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Waters (WAT)

Filed: 28 Oct 20, 10:07am
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                
to
                
.
Commission File Number:
01-14010
 
 
Waters Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-3668640
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
34 Maple Street
Milford, Massachusetts 01757
(Address, including zip code, of principal executive offices)
(508) 478-2000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, par value $0.01 per share
 
WAT
 
New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
   Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act).    Yes  ☐    No  ☑
Indicate the number of shares outstanding of the registrant’s common stock as of October 23, 2020: 62,047,666
 
 
 

WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM
10-Q
INDEX
 
PART I
 
FINANCIAL INFORMATION
  
 
Page
 
 
 
 
 
 
  
 
 
 
 
 
Item 1.
 
  
   
 
 
 
 
  
 
3
 
 
 
 
 
  
 
4
 
 
 
 
 
  
 
5
 
 
 
 
 
  
 
6
 
 
 
 
 
  
 
7
 
 
 
 
 
  
 
8
 
 
 
 
 
  
 
9
 
 
 
 
 
  
 
10
 
 
 
Item 2.
 
  
 
30
 
 
 
Item 3.
 
  
 
42
 
 
 
Item 4.
 
  
 
42
 
   
PART II
 
OTHER INFORMATION
  
   
 
 
Item 1.
 
  
 
43
 
 
 
Item 1A.
 
  
 
43
 
 
 
Item 2.
 
  
 
44
 
 
 
Item 6.
 
  
 
45
 
 
 
 
 
  
 
46
 
Item 1:
 Financial Statements
WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
   
September 26, 2020
  
December 31, 2019
 
   
(In thousands,
 
except per share data)
 
ASSETS
  
Current assets:
   
Cash and cash equivalents
  $374,934  $335,715 
Investments
   22,136   1,429 
Accounts receivable, net
   494,432   587,734 
Inventories
   326,946   320,551 
Other current assets
   73,225   67,062 
  
 
 
  
 
 
 
Total current assets
   1,291,673   1,312,491 
Property, plant and equipment, net
   469,721   417,342 
Intangible assets, net
   255,168   240,203 
Goodwill
   431,078   356,128 
Operating lease assets
   86,757   93,358 
Other assets
   144,889   137,533 
  
 
 
  
 
 
 
Total assets  $2,679,286  $2,557,055 
  
 
 
  
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
     
Current liabilities:
   
Notes payable and debt
  $150,000  $100,366 
Accounts payable
   60,357   49,001 
Accrued employee compensation
   46,015   43,467 
Deferred revenue and customer advances
   211,348   176,360 
Current operating lease liabilities
   26,745   27,125 
Accrued income taxes
   60,444   45,967 
Accrued warranty
   10,261   11,964 
Other current liabilities
   157,018   137,084 
  
 
 
  
 
 
 
Total current liabilities
   722,188   591,334 
Long-term liabilities:
   
Long-term debt
   1,421,337   1,580,797 
Long-term portion of retirement benefits
   65,003   59,159 
Long-term income tax liabilities
   356,953   394,562 
Long-term operating lease liabilities
   62,471   66,881 
Other long-term liabilities
   92,915   80,603 
  
 
 
  
 
 
 
Total long-term liabilities
   1,998,679   2,182,002 
  
 
 
  
 
 
 
Total liabilities
   2,720,867   2,773,336 
Commitments and contingencies (Notes 7, 8 and 12)
    
Stockholders’ deficit:
   
Preferred stock, par value $0.01 per share, 5,000 shares authorized, NaN issued at September 26, 2020 and December 31, 2019
   —     —   
Common stock, par value $0.01 per share, 400,000 shares authorized, 161,381 and 161,030 shares issued, 62,024 and 62,587 shares outstanding at September 26, 2020 and December 31, 2019, respectively
   1,614   1,610 
Additional
paid-in
capital
   1,982,731   1,926,753 
Retained earnings
   6,889,678   6,587,403 
Treasury stock, at cost, 99,357 and 98,443 shares at September 26, 2020 and December 31, 2019, respectively
   (8,788,928  (8,612,576
Accumulated other comprehensive loss
   (126,676  (119,471
  
