UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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. |
Securities registered pursuant to Section 12(g) of the Act: | None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
☑
No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
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.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 Regulationfiles)files
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 ).
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” inRule
12b-2
of the Exchange Act. (Check one):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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report.
☑Indicate by check mark whether the registrant is a shell company (as defined in
Rule☐ No ☑
12b-2
of the Act). Yes ☐State the aggregate market value of the registrant’s common stock held byJune July 3, 202291, 2019: $14,554,561,947.: $21,855,696,546.
non-affiliates
of the registrant as of Indicate the number of shares outstanding of the registrant’s common stock as of February 21, 2020: 62,158,04518, 2022: 60,515,620
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement that will be filed for the 20202022 Annual Meeting of Stockholders are incorporated by reference in Part III.
WATERS CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM
10-K
INDEX
Item No. | Page | |||||||
PART I | ||||||||
1. | 1 | |||||||
1A. | 12 | |||||||
1B. | 19 | |||||||
2. | 19 | |||||||
3. | 20 | |||||||
4. | 20 | |||||||
20 | ||||||||
PART II | ||||||||
5. | 22 | |||||||
6. | 25 | |||||||
7. | 26 | |||||||
7A. | 43 | |||||||
8. | 46 | |||||||
9. | 96 | |||||||
9A. | 96 | |||||||
9B. | 96 | |||||||
PART III | ||||||||
10. | 97 | |||||||
11. | 97 | |||||||
12. | 97 | |||||||
13. | 98 | |||||||
14. | 98 | |||||||
PART IV | ||||||||
15. | 99 | |||||||
16. | 103 | |||||||
104 | ||||||||
Item No. | Page | |||||||
| 1. | 3 | |||||||
| 1A. | 16 | |||||||
| 1B. | 25 | |||||||
| 2. | 26 | |||||||
| 3. | 27 | |||||||
| 4. | 27 | |||||||
| 5. | 28 | |||||||
| 6. | 31 | |||||||
| 7. | 31 | |||||||
| 7A. | 48 | |||||||
| 8. | 51 | |||||||
| 52 | ||||||||
| 9. | 102 | |||||||
| 9A. | 102 | |||||||
| 9B. | 102 | |||||||
| 9C. | 102 | |||||||
| 10. | 102 | |||||||
| 102 | ||||||||
| 11. | 104 | |||||||
| 12. | 104 | |||||||
| 13. | 105 | |||||||
| 14. | 105 | |||||||
| 15. | 106 | |||||||
| 16. | 110 | |||||||
| 111 | ||||||||
PART I
Item 1: Business |
General
Waters Corporation (the “Company,” “WatersTMhas 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 performanceultra-performance liquid chromatography (“UPLC
TM
,” “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. WatersTM
” 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. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA InstrumentsTM
(“TA”) product line. 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 products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental customers working in research and development, quality assurance and other laboratory applications. 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. The Company’s thermal analysis, rheometry and calorimetry 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.Waters Corporation, organized as a Delaware corporation in 1991, is a holding company that owns all of the outstanding common stock of Waters Technologies Corporation, its operating subsidiary. Waters Corporation became a publicly-traded company with its initial public offering (“IPO”) in November 1995. Since the IPO, the Company has added two significant and complementary technologies to its range of products with the acquisitions of TA Instruments in May 1996 and Micromass Limited in September 1997.
Business Segments
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 and TA. The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instrument systems, 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.
Information concerning revenues and long-lived assets attributable to each of the Company’s products, services and geographic areas is set forth in Note 18 in the Notes to the Consolidated Financial Statements, which is incorporated herein by reference.
Waters Products and Markets
High Performance and Ultra Performance Liquid Chromatography
HPLC is a standard technique used to identify and analyze the constituent components of a variety of chemicals and other materials. The Company believes that HPLC’s performance capabilities enable it to separate, identify and quantify a high proportion of all known chemicals. As a result, HPLC is used to analyze substances in a wide variety of industries for research and development purposes, quality control and process engineering applications.
The most significant
end-use
markets for HPLC are those served by the pharmaceutical and life science industries. In these markets, HPLC is used extensively to understand diseases, identify new drugs, develop manufacturing methods and assure the potency and purity of new pharmaceuticals. HPLC is also used in a variety of other applications, such as analyses of foods and beverages for nutritional labeling and compliance with safety regulations and the testing of water and air purity within the environmental testing industry, as well as applications in other industries, such as chemical and consumer products. Waters also has in vitro diagnostic (IVD) labelled products that are used as general-purpose instruments for clinical diagnostic applications, such as newborn screening and therapeutic drug management, in countries where these products are registered. HPLC is also used by universities, research institutions and governmental agencies, such as the United States Food and Drug Administration (“FDA”) and the United States Environmental Protection Agency (“EPA”) and their foreign counterparts that mandate safety and efficacy testing.In 2004, Waters introduced a novel technology that the Company describes as ultra performance liquid chromatography that utilizes a packing material with small, uniform diameter particles and a specialized instrument, the ACQUITY UPLCnewinnovative technology and instrument. In 2018, the Company introduced the ACQUITY ARC
TM
, to accommodate the increased pressure and narrower chromatographic bands that are generated by these small and tightly packed particles. By using the ACQUITY UPLC, researchers and analysts are able to achieve more comprehensive chemical separations and faster analysis times in comparison with many analyses previously performed by HPLC. In addition, in using the ACQUITY UPLC, researchers have the potential to extend the range of applications beyond that of HPLC, enabling them to uncover more levels of scientific information. While offering significant performance advantages, the ACQUITY UPLC is also compatible with the Company’s software products and the general operating protocols of HPLC. For these reasons, the Company’s customers and field sales and support organizations are well positioned to utilize this TM
Bio System, a versatile,iron-free,quaternary liquid chromatograph specifically engineered to improve bioseparation analytical methods. The Company also introduced the ACQUITYUPLC PLUS series in 2018, consisting of
bio-inert, quaternary
thePLUS,H-ClassPLUS, H-Class PLUS
BioH-Class
andPLUS systems, which incorporate foundational enhancements into the legacy systems. In 2019, the Company introduced the ACQUITYTMAdvanced Polymer ChromatographyTMSystem, which is the first fully solvent-compatible UPLC system to perform size exclusion, gradient polymer elution and solvent compatible reversed-phase liquid chromatographic separations on a single platform. Theall-in-onesystem gives research scientists greater analytical versatility and speed when conducting research on next-generation polymers.
I-Class PLUS
Waters manufactures LC instruments that are offered in configurations that allow for varying degrees of automation, from component configured systems for academic teaching and research applications to fully automated systems for regulated and high sample throughput testing, and that have a variety of detection technologies, from optical-based ultra-violet (“UV”) absorbance, refractive index and fluorescence detectors to a suite of
MS-based
detectors, optimized for certain analyses.In 2019, the Company introduced the ACQUITYsystem gives research scientists greater analytical versatility and speed when conducting research on next-generation polymers. In 2020, the Company introduced the Waters Arc
TM
Advanced Polymer ChromatographyTM
System, which is the first fully solvent-compatible UPLC system to perform size exclusion, gradient polymer elution and solvent compatible reversed-phase liquid chromatographic separations on a single platform. Theall-in-one
TM
HPLC System, a new HPLC system for routine testing in the pharmaceutical, food, academic and materials markets. A key target application is quality control in laboratories performing batch release tests on small molecule pharmaceuticals. In 2021, the Company introduced the new ACQUITY PREMIER LC solution and the Arc Premier System both featuring Waters’ MaxPeakTM
High Performance Surface (“HPS”) technology. MaxPeakTM
HPS technology, which was first introduced with the4
Company’s introduction of ACQUITY
TM
PREMIER Columns in 2020, is a surface technology that forms a barrier between the sample and the metal surfaces of both the system and column, eliminating the need for system passivation, mitigating the loss of metal-sensitive analytes and yielding higher quality data in less time and effort.The primary consumable products for LC are chromatography columns. These columns are packed with separation media used in the LC testing process and are typically replaced at regular intervals. The chromatography column contains one of several types of packing material, typically stationary phase particles made from silica or polymeric resins. As a pressurized sample is introduced to the column inlet and permeates through the packed column, it is separated into its constituent components.
Waters HPLC columns can be used on Waters-branded and competitors’ LC systems. The Company believes that it is one of a few suppliers in the world that manufactures silica and polymeric resins, packs columns and distributes its own products. In doing so, the Company believes it can better ensure product consistency, a key attribute for its customers in quality control laboratories, and can react quickly to new customer requirements. The Company believes that its ACQUITY UPLC lines of columns are used primarily on its ACQUITY UPLC instrument systems and, furthermore, that its ACQUITY UPLC instruments primarily use ACQUITY UPLC columns. In 2018, the Company introduced the BioResolveTMRP mAb Polyphenyl columns, which improve the consistency and reliability of the overly complex separations of monoclonal antibodies and antibody-drug conjugates. In 2019, the Company introduced the BioResolv SCX mAb Columns and VanGuardcolumns featuring MaxPeak
TM
FIT Cartridge technologies. These new cation exchange column lines with specialized consumables are designed to simplify and improve the characterization and monitoring of monoclonal antibody (mAb) therapeutics, as well as enable mAb charge-variant analyses as required by the World Health Organization, the FDA and the International Conference on Harmonization for confirming the efficacy and safety of biologics and biosimilars with discovery, development and manufacturing applications. In 2020, Waters introduced ACQUITYTM
PREMIER Columns, a new family of premiumsub-2-micron
TM
HPS technology. The columns are for use with any brand of UPLC system and can measurably improve data quality by mitigating the loss of sample analytes due toanalyte-to-surface
interactions.The Company’s precision chemistry consumable products also include environmental and nutritional safety testing products, including Certified Reference Materials (“CRM”s) and Proficiency Testing (“PT”) products. Laboratories around the world and across multiple industries use these products for quality control and proficiency testing and also purchase product support services required to help with their federal and state mandated accreditation requirements or with quality control over critical pharmaceutical analysis.
In 2018,2020, the Company introducedacquired all of the VICAMTMBPATestTMoutstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively, “Andrew Alliance”), which provides a sensitive, precise determinationfor $80 million, net of Bisphenol A in as little as ten minutes. VICAM also introduced a user-friendly lateral flow zearalenone strip test,cash acquired. Andrew Alliance offers lab workflow automation solutions with theZearala-V combination of its software platform and smart, connected laboratory equipment and accessories. The Company expects the acquisition to positively impact our customers’ workflows by improving the repeatability, performance and speed of laboratory operations and chemistry workflows.TMAQUATMin 2018.
Mass Spectrometry and Liquid Chromatography-Mass Spectrometry
MS is a powerful analytical technology that is used to identify unknown compounds, to quantify known materials and to elucidate the structural and chemical properties of molecules by measuring the masses of molecules that have been converted into ions.
The Company is a technology and market leader in the development, manufacture, sale and service of MS instruments and components. These instruments are typically integrated and used along with other complementary analytical instruments and systems, such as LC, chemical electrophoresis and gas chromatography. A wide variety of instrumental designs fall within the overall category of MS instrumentation, including devices that incorporate quadrupole, ion trap,(“Tof”), magnetic sector and ion mobility technologies. Furthermore, these technologies are often used in tandem
time-of-flight
(MS-MS)
to maximize the speed and/or efficacy of certain experiments.5
Currently, the Company offers a wide range of MS instrument systems utilizing various combinations of quadrupole, Tof and ion mobility designs. These instrument systems are used in drug discovery and development, as well as for environmental, clinical and nutritional safety testing. The overwhelming majority of mass spectrometers sold by the Company are designed to utilize an LC system and a liquid compatible interface (such as an electrospray ionization source) as the sample introduction device. These products supply a diverse market with a strong emphasis on the pharmaceutical, biomedical, clinical, food and beverage and environmental market segments worldwide.
MS is an increasingly important detection technology for LC. The Company’sinstruments, such as the Company’s SYNAPT
smaller-sized
mass spectrometers, such as the single quadrupole detector (“SQD”) and the tandem quadrupole detector (“TQD”), are often referred to as LC “detectors” and are typically sold as part of an LC system or as an LC system upgrade. Larger quadrupole systems, such as the XevoTM
TQ and XevoTQ-S
instruments, are used primarily for experiments performed for late-stage drug development, including clinical trial testing. Quadrupoletime-of-flight
(“Q-Tof”)TM
G2-S,
are often used to analyze the role of proteins in diseaseprocesses, an application sometimes referred to as “proteomics”. In 2018, the Company introduced the DART QDaTMsystem with LiveIDTM, a direct-from-sample analytical system that verifies sample authenticity or adulteration, specifically for food applications. The Company also introduced the XevoTQ-GCmass spectrometer in 2018, which allows laboratories to meet and exceed lowpart-per-billionlimits of detection when quantifying pesticide residues and other contaminants in food usingGC-MS/MSmethods set forth by worldwide regulatory agencies/authorities. In addition, the Company introduced the RenataDXTMscreening system, a flow-injection tandem mass spectrometry system for rapid high-throughput analysis of extracted dried blood spots and other human biological matrices. In 2019, the Company introduced the BioAccordTMsystem, a liquid chromatography-mass spectrometry solution that expands access to high-resolutiontime-of-flightmass spectrometry capabilities. The system provides new levels of user experience with automated setup and self-diagnosis delivered through an intuitive user interface. Also in 2019, the Company introduced the Cyclic IMS system, which seamlessly integrates cyclic ion mobility technology into a high-performance research-gradetime-of-flightmass spectrometer. In addition, the Company introduced the SYNAPT XS, a new highly flexible, high-resolution mass spectrometer for research and development labs focused on discovery applications. The Company also reinforced its tandem quadrupole mass spectrometry portfolio during the current year with upgrades to the XevoTQ-Smicro and the introduction of the new XevoTQ-Scronos. The XevoTQ-Smicro features new performance enhancements that bring the quantitation of highly polar, ionic compounds in food to a higher level. The XevoTQ-Scronos is a new, tandem quadrupole mass spectrometer purposely-built for routine quantitation of large numbers of small-molecule organic compounds over a wide concentration range. The XevoTQ-Smicro and the XevoTQ-Scronos are also well suited to meet regulatory requirements for pesticide residue analysis, the monitoring for contaminants in processed foods, identifying drugs of abuse, and performing impurity profiling of pharmaceuticals.
LC and MS are typically embodied within an analytical system tailored for either a dedicated class of analyses or as a general purpose analytical device. An increasing percentage of the Company’s customers are purchasing LC and MS components simultaneously and it has become common for LC and MS instrumentation to be used within the same laboratory and operated by the same user. The descriptions of LC and MS above reflect the historical segmentation of these analytical technologies and the historical categorization of their respective practitioners. Increasingly in today’s instrument market, this segmentation and categorization is becoming obsolete as a high percentage of instruments used in the laboratory embody both LC and MS technologies as part of a single device. In response to this development and to further promote the high utilization of these hybrid instruments, the Company has organized its Waters operating segment to develop, manufacture, sell and service integrated
LC-MS
systems.In 2019, the Company introduced the BioAccordmass spectrometry capabilities. The system provides new levels of user experience with automated setup and self-diagnosis delivered through an intuitive user interface. Also in 2019, the Company introduced the Cyclic IMS system, which seamlessly integrates cyclic ion mobility technology into a high-performance research-grademass spectrometer. In addition, the Company introduced the SYNAPT XS, a new highly flexible, high-resolution mass spectrometer for research and development labs focused on discovery applications. The Company also reinforced its tandem quadrupole mass spectrometry portfolio during the current year with upgrades to the Xevo(“MRT”) technology with enhanced desorption electrospray ionization and new matrix-assisted laser desorption ionization imaging sources. The platform will serve as the basis for Waters’ next generation Tof instruments with applications in pharmaceutical, biomedical, natural products, and materials research. Also in 2021, the Company released the ACQUITY RDa
TM
system, a liquid chromatography-mass spectrometry solution that expands access to high-resolutiontime-of-flight
time-of-flight
TQ-S
micro and the introduction of the new XevoTQ-S
cronos. The XevoTQ-S
micro features new performance enhancements that bring the quantitation of highly polar, ionic compounds in food to a higher level. The XevoTQ-S
cronos is a new, tandem quadrupole mass spectrometer purposely-built for routine quantitation of large numbers of small-molecule organic compounds over a wide concentration range. The XevoTQ-S
micro and the XevoTQ-S
cronos are also well suited to meet regulatory requirements for pesticide residue analysis, the monitoring for contaminants in processed foods, identifying drugs of abuse, and performing impurity profiling of pharmaceuticals. In 2020, the Company introduced the new RADIANTM
ASAPTM
System, a novel direct mass detector engineered fornon-mass
spectrometry experts to conduct fast and accurate analyses of solids and liquids with minimal sample prep. Also in 2020, the Company introduced enhancements for the Waters XevoG2-XS
QTof SYNAPT XS and SELECT SERIES Cyclic IMS, including a new fragmentation technique and imaging option. In 2021, the Company introduced the Waters SELECT SERIESTM
MRT, a high-resolution mass spectrometer that combines Multi-ReflectingTime-of-Flight
™
Detector featuring SmartMS™
, the company’s newest Tof MS designed to improve the ease and reliability of small molecule analysis for pharmaceutical, academic, food, and forensic applications. The Company also introduced a new peptide6
multi-attribute method workflow for the BioAccord
LC-MS
system in 2021, which is an end to end workflow for analyzing monoclonal antibodies and other protein and peptide based drugs.Based upon 2021 reports from independent marketing research firms and publicly-disclosed sales figures from competitors, the Company believes that it is one of the world’s largest manufacturers and distributors of LC and
LC-MS
instrument systems, chromatography columns and other consumables and related services.The Company has been a developer and supplier of software-based products that interface with both the Company’s instruments, as well asand other suppliers’ instruments. The Company’s newest software technology UNIFITM, is a scientific information system that is the culminationwaters_connectmulti-year effortseries of applications on this platform supporting the BioAccord system and the Xevo G2 XS mass spectrometers. These applications support biopharmaceutical workflows, simplifying the collection of often complex LCMS data for use in biopharmaceutical development and into QC where it is used to substantially bring allassure the quality of Waters’ preexisting, distinct software systems under one operating system. UNIFIexisting medicines and new drug formulations. The platform design of waters_connect has enabled rapid delivery of several major updates including new biopharma application workflows designed in close collaboration with biopharmaceutical innovators to solve specific challenges they face with existing solutions. The platform also provides the foundation for the connected lab of the future where data is no longer siloed but can be securely shared among a community of connected scientists. Waters_connect joins Waters’the existing suite of informatics products – EmpowerTM™Chromatography Data Software, MassLynxTM™Mass Spectrometry Software and NuGenesisTM™Scientific Data Management System, each of which is used to support innovations within world-leading institutions. UNIFI isIn 2020, Waters announced the industry’s first comprehensive software that seamlessly integrates UPLC chromatography, mass spectrometry and informatics data workflows. In 2018,availability of Waters Empower BC LAC/ETM with SecureSync, a newly enhanced solution to preserve the ability for laboratories to work locally when organizations with distributed laboratory environments experience an enterprise interruption.
TM
platform. In 2019, the Company introduced the first of a On December 15, 2020, the Company announced new analysis capabilities acrossacquired all of the outstanding stock of Integrated Software Solutions Pty Limited and its two operating subsidiaries Integrated Software Solutions Limited and Integrated Software Solutions USA, LLC (collectively, “ISS”), for $4 million, net of cash acquired. In addition, the Company may have to pay additional consideration which has an estimated fair value of $1 million as of the close date. The contingent consideration is recorded as a varietyliability and will be paid to the prior shareholders of molecules by integrating UNIFIISS if certain revenue and customer account conditions are achieved over the next two years after the acquisition date. ISS offers clinical laboratory software systems that will support and further expand product offerings within our clinical business. The net assets acquired data from the Company’sprimarily relate to ISS’ laboratory information system,VionTMIMS QTofor XevoGS XS mass spectrometers with Molecular Discovery’s Mass-MetaSite and WebMetabase processing software.OMNI-Lab.
Waters Service
Services provided by Waters enable customers to maximize technology productivity, support customer compliance activities and provide transparency into enterprise resource management efficiencies. The customer
benefits from improved budget control, data-driven technology adoption and accelerated workflow at a site or on a global perspective. The Company considers its service offerings to be highly differentiated from our competition, as evidenced by a consistent increase in annual service revenues. The Company’s principal competitors in the service market include PerkinElmer, Inc., Agilent Technologies, Inc., and Thermo Fisher Scientific Inc. and General Electric Company. These competitors can provide certain services on Waters instruments to varying degrees and always present competitive risk.
The servicing and support of instruments, software and accessories is an important source of revenue and represented over 35% of sales for Waters in 2019.2021. These revenues are derived primarily through the sale of support plans, demand services, spare parts, customer performance validation services and customer training. Support plans typically involve scheduled instrument maintenance and an agreement to promptly repair a
non-functioning
instrument in return for a fee described in a contract that is priced according to the configuration of the instrument.7
TA Products and Markets
Thermal Analysis, Rheometry and Calorimetry
Thermal analysis measures the physical or thermodynamic characteristics of materials as a function of temperature. Changes in temperature affect several characteristics of materials, such as their heat flow characteristics, physical state, weight, dimension and mechanical and electrical properties, which may be measured by one or more thermal analysis techniques, including calorimetry. Consequently, thermal analysis techniques are widely used in the development, production and characterization of materials in various industries, such as plastics, chemicals, automobiles, pharmaceuticals and electronics.
Rheometry instruments often complement thermal analyzers in characterizing materials. Rheometry characterizes the flow properties of materials and measures their viscosity, elasticity and deformation under different types of “loading” or other conditions. The information obtained under such conditions provides insight into a material’s behavior during processing, packaging, transport, usage and storage.
Thermal analysis, rheometry and calorimetry instruments are heavily used in material testing laboratories and, in many cases, provide information useful in predicting the suitability and stability of industrial polymers, fine chemicals, pharmaceuticals, water, metals and viscous liquids in various industrial, consumer goods and healthcare products, as well as for life science research. As with systems offered by Waters, a range of instrument configurations is available with increasing levels of sample handling and information processing automation. In addition, systems and accompanying software packages can be tailored for specific applicationsapplications.
In 2019, TA introduced a range of new instruments including the TMA 450, a Rheo-Raman
TM
capability for the DHR product line, and a High Sensitivity Pressure Cell for theARES-G2
Rheometer. The Discovery™
TMA 450, precisely measures dimensional changes of materials from (150) to 1,000o
C and handles virtually all sample configurations for testing in expansion, compression, flexure and tension modes. The Rheo-Raman capability for the DHR product line combines a Raman spectrometer with the DHR to enable simultaneous collection of rheology and Raman spectroscopy data. This combination allows for direct correlation between flow characteristics and the unique spectroscopic fingerprints of each material including information about its chemical and morphological structure. The High Sensitivity Pressure Cell for theARES-G2
Rheometer enables scientists to perform sensitive viscoelastic measurements under controlled atmospheric pressure and temperature and gain detailed understanding of complex fluid behavior in complex environments.Also in 2019, TA introduced the MSF16 Multi-Specimen Fatigue Instrument. The MSF16 extends the capability of accelerated cyclic components and products under repeated loading, significantly accelerating fatigue analysis.
In 2020, TA introduced the new Discovery X3 Differential Scanning Calorimeter (“X3 DSC”), Discovery Hybrid Rheometers and TAM IV Micro XL isothermal microcalorimeter. The X3 DSC accelerates productivity in customers’ laboratories by enabling three samples to be measured in a single experiment, compared to the single-sample series operation of the other available DSC offerings in the market. This particularly addresses a need in high-throughput laboratories in industries such as composites, electronics and polymer manufacturing. The new line of Discovery Hybrid Rheometers provides increased sensitivity and versatility of rheometry measurements, supporting the development of next-generation, high-performance materials by improving the productivity and efficiency of materials science research. The TAM IV Micro XL isothermal calorimeter supports the development of new battery chemistries by measuring self-discharge and unwanted reactions that reduce battery life and efficiency.
In 2021, TA introduced the TMA 450RH and the Discovery SA. The TMA 450RH provides measurements of dimensional compatibility of materials under controlled temperature and humidity that are important for the development of new electronic devices. The Discovery SA is used in pharmaceutical development to assess the impact of moisture in drug product processing and storage on crystalline structure, which is related to drug product efficacy.
8
In 2021, TA introduced the TRIOS AutoPilot software for its thermal analyzer product line. This software helps laboratory staff using TA’s thermal analyzers create routine and streamlined standard operating procedures improving the speed and productivity of thermal analysis measurements.
TA Service
Similar to Waters, the servicing and support of TA’s instruments is an important source of revenue and represented more than 25%20% of sales for TA in 2019.2021. TA operates independently from the Waters operating segment, though many of its overseas offices are situated in Waters’ facilities to achieve operational efficiencies. TA has dedicated field sales and service operations. Service sales are primarily derived from the sale of support plans, replacement parts and billed labor fees associated with the repair, maintenance and upgrade of installed systems.
Global Customers
The Company typically has a broad and diversified customer base that includes pharmaceutical accounts, other industrial accounts, universities and governmental agencies. Purchase of the Company’s instrument systems is often dependent on its customers’ capital spending, or funding as in the cases of academic, governmental and research institutions, which often fluctuate from year to year. The pharmaceutical segment represents the Company’s largest sector and includes multinational pharmaceutical companies, generic drug manufacturers, contract research organizations (“CRO”s) and biotechnology companies. The Company’s other industrial customers include chemical manufacturers, polymer manufacturers, food and beverage companies and environmental testing laboratories. The Company also sells to universities and governmental agencies worldwide. The Company’s technical sales and support staff members work closely with its customers in developing and implementing applications that meet their full range of analytical requirements. During 2019, 57%2021, 60% of the Company’s net sales were to pharmaceutical accounts, 30% to other industrial accounts and 13%10% to academic institutions and governmental agencies.
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of many customers who tend to exhaust their spending budgets by calendar year end. The Company does not rely on any single customer for a material portion of its sales. During fiscal years 2019, 20182021, 2020 and 2017,2019, no single customer accounted for more than 2% of the Company’s net sales.
Sales and Service
The Company has one of the largest direct sales and service organizations focused exclusively on the analytical workflows offered by the Company. Across these product technologies, using respective specialized sales and service workforces, the Company serves its customer base with 5682 sales offices throughout the world as of December 31, 20192021 and approximately 4,300, 4,000 3,900 and 3,8004,000 field representatives in 2019, 20182021, 2020 and 2017,2019, respectively. This investment in sales and service personnel serves to maintain and expand the Company’s installed base of instruments. The Company’s sales representatives have direct responsibility for account relationships, while service representatives work in the field to install instruments, train customers and minimize
instrument downtime.
In-house
and field-based technical support representatives work directly with customers, providing them assistance with applications and procedures on Company products. The Company provides customers with comprehensive information through various corporate and regional internet websites and product literature, and also makes consumable products available through electronic ordering facilities and a dedicated catalog.Manufacturing and Distribution
The Company provides high product quality by overseeing each stage of the production of its instruments, columns and chemical reagents.
9
The Company currently assembles a portion of its LC instruments at its facility in Milford, Massachusetts, where it performs machining, assembly and testing. The Milford facility maintains quality management and environmental management systems in accordance with the requirements of ISO 9001:2015, ISO 13485:2016 and ISO 14001:2015, and adheres to applicable regulatory requirements (including the FDA Quality System Regulation and the European
In-Vitro
Diagnostic Directive). The Company outsources manufacturing of certain electronic components, such as computers, monitors and circuit boards, to outside vendors that meet the Company’s quality requirements. In addition, the Company outsources the manufacturing of certain LC instrument systems and components to well-established contract manufacturing firms in Singapore. The Company’s Singapore entity is ISO 9001:2015 certified and manages all Asian outsourced manufacturing as well as the distribution of all products from Asia. The Company may pursue outsourcing opportunities as they arise but believes it maintains adequate supply chain and manufacturing capabilities in the event of disruption or natural disasters.The Company manufactures specialty Supercritical Fluid Chromatography (“SFC”) and Supercritical Fluid Extraction (“SFE”) products in its facility in Sharpsburg, Pennsylvania. The Sharpsburg facility is aligned with the policies and procedures for product manufacturing and distribution as adhered to in the Milford, Massachusetts facility and is under the same structural leadership organization.
TM
manufactures antibody-linked resins and magnetic beads that are packed into columns and kits in Milford, Massachusetts and Nixa, Missouri. The Company manufactures and distributes its Analytical Standards and Reagents and Environmental Resource Associates (“ERA”) product lines at its facility in Golden, Colorado, which is certified to ISO 9001:2015 and accredited to ISO/IEC 17025:2017, ISO/IEC 17034:16 and ISO Guide 34. Some ERA products are also manufactured in the Wexford, Ireland facility, which is also accredited to ISO/IEC 17025:2005, ISO/IEC 17034:2016.The Company manufactures and distributes its MS products at its facilities in Wilmslow, England and Wexford, Ireland. Certain components or modules of the Company’s MS instruments are manufactured at its facility in Solihull, England and by long-standing outside contractors. Each stage of this supply chain is closely monitored by the Company to maintain high quality and performance standards. The instruments, components or modules are then returned to the Company’s facilities, where its engineers perform final assembly, calibrations to customer specifications and quality control procedures. The Company’s MS facilities are certified to ISO 9001:2015 and ISO 13485:2016/EN ISO 13485:2016 and adhere to applicable regulatory requirements (including the FDA Quality System Regulation and the European
In-Vitro
Diagnostic Directive).TA’s thermal analysis, rheometry and calorimetry products are manufactured and distributed at the Company’s New Castle, Delaware, Wakefield, Massachusetts, Eden Prairie, Minnesota, Lindon, Utah and Huellhorst, Germany facilities. Similar to MS, elements of TA’s products are manufactured by outside contractors and are then returned to the Company’s facilities for final assembly, calibration and quality control. The Company’s New Castle facility is certified to ISO 9001:2015 and ISO 17025:2005 standards and the Eden Prairie facility is certified to both ISO 9001:2015 and ISO/IEC 17025:2017 standards.standards, and the Lindon facility is certified to ISO 9001:2015.
Raw Materials
The Company purchases a variety of raw materials, primarily consisting of high temperature alloy sheet metal and castings, forgings,
pre-plated
metals and electrical components from various vendors. The materials used by the Company’s operations are generally available from a number of sources and in sufficient quantities to meet current requirements subject to normal lead times.10
The Company is subject to rules of the Securities and Exchange Commission (“SEC”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring disclosure as to whether certain materials (tantalum, tin, gold and tungsten), known as conflict minerals, which may be contained in the Company’s products, are mined from the Democratic Republic of the Congo and adjoining countries. In 2018,2020, the Company was not able to determine with certainty the country of origin of some of the conflict minerals in its manufactured products. However, the Company does not have knowledge that any of its conflict minerals originated from the Democratic Republic of the Congo or adjoining countries. The Company is in the process of evaluating its 20192021 supply chain, and the Company plans to file its 20192021 Form SD with the SEC in May 2020.2022. The results of this and future evaluations may impose additional costs and may introduce new risks related to the Company’s ability to verify the origin of any conflict minerals contained in its products.
In addition, the Company continues to monitor environmental health and safety regulations in countries in which it operates throughout the world, in particular, European Union and China Restrictions on the use of certain Hazardous Substances in electrical and electronic equipment (RoHS) and European Union Waste Electrical and Electronic Equipment directives. Further information regarding these regulations is available on the Company’s website,, under the caption “About Waters / Environmental Health & Safety”Corporate Governance”.
www.waters.com
Research and Development
The Company maintains an active research and development program focused on the development and commercialization of products that extend, complement and update its existing product offering. The Company’s research and development expenditures for 2021, 2020 and 2019 2018 and 2017 were $143$168 million, $143$141 million and $133$143 million, respectively. In addition, in 2017, the Company incurred a $5 million charge for acquiredin-processresearch and development relatedis party to milestone payments associated with aan existing licensing arrangement for certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. This licensing arrangement is significantly related to new, biologically-focused applications, as well as other applications, and requires the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales.
Nearly all of the Company’s LC products have been developed at the Company’s main research and development center located in Milford, Massachusetts, with input and feedback from the Company’s extensive field organizations and customers. The majority of the Company’s MS products are developed at facilities in England and most of the Company’s current materials characterization products are developed at the Company’s research and development center in New Castle, Delaware. At December 31, 2019, 20182021, 2020 and 2017,2019, there were 1,089, 1,0111,150, 1,112 and 1,0041,089 employees, respectively, involved in the Company’s research and development efforts. The Company has increased research and development expenses from its continued commitment to invest significantly in new product development and existing product enhancements, and as a result of acquisitions.
Despite the Company’s active research and development programs, there can be no assurance that the Company’s product development and commercialization efforts will be successful or that the products developed by the Company will be accepted by the marketplace.
In 2020, the Company opened a new research laboratory in Cambridge, MA, which will serve as a strategic, collaborative space in the community, where Waters can partner with academia, research and industry to accelerate the next generation of scientific advancements.
Human Capital
We believe that our people differentiate our business and are vital to our continued success. As a result, we have made important investments in our workforce through initiatives and programs that support talent development and inclusion and enhance our Total Rewards programs.
11
Employees
The Company employed approximately 7,800, 7,400 and 7,500 employees at December 31, 2019 and 7,200 at both2021, December 31, 20182020 and 2017,2019, respectively, with approximately 39% of the Company’s employees located in the United States. The Company believes its employee relations are generally good. The Company’s employees are not unionized or affiliated with any internal or external labor organizations. The Company firmly believes
Talent Development
We believe that itsour future success largely depends upon itsin a significant part on our continued ability to attract and retain highly skilled employees and then contribute to the growth and development of these employees.
We further the growth and development of our employees by investing in various programs, digital platforms and workshops that build professional and technical skills.
Inclusion & Diversity
We believe inclusion is a core tenet of organizational success and that fostering a sense of inclusivity allows our employees to maximize their performance contribution to our business. We celebrate difference and diversity in our Employee Circles, which are composed of employees from throughout the company, which provide a forum in which to promote topics related to diversity and inclusion focusing on gender, Multicultural, Veterans and LGBTQ+ employees and allies. All employees are encouraged to participate in these Employee Circles at the local and global levels. We have also rolled out training to all employees to support an inclusive culture that values diverse perspectives.
We believe that part of fostering an inclusive and increasingly racially and ethnically diverse workforce requires understanding the makeup of our current employees. As of December 31, 2021, our workforce is:
32% female, with women occupying 30% of company leadership roles (defined as Senior Director or above) compared with 18% in 2016, a 12% increase; and
19% racially and/or ethnically diverse, with 9% of our workforce identifying as Asian, 3% as Black or African American, 6% identifying as Hispanic/Latinx and 1% identifying as two or more races.
Recruitment
Waters has focused on expanding diversity in our recruitment processes. We have developed hiring partnerships with agencies such as the National Society of Black Engineers, Recruit Military, Out in Tech and Power to Fly to expand the pipeline of strong candidates.
Health and Safety
The health and safety of our employees is our highest priority. Through online and
in-person
training programs, we believe that we foster a safe workplace and ensure that all employees are empowered to prevent accidents and injuries.We manufacture products deemed essential to critical infrastructure, including health and safety, food and agriculture, and energy, and as a result, the majority of our production sites continued operating during the
COVID-19
pandemic.During the pandemic, we invested in maintaining safe work environments for our employees. We responded to the
COVID-19
pandemic by, among other things:Adding work from home flexibility;
Adjusting attendance policies to encourage those who are sick to stay home;
12
Increasing cleaning protocols across all work locations;
Initiating regular communication regarding impacts of the
COVID-19
pandemic, including health and safety protocols and procedures;Establishing new physical distancing and safety procedures for employees who need to be onsite;
Modifying workspaces as appropriate;
Implementing protocols to address actual and suspected
COVID-19
cases and potential exposure; andContinuing to modify and evolve our
COVID-19
response plan as governments issue new recommendations and guidelines.Competition
The analytical instrument systems, supplies and services market is highly competitive. The Company encounters competition from several worldwide suppliers and other companies in both domestic and foreign markets for each of its three primary technologies. The Company competes in its markets primarily on the basis of product performance, reliability, service and, to a lesser extent, price. Competitors continuously introduce new products and have instrument businesses that are generally more diversified than the Company’s business. Some competitors have greater financial resources and broader distribution than the Company’s.
In the markets served by Waters, the Company’s principal competitors include: Agilent Technologies, Inc., Shimadzu Corporation, Bruker Corporation, Danaher Corporation and Thermo Fisher Scientific Inc. In the markets served by TA, the Company’s principal competitors include: PerkinElmer, Inc., Mettler-Toledo International Inc., NETZSCH-Geraetebau GmbH, Thermo Fisher Scientific Inc., Malvern PANalytical Ltd., a subsidiary of Spectris plc, Mettler-Toledo International Inc. and Anton-Paar GmbH.
The market for consumable LC products, including separation columns, is highly competitive and generally more fragmented than the analytical instruments market. The Company encounters competition in the consumable columns market from chemical companies that produce column sorbents and small specialized companies that primarily pack purchased sorbents into columns and subsequently package and distribute columns. The Company believes that it is one of the few suppliers that processes silica and polymeric resins, packs columns and distributes its own products. The Company competes in this market on the basis of performance, reproducibility, reputation and, to a lesser extent, price. In recent years, the Company’s principal competitors for consumable products have included: Danaher Corporation; Merck KGaA; Agilent Technologies, Inc.; General Electric Company and Thermo Fisher Scientific Inc. The ACQUITY UPLC instrument is designed to offer a predictable level of performance when used with ACQUITY UPLC columns and the Company believes that the expansion of the ACQUITY UPLC instrument base will enhance its chromatographic column business because of the high level of synergy between ACQUITY UPLC columns and the ACQUITY UPLC instruments.
Patents, Trademarks and Licenses
The Company owns a number of United States and foreign patents and has patent applications pending in the United States and abroad. Certain technology and software has been acquired or is licensed from third parties. The Company also owns a number of trademarks. The Company’s patents, trademarks and licenses are viewed as valuable assets to its operations. However, the Company believes that no one patent or group of patents, trademark or license is, in and of itself, essential to the Company such that its loss would materially affect the Company’s business as a whole.
Environmental Matters and Climate Change
The Company is subject to foreign and U.S. federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and
water as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up and certain damages resulting from sites of past spills, disposals or other releases of hazardous substances. The Company believes that it currently conducts its operations and has operated its business in the past in substantial compliance with applicable environmental laws. From time to time, Company operations have resulted or may result in noncompliance with environmental laws or liability for cleanup pursuant to environmental laws. The Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental laws.
The Company is sensitive to the growing global debate with respect to climate change. An internal sustainability working group develops increasingly robust data with respect to the Company’s utilization of carbon producing substances in an effort to continuously reduce the Company’s carbon footprint. In 2019, the Company published a sustainability report identifying the various actions and behaviors the Company adopted in 2018 concerning its commitment to both the environment and the broader topic of social responsibility. The Company has continued to annually publish a sustainability report detailing the Company’s efforts to address its environmental impact and uphold its social responsibilities. See Item 1A, Risk Factors –, for more information on the potential significance of climate change legislation. See also Note 18 in the Notes to the Consolidated Financial Statements for financial information about geographic areas.
The effects of climate change could harm the Company’s business
Available Information
The Company files or furnishes all required reports with the SEC. The Company is an electronic filer and the SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of the SEC electronic filing website is. The Company also makes available, free of charge on its website, its annual report on
10
11
12
Disruption in worldwide financial markets could adversely impact the Company’s access to capital and financial condition.Financial markets in the U.S., Europe and Asia have experienced times of extreme disruption, including, among other things, sharp increases in the cost of new capital, credit rating downgrades and bailouts, severely diminished capital availability and severely reduced liquidity in money markets. Financial and banking institutions have also experienced disruptions, resulting in large asset write-downs, higher costs of capital, rating downgrades and reduced desire to lend money. There can be no assurance that there will not be future deterioration or prolonged disruption in financial markets or financial institutions. Any future deterioration or prolonged disruption in financial markets or financial institutions in which the Company participates may impair the Company’s ability to access its existing cash, utilize its existing syndicated bank credit facility funded by such financial institutions, and impair its ability to access sources of new capital. The cost to the Company of any new capital raised and interest expense would increase if this were to occur.
13
The loss of key members of management and the risks inherent in succession planning could adversely affect the Company’s results of operations or financial condition.The operation of the Company requires managerial and operational expertise. None of the Company’s key management employees, with the exception of the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, have an employment contract with the Company and there can be no assurance that such individuals will remain with the Company. If, for any reason, other such key personnel do not continue to be active in management, the Company’s results of operations or financial condition could be adversely affected.
