectively. TA sales in Europe were negatively impacted by the effect of foreign currency translation, which decreased sales 3% and 4% in second quarter and first half of 2019, respectively. Within Asia, TA sales growth in Japan and China were offset by declines in the rest of Asia.
Cost of Sales
Cost of sales for the second quarter and first half of 2019 increased 3% and 1%, respectively, as compared to the second quarter and first half of 2018 due to a change in sales mix. The effect of foreign currency translation had a slight impact on the second quarter of 2019, but increased cost of sales by 2% for the first half of 2019. 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 2019.
Selling and Administrative Expenses
Selling and administrative expenses decreased 3% for the second quarter and were flat
year-to-date.
Selling and administrative expenses were impacted by higher merit compensation costs, as well as $1 million and $9 million of severance-related costs in connection with a reduction in workforce in the second quarter and first half of 2019, respectively. In addition, the effect of foreign currency translation decreased selling and administrative expenses by 3% and 4% for the second quarter and first half of 2019, respectively.
As a percentage of net sales, selling and administrative expenses were 22.2% and 24.0% for the 2019 quarter and
year-to-date,
respectively, and 22.9% and 23.7% for the 2018 quarter and
year-to-date,
respectively.
 
36
 

Research and Development Expenses
Research and development expenses increased 2% in both the second quarter and first half of 2019, primarily as a result of merit compensation and costs associated with new products and the development of new technology initiatives. The effect of foreign currency translation decreased research and development expenses by 3% for both the second quarter and first half of 2019 on the Company’s U.K.-based research and development expenses, as the British pound weakened against the U.S. dollar as compared to the second quarter and first half of 2018.
Litigation Settlement
In the second quarter of 2017, the Company incurred an $11 million litigation provision related to the issuance of a verdict in a patent litigation case. In the first quarter of 2018, the Company resolved the case with a final settlement that resulted in a gain of $2 million.
Interest Expense, Net
The increase in net interest expense in the second quarter and first half of 2019 was primarily attributable to lower interest income on lower cash, cash equivalents and investment balances, offset by the additional interest income from the
U.S.-to-Euro
interest rate cross-currency swap agreements entered into during the second half of 2018 and second quarter of 2019.
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 are 21%, 12.5%, 19% and 17%, respectively, as of June 29, 2019. 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 first half of 2019 and 2018 by $9 million and $13 million, respectively, and increased the Company’s net income per diluted share by $0.13 and $0.17, respectively.
The Company’s effective tax rate for the second quarter of 2019 and 2018 was 15.9% and 10.8%, respectively. The increase in the effective income tax rate can be attributed to a $9 million reduction in the second quarter 2018 income tax expense related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act and an additional $1 million tax benefit related to stock-based compensation. This reduction in income tax expense decreased the effective tax rate by 5.6 percentage points for the second quarter of 2018. 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’s effective tax rate for the first half of 2019 and 2018 was 12.4% and 15.1%, respectively. The effective tax rate for the first half of 2019 includes a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act (the “2017 Tax Act”). This income tax benefit decreased the effective tax rate by 1.0 percentage points for the first half of 2019. The effective tax rate for the first half of 2018 includes $4 million of additional income tax expense related to the change in foreign currency exchange rates on the earnings taxed in December 2017 under the toll charge of the 2017 Tax Act. This additional income tax expense increased the effective tax rate by 1.3 percentage points for the first half of 2018. 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.
 
37
 

Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
                 
 
Six Months Ended
 
 
June 29, 2019
   
June 30, 2018
 
Net income
  $
253,396
    $
267,628
 
Depreciation and amortization
   
53,615
     
55,836
 
Stock-based compensation
   
19,255
     
18,971
 
Deferred income taxes
   
1,632
     
(2,992
)
Change in accounts receivable
   
52,508
     
36,591
 
Change in inventories
   
(62,200
)    
(33,877
)
Change in accounts payable and other current liabilities
   
(10,439
)    
(77,848
)
Change in deferred revenue and customer advances
   
54,672
     
40,134
 
Effect of the 2017 Tax Act
   
(3,229
)    
12,450
 
Other changes
   
(56,407
)    
(40,336
)
                 
Net cash provided by operating activities
   
302,803
     
276,557
 
Net cash provided by investing activities
   
785,063
     
1,206,382
 
Net cash used in financing activities
   
(1,294,734
)    
(1,370,231
)
Effect of exchange rate changes on cash and cash equivalents
   
(1,414
)    
(12,823
)
                 
(Decrease) increase in cash and cash equivalents
  $
(208,282
)   $
99,885
 
                 
 
Cash Flow from Operating Activities
Net cash provided by operating activities was $303 million and $277 million during the six months ended June 29, 2019 and June 30, 2018, respectively. 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 79 days at June 29, 2019 as compared to 75 days at June 30, 2018.
 
  The changes in inventory were primarily attributable to anticipated annual increases in sales volumes, as well as new product launches and a build of safety stock inventory in advance of the Brexit decision.
 
  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 provided by investing activities totaled $785 million in the six months ended June 29, 2019 compared to net cash provided by investing activities that totaled $1,206 million in the six months ended June 30, 2018. Additions to fixed assets and capitalized software were $65 million and $37 million in the first half of 2019 and 2018, 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 has incurred $33 million of costs associated with the construction of this facility during the first half of 2019, and has incurred a total of $48 million through the end of the second quarter 2019.
During the six months ended June 29, 2019 and June 30, 2018, the Company purchased $36 million and $513 million of investments, respectively, while $891 million and $1,760 million of investments matured, respectively, and were used for financing activities described below.
 