 
 
  
 
 
 
Total stockholders’ deficit
   (41,581  (216,281
  
 
 
  
 
 
 
Total liabilities and stockholders’ deficit
  $2,679,286  $2,557,055 
  
 
 
  
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
3

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Three Months Ended
 
   
September 26, 2020
  
September 28, 2019
 
   
(In thousands, except per share data)
 
Revenues:
   
Product sales
  $376,239  $370,573 
Service sales
   217,545   206,705 
  
 
 
  
 
 
 
Total net sales
   593,784   577,278 
Costs and operating expenses:
   
Cost of product sales
   166,330   149,793 
Cost of service sales
   96,012   91,262 
Selling and administrative expenses
   135,430   126,036 
Research and development expenses
   34,971   34,333 
Purchased intangibles amortization
   2,657   2,619 
  
 
 
  
 
 
 
Total costs and operating expenses
   435,400   404,043 
  
 
 
  
 
 
 
Operating income
   158,384   173,235 
Other expense
   (1,039  (496
Interest expense
   (10,915  (11,456
Interest income
   4,007   3,455 
  
 
 
  
 
 
 
Income before income taxes
   150,437   164,738 
Provision for income taxes
   23,668   26,605 
  
 
 
  
 
 
 
Net income
  $126,769  $138,133 
  
 
 
  
 
 
 
Net income per basic common share
  $2.04  $2.09 
Weighted-average number of basic common shares
   62,002   66,226 
Net income per diluted common share
  $2.03  $2.07 
Weighted-average number of diluted common shares and equivalents
   62,303   66,768 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
4

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Nine Months Ended
 
   
September 26, 2020
  
September 28, 2019
 
   
(In thousands, except per share data)
 
Revenues:
   
Product sales
  $965,342  $1,078,341 
Service sales
   613,365   611,961 
  
 
 
  
 
 
 
Total net sales
   1,578,707   1,690,302 
Costs and operating expenses:
   
Cost of product sales
   420,971   439,158 
Cost of service sales
   265,149   272,474 
Selling and administrative expenses
   400,614   393,583 
Research and development expenses
   101,115   105,883 
Purchased intangibles amortization
   7,900   7,164 
Litigation provision
   1,180   —   
Total costs and operating expenses
   1,196,929   1,218,262 
  
 
 
  
 
 
 
Operating income
   381,778   472,040 
Other expense
   (2,149  (1,363
Interest expense
   (38,012  (34,467
Interest income
   12,046   17,641 
  
 
 
  
 
 
 
Income before income taxes
   353,663   453,851 
Provision for income taxes
   50,403   62,322 
Net income
  $303,260  $391,529 
  
 
 
  
 
 
 
Net income per basic common share
  $4.89  $5.68 
Weighted-average number of basic common shares
   62,057   68,952 
Net income per diluted common share
  $4.86  $5.63 
Weighted-average number of diluted common shares and equivalents
   62,371   69,533 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
5

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
   
Three Months Ended
  
Nine Months Ended
 
   
September 26,
2020
  
September 28,
2019
  
September 26,
2020
  
September 28,
2019
 
   
(In thousands)
  
(In thousands)
 
Net income
  $126,769  $138,133  $303,260  $391,529 
Other comprehensive income (loss):
     
Foreign currency translation
   601   (4,894  (7,156  (4,403
Unrealized (losses) gains on investments before income taxes
   —     (8  —     3,046 
Income tax benefit (expense)
   —     2   —     (702
  
 
 
  
 
 
  
 
 
  
 
 
 
Unrealized (losses) gains on investments, net of tax
   —     (6  —     2,344 
Retirement liability adjustment before reclassifications
   (654  267   (880  165 
Amounts reclassified to other income
   352   88   1,028   271 
  
 
 
  
 
 
  
 
 
  
 
 
 
Retirement liability adjustment before income taxes
   (302  355   148   436 
Income tax (expense) benefit
   (85  60   (197  13 
  
 
 
  
 
 
  
 
 