14
We cannot provide assurance that our internal controls and compliance systems will always protect the Company from acts committed by employees, agents or business partners that would violate domestic and international laws, including laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy. In particular, the FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced governmental corruption to some degree. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the U.S. and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary andnon-monetarypenalties and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable as a successor for violations committed by companies in which we invest or that we acquire. We also rely on our suppliers to adhere to our supplier standards of conduct and material violations of such standards of conduct could occur that could have a material effect on our business, reputation and financial statements.The effects of climate change could harm the Company’s business.The Company’s manufacturing processes for certain of its products involve the use of chemicals and other substances that are regulated under various international, federal, state and local laws governing the environment. In the event that any future climate change legislation would require that stricter standards be imposed by domestic or international environmental regulatory authorities with respect to the use and/or levels of possible emissions from such chemicals and/or other substances, the Company may be required to make certain changes and adaptations to its manufacturing processes. Any such changes could have a material adverse effect on the financial statements of the Company.Another potential effect of climate change is an increase in the severity of global weather conditions. The Company’s manufacturing facilities are located in the U.S., U.K., Ireland and Germany. In addition, the Company manufactures a growing percentage of its HPLC, UPLC and MS products in both Singapore and Ireland. Severe weather and geological conditions or events, including earthquakes, hurricanes and/or tsunamis, could potentially cause significant damage to the Company’s manufacturing facilities in each of these countries. The effects of such damage and the resulting disruption of manufacturing operations and the impact of lost sales could have a material adverse impact on the financial results of the Company.The Company’s financial results are subject to unexpected shifts in15
Debt covenants, and the Company’s failure to comply with them, could negatively impact the Company’s capital and financial results.The Company’s debt is subject to restrictive debt covenants that limit the Company’s ability to engage in certain activities that could otherwise benefit the Company. These debt covenants include restrictions on the Company’s ability to enter into certain contracts or agreements, which may limit the Company’s ability to make dividend or other payments, secure other indebtedness, enter into transactions with affiliates and consolidate, merge or transfer all or substantially all of the Company’s assets. The Company is also required to meet specified financial ratios under the terms of the Company’s debt agreements. The Company’s ability to comply with these financial restrictions and all other covenants is dependent on the Company’s future performance, which is subject to, but not limited to, prevailing economic conditions and other factors, including factors that are beyond the Company’s control, such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition.16
17
The Company sponsors various retirement plans, both inside and outside the U.S. Any changes in regulations made by governments in countries in which the Company sponsors retirement plans could adversely impact the Company’s cash flows or results of operations. In connection with these retirement plans, the Company is exposed to market risks associated with changes in the various capital markets. For example, changes in long-term interest rates affect the discount rate that is used to measure the Company’s retirement plan obligations and related expense. In addition, changes in the market value of investments held by the retirement plans could materially impact the funded status of the retirement plans, and affect the related pension expense and level and timing of contributions required under applicable laws.2318
1926
INFORMATION ABOUT OUR EXECUTIVE OFFICERSOfficers of the Company are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. The following persons serve as executive officers of the Company:27Christopher J. O’Connell, 53, has served as a Director of the Company since September 2015, when he assumed the position of President and Chief Executive Officer of the Company. In December 2017, Mr. O’Connell was appointed as the Chairman of the Board of Directors of the Company. Mr. O’Connell served as Executive Vice President and President of Restorative Therapies Group of Medtronic plc from August 2009 to August 2015. From 1994 to August 2009, Mr. O’Connell served in the following positions at Medtronic plc: Senior Vice President and President of Medtronic Diabetes, President of Medtronic Physio-Control, Vice President of Sales and Marketing for the Cardiac Rhythm Management business, Vice President/General Manager of the Patient Management Business, Vice President of Corporate Strategy, Director of Investor Relations and Corporate Development Associate.Keeley Aleman, 43, was appointed Senior Vice President, General Counsel and Secretary in October of 2019. Ms. Aleman joined Waters Corporation in 2006 as the Assistant General Counsel and held various legal roles focusing on business transactions, commercial strategies, international development, compliance, corporate governance and organizational matters. Prior to joining Waters Corporation she held corporate associate positions at Goodwin Procter, LLP, and Testa, Hurwitz & Thibeault, LLP.20
Sherry L. Buck, 56, was appointed Senior Vice President and Chief Financial Officer in January 2017. Previously, Ms. Buck served as the Vice President, Chief Financial Officer of Libbey Inc. since August 2012. From 1993 to 2012, Ms. Buck held several positions at Whirlpool Corporation, including Vice President, Finance/Chief Financial Officer, Global Product and Enterprise Cost Leadership; Vice President, Finance—US; Vice President, Cost Leadership; Vice President, Finance—International; and Vice President, Business Performance Management.Robert G. Carson, 46, was appointed Senior Vice President, Corporate Development in February 2018. Prior to joining Waters Corporation, he held several positions during his 16 years at Medtronic plc, including Vice President and General Manager, Pacemaker Business from January 2017 to January 2018. In addition, Mr. Carson spent nearly 12 years in Medtronic’s spinal implants and biologics business, serving as Vice President and General Manager from July 2016 to January 2017, Vice President of Global Marketing & Strategy from April 2015 to July 2016 and Vice President & Therapy Segment Leader from October 2012 to April 2015. Mr. Carson began his career with Banc of America Securities.Dr. Michael C. Harrington, 59, was appointed Senior Vice President, Global Markets in February 2016. Dr. Harrington joined Waters Corporation in 1987 and has held several senior positions with Waters Corporation, including Vice President, Europe and Asia Pacific Operations, Senior Director of US Sales Operations, Director of US Chemistry Sales and General Manager of Phase Separations. Prior to joining Waters Corporation, Dr. Harrington held senior sales positions at Celsis, Inc.Jonathan M. Pratt, 50, was appointed Senior Vice President and President, TA Instruments in August 2019. Prior to joining Waters Corporation, Mr. Pratt was President of Beckman Coulter Life Sciences. Additionally, he held senior positions at Pall Corporation, where he was President of its Food & Beverage, Laboratory and ForteBio businesses.Francis Kim, 53, was appointed Senior Vice President, Global Operations in February 2018. Mr. Kim previously served as Vice President of Global Quality Assurance since November 2016. Prior to joining Waters Corporation, he held several positions during his 20 years at Medtronic plc, including Vice President of Quality, Restorative Therapies Group from May 2015 to November 2016 and Vice President of Quality, Regulatory and Clinical Affairs, Surgical Technologies Division from January 2011 to May 2015. On February 17, 2020, Mr. Kim notified the Company that he will be resigning his position on March 16, 2020.Ian S. King, 63, was appointed Senior Vice President, Global Products in July 2017. Mr. King joined Waters in 1982 and previously served as Senior Vice President, Instrument Technology; Vice President, Separations Technologies; and Vice President and General Manager of Consumable Division, as well as a variety of scientific and management positions in Waters Corporation’s international subsidiaries. Prior to joining Waters Corporation, Mr. King worked at Edinburgh University as a research scientist.Elizabeth B. Rae, 62, was appointed Senior Vice President, Global Human Resources in February 2016 and was Vice President of Human Resources since October 2005 and Vice President of Worldwide Compensation and Benefits since January 2002. Ms. Rae joined Waters Corporation in January 1996 as Director of Worldwide Compensation. Prior to joining Waters Corporation, she held senior human resources positions in retail, healthcare and financial services companies.21
2228
23
2430
The following table sets forth selected historical consolidated financial
The Company adopted new accounting guidance related to stock-based compensation in 2017. The new accounting guidance requires the excess tax benefits or deficiencies related to stock-based compensation to be reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they were previously recognized in equity. This aspect of the new accounting guidance was required to be adopted on a prospective basis for the statement of operations and retroactive restatement was not permitted. In 2019, 2018 and 2017, the Company recognized an excess tax benefit, which decreased income tax expense by $9 million, $9 million and $20 million, respectively, and added $0.14, $0.11 and $0.24, respectively, to net income per diluted share.In addition, in December 2018, the Company settled a pension plan obligation by makinglump-sumcash payments and purchasing annuity contracts for participants to permanently extinguish the pension plan’s obligations. As a result, the Company recorded a $46 million charge, which consisted of a $6 million cash contribution to the plan and a $40 millionnon-cashcharge related to the reversal of unrecognized actuarial losses recorded in accumulated other comprehensive income in the stockholders’ equity. The $46 millionpre-taxcharge reduced net income per diluted share by $0.39.25
Business and Financial OverviewThe Company has two operating segments: WatersTMand TATM. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLCTM” 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 years ended December 31, 2019, 2018 and 2017 (dollars in thousands, except per share data):
** Percentage not meaningful26
The Company’s net sales decreased approximately 1% in 2019 as compared to 2018, and increased 5% in 2018 as compared to 2017. Foreign currency translation decreased sales by 2% in 2019 and increased sales by 1% in 2018. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.Instrument system sales decreased 4% and increased 2% in 2019 and 2018, respectively. In 2019, the decrease in instrument system sales was primarily driven by weaker demand for our products by our customers due to uncertainty caused by macroeconomic conditions and governmental policy changes. In 2018, the increase in instrument system sales was primarily driven by an increase in demand for LC and TA’s instrument systems. Foreign currency translation decreased instrument system sales by 1% in 2019 and increased instrument system sales by 1% in 2018. Recurring revenues (combined sales of precision chemistry consumables and services) increased 3% and 8% in 2019 and 2018, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. Recurring revenues were impacted by foreign currency, which decreased sales by 2% in 2019 and increased sales by 2% in 2018.Geographically, the decline in the Company’s sales in 2019 was a result of increased sales in the U.S., Canada, Japan and the rest of Asia being offset by a decrease in sales in other geographies on weaker demand for our products due to uncertainty caused by macroeconomic conditions, primarily from Brexit as well as Latin America, and governmental policy changes in China. In addition, the effect of foreign currency translation negatively impacted sales by 2% overall. The Company’s sales growth in 2018 was primarily driven by the 7% sales growth in Asia, with China’s sales growing 15%.Sales in Europe decreased 4% in 2019 and increased 4% in 2018. In 2019, Europe sales were impacted by weak demand in Western Europe caused by the political uncertainties of Brexit and the effect of foreign currency translation, which reduced sales by 4% in 2019 and increased sales by 3% in 2018.Sales in the Americas decreased 1% in 2019 and increased 3% in 2018. The Americas sales in 2019 were negatively impacted by macroeconomic conditions in Latin America, and the 2018 Americas sales growth can be attributed to the increase in sales after the lower customer demand stemming from the 2017 natural disasters in the U.S., Mexico and Puerto Rico.Sales to pharmaceutical customers were flat in 2019 and grew 5% in 2018. Sales to pharmaceutical customers in 2019 were negatively impacted by the lower customer demand in China for our instrument systems as a result of changes in governmental policy and lower sales in Latin America. Despite the sales declines in China and Latin America, the need for global access to prescription drugs and the testing of newer and complex biologic drugs increased in the rest of the world.Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, declined 2% in 2019 and grew 2% in 2018. The 2019 industrial customer sales were negatively impacted by a 6% decline in TA instrument system sales and a 1% decline from the effect of foreign currency translation.Combined sales to academic and governmental customers increased 2% in 2019 and 8% in 2018, with the effect of foreign currency translation decreasing sales by 1% in 2019 and increasing sales by 1% in 2018. Sales to academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales growth rates can vary significantly from period to period.Operating income was $708 million in 2019, a decrease of 4% as compared to 2018. This decrease can be attributed to lower sales volume, the effect of foreign currency translation and $10 million of severance-related costs in connection with a reduction in workforce that occurred in early 2019, offset by lower variable incentive compensation costs.27
Operating income increased 12% in 2018 as compared to 2017. This increase was primarily a result of the effect of higher sales volume achieved in 2018, as well as the effect of approximately $33 million of facility closure, litigation and intellectual property payment charges from 2017 that did not recur in 2018.The Company’s effective tax rates were 12.7%, 13.0% and 96.8% for 2019, 2018 and 2017, respectively. Net income per diluted share was $8.69, $7.65 and $0.25 in 2019, 2018 and 2017, respectively. In 2018, the Company settled a pension plan obligation and incurred a $46 million expense which reduced the net income per diluted share by $0.39. In 2017, The Company incurred a $550 million income tax provision related to the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) which reduced the net income per diluted share by $6.82, and excluding the 2017 Tax Act income tax provision, the Company’s effective tax rate in 2017 would have been 11.0%.The Company generated $643 million, $604 million and $698 million of net cash flows from operations in 2019, 2018 and 2017, respectively. The increase in operating cash flow in 2019 was primarily a result of payments made in 2018 that did not recur, including $103 million of income tax payments made in the U.S. relating to the Company’s estimated 2017 transition tax liability and 2018 estimated tax payments, a $15 million litigation settlement payment and $11 million of contributions to certain defined benefit pension plans. Included in the 2019 net cash flow from operations is $29 million of income tax payments made in the U.S. in relation to the 2017 transition tax liability. Over the next three years, the Company is required to make annual U.S. federal tax payments of approximately $38 million to tax authorities in connection with the Company’s estimated remaining transition tax liabilities of $404 million under the 2017 Tax Act. The final 60% of the total liability is required to be paid over a three-year period beginning in 2023.Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $164 million, $96 million and $85 million in 2019, 2018 and 2017, respectively. In 2019, $68 million of capital expenditures paid related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $85 million of costs for this facility through the end of 2019. In 2018, the Company acquired the sole intellectual property rights to the Desorption Electrospray Ionization (“DESI”) imaging technology for $30 million in cash and a future contractual obligation to pay a minimum royalty of $3 million over the remaining life of the patent. DESI is a mass spectrometry imaging technique that is used to develop medical therapies.In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over atwo-yearperiod. During 2019, 2018 and 2017, the Company repurchased 11.1 million, 6.8 million and 1.8 million shares of the Company’s outstanding common stock at a cost of $2.5 billion, $1.3 billion and $323 million, respectively, under the January 2019 authorization and other previously announced programs. As of December 31, 2019, the Company has a total of $1.7 billion authorized for future repurchases. 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.In September 2019, the Company issued fixed interest rate senior unsecured notes with an aggregate principal amount of $500 million, of which $200 million of the outstanding notes matures in seven years and the remaining $300 million matures in 10 years. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.During 2019 and 2018, the Company entered into $260 million and $300 million, respectively, ofU.S.-to-Eurointerest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets, bringing the total currency interest rate cross-currency swap agreement notional value to $560 million at December 31, 2019. As a result of entering into these agreements, the Company lowered its net interest expense by $12 million and $3 million during 2019 and 2018, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $15 million in 2020, $11 million in 2021 and $1 million in 2022 as the three-year term of the agreements expire.28
In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees. The Company expects to incur approximately $25 million of severance costs, lease termination costs and other related costs during 2020.In January 2020, the Company entered into a definitive agreement to acquire Andrew Alliance, an innovator in specialty laboratory automation technology, including software and robotics for approximately $80 million. This acquisition is not expected to have a material effect on the Company sales and expenses in 2020.
In 2018, sales in 2020 occurred in China, increased across all product lines and were driven by double-digit increases inwhere sales to pharmaceutical, academic and governmental customers. The effectdeclined 8%, as well as declines of foreign currency translation increased sales in Japan by 2% in 2018 and sales growth was also driven by increased sales to pharmaceutical and industrial customers. The sales decline in Asia Other in 2018 was a result of lower customer demand in India and weaker sales to environmental customers in the first quarter of 2018. In 2018, sales growth in Europe was driven by TA’s products and services and recurring revenues to pharmaceutical and industrial customers. In addition, the effect of foreign currency translation increased sales in Europe by 3% in 2018. Sales growth in the U.S. in 2018 was driven by recurring revenues and TA instruments. Sales13% in the rest of the Americas had double-digit sales growth for instrument systems and double-digit sales growth for pharmaceutical customers, which was offset by a decline in sales to industrial customers.29Sales by Trade Class
http://www.sec.gov
Form
10-K,
quarterly reports onForm
10-Q,
current reports onFormand SEC filings can be found under the caption “Investors”.
8-K
and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The website address for Waters Corporation ishttp://www.waters.com
Forward-Looking Statements
Certain of the statements in this Form
10-K,
including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of the ongoingCOVID-19
pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the Tax Cuts and Jobs Act (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’s14
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, in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form
10-K.
Statements that are not statements of historicalfact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:
Risks related to the effects of the
COVID-19
pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the pandemic, increased risks of cyber-attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases and volatility in demand for our products.Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its
non-U.S.
operations, especially when a currency weakens against the U.S. dollar.Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of new or proposed tariff or trade regulations; the United Kingdom’s exit from 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, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of academic, governmental 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 FDA and EPA, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, including the impact, if any, of the coronavirus in China or elsewhere; completion of purchase order documentation by our customers; and the customers’ ability to obtain letters of credit or other financing alternatives.
Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.
The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.
15
Certain of these and other factors are further described below in Item 1A, Risk Factors, of this Form
10-K.
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 annual report on Form10-K
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 1A:
Risk Factors
The Company is subject to risks and uncertainties, including, but not limited to, the following:
RISKS RELATED TO THE CORONAVIRUS
(COVID-19)
PANDEMICThe adverse effects of the continuing
COVID-19
pandemic and an indeterminate recovery period has negatively affected the Company’s business and operations, and may continue to negatively impact the Company’s business and operations, the nature and extent of such impact is highly uncertain.The impact of the global
COVID-19
pandemic over the last two years has resulted in a widespread public health crisis. TheCOVID-19
pandemic has caused significant volatility and continued spread throughout the United States and globally, which has disrupted and may continue to disrupt the Company’s business. The Company operates in over 35 countries, including those in the regions most impacted by theCOVID-19
pandemic. In response, governments of most countries, including the United States, as well as private businesses, have implemented numerous measures attempting to contain and mitigate the effects ofCOVID-19.
Such measures have had and are expected to continue to have adverse impacts on the United States and foreign economies of uncertain severity and duration, and have had and may continue to have a negative impact on the Company’s operations, including Company sales, supply chain and cash flow.The
COVID-19
pandemic has and may continue to have a significant impact on our supply chain if our manufacturing facilities or those of third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. The current logistic and supply chain issues being experienced throughout the world have made it more difficult for us to manage our operations and as such we cannot provide any assurances that any further disruptions in the logistics and supply chains will not have a material impact on our future financial results and cashflows. We have and may continue to have disruptions or delays in shipments of certain materials or components of our products.In addition, in the event of a sustained downturn in customer demand or other economic conditions due to the
COVID-19
pandemic could result in material charges related to bad debt or inventory write-offs, restructuring charges, or impairments of long-lived assets, including both tangible and intangible assets. Furthermore, such a sustained downturn in financial markets and asset values could adversely affect the Company’s cost of capital, liquidity and access to capital markets.The
COVID-19
pandemic has caused the Company to take measures to modify its business practices. We have invested in maintaining safe work environments for our employees by, among other things, adding work from home flexibility, adjusting attendance policies to encourage those who are sick to stay at home, increasing cleaning protocols across all work locations, initiating regular communications regarding the impacts of theCOVID-19
pandemic, establishing new physical distancing and safety procedures for employees, modifying workplaces as appropriate and implementing protocols to address actual and suspectedCOVID-19
cases and potential exposure. Further, the Company has modified policies regarding employee travel and physical participation in meetings, events and conferences. The Company may take further actions as may be required by government authorities or that the Company determines are in the best interests of, among others, its employees, customers, distributors and suppliers. The Company’s change in business practices may result in the Company experiencing lower workforce efficiency and productivity. In addition, as Company employees work from home16
and access the Company’s systems remotely, the Company may be subject to heightened security risks, including the risks of cyber-attacks. Although we are in
re-opening
processes for our corporate and other facilities, such processes may face future closure requirements. There is no certainty that the Company measures will be sufficient to mitigate the risks posed byCOVID-19,
and the Company’s ability to perform critical functions could be adversely impacted. Furthermore, the Company’s business could be adversely affected if any of the Company’s key management employees are unable to perform their duties for a period of time, including as a result of illness.The degree to which
COVID-19
ultimately affects the Company’s business, financial results and operations will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, including the effect of the emergence of variants of the virus, its severity, the actions to contain the virus or treat its impact, the availability, distribution, acceptance and efficacy of a vaccine, and how quickly and to what extent normal economic and operating conditions can resume.RISKS RELATED TO MACROECONOMIC CONDITIONS
The Company’s international operations may be negatively affected by political events, wars or terrorism and regulatory changes, related to either a specific country or a larger region. These potential political, currency and economic disruptions, as well as foreign currency exchange rate fluctuations, could have a material adverse effect on the Company’s results of operations or financial condition.
Approximately 71%72% and 72%71% of the Company’s net sales in 20192021 and 2018,2020, respectively, were outside of the United States and were primarily denominated in foreign currencies. In addition, the Company has considerable manufacturing operations in Ireland and the U.K., as well as significant subcontractors located in Singapore. As a result, a significant portion of the Company’s sales and operations are subject to certain risks, including adverse developments in the political, regulatory and economic environment, in particular, uncertainty regarding possible changes to foreign and domestic trade policy; the effect of the U.K.’s exit from the European Union as well as the financial difficulties and debt burden experienced by a number of European countries; the instability and potential impact of war or terrorism; the instability and possible dissolution of the Euro as a single currency; sudden movements in a country’s foreign exchange rates due to a change in a country’s sovereign risk profile or foreign exchange regulatory practices; tariffs and other trade barriers; the impact of publicglobal health pandemics and epidemics, such as the coronavirus currently impacting China and elsewhere;
COVID-19;
difficulties in staffing and managing foreign operations; and associated adverse operational, contractual and tax consequences.Additionally, the U.S. dollar value of the Company’s net sales, cost of sales, operating expenses, interest, taxes and net income varies with foreign currency exchange rate fluctuations. Significant increases or decreases in the value of the U.S. dollar relative to certain foreign currencies, particularly the Euro, Japanese yen and British pound, could have a material adverse effect or benefit on the Company’s results of operations or financial condition.
Global economic conditions may decrease demand for the Company’s products and harm the Company’s financial results.
The Company is a global business that may be adversely affected by changes in global economic conditions. These changes in global economic conditions, both inside and outside the U.S., may affect the demand for the Company’s products and services. This may result in a decline in sales in the future, increased rate of order cancellations or delays, increased risk of excess or obsolete inventories, longer sales cycles and potential difficulty in collecting sales proceeds. There can be no assurance regarding demand for the Company’s products and services in the future.
Disruption in worldwide financial markets could adversely impact the Company’s access to capital and financial condition.
Financial markets in the U.S., Europe and Asia have experienced times of extreme disruption, including, among other things, sharp increases in the cost of new capital, credit rating downgrades and bailouts, severely
17
diminished capital availability and severely reduced liquidity in money markets. Financial and banking institutions have also experienced disruptions, resulting in large asset write-downs, higher costs of capital, rating downgrades and reduced desire to lend money. There can be no assurance that there will not be future deterioration or prolonged disruption in financial markets or financial institutions. Any future deterioration or prolonged disruption in financial markets or financial institutions in which the Company participates may impair the Company’s ability to access its existing cash, utilize its existing syndicated bank credit facility funded by such financial institutions, and impair its ability to access sources of new capital. The cost to the Company of any new capital raised and interest expense would increase if this were to occur.
RISKS RELATED TO OUR BUSINESS
The Company’s financial results are subject to changes in customer demand, which may decrease for a number of reasons, many beyond the Company’s control.
The demand for the Company’s products is dependent upon the size of the markets for its LC,
LC-MS,
thermal analysis, rheometry and calorimetry products; the timing and level of capital spending and expenditures of the Company’s customers; changes in governmental regulations, particularly affecting drug, food and drinking water testing; funding available to academic, governmental and research institutions; general economic conditions and the rate of economic growth in the Company’s major markets; and competitive considerations. The Company typically experiences an increase in sales in its fourth quarter as a result of purchasing habits for capital goods by customers that tend to exhaust their spending budgets by calendar year end. However, there can be no assurance that the Company will effectively forecast customer demand and appropriately allocated research and development expenditures to products with high growth and high margin prospects. Additionally, there can be no assurance that the Company’s results of operations or financial condition will not be adversely impacted by a change in any of the factors listed above or the continuation of uncertain global economic conditions.Additionally, the analytical instrument market may, from time to time, experience low sales growth. Approximately 57%60% and 56%59% of the Company’s net sales in 20192021 and 2018,2020, respectively, were to worldwide pharmaceutical and biotechnology companies, which may be periodically subject to unfavorable market conditions and consolidations. Unfavorable industry conditions could have a material adverse effect on the Company’s results of operations or financial condition.
Competitors may introduce more effective or less expensive products than the Company’s, which could result in decreased sales. The competitive landscape may transform as a result of potential changes in ownership, mergers and continued consolidations among the Company’s competitors, which could harm the Company’s business.
The analytical instrument market and, in particular, the portion related to the Company’s HPLC, UPLC,
LC-MS,
thermal analysis, rheometry and calorimetry product lines, is highly competitive and subject to rapid changes in technology. The Company encounters competition from several international instrument suppliers and other companies in both domestic and foreign markets. Some competitors have instrument businesses that are generally more diversified than the Company’s business, but are typically less focused on the Company’s chosen markets. Over the years, some competitors have merged with other competitors for various reasons, including increasing product line offerings, improving market share and reducing costs. There can be no assurance that the Company’s competitors will not introduce more effective and less costly products than those of the Company or that the Company will be able to increase its sales and profitability from new product introductions. There can be no assurance that the Company’s sales and marketing forces will compete successfully against the Company’s competitors in the future.Strategies for organic growth require developing new technologies and bringing these new technologies to market, which could negatively impact the Company’s financial results.
The Company’s corporate strategy is fundamentally based on winning through organic innovation and deep application expertise. The Company is in the process of developing new products with recently acquired technologies. The future development of these new products will require a significant amount of spending over
18
the next few years before significant, robust sales will be realized. Furthermore, these new products will be sold into both the
non-clinical
and clinical markets, and any new products requiring FDA clearance may take longer to bring to market. There can be no assurance given as to the timing of these new product launches and the ultimate realization of sales and profitability in the future.The Company’s software or hardware may contain coding or manufacturing errors that could impact their function, performance and security, and result in other negative consequences.
Despite testing prior to the release and throughout the lifecycle of a product or service, the detection and correction of any errors in released software or hardware can be time consuming and costly. This could delay the development or release of new products or services, or new versions of products or services, create security vulnerabilities in the Company’s products or services, and adversely affect market acceptance of products or services. If the Company experiences errors or delays in releasing its software or hardware, or new versions thereof, its sales could be affected and revenues could decline. Errors in software or hardware could expose the Company to product liability, performance and warranty claims as well as harm to brand and reputation, which could impact future sales.
Disruption of operations at the Company’s manufacturing facilities could harm the Company’s financial condition.
The Company manufactures LC instruments at facilities in Milford, Massachusetts and through a subcontractor in Singapore; precision chemistry separation columns at its facilities in Taunton, Massachusetts and Wexford, Ireland; MS products at its facilities in Wilmslow, England, Solihull, England and Wexford, Ireland; thermal analysis and rheometry products at its facilities in New Castle, Delaware and other instruments and consumables at various other locations as a result of the Company’s acquisitions. Any prolonged disruption to the operations at any of these facilities, whether due to labor difficulties, destruction of or damage to any facility or other reasons, could have a material adverse effect on the Company’s results of operations or financial condition.
Failure to adequately protect intellectual property could have materially adverse effects on the Company’s results of operations or financial condition.
There can be no assurance that any patents held by the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Additionally, there could be successful claims against the Company by third-party patent holders with respect to certain Company products that may infringe the intellectual property rights of such third parties. The Company’s patents, including those licensed from others, expire on various dates. If the Company is unable to protect its intellectual property rights, it could have an adverse and material effect on the Company’s results of operations or financial condition.
The Company’s business would suffer if the Company were unable to acquire adequate sources of supply.
Most of the raw materials, components and supplies purchased by the Company are available from a number of different suppliers; however, a number of items are purchased from limited or single sources of supply and disruption of these sources could have, at a minimum, a temporary adverse effect on shipments and the financial results of the Company. A prolonged inability to obtain certain materials or components could have an adverse effect on the Company’s financial condition or results of operations and could result in damage to its relationships with its customers and, accordingly, adversely affect the Company’s business.
The Company’s sales would deteriorate if the Company’s outside contractors fail to provide necessary components or modules.
Certain components or modules of the Company’s LC and MS instruments are manufactured by outside contractors, including the manufacturing of LC instrument systems and related components by contract manufacturing firms in Singapore. Disruptions of service by these outside contractors could have an adverse effect on the supply chain and the financial results of the Company. A prolonged inability to obtain these components or modules could have an adverse effect on the Company’s financial condition or results of operations.
19
The Company’s business could be harmed by actions of distributors and other third parties that sell our products.
The Company sells some products through third parties, including distributors and value-added resellers. This exposes us to various risks, including competitive pressure, concentration of sales volumes, credit risks and compliance risks. We may rely on one or a few key distributors for a product or market and the loss of these
distributors could reduce our revenue or net earnings. Distributors may also face financial difficulties, including bankruptcy, which could harm our collection of accounts receivable. Violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act or similar anti-bribery laws by distributors or other third-party intermediaries could materially impact our business. Risks related to our use of distributors may reduce sales, increase expenses and weaken our competitive position.
The Company may be harmed by improper conduct of any of our employees, agents or business partners.
pre-tax
income between tax jurisdictions, changing application of tax law and tax audit examinations.The Company is subject to rates of income tax that range from 0% up to 34% in various jurisdictions in which it conducts business. In addition, the Company typically generates a substantial portion of its income in the fourth quarter of each fiscal year. Geographical shifts in income from previous quarters’ projections caused by factors including, but not limited to, changes in volume and product mix and fluctuations in foreign currency translation rates, could therefore have potentially significant favorable or unfavorable effects on the Company’s income tax expense, effective tax rate and results of operations.
Governments in the jurisdictions in which the Company operates implement changes to tax laws and regulations from time to time. Any changes in corporate income tax rates or regulations regarding transfer
pricing or repatriation of dividends or capital, as well as changes in the interpretation of existing tax laws and regulations, in the jurisdictions in which the Company operates could adversely affect the Company’s cash flow and lead to increases in its overall tax burden, which would negatively affect the Company’s profitability.
The Company hasentered into a contractualnew Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. Prior to April 1, 2021, the Company had a tax exemption in Singapore on certain types of 0% through March 2021,income, based upon the achievement and continued satisfaction of certain operational and financial milestones, which the Company expects to continue to meet. Currently, themet as of December 31, 2020 and maintained through March 2021. The Company hashad determined that it iswas more likely than not to realize the contractual tax rateexemption in Singapore of 0% and, hasaccordingly, did not recognizedrecognize any uncertainreserves for unrecognized tax position inbenefits on its balance sheet related to the achievementthis tax exemption. If any of the contractual milestones in Singapore. In the event that it appears that the milestone targets willwere not be met, the Company will no longer bewould not have been entitled to a 0% contractualthe tax rate benefitexemption on income earned in Singapore dating back to the start date of the agreement (April 1, 2016), at which timeand all the tax benefits previously recordedrecognized would be reversed, and anresulting in the recognition of income tax chargeexpense equal to the statutory tax of 17% on income earned during that period would be recorded.period.
As a global business, the Company is subject to tax audit examinations in various jurisdictions throughout the world. The Company must manage the cost and disruption of responding to governmental audits, investigation and proceedings. In addition, the impact of the settlement of pending or future tax audit examination could have an unfavorable effect on the Company’s income tax expense, effective tax rate and results of operations.
RISKS RELATED TO HUMAN CAPITAL MANAGEMENT
We may not be able to attract and retain qualified employees.
Our future success depends upon the continued service of our executive officers and other key management and technical personnel, and on our ability to continue to identify, attract, retain and motivate them. Implementing our business strategy requires specialized engineering and other talent, as our revenues are highly dependent on technological and product innovations. The market for employees in our industry is extremely competitive, and competitors for talent, particularly engineering talent, increasingly attempt to hire, and to varying degrees have
20
been successful in hiring, our employees. A number of such competitors for talent are significantly larger than us and are able to offer compensation in excess of what we are able to offer. Further, existing immigration laws make it more difficult for us to recruit and retain highly skilled foreign national graduates of universities in the United States, making the pool of available talent even smaller. If we are unable to attract and retain qualified employees, our business may be harmed.
The loss of key members of management and the risks inherent in succession planning could adversely affect the Company’s financial condition and results of operations could be adversely affected if the Company is unable to maintain a sufficient level of cash flow.or financial condition.
The Company had $1.7 billion in debt and $337 million in cash, cash equivalents and investments asoperation of December 31, 2019. As of December 31, 2019, the Company also had the ability to borrow an additional $1.2 billion from its existing, committed credit facility. All but a small portionrequires managerial and operational expertise. None of the Company’s debt waskey management employees, with the exception of the Chief Executive Officer and Chief Financial Officer, have an employment contract with the Company and there can be no assurance that such individuals will remain with the Company. If, for any reason, other key personnel do not continue to be active in the U.S. There is a substantial cash requirement in the U.S. to fund operations and capital expenditures, service debt interest obligations, finance potential U.S. acquisitions and continue authorized stock repurchase programs. As such,management, the Company’s financial condition and results of operations or financial condition could be adversely impacted if the Company is unable to generate and maintain a sufficient level of cash flow to address these requirements through (1) cash from operations, (2) the Company’s ability to access its existing cash and revolving credit facility, (3) the ability to expand the Company’s borrowing capacity and (4) other sources of capital obtained at an acceptable cost.affected.
RISKS RELATED TO CYBERSECURITY AND DATA PRIVACY
Disruption, cyber attackcyber-attack or unforeseen problems with the security, maintenance or upgrade of the Company’s information and
web-based
systems could have an adverse effect on the Company’s operations and financial condition.The Company relies on its technology infrastructure and that of its software and banking partners, among other functions, to interact with suppliers, sell products and services, fulfill contract obligations, ship products, collect and make electronic wire and check based payments and otherwise conduct business. The Company’s technology
infrastructure may be vulnerable to damage or interruption from, but not limited to, natural disasters, power loss, telecommunication failures, terrorist attacks, computer viruses, unauthorized access to customer or employee data, unauthorized access to and funds transfers from Company bank accounts and other attempts to harm the Company’s systems. For example, in December 2021, a vulnerability named “Log4Shell” was reported for the widely used Java logging library, Apache Log4j 2. We have reviewed the use of this library within our software product portfolio and in our IT environment and have taken steps to mitigate the vulnerability. To date, cybersecurity incidents have not resulted in a material adverse impact to our business or operations, but there can be no guarantee we will not experience such an impact. Additionally, we must maintain and periodically upgrade our information and
web-based
systems, which has caused and will in the future cause temporary interruptions to our technology infrastructure. Any prolonged disruption to the Company’s technology infrastructure, at any of its facilities, could have a material adverse effect on the Company’s results of operations or financial condition.If the Company’s security measures are compromised or fail to adequately protect its technology infrastructure, research and development efforts or manufacturing operations, the Company’s products and services may be perceived as vulnerable or unreliable, the information [protected by]protected by the Company’s controls and processes may be subject to unauthorized access, acquisition or modification, the Company’s brand and reputation could be damaged, the services that the Company provides to its customers could be disrupted, and customers may stop using the Company’s products and services, all of which could reduce the Company’s revenue and earnings, increase its expenses and expose the Company to legal claims and regulatory actions.
The Company is in the business of designing, manufacturing, selling and servicing analytical instruments to life science, pharmaceutical, biochemical, industrial, nutritional safety and environmental, academic and governmental customers working in research and development, quality assurance and other laboratory applications, and the Company is also a developer and supplier of software-based products that support instrument systems. Many of the Company’s customers are in highly regulated industries. While the Company has invested time and resources implementing measures designed to protect the integrity and security of its technology infrastructure, research and development processes, manufacturing operations, products and services, and the internal and external data managed by the Company, there is a risk these measures will be defeated or compromised or that they are otherwise insufficient to protect against existing or emerging threats. The Company also has acquired companies, products, services and technologies over time and may face inherent risk when integrating these acquisitions into the Company. In addition, at times, the Company faces attempts by third
21
parties to defeat its security measures or exploit vulnerabilities in its systems. These risks will increase as the Company continues to grow and expand geographically, and its systems, products and services become increasingly digital and sensor- and
web-based.
The Company could suffer significant damage to its brand and reputation if a security incident resulted in unauthorized access to, acquisition of, or modification to the Company’s technology infrastructure, research and development processes, manufacturing operations, its products and services as well as the internal and external data managed by the Company. Such an incident could disrupt the Company’s operations and customers could lose confidence in the Company’s ability to deliver quality and reliable products or services. This could negatively impact sales and could increase costs related to fixing and addressing these incidents and any vulnerabilities exposed by them, as well as to lawsuits, regulatory investigations, claims or legal liability including contractual liability, costs and expenses owed to customers and business partners.
RISKS RELATED TO COMPLIANCE, REGULATORY OR LEGAL CHANGES
Compliance failures could harm the Company’s business.
The Company is subject to regulation by various federal, state and foreign governments and agencies in areas including, among others, health and safety, import/export, privacy and data protection, FCPA and environmental laws and regulations. A portion of the Company’s operations are subject to regulation by the FDA and similar foreign regulatory agencies. These regulations are complex and govern an array of product activities, including design, development, labeling, manufacturing, promotion, sales and distribution. Any failure by the Company to comply with applicable governmental regulations could result in product recalls, the imposition of fines, restrictions on the Company’s ability to conduct or expand its operations or the cessation of all or a portion of its operations.
Regulators globally are increasingly imposing greater fines and penalties for privacy and data protection violations, and the European Union has enacted a broad data protection regulation with fines based on a percentage of global revenues. Changes in laws or regulations associated with enhanced protection of certain sensitive types of personal information, such as information related to health, could greatly increase the cost of
compliance and the cost of providing the Company’s products or services. Any failure, or perceived failure, by the Company to comply with laws and regulations on privacy, data security or consumer protection, or other policies, public perception, standards, self-regulatory requirements or legal obligations, could result in lost or restricted business, proceedings, actions or fines brought against the Company or levied by governmental entities or others, or could otherwise adversely affect the business and harm the Company’s reputation.
Some of the Company’s operations are subject to domestic and international laws and regulations with respect to the manufacturing, handling, use or sale of toxic or hazardous substances. This requires the Company to devote substantial resources to maintain compliance with those applicable laws and regulations. If the Company fails to comply with such requirements in the manufacturing or distribution of its products, it could face civil and/or criminal penalties and potentially be prohibited from distributing or selling such products until they are compliant.
Some of the Company’s products are also subject to the rules of certain industrial standards bodies, such as the International Standards Organization. The Company must comply with these rules, as well as those of other agencies, such as the United States Occupational Safety and Health Administration. Failure to comply with such rules could result in the loss of certification and/or the imposition of fines and penalties, which could have a material adverse effect on the Company’s operations.
As a publicly-traded company, the Company is subject to the rules of the SEC and the New York Stock Exchange. In addition, the Company must comply with the Sarbanes-Oxley regulations, which require the Company to establish and maintain adequate internal control over financial reporting. The Company’s efforts to comply with such laws and regulations are time consuming and costly. While we continue to enhance our controls, we cannot be certain that we will be able to prevent future significant deficiencies or material
22
weaknesses. Failure to comply with such regulations or having inadequate internal controls could have a material adverse effect on the Company’s financial condition and operations, which could cause investors to lose confidence in our reported financial information and could have a negative effect on the trading price of our stock and our access to capital.
The Company is subject to the rules of the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring disclosure as to whether certain materials (tantalum, tin, gold and tungsten), known as conflict minerals, which may be contained in the Company’s products, are mined from the Democratic Republic of the Congo and adjoining countries. In 2018,2020, the Company was not able to determine with certainty the country of origin of some of the conflict minerals in its manufactured products. However, the Company does not have knowledge that any of its conflict minerals originated from the Democratic Republic of the Congo or adjoining countries. The Company is in the process of evaluating its 20192021 supply chain, and the Company plans to file its 20192021 Form SD with the SEC in May 2020.2022. The results of this and future evaluations may impose additional costs and may introduce new risks related to the Company’s ability to verify the origin of any conflict minerals contained in its products.
The Company’sCompany may be harmed by improper conduct of any of our employees, agents or business partners.
We cannot provide assurance that our internal controls and compliance systems will always protect the Company from acts committed by employees, agents or business partners that would violate domestic and international laws, including laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy. In particular, the FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced governmental corruption to some degree. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the U.S. and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and
non-monetary
penalties and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable as a successor for violations committed by companies in which we invest or that we acquire. We also rely on our suppliers to adhere to our supplier standards of conduct and material violations of such standards of conduct could occur that could have a material effect on our business, reputation and financial statements.Environmental, social and corporate governance (“ESG”) issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations couldand damage our reputation.
There is an increasing focus from certain investors, customers, consumers, employees and other stakeholders concerning ESG matters. Additionally, public interest and legislative pressure related to public companies’ ESG practices continue to grow. If our ESG practices fail to meet regulatory requirements or investor, customer, consumer, employee or other stakeholders’ evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship and sustainability, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency, our reputation, brand and employee retention may be adversely affected by changesnegatively impacted, and our customers and suppliers may be unwilling to continue to do business with us.
Customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, energy and water use, plastic waste and other sustainability concerns. Concern over climate change or plastics and packaging materials, in particular, may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the Company’s retirement plansenvironment. Changing customer and consumer preferences or retirement plan assets.increased regulatory requirements may result in increased demands or requirements regarding plastics and packaging materials, including
single-use
andnon-recyclable
plastic products and packaging, othercomponents of our products and their environmental impact on sustainability, or increased customer and consumer concerns or perceptions (whether accurate or inaccurate) regarding the effects of substances present in certain of our products. Complying with these demands or requirements could cause us to incur additional manufacturing, operating or product development costs.
If we do not adapt to or comply with new regulations, or fail to meet evolving investor, industry or stakeholder expectations and concerns regarding ESG issues, investors may reconsider their capital investment in our Company, and customers and consumers may choose to stop purchasing our products, which could have a material adverse effect on our reputation, business or financial condition.
GENERAL RISK FACTORS
The effects of climate change could harm the Company’s business.
The Company’s manufacturing processes for certain of its products involve the use of chemicals and other substances that are regulated under various international, federal, state and local laws governing the environment. In the event that any future climate change legislation would require that stricter standards be imposed by domestic or international environmental regulatory authorities with respect to the use and/or levels of possible emissions from such chemicals and/or other substances, the Company may be required to make certain changes and adaptations to its manufacturing processes. Any such changes could have a material adverse effect on the financial statements of the Company.
Another potential effect of climate change is an increase in the severity of global weather conditions. The Company’s manufacturing facilities are located in the U.S., U.K., Ireland and Germany. In addition, the Company manufactures a growing percentage of its HPLC, UPLC and MS products in both Singapore and Ireland. Severe weather and geological conditions or events, including earthquakes, hurricanes and/or tsunamis, could potentially cause significant damage to the Company’s manufacturing facilities in each of these countries. The effects of such damage and the resulting disruption of manufacturing operations and the impact of lost sales could have a material adverse impact on the financial results of the Company.
Estimates and assumptions made in accounting for the Company’s results from operations are dependent on future results, which involve significant judgments and may be imprecise and may differ materially from actual results.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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. These estimates and assumptions must be made due to certain information used in preparation of our financial statements which is dependent on future events, cannot be calculated with a high degree of precision from data available or is not capable of being readily calculated based on generally accepted methodologies. The Company believes that the accounting related to revenue recognition, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty and installation provisions, litigation, retirement plan obligations, stock-based compensation, business combinations and asset acquisitions, uncertain tax positions and contingencies involves significant judgments and estimates. Actual results for all estimates could differ materially from the estimates and assumptions used, which could have a material adverse effect on our financial condition and results of operations.
The Company’s financial condition and results of operations could be adversely affected by changes to the Company’s retirement plans or retirement plan assets.