38
 

Cash Flow from Financing Activities
During the six months ended June 29, 2019 and June 30, 2018, the Company’s net debt borrowings were flat and decreased by $850 million, respectively. During the six months ended June 30, 2018, the Company reduced its outstanding debt using cash repatriated under the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”). As of June 29, 2019, the Company had a total of $1,149 million in outstanding debt, which consisted of $560 million in outstanding senior unsecured notes, $300 million borrowed under a term loan and $290 million borrowed under a revolving credit facility, with both the term loan and revolving credit facilities under the credit agreement dated November 2017 (“2017 Credit Agreement”). As of June 29, 2019, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1,208 million after outstanding letters of credit. As of June 29, 2019, 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 April 2019, the Company entered into $410 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 2019 and 2018, the Company repurchased $1,321 million and $546 million, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $8 million of common stock related to the vesting of restricted stock units during both the six months ended June 29, 2019 and June 30, 2018. The Company expects to increase its share repurchase activity in 2019 as compared to 2018 and intends to use existing cash and investments, cash flows from operations and, as needed, borrowings under its existing credit facilities to fund its repurchases under its share repurchase program.
The Company received $30 million and $35 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 29, 2019 and June 30, 2018, respectively.
The Company had cash, cash equivalents and investments of $676 million as of June 29, 2019. The majority of the Company’s cash, cash equivalents and investments are generated from foreign operations, with $421 million held by foreign subsidiaries at June 29, 2019, of which $256 million was held in currencies other than U.S. dollars. The Company believes it has sufficient levels of cash flow and access to its existing cash, cash equivalents and investments to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program in the U.S. These cash requirements are managed by the Company’s cash flow from operations, its existing cash, cash equivalents and investments, and the use of the Company’s revolving credit facility.
Management believes, 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. The Company has conducted a
post-tax
reform evaluation of its capital allocation strategy and the Company is currently planning to use its existing cash, cash equivalents and investments, cash flow from operations and available debt capacity to repurchase up to $4 billion of the Company’s common stock over the next two years. The Company is currently planning to increase its outstanding debt balances up to approximately 2.5 times the Company’s net
debt-to-earnings
before interest, taxes, depreciation and amortization ratio to fund a significant portion of these share repurchases. In addition, as of December 31, 2018, the Company determined that it will provide income taxes on all future foreign earnings and reverse its historical assertion that its foreign earnings were
 
39
 

permanently invested. However, the Company will continue to be permanently reinvested in relation to the cumulative historical outside basis difference that is not related to the unremitted earnings. There have been no other significant changes to the Company’s financial position.
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/A
for the year ended December 31, 2018, as filed with the SEC on March 1, 2019. The Company reviewed its contractual obligations and commercial commitments as of June 29, 2019 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/A.
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 2019, 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/A
for the year ended December 31, 2018, as filed with the SEC on March 1, 2019, 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, business combinations and asset acquisitions and valuation of contingent consideration. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the six months ended June 29, 2019. The Company did not make any changes in those policies during the six months ended June 29, 2019.
New Accounting Pronouncements
Please refer to Note 14, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
 
40
 

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 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:
  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 new or proposed tariff 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.
 
  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.
 
 
41
 

 
 
  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/A
for the year ended December 31, 2018, as filed with the SEC on March 1, 2019. 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 29, 2019, 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 29, 2019 and December 31, 2018, $421 million out of $676 million and $471 million out of $1,735 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $256 million out of $676 million and $251 million out of $1,735 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at June 29, 2019 and December 31, 2018, respectively. As of June 29, 2019, 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 29, 2019 would decrease by approximately $26 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity.
There have been no other material changes in the Company’s market risk during the six months ended June 29, 2019. 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/A
for the year ended December 31, 2018, as filed with the SEC on March 1, 2019.
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 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 29, 2019 (1) to ensure that information required to be disclosed by the 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.
 
42
 

Changes in Internal Controls 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 29, 2019 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 29, 2019 as described in Item 3 of Part I of the Company’s Annual Report on Form
10-K/A
for the year ended December 31, 2018, as filed with the SEC on March 1, 2019.
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/A
for the year ended December 31, 2018, as filed with the SEC on March 1, 2019. The Company reviewed its risk factors as of June 29, 2019 and determined that there were no material changes from the ones set forth in the Form
10-K/A.
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.
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 29, 2019 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 (2)
   
Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under
the Programs (2)
 
March 31, 2019 to April 27, 2019
   
721
    $
241.08
     
721
    $
3,228,622
 
April 28, 2019 to May 25, 2019
   
728
    $
211.17
     
728
    $
3,074,898
 
May 26, 2019 to June 29, 2019
   
1,129
    $
206.95
     
1,129
    $
2,841,274
 
                                 
Total
   
2,578
    $
217.69
     
2,578
    $
2,841,274
 
                                 
 
 
 
 
(1) The Company’s repurchase activity related to the vesting of restricted stock units during the three months ended June 29, 2019 was insignificant.
 
 
 
 
(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.
 
 
 
 
 
43
 

Item 6:
 Exhibits
         
Exhibit
 

Number
   
Description of Document
         
 
31.1
   
         
 
31.2
    Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         
 
32.1
   
         
 
32.2
   
         
 
101
   
The following materials from Waters Corporation’s Quarterly Report on Form
 
10-Q
 
for the quarter ended June 29, 2019, formatted in Inline XBRL: (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).
 
 
(*) 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.
 
 
 
 
44
 

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 31, 2019
 
45