  
 
 
 
Retirement liability adjustment, net of tax
   (387  415   (49  449 
Other comprehensive income (loss)
   214   (4,485  (7,205  (1,610
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income
  $126,983  $133,648  $296,055  $389,919 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
6

WATERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
Nine Months Ended
 
   
September 26, 2020
  
September 28, 2019
 
Cash flows from operating activities:  
(In thousands)
 
Net income
  $303,260  $391,529 
Adjustments to reconcile net income to net cash provided by operating activities:
   
Stock-based compensation
   27,715   28,917 
Deferred income taxes
   1,089   1,817 
Depreciation
   49,407   42,168 
Amortization of intangibles
   41,684   38,151 
Change in operating assets and liabilities:
   
Decrease in accounts receivable
   96,955   57,897 
Increase in inventories
   (8,139  (83,973
Increase in other current assets
   (16,776  (6,259
Increase in other assets
   (2,612  (9,302
Increase (decrease) in accounts payable and other current liabilities
   46,721   (493
Increase in deferred revenue and customer advances
   32,053   34,926 
Effect of the 2017 Tax Cuts & Jobs Act
   —     (3,229
Decrease in other liabilities
   (48,332  (40,957
  
 
 
  
 
 
 
Net cash provided by operating activities
   523,025   451,192 
Cash flows from investing activities:   
Additions to property, plant, equipment and software capitalization   (125,340  (110,205
Business acquisitions, net of cash acquired   (76,664  —   
Investment in unaffiliated companies   (3,850  (7,250
Purchases of investments   (22,458  (35,523
Maturities and sales of investments   1,751   978,419 
  
 
 
  
 
 
 
Net cash (used in) provided by investing activities   (226,561  825,441 
Cash flows from financing activities:   
Proceeds from debt issuances   315,000   600,362 
Payments on debt   (425,366  (390,482
Payments of debt issuance costs   —     (2,932
Proceeds from stock plans   28,421   34,311 
Purchases of treasury shares   (196,353  (1,909,700
Proceeds from derivative contracts   10,330   6,900 
  
 
 
  
 
 
 
Net cash used in financing activities   (267,968  (1,661,541
Effect of exchange rate changes on cash and cash equivalents   10,723   (6,723
  
 
 
  
 
 
 
Increase (decrease) in cash and cash equivalents   39,219   (391,631
Cash and cash equivalents at beginning of period   335,715   796,280 
  
 
 
  
 
 
 
Cash and cash equivalents at end of period  $374,934  $404,649 
  
 
 
  
 
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
7

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

Capital
   
Retained
Earnings
   
Treasury
Stock
  
Accumulated
Other
Comprehensive
Loss
  
Total
Stockholders’
Equity
 
Balance June 29,
 
2019
   160,841   $1,608   $1,883,958   $6,248,601   $(7,462,826 $(115,096 $556,245 
Net income
   —      —      —      138,133    —     —     138,133 
Other comprehensive loss
   —      —      —      —      —     (4,485  (4,485
Issuance of common stock for employees:
            
Employee Stock Purchase Plan
   8    —      1,803    —      —     —     1,803 
Stock options exercised
   19    —      2,378    —      —     —     2,378 
Treasury stock
   —      —      —      —      (588,207  —     (588,207
Stock-based compensation
   1    1    9,632    —      —     —     9,633 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Balance September 28, 2019
   160,869   $1,609   $1,897,771   $6,386,734   $(8,051,033 $(119,581 $115,500 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
   
Number
of
Common
Shares
   
Common
Stock
   
Additional
Paid-In

Capital
   
Retained
Earnings
   
Treasury
Stock
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
Stockholders’
Deficit
 
Balance June 27,
 
2020
   161,273   $1,613   $1,959,498   $6,762,909   $(8,788,872 $(126,890 $(191,742
Net income
   —      —      —      126,769    —     —     126,769 
Other comprehensive income
   —      —      —      —      —     214   214 
Issuance of common stock for employees:
            