The Company sponsors various retirement plans, both inside and outside the United States. Any changes in regulations made by governments in countries in which the Company sponsors retirement plans could adversely impact the Company’s cash flows or results of operations. In connection with these retirement plans, the Company is exposed to market risks associated with changes in the various capital markets. For example, changes in long-term interest rates affect the discount rate that is used to measure the Company’s retirement plan 24 obligations and related expense. In addition, changes in the market value of investments held by the retirement plans could materially impact the funded status of the retirement plans, and affect the related pension expense and level and timing of contributions required under applicable laws. The Company’s financial condition and results of operations could be adversely affected if the Company is unable to maintain a sufficient level of cash flow. The Company had $1.5 billion in debt and $569 million in cash, cash equivalents and investments as of December 31, 2021. As of December 31, 2021, the Company also had the ability to borrow an additional $1.6 billion from its existing, committed credit facility. All but a small portion of the Company’s debt was in the U.S. There is a substantial cash requirement in the United States to fund operations and capital expenditures, service debt interest obligations, finance potential United States acquisitions and continue authorized stock repurchase programs. As such, the Company’s financial condition and results of operations could be adversely impacted if the Company is unable to generate and maintain a sufficient level of cash flow to address these requirements through (1) cash from operations, (2) the Company’s ability to access its existing cash and revolving credit facility, (3) the ability to expand the Company’s borrowing capacity and (4) other sources of capital obtained at an acceptable cost. Debt covenants, and the Company’s failure to comply with them, could negatively impact the Company’s capital and financial results. The Company’s debt is subject to restrictive debt covenants that limit the Company’s ability to engage in certain activities that could otherwise benefit the Company. These debt covenants include restrictions on the Company’s ability to enter into certain contracts or agreements, which may limit the Company’s ability to make dividend or other payments, secure other indebtedness, enter into transactions with affiliates and consolidate, merge or transfer all or substantially all of the Company’s assets. The Company is also required to meet specified financial ratios under the terms of the Company’s debt agreements. The Company’s ability to comply with these financial restrictions and all other covenants is dependent on the Company’s future performance, which is subject to, but not limited to, prevailing economic conditions and other factors, including factors that are beyond the Company’s control, such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition. Item 1B: Unresolved Staff Comments |
None.
25
Item 2:
Properties
Waters Corporation operates 2319 United States facilities and 6769 international facilities, including field offices. The Company believes its facilities are suitable and adequate for its current production level and for reasonable growth over the next several years. The Company’s primary facilities are summarized in the table below.
Primary Facility Locations (1)
Location | Function (2) | Owned/Leased | ||||||||
Golden, CO | M, R, S, D, A | Leased | ||||||||
New Castle, DE | M, R, S, D, A | Owned | ||||||||
Franklin, MA | D | Leased | ||||||||
Milford, MA | M, R, S, A | Owned | ||||||||
Taunton, MA | M, R | Owned | ||||||||
Cambridge, MA | R, S | Leased | ||||||||
Eden Prairie, MN | M, R, S, D, A | Leased | ||||||||
Nixa, MO | M, S, D, A | Leased | ||||||||
Lindon, UT | M, R, S, D, A | Leased | ||||||||
| S, A | Leased | |||||||||
| S, | Leased | |||||||||
Solihull, England | M,A | Owned | ||||||||
Wilmslow, England | M, R, S, D, A | Owned | ||||||||
St. Quentin, France | S, A | Leased | ||||||||
Huellhorst, Germany | M, R, S, D, A | Owned | ||||||||
| S, A | Leased | |||||||||
Wexford, Ireland | M, R, D, A | Owned | ||||||||
| M, S, D, A | Owned | |||||||||
Etten-Leur, Netherlands | S, D, A | Owned | ||||||||
Brasov, Romania | R, A | Leased | ||||||||
Singapore | R, S, D, A | Leased | ||||||||
| (1) | The Company operates more than one primary facility within certain states and foreign countries. |
| (2) | M = Manufacturing; R = Research; S = Sales and Service; D = Distribution; A = Administration |
The Company operates and maintains 119 field offices in the United States and 56 field offices abroad in addition to sales offices in the primary facilities listed above. The Company’s field office locations are listed below.
Field Office Locations (2)(3)
United States | International | ||||||||
Costa Mesa, CA | Australia | ||||||||
Pleasanton, CA | Austria | ||||||||
Wood Dale, IL | Belgium | ||||||||
Carmel, IN | Brazil | ||||||||
Columbia, MD | Canada | ||||||||
Morrisville, NC | |||||||||
Parsippany, NJ | Sweden | ||||||||
Plymouth Meeting, PA | Switzerland | ||||||||
Bellaire, TX | Taiwan | ||||||||
| Germany | Netherlands | United Arab Emirates | |||||||
| United Kingdom | |||||||||
The Company operates more than one field office within certain states and foreign countries. |
Item 3:
Legal Proceedings
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 it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
Item 4:
Mine Safety Disclosures
Not applicable.
PART II
Item 5: Market | for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is listed on the New York Stock Exchange under the symbol “WAT”. As of February 21, 2020,19, 2022, the Company had 8075 common stockholders of record. The Company has not declared or paid any dividends on its common stock in its past three fiscal years and does not intend to pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of the Board of Directors and will depend on restrictions and other factors the Board of Directors may deem relevant. The Company has not made any sales of unregistered equity securities in the years ended December 31, 2019, 20182021, 2020 or 2017.2019.
Securities Authorized for Issuance under Equity Compensation Plans
Equity compensation plan information is incorporated by reference from Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this document and should be considered an integral part of this Item 5.
Stock Price Performance Graph
The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended (“Securities Act”), or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the cumulative total return on $100 invested as of December 31, 20142016 (the last day of public trading of the Company’s common stock in fiscal year 2014)2016) through December 31, 20192021 (the last day of public trading of the common stock in fiscal year 2019)2021) in the Company’s common stock, the NYSE Market Index, the SIC Code 3826 Index and the S&P 500 Index. The return of the indices is calculated assuming reinvestment of dividends during the period presented. The Company has not paid any dividends since its IPO. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE DECEMBER 31, 20142016
AMONG WATERS CORPORATION, NYSE MARKET INDEX, SIC CODE 3826 INDEX – LABORATORY ANALYTICAL INSTRUMENTS AND S&P 500 INDEX
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||
WATERS CORPORATION | $ | 100.00 | $ | 119.39 | $ | 119.22 | $ | 171.39 | $ | 167.36 | $ | 207.28 | |||||||||||||
NYSE MARKET INDEX | $ | 100.00 | $ | 95.91 | $ | 107.36 | $ | 127.46 | $ | 116.06 | $ | 145.66 | |||||||||||||
SIC CODE INDEX | $ | 100.00 | $ | 111.14 | $ | 102.42 | $ | 156.71 | $ | 165.13 | $ | 205.80 | |||||||||||||
S&P 500 INDEX | $ | 100.00 | $ | 101.38 | $ | 113.51 | $ | 138.29 | $ | 132.23 | $ | 173.86 | |||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||
WATERS CORPORATION | 100.00 | 143.75 | 140.38 | 173.86 | 184.11 | 277.25 | ||||||||||||||||||
NYSE MARKET INDEX | 100.00 | 118.73 | 108.10 | 135.68 | 145.16 | 175.18 | ||||||||||||||||||
SIC CODE INDEX | 100.00 | 121.83 | 116.49 | 153.17 | 181.35 | 233.41 | ||||||||||||||||||
S&P 500 INDEX | 100.00 | 139.02 | 142.44 | 200.67 | 275.70 | 372.23 | ||||||||||||||||||
29
Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company during the three months ended December 31, 20192021 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) | ||||||||||||
September 29, 2019 to October 26, 2019 | 646 | $ | 217.06 | 646 | $ | 2,112,901 | ||||||||||
October 27, 2019 to November 23, 2019 | 797 | $ | 214.93 | 797 | $ | 1,941,602 | ||||||||||
November 24, 2019 to December 31, 2019 | 1,092 | $ | 228.96 | 1,092 | $ | 1,691,643 | ||||||||||
Total | 2,535 | $ | 221.52 | 2,535 | $ | 1,691,643 | ||||||||||
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs (2) | ||||||||||||
October 3, 2021 to October 30, 2021 | 145 | $ | 351.92 | 145 | $ | 989,582 | ||||||||||
October 31, 2021 to November 27, 2021 | 141 | $ | 348.42 | 141 | $ | 940,385 | ||||||||||
November 28, 2021 to December 31, 2021 | 162 | $ | 346.16 | 162 | $ | 884,561 | ||||||||||
Total | 448 | $ | 348.74 | 448 | $ | 884,561 | ||||||||||
| (1) | The |
| (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 pre-existing authorization. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. The size and timing of these purchases, if any, will depend on our stock price and market and business conditions, as well as other factors. |
Item 6:
Reserved
Item 7:
Management
’
s Discussion and operating data for the periods indicated. The statementAnalysis of operationsFinancial Condition and balance sheet data is derived from financial statements for the years 2019, 2018, 2017, 2016 and 2015. The Company’s financial statements as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019 are included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form10-K.
In thousands, except per share and employees data | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
STATEMENT OF OPERATIONS DATA: | ||||||||||||||||||||
Net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | $ | 2,167,423 | $ | 2,042,332 | ||||||||||
Income from operations before income taxes | $ | 678,239 | $ | 682,146 | $ | 641,097 | $ | 600,114 | $ | 541,918 | ||||||||||
Net income* | $ | 592,198 | $ | 593,794 | $ | 20,311 | $ | 521,503 | $ | 469,275 | ||||||||||
Net income per basic common share* | $ | 8.76 | $ | 7.71 | $ | 0.25 | $ | 6.46 | $ | 5.70 | ||||||||||
Weighted-average number of basic common shares | 67,627 | 76,992 | 79,793 | 80,786 | 82,336 | |||||||||||||||
Net income per diluted common share* | $ | 8.69 | $ | 7.65 | $ | 0.25 | $ | 6.41 | $ | 5.65 | ||||||||||
Weighted-average number of diluted common shares and equivalents | 68,166 | 77,618 | 80,604 | 81,417 | 83,087 | |||||||||||||||
BALANCE SHEET AND OTHER DATA: | ||||||||||||||||||||
Cash, cash equivalents and investments | $ | 337,144 | $ | 1,735,224 | $ | 3,393,701 | $ | 2,813,032 | $ | 2,399,263 | ||||||||||
Working capital, including current maturities of debt** | $ | 721,157 | $ | 2,214,232 | $ | 3,663,977 | $ | 3,115,124 | $ | 2,649,457 | ||||||||||
Total assets** | $ | 2,557,055 | $ | 3,727,426 | $ | 5,324,354 | $ | 4,662,059 | $ | 4,268,677 | ||||||||||
Long-term debt | $ | 1,580,797 | $ | 1,148,172 | $ | 1,897,501 | $ | 1,701,966 | $ | 1,493,027 | ||||||||||
Stockholders’ (deficit) equity*** | $ | (216,281 | ) | $ | 1,567,258 | $ | 2,233,788 | $ | 2,301,949 | $ | 2,058,851 | |||||||||
Employees | 7,467 | 7,246 | 7,020 | 6,899 | 6,594 | |||||||||||||||
Year Ended December 31, | % change | |||||||||||||||||||
2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Product sales | $ | 1,567,189 | $ | 1,604,993 | $ | 1,552,349 | (2 | %) | 3 | % | ||||||||||
Service sales | 839,407 | 814,936 | 756,729 | 3 | % | 8 | % | |||||||||||||
Total net sales | 2,406,596 | 2,419,929 | 2,309,078 | (1 | %) | 5 | % | |||||||||||||
Costs and operating expenses: | ||||||||||||||||||||
Cost of sales | 1,010,700 | 992,564 | 947,067 | 2 | % | 5 | % | |||||||||||||
Selling and administrative expenses | 534,791 | 536,902 | 544,363 | — | (1 | %) | ||||||||||||||
Research and development expenses | 142,955 | 143,403 | 132,593 | — | 8 | % | ||||||||||||||
Purchased intangibles amortization | 9,693 | 7,712 | 6,743 | 26 | % | 14 | % | |||||||||||||
Litigation (settlement) provision | — | (426 | ) | 11,114 | 100 | % | (104 | %) | ||||||||||||
Acquired in-process research and development | — | — | 5,000 | — | (100 | %) | ||||||||||||||
Operating income | 708,457 | 739,774 | 662,198 | (4 | %) | 12 | % | |||||||||||||
Operating income as a % of sales | 29.4 | % | 30.6 | % | 28.7 | % | ||||||||||||||
Other expense | (3,586 | ) | (47,794 | ) | (340 | ) | ** | ** | ||||||||||||
Interest expense, net | (26,632 | ) | (9,834 | ) | (20,761 | ) | 171 | % | (53 | %) | ||||||||||
Income before income taxes | 678,239 | 682,146 | 641,097 | (1 | %) | 6 | % | |||||||||||||
Provision for income taxes | 86,041 | 88,352 | 620,786 | (3 | %) | (86 | %) | |||||||||||||
Net income | $ | 592,198 | $ | 593,794 | $ | 20,311 | — | ** | ||||||||||||
Net income per diluted common share | $ | 8.69 | $ | 7.65 | $ | 0.25 | 14 | % | ** | |||||||||||
Results of Operations
Business Overview
The Company has two operating segments: Waters
TM
and TATM
. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLCTM
” 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 government 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.COVID-19
PandemicBoth the Company’s domestic and international operations have been and continue to be affected by the ongoing global
COVID-19
pandemic that has led to volatility and uncertainty in the U.S. and international markets. The Company is actively managing its business to respond to theCOVID-19
impact; however, the Company cannot reasonably estimate the length or severity of theCOVID-19
pandemic, including the effect of the emergence of variants of the virus, or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.The
COVID-19
pandemic has not materially impacted the Company’s manufacturing facilities or those of the third parties to whom it outsources certain manufacturing processes, the distribution centers where its inventory is managed, or the operations of its logistics and other service providers. The Company also did not see material disruptions or delays in shipments of certain materials or components of its products. However, the current logistic and supply chain issues being experienced throughout the world have made it more difficult for us to manage our operations and as such we cannot provide any assurances that any further disruptions in the logistics and supply chains will not have a material impact on our future financial results and cashflows.The Company has taken decisive and appropriate actions throughout the
COVID-19
pandemic, and continues to take proactive measures to guard the health of its global employee base and the safety of all customer interactions. The Company has implemented rigorous protocols to promote a safe work environment in all of its locations that are operational around the world and continues to closely monitor and update its multi-phase process for the safe return of employees to their physical workplaces as social distancing, governmental requirements, including capacity limitations, and other protocols allow.The vast majority of the markets the Company serves, most notably the pharmaceutical, biomedical research, materials sciences, food/environmental and clinical markets, have continued to operate at various levels, and the Company is working closely with these customers to facilitate their seamless operation.
The
COVID-19
pandemic continues to be fluid with uncertainties and risks across the global economy. During 2020, the Company took a proactive approach managing through this unpredictability and implemented a series of cost reduction actions, which included temporary salary reductions, furloughs and reductions innon-essential
spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. These cost reductions were completed by the end of 2020 and reduced the Company’s spending by approximately $100 million in 2020. The majority of these cost saving actions were reinstated at the beginning of 2021, which negatively impacted the Company’s cashflows in 2021 and also attributed to the increase in expenses as a result of the normalization of these costs.31
Financial Overview
The Company’s operating results are as follows for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands, except per share data):
Year Ended December 31, | % change | |||||||||||||||||||
2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Product sales | $ | 1,822,070 | $ | 1,497,333 | $ | 1,567,189 | 22 | % | (4 | %) | ||||||||||
Service sales | 963,804 | 868,032 | 839,407 | 11 | % | 3 | % | |||||||||||||
Total net sales | 2,785,874 | 2,365,365 | 2,406,596 | 18 | % | (2 | %) | |||||||||||||
Costs and operating expenses: | ||||||||||||||||||||
Cost of sales | 1,156,533 | 1,006,689 | 1,010,700 | 15 | % | — | % | |||||||||||||
Selling and administrative expenses | 626,968 | 553,698 | 534,791 | 13 | % | 4 | % | |||||||||||||
Research and development expenses | 168,358 | 140,777 | 142,955 | 20 | % | (2 | %) | |||||||||||||
Purchased intangibles amortization | 7,143 | 10,587 | 9,693 | (33 | %) | 9 | % | |||||||||||||
Asset impairments | — | 6,945 | — | (100 | %) | * | * | |||||||||||||
Litigation provision | 5,165 | 1,180 | — | 338 | % | * | * | |||||||||||||
Operating income | 821,707 | 645,489 | 708,457 | 27 | % | (9 | %) | |||||||||||||
Operating income as a % of sales | 29.5 | % | 27.3 | % | 29.4 | % | ||||||||||||||
Other income (expense), net | 17,203 | (1,775 | ) | (3,586 | ) | * | * | 51 | % | |||||||||||
Interest expense, net | (32,717 | ) | (32,800 | ) | (26,632 | ) | — | % | (23 | %) | ||||||||||
Income before income taxes | 806,193 | 610,914 | 678,239 | 32 | % | (10 | %) | |||||||||||||
Provision for income taxes | 113,350 | 89,343 | 86,041 | 27 | % | 4 | % | |||||||||||||
Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | 33 | % | (12 | %) | ||||||||||
Net income per diluted common share | $ | 11.17 | $ | 8.36 | $ | 8.69 | 34 | % | (4 | %) | ||||||||||
** Percentage not meaningful
The Company’s net sales increased approximately 18% in 2021 as compared to 2020, and decreased 2% in 2020 as compared to 2019. The increase in sales in 2021 can be attributed to the strong sales performance across most major geographies, end markets, and product categories due to customer demand continuing to return to
pre-pandemic
normal operations. Foreign currency translation increased sales by 2% and less than 1% in 2021 and 2020, respectively. The Company’s recent acquisitions did not have material impacts on sales growth. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year.Instrument system sales increased 23% in 2021 and decreased 8% in 2020. In 2021, the increase in instrument system sales was attributable to customer demand continuing to increase topandemic levels as customer laboratories and manufacturing facilities continued to return to normal operations. This strength in 2021 was broad-based, particularly in LC,
pre-COVID-19
LC-MS
and TA instrument system sales. Foreign currency translation had minimal impact on instrument system sales in 2021 and increased sales by 1% in 2020. Recurring revenues (combined sales of precision chemistry consumables and services) increased 13% and 4% in 2021 and 2020, respectively, as a result of a larger installed base of customers and higher billing demand for service sales. In 2020, recurring revenues were impacted by the interruption of business activities and the uncertainty caused bythe COVID-19 pandemic.
Recurring revenues were positively impacted by foreign currency translation in 2021 and 2020, which increased sales by 2% and 1%, respectively.32
Geographically, the sales growth in 2021 was broad-based across the world, and was due to customer demand continuing to increase to
pre-pandemic
levels as customer laboratories and manufacturing facilities continued to return to normal operations. In 2021, the strong sales performance was broad-based across all regions, with sales increasing 20% in Asia, 16% in the Americas, and 17% in Europe. Foreign currency translation increased sales by 1% and 3% in Asia and Europe, respectively. The sales declines in 2020 were broad-based across the world, except for Europe, and were due to the weaker demand and disruption of business activities caused bythe COVID-19 lockdowns.
Sales to pharmaceutical customers increased 20% and 2% in 2021 and 2020, respectively, with foreign currency translation positively impacting sales by 1% in both 2021 and 2020. The pharmaceutical sales growth was driven by strong double-digit growth in all major regions, including 45% in China, 26% in India, 17% in the Americas and 15% in Europe as strong customer demand continued to recover to
pre-pandemic
levels. Foreign currency translation added 4% to Europe sales growth in 2021. Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 17% in 2021 and decreased 2% in 2020, with foreign currency translation increasing sales by 2% and 1% in 2021 and 2020, respectively. This increase in sales to industrial customers was driven by the TA business as TA’s sales grew 26% in 2021 as compared to a decline of 8% in 2020. Combined sales to academic and government customers increased 7% in 2021 and decreased 16% in 2020, with foreign currency translation increasing sales by 2% in 2021 and having minimal impact on sales in 2020. Sales to our academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.Operating income was $822 million in 2021, an increase of 27% as compared to 2020. This increase was primarily a result of the increase in sales volumes caused by our customers resuming laboratory and manufacturing operations throughout the world and the favorable impact of foreign currency translation. The operating income increase was partially offset by the restoration of expenses that had been decreased in 2020 which consisted of a series of cost reduction actions that included salary reductions, furloughs and reductions in
non-essential
spending that increased operating income by approximately $100 million in 2020. In addition, in the second half of 2021, the Company’s operating income was negatively impacted by higher freight costs and higher costs associated with certain electronic components.Operating income decreased 9% in 2020 as compared to 2019. This decrease can be attributed to the decline in sales volumes caused by
the COVID-19 pandemic,
unfavorable manufacturing absorption and unfavorable foreign currency translation. The operating income decline was partially mitigated by a series of cost reduction actions, equaling $100 million, implemented by the Company in 2020. Operating income in 2020 also included $27 million of severance-related costs in connection with a reduction in workforce and lease termination and exit costs.Operating income as a percentage of sales was 29.5%, 27.3% and 29.4% in 2021, 2020 and 2019, respectively. The 2020 operating income percentage decreased as a result of the decrease in sales volume due to the
COVID-19
pandemic. In addition, the 2020 operating margin benefited by the $100 million of cost reduction actions. The 2021 operating income margin was negatively impacted by the cost actions as these costs had been reinstated by the beginning of 2021.The Company’s effective tax rates were 14.1%, 14.6% and 12.7% for 2021, 2020 and 2019, respectively. Net income per diluted share was $11.17, $8.36 and $8.69 in 2021, 2020 and 2019, respectively.
The Company generated $747 million, $791 million and $643 million of net cash flows from operations in 2021, 2020 and 2019, respectively. The decrease in operating cash flow in 2021 was primarily a result of the $100 million of 2020 cost actions and working capital improvements implemented being reinstated once customer demand increased. Included in the 2021, 2020 and 2019 net cash flow from operations is $38 million,
33
$38 million and $29 million, respectively, of income tax payments made in the U.S. in relation to the 2017 transition tax liability. The Company is required to make a U.S. federal tax payment of approximately $38 million in 2022 to tax authorities in connection with the Company’s estimated remaining transition tax liabilities of $327 million under the 2017 Tax Act. The remainder of the liability is required to be paid in annual installments of $72 million, $96 million and $121 million in 2023, 2024 and 2025, respectively.
Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $161 million, $172 million and $164 million in 2021, 2020 and 2019, respectively. The cash flows from investing activities in 2021 also included $49 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the United States. The Company has incurred costs of $200 million on this facility through the end of 2021, and anticipates spending approximately $50 million to complete this new state-of-the-art facility in 2022.
On September 17, 2021, the Company entered into an amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”). The 2021 Credit Agreement provides for a $1.8 billion revolving facility (the “2021 Credit Facility”) and converted the $300 million term loan under the 2017 Credit Agreement into part of the new revolving facility. As of December 31, 2021, the 2021 Credit Facility had a total of $210 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan governed by the 2017 Credit Agreement had a total of $100 million and $300 million, respectively, outstanding. The 2021 Credit Facility matures on September 17, 2026 and requires no scheduled prepayments before that date.
In March 2021, the Company issued senior unsecured notes with an aggregate principal amount of $500 million. The Series N $100 million notes have a five-year term and a fixed interest rate of 1.68%. The Series O $400 million notes have
a 10-year term
and a fixed interest rate of 2.25%.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 2021, 2020 and 2019, the Company repurchased 2.0 million, 0.8 million and 11.1 million shares of the Company’s outstanding common stock at a cost of $640 million, $167 million and $2.5 billion, respectively, under authorized share repurchase programs. As of December 31, 2021, the Company has a total of $885 million authorized for future repurchases. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. 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.34
Results of Operations
Sales by Geography
Geographic sales information is presented below for the years ended December 31, 2019, 20182021, 2020 and 20172019 (dollars in thousands):
Year Ended December 31, | % change | |||||||||||||||||||
2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
Net Sales: | ||||||||||||||||||||
Asia: | ||||||||||||||||||||
China | $ | 439,557 | $ | 443,321 | $ | 387,059 | (1 | %) | 15 | % | ||||||||||
Japan | 180,707 | 173,357 | 167,258 | 4 | % | 4 | % | |||||||||||||
Asia Other | 318,848 | 305,613 | 308,300 | 4 | % | (1 | %) | |||||||||||||
Total Asia | 939,112 | 922,291 | 862,617 | 2 | % | 7 | % | |||||||||||||
Americas: | ||||||||||||||||||||
United States | 692,277 | 683,596 | 669,274 | 1 | % | 2 | % | |||||||||||||
Americas Other | 137,964 | 151,581 | 140,715 | (9 | %) | 8 | % | |||||||||||||
Total Americas | 830,241 | 835,177 | 809,989 | (1 | %) | 3 | % | |||||||||||||
Europe | 637,243 | 662,461 | 636,472 | (4 | %) | 4 | % | |||||||||||||
Total net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | (1 | %) | 5 | % | ||||||||||
Year Ended December 31, | % change | |||||||||||||||||||
2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||||||||
Net Sales: | ||||||||||||||||||||
Asia: | ||||||||||||||||||||
China | $ | 521,128 | $ | 404,352 | $ | 439,557 | 29 | % | (8 | %) | ||||||||||
Japan | 182,597 | 179,815 | 180,707 | 2 | % | — | % | |||||||||||||
Asia Other | 372,040 | 315,010 | 318,848 | 18 | % | (1 | %) | |||||||||||||
Total Asia | 1,075,765 | 899,177 | 939,112 | 20 | % | (4 | %) | |||||||||||||
Americas: | ||||||||||||||||||||
United States | 774,014 | 678,313 | 692,277 | 14 | % | (2 | %) | |||||||||||||
Americas Other | 151,206 | 119,529 | 137,964 | 27 | % | (13 | %) | |||||||||||||
Total Americas | 925,220 | 797,842 | 830,241 | 16 | % | (4 | %) | |||||||||||||
Europe | 784,889 | 668,346 | 637,243 | 17 | % | 5 | % | |||||||||||||
Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | 18 | % | (2 | %) | ||||||||||
In 2019,2021, sales in China were negatively impacted by economic uncertaintyincreased 18% as compared to 2020, due to stronger demand for our products and services across most major geographies and customer classes as a result of our customers resuming laboratory and manufacturing operations, as well as certain regulatory changes in our food and pharmaceutical markets. 4% increase in sales in Japanstrength was broad-based, driven by continued growth in recurring revenues and the strong sales growth in instruments, particularly in LC instrument systems, primarily to pharmaceutical and academic and governmental customers, as well as foreignsystem sales. Foreign currency translation which increased Japan’s sales by 2% in 2019. Sales growth2021 and had minimal impact on sales in Asia Other was due primarily2020.
the pent-up
demand from 2020 caused bythe COVID-19 pandemic.
The In 2020, sales decreased 2% as compared to pharmaceutical2019, as theacademicuncertainties that resulted in our customers reducing purchases of our products and governmental customer classes in 2019. Sales in the U.S. increased by 1% despite large pharmaceutical customers slowing capital spending on our instrument systems. Salesservices. The sales declines in the rest of the Americas and Europe2020 were broad-based across all productgeographies and customer classes due to macroeconomic conditionswere a result of the weaker demand and political instability, disruption of business activities caused byacademic and governmental customers grew 8%. Salesthe prior year. The most significant decline in Europe were also negatively impacted by the effect of foreign currency translation, which decreased sales 4% in 2019.
COVID-19 pandemic
caused interruptions in business activities and the COVID-19 lockdowns,
except in Europe where sales increased 5% as compared to Other region.
Net sales by customer class are presented below for the years ended December 31, 2019, 20182021, 2020 and 20172019 (dollars in thousands):
Year Ended December 31, | % change | |||||||||||||||||||
2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||
Pharmaceutical | $ | 1,365,275 | $ | 1,365,731 | $ | 1,294,668 | — | 5 | % | |||||||||||
Industrial | 719,377 | 737,144 | 721,088 | (2 | %) | 2 | % | |||||||||||||
Academic and governmental | 321,944 | 317,054 | 293,322 | 2 | % | 8 | % | |||||||||||||
Total net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | (1 | %) | 5 | % | ||||||||||
Year Ended December 31, | % change | |||||||||||||||||||
2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||||||||
Pharmaceutical | $ | 1,667,061 | $ | 1,386,966 | $ | 1,365,275 | 20 | % | 2 | % | ||||||||||
Industrial | 829,204 | 707,772 | 719,377 | 17 | % | (2 | %) | |||||||||||||
Academic and governmental | 289,609 | 270,627 | 321,944 | 7 | % | (16 | %) | |||||||||||||
Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | 18 | % | (2 | %) | ||||||||||
35
In 2019,2021, sales to pharmaceutical customers were negatively impacted by the effect ofincreased 20% with foreign currency translation which decreasedpositively impacting sales to pharmaceutical customers by 2%, as well as a slower release of capital budgets by our customers due to uncertain macroeconomic conditions due to Brexit and regulatory changes in our food and pharmaceutical markets in China. Offsetting those declines was an increase in the need for global access to prescription drugs and the testing of newer and complex biologic drugs. The decline in sales to industrial customers in 2019 was due to weaker demand for ourLC-MSinstruments and also a 4% decline in TA sales.1%. The increase in sales to academic and governmentalpharmaceutical customers was broad-based with double-digit sales growth across most major geographies, primarily due to higher instrument system sales.stronger demand for our products and services as a result of our customers continuing to resume laboratory and manufacturing operations. Sales also benefited from the demand from certain pharmaceutical customers involved
with COVID-19
diagnostic testing and the increase in the development of new drugs and therapies. Sales to industrial customers in 2021 increased 17%, primarily due to customers continuing to resume laboratory and manufacturing operations during the year and this growth was driven by the increased customer demand for our TA products. Foreign currency translation increased sales to industrial customers by 2% in 2021. Sales to academic and government customers increased 7% in 2021, with foreign currency translation increasing sales by 2%.In 2018,2020, sales to pharmaceutical customers were drivenincreased 2% with foreign currency translation positively impacting sales by recurring revenues, with double-digit growth1%. The lower sales volumes to pharmaceutical customers in China, Canada and Latin America. Sales growth2020, particularly in the first half of the year, can be attributed to the disruption in business activities causedthe industrial market in 2018 was driven by TAour products and services from certain pharmaceutical customers who aremid-single-digit the development of new drugs and therapies. Sales to industrial customers in 2020 declined 2%, which were significantly impacted by the TA sales growthdeclines of 8% in Europe, Japan and India.2020. The increase in sales declines to academic and governmentalgovernment customers in 2018 waswere broad-based across all product classes as academic and geographies, with double-digit growthgovernmental customers adjusted their spending to mitigate the effects ofChina, India and Canada.China.
by COVID-19, despite
increased demand for involved with COVID-19 diagnostic testing
andthe COVID-19 pandemic,
which significantly impacted sales in Waters Products and Services Net Sales
Net sales for Waters products and services arewere as follows for the years ended December 31, 2019, 20182021, 2020 and 20172019 (dollars in thousands):
Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
2019 | % of Total | 2018 | % of Total | 2017 | % of Total | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||||
Waters instrument systems | $ | 963,871 | 45 | % | $ | 1,000,625 | 47 | % | $ | 988,750 | 48 | % | (4 | %) | 1 | % | ||||||||||||||||
Chemistry consumables | 412,018 | 19 | % | 400,287 | 18 | % | 372,157 | 18 | % | 3 | % | 8 | % | |||||||||||||||||||
Total Waters product sales | 1,375,889 | 64 | % | 1,400,912 | 65 | % | 1,360,907 | 66 | % | (2 | %) | 3 | % | |||||||||||||||||||
Waters service | 761,594 | 36 | % | 738,433 | 35 | % | 686,656 | 34 | % | 3 | % | 8 | % | |||||||||||||||||||
Total Waters net sales | $ | 2,137,483 | 100 | % | $ | 2,139,345 | 100 | % | $ | 2,047,563 | 100 | % | — | 4 | % | |||||||||||||||||
Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
2021 | % of Total | 2020 | % of Total | 2019 | % of Total | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||
Waters instrument systems | $ | 1,089,248 | 44 | % | $ | 890,855 | 42 | % | $ | 963,871 | 45 | % | 22 | % | (8 | %) | ||||||||||||||||
Chemistry consumables | 507,209 | 21 | % | 432,080 | 20 | % | 412,018 | 19 | % | 17 | % | 5 | % | |||||||||||||||||||
Total Waters product sales | 1,596,457 | 65 | % | 1,322,935 | 62 | % | 1,375,889 | 64 | % | 21 | % | (4 | %) | |||||||||||||||||||
Waters service | 876,626 | 35 | % | 794,189 | 38 | % | 761,594 | 36 | % | 10 | % | 4 | % | |||||||||||||||||||
Total Waters net sales | $ | 2,473,083 | 100 | % | $ | 2,117,124 | 100 | % | $ | 2,137,483 | 100 | % | 17 | % | (1 | %) | ||||||||||||||||
Waters products and service sales increased 17% in 2021 and declined 1% in 2020, with the effect of foreign currency translation increasing Waters sales by 2% and 1% in 2021 and 2020, respectively. Waters instrument system sales (LC and MS technology-based) increased 22% in 2021 primarily due to customer demand continuing to increase toIn 2019, Waters sales increased 2% in Asia, were flat in the Americas and decreased 3% in Europe, where the effect of foreign currency decreased sales by 4%. Within Asia, Waters sales decreased 1% in China and increased 4% in Japan and 9% in the rest of Asia, excluding India.3630
In 2018, Waters sales increased 7% in Asia, 4% in Europe and 2% in the Americas. Waters sales increased 15% in China in 2018 and were broad-based across all product classes, with double-digit increases in sales to pharmaceutical, academic and governmental customers. Waters sales in Japan in 2018 increased 5%, with the effect of foreign currency translation increasing sales 2%. Sales in Asia Other declined 2% in 2018, primarily due to lower customer demand in India and a negative 2% impact of foreign currency translation. In the Americas, U.S. sales increased 1% in 2018.
In 2019, TA sales decreased 4% in the Americas, 12% in Europe and increased 1% in Asia. TA sales in the U.S. increased 9% in 2018, while sales in the rest of the Americas increased 8%. TA’s sales in Asia were driven by double-digit sales growth in India and 8% sales growth in China, which was offset by declines in Japan.sales.
31
AcquiredIn-ProcessAsset ImpairmentsResearch and Development
32
Company’s deferred tax assets and liabilities at the new federal tax rate of 21%. This provision reduced net income per diluted share by $6.82 in 2017, and the Company’s effective tax rate was 11.0% excluding this $550 million provision. During 2017, the Company also had a benefit of $20$9 million related to stock-based compensation. The remaining differences between effective tax rates can primarily be attributed to differences in the proportionate amounts ofpre-taxincome recognized in jurisdictions with different effective tax rates.Prior to the enactment of the 2017 Act, the Company had indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, we reevaluated our historic assertion and no longer considered these earnings to be indefinitely reinvested in our foreign subsidiaries. The Company recorded a tax provision of $3 million and $4 million for 2019 and 2018, respectively, for future withholding taxes and U.S. state taxes on repatriation of 2019 and 2018 undistributed earnings.
33
During 2018$26 million and 2017, the Company purchased $1.0 billion and $3.0 billion$37 million of investments, respectively. During 2021, 2020 and 2019, 2018$218 million, $21 million and 2017, $1.0 billion, $2.8 billion and $2.5 billion of investments matured, respectively. The majority of the proceeds received in 2019 and 2018 were repatriated into the U.S. at lower income tax rates as a result of the 2017 Tax Act and used to reduce the Company’s debt and to repurchase shares.Asset and business acquisitions, net of cash acquired, were $31 million during 2018. There were no business acquisitions in 2019 or 2017. During 2019 and 2018, the Company made $9 million and $8 million of investments in unaffiliated companies, respectively. During 2017, the Company made a $7 million payment for an investment in a developer of analytical system solutions used to make measurements, predict stability and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets. Also during 2017, the Company made payments of $5 million to acquire and license intellectual property relating to mass spectrometry technologies yet to be commercialized.
InOn September 2019, the Company issued fixed interest rate senior unsecured notes with an aggregate principle of $500 million, of which $200 million of the outstanding notes matures in seven years and the remaining $300 million matures in 10 years. The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes.In November 2017,17, 2021, the Company entered into aan amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”), which. The 2021 Credit Agreement provides for a $1.5$1.8 billion revolving facility (the “2021 Credit Facility”) and aconverted the $300 million term loan. Theloan under the 2017 Credit Agreement into part of the new revolving facility. As of December 31, 2021, the 2021 Credit Facility had a total of $210 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan both maturegoverned by the 2017 Credit Agreement had a total of $100 million and $300 million, respectively, outstanding. The 2021 Credit Facility matures on November 30, 2022September 17, 2026 and requirerequires no scheduled prepayments before that date.34
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 (a) the prime rate in effect on such day, (b) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (c) 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 thatIn March 2021, 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.Interest on the Company’s fixed rateissued 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 inwith an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium forof $500 million. The Series H and J senior unsecured notes. In the event ofN $100 million notes have 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 quartersfive-year term and a leverage ratio testfixed interest rate of not more than 3.50:1 as1.68%. The Series O $400 million notes havethe end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.2.25%.35
As of December 31, 2021, the Company believes it has sufficient levelshad $1.5 billion of cash flowrequirements for the principal on long-term debt that will mature and accessbe paid as follows: $50 million in 2023; $100 million in 2024; $670 million in 2026; $300 million in 2029 and $400 million in 2031.As of December 31, 2021, the Company had $240 million of cash requirements for the interest on senior unsecured notes that is to its existing cashbe paid as follows: $39 million in 2022; $38 million in 2023; $35 million in 2024; $33 million in 2025; $27 million in 2026; $20 million in both 2027 and cash equivalents, as well as the ability to raise funds from external sources2028; $17 million in 2029; $9 million in 2030; and the borrowing capacity from existing, committed credit facilities, to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program$2 million in 2031. See also Note 9 in the U.S. TheseNotes to the Consolidated Financial Statements for financial information about interest payable.As a result of the 2017 Tax Act, the Company incurred a Transition Toll Tax, that would be paid over an eight-year period, starting in 2018, and will not accrue interest. As of December 31, 2021, the Company had a remaining cash requirements are managed byrequirement of $327 million of which $38 million, $72 million, $96 million and $121 million will be paid in 2022, 2023, 2024 and 2025, respectively. See also Note 10 in the Notes to the Consolidated Financial Statements for financial information about tax liabilities.The Company’s cash flow from operations, its existing cashoperating leases consist of property leases for sales, demonstration, laboratory, warehouse and cash equivalentsoffice spaces, automotive leases for sales and service personnel and equipment leases, primarily used in our manufacturing and distribution operations. For leases with terms greater than 12 months, the useCompany recorded theand lease liability obligation at the present value of lease payments over the term of the leases. Some of the Company’s revolving credit facility.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 real estate taxes and other expenses, which are recorded as variable costs when incurred. The Company’s cash requirements for future lease payments were approximately $94 million as of December 31, 2021. See also Note 12 in the Notes to the Consolidated Financial Statements for financial information about lease liabilities. For contracts the Company is committed to that are not cancelable without penalties. The Company’s contractual obligation with these vendors was approximately $28 million as of December 31, 2021.Contractual Obligations and Commercial CommitmentsThe following is a summary of the Company’s known contractual obligations as of December 31, 2019 (in thousands):
36
The following is a summary of the Company’s known commercial commitments as of December 31, 2019 (in thousands):
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 it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.The Company has long-term liabilities for deferred employee compensation, including pension and supplemental executive retirement plans. The payments related to the supplemental retirement plan are not included above since they are dependent upon when the employee retires or leaves the Company and whether the employee electslump-sumor annuity payments. During fiscal year 2020, the Company expects to contribute approximately $3 million to $6 million to the Company’s defined benefit plans.The Company has contingent consideration for an earnout pertaining to its July 2014 acquisition of the net assets of Medimass Research, Development and Service Kft. (“Medimass”). The earnout payments are not included above since they are dependent upon many factors that cannot be predicted with any certainty. The estimated fair value of the contingent consideration as of December 31, 2019 is $3 million.The Company licenses certain technology and software from third parties. Future minimum license fees payable under existing license agreements as of December 31, 2019 are immaterial. The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to $7 million, as well as royalties on future net sales. It is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement. As a result, these potential payments are not included in the table above.The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.Off-BalanceSheet ArrangementsThe Company has not created, and is not party to, any special-purpose oroff-balancesheet 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.37
The Company adopted new accounting guidance regarding the recognition of revenue from contracts with customers as of January 1, 2018 and applied the modified-retrospective method. The Company elected the practical expedient and only evaluated the contracts that were considered incomplete as of January 1, 2018 when quantifying the cumulative effect adjustment under the modified retrospective method. Ultimately, the Company determined that there was not a significant change in the timing or pattern of revenue recognition for the Company’s products and services. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows and, as such, did not require any adjustments to information reported in the prior year. The revenue recognition policies described below were effective as of January 1, 2018.38
Loss ProvisionsAllowance for credit losses on Accounts Receivable and Inventory39
40
Currently, the Company has determined that it iswas more likely than not to realize the contractual tax rateexemption in Singapore of 0% and, hasaccordingly, did not recognized an uncertainrecognize any reserves for unrecognized tax position inbenefits on its balance sheet related to the achievement of the contractual milestones in Singapore. However, these milestones can be significantly influenced by the business climate in Singapore and the Company’s overall financial performance and, inthis exemption. In the event that the Company determines thatany of the milestone targets arewere not expected to be met, the Company would no longernot be ableentitled to record athe tax benefit at a 0% contractual tax rateexemption on income earned in Singapore from and afterall the April 1, 2016 start datetax benefits previously recognized would be reversed, resulting in the recognition of the contract period. At such time, the Company would record an income tax charge on the affected Singapore income earned backexpense equal to April 1, 2016 at the Singapore statutory tax rate(s) (currently 17%), with a corresponding income tax liability recorded on the balance sheet. For the year ended 2019, the effect of applying the contractual tax rate rather than the statutory tax rate toof 17% on income from qualifying activities in Singapore increased the Company’s net income and net income per diluted share by $24 million and $0.35, respectively.earned during that period.41
42
43
44
45
46
Change in Accounting PrincipleAs discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.47
December 31of each year,event occurs or more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performs an annual goodwill impairment assessment for its reporting units as of December 31 each year. Under the impairment test,assessment, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwilla reporting unit exceeds the impliedits fair value, an impairment loss is recognized in an amount equal to the amount of the goodwill.excess carrying amount of the reporting unit over its fair value. This impairment is limited to the total amount of goodwill allocated to that reporting unit. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates. TheAs disclosed by management, the estimated fair value of the reporting units significantly exceeds the carrying value.48
assumptions used by management, including the estimated growth rates. Evaluating management’s
4954
5055
51
5257
5358
5459
55The impact of the global pandemic of a novel strain of coronavirus
ReclassificationsCertain amounts from priorcontinuedspread throughout the United States and globally, which has disrupted and may continue to disrupt the Company’s business. The Company operates in over 35 countries, including those in the regions most impacted by the
reclassifiedno violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the accompanying financial statements in order to be consistent with the current year’s classification.future.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DeferredAs part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes are recognized for temporary differences betweenin each of the financial statementjurisdictions in which it operates. This process involves the Company estimating its income taxes, taking into account the amount, timing and character of taxable income, tax basisdeductions and credits and assessing changes in tax laws, regulations, agreements and treaties. Differing treatment of items for tax and accounting purposes, such as depreciation, amortization and inventory reserves, result in deferred tax assets and liabilities, using tax rateswhich are included within the consolidated balance sheets. In the event that actual results differ from these estimates, or the Company adjusts these estimates in effectfuture periods, such changes could materially impact the Company’s financial position and results of operations.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
59
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)is no contractual limit, the3million and $2earnoutis based on future sales
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued),2021, the Companyhasentered into had three-year interest rate cross-currency swap derivative agreements witha an aggregate notional value of $560$230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
TheThe Company accrued $20 millionand $23 million at December 31, 2019 and 2018, respectively, as a result of treasury stock purchases that were unsettled. These transactions were settled in January 2020 and 2019, respectively.2020. There was 0 such accrual at December 31, 2021 or 2020.
years
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Subsequent EventsOther ItemsIn January 2020,During the year ended December 31, 2021, the Company made organizational changesexecuted a settlement agreement to better align its resourcesresolve patent infringement litigation with its growthBruker Corporation and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% ofBruker Daltronik GmbH regarding their timsTOF product line. In connection with the Company’s employees. The Company expects to incur approximately $25 million of severance-related costs, lease termination costs and other related costs during 2020.In January 2020,settlement, the Company entered into a definitive agreementis entitled to acquire Andrew Alliance, an innovatorreceive $10 million in specialty laboratory automation technology,guaranteed payments, including software and roboticsminimum royalty payments, which was recognized within other income in our consolidated statement of operations for approximately $80 million. This acquisition is not expected to have a material effect onthe year ended year ended December 31, 2021. During the year ended December 31, 2021, the Company sales and expensesreceived $3 million in 2020.64
Tableguaranteed payments, net of Contentsapplicable withholding taxes.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 wasis effective for annual and interim periods beginning after December 15, 2018.2020. The Company adopted this standard as ofon January 1, 2019 and the2021. 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 theinternal-usesoftware 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.65
be recognizedwith Topic 606. The new guidance requires that at the acquisition date, the acquirer should account for the related revenue contracts in earningsaccordance with 606 as if it had originated the contracts. This guidance differs from current GAAP which requires an acquirer to recognize assets acquired and any changes not considered credit related will continue to be recognized withinliabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other comprehensive income.similar contracts that are accounted for in accordance with 606, at fair value on the acquisition date. This guidance is effective for annual and interim periodspublic business entities for fiscal years beginning after December 15, 2019.2022, including interim periods within those years. The Company currently does not expect thatamendments within this update should be applied prospectively to business combinations on or after the effective date of the amendments. Early adoption of the amendment is permitted, including adoption in an interim period. The applicability of this standard is dependent on there being a business combination activity and therefore the Company will have a material effect onevaluate 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 adoptionimpact of this standard will have a material effect on the Company’s financial position, results of operationsguidance when and cash flows.if there is applicable activity.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.In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance; including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.The Company adopted new accounting guidance regarding the recognition of revenue from contracts with customers as of January 1, 2018 and applied the modified-retrospective method. The Company elected the practical expedient and only evaluated the contracts that were considered incomplete as of January 1, 2018 when quantifying the cumulative effect adjustment under the modified retrospective method. Ultimately, the Company determined that there was not a significant change in the timing or pattern of revenue recognition for the Company’s products and services. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows and, as such, did not require any adjustments to information reported in the prior year. The revenue recognition policies described below were effective as of January 1, 2018.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.66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 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 determinestherelative 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, whichareincluded 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 awhen-and-if-availablebasis.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 oftheircredit 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.67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In July 2018,On January 15, 2020, the Company acquired the sole intellectual property rights to the Desorption Electrospray Ionization (“DESI”) imaging technology for $30 million in cash and a future contractual obligation to pay a minimum royalty of $3 million over the remaining lifeall of the patent. DESI is a mass spectrometry imaging technique that is used to develop medical therapies.outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively, “Andrew Alliance”), for $80 million, net of cash acquired. The Company accounted for this transactionhad an equity investment in Andrew Alliance that was valued at $4 million and included as an asset acquisition as it did not meetpart of the definitiontotal consideration.
Tablecharge of Contents$10 million for the impairment of certain intangible assets associated with its 2014 acquisition of Medimass due to a shift in strategic priorities. As a result, the Company reduced the gross carrying amount and accumulated amortization balances of its intangible assets by $15 million and $5 million, respectively.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)InOn September 2019, the Company issued the following senior unsecured notes:
The Company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series L and M Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series L and M Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.In November 2017,17, 2021, the Company entered into aan amended and restated credit agreement (the “2021 Credit Agreement”), which amended the Company’s existing credit agreement entered into in 2017 (the “2017 Credit Agreement”) that. The 2021 Credit Agreement provides for a $1.5$1.8 billion revolving facility (the “2021 Credit Facility”) and aconverted the $300 million term loan. Theloan under the 2017 Credit Agreement into part of the new revolving facility. As of December 31, 2021, the 2021 Credit Facility had a total of $210 million outstanding. As of December 31, 2020, the revolving credit facility and the term loan both maturegoverned by the 2017 Credit Agreement had a total of $400 million outstanding. The 2021 Credit Facility matures on November 30, 2022September 17, 2026 and requirerequires no scheduled prepayments before that date.
7179
In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.
The Company had the followingAnnual maturities of debt outstanding debt at December 31, 2019 and 20182021 are as follows (in thousands):
As of both December 31, 2019 and 2018, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.2 billion after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 3.39% and 3.83% at December 31, 2019 and 2018, respectively. As of December 31, 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 $105 million and $90 million at December 31, 2019 and 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 December 31, 2019 and 2018, respectively.72
Annual maturities of debt outstanding at December 31, 2019 are as follows (in thousands):
73
NOTES TO CONSOLIDATED FINANCIALSTATEMENTS— (Continued)
net benefit related to the finalization of the impact of the Tax Cuts and Jobs Act (the “2017 Act”).The 2017 effective tax rate of 96.8% differs from the 35% U.S. statutory tax rate primarily due to the 2017 Act and the jurisdictional mix of earnings. As a result of the 2017 Act, for the year ended December 31, 2017, the Company accrued a $550 million tax provision. This provision reduced net income per diluted share by $6.82 in 2017, and the Company’s effective tax rate was 11.0% excluding this $550 million provision. During 2017, the Company also had a benefit of $20 million related toon stock-based compensation.74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Prior to the enactment of the 2017 Act, the Company had an indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, the Companywe reevaluated itsour historic assertion and no longer considered theseundistributed earnings from foreign subsidiaries to be indefinitely reinvested in its foreign subsidiaries.reinvested. The Company recorded a tax provision of $4 million, $3 million and $4$3 million for 20192021, 2020 and 2018,2019, respectively, for future withholding taxes and U.S. state taxes on the repatriation of 20192021, 2020 and 20182019 undistributed earnings.
The Company adopted new accounting guidance which eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. The Company adopted this standard as of January 1, 2018 with a $4 million charge to beginning retained earnings in the consolidated balance sheet.75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company adopted new accounting guidance regarding the accounting for leases as 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 relatedright-of-useasset 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 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)lease payments. The Company also has variable lease payments that do not depend on a rate or index, primarily for items such as real estate taxes and other expenses, which are recorded as variable costs when incurred. Variable costs incurred were not material in 2019.In addition, the Company’s lease agreements that contain lease andnon-leasecomponents 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. Costs incurred related to leases with terms less than 12 months were not material in 2019. As of December 31, 2019 and 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 December 31, 2019, the Company hashad lease agreements that expire at various dates through2034December 31, 2019 under the new lease accounting standard and $28 million for the yearyears ended December 31 2018 under the previous lease accounting standard. 2019,recorded million, $16 2019. The totalright-of-use,assets2021recorded,during 2020 includes the $100 millionright-of-useassets recorded upon adoption as of January 1, 2019., respectively.
78
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):
79NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
%15% of their earnings toward the quarterly purchase of the Company’s common stock. The plan makes available 0.92018 and 2017, respectively.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)$44 million$76 $45 million, respectively. The total cash received from the exercise of these stock options$45 $59 million$91 $46 million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.were 0.7 million,0.8 millionand0.9 million, respectively. The weighted-average exercise prices of options exercisable at December 31, 2021, 2020 and 2019 2018were $162.09, $154.16 and 2017were $134.94,$117.08 and$103.63, respectively. The weighted-average remaining contractual life of the exercisable outstanding stock options at December 31, 20192021 was 65.5 years.
5granted4thousand, 6 thousand and8 5 thousand shares of restricted stock, respectively. The weighted-average fair value per share on the grant date of the restricted stock granted in 2021, 2020 and 2019 2018was $256.28, $229.67 and 2017 was $183.41, $194.73 and$130.35, respectively. The Company has recorded $1 million of compensation expense in each of the years ended December 31, 2019, 20182021, 2020 and 20172019 related to the restricted stock grants. As of December 31, 2019,2021, the Company had5 3 thousand unvested shares of restricted stock outstanding, which have been fully expensed.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Treasury2019, 20182021, 2020 and 20172019 are as follows:
, $5 millionandless than$1.$6 million and $7 million, respectively. As of DecemberDecember 31, 2019,2021, there were $101.983
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company adopted new accounting guidance which requires that an employer disaggregate the service cost component from other components of net benefit cost. As a result of the adoption of this standard, the components of net periodic benefit cost other than the service cost component are included in other income in the consolidated statements of operations and all previous periods have been adjusted accordingly.
Net actuarial (gains) losses that arose during the year were due to changes in the discount rate as well as differences between expected and actual return on plan assets.85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accumulated benefit obligations for the plans at December 31, 2019 and 2018 are as follows (in thousands):
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
follows (in thousands):
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued),20192018(in 2020 (in thousands):
$1 millionless than $1 million.
Aone-quarter
.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9298
93
In1). In
None.
pre-pandemic
levels as customer laboratories and manufacturing facilities continued to return to normal operations. Precision chemistry consumables sales increased in both 2019 and 2018,double-digits due to the strong demand across most major geographies driven by sales in the U.S. and China, primarily to pharmaceutical customers, on the uptake in columns and application-specific testing kits.kits to pharmaceutical customers. Waters service sales increased 10% due to higher service demand billings asboth 2019 and 20182021 benefited from the growing contributions made by the Company’s recent introductions of new higher-performing products which included the ACQUITY PREMIER System, Arc Premier HPLC System and Multi-Reflecting ToF mass spectrometers.
COVID-19
business closures and restrictions began to ease. In addition, sales growth in In 2020 Waters instrument system sales (LC and MS technology-based) decreased 8%, primarily attributed to the weaker demand for our products and services by our customers due to the disruption and uncertainty causedcustomers. Waters instrument system sales (LC and MS technology-based) decreased in 2019 in most 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. The effect of foreign currency translation decreased Waters sales by 2% in 2019 and had a minimal impact on Waters sales in 2018.
by the COVID-19 pandemic.
Precision chemistry consumables sales increased 5% in 2020, despite the disruption in business activities causedby COVID-19.
Waters service sales increased 4%, primarily due to increased sales of service plans and higher service demand billings to a higher installed base of respectively, with sales in 2020 being partially offset by the weaker demand and disruption of business activities caused by
the COVID-19 lockdowns.
TA Product and Services Net Sales
Net sales for TA products and services arewere as follows for the years ended December 31, 20192021, 2020 and December 31, 20182019 (dollars in thousands):
Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
2019 | % of Total | 2018 | % of Total | 2017 | % of Total | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||||
TA instrument systems | $ | 191,300 | 71 | % | $ | 204,081 | 73 | % | $ | 191,442 | 73 | % | (6 | %) | 7 | % | ||||||||||||||||
TA service | 77,813 | 29 | % | 76,503 | 27 | % | 70,073 | 27 | % | 2 | % | 9 | % | |||||||||||||||||||
Total TA net sales | $ | 269,113 | 100 | % | $ | 280,584 | 100 | % | $ | 261,515 | 100 | % | (4 | %) | 7 | % | ||||||||||||||||
Year Ended December 31, | % change | |||||||||||||||||||||||||||||||
2021 | % of Total | 2020 | % of Total | 2019 | % of Total | 2021 vs. 2020 | 2020 vs. 2019 | |||||||||||||||||||||||||
TA instrument systems | $ | 225,613 | 72 | % | $ | 174,398 | 70 | % | $ | 191,300 | 71 | % | 29 | % | (9 | %) | ||||||||||||||||
TA service | 87,178 | 28 | % | 73,843 | 30 | % | 77,813 | 29 | % | 18 | % | (5 | %) | |||||||||||||||||||
Total TA net sales | $ | 312,791 | 100 | % | $ | 248,241 | 100 | % | $ | 269,113 | 100 | % | 26 | % | (8 | %) | ||||||||||||||||
TA instrument system and service sales growth in 2021 was broad-based across all geographies increasing 26%, and was primarily driven by stronger demand as a result of our customers continuing to resume laboratory and manufacturing operations. In 2021, the increase in TA instrument system sales was primarily driven by strength in all major regions. The increase in TA service sales was attributable to customers continuing to resume their operations after the restrictions caused
by COVID-19 during
2020, as well as sales of service plans and billings to a higher installed base of customers. The effect of foreign currency translation increased TA’s sales by 1% in 2021.TA product and service sales declines in 2020 were primarily due to lower customer demand resulting from theinstability, while 2018 instrument system sales growth was broad-based across all product classes.instability. TA service sales increased in 2019 due to sales of service plans and billings to a higher installed base of customers. The effect ofTA sales declined in all major regions in 2020, with foreign currency translation had ahaving minimal impact on TA’s sales in both 2019 and 2018.
COVID-19 pandemic.
TA’s instrument system sales declined in 2019 primarily due to lower customer demand resulting from macroeconomic conditions, tariff posturing and political Cost of Sales
Cost of sales for 2019 increased 2%15% in 2021 as compared to 2018,2020, primarily due to a changethe increase in sales mix. The effectvolumes during the year, the reinstatement in 2021 of foreign currency translation decreased costexpenses that had been reduced as a result of sales by 1%the2019 primarily from the favorable foreign currency translation effect the British Pound had on the Company’s U.K. manufacturing operations.2020 that consisted of salary reductions, furloughs and reductions in
COVID-19
pandemic in non-essential
spending as well as an increase in freight costs.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 that the impact of foreign currency translation mayto decrease sales and gross profit during 2020.2022.
Selling and Administrative Expenses
Selling and administrative expenses were flatincreased 13% and 4% in 20192021 and decreased 1%2020, respectively. The increase in 2018. In 2019, selling and administrative expenses were impacted byin 2021 can be attributed to the higher salary merit compensation costs that were offset by lowerand variable incentive compensation costs. In addition, 2019 was also impacted bycosts as well as the $10 millionimpact of the reinstatement of salary reductions, furloughs and reductions inoccurred in January of 2019. reduced planned salariesdecreasedincreased selling and administrative expenses by 1% in 20192021 and had a minimal impact on selling and administrative expenses in 2018.2020.
non-essential
spending that occurred in 2020. The increase in selling and administrative expenses in 2020 can be attributed to the salary merit and incentive compensation increases along with the severance-related costs in connection with a reduction in workforce and lease-termination and exit costs. Severance and lease termination and exit costs were $27 million and $10 million in 2020 and 2019, respectively. Offsetting these increases in selling and administrative expenses were $70 million of savings in 2020, whichincludes COVID-19 and
restructuring cost saving actions that and non-essential spending.
The effect of foreign currency translation 37
As a percentage of net sales, selling and administrative expenses were 22.2%22.5%, 23.4% and 22.2% for 2021, 2020 and 23.6% for 2019, 2018 and 2017, respectively.
Research and Development Expenses
Research and development expenses were flatincreased 20% in 20192021 and increased 8%decreased 2% in 2018. Research2020. The increase in research and development expenses in both 2019 and 2018 werewas impacted by additional headcount, merit compensation and costs associated with new products and the development of new technology initiatives. initiatives as well as the reinstatement ofcostsexpenses in 2021 by 2% in 20191% and had a minimal impact on research and development costs in 2018.
2020.COVID-19
cost actions implemented in 2020. Research and development expenses in 2020 include $15 million of cost action savings from salary reductions, furloughs and reductionsin non-essential spending.
Foreign currency translation decreased research and development During 2017,2020, due to a shift in strategic priorities, the Company incurred chargesrecorded a$5$10 million for acquiredin-processresearch and development related to milestone paymentsthe impairment of certain intangible assets associated with a licensing arrangementthe acquisition of Medimass Research Development and Service Kft (“Medimass”). In conjunction with the intangible asset impairment, the Company also reduced its liability for certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was nocontingent consideration of $3 million during 2020 as the carrying value of this liability is based on the future alternative use assales of the acquisition date. These licensing arrangements are significantly relatedMedimass intangible assets that were impaired. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, under the heading “Asset Impairments” in the Notes to new, biologically-focused applications, as well as other applications, and requireConsolidated Financial Statements for a description of the impairment charge.
non-cash
charge of Other Income (Expense), Net
In 2021, the Company executed a settlement agreement to make additional futureresolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which were recognized within other income in our consolidated statement of upoperations. In 2021, the Company also recorded an unrealized gain of $10 million due to $7 million if certain milestones are achieved, as well as royalties on future net sales. These future payments may bean observable change in the fair value of an existing investment the Company does not have the ability to exercise significant and occur over multiple years.influence over.
Interest Expense, Net
Net interest expense in 2021 remained consistent with 2020 as the increase in the average debt balance in 2021 was offset by the impact of lower interest rates. The increase in net interest expense infrom 2019 was primarily attributableto 2020 is due to higher outstanding debt balances and lower interest income on lower cash, cash equivalents and investment balances, being somewhat offset by the additional interest income from theU.S.-to-Euroin 2020.interest rate cross-currency swap agreements.
Provision for Income Taxes
The Company’s effective tax rates were 12.7%14.1%, 13.0%14.6% and 96.8%12.7% in 2019, 20182021, 2020 and 2017,2019, respectively.
The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates and the items discussed below.The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of December 31, 2019.2021. The Company hasentered into a receivednew Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period of April 1, 2021 through March 31, 2026. Prior to April 1, 2021, the Company had a tax holidayexemption on income arising from qualifying activities in Singapore, through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet.met as of December 31, 2020 and maintained through March 2021. The effect of applying the 0% contractualthese concessionary income tax raterates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the
38
Company’s net income during the years ended December 31, 2021, 2020 and 2019 2018 and 2017 by $24$20 million, $28$21 million and $25$24 million, respectively, and increased the Company’s net income per diluted share by $0.35, $0.36$0.32, $0.33 and $0.31,$0.35, respectively.
During 2019,2021, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, an $11a $10 million provision related to the Global Intangible$9$7 million on stock-based compensation.
Low-Taxed
Income (“GILTI”) tax and a tax benefit of The 20182020 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, a $14$13 million provision related to the GILTI tax an $8 million provision for a change in foreign currency exchange rates related to the transition tax, a $9 million benefit related to stock-based compensation and a $6tax benefit of $7 million net benefit related to the finalization of the impact of the Tax Cuts and Jobs Act (the “2017 Act”).on stock-based compensation.
The 20172019 effective tax rate of 96.8% differsdiffered from the 35% U.S. federal statutory tax rate primarily due to the 2017 Act and the jurisdictional mix of earnings. As a result of the 2017 Act, for the year ended December 31, 2017, the Company accrued a $550earnings, an $11 million tax provision which consisted of $490 million related to the federal transitionGILTI tax $40 million for state income taxes and foreign withholding taxes and $20 million for the revaluation of the
The Company’s effective tax rate is influenced by many significant factors, including, but not limited to, the wide range of income tax rates in jurisdictions in which the Company operates; sales volumes and profit levels in each tax jurisdiction; changes in tax laws, tax rates and policies; the outcome of various ongoing tax audit examinations; and the impact of foreign currency transactions and translation. As a result of variability in these factors, the Company’s effective tax rates in the future may not be similar to the effective tax rates for the current or prior years, or for previously forecasted periods.
Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net income | $ | 592,198 | $ | 593,794 | $ | 20,311 | ||||||
Depreciation and amortization | 105,296 | 108,408 | 106,002 | |||||||||
Stock-based compensation | 38,577 | 37,541 | 39,436 | |||||||||
Deferred income taxes | 9,620 | 2,405 | 45,510 | |||||||||
In-process research and development and othernon-cash charges | — | — | 5,000 | |||||||||
Change in accounts receivable | (22,195 | ) | (47,921 | ) | (24,013 | ) | ||||||
Change in inventories | (31,854 | ) | (25,396 | ) | 731 | |||||||
Change in accounts payable and other current liabilities | 9,784 | (81,663 | ) | 3,175 | ||||||||
Change in deferred revenue and customer advances | 12,189 | 2,721 | 10,386 | |||||||||
Effect of the 2017 Tax Cuts and Jobs Act | (3,229 | ) | (6,059 | ) | 530,383 | |||||||
Other changes | (67,299 | ) | 20,616 | (39,281 | ) | |||||||
Net cash provided by operating activities | 643,087 | 604,446 | 697,640 | |||||||||
Net cash provided by (used in) investing activities | 768,802 | 1,683,302 | (535,752 | ) | ||||||||
Net cash used in financing activities | (1,872,678 | ) | (2,119,522 | ) | (63,869 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 224 | (14,265 | ) | 38,669 | ||||||||
(Decrease) increase in cash and cash equivalents | $ | (460,565 | ) | $ | 153,961 | $ | 136,688 | |||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
Depreciation and amortization | 131,680 | 125,361 | 105,296 | |||||||||
Stock-based compensation | 29,918 | 36,865 | 38,577 | |||||||||
Deferred income taxes | 16,633 | (2,693 | ) | 9,620 | ||||||||
Asset impairments | — | 6,945 | — | |||||||||
Observable unrealized gain on investment | (9,707 | ) | — | — | ||||||||
Change in accounts receivable | (62,448 | ) | 37,467 | (22,195 | ) | |||||||
Change in inventories | (67,250 | ) | 18,940 | (31,854 | ) | |||||||
Change in accounts payable and other current liabilities | 46,110 | 140,598 | 9,784 | |||||||||
Change in deferred revenue and customer advances | 37,845 | 11,073 | 12,189 | |||||||||
Effect of the 2017 Tax Cuts and Jobs Act | — | — | (3,229 | ) | ||||||||
Other changes | (68,350 | ) | (105,620 | ) | (67,299 | ) | ||||||
Net cash provided by operating activities | 747,274 | 790,507 | 643,087 | |||||||||
Net cash (used in) provided by investing activities | (231,630 | ) | (264,094 | ) | 768,802 | |||||||
Net cash used in financing activities | (438,275 | ) | (440,502 | ) | (1,872,678 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (12,830 | ) | 15,069 | 224 | ||||||||
Increase (decrease) in cash and cash equivalents | $ | 64,539 | $ | 100,980 | $ | (460,565 | ) | |||||
39
Cash Flow fromProvided By Operating Activities
Net cash provided by operating activities was $747 million, $791 million and $643 million $604 millionin 2021, 2020 and $698 million in 2019, 2018 and 2017, 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 the increase in sales volumes as well as the timing of sales and the timing of payments made by customers and timing of sales.customers. Days sales outstanding was 66 days at December 31, 2021, 70 days at December 31, 2020 and 77 days at December 31, 2019, 74 days at December 31, 2018 and 71 days at 2017.2019.
The changesincrease in inventory were primarily attributablein 2021 can be attributed to new product launcheshigher sales volumes and the increase in safety stock levels to mitigate logistic and supply chain issues. The change in advanceinventory in 2020 compared to 2019 is a result of Brexit.the Company’s efforts to reduce its inventory levels during the
COVID-19
pandemic to preserve its liquidity.
The changes in accounts payable and other current liabilities were the result of timing of payments to vendors. In addition, the changechanges in 2021, 2020 and 2019 as compared to 2018 includes $29include $38 million, $38 million and $103$29 million, respectively, of income tax payments made in the U.S. relating to the Company’s estimated 2017 tax reform liability and 2018 estimated income tax payments and a $15 million litigation settlement payment.liability. In addition, in 2021, the change was impacted by the normalization of
COVID-19
cost actions, as well as higher variable incentive compensation costs.
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, other liabilities and an income tax expensespayment related to the 2017 Tax Act. In addition, in 2018,2019, the Company made $11 million of contributions to certain defined benefit pension plans.
Cash (Used in) Provided By (Used in) Investing Activities
Net cash provided by investing activities totaled $769 million and $1,683 million in 2019 and 2018, respectively, while net cash used in investing activities totaled $536$232 million and $264 million in 2017.2021 and 2020, respectively, while net cash provided by investing activities was $769 million in 2019. Additions to fixed assets and capitalized software were $161 million, $172 million and $164 million $96in 2021, 2020 and 2019, respectively. The cash flows from investing activities in 2021 also included $49 million and $85 million in 2019, 2018 and 2017, respectively. In February 2018,of capital expenditures related to the expansion of the Company’s Board of Directors approved expanding itsprecision chemistry synthesisconsumable operations in the U.S.United States. The Company has incurred costs of $200 million on this facility through the end of 2021, and anticipates spending an estimated $215approximately $50 million to build and equipcomplete this newmanufacturing facility which will be paid for with existing cash, investmentsin 2022.
state-of-the-art
During 2021, 2020 and debt capacity. Through December 31, 2019, the Company has incurred $85purchased $280 million, of costs for this facility.
In January 2020, the company entered into a definitive agreement to acquire Andrew Alliance, an innovator in specialty laboratory automation technology, including software and robotics for approximately $80 million in cash. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. This acquisition isdid not expected to have a material effect on the Company’s sales and expenses in 2020.
In December 2020, the company entered into a definitive agreement to acquire ISS, a provider of clinical laboratory software systems, for $4 million in cash. This acquisition did not have a material effect on the Company’s sales and expenses in 2020.
There were no business acquisitions in 2021 and 2019.
40
During 2021, 2020 and 2019, the Company made $2 million, $6 million and $9 million of investments in unaffiliated companies, respectively.
Cash Used in Financing Activities
a 10-year term
and a fixed interest rate of The Company’s net debt borrowings increased by $160 million in 2021, decreased by $325 million in 2020 and increased by $535 million in 2019, decreased by $850 million in 2018 and increased by $170 million in 2017.2019. As of December 31, 2019,2021, the Company had a total of $1.7$1.5 billion in outstanding debt, which consisted of $1.1$1.3 billion in outstanding senior unsecured notes $300 million borrowed under a term loan and $325$210 million borrowed under a revolving credit facility, with both the term loan and revolving credit facilities under the 2017 Credit Agreement. As of December 31, 2019,2021, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1,173 million$1.6 billion after outstanding letters of credit. As of December 31, 2019,2021, the Company was in compliance with all debt covenants.
As of December 31, 2019,2021, the Company has entered into three-year interest rate cross-currency swap derivative agreements with a notional value of $560$230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. As a result of entering into these agreements, the Company lowered its net interest expense by $11 million, $15 million and $12 million during 2021, 2020 and $3 million during 2019, and 2018, respectively. The Company anticipates that these swap agreements will lower net interest expense by approximately $15 million annually in 2020, $11 million in 2021 and $1 million in 2022, as the three-year term of the agreements expire. During 2021, the Company entered into a new cross-currency swap derivative agreement with a notional value of $40 million.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a2019, 20182021, 2020 and 2017,2019, the Company repurchased 11.12.0 million, 6.80.8 million and 1.811.1 million shares of the Company’s outstanding common stock at a cost of $640 million, $167 million and $2.5 billion, $1.3 billion and $323 million, respectively, under the January 2019 authorization and other previously announced programs. In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023. In addition, the Company repurchased $8$9 million, $10$9 million and $10$8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
two-year
period. During The Company received $54$56 million, $52$66 million and $98$54 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan in 2019, 20182021, 2020 and 2017,2019, respectively.
The Company had cash, and cash equivalents and investments of $337$569 million as of December 31, 2019.2021. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $249$440 million held by foreign subsidiaries at December 31, 2019,2021, of which $176$298 million was held in currencies other than U.S. dollars. The
41
As of December 31, 2021, the Company’s material cash requirements include the following contractual and other obligations:
Long-term debt.
Interest on Senior Unsecured Notes.
2017 Tax Act liabilities.
Operating Leases.
related right-of-use asset
Long-term Software Contract Commitments.
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. Prior to the enactment of the 2017 Act, the Company had an indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, we reevaluated our historic assertion and no longer considered these earnings to be indefinitely reinvested in our foreign subsidiaries.
Payments Due by Year (1) | ||||||||||||||||||||||||||||||||
Total | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | After 2025 | |||||||||||||||||||||||||
Notes payable and debt | $ | 100,366 | $ | 100,366 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Interest on senior unsecured notes | 214,160 | 33,962 | 30,273 | 28,160 | 27,182 | 24,654 | 22,714 | 47,215 | ||||||||||||||||||||||||
Long-term debt (2) | 1,585,000 | — | 150,000 | 625,000 | 50,000 | 100,000 | — | 660,000 | ||||||||||||||||||||||||
2017 Tax Act liability | 403,768 | 38,454 | 38,454 | 38,454 | 72,101 | 96,135 | 120,170 | — | ||||||||||||||||||||||||
Operating leases | 103,359 | 29,489 | 21,774 | 16,743 | 9,175 | 6,867 | 5,550 | 13,761 | ||||||||||||||||||||||||
Total | $ | 2,406,653 | $ | 202,271 | $ | 240,501 | $ | 708,357 | $ | 158,458 | $ | 227,656 | $ | 148,434 | $ | 720,976 | ||||||||||||||||
Amount of Commitments Expiration Per Period | ||||||||||||||||||||||||||||||||
Total | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | After 2025 | |||||||||||||||||||||||||
Letters of credit | $ | 1,797 | $ | 1,797 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Critical Accounting Policies and Estimates
Summary
The preparation of consolidated financial statements 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. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results of operations that require management to make estimates about matters that are highly uncertain and that would have a material impact on the Company’s results of operations given changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that reasonably could have been used in the current period. On an ongoing basis, the Company evaluates its policies and estimates. The Company bases its estimates on historical experience and on various other assumptions that are
42
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions. There are other items within the Company’s consolidated financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could potentially have a material impact on the Company’s consolidated financial statements.
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 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 the 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 are 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 abasis.
when-and-if-available
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 their 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.
43
Service revenue includes (i) service and software maintenance contracts and (ii) 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 at December 31, 2019 was $2142021 of $274 million on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to our trade receivable balances. The allowance for credit losses policies described below were effective as of January 1, 2020.
The Company maintains allowances for doubtfulexpected credit losses based on applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance on current receivables along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. The historical loss rate is calculated by comparing the prior year actual sales and accounts for estimated losses resulting fromreceivable balances to estimate the inabilityperiod of its customerscollection of trade receivables by aging category. This collection information by aging category is then compared to make required payments.write offs over the same prior year period to estimate the amount of allowance that is attributable to each category of our accounts receivable aging. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. If the financial condition of the Company’s customers were to deteriorate beyond what is estimated in the current expected credit loss model, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not request collateral from its customers, but collectibility is enhanced through the use of credit card payments and letters of credit. The Company assesses collectibility based on a number of factors, including, but not limited to, past transaction history with the customer, the credit-worthiness of the customer, industry trends and the macro-economic environment. Historically, the Company has not experienced significant bad debtcredit losses. Sales returns and allowances are estimates of future product returns related to current period revenue. Material differences may result in the amount and timing of revenue for any period if management made different judgments or utilized different estimates for sales returns and allowances for doubtful accounts.expected credit losses. The Company’s accounts receivable balance at December 31, 20192021 was $588$613 million, net of allowances for doubtful accountsexpected credit losses of $10$13 million.
Loss Provision on Inventory
The Company values all of its inventories at the lower of cost or net realizable value on a
first-in,
first-out
basis (“FIFO”). The Company estimates revisions to its inventory valuations based on technical obsolescence,historical demand, projections of future demand, including that in the Company’s current backlog of orders, and industry and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required. The Company’s inventory balance at December 31, 20192021 was recorded at its net realizable value of $321$356 million, which is net of write-downs of $26$32 million.
44
Long-Lived Assets, Intangible Assets and Goodwill
The Company assesses the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger impairment include, but are not limited to, the following:
significant underperformance relative to historical or projected future operating results, particularly as it pertains to capitalized software and patent costs;
significant negative industry or economic trends, competitive products and technologies; and
significant changes or developments in strategic technological collaborations or legal matters which affect the Company’s capitalized patents, purchased technology, trademarks and intellectual properties, such as licenses.
When the Company determines that the carrying value of an individual intangible asset, long-lived asset or goodwill may not be recoverable based upon the existence of one or more of the above indicators, an estimate of undiscounted future cash flows produced by that intangible asset, long-lived asset or goodwill, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the asset is written-down to its estimated fair value. Net intangible assets, long-lived assets and goodwill amounted to $240$242 million, $417$548 million and $356$438 million, respectively, as of December 31, 2019.2021.
The Company performs annual impairment reviews of its goodwill on
December 31
of each year. For goodwill impairment review purposes, the Company has two reporting units: Waters and TA. The Company currently does not expect to record an impairment charge in the foreseeable future as the estimated fair values of the reporting units significantly exceeds the carrying value of the reporting units; however, there can be no assurance that, at the time future reviews are completed, a material impairment charge will not be recorded. The factors that could cause a material goodwill impairment charge in the future include, but are not limited to, the following:
significant decline in the Company’s projected revenue, earnings or cash flows;
significant adverse change in legal factors or business climate;
significant decline in the Company’s stock price or the stock price of comparable companies;
adverse action or assessment by a regulator; and
unanticipated competition.
Income Taxes
As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its income taxes, taking into account the amount, timing and character of taxable income, tax deductions and credits and assessing changes in tax laws, regulations, agreements and treaties. Differing treatment of items for tax and accounting purposes, such as depreciation, amortization and inventory reserves, result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. In the event that actual results differ from these estimates, or the Company adjusts these estimates in future periods, such changes could materially impact the Company’s financial position and results of operations.
The accounting standards for income taxes require that a company continually evaluate the necessity of establishing or changing a valuation allowance for deferred tax assets depending on whether it is more likely than not that the actual benefit of those assets will be realized in future periods.
45
Uncertain Tax Positions
The Company accounts for its uncertain tax return 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 classified interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. At December 31, 2019,2021, the Company had unrecognized tax benefits, excluding interest and penalties, of $28$29 million.
The Company has been granted a 0% contractual tax ratenew Development and Expansion Incentive in Singapore that requiresprovides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026. This new incentive has similar requirements for business spending targets, attaining and sustaining employment targets and performance of certain research and manufacturing activities as previous agreements. Prior to April 1, 2021, the Company had a tax exemption on income arising from qualifying activities in Singapore, based upon the achievement of certain operational and financialcontractual milestones, thatwhich the Company expects to meet, to the extent not already achieved, bymet as of December 31, 2020 and maintainmaintained through at least March 31, 2021. As part of the Company’s determination of uncertain tax positions, the Company regularly assesses its progress against these operational and financial milestone targets to determine whether the milestones can be reasonably achieved. These milestones were negotiated with the Singaporean tax authorities and established based on the Company’s historical financial performance; the anticipated customer end-market demand, particularly in certain regions in the world, and the Company’s anticipated future operating plans. These assessments require significant judgments and estimates about the Company’s ability to meet the milestone targets forinclude the following types of objectives: reaching and maintaining annual revenue and business spending targets; meeting capital expenditures targets; attaining and sustaining employment targets; and establishing a local research and development and service center. The Company regularly monitors its actual and forecasted sales and operating results against these milestones and the Company makes the determination as to whether the future forecasted financial results are most likely to be achieved. These milestones are very similar in nature to the previous Singaporean tax holiday contractual agreements that the Company successfully completed. These milestones are not required to be met until December 2020, at the earliest, which gives the Company sufficient time to make any necessary adjustments to its operating plans to achieve the milestones.
Warranty
Product warranties are recorded at the time revenue is recognized for certain product shipments. 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. Should actual product failure rates, material usage or service delivery costs differ from the Company’s previous estimates, revisions to the estimated warranty liability would be required. At December 31, 2019,2021, the Company’s warranty liability was $12$11 million.
Litigation
As described in Part I, Item 3, Legal Proceedings, of this
Form
10-K,
the Company is a party to various pending litigation matters. With respect to each pending claim, management determines whether it can reasonably estimate whether a loss is probable and, if so, the probable range of that loss. If and when management has determined, with respect to a particular claim, both that a loss is probable and that it can reasonably estimate the range of that loss, the Company records a charge equal to either its best estimate of that loss or the lowest amount in that probable range of loss. The Company will disclose additional exposures when the range of loss is subject to considerable uncertainty.Pension and Other Retirement Benefits
In 2018, the Company settled its defined benefit pension plan in the U.S.United States. As a result of this settlement, the Company’s defined benefit pension obligations were significantly reduced in 2018 and 2019. The Company still maintains a number of smaller defined benefit pension plans and other retirement benefits throughout the world. Assumptions used in determining projected benefit obligations and the fair values of plan assets for the Company’s remaining less significant pension plans and other retirement benefits are evaluated periodically by management. Changes in assumptions are based on relevant Company data. Critical assumptions, such as the
46
discount rate used to measure the benefit obligations and the expected long-term rate of return on plan assets, are evaluated and updated annually. The Company has assumed that the weighted-average expected long-term rate of return on plan assets will be 6.25% for its U.S. benefit plans and 3.11%2.58% for its
non-U.S.
benefit plans.At the end of each year, the Company determines the discount rate that reflects the current rate at which the pension liabilities could be effectively settled. The Company utilized Milliman’s Bond Matching model to determine the discount rate for its U.S. benefit plans. The Company determined the discount rate for its20192021 that best matched the timing of the plan’s future cash flows for the period to maturity of the pension benefits. Once the interest rates were determined, the plan’s cash flow was discounted at the spot interest rate back to the measurement date. At December 31, 2019,2021, the Company determined the weighted-average discount rate to be 3.42%2.70% for the U.S. benefit plans and 1.38%1.40% for the
non-U.S.
benefit plans based on the analysis of the Mercer Pension Discount Curve for high quality investments as of December 31, non-U.S.
benefits plans.A
one-quarter
percentage point increase in the assumed long-term rate of return would decrease the Company’s net periodic benefit cost by less than $1 million. Aone-quarter
percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost by less than $1 million.Stock-based Compensation
The accounting standards for stock-based compensation require that all share-based payments to employees be recognized in the statements of operations based on their fair values. The Company has used the Black-Scholes option pricing model and Monte Carlo simulation model to determine the fair value of its stock option awards and performance stock unit awards, respectively. Under the fair-value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility and employee stock option exercise behaviors. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. These accounting standards require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and the Company employs different assumptions in the application of these accounting standards, the compensation expense that the Company records in future periods may differ significantly from what the Company has recorded in the current period. The Company recognizes the expense using the straight-line attribution method.
As of December 31, 2019,2021, unrecognized compensation costs and related weighted-average lives over which the costs will be amortized were as follows (in millions):
Unrecognized Compensation Costs | Weighted-Average Life in Years | |||||||
Stock options | $ | 32 | 3.2 | |||||
Restricted stock units | 36 | 3.3 | ||||||
Performance stock units | 10 | 1.9 | ||||||
Restricted stock | — | — | ||||||
Total | $ | 78 | 3.1 | |||||
Unrecognized Compensation Costs | Weighted-Average Life in Years | |||||||
Stock options | $ | 20 | 3.5 | |||||
Restricted stock units | 44 | 3.3 | ||||||
Performance stock units | 12 | 2.0 | ||||||
Total | $ | 76 | 3.1 | |||||
Business Combinations and Asset Acquisitions
The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on
47
their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired
in-process
research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.
Recent Accounting Standard Changes and Developments
Information regarding recent accounting standard changes and developments is incorporated by reference from Part II, Item 8, Financial Statements and Supplementary Data, of this document and should be considered an integral part of this Item 7. See Note 2 in the Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards.
Item 7A:
Quantitative and Qualitative Disclosures About Market Risk
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars, and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against
corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates these 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.