Employee Stock Purchase Plan
   10    —      1,641    —      —     —     1,641 
Stock options exercised
   97    1    12,040    —      —     —     12,041 
Treasury stock
   —      —      —      —      (56  —     (56
Stock-based compensation
   1      9,552    —      —     —     9,552 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Balance September 26, 2020
   161,381   $1,614   $1,982,731   $6,889,678   $(8,788,928 $(126,676 $(41,581
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
8

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

Capital
   
Retained
Earnings
  
Treasury
Stock
  
Accumulated
Other
Comprehensive
Loss
  
Total
Stockholders’
Equity
 
Balance December 31, 2018
   160,472   $1,605   $1,834,741   $5,995,205  $(6,146,322 $(117,971 $1,567,258 
Net income
   —      —      —      391,529   —     —     391,529 
Other comprehensive loss
   —      —      —      —     —     (1,610  (1,610
Issuance of common stock for employees:
           
Employee Stock Purchase Plan
   33    —      5,971    —     —     —     5,971 
Stock options exercised
   256    3    28,475    —     —     —     28,478 
Treasury stock
   —      —      —      —     (1,904,711  —     (1,904,711
Stock-based compensation
   108    1    28,584    —     —     —     28,585 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance September 28, 2019
   160,869   $1,609   $1,897,771   $6,386,734  $(8,051,033 $(119,581 $115,500 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
   
Number
of
Common
Shares
   
Common
Stock
   
Additional
Paid-In

Capital
   
Retained
Earnings
  
Treasury
Stock
  
Accumulated
Other
Comprehensive
Loss
  
Total
Stockholders’
Deficit
 
Balance December 31, 2019
   161,030   $1,610   $1,926,753   $6,587,403  $(8,612,576 $(119,471 $(216,281
Net income
   —      —      —      303,260   —     —     303,260 
Adoption of new accounting pronouncement
   —      —      —      (985  —     —     (985
Other comprehensive loss
   —      —      —      —     —     (7,205  (7,205
Issuance of common stock for employees:
           
Employee Stock Purchase Plan
   31      5,593    —     —     —     5,593 
Stock options exercised
   184    2    22,944    —     —     —     22,946 
Treasury stock
   —      —      —      —     (176,352  —     (176,352
Stock-based compensation
   136    2    27,441    —     —     —     27,443 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance September 26, 2020
   161,381   $1,614   $1,982,731   $6,889,678  $(8,788,928 $(126,676 $(41,581
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
9

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1 Basis of Presentation and Summary of Significant Accounting Policies
Waters Corporation (the “Company,” “we,” “our,” or “us”) is a specialty measurement company that operates with a fundamental underlying purpose to advance the science that enables our customers to enhance human health and well-being. The Company has pioneered analytical workflow solutions involving liquid chromatography, mass spectrometry and thermal analysis innovations serving the life, materials and food sciences for more than 60 years. The Company primarily designs, manufactures, sells and services high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”) and mass spectrometry (“MS”) technology systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans. These systems are complementary products that are frequently employed together
(“LC-MS”)
and sold as integrated instrument systems using common software platforms. LC is a standard technique and is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. MS technology, principally in conjunction with chromatography, is employed in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), nutritional safety analysis and environmental testing.
LC-MS
instruments combine a liquid phase sample introduction and separation system with mass spectrometric compound identification and quantification. In addition, the Company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA
TM
product line. These instruments are used in predicting the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids for various industrial, consumer goods and healthcare products, as well as for life science research. The Company is also a developer and supplier of advanced software-based products that interface with the Company’s instruments, as well as other manufacturers’ instruments.
The Company’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year end is December 31, the first and fourth fiscal quarters may have more or less than thirteen complete weeks. The Company’s third fiscal quarters for 2020 and 2019 ended on September 26, 2020 and September 28, 2019, respectively.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form
10-Q
and do not include all of the information and footnote disclosures required for annual financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly owned. All inter-company balances and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Actual amounts may differ from these estimates under different assumptions or conditions.
It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) that are necessary for a fair statement of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 25, 2020.
Risks and Uncertainties
The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, global economic and financial market conditions, fluctuations in foreign currency exchange rates, fluctuations in customer demand, development by its competitors of new technological innovations, costs of developing new technologies, levels of debt and debt service requirements, risk of disruption, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.
Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus
(“COVID-19”)
and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared
COVID-19
a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President
 
10

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Trump announced a National Emergency relating to the disease. Since then,
COVID-19
has continued to spread throughout the U.S. and globally. The
COVID-19
pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn.
 
It is unclear whether increases in the number of infections will continue and amplify as certain areas of the economy are
re-opened
and restrictions are eased, or whether so called “second waves” of
COVID-19
infections will be experienced in the U.S. and globally. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic.
In the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019, the Company experienced a decline in net sales of 7% due in large part to the
COVID-19
pandemic and related economic uncertainty; however, through the date of the issuance of these financial statements, the Company’s consolidated financial position, results of operations and cash flows have not been materially impacted and, thus, the Company concluded that no
interim
goodwill or long-lived asset impairment analyses were required. Further, there have been no violations of debt covenants. Any prolonged material disruption to the Company’s employees, suppliers, manufacturing, or customers could result in a material impact to its consolidated financial position, results of operations or cash flows in the future.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign operating subsidiaries is the local currency of its country of domicile, except for the Company’s subsidiaries in Hong Kong, Singapore and the Cayman Islands, where the underlying transactional cash flows are denominated in currencies other than the respective local currency of domicile. The functional currency of the Hong Kong, Singapore and Cayman Islands subsidiaries is the U.S. dollar, based on the respective entity’s cash flows.
For most of the Company’s foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date, while revenues and expenses are translated at average exchange rates prevailing during the respective period. Any resulting translation gains or losses are included in accumulated other comprehensive income in the consolidated balance sheets.
Cash, Cash Equivalents and Investments
Cash equivalents represent highly liquid investments, with original maturities of 90 days or less, while investments with longer maturities are classified as investments. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of September 26, 2020 and December 31, 2019, $359 million out of $397 million and $249 million out of $337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $262 million out of $397 million and $176 million out of $337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at September 26, 2020 and December 31, 2019, respectively.
Accounts Receivable and Allowance for Credit Losses
The Company adopted new accounting guidance regarding the accounting for credit losses as of January 1, 2020 using a modified retrospective transition approach that was applied to the trade receivable balance as of January 1, 2020. This new accounting guidance required the Company to move from an incurred loss model to a current expected credit loss (“CECL”) model. Upon adoption, the Company recorded a net decrease of approximately $1 million to the Company’s stockholders’ deficit as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s balance sheets, results of operations or cash flows.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company has very limited use of rebates and other cash considerations payable to customers and, as a result, the transaction price determination does not have any material variable consideration. The Company does not consider there to be significant concentrations of credit risk with respect to trade receivables due to the short-term nature of the balances, the Company having a large and diverse customer base, and the Company having a strong historical experience of collecting
 
11

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
receivables with minimal defaults. As a result, credit risk is considered low across territories and trade receivables are considered to be a single class of financial asset. The allowance for credit losses is based on a number of factors and is calculated by applying a historical loss rate to trade receivable aging balances to estimate a general reserve balance along with an additional adjustment for any specific receivables with known or anticipated issues affecting the likelihood of recovery. Past due balances with a probability of default based on historical data as well as relevant available forward-looking information are included in the specific adjustment. The historical loss rate is reviewed on at least an annual basis and the allowance for credit losses is reviewed quarterly for any required adjustments. The Company does not have any off-balance sheet credit exposure related to its customers.
Trade receivables related to instrument sales are collateralized by the instrument that is sold. If there is a risk of default related to a receivable that is collateralized, then the fair value of the collateral is calculated and adjusted for the cost to
re-possess,
refurbish and
re-sell
the instrument. This adjusted fair value is compared to the receivable balance and the difference would be recorded as the expected credit loss.
Any recovery of amounts that were written off prior to adoption of the new CECL standard that are received after adoption are recorded in income in the period in which they are received.
The following is a summary of the activity of the Company’s allowance for doubtful accounts for the
 
nine months ended September 26, 2020 and September 28, 2019 (in thousands). The September 26, 2020 balance is calculated using the CECL method and the September 28, 2019 balance is calculated using the incurred loss method under legacy GAAP:
 