48
Interest Rate Cross-Currency Swap Agreements
As of December 31, 2019,2021, the Company has entered intohad three-year interest rate cross-currency swap derivative agreements with a notional value of $560$230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity (deficit) equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
December 31, 2019 | December 31, 2018 | |||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||
Other current assets | $ | 119,576 | $ | 16 | $ | 112,212 | $ | 503 | ||||||||
Other current liabilities | $ | 29,495 | $ | 1,028 | $ | 40,175 | $ | 224 | ||||||||
Interest rate cross-currency swap agreements: | ||||||||||||||||
Other assets | $ | 560,000 | $ | 4,485 | $ | 300,000 | $ | 1,093 | ||||||||
Accumulated other comprehensive income | $ | (4,485 | ) | $ | (1,093 | ) | ||||||||||
December 31, 2021 | December 31, 2020 | |||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||
Other current assets | $ | 55,309 | $ | 504 | $ | 66,690 | $ | 836 | ||||||||
Other current liabilities | $ | 9,000 | $ | 195 | $ | 20,000 | $ | 185 | ||||||||
Interest rate cross-currency swap agreements: | ||||||||||||||||
Other liabilities | $ | 230,000 | $ | 5,363 | $ | 560,000 | $ | 44,996 | ||||||||
Accumulated other comprehensive loss | $ | 15,944 | $ | 44,996 | ||||||||||||
The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts and interest rate cross-currency swap agreements (in thousands):
Financial Statement Classification | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||
Realized (losses) gains on closed contracts | Cost of sales | $ | (3,552 | ) | $ | (6,684 | ) | $ | 3,894 | |||||||
Unrealized (losses) gains on open contracts | Cost of sales | (1,292 | ) | (105 | ) | 1,054 | ||||||||||
Cumulative net pre-tax (losses) gains | Cost of sales | $ | (4,844 | ) | $ | (6,789 | ) | $ | 4,948 | |||||||
Interest rate cross-currency swap agreements: | ||||||||||||||||
Interest earned | Interest income | $ | 11,709 | $ | 2,713 | $ | — | |||||||||
Unrealized gains on open contracts | Stockholders’ (deficit) equity | $ | 4,485 | $ | 1,093 | $ | — | |||||||||
Financial Statement Classification | ||||||||||||||
Year Ended December 31, | ||||||||||||||
2021 | 2020 | 2019 | ||||||||||||
Foreign currency exchange contracts: | ||||||||||||||
Realized (losses) gains on closed contracts | Cost of sales | $ | (1,973 | ) | $ | 1,444 | $ | (3,552 | ) | |||||
Unrealized (losses) gains on open contracts | Cost of sales | (343 | ) | 1,663 | (1,292 | ) | ||||||||
Cumulative net pre-tax (losses) gains | Cost of sales | $ | (2,316 | ) | $ | 3,107 | $ | (4,844 | ) | |||||
Interest rate cross-currency swap agreements: | ||||||||||||||
Interest earned | Interest income | $ | 11,084 | $ | 15,296 | $ | 11,709 | |||||||
Unrealized gains (losses) on open contracts | Accumulated other comprehensive loss | $ | 29,052 | $ | (44,996 | ) | $ | 4,485 | ||||||
Assuming a hypothetical adverse change of 10% in20192021 would decrease$15$5 million. Assuming a hypothetical adverse change of 10% in20192021 would increase by approximately $56$23 million and would be recorded to foreign currency translation in other comprehensive income within stockholders’ equity (deficit) equity.. The related impact on interest income would not have a material effect on
year-end
exchange rates (a strengthening of the U.S. dollar), the fair market value of the foreign currency exchange contracts outstanding as of December 31, pre-tax
earnings by approximately year-end
exchange rates (a strengthening of the U.S. dollar), the fair market value of the interest rate cross-currency swap agreements outstanding as of December 31, pre-tax
earnings.The Company’s cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. The Company’s cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper. As of December 31, 2019,2021, the carrying value of the Company’s cash and cash equivalents approximated fair value.
49
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 December 31, 2019,2021, 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 December 31, 20192021 and 2018, $2492020, $440 million out of $337$569 million and $471$364 million out of $1,735$443 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $176$298 million out of $337$569 million and $251$254 million out of $1,735$443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 20192021 and 2018,2020, respectively. As of December 31, 2019,2021, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.
Assuming a hypothetical adverse change of 10% in20192021 would decrease by approximately $18$30 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ (deficit) equity.
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 December 31, 50
Item 8: |
Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rules
13a-15(f)
and15d-15(f)
under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in, our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was effective as of December 31, 2019.2021.
Internal Control
— Integrated Framework (2013)
Internal Control
— Integrated Framework (2013)
The effectiveness of our internal control over financial reporting as of December 31, 20192021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
51
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Waters Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Waters Corporation and its subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2019,2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Internal Control — Control—Integrated Framework
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in(2013) issued by the COSO.
Internal Control — Control—Integrated Framework
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
52
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s consolidated goodwill balance was $356$438 million as of December 31, 2019.2021. Management performstests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an impairment test as of
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there wasthe significant judgment by management when developing the fair value measurement of the reporting units. Thisunits, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating audit evidencemanagement’s significant assumptions related to management’s estimated future cash flows, including the estimated growth rates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate,estimates; (ii) evaluating the appropriateness of the discounted cash flow model,models; (iii) testing the completeness accuracy, and relevanceaccuracy of underlying data used in the modelmodels; and (iv) evaluating the significant assumptions used by management related to the estimated growth rates. Evaluating management’s
53
assumptions related to estimated revenue growth rates involved evaluating whether the growth rates used by management were reasonable considering the current and past performance of the reporting units and whether those growth rates were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP |
Boston, Massachusetts |
February |
We have served as the Company’s auditor since 1994.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2019 | 2018 | |||||||
(In thousands, except per share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 335,715 | $ | 796,280 | ||||
Investments | 1,429 | 938,944 | ||||||
Accounts receivable, net | 587,734 | 568,316 | ||||||
Inventories | 320,551 | 291,569 | ||||||
Other current assets | 67,062 | 68,054 | ||||||
Total current assets | 1,312,491 | 2,663,163 | ||||||
Property, plant and equipment, net | 417,342 | 343,083 | ||||||
Intangible assets, net | 240,203 | 246,902 | ||||||
Goodwill | 356,128 | 355,614 | ||||||
Operating lease assets | 93,358 | — | ||||||
Other assets | 137,533 | 118,664 | ||||||
Total assets | $ | 2,557,055 | $ | 3,727,426 | ||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and debt | $ | 100,366 | $ | 178 | ||||
Accounts payable | 49,001 | 68,168 | ||||||
Accrued employee compensation | 43,467 | 64,545 | ||||||
Deferred revenue and customer advances | 176,360 | 164,965 | ||||||
Current operating lease liabilities | 27,125 | — | ||||||
Accrued income taxes | 45,967 | 22,943 | ||||||
Accrued warranty | 11,964 | 12,300 | ||||||
Other current liabilities | 137,084 | 115,832 | ||||||
Total current liabilities | 591,334 | 448,931 | ||||||
Long-term liabilities: | ||||||||
Long-term debt | 1,580,797 | 1,148,172 | ||||||
Long-term portion of retirement benefits | 59,159 | 55,853 | ||||||
Long-term income tax liabilities | 394,562 | 430,866 | ||||||
Long-term operating lease liabilities | 66,881 | — | ||||||
Other long-term liabilities | 80,603 | 76,346 | ||||||
Total long-term liabil ities | 2,182,002 | 1,711,237 | ||||||
Total liabilities | 2,773,336 | 2,160,168 | ||||||
Commitments and contingencies (Notes 6, 9, 10, 11, 12, 13 and 17 ) | ||||||||
Stockholders’ (deficit) equity: | ||||||||
Preferred stock, par value $0.01 per share, 5,000 shares authorized, 0 ne issued at December 31, 2019 and December 31, 2018 | — | — | ||||||
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,030 and 160,472 shares issued, 62,587 and 73,115 shares outstanding at December 31, 2019 and December 31, 2018, respectively | 1,610 | 1,605 | ||||||
Additional paid-in capital | 1,926,753 | 1,834,741 | ||||||
Retained earnings | 6,587,403 | 5,995,205 | ||||||
Treasury stock, at cost, 98,443 and 87,357 shares at December 31, 2019 and December 31, 2018, respectively | (8,612,576 | ) | (6,146,322 | ) | ||||
Accumulated other comprehensive loss | (119,471 | ) | (117,971 | ) | ||||
Total stockholders’ (deficit) equity | (216,281 | ) | 1,567,258 | |||||
Total liabilities and stockholders’ (deficit) equity | $ | 2,557,055 | $ | 3,727,426 | ||||
December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands, except per share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 501,234 | $ | 436,695 | ||||
Investments | 68,051 | 6,451 | ||||||
Accounts receivable, net | 612,648 | 573,316 | ||||||
Inventories | 356,095 | 304,281 | ||||||
Other current assets | 90,914 | 80,290 | ||||||
Total current assets | 1,628,942 | 1,401,033 | ||||||
Property, plant and equipment, net | 547,913 | 494,003 | ||||||
Intangible assets, net | 242,401 | 258,645 | ||||||
Goodwill | 437,865 | 444,362 | ||||||
Operating lease assets | 84,734 | 93,252 | ||||||
Other assets | 153,077 | 148,625 | ||||||
Total assets | $ | 3,094,932 | $ | 2,839,920 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and debt | $ | 0 | $ | 150,000 | ||||
Accounts payable | 96,799 | 72,212 | ||||||
Accrued employee compensation | 101,192 | 72,166 | ||||||
Deferred revenue and customer advances | 227,561 | 198,240 | ||||||
Current operating lease liabilities | 27,906 | 27,764 | ||||||
Accrued income taxes | 61,278 | 76,558 | ||||||
Accrued warranty | 10,718 | 10,950 | ||||||
Other current liabilities | 155,054 | 197,093 | ||||||
Total current liabilities | 680,508 | 804,983 | ||||||
Long-term liabilities: | ||||||||
Long-term debt | 1,513,870 | 1,206,515 | ||||||
Long-term portion of retirement benefits | 64,027 | 72,620 | ||||||
Long-term income tax liabilities | 319,547 | 357,493 | ||||||
Long-term operating lease liabilities | 59,623 | 68,197 | ||||||
Other long-term liabilities | 89,803 | 97,968 | ||||||
Total long-term liabilities | 2,046,870 | 1,802,793 | ||||||
Total liabilities | 2,727,378 | 2,607,776 | ||||||
Commitments and contingencies (Notes 6, 9, 10, 11, 12, 13 and 17) | 0 | 0 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.01 per share, 5,000 shares authorized, NaN issued at December 31, 2021 and December 31, 2020 | 0 | 0 | ||||||
Common stock, par value $0.01 per share, 400,000 shares authorized, 162,084 and 161,666 shares issued, 60,728 and 62,309 shares outstanding at December 31, 2021 and December 31, 2020, respectively | 1,621 | 1,617 | ||||||
Additional paid-in capital | 2,114,880 | 2,029,465 | ||||||
Retained earnings | 7,800,832 | 7,107,989 | ||||||
Treasury stock, at cost, 101,356 and 99,357 shares at December 31, 2021 and December 31, 2020, respectively | (9,437,914 | ) | (8,788,984 | ) | ||||
Accumulated other comprehensive loss | (111,865 | ) | (117,943 | ) | ||||
Total stockholders’ equity | 367,554 | 232,144 | ||||||
Total liabilities and stockholders’ equity | $ | 3,094,932 | $ | 2,839,920 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Revenues: | ||||||||||||
Product sales | $ | 1,567,189 | $ | 1,604,993 | $ | 1,552,349 | ||||||
Service sales | 839,407 | 814,936 | 756,729 | |||||||||
Total net sales | 2,406,596 | 2,419,929 | 2,309,078 | |||||||||
Costs and operating expenses: | ||||||||||||
Cost of product sales | 642,706 | 656,275 | 623,214 | |||||||||
Cost of service sales | 367,994 | 336,289 | 323,853 | |||||||||
Selling and administrative expenses | 534,791 | 536,902 | 544,363 | |||||||||
Research and development expenses | 142,955 | 143,403 | 132,593 | |||||||||
Purchased intangibles amortization | 9,693 | 7,712 | 6,743 | |||||||||
Litigation provision (settlement) (Note 11) | — | (426 | ) | 11,114 | ||||||||
Acquired in-process research and development (Note 2) | — | — | 5,000 | |||||||||
Total costs and operating expenses | 1,698,139 | 1,680,155 | 1,646,880 | |||||||||
Operating income | 708,457 | 739,774 | 662,198 | |||||||||
Other expense | (3,586 | ) | (47,794 | ) | (340 | ) | ||||||
Interest expense | (48,690 | ) | (48,641 | ) | (56,839 | ) | ||||||
Interest income | 22,058 | 38,807 | 36,078 | |||||||||
Income before income taxes | 678,239 | 682,146 | 641,097 | |||||||||
Provision for income taxes | 86,041 | 88,352 | 620,786 | |||||||||
Net income | $ | 592,198 | $ | 593,794 | $ | 20,311 | ||||||
Net income per basic common share | $ | 8.76 | $ | 7.71 | $ | 0.25 | ||||||
Weighted-average number of basic common shares | 67,627 | 76,992 | 79,793 | |||||||||
Net income per diluted common share | $ | 8.69 | $ | 7.65 | $ | 0.25 | ||||||
Weighted-average number of diluted common shares and equivalents | 68,166 | 77,618 | 80,604 | |||||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Revenues: | ||||||||||||
Product sales | $ | 1,822,070 | $ | 1,497,333 | $ | 1,567,189 | ||||||
Service sales | 963,804 | 868,032 | 839,407 | |||||||||
Total net sales | 2,785,874 | 2,365,365 | 2,406,596 | |||||||||
Costs and operating expenses: | ||||||||||||
Cost of product sales | 752,514 | 638,033 | 642,706 | |||||||||
Cost of service sales | 404,019 | 368,656 | 367,994 | |||||||||
Selling and administrative expenses | 626,968 | 553,698 | 534,791 | |||||||||
Research and development expenses | 168,358 | 140,777 | 142,955 | |||||||||
Purchased intangibles amortization | 7,143 | 10,587 | 9,693 | |||||||||
Asset impairments | 0 | 6,945 | 0 | |||||||||
Litigation provision (Note 11) | 5,165 | 1,180 | 0 | |||||||||
Total costs and operating expenses | 1,964,167 | 1,719,876 | 1,698,139 | |||||||||
Operating income | 821,707 | 645,489 | 708,457 | |||||||||
Other income (expense), net | 17,203 | (1,775 | ) | (3,586 | ) | |||||||
Interest expense | (44,938 | ) | (49,070 | ) | (48,690 | ) | ||||||
Interest income | 12,221 | 16,270 | 22,058 | |||||||||
Income before income taxes | 806,193 | 610,914 | 678,239 | |||||||||
Provision for income taxes | 113,350 | 89,343 | 86,041 | |||||||||
Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
Net income per basic common share | $ | 11.25 | $ | 8.40 | $ | 8.76 | ||||||
Weighted-average number of basic common shares | 61,575 | 62,094 | 67,627 | |||||||||
Net income per diluted common share | $ | 11.17 | $ | 8.36 | $ | 8.69 | ||||||
Weighted-average number of diluted common shares and equivalents | 62,028 | 62,414 | 68,166 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(In thousands) | ||||||||||||
Net income | $ | 592,198 | $ | 593,794 | $ | 20,311 | ||||||
Other comprehensive (loss) income: | ||||||||||||
Foreign currency translation | 1,631 | (36,279 | ) | 101,148 | ||||||||
Unrealized gains (losses) on investments before income taxes | 3,046 | 698 | (1,794 | ) | ||||||||
Income tax (expense) benefit | (641 | ) | 443 | 68 | ||||||||
Unrealized gains (losses) on investments, net of tax | 2,405 | 1,141 | (1,726 | ) | ||||||||
Retirement liability adjustment before reclassifications | (9,360 | ) | (6,722 | ) | 7,832 | |||||||
Amounts reclassified to other expense | 1,979 | 48,792 | 3,948 | |||||||||
Retirement liability adjustment before income taxes | (7,381 | ) | 42,070 | 11,780 | ||||||||
Income tax benefit (expense) | 1,845 | (14,836 | ) | (4,989 | ) | |||||||
Retirement liability adjustment, net of tax | (5,536 | ) | 27,234 | 6,791 | ||||||||
Other comprehensive (loss) income | (1,500 | ) | (7,904 | ) | 106,213 | |||||||
Comprehensive income | $ | 590,698 | $ | 585,890 | $ | 126,524 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
(In thousands) | ||||||||||||
Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation | (1,903 | ) | 5,984 | 1,631 | ||||||||
Unrealized (losses) gains on investments before income taxes | (26 | ) | 0 | 3,046 | ||||||||
Income tax benefit (expense) | 6 | 0 | (641 | ) | ||||||||
Unrealized (losses) gains on investments, net of tax | (20 | ) | 0 | 2,405 | ||||||||
Retirement liability adjustment before reclassifications | 9,342 | (6,786 | ) | (9,360 | ) | |||||||
Amounts reclassified to other income (expense), net | 1,167 | 1,389 | 1,979 | |||||||||
Retirement liability adjustment before income taxes | 10,509 | (5,397 | ) | (7,381 | ) | |||||||
Income tax (expense) benefit | (2,508 | ) | 941 | 1,845 | ||||||||
Retirement liability adjustment, net of tax | 8,001 | (4,456 | ) | (5,536 | ) | |||||||
Other comprehensive income (loss) | 6,078 | 1,528 | (1,500 | ) | ||||||||
Comprehensive income | $ | 698,921 | $ | 523,099 | $ | 590,698 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 592,198 | $ | 593,794 | $ | 20,311 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Stock-based compensation | 38,577 | 37,541 | 39,436 | |||||||||
Deferred income taxes | 9,620 | 2,405 | 45,510 | |||||||||
Depreciation | 53,839 | 57,952 | 61,450 | |||||||||
Amortization of intangibles | 51,457 | 50,456 | 44,552 | |||||||||
In-process research and development and othernon-cash charges | — | — | 5,000 | |||||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||||||
Increase in accounts receivable | (22,195 | ) | (47,921 | ) | (24,013 | ) | ||||||
( Increase) decrease in inventories | (31,854 | ) | (25,396 | ) | 731 | |||||||
Increase in other current assets | (10,918 | ) | (12,446 | ) | (16,323 | ) | ||||||
(Increase) decrease in other assets | (16,470 | ) | 6,047 | (24,098 | ) | |||||||
Increase (decrease) in accounts payable and other current liabilities | 9,784 | (81,663 | ) | 3,175 | ||||||||
I ncrease in deferred revenue and customer advances | 12,189 | 2,721 | 10,386 | |||||||||
Effect of the 2017 Tax Cuts and Jobs Act | (3,229 | ) | (6,059 | ) | 530,383 | |||||||
(Decrease) ncrease in other liabilitiesi | (39,911 | ) | 27,015 | 1,140 | ||||||||
Net cash provided by operating activities | 643,087 | 604,446 | 697,640 | |||||||||
Cash flows from investing activities: | ||||||||||||
Additions to property, plant, equipment and software capitalization | (163,823 | ) | (96,079 | ) | (85,473 | ) | ||||||
Asset and business acquisitions, net of cash acquired | — | (31,486 | ) | — | ||||||||
Investment in unaffiliated company | (8,843 | ) | (7,615 | ) | (7,000 | ) | ||||||
Paym ents for intellectual p roperty licen ses | — | — | (5,000 | ) | ||||||||
P of investmentsurc hases | (36,951 | ) | (1,006,080 | ) | (2,960,379 | ) | ||||||
Maturities and sales of inves tments | 978,419 | 2,824,562 | 2,522,100 | |||||||||
Net cash provided by (used in) investing activities | 768,802 | 1,683,302 | (535,752 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from debt issuances | 925,670 | 274 | 1,480,190 | |||||||||
Payments on debt | (390,482 | ) | (850,435 | ) | (1,310,214 | ) | ||||||
Payments of debt issuance costs | (2,932 | ) | — | (2,984 | ) | |||||||
Proceeds from stock plans | 53,715 | 52,429 | 97,789 | |||||||||
Purchases of treasury shares | (2,469,258 | ) | (1,315,106 | ) | (332,544 | ) | ||||||
Proceeds from (payments for) derivative contracts | 10,609 | (6,684 | ) | 3,894 | ||||||||
Net cash used in financing activities | (1,872,678 | ) | (2,119,522 | ) | (63,869 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | 224 | (14,265 | ) | 38,669 | ||||||||
(Decrease) increase in cash and cash equivalents | (460,565 | ) | 153,961 | 136,688 | ||||||||
Cash and cash equivalents at beginning of period | 796,280 | 642,319 | 505,631 | |||||||||
Cash and cash equivalents at end of period | $ | 335,715 | $ | 796,280 | $ | 642,319 | ||||||
Supplemental cash flow information: | ||||||||||||
Income taxes paid | $ | 87,998 | $ | 159,397 | $ | 70,583 | ||||||
Interest paid | $ | 42,843 | $ | 50,798 | $ | 56,503 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 692,843 | $ | 521,571 | $ | 592,198 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Stock-based compensation | 29,918 | 36,865 | 38,577 | |||||||||
Deferred income taxes | 16,633 | (2,693 | ) | 9,620 | ||||||||
Depreciation | 71,560 | 68,685 | 53,839 | |||||||||
Amortization of intangibles | 60,120 | 56,676 | 51,457 | |||||||||
Asset impairments | 0 | 6,945 | 0 | |||||||||
Observable unrealized gain o n investment | (9,707 | ) | 0 | 0 | ||||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||||||
(Increase) decrease in accounts receivable | (62,448 | ) | 37,467 | (22,195 | ) | |||||||
(Increase) decrease in inventories | (67,250 | ) | 18,940 | (31,854 | ) | |||||||
Increase in other current assets | (20,765 | ) | (27,030 | ) | (10,918 | ) | ||||||
Decrease (increase) in other assets | 4,490 | (37,865 | ) | (16,470 | ) | |||||||
Increase in accounts payable and other current liabilities | 46,110 | 140,598 | 9,784 | |||||||||
Increase in deferred revenue and customer advances | 37,845 | 11,073 | 12,189 | |||||||||
Effect of the 2017 Tax Cuts and Jobs Act | 0 | 0 | (3,229 | ) | ||||||||
Decrease in other liabilities | (52,075 | ) | (40,725 | ) | (39,911 | ) | ||||||
Net cash provided by operating activities | 747,274 | 790,507 | 643,087 | |||||||||
Cash flows from investing activities: | ||||||||||||
Additions to property, plant, equipment and software capitalization | (161,266 | ) | (172,384 | ) | (163,823 | ) | ||||||
Asset and business acquisitions, net of cash acquired | 0 | (80,545 | ) | 0 | ||||||||
Investment in unaffiliated company | (1,788 | ) | (6,143 | ) | (8,843 | ) | ||||||
Payments for intellectual property licenses | (7,000 | ) | 0 | 0— | ||||||||
Purchases of investments | (279,660 | ) | (25,884 | ) | (36,951 | ) | ||||||
Maturities and sales of investments | 218,084 | 20,862 | 978,419 | |||||||||
Net cash (used in) provided by investing activities | (231,630 | ) | (264,094 | ) | 768,802 | |||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from debt issuances | 510,000 | 315,000 | 925,670 | |||||||||
Payments on debt | (350,000 | ) | (640,366 | ) | (390,482 | ) | ||||||
Payments of debt issuance costs | (8,537 | ) | 0 | (2,932 | ) | |||||||
Proceeds from stock plans | 55,643 | 66,033 | 53,715 | |||||||||
Purchases of treasury shares | (648,930 | ) | (196,409 | ) | (2,469,258 | ) | ||||||
Proceeds from derivative contracts | 3,549 | 15,240 | 10,609 | |||||||||
Net cash used in financing activities | (438,275 | ) | (440,502 | ) | (1,872,678 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (12,830 | ) | 15,069 | 224 | ||||||||
Increase (decrease) in cash and cash equivalents | 64,539 | 100,980 | (460,565 | ) | ||||||||
Cash and cash equivalents at beginning of period | 436,695 | 335,715 | 796,280 | |||||||||
Cash and cash equivalents at end of period | $ | 501,234 | $ | 436,695 | $ | 335,715 | ||||||
Supplemental cash flow information: | ||||||||||||
Income taxes paid | $ | 153,504 | $ | 97,621 | $ | 87,998 | ||||||
Interest paid | $ | 42,408 | $ | 52,103 | $ | 42,843 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
Number of Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity ( Defi cit) | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance December 31, 2016 | 158,634 | $ | 1,586 | $ | 1,607,241 | $ | 5,385,069 | $ | (4,475,667 | ) | $ | (216,280 | ) | $ | 2,301,949 | |||||||||||||
Net income | — | — | — | 20,311 | — | — | 20,311 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 106,213 | 106,213 | |||||||||||||||||||||
Issuance of common stock for employees: | ||||||||||||||||||||||||||||
Employee Stock Purchase Plan | 50 | 1 | 6,874 | — | — | — | 6,875 | |||||||||||||||||||||
Stock options exercised | 972 | 10 | 90,904 | — | — | — | 90,914 | |||||||||||||||||||||
Treasury stock | — | — | — | — | (332,544 | ) | — | (332,544 | ) | |||||||||||||||||||
Stock-based compensation | 189 | 1 | 40,069 | — | — | — | 40,070 | |||||||||||||||||||||
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 | — | — | — | 593,794 | — | — | 593,794 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (7,904 | ) | (7,904 | ) | |||||||||||||||||||
Issuance of common stock for employees: | ||||||||||||||||||||||||||||
Employee Stock Purchase Plan | 45 | — | 7,874 | — | — | — | 7,874 | |||||||||||||||||||||
Stock options exercised | 438 | 5 | 44,550 | — | — | — | 44,555 | |||||||||||||||||||||
Treasury stock | — | — | — | — | (1,338,111 | ) | — | (1,338,111 | ) | |||||||||||||||||||
Stock-based compensation | 144 | 2 | 37,229 | — | — | — | 37,231 | |||||||||||||||||||||
Balance December 31, 2018 | 160,472 | $ | 1,605 | $ | 1,834,741 | $ | 5,995,205 | $ | (6,146,322 | ) | $ | (117,971 | ) | $ | 1,567,258 | |||||||||||||
Net income | — | — | — | 592,198 | — | — | 592,198 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (1,500 | ) | (1,500 | ) | |||||||||||||||||||
Issuance of common stock for employees: | ||||||||||||||||||||||||||||
Employee Stock Purchase Plan | 43 | — | 7,996 | — | — | — | 7,996 | |||||||||||||||||||||
Stock options exercised | 406 | 4 | 45,715 | — | �� | — | — | 45,719 | ||||||||||||||||||||
Treasury stock | — | — | — | — | (2,466,254 | ) | — | (2,466,254 | ) | |||||||||||||||||||
Stock-based compensation | 109 | 1 | 38,301 | — | — | — | 38,302 | |||||||||||||||||||||
Balance December 31, 2019 | 161,030 | $ | 1,610 | $ | 1,926,753 | $ | 6,587,403 | $ | (8,612,576 | ) | $ | (119,471 | ) | $ | (216,281 | ) | ||||||||||||
Number of Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Balance December 31, 2018 | 160,472 | $ | 1,605 | $ | 1,834,741 | $ | 5,995,205 | $ | (6,146,322 | ) | $ | (117,971 | ) | $ | 1,567,258 | |||||||||||||
Net income | — | — | — | 592,198 | — | — | 592,198 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (1,500 | ) | (1,500 | ) | |||||||||||||||||||
Issuance of common stock for employees: | ||||||||||||||||||||||||||||
Employee Stock Purchase Plan | 43 | — | 7,996 | — | — | — | 7,996 | |||||||||||||||||||||
Stock options exercised | 406 | 4 | 45,715 | — | — | — | 45,719 | |||||||||||||||||||||
Treasury stock | — | — | — | — | (2,466,254 | ) | — | (2,466,254 | ) | |||||||||||||||||||
Stock-based compensation | 109 | 1 | 38,301 | — | — | — | 38,302 | |||||||||||||||||||||
Balance December 31, 2019 | 161,030 | $ | 1,610 | $ | 1,926,753 | $ | 6,587,403 | $ | (8,612,576 | ) | $ | (119,471 | ) | $ | (216,281 | ) | ||||||||||||
Adoption of new accounting pronouncement | — | — | — | (985 | ) | — | — | (985 | ) | |||||||||||||||||||
Net income | — | — | — | 521,571 | — | — | 521,571 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 1,528 | 1,528 | |||||||||||||||||||||
Issuance of common stock for employees: | ||||||||||||||||||||||||||||
Employee Stock Purchase Plan | 43 | — | 7,531 | — | — | — | 7,531 | |||||||||||||||||||||
Stock options exercised | 456 | 5 | 58,497 | — | — | — | 58,502 | |||||||||||||||||||||
Treasury stock | — | — | — | — | (176,408 | ) | — | (176,408 | ) | |||||||||||||||||||
Stock-based compensation | 137 | 2 | 36,684 | — | — | — | 36,686 | |||||||||||||||||||||
Balance December 31, 2020 | 161,666 | $ | 1,617 | $ | 2,029,465 | $ | 7,107,989 | $ | (8,788,984 | ) | $ | (117,943 | ) | $ | 232,144 | |||||||||||||
Net income | — | — | — | 692,843 | — | — | 692,843 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 6,078 | 6,078 | |||||||||||||||||||||
Issuance of common stock for employees: | ||||||||||||||||||||||||||||
Employee Stock Purchase Plan | 40 | — | 9,578 | — | — | — | 9,578 | |||||||||||||||||||||
Stock options exercised | 282 | 3 | 46,062 | — | — | — | 46,065 | |||||||||||||||||||||
Treasury stock | — | — | — | — | (648,930 | ) | — | (648,930 | ) | |||||||||||||||||||
Stock-based compensation | 96 | 1 | 29,775 | — | — | — | 29,776 | |||||||||||||||||||||
Balance December 31, 2021 | 162,084 | $ | 1,621 | $ | 2,114,880 | $ | 7,800,832 | $ | (9,437,914 | ) | $ | (111,865 | ) | $ | 367,554 | |||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Description of Business and Organization
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 TATM
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.2 Basis of Presentation and Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“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. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, goodwill and intangible assets, income taxes, litigation, stock-based compensation and contingencies, and to a lesser extent, product returns and allowances, bad debts, inventory valuation, warranty and installation provisions, retirement plan obligations and equity investments, which are not as significant to our financial statements. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
(“COVID-19”)
over the last two years has resulted in a widespread public health crisis. TheCOVID-19
pandemic has caused significant volatility and
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
COVID-19
pandemic. In response, governments of most countries, including the United States, as well as private businesses, have implemented numerous measures attempting to contain and mitigate the effects ofCOVID-19.
Such measures have had and are expected to continue to have adverse impacts on the United States and foreign economies of uncertain severity and duration, and have had and may continue to have a negative impact on the Company’s operations, including Company sales, supply chain and cash flow.COVID-19
and the related economic uncertainty adversely impacted sales of the Company for the year ended December 31, 2020; however, through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no interim goodwill or long-lived asset impairment analyses were required. Further, there have been Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares. All inter-company balances and transactions have been eliminated.
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.
The Company’s net sales derived from operations outside the United States were71% 72%,72% 71% and71% 71% in 2019, 20182021, 2020 and 2017,2019, respectively. Gains and losses from foreign currency transactions are includedprimarily primarily in2019, 20182021, 2020 and 2017,2019, foreign currency transactions resulted in net losses of $9$5 million, $3$7 million and $1$9 million, respectively.
cost of sales
in the consolidated statements of operations. In Seasonality of Business
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, primarily in bank deposits, U.S. treasury bill money market funds and commercial paper.
Investments with longer maturities are classified as investments, and are held primarily in U.S. treasury bills, U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities.61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments are classified asin accordance with the accounting standards for investments in(“AFS”) debt securities. AllIf the AFS debt securities are recorded atsecurity’s fair market value and anyexceeds the security’s amortized cost the unrealized holding gains and losses, to the extent deemed temporary, are includedgain is recognized in accumulated other comprehensive income in stockholders’equity,, net of the related tax effects. If any adjustment tothe AFS debt security’s fair value reflects a decline in the value of the investment,declines below its amortized cost the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary”due to credit-related factors or noncredit-related factors. If the decline is due to noncredit-related factors then no credit loss is recorded and if so, recordsthe unrealized loss is recognized in accumulated other comprehensive income in stockholders’ equity (deficit), net of the related tax effects. If the decline is considered to be a losscredit-related impairment, it is recognized as an allowance on the consolidated balance sheet with a corresponding charge to the statement of operations. The credit allowance is limited to the difference between the fair value and the amortized cost basis. No credit-related allowances or impairments have been recognized on the Company’s investments indebt securities. The Company classifies its investments exclusive of those categorized as cash equivalents.
available-for-sale
equity (deficit)
available-for-sale
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 December 31, 20192021 and 2018, $2492020, $440 million out of $337$569 million and $471$364 million out of $1,735$443 million, respectively, of the Company’s total
cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $176$298 million out of $337$569 million and $251$254 million out of $1,735$443 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at December 31, 20192021 and 2018,2020, respectively.
Accounts Receivable and Allowance for Doubtful AccountsCredit Losses
The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to the trade receivable balance as of January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for 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 includingand is calculated by applying a historical experience andloss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the customer’s credit-worthiness.likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The allowance for doubtful accountshistorical loss rate is reviewed on at least a quarterly basis.Past due balances over 90 daysan annual basis and over a specified amount are reviewed individually for collectibility.Account balances are charged against the allowance when the Company determines itfor credit losses is probable that the receivable will not be recovered.reviewed quarterly for any required adjustments. The Company does not have any Historically,
off-balance
sheet credit exposure related to its customers.Trade receivables related to instrument sales are collateralized by the Company has not experienced significant bad debt losses.instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish andre-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
following is a summary of the activity of the Company’s allowance for doubtful accountscredit losses for the year ended December 31
, 2021
, 2020
and 2019 2018
(in thousands). The December 31
, 2021
and 2017 (in thousands):2020
balances are calculated using the CECL method and the December 31
Balance at Beginning of Period | Additions | Deduction | Balance at End of Period | |||||||||||||
Allowance for Doubtful Accounts | ||||||||||||||||
December 31, 2019 | $ | 7,663 | $ | 4,701 | $ | (2,804 | ) | $ | 9,560 | |||||||
December 31, 2018 | $ | 6,109 | $ | 6,333 | $ | (4,779 | ) | $ | 7,663 | |||||||
December 31, 2017 | $ | 5,141 | $ | 3,752 | $ | (2,784 | ) | $ | 6,109 | |||||||
, 2019
balance is calculated using the incurred loss method under legacy GAAP:
Balance at Beginning | Impact of CECL Adoption | Additions | Deductions | Balance at End of Period | ||||||||||||||||
Allowance for Credit Losses | ||||||||||||||||||||
December 31, 2021 | $ | 14,381 | $ | 0 | $ | 5,380 | $ | (6,533 | ) | $ | 13,228 | |||||||||
December 31, 2020 | $ | 9,560 | $ | 985 | $ | 9,051 | $ | (5,215 | ) | $ | 14,381 | |||||||||
December 31, 2019 | $ | 7,663 | $ | — | $ | 4,701 | $ | (2,804 | ) | $ | 9,560 | |||||||||
Concentration of Credit Risk
The Company sells its products and services to a significant number of large and small customers throughout the world, with net sales to the pharmaceutical industry of approximately57% 60%, 59% and 57% in each of the years2021, 2020 and 2019, 2018 and 2017.respectively. None of the Company’s individual customers accounted for more than2% 2% of annual Company sales in 2019, 20182021, 2020 or 2017.2019. The Company performs continuing credit evaluations of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.
Inventory
The Company values all of its inventories at the lower of cost or net realizable value on a
first-in,
first-out
basis (“FIFO”).Income Taxes
The accounting standards for income taxes require that a company continually evaluate the years in which the differences are expected to reverse. Anecessity of establishing or changing a valuation allowance is provided to offset any netfor deferred tax assets if, based upon the available evidence,depending on whether it is more likely than not that some orthe actual benefit of those assets will be realized in future periods.
The Company accounts for its uncertain tax return 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 deferredpertinent facts and circumstances, but prohibit any discounting of unrecognized tax assets will not be realized. Appropriate long-term liabilities have also been recordedbenefits associated with those positions for the time value of money. The Company classified interest and penalties related to recognize uncertainunrecognized tax positions.benefits as a component of the provision for income taxes.
As part of the 2017 Tax Act, there is a provision for the taxation of
certain earnings referred to as the Global57
off-shore earnings
Intangible Income (“GILTI”) provision. This provision
Low-Taxed Income
taxes earnings at a rate of 10.5%, partially offset with foreign tax credits. In connection with this provision, the Company’s accounting policy is to treat this new tax as a current period cost.
off-shore earnings
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
The Company’s lease portfolio consists primarily of operating leases. 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 Company categorizes leases as either operating or finance leases at the commencement date of the lease. The Company does not have any material financing leases.
The Company makes variable lease payments that do not depend on a rate or index, primarily for items such as real estate taxes and other expenses. These expenses are recorded as variable costs in the period incurred. For the years ended December 31, 2021, 2020 and 2019, respectively, variable costs incurred were not material.
The Company’s lease agreements may include tenant improvement allowances, rent holidays, and/or contingent rent provisions as well as a certain number of these leases contain rental escalation clauses that are either fixed or adjusted periodically for inflation of market rates which are factored into our determination of lease payments at lease inception. The Company’s leases also sometimes include renewal options and/or termination options which are included in the determination of the lease term when they are reasonably certain to be exercised.
The Company has lease agreements which contain lease and
non-lease
components, which are accounted for as a single lease component for all underlying classes of assets.For leases with terms greater than 12 months, the Company records aasset and lease liability at the present value of lease payments over the term of the leases and records rent expense on a straight-line basis over the lease term. The Company has elected not to apply the recognition requirements to short-term leases with terms less than 12 months. For short-term leases, the Company recognizes lease payments in net income on a straight-line basis over the term of the lease. For the years ended December 31, 2021, 2020 or 2019, respectively, costs incurred related to short-term leases were not material.
right-of-use
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 estimates 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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: buildings —thirty-ninethirty-
fifteen
to nine years
; building improvements —five
to ten years; leasehold improvements — the shorter of the economic useful life or life of lease; and production and other equipment —three
to ten years. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the consolidated balance sheets and related gains or losses are reflected in the consolidated statements of operations.Asset Impairments
The Company reviews its long-lived assets for impairment in accordance with the accounting standards for property, plant and equipment. Whenever events or circumstances indicate that the carrying amount of an asset
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
may not be recoverable, the Company evaluates the recoverability of the carrying value of the asset based on the expected future cash flows, relying on a number of factors, including, but not limited to, operating results, business plans, economic projections and anticipated future cash flows. If the asset is deemed not recoverable, it is written down to fair value and the impairment is recorded in the consolidated statements of operations.
During 2020, the Company recorded a
non-cash
charge of $10 million for the impairment of certain intangible assets associated with its 2014 acquisition of Medimass Research Development and Service Kft (“Medimass”). The impairment charge was due to a shift in strategic priorities. In conjunction with the intangible asset impairment the Company also reduced its liability for contingent consideration of $3 million during 2020 as the carrying value of this liability is based on the future sales of the Medimass intangible assets that were impaired. The net impact of $7 million is reported separately within the consolidated statements of operations.Business Combinations and Asset Acquisitions
The Company accounts for business acquisitions under the accounting standards for business combinations. The results of each acquisition are included in the Company’s consolidated results as of the acquisition date and the purchase price of an acquisition is allocated to tangible and intangible assets and assumed liabilities based on their estimated fair values. Any excess of the fair value consideration transferred over the estimated fair values of the net assets acquired is recognized as goodwill. Acquired
in-process
research and development (“IPR&D”) included in a business combination is capitalized as an indefinite-lived intangible asset. Development costs incurred after the acquisition are expensed as incurred and acquired IPR&D is tested for impairment annually until completion of the acquired programs. Upon commercialization, this indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life, subject to periodic impairment reviews. If the research and development project is abandoned, the indefinite-lived asset is charged to expense. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.The Company also acquires intellectual property through licensing arrangements. These arrangements often require upfront payments and may include additional milestone or royalty payments, contingent upon certain future events. IPR&D acquired in an asset acquisition (as opposed to a business combination) is expensed immediately unless there is an alternative future use. Subsequent payments made for the achievement of milestones are evaluated to determine whether they have an alternative future use or should be expensed. Payments made to third parties subsequent to commercialization are capitalized and amortized over the remaining useful life of the related asset, and are classified as intangible assets.
Goodwill and Other Intangible Assets
The Company tests for goodwill impairment using a fair-value approach at the reporting unit level annually, or earlier, if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, theThe Company performs an annual goodwill impairment assessment for its reporting units as of
December 31
each year. The goodwill and other intangible assets accounting standards define a reporting unit as an operating segment, or one level below an operating segment, if discrete financial information is prepared and reviewed by management. For goodwill impairment review
purposes, the
Company has 2 reporting units: Waters
TM
and TATM
. Goodwill is allocated to the reporting units at the time of acquisition.As of January 1, 2020, the Company adopted a new accounting standard which eliminated the requirement to calculate the implied fair value of goodwill as noted above to measure a goodwill impairment charge. Under the impairment test,prior accounting standard, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the carrying amount of goodwill exceeds the implied fair value of the
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
goodwill. Under the new accounting standard impairment assessment, an impairment charge is based on the excess of a reporting unit’s carrying amount over its fair value. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the amount of the excess carrying amount of the reporting unit over its fair value. This impairment is limited to the total amount of goodwill allocated to that reporting unit. The fair value of reporting units was estimated using a discounted cash flows technique, which includes certain management assumptions, such as estimated future cash flows, estimated growth rates and discount rates.
The Company’s intangible assets include purchased technology; capitalized software development costs; costs associated with acquiring Company patents, trademarks and intellectual properties, such as licenses; and acquired IPR&D. Purchased intangibles are recorded at their fair market values as of the acquisition date and amortized over their estimated useful lives, ranging from one to fifteen years. Other intangibles are amortized over a period ranging from one to ten years. Acquired IPR&D is amortized from the date of completion of the acquired program over its estimated useful life. IPR&D and indefinite-lived intangibles are tested annually for impairment.
Software Development Costs
The Company capitalizes internal and external software development costs for products offered for sale in accordance with the accounting standards for the costs of software to be sold, leased, or otherwise marketed. Capitalized costs are amortized to cost of sales over the period of economic benefit, which approximates a straight-line basis over the estimated useful lives of the related software products, generally three to ten years. The Company capitalized $40$36 million, $53 million and $34$40 million of direct expenses that were related to the development of software in 20192021, 2020 and 2018,2019, respectively. Net capitalized software included in intangible assets totaled $149$155 million and $147$175 million at December 31, 20192021 and 2018,2020, respectively. See Note, “Goodwill Goodwill and Other Intangibles”.Intangibles.
8,
The Company capitalizes internal software development costs for internal use. Capitalized internal software development costs are amortized over the period of economic benefit, which approximates a straight-line basis over ten years. Net capitalized internal software included in property, plant and equipment totaled $3$12 million and $2$8 million at December 31, 20192021 and 2018,2020, respectively.
Other Investments
The Company accounts for its investments that represent less than twenty percent ownership, and for which the Company does not have the ability to exercise significant influence, using the accounting standards for investments in equity securities. Investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable market value, are accounted for at cost, adjusted for subsequent observable price changes as applicable. The Company periodically evaluates the carrying value of its investments for which the Company does not have the ability to exercise significant influence, and for which there is not a readily determinable fair value and carries them at cost, less impairment, adjusted for subsequent observable price changes. For equity investments in which the Company has the ability to exercise significant influence over operating and financial policies of the investee, the equity method of accounting is used. The Company’s share of net income or losses of equity method investments is included in the consolidated statements of operations and was not material in any period presented.