   
Balance at
Beginning
of Period
   
Impact of
CECL
Adoption
   
Additions
   
Deduction
  
Balance at
End of
Period
 
Allowance for Doubtful Accounts
         
September 26, 2020
  $9,560   $985   $7,826   $(5,784 $12,587 
September 28, 2019
  $7,663   $—     $6,014   $(5,461 $8,216 
Other Investments
During the nine months ended September 26, 2020 and September 28, 2019, the Company made investments in unaffiliated companies of $4 million and $7 million, respectively.
During the nine months ended September 26, 2020, the Company recorded an unrealized loss on an equity security still held at the reporting date of approximately $1 million within other expense on the income statement. This unrealized loss was recorded as a downward price adjustment to the carrying value of the investment due to an observable price change of a similar security issued during the current period.
Fair Value Measurements
In accordance with the accounting standards for fair value measurements and disclosures, certain of the Company’s assets and liabilities are measured at fair value on a recurring basis as of September 26, 2020 and December 31, 2019. Fair values determined by Level 1 inputs utilize observable data, such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points for which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
12

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at September 26, 2020 (in thousands):
 
   
Total at
September 26,
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
  $22,136   $—     $22,136   $—   
Waters 401(k) Restoration Plan assets
   34,466    34,466    —      —   
Foreign currency exchange contracts
   832    —      832    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $57,434   $34,466   $22,968   $—   
  
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities:
        
Contingent consideration
  $2,903   $—     $—     $2,903 
Foreign currency exchange contracts
   390    —      390    —   
Interest rate cross-currency swap agreements
   15,190    —      15,190    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $18,483   $—     $15,580   $2,903 
  
 
 
   
 
 
   
 
 
   
 
 
 
The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):
 
   
Total at
December 31,
2019
   
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets:
        
Time deposits
  $1,642   $—     $1,642   $—   
Waters 401(k) Restoration Plan assets
   30,158    30,158    —      —   
Foreign currency exchange contracts
   16    —      16    —   
Interest rate cross-currency swap agreements
   4,485      4,485   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $36,301   $30,158   $6,143   $—   
  
 
 
   
 
 
   
 
 
   
 
 
 
Liabilities:
        
Contingent consideration
  $2,557   $—     $—     $2,557 
Foreign currency exchange contracts
   1,028    —      1,028    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $3,585   $—     $1,028   $2,557 
  
 
 
   
 
 
   
 
 
   
 
 
 
Fair Value of 401(k) Restoration Plan Assets
The 401(k) Restoration Plan is a nonqualified defined contribution plan and the assets were held in registered mutual funds and have been classified as Level 1. The fair values of the assets in the plan are determined through market and observable sources from daily quoted prices on nationally recognized securities exchanges.
 