During the year ended December 31, 2021, year ended December 31, 2020 and year ended December 31, 2019, the Company made $9 million of investments in unaffiliated companies. During the year ended December 31, 2018, the Company made a $8companies of $2 million, investment in a developer of analytical system solutions used to make measurements, predict stability$6 million and accelerate product discovery in the routine analytic, process monitoring and quality control release processes for life science and biopharmaceutical markets.$9 million, respectively.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2021
, the Company also recorded an unrealized gain of $10 million due to an observable change in the fair value of an existing investment the Company does not have the ability to exercise significant influence over.
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 December 31, 20192021 and 2018.2020. 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.
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 20192021 (in thousands):
Total at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Time deposits | $ | 1,642 | $ | — | $ | 1,642 | $ | — | ||||||||
Waters 401(k) Restoration Plan assets | 30,158 | 30,158 | — | — | ||||||||||||
Foreign currency exchange contracts | 16 | — | 16 | — | ||||||||||||
Interest rate cross-currency swap agreements | 4,485 | — | 4,485 | — | ||||||||||||
Total | $ | 36,301 | $ | 30,158 | $ | 6,143 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 2,557 | $ | — | $ | — | $ | 2,557 | ||||||||
Foreign currency exchange contracts | 1,028 | — | 1,028 | — | ||||||||||||
Total | $ | 3,585 | $ | — | $ | 1,028 | $ | 2,557 | ||||||||
Total at December 31, 2021 | Quoted Prices in Active Markets for Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
U.S. Treasury securities | $ | 13,917 | $ | — | $ | 13,917 | $ | — | ||||||||
Corporate debt securities | 39,121 | — | 39,121 | — | ||||||||||||
Time deposits | 19,030 | — | 19,030 | — | ||||||||||||
Waters 401(k) Restoration Plan assets | 38,729 | 38,729 | 0 | — | ||||||||||||
Foreign currency exchange contracts | 504 | — | 504 | — | ||||||||||||
Total | $ | 111,301 | $ | 38,729 | $ | 72,572 | $ | 0 | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 1,347 | $ | — | $ | — | $ | 1,347 | ||||||||
Foreign currency exchange contracts | 195 | — | 195 | — | ||||||||||||
Interest rate cross-currency swap agreements | 5,363 | — | 5,363 | — | ||||||||||||
Total | $ | 6,905 | $ | 0 | $ | 5,558 | $ | 1,347 | ||||||||
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31 2018 (in
, 2020
(in thousands):
Total at December 31, 2018 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (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 | ||||||||
Total at December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Time deposits | $ | 6,451 | $ | — | $ | 6,451 | $ | — | ||||||||
Waters 401(k) Restoration Plan assets | 38,988 | 38,988 | — | — | ||||||||||||
Foreign currency exchange contracts | 836 | — | 836 | — | ||||||||||||
Total | $ | 46,275 | $ | 38,988 | $ | 7,287 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 1,185 | $ | — | $ | — | $ | 1,185 | ||||||||
Foreign currency exchange contracts | 185 | — | 185 | — | ||||||||||||
Interest rate cross-currency swap agreements | 44,996 | — | 44,996 | — | ||||||||||||
Total | $ | 46,366 | $ | — | $ | 45,181 | $ | 1,185 | ||||||||
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 and interest rate cross-currency swap agreements 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 2014December 2020 acquisition of Medimass Research, Development and Service Kft.Integrated Software Solutions (“ISS”) 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 resultsachievement of certain revenue and customer account milestones over the two years after the acquisition date 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
The fair value of future contingent consideration payments related to the December 2020 acquisition of ISS was estimated to be $
$1 million at both December 31, 20192021 and 2018, respectively, based on the Company’s best estimate, as the2020.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value of Other Financial Instruments
The Company’s accounts receivable and 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 variable interest rate debt approximates fair value due to the variable nature of the interest rate. The carrying value of the Company’s fixed interest rate debt was $1.0$1.3 billion and $510 million$0.9 billion at December 31, 20192021 and 2018,2020, 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 $1.0$1.3 billion and $502 million$1.0 billion at December 31, 20192021 and 2018,2020, respectively, using Level 2 inputs.
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation.
The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment.
Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.Interest Rate Cross-Currency Swap Agreements
As of DecemberDecember 31, 2019
other comprehensive income and remain in accumulated comprehensive income in stockholders’ equity (deficit) equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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):
December 31, 2019 | December 31, 2018 | |||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||
Other current assets | $ | 119,576 | $ | 16 | $ | 112,212 | $ | 503 | ||||||||
Other current liabilities | $ | 29,495 | $ | 1,028 | $ | 40,175 | $ | 224 | ||||||||
Interest rate cross-currency swap agreements: | ||||||||||||||||
Other assets | $ | 560,000 | $ | 4,485 | $ | 300,000 | $ | 1,093 | ||||||||
Accumulated other comprehensive income | $ | (4,485 | ) | $ | (1,093 | ) | ||||||||||
December 31, 2021 | December 31, 2020 | |||||||||||||||
Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||
Other current assets | $ | 55,309 | $ | 504 | $ | 66,690 | $ | 836 | ||||||||
Other current liabilities | $ | 9,000 | $ | 195 | $ | 20,000 | $ | 185 | ||||||||
Interest rate cross-currency swap agreements: | ||||||||||||||||
Other liabilities | $ | 230,000 | $ | 5,363 | $ | 560,000 | $ | 44,996 | ||||||||
Accumulated other comprehensive loss | $ | 15,944 | $ | 44,996 | ||||||||||||
The following is a summary of the activity included in the consolidated statements of operations and statements of comprehensive income related to the foreign currency exchange contracts (inand interest rate cross-currency swap agreements
(in thousands):
Financial Statement Classification | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||
Foreign currency exchange contracts: | ||||||||||||||||
Realized (losses) gains on closed contracts | Cost of sales | $ | (3,552 | ) | $ | (6,684 | ) | $ | 3,894 | |||||||
Unrealized (losses) gains on open contracts | Cost of sales | (1,292 | ) | (105 | ) | 1,054 | ||||||||||
Cumulative net pre-tax (losses) gains | Cost of sales | $ | (4,844 | ) | $ | (6,789 | ) | $ | 4,948 | |||||||
Interest rate cross-currency swap agreements: | ||||||||||||||||
Interest earned | Interest income | $ | 11,709 | $ | 2,713 | $ | — | |||||||||
Unrealized gains on open contracts | Stockholders’ ( def i cit equity | $ | 4,485 | $ | 1,093 | $ | — | |||||||||
Financial Statement Classification | Year Ended December 31, | |||||||||||||
2021 | 2020 | 2019 | ||||||||||||
Foreign currency exchange contracts: | ||||||||||||||
| Realized (losses) gains on closed contracts | Cost of sales | $ | (1,973 | ) | $ | 1,444 | $ | (3,552 | ) | |||||
| Unrealized (losses) gains on open contracts | Cost of sales | (343 | ) | 1,663 | (1,292 | ) | ||||||||
Cumulative net pre-tax (losses) gains | Cost of sales | $ | (2,316 | ) | $ | 3,107 | $ | (4,844 | ) | |||||
Interest rate cross-currency swap agreements: | ||||||||||||||
Interest earned | Interest income | $ | 11,084 | $ | 15,296 | $ | 11,709 | |||||||
| Unrealized gains (losses) on open contracts | Accumulated other | |||||||||||||
comprehensive loss | $ | 29,052 | $ | (44,996 | ) | $ | 4,485 | |||||||
Stockholders’ Equity (Deficit) 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 a2019, 20182021, 2020 and 2017,2019, the Company repurchased 11.12.0 million, 6.80.8 million and 1.811.1 million shares of the Company’s outstanding common stock at a cost of $640 million, $167 million and $2.5 billion, $1.3 billion and $323 million, respectively, under theauthorization and other previously announced programs. In addition, the Company repurchased $8$9 million, $10$9 million and $10$8 million of common stock related to the vesting of restricted stock units during the years ended December 31, 2021, 2020 and 2019, 2018 and 2017,In December 2020, the Company’s Board of Directors authorized the extension of the share repurchase program through January 21, 2023.
two-year
period. During January 2019
respectively. As of December 31, 2019,2021, the Company has a total of $1.7 billion$885 million authorized for future repurchases.
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.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 the 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 are 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 abasis.
when-and-if-available
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 their 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.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
year ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
Balance at Beginning of Period | Accruals for Warranties | Settlements Made | Balance at End of Period | |||||||||||||
Accrued warranty liability: | ||||||||||||||||
December 31, 2019 | $ | 12,300 | $ | 7,540 | $ | (7,876 | ) | $ | 11,964 | |||||||
December 31, 2018 | $ | 13,026 | $ | 5,033 | $ | (5,759 | ) | $ | 12,300 | |||||||
December 31, 2017 | $ | 13,391 | $ | 8,746 | $ | (9,111 | ) | $ | 13,026 | |||||||
Balance at Beginning of Period | Accruals for Warranties | Settlements Made | Balance at End of Period | |||||||||||||
Accrued warranty liability: | ||||||||||||||||
December 31, 2021 | $ | 10,950 | $ | 8,799 | $ | (9,031 | ) | $ | 10,718 | |||||||
December 31, 2020 | $ | 11,964 | $ | 7,909 | $ | (8,923 | ) | $ | 10,950 | |||||||
December 31, 2019 | $ | 12,300 | $ | 7,540 | $ | (7,876 | ) | $ | 11,964 | |||||||
Advertising Costs
All advertising costs are expensed as incurred and are included in selling and administrative expenses in the consolidated statements of operations. Advertising expenses were $6$7 million, $7$6 million and $6 million for 2019, 20182021, 2020 and 2017,2019, respectively.
Research and Development Expenses
Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, contract services and other outside costs. Research and development expenses are expensed as incurred. During 2017, the Company incurred a $5 million charge for acquiredin-processresearch and development related to the licensing of certain intellectual property relating to mass spectrometry technologies yet to be commercialized and for which there was no future alternative use as of the acquisition date. These licensing arrangements are significantly related to new, biologically-focused applications, as well as other applications, and require the Company to make additional future payments of up to $7 million if certain milestones are achieved, as well as royalties on future net sales.
Stock-Based Compensation
The Company has two stock-based compensation plans, which are described in Note 14, “Stock-Based Compensation”.
Earnings Per Share
In accordance with the earnings per share accounting standards, the Company presents two earnings per share (“EPS”) amounts. Income per basic common share is based on income available to common shareholders and the weighted-average number of common shares outstanding during the periods presented. Income per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding.
Retirement Plans
The Company sponsors various retirement plans, which are described in Note 17, “Retirement Plans”.
Comprehensive Income
The Company accounts for comprehensive income in accordance with the accounting standards for comprehensive income, which establish the accounting rules for reporting and displaying comprehensive income.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
These standards require that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
Recently Adopted Accounting Standards
In February 2016,December 2019, accounting guidance was issued regardingthat simplifies the accounting for leases. This new comprehensive lease standard amends variousincome taxes by removing certain exceptions within the current guidance, including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of existingthe accounting guidance for leases. The core principlefranchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of the new guidance requires lessees to present the assets and liabilities that arise from leases on their balance sheets.goodwill. 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 aright-of-uselease 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 February 2018,January 2020, accounting guidance was issued to addressthat clarifies the impactaccounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the 2017 Tax Act on items recorded in accumulated other comprehensive income. Current accounting guidance requires deferred tax liabilitiesthat could be applicable and assets tohelps clarify which guidance should be adjusted for the effectapplied in certain situations which should increase relevance and comparability 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.financial statement information. This guidance wasis effective for annual and interim periods beginning after December 15, 2018.2020. The Company adopted this standard as ofon January 1, 2019 and the2021. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
Recently Issued Accounting Standards
In June 2016,March 2020, accounting guidance was issued that modifiesfacilitates the recognitioneffects of credit losses relatedreference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial assets, such as debt securities, trade receivables, net investments in leases,off-balancesheet credit exposures,reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other financial assetstransactions 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 ofreference LIBOR or another reference rate expected credit losses to be based upon relevant information, including historical experience, current conditions,discontinued because of reference rate reform. In January of 2021, an update was issued to clarify that certain optional expedients and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized soonerexceptions under the newreference rate reform guidance duefor contract modifications and hedge accounting apply to derivatives that are affected by the broader rangediscounting transition. Specifically, certain provisions in the reference rate reform guidance, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of informationreference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified asavailable-for-sale.When the fair value of anavailable-for-saledebt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit andnon-creditcomponents. Any expected credit losses or subsequent recoveries willadopted.
In October 2021, accounting guidance was issued that requires acquirers in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received ini
n
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 year ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Balance at the beginning of the period | $ | 204,257 | $ | 192,589 | $ | 173,780 | ||||||
Recognition of revenue included in balance at beginning of the period | (176,981 | ) | (159,258 | ) | (143,589 | ) | ||||||
Revenue deferred during the period, net of revenue recognized | 186,419 | 170,926 | 162,398 | |||||||||
Balance at the end of the period | $ | 213,695 | $ | 204,257 | $ | 192,589 | ||||||
December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Balance at the beginning of the period | $ | 239,759 | $ | 213,695 | $ | 204,257 | ||||||
Recognition of revenue included in balance at beginning of the period | (216,920 | ) | (198,209 | ) | (176,981 | ) | ||||||
Revenue deferred during the period, net of revenue recognized | 250,759 | 224,273 | 186,419 | |||||||||
Balance at the end of the period | $ | 273,598 | $ | 239,759 | $ | 213,695 | ||||||
The Company classified $38$46 million and $39$42 million of deferred revenue and customer advances in other long-term liabilities at December 31, 20192021 and 2018,2020, respectively.
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):
December 31, 2019 | ||||
Deferred revenue and customer advances expected to be recognized in: | ||||
One year or less | $ | 176,360 | ||
13-24 months | 21,029 | |||
25 months and beyond | 16,306 | |||
Total | $ | 213,695 | ||
December 31, 2021 | ||||
Deferred revenue and customer advances expected to be recognized in: | ||||
One year or less | $ | 227,561 | ||
13-24 months | 26,840 | |||
25 months and beyond | 19,197 | |||
Total | $ | 273,598 | ||
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
December 31, 2019 | ||||||||||||||||
Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | |||||||||||||
Time deposits | $ | 1,642 | $ | — | $ | — | $ | 1,642 | ||||||||
Total | $ | 1,642 | $ | — | $ | — | $ | 1,642 | ||||||||
Amounts included in: | ||||||||||||||||
Cash equivalents | $ | 213 | $ | — | $ | — | $ | 213 | ||||||||
Investments | 1,429 | — | — | 1,429 | ||||||||||||
Total | $ | 1,642 | $ | — | $ | — | $ | 1,642 | ||||||||
December 31, 2021 | ||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
U.S. Treasury securities | $ | 13,929 | $ | 0 | $ | (12 | ) | $ | 13,917 | |||||||
Corporate debt securities | 39,135 | 0 | (14 | ) | 39,121 | |||||||||||
Time deposits | 19,030 | — | — | 19,030 | ||||||||||||
Total | $ | 72,094 | $ | 0 | $ | (26 | ) | $ | 72,068 | |||||||
Amounts included in: | ||||||||||||||||
Cash equivalents | $ | 4,017 | $ | — | $ | — | $ | 4,017 | ||||||||
Investments | 68,077 | 0 | (26 | ) | 68,051 | |||||||||||
Total | $ | 72,094 | $ | 0 | $ | (26 | ) | $ | 72,068 | |||||||
December 31, 2018 | December 31, 2020 | |||||||||||||||||||||||||||||||
Amortized Cost | Unrealized Gain | Unrealized Loss | Fair Value | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||
Cost | Gain | Loss | Value | |||||||||||||||||||||||||||||
Time deposits | 108,638 | — | — | 108,638 | 6,451 | — | — | 6,451 | ||||||||||||||||||||||||
Total | $ | 1,002,521 | $ | 58 | $ | (3,104 | ) | $ | 999,475 | $ | 6,451 | $ | — | $ | — | $ | 6,451 | |||||||||||||||
Amounts included in: | ||||||||||||||||||||||||||||||||
Cash equivalents | $ | 60,532 | $ | — | $ | (1 | ) | $ | 60,531 | |||||||||||||||||||||||
Investments | 941,989 | 58 | (3,103 | ) | 938,944 | 6,451 | — | — | 6,451 | |||||||||||||||||||||||
Total | $ | 1,002,521 | $ | 58 | $ | (3,104 | ) | $ | 999,475 | $ | 6,451 | $ | — | $ | — | $ | 6,451 | |||||||||||||||
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
December 31, 2019 | December 31, 2018 | |||||||
Due in one year or less | $ | 1,642 | $ | 797,649 | ||||
Due after one year through three years | — | 201,826 | ||||||
Total | $ | 1,642 | $ | 999,475 | ||||
December 31, 2021 | December 31, 2020 | |||||||
Due in one year or less | $ | 71,066 | $ | 6,451 | ||||
Due after one year through three years | 1,002 | — | ||||||
Total | $ | 72,068 | $ | 6,451 | ||||
Net realized gains and losses on sales of investments were not material in 2019, 20182021, 2020 and 2017.2019.
5 Inventories
Inventories are classified as follows (in thousands):
December 31, 2019 | December 31, 2018 | |||||||
Raw materials | $ | 126,850 | $ | 111,641 | ||||
Work in progress | 15,457 | 15,552 | ||||||
Finished goods | 178,244 | 164,376 | ||||||
Total inventories | $ | 320,551 | $ | 291,569 | ||||
December 31, 2021 | December 31, 2020 | |||||||
Raw materials | $ | 165,240 | $ | 133,490 | ||||
Work in progress | 19,726 | 18,678 | ||||||
Finished goods | 171,129 | 152,113 | ||||||
Total inventories | $ | 356,095 | $ | 304,281 | ||||
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2019, 20182021, 2020 and 2017,2019, the Company
recorded inventory-related excess and obsolescence provisions of $13$
9 million, $8$
12 million
and $2
$
13 million, respectively.
6 Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 31, | ||||||||
2019 | 2018 | |||||||
Land and land improvements | $ | 37,040 | $ | 36,554 | ||||
Buildings and leasehold improvements | 355,425 | 299,103 | ||||||
Production and other equipment | 537,211 | 494,302 | ||||||
Construction in progress | 57,985 | 41,909 | ||||||
Total property, plant and equipment | 987,661 | 871,868 | ||||||
Less: accumulated depreciation and amortization | (570,319 | ) | (528,785 | ) | ||||
Property, plant and equipment, net | $ | 417,342 | $ | 343,083 | ||||
December 31, | ||||||||
2021 | 2020 | |||||||
Land and land improvements | $ | 36,428 | $ | 36,884 | ||||
Buildings and leasehold improvements | 446,061 | 376,705 | ||||||
Production and other equipment | 621,792 | 588,625 | ||||||
Construction in progress | 117,148 | 125,925 | ||||||
Total property, plant and equipment | 1,221,429 | 1,128,139 | ||||||
Less: accumulated depreciation and amortization | (673,516 | ) | (634,136 | ) | ||||
Property, plant and equipment, net | $ | 547,913 | $ | 494,003 | ||||
In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in the U.S.United States. The Company anticipates spending an estimated $215has incurred costs of $200 million to build and equip this newand has spent $85 million on this facility throughas of December 31, 2019.2021, and anticipates spending approximately $50 million to complete the facility in 2022.
state-of-the-art
manufacturing facility During 2019, 20182021, 2020 and 2017,2019, the Company retired and disposed of approximately $11$23 million, $9$19 million and $15$11 million of property, plant and equipment, respectively, most of which was fully depreciated and no longer in use. Gains or losses on disposals were immaterial for the years ended December 31, 2019, 20182021, 2020 and 2017.2019.
7 Acquisitions
Andrew Alliance offers lab workflow automation solutions with the combination of a business. its software platform and smart, connected laboratory equipment and accessories.
The Company allocated $33$7 million of fair valuethe purchase price to a purchased intangible asset whichassets comprised of developed technology, trade name and customer relationships. The developed technology and customer relationships will be
amortized over ten years and the trade name will be amortized over 3 years. The Company allocated $72 million of the useful lifepurchase price to goodwill, which is not deductible for tax purposes. The principal factor that resulted in recognition of 12 years.goodwill in the acquisition was that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with the Company’s products, which are higher than if the acquired companies’ technology, customer access or products were utilized on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the assets and liabilities acquired were determined using various income-approach valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the acquisition date, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisition of Andrew Alliance (in thousands):
Cash | $ | 713 | ||
Accounts receivable and current other assets | 806 | |||
Inventory | 669 | |||
Prepaid and other assets | 611 | |||
Property, plant and equipment, net | 757 | |||
Operating lease assets | 847 | |||
Intangible assets | 6,960 | |||
Goodwill | 71,632 | |||
Total assets acquired | 82,995 | |||
Accrued expenses and other liabilities | 2,093 | |||
Total consideration | 80,902 | |||
Fair value of minority investment | 3,525 | |||
Cash consideration paid | $ | 77,377 | ||
On December 15, 2020, the Company acquired all of the outstanding stock of ISS, for $4 million, net of cash acquired. In addition, the Company may have to pay additional contingent consideration which has an estimated fair value of $1 million as of the close date. The contingent consideration is recorded as a liability and will be paid to the prior shareholders of ISS if certain revenue and customer account conditions are achieved over the next two years after the acquisition date.
ISS offers clinical laboratory software systems that will support and further expand product offerings within our clinical business. The net assets acquired primarily relate to ISS’ laboratory information system,
OMNI-Lab.
In each acquisition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs.
The pro forma effect of the ongoing operations for Waters Corporation from Andrew Alliance and the DESI imaging technology,ISS, either individually or in the aggregate, as though this acquisitionthese acquisitions had occurred at the beginning of the periods covered by this report waswere immaterial.
8 Goodwill and Other Intangibles
The carrying amount of goodwill was $356$438 million and $444 million at both December 31, 20192021 and 2018.2020, respectively. The effect of foreign currency translation decreased goodwill by $6 million.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | |||||||||||||||||||
Capitalized software | $ | 481,986 | $ | 333,255 | 5 years | $ | 454,307 | $ | 307,634 | 5 years | ||||||||||||||
Purchased intangibles | 200,523 | 151,722 | 11 years | 201,566 | 144,184 | 11 years | ||||||||||||||||||
Trademarks and IPR&D | 13,782 | — | — | 13,677 | — | — | ||||||||||||||||||
Licenses | 5,669 | 5,298 | 6 years | 5,568 | 4,875 | 6 years | ||||||||||||||||||
Patents and other intangibles | 83,035 | 54,517 | 8 years | 77,753 | 49,276 | 8 years | ||||||||||||||||||
Total | $ | 784,995 | $ | 544,792 | 7 years | $ | 752,871 | $ | 505,969 | 7 years | ||||||||||||||
December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Weighted- Average Amortization Period | |||||||||||||||||||
Capitalized software | $ | 575,658 | $ | 420,862 | 5 years | $ | 584,452 | $ | 409,847 | 5 years | ||||||||||||||
Purchased intangibles | 201,302 | 163,752 | 11 years | 205,585 | 160,342 | 11 years | ||||||||||||||||||
Trademarks | 9,680 | — | — | 9,680 | — | — | ||||||||||||||||||
Licenses | 12,635 | 6,199 | 7 years | 5,923 | 5,697 | 6 years | ||||||||||||||||||
Patents and other intangibles | 102,353 | 68,414 | 8 years | 90,699 | 61,808 | 8 years | ||||||||||||||||||
Total | $ | 901,628 | $ | 659,227 | 7 years | $ | 896,339 | $ | 637,694 | 7 years | ||||||||||||||
The Company capitalized $55 million and $68 million of intangible assets for the years ended December 31, 2021 and 2020, respectively. The gross carrying value of intangible assets and accumulated amortization for intangible assets decreased by $12$49 million and $11$38 million, respectively, in the year ended December 31, 20192021 due to the effects of foreign currency translation. Amortization expense for intangible assets was $51$60 million, $50$57 million and $45$51 million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. Amortization expense for intangible assets is estimated to be $52$62 million per year for each of the next five years.
During 2020, the Company recorded a70
non-cash
9 Debt
Senior | Face Value | |||||||||||||||
Unsecured Notes | Term | Interest Rate | (in millions) | Maturity Date | ||||||||||||
Series L | 7 years | 3.31 | % | $ | 200 | September 2026 | ||||||||||
Series M | 10 years | 3.53 | % | $ | 300 | September 2029 | ||||||||||
The interest rates applicable to the 20172021 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 20172021 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 20172021 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
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
any fiscal quarter. In addition, the 20172021 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
In March 2021, the Company issued the following senior unsecured notes:
Senior Unsecured Notes | Term | Interest Rate | Face Value (in millions) | Maturity Date | ||||||||||||
Series N | 5 years | 1.68 | % | $ | 100 | March 2026 | ||||||||||
Series O | 10 years | 2.25 | % | $ | 400 | March 2031 | ||||||||||
The Company used th
e
proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes. Interest on the Series N and O Senior Notes is payable semi-annually. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, plus the applicable make-whole amount for Series N and O Senior Notes, in each case, upon no more than 60 nor less than 20 days’ written notice to the holders of the Senior Notes. In the event of a change in control (as defined in the note purchase agreement) of the Company, the Company may be required to prepay the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. Other provisions for these senior unsecured notes are similar to the existing senior unsecured notes, as described below.As of December 31, 20192021 and 2018,2020, the Company had a total of $1.1$1.3 billion and $560 million,$1.0 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had the following outstanding debt at December 31, 2021 and 2020 (in thousands):
December 31, 2021 | December 31, 2020 | |||||||
Senior unsecured notes - Series E - 3.97%, due March 2021 | 0 | 50,000 | ||||||
Senior unsecured notes - Series F - 3.40%, due June 2021 | 0 | 100,000 | ||||||
Total notes payable and debt, current | 0 | 150,000 | ||||||
Senior unsecured notes - Series G - 3.92%, due June 2024 | 50,000 | 50,000 | ||||||
Senior unsecured notes - Series H - floating rate*, due June 2024 | 50,000 | 50,000 | ||||||
Senior unsecured notes - Series I - 3.13%, due May 2023 | 50,000 | 50,000 | ||||||
Senior unsecured notes - Series K - 3.44%, due May 2026 | 160,000 | 160,000 | ||||||
Senior unsecured notes - Series L - 3.31%, due September 2026 | 200,000 | 200,000 | ||||||
Senior unsecured notes - Series M - 3.53%, due September 2029 | 300,000 | 300,000 | ||||||
Senior unsecured notes - Series N - 1.68%, due March 2026 | 100,000 | — | ||||||
Senior unsecured notes - Series O - 2.25%, due March 2031 | 400,000 | — | ||||||
Credit agreement | 210,000 | 400,000 | ||||||
Unamortized debt issuance costs | (6,130 | ) | (3,485 | ) | ||||
Total long-term debt | 1,513,870 | 1,206,515 | ||||||
Total debt | $ | 1,513,870 | $ | 1,356,515 | ||||
| * | Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%. |
As of December 31, 2019,2021 and 2020, the Company hashad a total amount available to borrow under the 2021 or 2017 Credit Agreement of $1.6 billion and $1.4 billion, respectively, after outstanding letters of credit. The weighted-average interest rates applicable to the senior unsecured notes and credit agreement borrowings collectively were 2.74% and 2.92% at December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $121 million and $109 million at December 31, 2021 and 2020, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of December 31, 2021 or December 31, 2020.
As of December 31, 2021, the Company had entered into three-yearthree-year interest rate cross-currency swap derivative agreements with aan aggregate notional value of $560$230 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
December 31, 2019 | December 31, 2018 | |||||||
Foreign subsidiary lines of credit | $ | 366 | $ | 178 | ||||
Senior unsecured notes - Series B - 5.00%, due February 2020 | 100,000 | — | ||||||
Total notes payable and debt, current | 100,366 | 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 | ||||||
Senior unsecured notes - Series L - 3.31%, due September 2026 | 200,000 | — | ||||||
Senior unsecured notes - Series M - 3.53%, due September 2029 | 300,000 | — | ||||||
Credit agreement | 625,000 | 590,000 | ||||||
Unamortized debt issuance costs | (4,203 | ) | (1,828 | ) | ||||
Total long-term debt | 1,580,797 | 1,148,172 | ||||||
Total debt | $ | 1,681,163 | $ | 1,148,350 | ||||
* Series H senior unsecured notes bear interest at a 3-month LIBOR for that floating rate interest period plus 1.25%. | ||||||||
Total | ||||
2022 | $ | 0 | ||
2023 | 50,000 | |||
2024 | 100,000 | |||
2025 | 0 | |||
2026 | 670,000 | |||
Thereafter | 700,000 | |||
Total | $ | 1,520,000 | ||
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total | ||||
2020 | $ | 100,366 | ||
2021 | 150,000 | |||
2022 | 625,000 | |||
2023 | 50,000 | |||
2024 | 100,000 | |||
Thereafter | 660,000 | |||
Total | $ | 1,685,366 | ||
10 Income Taxes
Income tax data for the years ended December 31, 2019, 20182021, 2020 and 20172019 is as follows (in thousands):
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
The components of income from operations before income taxes are as follows: | ||||||||||||
Domestic | $ | 97,325 | $ | 57,822 | $ | 55,751 | ||||||
Foreign | 580,914 | 624,324 | 585,346 | |||||||||
Total | $ | 678,239 | $ | 682,146 | $ | 641,097 | ||||||
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
The components of the income tax provision from operations were as follows: | ||||||||||||
Federal | $ | 7,009 | $ | 27,277 | $ | 499,828 | ||||||
State | 3,329 | (11,964 | ) | 21,163 | ||||||||
Foreign | 66,083 | 70,634 | 54,285 | |||||||||
Total current tax provision | $ | 76,421 | $ | 85,947 | $ | 575,276 | ||||||
Federal | $ | 6,913 | $ | (3,256 | ) | $ | 35,949 | |||||
Stat e | 1,253 | 2,247 | 5,398 | |||||||||
Foreign | 1,454 | 3,414 | 4,163 | |||||||||
Total deferred tax provision | 9,620 | 2,405 | 45,510 | |||||||||
Total provision | $ | 86,041 | $ | 88,352 | $ | 620,786 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
The components of income before income taxes are as follows: | ||||||||||||
Domestic | $ | 144,410 | $ | 75,193 | $ | 97,325 | ||||||
Foreign | 661,783 | 535,721 | 580,914 | |||||||||
Total | $ | 806,193 | $ | 610,914 | $ | 678,239 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
The components of the income tax provision were as follows: | ||||||||||||
Federal | $ | 16,302 | $ | 28,385 | $ | 7,009 | ||||||
State | 3,691 | 4,243 | 3,329 | |||||||||
Foreign | 76,724 | 59,408 | 66,083 | |||||||||
Total current tax provision | $ | 96,717 | $ | 92,036 | $ | 76,421 | ||||||
Federal | $ | 10,491 | $ | (8,244 | ) | $ | 6,913 | |||||
State | 345 | (506 | ) | 1,253 | ||||||||
Foreign | 5,797 | 6,057 | 1,454 | |||||||||
Total deferred tax provision | 16,633 | (2,693 | ) | 9,620 | ||||||||
Total provision | $ | 113,350 | $ | 89,343 | $ | 86,041 | ||||||
The differences between income taxes computed at the United States statutory rate and the provision for income taxes are summarized as follows for the years ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Federal tax computed at U.S. statutory income tax rate | $ | 142,430 | $ | 143,251 | $ | 224,384 | ||||||
Enactment of the 2017 Tax Cuts and Jobs Act | — | (6,059 | ) | 550,000 | ||||||||
Foreign currency exchange impact on distributed earnings | (3,229 | ) | 7,495 | — | ||||||||
GILTI, net of foreign tax credits | 10,523 | 13,727 | — | |||||||||
Settlement of tax audits | — | — | 706 | |||||||||
State income tax, net of federal income tax benefit | 3,459 | 2,910 | 1,289 | |||||||||
Net effect of foreign operations | (52,727 | ) | (57,003 | ) | (131,694 | ) | ||||||
Effect of stock-based compensation | (9,211 | ) | (9,089 | ) | (19,566 | ) | ||||||
Other, net | (5,204 | ) | (6,880 | ) | (4,333 | ) | ||||||
Provision for income taxes | $ | 86,041 | $ | 88,352 | $ | 620,786 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Federal tax computed at U.S. statutory income tax rate | $ | 169,300 | $ | 128,292 | $ | 142,430 | ||||||
Foreign currency exchange impact on distributed earnings | — | — | (3,229 | ) | ||||||||
GILTI, net of foreign tax credits | 10,476 | 13,319 | 10,523 | |||||||||
State income tax, net of federal income tax benefit | 4,036 | 2,415 | 3,459 | |||||||||
Net effect of foreign operations | (54,566 | ) | (48,962 | ) | (52,727 | ) | ||||||
Effect of stock-based compensation | (6,682 | ) | (6,798 | ) | (9,211 | ) | ||||||
Other, net | (9,214 | ) | 1,077 | (5,204 | ) | |||||||
| �� | ||||||||||||
Provision for income taxes | $ | 113,350 | $ | 89,343 | $ | 86,041 | ||||||
The Company’s effective tax rates were 12.7%14.1%, 13.0%14.6% and 96.8%12.7% for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively.
The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates and the items discussed below.The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of December 31, 2019. 2021.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has a receivednew Development and Expansion Incentive in Singapore that provides a concessionary income tax rate of 5% on certain types of income for the period April 1, 2021 through March 31, 2026.
Prior to April 1, 2021, the
Company had a tax holidayexemption on income arising from qualifying activities in Singapore, through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet.met as of December 31, 2020 and maintained through March 2021. The effect of applying the 0% contractualthese concessionary income tax raterates rather than the statutory tax rate to income arising from qualifying activities in Singapore increased the Company’s net income during the years ended December 31, 2021, 2020 and 2019 2018 and 2017 by $24$20 million, $28$21 million and $25$24 million, respectively, and increased the Company’s net income per diluted share by $0.35, $0.36$0.32, $0.33 and $0.31,$0.35, respectively.
During 2019,2021, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $11$10 million provision related to the GILTI tax and a tax benefit of $9$7 million on stock-based compensation.
The 20182020 the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $13 million provision related to the GILTI tax and a tax benefit of $7 million on stock-based compensation.
The 2019 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, a $14an $11 million provision related to the GILTI tax an $8 million provision forand a change in foreign currency exchange rates related to the transition tax abenefit of $9 million benefit related to stock-based compensation and a $6 million
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The tax effects of temporary differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):
December 31, | ||||||||
2019 | 2018 | |||||||
Deferred tax assets: | ||||||||
Net operating losses and credits | $ | 55,939 | $ | 63,052 | ||||
Depreciation | 4,776 | 7,495 | ||||||
Operating leases | 19,849 | — | ||||||
Amortization | 3,738 | 3,633 | ||||||
Stock-based compensation | 9,790 | 9,984 | ||||||
Deferred compensation | 20,077 | 22,058 | ||||||
Unrealized foreign currency gain/loss | 7,955 | 5,881 | ||||||
Deferred revenue | 9,696 | 4,654 | ||||||
Revaluation of equity investments and licenses | 3,424 | 3,148 | ||||||
Inventory | 4,824 | 4,588 | ||||||
Accrued liabilities and reserves | 7,215 | 7,213 | ||||||
Other | 3,839 | 4,073 | ||||||
Total deferred tax assets | 151,122 | 135,779 | ||||||
Valuation allowance | (51,221 | ) | (53,893 | ) | ||||
Deferred tax assets, net of valuation allowance | 99,901 | 81,886 | ||||||
Deferred tax liabilities: | ||||||||
Capitalized software | (21,025 | ) | (19,491 | ) | ||||
Operating leases | (19,553 | ) | — | |||||
Indefinite-lived intangibles | (14,363 | ) | (13,753 | ) | ||||
Deferred tax liability on foreign earning s | (18,027 | ) | (20,443 | ) | ||||
Total deferred tax liabilities | (72,968 | ) | (53,687 | ) | ||||
Net deferred tax assets | $ | 26,933 | $ | 28,199 | ||||
December 31, | ||||||||
2021 | 2020 | |||||||
Deferred tax assets: | ||||||||
Net operating losses and credits | $ | 55,813 | $ | 61,962 | ||||
Depreciation | 0 | 5,701 | ||||||
Operating leases | 19,288 | 24,317 | ||||||
Amortization | 2,316 | 2,377 | ||||||
Stock-based compensation | 8,074 | 7,773 | ||||||
Deferred compensation | 30,105 | 27,754 | ||||||
Deferred revenue | 10,997 | 11,341 | ||||||
Revaluation of equity investments and licenses | 3,083 | 4,492 | ||||||
Inventory | 5,405 | 5,060 | ||||||
Accrued liabilities and reserves | 6,675 | 10,639 | ||||||
Unrealized foreign currency gain/loss | 2,266 | 0 | ||||||
Other | 6,713 | 3,483 | ||||||
Total deferred tax assets | 150,735 | 164,899 | ||||||
Valuation allowance | (58,834 | ) | (60,101 | ) | ||||
Deferred tax assets, net of valuation allowance | 91,901 | 104,798 | ||||||
Deferred tax liabilities: | ||||||||
Capitalized software | (24,357 | ) | (23,748 | ) | ||||
Operating leases | (19,251 | ) | (24,314 | ) | ||||
Indefinite-lived intangibles | (15,534 | ) | (14,973 | ) | ||||
Unrealized foreign currency gain/loss | 0 | (10,819 | ) | |||||
Depreciation | (3,481 | ) | 0 | |||||
Deferred tax liability on foreign earnings | (17,283 | ) | (17,277 | ) | ||||
Total deferred tax liabilities | (79,906 | ) | (91,131 | ) | ||||
Net deferred tax assets | $ | 11,995 | $ | 13,667 | ||||
The Company has gross foreign net operating losses of $221$229 million, thatof which $202 million do not expire under current laws.laws and $27 million start expiring in 2022. As of December 31, 2019,2021, the Company has provided a deferred tax valuation allowance of $51$59 million, of which $48$53 million relates to certain foreign net operating losses. The Company’s net deferred tax assets associated with net operating losses and tax credit carryforwards are approximately $8$3 million as of December 31, 2019,2021, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.
The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the year ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
2019 | 2018 | 2017 | ||||||||||
Balance at the beginning of the period | $ | 26,108 | $ | 5,843 | $ | 9,964 | ||||||
Net reductions for settlement of tax audits | — | — | (22 | ) | ||||||||
Net reductions for lapse of statutes taken during the period | (261 | ) | (436 | ) | (5,178 | ) | ||||||
Net additions for tax positions taken during the prior period | — | 17,651 | — | |||||||||
Net additions for tax positions taken during the current period | 1,943 | 3,050 | 1,079 | |||||||||
Balance at the end of the period | $ | 27,790 | $ | 26,108 | $ | 5,843 | ||||||
2021 | 2020 | 2019 | ||||||||||
Balance at the beginning of the period | $ | 28,666 | $ | 27,790 | $ | 26,108 | ||||||
Net reductions for settlement of tax audits | (1,300 | ) | (399 | ) | — | |||||||
Net reductions for lapse of statutes taken during the period | (433 | ) | (684 | ) | (261 | ) | ||||||
Net additions for tax positions taken during the current period | 1,759 | 1,959 | 1,943 | |||||||||
Balance at the end of the period | $ | 28,692 | $ | 28,666 | $ | 27,790 | ||||||
As of 2019,2021, the total amount of gross unrecognized tax benefits was $28$29 million, all of which, if recognized, would impact the Company’s effective tax rate.
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2014.2016. 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 December 31, 2019,2021, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $1$18 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.
As of December 31, 2019,2021, the Company is currently under an income tax audit in the U.S. for its 20162017 and 2018 tax year.years. The Company is also subject to various foreign audits and inquiries and we currently do not expect any material adjustments.
The following isi2019, 20182021, 2020 and 20172019 (in thousands):
s
a summary of the activity of the Company’s valuation allowance for the years ended December 31, Balance at Beginning of Period | Charged to Provision for Income Taxes* | Other** | Balance at End of Period | |||||||||||||
Valuation allowance for deferred tax assets: | ||||||||||||||||
2019 | $ | 53,893 | $ | (1,242 | ) | $ | (1,430 | ) | $ | 51,221 | ||||||
2018 | $ | 62,098 | $ | (2,128 | ) | $ | (6,077 | ) | $ | 53,893 | ||||||
201 7 | $ | 61,225 | $ | (6,363 | ) | $ | 7,236 | $ | 62,098 | |||||||
Balance at Beginning of Period | Charged to Provision for Income Taxes* | Other** | Balance at End of Period | |||||||||||||
Valuation allowance for deferred tax assets: | ||||||||||||||||
2021 | $ | 60,101 | $ | 2,919 | $ | (4,186 | ) | $ | 58,834 | |||||||
2020 | $ | 51,221 | $ | 1,137 | $ | 7,743 | $ | 60,101 | ||||||||
2019 | $ | 53,893 | $ | (1,242 | ) | $ | (1,430 | ) | $ | 51,221 | ||||||
| * | These amounts have been recorded as part of the income statement provision for income taxes. The income statement effects of these amounts have largely been offset by amounts related to changes in other deferred tax balance sheet accounts. |
| ** | The change in the valuation allowance during the year ended December 31, |
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the
COVID-19
outbreak which, among other things, contains numerous income tax provisions. The CARES Act does not have a material impact on the Company’s consolidated financial statements or related disclosures.11 Litigation
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 it has meritorious arguments in its current litigation matters and believes any outcome, either individually or in the aggregate, will not be material to the Company’s financial position, results of operations or cash flows. During the year ended December 31, 2017,2021, the Company incurred $11executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of operations for the year ended December 31, 2021. During the year ended December 31, 2021, the Company received $3 million in guaranteed payments, net of applicable withholding taxes. The Company also had a litigation provisions and related costs, primarilyprovision of $5 million during the year ended December 31, 2021 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.legal settlement. The accrued patent litigation expense is in other current liabilities in the consolidated balance sheets at December 31, 20192021 and 2018.2020
.
12 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 allowedDecember
31,
2021and
2020, 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 aright-of-uselease asset and lease liabilities in the amount $100million 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.
, with a weighted-average remaining lease termterms of 5.3 years.
4.7years and
5.2years, respectively. Rental expense was $36 $
34 million, $
38 million and $
36 million for the year ended
,
2021,
2020and
2019, respectively. As of December
31,
2021and
2020, the weighted-average discount raterates used to determine the present value of lease liabilities was 3.80%. Cashwere
3.04% and
3.50%, respectively. During the years ended December
31,
2021,
2020and
2019, cash paid for amounts included in the measurement of lease liabilities in operating activities in the statement of cash flows was $36$
34 million, during the year ended December 31, 2019.$
38 million and $
36 million, respectively. The Company recorded $
3 million and $
118 million
right-of-use
assets in exchange for new operating lease liabilities during the yearyears ended December
31and
2019The Company’slease assets and lease liabilities included in the consolidated balance sheets are classified as follows (in thousands):
right-of-use
Financial Statement Classification | December 31, 2019 | |||||
Assets: | ||||||
Property operating lease assets | Operating lease assets | $ | 64,206 | |||
Automobile operating lease assets | Operating lease assets | 27,197 | ||||
Equipment operating lease assets | Operating lease assets | 1,955 | ||||
Total lease assets | $ | 93,358 | ||||
Liabilities: | ||||||
Current operating lease liabilities | Current operating lease liabilities | $ | 27,125 | |||
Long-term operating lease liabilities | Long-term operating lease liabilities | 66,881 | ||||
Total lease liabilities | $ | 94,006 | ||||
December 31, | ||||||||||
Financial Statement Classification | 2021 | 2020 | ||||||||
Assets: | ||||||||||
Property operating lease assets | Operating lease assets | $ | 55,774 | $ | 62,374 | |||||
Automobile operating lease assets | Operating lease assets | 28,236 | 29,694 | |||||||
Equipment operating lease assets | Operating lease assets | 724 | 1,184 | |||||||
Total lease assets | $ | 84,734 | $ | 93,252 | ||||||
Liabilities: | ||||||||||
Current operating lease liabilities | Current operating lease liabilities | $ | 27,906 | $ | 27,764 | |||||
Long-term operating lease liabilities | Long-term operating lease liabilities | 59,623 | 68,197 | |||||||
Total lease liabilities | $ | 87,529 | $ | 95,961 | ||||||
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Undiscounted future minimum rents payable as of December 31, 20192021 under
non-cancelable
leases with initial terms exceeding one year reconcile to lease liabilities included in the consolidated balance sheet as follows (in thousands):2020 | $ | 29,489 | ||
2021 | 21,774 | |||
2022 | 16,743 | |||
2023 | 9,175 | |||
2024 | 6,867 | |||
2025 and thereafter | 19,311 | |||
Total future minimum lease payments | 103,359 | |||
Less: amount of lease payments representing interest | (9,353 | ) | ||
Present value of future minimum lease payments | 94,006 | |||
Less: current operating lease liabilities | (27,125 | ) | ||
Long-term operating lease liabilities | $ | 66,881 | ||
2019 | $ | 28,417 | ||
2020 | 23,424 | |||
2021 | 16,032 | |||
2022 | 11,816 | |||
2023 and thereafter | 23,269 | |||
Total future minimum lease payments | $ | 102,958 | ||
2022 | $ | 29,311 | ||
2023 | 20,763 | |||
2024 | 14,688 | |||
2025 | 10,642 | |||
2026 | 7,107 | |||
2027 and thereafter | 11,072 | |||
Total future minimum lease payments | 93,583 | |||
Less: amount of lease payments representing interest | (6,054 | ) | ||
Present value of future minimum lease payments | 87,529 | |||
Less: current operating lease liabilities | (27,906 | ) | ||
Long-term operating lease liabilities | $ | 59,623 | ||
13 Other Commitments and Contingencies
The Company licenses certain technology and software from third parties.$7 million, as well as royalties on future net sales.$2 million.
parties in the course of ordinary business. Future minimum license fees payable under existing license agreements as of December 31, 20192021 are immaterial for the years ended December 31, 20202022 and thereafter.
The Company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events. Upon the achievement of certain milestones in existing agreements, the Company could make additional future payments of up to The Company enters into standard indemnification agreements ini
n
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.14 Stock-Based Compensation
In May 2012,2020, the Company’s shareholders approved the Company’s 20122020 Equity Incentive Plan (“20122020 Plan”). As of December 31, 2019,2021, the 20122020 Plan has 2.16.7 million shares available for grant in the form of incentive orrestricted stock units, performance stock units or other types of awards.awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options, restricted stock unit conversion or performance stock unit conversion. Under the 20122020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 20122020 Plan is scheduled to terminate on May 9, 2022.13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, and restricted stock units and performance stock units may be issued under the 20122020 Plan for such
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consideration as is determined by the Compensation Committee of the Board of Directors. As of December 31, 2019,2021, the Company had stock options, restricted stock and restricted and performance stock unit awards outstanding.
In May 2009, the Company’s shareholders approved the 2009 Employee Stock Purchase Plan, under which eligible employees may contribute up to 15
0.8 million shares of the Company’s common stock, which includes the remaining shares available under the 1996 Employee Stock Purchase Plan. As of December 31, 2019, 1.5
2021, 1.6 million shares have been issued under both the 2009 and 1996 Employee Stock Purchase Plans. Each plan period lasts three months beginning on January 1, April 1, July 1 and October 1 of each year.
The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period.
Stock-based compensation expense related to this plan was $1million for each of the years ended December 31, 2021, 2020 and 2019,
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 years ended December 31, 2019, 20182021, 2020 and 20172019 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):
2019 | 2018 | 2017 | ||||||||||
Cost of sales | $ | 2,271 | $ | 2,212 | $ | 3,032 | ||||||
Selling and administrative expenses | 30,907 | 30,443 | 33,335 | |||||||||
Research and development expenses | 5,399 | 4,886 | 3,069 | |||||||||
Total stock-based compensation | $ | 38,577 | $ | 37,541 | $ | 39,436 | ||||||
2021 | 2020 | 2019 | ||||||||||
Cost of sales | $ | 2,500 | $ | 2,485 | $ | 2,271 | ||||||
Selling and administrative expenses | 21,727 | 29,711 | 30,907 | |||||||||
Research and development expenses | 5,691 | 4,669 | 5,399 | |||||||||
Total stock-based compensation | $ | 29,918 | $ | 36,865 | $ | 38,577 | ||||||
During the years ended December 31,2020 and 2019, 2018 and 2017, the Company recognized less than $1 million, $1 million and $4less than $1 million of expense, respectively, of stock-based compensation related to the modification of certain stock awards upon the retirement of senior executives. There was no expense related to stock award modifications in 2021.
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. Treasuryzero-coupon
issues with a87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 year ended December 31, 2019, 20182021, 2020 and 20172019 are as follows:
Options Issued and Significant Assumptions Used to Estimate Option Fair Values | 2019 | 2018 | 2017 | |||||||||
Options issued in thousands | 146 | 321 | 389 | |||||||||
Risk-free interest rate | 2.5 | % | 2.7 | % | 2.2 | % | ||||||
Expected life in years | 5 | 6 | 6 | |||||||||
Expected volatility | 24.5 | % | 25.3 | % | 22.7 | % | ||||||
Expected dividends | — | — | — | |||||||||
Options Issued and Significant Weighted-Average Assumptions Used to Estimate Option Fair Values | 2021 | 2020 | 2019 | |||||||||
Options issued in thousands | 160 | 267 | 146 | |||||||||
Risk-free interest rate | 0.8 | % | 1.2 | % | 2.5 | % | ||||||
Expected life in years | 6 | 6 | 5 | |||||||||
Expected volatility | 32.4 | % | 27.8 | % | 24.5 | % | ||||||
Expected dividends | 0 | — | — | |||||||||
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant | 2019 | 2018 | 2017 | |||||||||
Exercise price | $ | 230.37 | $ | 196.78 | $ | 170.24 | ||||||
Fair value | $ | 61.75 | $ | 59.89 | $ | 45.73 | ||||||
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant | 2021 | 2020 | 2019 | |||||||||
Exercise price | $ | 281.33 | $ | 215.12 | $ | 230.37 | ||||||
Fair value | $ | 91.48 | $ | 63.14 | $ | 61.75 | ||||||
The following table summarizes stock option activity for the plans for the year ended December 31, 20192021 (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 | 146 | $ | 183.41 | to | $ | 238.52 | $ | 230.37 | ||||||||||||
Exercised | (406 | ) | $ | 38.09 | to | $ | 208.47 | $ | 113.06 | |||||||||||
Canceled | (75 | ) | $ | 113.36 | to | $ | 238.52 | $ | 159.67 | |||||||||||
Outstanding at December 31, 2019 | 1,455 | $ | 61.63 | to | $ | 238.52 | $ | 158.61 | ||||||||||||
Number of Shares | Exercise Price per Share | Weighted- Average Exercise Price per Share | ||||||||||||||||||
Outstanding at December 31, 2020 | 1,067 | $ | 75.94 | to | $ | 238.52 | $ | 179.59 | ||||||||||||
Granted | 160 | $ | 250.15 | to | $ | 371.64 | $ | 281.33 | ||||||||||||
Exercised | (282 | ) | $ | 75.94 | to | $ | 238.52 | $ | 165.29 | |||||||||||
Canceled | (254 | ) | $ | 139.51 | to | $ | 280.80 | $ | 198.05 | |||||||||||
Outstanding at December 31, 2021 | 691 | $ | 88.71 | to | $ | 371.64 | $ | 202.24 | ||||||||||||
The following table details the options outstanding at December 31, 20192021 by range of exercise prices (in thousands, except per share data):
Exercise Price Range | Number of Shares Outstanding | Weighted- Average Exercise Price | Remaining Contractual Life of Options Outstanding | Number of Shares Exercisable | Weighted- Average Exercise Price | |||||||||||||||
$61.63 to $128.93 | 529 | $ | 117.10 | 5.1 | 430 | $ | 114.85 | |||||||||||||
$128.94 to $192.62 | 520 | $ | 160.06 | 7.7 | 208 | $ | 149.37 | |||||||||||||
$192.63 to $238.52 | 406 | $ | 210.84 | 8.2 | 91 | $ | 196.83 | |||||||||||||
Total | 1,455 | $ | 158.61 | 6.9 | 729 | $ | 134.94 | |||||||||||||
Exercise Price Range | Number of Shares Outstanding | Weighted- Average Exercise Price | Remaining Contractual Life of Options Outstanding | Number of Shares Exercisable | Weighted- Average Exercise Price | |||||||||||||||
$88.71 to $194.2 5 | 232 | $ | 135.77 | 4.3 | 213 | $ | 133.11 | |||||||||||||
$194.2 6 to $224.37 | 232 | $ | 206.51 | 7.4 | 84 | $ | 204.73 | |||||||||||||
$224.38 to $371.64 | 227 | $ | 265.81 | 8.4 | 34 | $ | 237.24 | |||||||||||||
Total | 691 | $ | 202.24 | 6.7 | 331 | $ | 162.09 | |||||||||||||
During 2019, 20182021, 2020 and 2017,2019, the total intrinsic value of the stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $43 million, $45 million
and
was $46 million,
and
The aggregate intrinsic value of the outstanding stock options at December 31, 20192021 was $110$118 million. Options exercisable at December 31, 2021, 2020 and 2019 2018were 0.3 million, 0.5 million and 2017
The aggregate intrinsic value of stock options exercisable as of December 31, 20192021 was $72$71 million.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2019,2021, the Company had 1.40.7 million stock options that are vested and expected to vest. The intrinsic value, weighted-average exercise price and remaining contractual life of the vested and expected to vest stock options were $109$117 million, $158.33$201.85 and 6.9 years, respectively, at December 31, 2019.2021.
As of December 31, 2019,2021, there were $32$19 million of total unrecognized compensation costs related to unvested stock option awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.23.5 years.
Restricted Stock
During the years ended December 31, 2019, 20182021, 2020 and 2017,2019, the Company granted5thousand,
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the year ended December 31, 20192021 (in thousands, except per share data):
Shares | Weighted-Average Grant Fair Dat e Value per | |||||||
Unvested at December 31, 2018 | 304 | $ | 153.31 | |||||
Granted | 86 | $ | 235.31 | |||||
Vested | (104 | ) | $ | 139.07 | ||||
Forfeited | (26 | ) | $ | 167.60 | ||||
Unvested at December 31, 2019 | 260 | $ | 184.70 | |||||
Shares | Weighted-Average Grant Date Fair Value per Share | |||||||
Unvested at December 31, 2020 | 271 | $ | 202.00 | |||||
Granted | 88 | $ | 283.10 | |||||
Vested | (88 | ) | $ | 184.60 | ||||
Forfeited | (26 | ) | $ | 224.71 | ||||
Unvested at December 31, 2021 | 245 | $ | 234.97 | |||||
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period. The amount of compensation costs recognized for the years ended December 31, 2019, 20182021, 2020 and 20172019 on the restricted stock units expected to vest were $14$17 million, $16$15 million and $17$14 million, respectively. As of December 31, 2019,2021, there were $33$41 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of 3.3 years.
Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health
Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends.
The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants made in 2020, the vesting conditions for performance stock units now include a performance condition based on future sales growth.
In determining the fair value of the performance stock units, the Company makes a variety of assumptions and estimates, including volatility measures, expected yields and expected terms. The fair value of each performance stock unit grant was estimated on the date of grant using the Monte Carlo simulation model. The
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the year ended December 31, Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values | 2019 | 2018 | 2017 | |||||||||
Performance stock units issued in thousands | 13 | 40 | 40 | |||||||||
Risk-free interest rate | 2.4 | % | 2.4 | % | 1.6 | % | ||||||
Expected life in years | 2.8 | 3.0 | 3.0 | |||||||||
Expected volatility | 23.5 | % | 22.0 | % | 20.9 | % | ||||||
Average volatility of peer companies | 26.2 | % | 25.9 | % | 25.6 | % | ||||||
Correlation Coefficient | 34.2 | % | 35.9 | % | 37.8 | % | ||||||
Expected dividends | — | — | — | |||||||||
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair Values | 2021 | 2020 | 2019 | |||||||||
Performance stock units issued in thousands | 41 | 58 | 13 | |||||||||
Risk-free interest rate | 0.2 | % | 1.3 | % | 2.4 | % | ||||||
Expected life in years | 2.9 | 2.9 | 2.8 | |||||||||
Expected volatility | 38.7 | % | 25.1 | % | 23.5 | % | ||||||
Average volatility of peer companies | 34.7 | % | 26.1 | % | 26.2 | % | ||||||
Correlation Coefficient | 45.8 | % | 36.6 | % | 34.2 | % | ||||||
Expected dividends | 0 | — | — | |||||||||
The following table summarizes the unvested performance stock unit award activity for the year ended December 31, 20192021 (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 | (8 | ) | $ | 200.26 | ||||
Unvested at December 31, 2019 | 105 | $ | 233.11 | |||||
Shares | Weighted-Average Fair Value per Share | |||||||
Unvested at December 31, 2020 | 95 | $ | 230.36 | |||||
Granted | 41 | $ | 315.98 | |||||
Vested | (5 | ) | $ | 242.94 | ||||
Forfeited | (44 | ) | $ | 199.22 | ||||
Unvested at December 31, 2021 | 87 | $ | 285.73 | |||||
The amount of compensation costs recognized for the years ended December 31, 2019, 20182021, 2020 and 20172019 on the performance stock units expected to vest were $7million
$3 million, respectively
$12 million of total unrecognized compensation costs related to the restricted stock unit awards that are expected to vest. These costs are expected to be recognized over a weighted-average period of
2.0 years.
15 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
Year Ended December 31, 2019 | ||||||||||||
Net Income | Weighted-Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Net income per basic common share | $ | 592,198 | 67,627 | $ | 8.76 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 539 | (0.07 | ) | ||||||||
Net income per diluted common share | $ | 592,198 | 68,166 | $ | 8.69 | |||||||
Year Ended December 31, 2021 | ||||||||||||
Net Income | Weighted-Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Net income per basic common share | $ | 692,843 | 61,575 | $ | 11.25 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 453 | (0.08 | ) | ||||||||
Net income per diluted common share | $ | 692,843 | 62,028 | $ | 11.17 | |||||||
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Year Ended December 31, 2020 | ||||||||||||
Net Income | Weighted-Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Net income per basic common share | $ | 521,571 | 62,094 | $ | 8.40 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 320 | (0.04 | ) | ||||||||
Net income per diluted common share | $ | 521,571 | 62,414 | $ | 8.36 | |||||||
Year Ended December 31, 2018 | ||||||||||||
Net Income | Weighted-Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Net income per basic common share | $ | 593,794 | 76,992 | $ | 7.71 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 626 | (0.06 | ) | ||||||||
Net income per diluted common share | $ | 593,794 | 77,618 | $ | 7.65 | |||||||
Year Ended December 31, 2017 | ||||||||||||
Net Income | Weighted-Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Net income per basic common share | $ | 20,311 | 79,793 | $ | 0.25 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 811 | — | |||||||||
Net income per diluted common share | $ | 20,311 | 80,604 | $ | 0.25 | |||||||
Year Ended December 31, 2019 | ||||||||||||
Net Income | Weighted-Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Net income per basic common share | $ | 592,198 | 67,627 | $ | 8.76 | |||||||
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities | — | 539 | (0.07 | ) | ||||||||
Net income per diluted common share | $ | 592,198 | 68,166 | $ | 8.69 | |||||||
For the years ended December 31, 2019, 20182021, 2020 and 2017,2019, the Company had 0.1 million, 0.10.3 million and 0.40.1 million stock options that were antidilutive, respectively, 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.
16 Accumulated Other Comprehensive Income
The components of accumulated otherotheincome (loss)loss are detailed as follows (in thousands):
r
comprehensive Currency Translation | Unrealized Gain (Loss) on Retirement Plans | Unrealized Gain (Loss) on Investments | Accumulated Other Comprehensive Income (Loss) | |||||||||||||
Balance at December 31, 2017 | $ | (69,418 | ) | $ | (37,103 | ) | $ | (3,546 | ) | $ | (110,067 | ) | ||||
Other comprehensive (loss) income, net of tax | (36,279 | ) | 27,234 | 1,141 | (7,904 | ) | ||||||||||
Balance at December 31, 2018 | $ | (105,697 | ) | $ | (9,869 | ) | $ | (2,405 | ) | $ | (117,971 | ) | ||||
Other comprehensive income (loss), net of tax | 1,631 | (5,536 | ) | 2,405 | (1,500 | ) | ||||||||||
Balance at December 31, 2019 | $ | (104,066 | ) | $ | (15,405 | ) | $ | — | $ | (119,471 | ) | |||||
Currency Translation | Unrealized Gain (Loss) on Retirement Plans | Unrealized Loss on Investments | Accumulated Other Comprehensive Loss | |||||||||||||
Balance at December 31, 2019 | $ | (104,066 | ) | $ | (15,405 | ) | $ | 0 | $ | (119,471 | ) | |||||
Other comprehensive income (loss), net of tax | 5,984 | (4,456 | ) | 0 | 1,528 | |||||||||||
Balance at December 31, 2020 | $ | (98,082 | ) | $ | (19,861 | ) | $ | 0 | $ | (117,943 | ) | |||||
Other comprehensive income (loss), net of tax | (1,903 | ) | 8,001 | (20 | ) | 6,078 | ||||||||||
Balance at December 31, 2021 | $ | (99,985 | ) | $ | (11,860 | ) | $ | (20 | ) | $ | (111,865 | ) | ||||
17 Retirement Plans
U.S. employees are eligible to participate in the Waters Employee Investment Plan, a 401(k) defined contribution plan, immediately upon hire. Employees may contribute up to 60% of eligible pay on a2019, 20182021, 2020 and 2017,2019, the Company’s matching contributions amounted to $17$19 million, $17$7 million and $16$17 million, respectively.
pre-tax
orpost-tax
basis and the Company makes matching contributions of 100% for contributions up to 6% of eligible pay. The Company also sponsors a 401(k) Restoration Plan, which is a nonqualified defined contribution plan. Employees are 100% vested in employee and Company matching contributions for both plans. For the years ended December 31, In May 2018, the Company’s boardBoard of directorsDirectors approved the termination of two defined benefit pension plans in the U.S. for which the pay credit accruals have been frozen, the Waters Retirement Plan and the Waters Retirement Restoration Plan (collectively, the “U.S. Pension Plans”). In December 2018, the Company settled the
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Waters
Retirement Plan obligation by makinglump-sum
cash payments and purchasing annuity contracts for participants to permanently extinguish the pension plan’s obligations. As a result, the Company recorded a $46 million charge to other expense, which consisted of a $6 million cash contribution to the plan and a $40 millionnon-cash
charge related to the reversal of unrecognized actuarial losses recorded in accumulated other comprehensive income in the stockholders’ equity. The $46 millionpre-tax
charge reduced net income per diluted share by $0.39. The termination of the Waters Retirement Restoration Planwas
completed in 2019.The Company also sponsors other employee benefit plans in the U.S., including a retiree healthcare plan, which provides reimbursement for medical expenses and is contributory. There are various employee benefit plans outside the United States (both defined benefit and defined contribution plans). Certain
non-U.S.
defined benefit plans(“Non-U.S.
Pension Plans”) are included in the disclosures below, which are required under the accounting standards for retirement benefits.The Company contributed $15$17 million, $13$14 million and $12$15 million in the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively, to the plans are consistent with local laws and regulations.
non-U.S.
plans (primarily defined contribution plans) which are currently outside of the scope of the required disclosures. The eligibility and vesting ofnon-U.S. plans
The net periodic pension cost is made up of several components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Company’s accounting policy is to reflect in the projected benefit obligation all benefit changes to which the Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active participants.
Summary data for the U.S. Pension Plans, U.S. Retiree Healthcare Plan and Pension Plans are presented in the following tables, using the measurement dates of December 31, 20192021 and 2018,2020, respectively.
Non-U.S. Pension
The reconciliation of the projected benefit obligations for the plans at December 31, 20192021 and 20182020 is as follows (in thousands):
2019 | 2018 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Projected benefit obligation, January 1 | $ | 972 | $ | 17,724 | $ | 93,722 | $ | 168,064 | $ | 17,121 | $ | 96,378 | ||||||||||||
Service cost | — | 499 | 4,339 | 568 | 566 | 5,368 | ||||||||||||||||||
Employee contributions | — | 1,214 | 499 | — | 1,159 | 622 | ||||||||||||||||||
Interest cost | 29 | 777 | 1,735 | 6,491 | 636 | 1,707 | ||||||||||||||||||
Actuarial (gains) losses | (32 | ) | 2,081 | 13,385 | 6,415 | (621 | ) | (2,274 | ) | |||||||||||||||
Benefits paid | — | (1,109 | ) | (3,281 | ) | (3,416 | ) | (1,007 | ) | (3,277 | ) | |||||||||||||
Plan amendments | — | — | — | — | (130 | ) | (44 | ) | ||||||||||||||||
Plan settlements | (969 | ) | — | (7,407 | ) | (177,150 | ) | — | (2,791 | ) | ||||||||||||||
Other plans | — | — | 1,598 | — | — | 1,063 | ||||||||||||||||||
Currency impact | — | — | (1,224 | ) | — | — | (3,030 | ) | ||||||||||||||||
Projected benefit obligation, December 31 | $ | — | $ | 21,186 | $ | 103,366 | $ | 972 | $ | 17,724 | $ | 93,722 | ||||||||||||
2019 | 2018 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Accumulated benefit obligation | $ | — | ** | $ | 88,105 | $ | 972 | ** | $ | 82,026 | ||||||||||||||
2021 | 2020 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Projected benefit obligation, January 1 | $ | 25,369 | $ | 119,590 | $ | 21,186 | $ | 103,366 | ||||||||
Service cost | 884 | 4,577 | 665 | 4,519 | ||||||||||||
Employee contributions | 1,176 | 561 | 1,149 | 514 | ||||||||||||
Interest cost | 559 | 1,247 | 711 | 1,413 | ||||||||||||
Actuarial (gains) losses | (852 | ) | (5,803 | ) | 2,788 | 2,624 | ||||||||||
Benefits paid | (1,178 | ) | (5,334 | ) | (1,130 | ) | (1,474 | ) | ||||||||
Plan amendments | — | 69 | — | — | ||||||||||||
Plan settlements | — | (341 | ) | — | (1,449 | ) | ||||||||||
Currency impact | — | (7,642 | ) | — | 10,077 | |||||||||||
Projected benefit obligation, December 31 | $ | 25,958 | $ | 106,924 | $ | 25,369 | $ | 119,590 | ||||||||
92 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The reconciliation of the fair value of the plan assets at December 31, 20192021 and 20182020 is as follows (in thousands):
2019 | 2018 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Fair value of plan assets, January 1 | $ | — | $ | 11,080 | $ | 81,587 | $ | 171,373 | $ | 11,125 | $ | 74,990 | ||||||||||||
Actual return on plan assets | — | 2,140 | 6,237 | 2,555 | (584 | ) | 1,070 | |||||||||||||||||
Company contributions | 969 | 448 | 6,103 | 6,625 | 387 | 10,778 | ||||||||||||||||||
Employee contributions | — | 1,214 | 499 | — | 1,159 | 622 | ||||||||||||||||||
Plan settlements | (969 | ) | — | (7,044 | ) | (177,137 | ) | — | — | |||||||||||||||
Benefits paid | — | (1,109 | ) | (3,281 | ) | (3,416 | ) | (1,007 | ) | (3,277 | ) | |||||||||||||
Other plans | — | — | 82 | — | — | — | ||||||||||||||||||
Currency impact | — | — | (1,172 | ) | — | — | (2,596 | ) | ||||||||||||||||
Fair value of plan assets, December 31 | $ | — | $ | 13,773 | $ | 83,011 | $ | — | $ | 11,080 | $ | 81,587 | ||||||||||||
2021 | 2020 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Fair value of plan assets, January 1 | $ | 16,168 | $ | 93,890 | $ | 13,773 | $ | 83,011 | ||||||||
Actual return on plan assets | 1,682 | 2,739 | 1,967 | 1,395 | ||||||||||||
Company contributions | 466 | 5,529 | 409 | 3,581 | ||||||||||||
Employee contributions | 1,176 | 561 | 1,149 | 514 | ||||||||||||
Plan settlements | — | (341 | ) | — | (1,449 | ) | ||||||||||
Benefits paid | (1,178 | ) | (5,334 | ) | (1,130 | ) | (1,474 | ) | ||||||||
Currency impact | — | (5,875 | ) | — | 8,312 | |||||||||||
Fair value of plan assets, December 31 | $ | 18,314 | $ | 91,169 | $ | 16,168 | $ | 93,890 | ||||||||
The summary of the funded status for the plans at December 31, 20192021 and 20182020 is as follows (in thousands):
2019 | 2018 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Projected benefit obligation | $ | — | $ | (21,186 | ) | $ | (103,366 | ) | $ | (972 | ) | $ | (17,724 | ) | $ | (93,722 | ) | |||||||
Fair value of plan assets | — | 13,773 | 83,011 | — | 11,080 | 81,587 | ||||||||||||||||||
Funded status | $ | — | $ | (7,413 | ) | $ | (20,355 | ) | $ | (972 | ) | $ | (6,644 | ) | $ | (12,135 | ) | |||||||
2021 | 2020 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Projected benefit obligation | $ | (25,958 | ) | $ | (106,924 | ) | $ | (25,369 | ) | $ | (119,590 | ) | ||||
Fair value of plan assets | 18,314 | 91,169 | 16,168 | 93,890 | ||||||||||||
Funded status | $ | (7,644 | ) | $ | (15,755 | ) | $ | (9,201 | ) | $ | (25,700 | ) | ||||
The change in the Company’s projected benefit obligation for the year ended December 31, 2021 was primarily due to fluctuations in foreign currency exchange rates during the year, net actuarial gains that arose during the year driven by an increase in discount rates and differences between expected and actual return on plan assets. The change in the Company’s projected benefit obligation for the year ended December 31, 2020 was primarily due to net actuarial losses that arose during the year driven by a decline in discount rates, differences between expected and actual return on plan assets, and also fluctuations in foreign currency exchange rates during the year.
The summary of the amountsamount20192021 and 20182020 is as follows (in thousands):
s
recognized in the consolidated balance sheets for the plans at December 31, 2019 | 2018 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Long-term assets | $ | — | $ | — | $ | 1,466 | $ | — | $ | — | $ | 3,284 | ||||||||||||
Current liabilities | — | (448 | ) | (4 | ) | (972 | ) | (387 | ) | (1 | ) | |||||||||||||
Long-term liabilities | — | (6,965 | ) | (21,817 | ) | — | (6,257 | ) | (15,418 | ) | ||||||||||||||
Net amount recognized at December 31 | $ | — | $ | (7,413 | ) | $ | (20,355 | ) | $ | (972 | ) | $ | (6,644 | ) | $ | (12,135 | ) | |||||||
2021 | 2020 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Long-term assets | $ | — | $ | 1,992 | $ | — | $ | 971 | ||||||||
Current liabilities | (466 | ) | 0 | (409 | ) | (1,999 | ) | |||||||||
Long-term liabilities | (7,178 | ) | (17,747 | ) | (8,792 | ) | (24,672 | ) | ||||||||
Net amount recognized at December 31 | $ | (7,644 | ) | $ | (15,755 | ) | $ | (9,201 | ) | $ | (25,700 | ) | ||||
The accumulated benefit obligation for all defined benefit pension plans was $92 million and $103 million at December 31, 2021 and 2020, respectively.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summary of theall of the plans where the projectedthat have accumulated benefit obligation isobligations in excess of plan assets also have an accumulated benefit obligation that is in excess of plan assets, with the exception of a defined benefit plan in Belgium which has a projected benefit obligation of $11 million, an accumulated benefit obligation of $6 million, and plan assets of $10 million at December 31, 2019. 2021 and 2020 is as follows (in thousands):
Non-U.S.
Pension Plans 2021 | 2020 | |||||||
Accumulated benefit obligations | $ | 75,178 | $ | 84,940 | ||||
Fair value of plan assets | $ | 66,414 | $ | 68,334 | ||||
The summary of theand accumulated benefit obligations in excess of plan assets at December 31, 20192021 and 20182020 is as follows (in thousands):
Non-U.S.
Pension Plans that have projected benefit obligations 2019 | 2018 | |||||||
Projected benefit obligation | $ | 81,566 | $ | 60,359 | ||||
Accumulated benefit obligations | $ | 73,644 | $ | 56,029 | ||||
Fair value of plan assets | $ | 60,832 | $ | 44,940 | ||||
2021 | 2020 | |||||||
Projected benefit obligations | $ | 96,010 | $ | 107,093 | ||||
Fair value of plan assets | $ | 78,264 | $ | 80,422 | ||||
The summary of the components of net periodic pension costs for the plans for the years ended December 31, 2019, 20182021, 2020 and 20172019 is as follows (in thousands):
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
Service cost | $ | — | $ | 499 | $ | 4,339 | $ | 568 | $ | 566 | $ | 5,368 | $ | 450 | $ | 546 | $ | 5,082 | ||||||||||||||||||
Interest cost | 29 | 777 | 1,735 | 6,491 | 636 | 1,707 | 6,829 | 618 | 1,518 | |||||||||||||||||||||||||||
Expected return on plan assets | — | (706 | ) | (2,154 | ) | (6,833 | ) | (706 | ) | (1,974 | ) | (10,298 | ) | (587 | ) | (1,688 | ) | |||||||||||||||||||
Settlement loss | 27 | — | 1,548 | 45,157 | — | — | 155 | — | 232 | |||||||||||||||||||||||||||
Net amortization: | ||||||||||||||||||||||||||||||||||||
Prior service credit | — | (19 | ) | (108 | ) | — | (19 | ) | (108 | ) | — | — | (168 | ) | ||||||||||||||||||||||
Net actuarial loss | — | — | 531 | 3,082 | — | 680 | 2,770 | — | 959 | |||||||||||||||||||||||||||
Net periodic pension cost (benefit) | $ | 56 | $ | 551 | $ | 5,891 | $ | 48,465 | $ | 477 | $ | 5,673 | $ | (94 | ) | $ | 577 | $ | 5,935 | |||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
Service cost | $ | — | $ | 884 | $ | 4,577 | $ | — | $ | 665 | $ | 4,519 | $ | 0 | $ | 499 | $ | 4,339 | ||||||||||||||||||
Interest cost | — | 559 | 1,247 | 0 | 711 | 1,413 | 29 | 777 | 1,735 | |||||||||||||||||||||||||||
Expected return on plan assets | — | (1,011 | ) | (1,835 | ) | — | (871 | ) | (1,874 | ) | 0 | (706 | ) | (2,154 | ) | |||||||||||||||||||||
Settlement loss | — | — | 77 | 0 | — | 235 | 27 | — | 1,548 | |||||||||||||||||||||||||||
Net amortization: | ||||||||||||||||||||||||||||||||||||
Prior service credit | — | (19 | ) | (87 | ) | — | (19 | ) | (163 | ) | — | (19 | ) | (108 | ) | |||||||||||||||||||||
Net actuarial loss | — | 10 | 1,186 | — | — | 1,571 | 0 | — | 531 | |||||||||||||||||||||||||||
Net periodic pension cost | $ | — | $ | 423 | $ | 5,165 | $ | 0 | $ | 486 | $ | 5,701 | $ | 56 | $ | 551 | $ | 5,891 | ||||||||||||||||||
The summary of the changes in amounts recognized in other comprehensive income (loss) for the plans for the years ended December 31, 2019, 20182021, 2020 and 20172019 is as follows (in thousands):
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
Prior service (cost) credit | $ | — | $ | — | $ | — | $ | — | $ | 130 | $ | 44 | $ | — | $ | — | $ | (636 | ) | |||||||||||||||||
Net gain (loss) arising during the year | 32 | (648 | ) | (8,940 | ) | (10,616 | ) | (670 | ) | 4,088 | 8,879 | 13 | 1,609 | |||||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||||||
Prior service credit | — | (19 | ) | (108 | ) | — | (19 | ) | (35 | ) | — | — | (168 | ) | ||||||||||||||||||||||
Net loss | 27 | — | 2,079 | 48,239 | — | 680 | 2,925 | — | 1,191 | |||||||||||||||||||||||||||
Other Plans | — | — | 18 | — | — | (354 | ) | — | — | — | ||||||||||||||||||||||||||
Currency impact | — | — | 178 | — | — | 583 | — | — | (2,033 | ) | ||||||||||||||||||||||||||
Total recognized in other comprehensive (loss) income | $ | 59 | $ | (667 | ) | $ | (6,773 | ) | $ | 37,623 | $ | (559 | ) | $ | 5,006 | $ | 11,804 | $ | 13 | $ | (37 | ) | ||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||||||||||||||||||||
Prior service credit | $ | — | $ | — | $ | (69 | ) | $ | — | $ | — | $ | — | $ | — | $ | 0 | $ | 0 | |||||||||||||||||
Net gain (loss) arising during the year | — | 1,524 | 6,708 | 0 | (1,692 | ) | (3,104 | ) | 32 | (648 | ) | (8,940 | ) | |||||||||||||||||||||||
Amortization: | ||||||||||||||||||||||||||||||||||||
Prior service credit | — | (19 | ) | (87 | ) | — | (19 | ) | (163 | ) | — | (19 | ) | (108 | ) | |||||||||||||||||||||
Net loss | — | 10 | 1,263 | 0 | — | 1,806 | 27 | — | 2,079 | |||||||||||||||||||||||||||
Other Plans | — | — | — | — | — | 0 | — | — | 18 | |||||||||||||||||||||||||||
Currency impact | — | — | 1,179 | — | — | (2,225 | ) | — | — | 178 | ||||||||||||||||||||||||||
Total recognized in other comprehensive income (loss) | $ | 0 | $ | 1,515 | $ | 8,994 | $ | 0 | $ | (1,711 | ) | $ | (3,686 | ) | $ | 59 | $ | (667 | ) | $ | (6,773 | ) | ||||||||||||||
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summarycomponents of net periodic benefit cost other than the amountsservice cost component are included inaccumulatedother comprehensive lossincome (expense) in stockholders’ (deficit) equity for the plans at December 31, 2019 and 2018 is asconsolidated statements of operations.
2019 | 2018 | |||||||||||||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||||||||
Net actuarial loss | $ | — | $ | (731 | ) | $ | (20,600 | ) | $ | (59 | ) | $ | (83 | ) | $ | (13,987 | ) | |||||||
Prior service credit | — | 93 | 506 | — | 112 | 666 | ||||||||||||||||||
Total | $ | — | $ | (638 | ) | $ | (20,094 | ) | $ | (59 | ) | $ | 29 | $ | (13,321 | ) | ||||||||
The summary of the amounts included in accumulated other comprehensive loss expected to be included in next year’s net periodic benefit coststockholders’ equity for the plans at December 31, 20192021 and 2020 is as follows (in thousands):
2019 | ||||||||||||
U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | ||||||||||
Net actuarial loss | $ | — | $ | — | $ | (1,541 | ) | |||||
Prior service credit | — | 19 | 158 | |||||||||
Total | $ | — | $ | 19 | $ | (1,383 | ) | |||||
2021 | 2020 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Net actuarial loss | $ | (889 | ) | $ | (14,938 | ) | $ | (2,423 | ) | $ | (24,138 | ) | ||||
Prior service credit | 55 | 152 | 74 | 358 | ||||||||||||
Total | $ | (834 | ) | $ | (14,786 | ) | $ | (2,349 | ) | $ | (23,780 | ) | ||||
The plans’ investment asset mix is as follows at December 31, 20192021 and 2018:2020:
2019 | 2018 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Equity securities | 64 | % | 6 | % | 61 | % | 7 | % | ||||||||
Debt securities | 36 | % | 21 | % | 39 | % | 18 | % | ||||||||
Cash and cash equivalents | 0 | % | 1 | % | 0 | % | 5 | % | ||||||||
Insurance contracts and other | 0 | % | 72 | % | 0 | % | 70 | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
2021 | 2020 | |||||||||||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans | |||||||||||||
Equity securities | 77 | % | 8 | % | 67 | % | 5 | % | ||||||||
Debt securities | 23 | % | 18 | % | 33 | % | 20 | % | ||||||||
Cash and cash equivalents | 0 | % | 1 | % | 0 | % | 1 | % | ||||||||
Insurance contracts and other | 0 | % | 73 | % | 0 | % | 74 | % | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The plans’ investment policies include theth
e
following asset allocation guidelines:U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans Policy Target | |||||||||||
Policy Target | Range | |||||||||||
Equity securities | 60 | % | 30% - 90% | 5 | % | |||||||
Debt securities | 35 | % | 20% - | 20 | % | |||||||
Cash and cash equivalents | 0 | % | 0% - | 10 | % | |||||||
Insurance contracts and other | 5 | % | 0% - | 65 | % | |||||||
U.S. Retiree Healthcare Plan | Non-U.S. Pension Plans Policy Target | |||||||||||
Policy Target | Range | |||||||||||
Equity securities | 60 | % | 30% - 90% | 13 | % | |||||||
Debt securities | 35 | % | 20% - 50% | 19 | % | |||||||
Cash and cash equivalents | 0 | % | 0% - 10% | 8 | % | |||||||
Insurance contracts and other | 5 | % | 0% - 10% | 60 | % | |||||||
The asset allocation policy for the U.S. Retiree Healthcare Plan was developed in consideration of the following long-term investment objectives: achieving a return on assets consistent with the investment policy, achieving portfolio returns which compare favorably with those of other similar plans, professionally managed portfolios and of appropriate market indexes and maintaining sufficient liquidity to meet the obligations of the plan. Within the equity portfolio of the U.S. Retiree Healthcare Plan,The Company does not invest in its own stock within the U.S. Retiree Healthcare Plan’s assets.
investments are diversified among market capitalization and investment strategy, and targets a 45% allocation of the equity portfolio to be invested in financial markets outside of the United States.
Plan assets are measured at fair value using the following valuation techniques and inputs:
Level 1: | The fair value of these types of investments is based on market and observable sources from daily quoted prices on nationally recognized securities exchanges. |
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Level 2: | |||
The fair value of these types of investments utilizes data points other than quoted prices in active markets that are observable either directly or indirectly. | |||
Level 3: | These bank and insurance investment contracts are issued by well-known, highly-rated companies. The fair value disclosed represents the present value of future cash flows under the terms of the respective contracts. Significant assumptions used to determine the fair value of these contracts include the amount and timing of future cash flows and counterparty credit risk. | ||
There have been no changes in the above valuation techniques associated with determining the value of the plans’ assets during the years ended December 31, 20192021 and 2018.2020.