13

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Fair Value of Cash Equivalents, Investments, Foreign Currency Exchange Contracts and Interest Rate Cross-Currency Swap Agreements
The fair values of the Company’s cash equivalents, investments and foreign currency exchange contracts are determined through market and observable sources and have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued, typically utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, current spot rates and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources.
Fair Value of Contingent Consideration
The fair value of the Company’s liability for contingent consideration relates to earnout payments in connection with the July 2014 acquisition of Medimass Research, Development and Service Kft. and is determined using a probability-weighted discounted cash flow model, which uses significant unobservable inputs, and has been classified as Level 3. Subsequent changes in the fair value of the contingent consideration liability are recorded in the results of operations. The fair value of the contingent consideration liability associated with future earnout payments is based on several factors, including the estimated future results and a discount rate that reflects both the likelihood of achieving the estimated future results and the Company’s creditworthiness. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. Although there is no contractual limit, the fair value of future contingent consideration payments was estimated to be $3 million at both September 26, 2020 and December 31, 2019, based on the Company’s best estimate, as the earnout is based on future sales of certain products, some of which are currently in development, through 2034.
Fair Value of Other Financial Instruments
The Company’s accounts receivable, accounts payable and variable interest rate debt are recorded at cost, which approximates fair value due to their short-term nature. The carrying value of the Company’s fixed interest rate debt was $910 million and $1.0 billion at September 26, 2020 and December 31, 2019, respectively. The fair value of the Company’s fixed interest rate debt was estimated using discounted cash flow models, based on estimated current rates offered for similar debt under current market conditions for the Company. The fair value of the Company’s fixed interest rate debt was estimated to be $938 million and $1.0 billion at September 26, 2020 and December 31, 2019, respectively, using Level 2 inputs.
Derivative Transactions
The Company is a global company that operates in over 35 countries and, as a result, the Company’s net sales, cost of sales, operating expenses and balance sheet amounts are significantly impacted by fluctuations in foreign currency exchange rates. The Company is exposed to currency price risk on foreign currency exchange rate fluctuations when it translates its
non-U.S.
dollar foreign subsidiaries’ financial statements into U.S. dollars and when any of the Company’s subsidiaries purchase or sell products or services in a currency other than its own currency.
The Company’s principal strategies in managing exposures to changes in foreign currency exchange rates are to (1) naturally hedge the foreign-currency-denominated liabilities on the Company’s balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in foreign currency exchange rates are typically offset by corresponding changes in assets and (2) mitigate foreign exchange risk exposure of international operations by hedging the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. The Company presents the derivative transactions in financing activities in the statement of cash flows.
Foreign Currency Exchange Contracts
The Company does not specifically enter into any derivatives that hedge foreign-currency-denominated operating assets, liabilities or commitments on its balance sheet, other than a portion of certain third-party accounts receivable and accounts payable, and the Company’s net worldwide intercompany receivables and payables, which are eliminated in consolidation. The Company periodically aggregates its net worldwide balances by currency and then enters into foreign currency exchange contracts that mature within 90 days to hedge a portion of the remaining balance to minimize some of the Company’s currency price risk exposure. The foreign currency exchange contracts are not designated for hedge accounting treatment. Principal hedged currencies include the Euro, Japanese yen, British pound, Mexican peso and Brazilian real.
 
14

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Interest Rate Cross-Currency Swap Agreements
As of September 26, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments. Under hedge accounting, the change in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in other comprehensive income and remain in accumulated comprehensive income in stockholders’ (deficit) equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of operations.
The Company’s foreign currency exchange contracts and interest rate cross-currency swap agreements included in the consolidated balance sheets are classified as follows (in thousands):
 
   
September 26, 2020
   
December 31, 2019
 
   
Notional
Value
   
Fair
Value
   
Notional
Value
   
Fair
Value
 
Foreign currency exchange contracts:
        
Other current assets
  $57,380   $832   $119,576   $16 
Other current liabilities
  $65,536   $390   $29,495   $1,028 
Interest rate cross-currency swap agreements:
        
Other (liabilities) assets
  $560,000   $(15,190  $560,000   $4,485 
Accumulated other comprehensive loss (income)
    $15,190     $(4,485
The following is a summary of the activity included in the statements of comprehensive income related to the foreign currency exchange contracts (in thousands):
 
   
Financial

Statement

Classification
  
Three Months Ended
  
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
  
September 26,
2020
  
September 28,
2019
 
 
Foreign currency exchange contracts:      
Realized gains (losses) on closed contracts
  Cost of sales  $1,113   $(3,340  $(45
 
 
 
 
 
$(5,858
Unrealized gains (losses) on open contracts
  Cost of sales   808    (633   1,455    (1,040
    
 
 
   
 
 
   
 
 
   
 
 
 
Cumulative net
pre-tax
gains (losses)
  Cost of sales  $1,921   $(3,973  $1,410   $(6,898
    
 
 
   
 
 
   
 
 
   
 
 
 
Interest rate cross-currency swap agreements:
        