The fair value of the Company’s retirement plan assets are as follows at December 31, 20192021 (in thousands):
Total at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| U.S. Retiree Healthcare Plan: | ||||||||||||||||
Mutual funds (a) | 13,773 | 13,773 | — | — | ||||||||||||
Total U.S. Retiree Healthcare Plan | 13,773 | 13,773 | — | — | ||||||||||||
Non-U.S. Pension Plans: | ||||||||||||||||
Cash equivalents (b) | 690 | 690 | — | — | ||||||||||||
Mutual funds (c) | 22,202 | 22,202 | — | — | ||||||||||||
Bank and insurance investment contracts (d) | 60,119 | — | — | 60,119 | ||||||||||||
Total Non-U.S. Pension Plans | 83,011 | 22,892 | — | 60,119 | ||||||||||||
Total fair value of retirement plan assets | $ | 96,784 | $ | 36,665 | $ | — | $ | 60,119 | ||||||||
Total at December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level | |||||||||||||
U.S. Retiree Healthcare Plan: | ||||||||||||||||
Mutual funds (a) | 18,314 | 18,314 | — | — | ||||||||||||
Total U.S. Retiree Healthcare Plan | 18,314 | 18,314 | — | — | ||||||||||||
Non-U.S. Pension Plans: | ||||||||||||||||
Cash equivalents (b) | 1,333 | 1,333 | — | — | ||||||||||||
Mutual funds (c) | 23,891 | 23,891 | — | — | ||||||||||||
Bank and insurance investment contracts (d) | 65,945 | — | — | 65,945 | ||||||||||||
Total Non-U.S. Pension Plans | 91,169 | 25,224 | — | 65,945 | ||||||||||||
Total fair value of retirement plan assets | $ | 109,483 | $ | 43,538 | $ | — | $ | 65,945 | ||||||||
The fair value of the Company’s retirement plan assets are as follows at December 31, 20182020 (in thousands):
Total at December 31, 2018 | Quoted Prices in Active Markets for Identical (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
U.S. Retiree Healthcare Plan: | ||||||||||||||||
Mutual funds ( e ) | 11,080 | 11,080 | — | — | ||||||||||||
Total U.S. Retiree Healthcare Plan | 11,080 | 11,080 | — | — | ||||||||||||
Non-U.S. Pension Plans: | ||||||||||||||||
Cash equivalents (b) | 4,439 | 4,439 | — | — | ||||||||||||
Mutual funds ( f ) | 20,430 | 20,430 | — | — | ||||||||||||
Bank and insurance investment contracts (d) | 56,718 | — | — | 56,718 | ||||||||||||
Total Non-U.S. Pension Plans | 81,587 | 24,869 | — | 56,718 | ||||||||||||
Total fair value of retirement plan assets | $ | 92,667 | $ | 35,949 | $ | — | $ | 56,718 | ||||||||
Total at December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
U.S. Retiree Healthcare Plan: | ||||||||||||||||
Mutual funds (e) | 16,168 | 16,168 | — | — | ||||||||||||
Total U.S. Retiree Healthcare Plan | 16,168 | 16,168 | — | — | ||||||||||||
Non-U.S. Pension Plans: | ||||||||||||||||
Cash equivalents (b) | 1,188 | 1,188 | — | — | ||||||||||||
Mutual funds (f) | 23,582 | 23,582 | — | — | ||||||||||||
Bank and insurance investment contracts (d) | 69,120 | — | — | 69,120 | ||||||||||||
Total Non-U.S. Pension Plans | 93,890 | 24,770 | — | 69,120 | ||||||||||||
Total fair value of retirement plan assets | $ | 110,058 | $ | 40,938 | $ | — | $ | 69,120 | ||||||||
| (a) | The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: large-cap U.S. companies, 29% in the common stock of international growth companies and the U.S. government. |
| (b) | Primarily represents deposit account funds held with various financial institutions. |
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (c) | The mutual fund balance in the Non-U.S. Pension Plans is primarily invested in the following categories: |
| (d) | Amount represents bank and insurance guaranteed investment contracts. |
| (e) | The mutual fund balance in the U.S. Retiree Healthcare Plan is invested in the following categories: large-cap U.S. companies, of U.S. companies andthe U.S. government. |
| (f) | The mutual fund balance in the Pension Plans is invested in the following categories: international bonds, 17% in various other global investments. |
The following table summarizes the changes in fair value of the Level
3retirement plan assets for the years ended December
31, 2021 and
Insurance Guaranteed Investment Contracts | ||||
Fair value of assets, December 31, 2017 | $ | 51,963 | ||
Net purchases (sales) and appreciation (depreciation) | 4,755 | |||
Fair value of assets, December 31, 2018 | 56,718 | |||
Net purchases (sales) and appreciation (depreciation) | 3,401 | |||
Fair value of assets, December 31, 2019 | $ | 60,119 | ||
Insurance Guaranteed Investment Contracts | ||||
Fair value of assets, December 31, 2019 | $ | 60,119 | ||
Net purchases (sales) and appreciation (depreciation) | 9,001 | |||
Fair value of assets, December 31, 2020 | 69,120 | |||
Net purchases (sales) and appreciation (depreciation) | (3,175 | ) | ||
Fair value of assets, December 31, 2021 | $ | 65,945 | ||
The weighted-average assumptions used to determine the benefit obligation in the consolidated balance sheets at December 31, 2019, 20182021, 2020 and 20172019 are as follows:
2019 | 2018 | 2017 | ||||||||||||||||||||||
U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
Discount rate | 3.42 | % | 1.38 | % | 4.40 | % | 1.95 | % | 3.94 | % | 1.79 | % | ||||||||||||
Increases in compensation levels | ** | 2.83 | % | ** | 2.66 | % | ** | 2.43 | % | |||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
Discount rate | 2.70 | % | 1.40 | % | 2.25 | % | 1.12 | % | 3.42 | % | 1.38 | % | ||||||||||||
Increases in compensation levels | * | * | 2.74 | % | * | * | 2.69 | % | * | * | 2.83 | % | ||||||||||||
Interest crediting rate | 5.25 | % | 0.99 | % | 5.25 | % | 0.85 | % | 5.25 | % | 0.79 | % | ||||||||||||
| ** | Not applicable |
The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31, 2019, 20182021, 2020 and 20172019 are as follows:
2019 | 2018 | 2017 | ||||||||||||||||||||||
U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
Discount rate | 4.41 | % | 2.25 | % | 3.96 | % | 1.93 | % | 4.28 | % | 1.80 | % | ||||||||||||
Return on plan assets | 6.25 | % | 3.11 | % | 4.35 | % | 2.75 | % | 6.53 | % | 2.64 | % | ||||||||||||
Increases in compensation levels | ** | 3.20 | % | ** | 2.70 | % | ** | 2.63 | % | |||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
Discount rate | 2.25 | % | 1.40 | % | 3.42 | % | 1.98 | % | 4.41 | % | 2.25 | % | ||||||||||||
Return on plan assets | 6.25 | % | 2.58 | % | 6.25 | % | 2.99 | % | 6.25 | % | 3.11 | % | ||||||||||||
Increases in compensation levels | * | * | 3.11 | % | * | * | 3.62 | % | * | * | 3.20 | % | ||||||||||||
Interest crediting rate | 5.25 | % | 0.77 | % | 5.25 | % | 0.63 | % | 5.25 | % | 0.58 | % | ||||||||||||
| ** | Not applicable |
To develop the
expected
long-term rate of return on assets assumption, the Company considered historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and historical expenses paid by the plan. Aone-quarter
percentage point increase in the assumed long-term rate of return on assets would decrease the Company’s net periodic benefit cost by
less than$1 million
. A
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
one-quarter percentage point increase in the discount rate would decrease the Company’s net periodic benefit cost by
less than $1 million
million.
During fiscal year 2020,2022, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans. Estimated future benefit payments from the plans as of December 31, 20192021 are as follows (in thousands):
U.S. Retiree Healthcare Plans | Non-U.S. Pension Plans | Total | ||||||||||
2020 | $ | 1,123 | $ | 2,723 | $ | 3,846 | ||||||
2021 | 1,209 | 4,746 | 5,955 | |||||||||
2022 | 1,281 | 3,238 | 4,519 | |||||||||
2023 | 1,376 | 2,749 | 4,125 | |||||||||
2024 | 1,437 | 2,884 | 4,321 | |||||||||
2025 - 2029 | 7,420 | 20,691 | 28,111 | |||||||||
U.S. Retiree Healthcare Plans | Non-U.S. Pension Plans | Total | ||||||||||
2022 | $ | 1,452 | $ | 4,090 | $ | 5,542 | ||||||
2023 | 1,554 | 2,285 | 3,839 | |||||||||
2024 | 1,643 | 2,635 | 4,278 | |||||||||
2025 | 1,703 | 3,815 | 5,518 | |||||||||
2026 | 1,726 | 3,093 | 4,819 | |||||||||
2027 - 2031 | 8,358 | 23,408 | 31,766 | |||||||||
18 Business Segment
Information
The accounting standards for segment reporting establish standards for reporting information about operating segments in annual financial statements and require selected information for those segments to be presented in interim financial reports of public business enterprises. They also establish standards for related disclosures about products and services, geographic areas and major customers. 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 two2 operating segments: Waters
TM
and TATM
.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’s2 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
1
reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company.Net sales for the Company’s products and services are as follows for the years ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
2019 | 2018 | 2017 | ||||||||||
Product net sales: | ||||||||||||
Waters instrument systems | $ | 963,871 | $ | 1,000,625 | $ | 988,750 | ||||||
Chemistry consumables | 412,018 | 400,287 | 372,157 | |||||||||
TA instrument systems | 191,300 | 204,081 | 191,442 | |||||||||
Total product sales | 1,567,189 | 1,604,993 | 1,552,349 | |||||||||
Service net sales: | ||||||||||||
Waters service | 761,594 | 738,433 | 686,656 | |||||||||
TA service | 77,813 | 76,503 | 70,073 | |||||||||
Total service sales | 839,407 | 814,936 | 756,729 | |||||||||
Total net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | ||||||
2021 | 2020 | 2019 | ||||||||||
Product net sales: | ||||||||||||
Waters instrument systems | $ | 1,089,248 | $ | 890,855 | $ | 963,871 | ||||||
Chemistry consumables | 507,209 | 432,080 | 412,018 | |||||||||
TA instrument systems | 225,613 | 174,398 | 191,300 | |||||||||
Total product sales | 1,822,070 | 1,497,333 | 1,567,189 | |||||||||
Service net sales: | ||||||||||||
Waters service | 876,626 | 794,189 | 761,594 | |||||||||
TA service | 87,178 | 73,843 | 77,813 | |||||||||
Total service sales | 963,804 | 868,032 | 839,407 | |||||||||
Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the years ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
2019 | 2018 | 2017 | ||||||||||
Net Sales: | ||||||||||||
Asia: | ||||||||||||
China | $ | 439,557 | $ | 443,321 | $ | 387,059 | ||||||
Japan | 180,707 | 173,357 | 167,258 | |||||||||
Asia Other | 318,848 | 305,613 | 308,300 | |||||||||
Total Asia | 939,112 | 922,291 | 862,617 | |||||||||
Americas: | ||||||||||||
United States | 692,277 | 683,596 | 669,274 | |||||||||
Americas Other | 137,964 | 151,581 | 140,715 | |||||||||
Total Americas | 830,241 | 835,177 | 809,989 | |||||||||
Europe | 637,243 | 662,461 | 636,472 | |||||||||
Total net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | ||||||
2021 | 2020 | 2019 | ||||||||||
Net Sales: | ||||||||||||
Asia: | ||||||||||||
China | $ | 521,128 | $ | 404,352 | $ | 439,557 | ||||||
Japan | 182,597 | 179,815 | 180,707 | |||||||||
Asia Other | 372,040 | 315,010 | 318,848 | |||||||||
Total Asia | 1,075,765 | 899,177 | 939,112 | |||||||||
Americas: | ||||||||||||
United States | 774,014 | 678,313 | 692,277 | |||||||||
Americas Other | 151,206 | 119,529 | 137,964 | |||||||||
Total Americas | 925,220 | 797,842 | 830,241 | |||||||||
Europe | 784,889 | 668,346 | 637,243 | |||||||||
Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
None of the Company’s individual customers accounts for more than2% 2% of annual Company sales. Net sales by customer class are as follows for the years ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
2019 | 2018 | 2017 | ||||||||||
Pharmaceutical | $ | 1,365,275 | $ | 1,365,731 | $ | 1,294,668 | ||||||
Industrial | 719,377 | 737,144 | 721,088 | |||||||||
Academic and governmental | 321,944 | 317,054 | 293,322 | |||||||||
Total net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | ||||||
2021 | 2020 | 2019 | ||||||||||
Pharmaceutical | $ | 1,667,061 | $ | 1,386,966 | $ | 1,365,275 | ||||||
Industrial | 829,204 | 707,772 | 719,377 | |||||||||
Academic and governmental | 289,609 | 270,627 | 321,944 | |||||||||
Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
Net sales for the Company recognized at a point in time versus over time are as follows for the years ended December 31, 2019, 20182021, 2020 and 20172019 (in thousands):
2019 | 2018 | 2017 | ||||||||||
Net sales recognized at a point in time: | ||||||||||||
Instrument systems | $ | 1,155,171 | $ | 1,204,706 | $ | 1,180,192 | ||||||
Chemistry consumables | 412,018 | 400,287 | 372,157 | |||||||||
Service sales recognized at a point in time (time & materials) | 323,247 | 317,549 | 299,385 | |||||||||
Total net sales recognized at a point in time | 1,890,436 | 1,922,542 | 1,851,734 | |||||||||
Net sales recognized over time: | ||||||||||||
Service and software sales recognized over time (contracts) | 516,160 | 497,387 | 457,344 | |||||||||
Total net sales | $ | 2,406,596 | $ | 2,419,929 | $ | 2,309,078 | ||||||
2021 | 2020 | 2019 | ||||||||||
Net sales recognized at a point in time: | ||||||||||||
Instrument systems | $ | 1,314,861 | $ | 1,065,253 | $ | 1,155,171 | ||||||
Chemistry consumables | 507,209 | 432,080 | 412,018 | |||||||||
Service sales recognized at a point in time (time & materials) | 354,666 | 365,776 | 323,247 | |||||||||
Total net sales recognized at a point in time | 2,176,736 | 1,863,109 | 1,890,436 | |||||||||
Net sales recognized over time: | ||||||||||||
Service and software sales recognized over time (contracts) | 609,138 | 502,256 | 516,160 | |||||||||
Total net sales | $ | 2,785,874 | $ | 2,365,365 | $ | 2,406,596 | ||||||
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-lived assets information at December 31, 20192021 and 20182020 is presented below (in thousands):
2019 | 2018 | 2017 | ||||||||||
Long-lived assets: | ||||||||||||
United States | $ | 276,891 | $ | 203,664 | $ | 186,344 | ||||||
Americas Other | 1,929 | 1,680 | 1,720 | |||||||||
Total Americas | 278,820 | 205,344 | 188,064 | |||||||||
Europe | 116,734 | 118,513 | 136,440 | |||||||||
Asia | 21,788 | 19,226 | 24,774 | |||||||||
Total long-lived assets | $ | 417,342 | $ | 343,083 | $ | 349,278 | ||||||
2021 | 2020 | 2019 | ||||||||||
Long-lived assets: | ||||||||||||
United States | $ | 395,446 | $ | 350,615 | $ | 276,891 | ||||||
Americas Other | 1,662 | 1,179 | 1,929 | |||||||||
Total Americas | 397,108 | 351,794 | 278,820 | |||||||||
Europe | 130,806 | 119,978 | 116,734 | |||||||||
Asia | 19,999 | 22,231 | 21,788 | |||||||||
Total long-lived assets | $ | 547,913 | $ | 494,003 | $ | 417,342 | ||||||
The Americas Other category includes Canada, Latin America and Puerto Rico. Long-lived assets exclude goodwill, other intangible assets and other assets.
19 Unaudited Quarterly Results
The Company’s unaudited quarterly results are summarized below (in thousands, except per share data):
First | Second | Third | Fourth | |||||||||||||||||
2019 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Net sales | $ | 513,862 | $ | 599,162 | $ | 577,278 | $ | 716,294 | $ | 2,406,596 | ||||||||||
Costs and operating expenses: | ||||||||||||||||||||
Cost of sales | 221,031 | 249,546 | 241,055 | 299,068 | 1,010,700 | |||||||||||||||
Selling and administrative expenses | 134,339 | 133,208 | 126,036 | 141,208 | 534,791 | |||||||||||||||
Research and development expenses | 35,060 | 36,490 | 34,333 | 37,072 | 142,955 | |||||||||||||||
Purchased intangibles amortization | 2,281 | 2,264 | 2,619 | 2,529 | 9,693 | |||||||||||||||
Total costs and operating expenses | 392,711 | 421,508 | 404,043 | 479,877 | 1,698,139 | |||||||||||||||
Operating income | 121,151 | 177,654 | 173,235 | 236,417 | 708,457 | |||||||||||||||
Other expense | (525 | ) | (342 | ) | (496 | ) | (2,223 | ) | (3,586 | ) | ||||||||||
Interest expense | (11,563 | ) | (11,448 | ) | (11,456 | ) | (14,223 | ) | (48,690 | ) | ||||||||||
Interest income | 8,315 | 5,871 | 3,455 | 4,417 | 22,058 | |||||||||||||||
Income before income taxes | 117,378 | 171,735 | 164,738 | 224,388 | 678,239 | |||||||||||||||
Provision for income taxes | 8,392 | 27,325 | 26,605 | 23,719 | 86,041 | |||||||||||||||
Net income | $ | 108,986 | $ | 144,410 | $ | 138,133 | $ | 200,669 | $ | 592,198 | ||||||||||
Net income per basic common share | 1.52 | 2.09 | 2.09 | 3.15 | 8.76 | |||||||||||||||
Weighted-average number of basic common shares | 71,704 | 68,989 | 66,226 | 63,795 | 67,627 | |||||||||||||||
Net income per diluted common share | 1.51 | 2.08 | 2.07 | 3.12 | 8.69 | |||||||||||||||
Weighted-average number of diluted common shares and equivalents | 72,415 | 69,494 | 66,768 | 64,348 | 68,166 | |||||||||||||||
First | Second | Third | Fourth | |||||||||||||||||
2021 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Net sales | $ | 608,545 | $ | 681,647 | $ | 659,233 | $ | 836,449 | $ | 2,785,874 | ||||||||||
Costs and operating expenses: | ||||||||||||||||||||
Cost of sales | 254,147 | 280,254 | 271,128 | 351,004 | 1,156,533 | |||||||||||||||
Selling and administrative expenses | 143,196 | 158,213 | 152,545 | 173,014 | 626,968 | |||||||||||||||
Research and development expenses | 38,092 | 44,949 | 41,986 | 43,331 | 168,358 | |||||||||||||||
Purchased intangibles amortization | 1,840 | 1,809 | 1,759 | 1,735 | 7,143 | |||||||||||||||
Litigation provisions | 0 | 0 | — | 5,165 | 5,165 | |||||||||||||||
Total costs and operating expenses | 437,275 | 485,225 | 467,418 | 574,249 | 1,964,167 | |||||||||||||||
Operating income | 171,270 | 196,422 | 191,815 | 262,200 | 821,707 | |||||||||||||||
Other income (expense) | 9,359 | 9,321 | (607 | ) | (870 | ) | 17,203 | |||||||||||||
Interest expense | (10,946 | ) | (12,027 | ) | (11,081 | ) | (10,884 | ) | (44,938 | ) | ||||||||||
Interest income | 4,101 | 3,698 | 2,548 | 1,874 | 12,221 | |||||||||||||||
Income before income taxes | 173,784 | 197,414 | 182,675 | 252,320 | 806,193 | |||||||||||||||
Provision for income taxes | 25,657 | 30,122 | 21,490 | 36,081 | 113,350 | |||||||||||||||
Net income | $ | 148,127 | $ | 167,292 | $ | 161,185 | $ | 216,239 | $ | 692,843 | ||||||||||
Net income per basic common share | 2.38 | 2.71 | 2.63 | 3.55 | 11.25 | |||||||||||||||
Weighted-average number of basic common shares | 62,260 | 61,685 | 61,359 | 60,984 | 61,575 | |||||||||||||||
Net income per diluted common share | 2.37 | 2.69 | 2.60 | 3.52 | 11.17 | |||||||||||||||
Weighted-average number of diluted common shares and equivalents | 62,632 | 62,157 | 61,888 | 61,423 | 62,028 | |||||||||||||||
10940
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
First | Second | Third | Fourth | |||||||||||||||||
2018 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Net sales | $ | 530,670 | $ | 596,219 | $ | 578,021 | $ | 715,019 | $ | 2,419,929 | ||||||||||
Costs and operating expenses: | ||||||||||||||||||||
Cost of sales | 221,421 | 243,135 | 241,139 | 286,869 | 992,564 | |||||||||||||||
Selling and administrative expenses | 130,407 | 136,645 | 126,997 | 142,853 | 536,902 | |||||||||||||||
Research and development expenses | 34,480 | 35,644 | 35,173 | 38,106 | 143,403 | |||||||||||||||
Purchased intangibles amortization | 1,659 | 1,602 | 2,114 | 2,337 | 7,712 | |||||||||||||||
Litigation provisions | (1,672 | ) | — | 924 | 322 | (426 | ) | |||||||||||||
Total costs and operating expenses | 386,295 | 417,026 | 406,347 | 470,487 | 1,680,155 | |||||||||||||||
Operating income | 144,375 | 179,193 | 171,674 | 244,532 | 739,774 | |||||||||||||||
Other income (expense) | 346 | (1,828 | ) | (811 | ) | (45,501 | ) | (47,794 | ) | |||||||||||
Interest expense | (13,838 | ) | (11,692 | ) | (11,435 | ) | (11,676 | ) | (48,641 | ) | ||||||||||
Interest income | 9,666 | 8,888 | 9,802 | 10,451 | 38,807 | |||||||||||||||
Income before income taxes | 140,549 | 174,561 | 169,230 | 197,806 | 682,146 | |||||||||||||||
Provision for income taxes | 28,598 | 18,884 | 28,216 | 12,654 | 88,352 | |||||||||||||||
Net income | $ | 111,951 | $ | 155,677 | $ | 141,014 | $ | 185,152 | $ | 593,794 | ||||||||||
Net income per basic common share | 1.42 | 2.00 | 1.84 | 2.48 | 7.71 | |||||||||||||||
Weighted-average number of basic common shares | 78,883 | 77,833 | 76,575 | 74,802 | 76,992 | |||||||||||||||
Net income per diluted common share | 1.40 | 1.98 | 1.83 | 2.46 | 7.65 | |||||||||||||||
Weighted-average number of diluted common shares and equivalents | 79,715 | 78,438 | 77,136 | 75,345 | 77,618 | |||||||||||||||
First | Second | Third | Fourth | |||||||||||||||||
2020 | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Net sales | $ | 464,939 | $ | 519,984 | $ | 593,784 | $ | 786,658 | $ | 2,365,365 | ||||||||||
Costs and operating expenses: | ||||||||||||||||||||
Cost of sales | 210,644 | 213,134 | 262,342 | 320,569 | 1,006,689 | |||||||||||||||
Selling and administrative expenses | 147,735 | 117,449 | 135,430 | 153,084 | 553,698 | |||||||||||||||
Research and development expenses | 34,989 | 31,155 | 34,971 | 39,662 | 140,777 | |||||||||||||||
Purchased intangibles amortization | 2,625 | 2,618 | 2,657 | 2,687 | 10,587 | |||||||||||||||
Asset Impairments | — | — | — | 6,945 | 6,945 | |||||||||||||||
Litigation provisions | 666 | 514 | — | — | 1,180 | |||||||||||||||
Total costs and operating expenses | 396,659 | 364,870 | 435,400 | 522,947 | 1,719,876 | |||||||||||||||
Operating income | 68,280 | 155,114 | 158,384 | 263,711 | 645,489 | |||||||||||||||
Other (expense) income | (374 | ) | (736 | ) | (1,039 | ) | 374 | (1,775 | ) | |||||||||||
Interest expense | (14,079 | ) | (13,018 | ) | (10,915 | ) | (11,058 | ) | (49,070 | ) | ||||||||||
Interest income | 4,036 | 4,003 | 4,007 | 4,224 | 16,270 | |||||||||||||||
Income before income taxes | 57,863 | 145,363 | 150,437 | 257,251 | 610,914 | |||||||||||||||
Provision for income taxes | 4,301 | 22,434 | 23,668 | 38,940 | 89,343 | |||||||||||||||
Net income | $ | 53,562 | $ | 122,929 | $ | 126,769 | $ | 218,311 | $ | 521,571 | ||||||||||
Net income per basic common share | 0.86 | 1.98 | 2.04 | 3.51 | 8.40 | |||||||||||||||
Weighted-average number of basic common shares | 62,232 | 61,944 | 62,002 | 62,170 | 62,094 | |||||||||||||||
Net income per diluted common share | 0.86 | 1.98 | 2.03 | 3.49 | 8.36 | |||||||||||||||
Weighted-average number of diluted common shares and equivalents | 62,626 | 62,184 | 62,303 | 62,501 | 62,414 | |||||||||||||||
The Company typically experiences an increase in sales in the fourth quarter, as a result of purchasing habits for capital goods of customers that tend to exhaust their spending budgets by calendar year end. Selling and administrative expenses are typically higher after the first quarter in each year as the Company’s annual payroll merit increases take effect.effect, however during the second quarter of 2020, the Company’s selling and administrative expenses decreased compared to the first quarter of 2020 as a result of severance-related costs incurred during the first quarter of 2020 in connection with a reduction in workforce and lease-termination and exit costs. These costs were offset by
COVID-19 and restructuring
cost-saving actions that reduced plannedsalaries and non-essential spending,
beginning in the second quarter of 2020 and totaled $70 million for the year. Selling and administrative expenses will vary in the fourth quarter in relation to performance in the quarter and for the year.During the first quarter of 2018,2021, the Company resolved the case with a final settlement that resulted in arecorded an unrealized gain of $2$10 million (see Note 1due to an observable change in fair value of an existing investment the Company does not have the ability to exercise significant influence over. This unrealized gain was recorded in Other income.
During the second quarter of 2021, the Company executed a settlement agreement to resolve patent infringement litigation with Bruker Corporation and Bruker Daltronik GmbH regarding their timsTOF product line. In connection with the settlement, the Company is entitled to receive $10 million in guaranteed payments, including minimum royalty payments, which was recognized within other income in our consolidated statement of operations. This settlement was recorded in Other income.
During the fourth quarter of 2018,2020, the Company settled a pension plan obligation and recorded a $46 million charge, which consisted of a $6 million cash contribution to the plan and a $40 millionrelatedof $10 million for the impairment of certain intangible assets associated with its 2014 acquisition of Medimass. The impairment charge was due to a shift in strategic priorities. In conjunction with the reversalintangible asset impairment the Company also
non-cash
charge reduced its liability for contingent consideration of unrecognized actuarial losses recorded in accumulated other comprehensive income in$3 million during 2020 as the stockholders’ equity (see Note 17carrying value of this liability is based on the future sales of the Medimass intangible assets that were impaired. The net impact of $7 million is reported separately within the consolidated statements of operations.).
Item 9:
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A:
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
Table of ContentsNone.
104
98105
Item 15: Exhibits, Financial Statement Schedules
100
101
102
103110
104111
RulesAct)Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report on Form20192021 (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.
13a-15(e)
and15d-15(e)
under the Securities Exchange 10-K.
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 December 31, Management’s Annual Report on Internal Control Over Financial Reporting
See Management’s Report on Internal Control Over Financial Reporting in Item 8 on page 4651 of this Form
10-K.
Report of the Independent Registered Public Accounting Firm
See the report of PricewaterhouseCoopers LLP in Item 8 beginning on page 4752 of this Form
10-K.
Changes in Internal Control Over Financial Reporting
No change was identified in the Company’s internal control over financial reporting (as defined in
None.96 Other Information
Rules20192021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
13a-15(f)
and15d-15(f)
under the Exchange Act) during the quarter ended December 31, Item 9B: |
Item 9C:
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
None.
PART III
Item 10: | Directors, Executive Officers and Corporate Governance |
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Officers of the Company are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. The following persons serve as executive officers of the Company:
Dr. Udit Batra, 51, was appointed a Director of the Company as well as President and CEO on September 1, 2020. He most recently served as Chief Executive Officer of the Life Science business of Merck KGaA, Darmstadt, Germany, which operates as MilliporeSigma in the United States and Canada, and as a member of its Executive Board, roles he held from 2014 and 2016, respectively, through July 2020. Prior to that, Dr. Batra
102
served as President and Chief Executive Officer of Merck KGaA, Darmstadt, Germany’s Consumer Health business. Dr. Batra oversaw the company’s Bioethics Advisory Panel and had Board responsibility for the global Information Technology function. Before joining Merck KGaA, Darmstadt, Germany, Dr. Batra held several positions of increasing responsibility at Novartis, including Global Head of Corporate Strategy in Switzerland, Country President for the Pharma Business of Novartis in Australia and New Zealand and the Global Head of Public Health and Market Access in Cambridge, Massachusetts. Dr. Batra also served at the global consultancy McKinsey & Company across the healthcare, consumer and
non-profit
sectors. Dr. Batra started his career at Merck Research Labs in West Point, Pennsylvania as a research engineer.Keeley Aleman, 45, was appointed Senior Vice President, General Counsel and Secretary in October of 2019. Ms. Aleman joined Waters Corporation in 2006 as the Assistant General Counsel and held various legal roles focusing on business transactions, commercial strategies, international development, compliance, corporate governance and organizational matters. Prior to joining Waters Corporation she held corporate associate positions at Goodwin Procter, LLP and Testa, Hurwitz & Thibeault, LLP.
Jianqing Bennett, 52, was appointed Senior Vice President of TA Instruments Division on May 1, 2021. Previously, Ms. Bennett served as Senior Vice President, High Growth Markets at Beckman Coulter Diagnostics from November 2017 to March 2021. Prior to that, from 2007-2017, she held various senior management positions at Carestream Health Inc, including serving as President, Medical Digital Solutions from August 2015 to November 2017.
Amol Chaubal, 46, was appointed Chief Financial Officers of Waters Corporation on May 12, 2021. Previously, Mr. Chaubal was Chief Financial Officer of Quanterix Corporation, a life sciences company, where he served as Chief Financial Officer since April 2019. Before Quanterix, Mr. Chaubal served as Chief Financial Officer, Global Operations at Smith & Nephew, a global medical devices company, from October 2017 to April 2019. Prior to his time at Smith & Nephew, he served as Corporate Vice President and Head of Finance for the Clinical Research Services and Access business at Parexel from July 2015 to October 2017.
Belinda Hyde, 51, was appointed Senior Vice President, Global Human Resources of Waters Corporation in January 2021. She is responsible for all aspects of the Global Human Resources function including talent management, total rewards, HR business partners, HR operations and technology, employee engagement and diversity and inclusion. Prior to joining Waters, Ms. Hyde served as the Chief Human Resources Officer for SPX FLOW, from July 2015 to December 2020, and Schnitzer Steel. She has also held leadership roles in business and cultural transformation, executive development, talent management, compensation, benefits, training, internal communications and business partner support at companies such as Caltex Petroleum, Dell Technologies, Invitrogen and Celanese Corporation. Ms. Hyde earned a Bachelor of Arts in psychology from the University of Texas, as well as both a master’s degree and doctorate in industrial and organizational psychology from the University of Houston.
Jonathan M. Pratt, 52, was appointed Senior Vice President, Waters Division, on May 1, 2021. Previously, he served as Senior Vice President and President, TA Instruments from August 2019 to April 30, 2021. Prior to joining Waters Corporation, Mr. Pratt was President of Beckman Coulter Life Sciences from January 2017 to April 2019. Additionally, he held senior positions at Pall Corporation from 2001 to 2017, where he was Vice President and General Manager from October 2015 to December 2016 following Pall Corporation’s acquisition by Danaher Corporation and, prior to that, President of its Food & Beverage, Laboratory and ForteBio businesses from April 2011 to October 2015. Since August 2020, Mr. Pratt has served on the Board of SPX FLOW, Inc. (NYSE:FLOW) as an independent director and a member of the Audit, Compensation and Nominating & Governance Committees.
Dan Welch, 60, was appointed Senior Vice President, Global Operations in July 2020 and was Vice President of Global Supply Chain since July 2019 and Senior Director, Supply Chain Management since August 2017. Mr. Welch joined Waters Corporation in May 2012 as General Manager and Senior Director of Manufacturing Operations. Prior to joining Waters Corporation, he held senior operations and engineering positions at semiconductor and solar energy companies.
103
Information regarding the Company’s directors, and any material changes to the process by which security holders may recommend nominees to the Board of Directors isand the information required by the Item will be contained in theour definitive proxy statement for the 20202022 Annual Meeting of Stockholders, to be filed with the SEC not later than 120 days after the close of business of the fiscal year and is incorporated in this report by reference (the “2022 Proxy Statement”), under the headings “Election of Directors”, “Directors Meetings and Board Committees”, “Corporate Governance”, “Report of the Audit Committee of the Board of Directors” and “Compensation of Directors and Executive Officers”. Information regarding compliance with Section 16(a) of the Exchange Act is contained in the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders2022 Proxy Statement, under the heading “Delinquent Section 16(a) Reports”. Information regarding the Company’s Audit Committee and Audit Committee Financial Expert is contained in the definitive proxy statement for the 2020 Annual Meeting of Stockholders2022 Proxy Statement, under the headings “Report of the Audit Committee of the Board of Directors” and “Directors Meetings and Board Committees”. Such information is incorporated herein by reference. Information regarding the Company’s executive officers is contained in Part I of this Form 10-K.
The Company has adopted a Global Code of Business Conduct & Ethics (the “Code”) that applies to all of the Company’s employees (including its executive officers) and directors and that is in compliance with Item 406 of Regulation, under the caption “Corporate Governance”. The Company intends to satisfy the disclosure requirement regarding any amendment to, or waiver of a provision of, the Code applicable to any executive officer or director by posting such information on its website. The Company shall also provide to any person without charge, upon request, a copy of the Code. Any such request must be made in writing to the Secretary of the Company, c/o Waters Corporation, 34 Maple Street, Milford, MA 01757.
S-K.
The Code has been distributed to all employees of the Company. In addition, the Code is available on the Company’s website,www.waters.com
The Company’s corporate governance guidelines and the charters of the audit committee, compensation committee finance committee and nominating and corporate governance committee of the Board of Directors are available on the Company’s website,, under the caption “Corporate Governance”. The Company shall provide to any person without charge, upon request, a copy of any of the foregoing materials. Any such request must be made in writing to the Secretary of the Company, c/o Waters Corporation, 34 Maple Street, Milford, MA 01757.
www.waters.com
Item 11: | Executive Compensation |
This information is contained in the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders2022 Proxy Statement, under the headings “Compensation of Directors and Executive Officers”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”. Such information is incorporated herein by reference.
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Except for the Equity Compensation Plan information set forth below, this information is contained in the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders2022 Proxy Statement, under the heading “Security Ownership of Certain Beneficial Owners and Management”. Such information is incorporated herein by reference.
104
Equity Compensation Plan Information
The following table provides information as of December 31, 20192021 about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under its existing equity compensation plans (in thousands):
A | B | C | ||||||||||
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-Average ExercisePrice of Outstanding Options, Warrants and Rights (1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (A)) | ||||||||||
Equity compensation plans approved by security holders | 1,861 | $ | 158.61 | 2,711 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 1,861 | $ | 158.61 | 2,711 | ||||||||
A | B | C | ||||||||||
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (A)) | ||||||||||
Equity compensation plans approved by security holders | 1,064 | $ | 202.24 | 7,177 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 1,064 | $ | 202.24 | 7,177 | ||||||||
| (1) | Column (a) includes an aggregate of |
See Note 14, Stock-Based Compensation, in the Notes to Consolidated Financial Statements for a description of the material features of the Company’s equity compensation plans.
Item 13: | Certain Relationships and Related Transactions and Director Independence |
This information is contained in the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders2022 Proxy Statement, under the headings “Directors Meetings and Board Committees”, “Corporate Governance” and “Compensation of Directors and Executive Officers”. Such information is incorporated herein by reference.
Item 14: | Principal Accountant Fees and Services |
This information is contained in the Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders2022 Proxy Statement, under the headings “Ratification of Selection of Independent Registered Public Accounting Firm” and “Report of the Audit Committee of the Board of Directors”. Such information is incorporated herein by reference.
PART IV
Item 15: | Exhibits, Financial Statement Schedules |
(a) Documents filed as part of this report:
| (1) | Financial Statements: |
The consolidated financial statements of the Company and its subsidiaries are filed as part of this
99
Form50
10-K
and are set forth on pages 55
to 95.
101
. The report of PricewaterhouseCoopers LLP (PCAOB ID: 238), an independent registered public accounting firm, dated February 25, 2020,24, 2022, is set forth beginning on page 47
52
of this
Form
10-K.
| (2) | Exhibits: |
Exhibit Number | Description of Document | ||||
| 3.1 | |||||
Second Amended and Restated Certificate of Incorporation of Waters Corporation.(1)(P) | |||||
| 3.2 | |||||
| 3.3 | |||||
| 3.4 | |||||
| 3.5 | |||||
| 4.1 | |||||
| 10.1 | |||||
Waters Corporation Retirement Plan.(2)(P)(*) | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | |||||
| 10.6 | |||||
10.7 | |||||
| 10.8 | |||||
| 10.9 | |||||
| 10.10 | |||||
Number | ||||
| 10.11 | ||||
| 10.12 | ||||
| 10.13 | ||||
| 10.14 | ||||
106
Exhibit Number | Description of Document | |||
| 10.15 | ||||
| 10.16 | ||||
| 10.17 | ||||
| 10.18 | ||||
| 10.19 | ||||
| 10.20 | ||||
| 10.21 | ||||
| 10.22 | ||||
| 10.23 | ||||
| 10.24 | ||||
| 10.25 | ||||
| 10.26 | ||||
| 10.27 | ||||
| 10.28 | ||||
| 10.29 | ||||
| 10.30 | ||||
| 10.31 | ||||
| 10.32 | ||||
| 10.33 | ||||
| 10.34 | ||||
Number | ||||
| 10.35 | ||||
| 10.36 | ||||
| 10.37 | ||||
| 10.38 | ||||
| 10.39 | ||||
107
Exhibit Number | Description of Document | ||||
| 10.40 | |||||
| 10.41 | |||||
| 10.42 | |||||
| 10.43 | |||||
| 10.44 | |||||
| 10.45 | |||||
| 10.46 | |||||
| 10.47 | |||||
| 10.48 | |||||
| 10.49 | |||||
| 10.50 | |||||
| 10.51 | |||||
| 10.52 | |||||
| 10.53 | |||||
| 10.54 | |||||
| 10.55 | |||||
| 10.56 | |||||
| 21.1 | |||||
| 23.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
101 | The following materials from Waters Corporation’s Annual Report on Form 10-K for the year ended December 31, | ||||
108
Exhibit Number | Description of Document | |||
| 104 | Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101). | |||
| (1) | Incorporated by reference to the Registrant’s Report on Form 10-K dated March 29, 1996 (FileNo. 001-14010). |
| (2) | Incorporated by reference to the Registrant’s Registration Statement on Form S-1 dated October 24, 1996 (FileNo. 333-96934). |
| (3) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated August 11, 1999 (FileNo. 001-14010). |
| (4) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated August 8, 2000 (FileNo. 001-14010). |
| (5) | Incorporated by reference to the Registrant’s Report on Form 10-K dated March 28, 2002 (FileNo. 001-14010). |
| (6) | Incorporated by reference to Exhibit 4.1 of the Registrant’s Report on Form 10-K dated February 24, 2021 (FileNo. 001-14010) |
| (7) | Incorporated by reference to the Registrant’s Report on Form S-8 dated November 20, 2003 (FileNo. 333-110613). |
| (8) | Incorporated by reference to the Registrant’s Report on Form 10-K dated March 12, 2004 (FileNo. 001-14010). |
| (9) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated November 10, 2004 (FileNo. 001-14010). |
| (10) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated August 5, 2005 (FileNo. 001-14010). |
| (11) | Incorporated by reference to the Registrant’s Report on Form 10-K dated March 1, 2007 (FileNo. 001-14010). |
| (12) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated November 2, 2007 (FileNo. 001-14010). |
| (13) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated February 27, 2009 (FileNo. 001-14010). |
| (14) | Incorporated by reference to the Registrant’s Report on Form S-8 dated July 10, 2009 (FileNo. 333-160507). |
| (15) | Incorporated by reference to the Registrant’s Report on Form 10-K dated February 26, 2010 (FileNo. 001-14010). |
| (16) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated May 6, 2011 (FileNo. 001-14010). |
| (17) | Incorporated by reference to the Registrant’s Report on Form S-8 dated September 5, 2012 (FileNo. 333-183721). |
| (18) | Incorporated by reference to the Registrant’s Report on Form 8-K dated December 11, 2012 (FileNo. 001-14010). |
| (19) | Incorporated by reference to the Registrant’s Report on Form 8-K dated December 11, 2013 (FileNo. 001-14010). |
| (20) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated August 1, 2014 (FileNo. 001-14010). |
| (21) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated February 27, 2015 (FileNo. 001-14010). |
| (22) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated May 8, 2015 (FileNo. 001-14010). |
| (23) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated August 7, 2015 (FileNo. 001-14010). |
| (24) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated August 5, 2016 (FileNo. 001-14010). |
109
| (25) | Incorporated by reference to the Registrant’s Report on Form 8-K dated December 15, 2016 (FileNo. 001-14010). |
| (26) | Incorporated by reference to the Registrant’s Report on Form 10-K dated February 24, 2017 (FileNo. 001-14010). |
| (27) | Incorporated by reference to the Registrant’s Report on Form 8-K dated March 27, 2017 (FileNo. 001-14010). |
| (28) | Incorporated by reference to the Registrant’s Report on Form 10-Q dated November 3, 2017 (FileNo. 001-14010). |
| (29) | Incorporated by reference to the Registrant’s Report on Form 8-K dated December 8, 2017 (FileNo. 001-14010). |
| (30) | Incorporated by reference to the Registrant’s Report on Form 10-K dated February 27, 2018 (FileNo. 001-14010). |
| (31) | Incorporated by reference to the Registrant’s Report on Form 10-K/A dated March 1, 2019 (FileNo. 001-14010). |
| (32) | Incorporated by reference to the Registrant’s Report on Form 8-K dated September 16, 2019 (FileNo. 001-14010). |
| (33) | Incorporated by reference to the Registrant’s Report on Form No. 001-14010). |
| Incorporated by reference to the Registrant’s Report on Form 10-Q dated No. 001-14010). |
| (35) | Incorporated by reference to Exhibit 4.2 of the Registration Statement filed on Form S-8 dated June 8, 2020 (FileNo. 333-239020). |
Incorporated by reference to the Registrant’s Report on Form 10-K dated February 25, 2020 (FileNo. 001-14010). |
| (37) | Incorporated by reference to the Registrant’s Report on Form No. 001-14010). |
Incorporated by reference to the Registrant’s Report on Form No. 001-14010). |
Incorporated by reference to the Registrant’s Report on Form |
8-K dated September No. 001-14010). |
| (P) | Paper Filing |
| (*) | Management contract or compensatory plan required to be filed as an Exhibit to this Form 10-K. |
| (**) | 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, |
| (b) | See Item 15 (a) |
Item 16: | Form 10-K Summary |
The optional summary in Item 16 has not been included in this Form
10-K.
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.
W ORPORATION |
/s/ Amol Chaubal |
| Senior Vice President and Chief Financial Officer |
(Principal Financial Officer) |
(Principal Accounting Officer) |
Date: February 25, 202024, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on February 25, 2020.24, 2022.
/s/ | Chairman of the Board of Directors | ||
| Dr. Flemming Ornskov, M.D., M.P.H. | |||
/s/ Dr. Udit Batra, Ph.D. | President and Chief Executive Officer | ||
| Dr. Udit Batra, Ph.D. | Director (Principal Executive Officer) | ||
/s/ | Senior Vice President and Chief Financial Officer | ||
( ( | |||
/s/ Linda Baddour | Director | ||
Linda Baddour | |||
/s/ | Director | ||
/s/ Edward Conard | Director | ||
Edward Conard | |||
/s/ | Director | ||
/s/ | Director | ||
/s/ Wei Jiang | Director | ||
| Wei Jiang | |||
/s/ Christopher A. Kuebler | Director | ||
Christopher A. Kuebler | |||
/s/ Thomas P. Salice | Director | ||
Thomas P. Salice | |||