Interest earned
  Interest income  $3,777   $2,698   $11,275   $7,848 
Unrealized gains on open contracts
  Stockholders’ deficit  $19,582   $15,847   $19,675   $15,852 
Stockholders’ Equity
In January 2019, the Company’s Board of
Directors
authorized
the Company to repurchase up to $4 billion of its
outstanding
common stock over a
two-year
period. This program replaced the remaining amounts available from the
pre-existing
program. During the nine months ended September 26, 2020 and September 28, 2019, the Company repurchased 0.8 million and 8.6 million shares of the Company’s outstanding common stock at a cost of $167 million and $1.9 billion, respectively, under the January 2019 authorization and other previously announced programs. As of September 26, 2020, the Company had repurchased an aggregate of 11.1 million shares at a cost of $2.5 billion under the January 2019 repurchase program and had a total of $1.5 billion authorized for future repurchases. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during the nine months ended September 26, 2020 and September 28, 2019, respectively. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
 
15

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The Company had $20 million of treasury stock purchases that were accrued and unsettled at December 31, 2019. These transactions were settled in January 2020. There were 0 unsettled treasury stock purchases as of September 26, 2020, while the Company had accrued $18 million for such purchases as of September 28, 2019, which settled in the subsequent quarter.​​​​​​​
Product Warranty Costs
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information, such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.
The following is a summary of the activity of the Company’s accrued warranty liability for the nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
Balance at

Beginning

of Period
   
Accruals for

Warranties
   
Settlements

Made
   
Balance at

End of

Period
 
Accrued warranty liability:
        
September 26, 2020  $11,964   $5,442   $(7,145  $10,261 
September 28, 2019  $12,300   $5,271   $(6,094  $11,477 
Restructuring
In January 2020, the Company made organizational changes to better align its resources with its growth and innovation strategies, resulting in a worldwide workforce reduction, impacting 3% of the Company’s employees. During the three and nine months ended September 26, 2020, the Company incurred $6 million and $27 million, respectively, of severance-related costs, lease termination costs and other related costs. The Company expects to incur an additional $4 million of costs for the remainder of the year.
2 Revenue Recognition
The Company’s deferred revenue liabilities on the consolidated balance sheets consist of the obligation on instrument service contracts and customer payments received in advance, prior to transfer of control of the instrument. The Company records deferred revenue primarily related to its service contracts, where consideration is billable at the beginning of the service period.
The following is a summary of the activity of the Company’s deferred revenue and customer advances for the nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
September 26,
2020
   
September 28,
2019
 
Balance at the beginning of the period
  $213,695   $204,257 
Recognition of revenue included in balance at beginning of the period   (177,667   (174,929
Revenue deferred during the period, net of revenue recognized   213,895    206,093 
  
 
 
   
 
 
 
Balance at the end of the period
  $249,923   $235,421 
  
 
 
   
 
 
 
The Company classified $39 million and $38 million of deferred revenue and customer advances in other long-term liabilities at September 26, 2020 and December 31, 2019, respectively.
 
16

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The amount of deferred revenue and customer advances equals the transaction price allocated to unfulfilled performance obligations for the period presented. Such amounts are expected to be recognized in the future as follows (in thousands):
 
   
September 26, 2020
 
Deferred revenue and customer advances expected to be recognized in:
  
One year or less
  $211,348 
13-24 months   22,452 
25 months and beyond
   16,123 
  
 
 
 
Total  $249,923 
  
 
 
 
3 Marketable Securities
The Company’s marketable securities within cash equivalents and investments included in the consolidated balance sheets are detailed as follows (in thousands):
 
   
September 26, 2020
 
   
Amortized

Cost
   
Unrealized

Gain
   
Unrealized

Loss
   
Fair

Value
 
Time deposits
   22,136    —      —      22,136 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total  $22,136   $—     $—     $22,136 
  
 
 
   
 
 
   
 
 
   
 
 
 
Amounts included in:
        
Investments   22,136    —      —      22,136 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total  $22,136   $—     $—     $22,136 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
   
December 31, 2019
 
   
Amortized

Cost
   
Unrealized

Gain
   
Unrealized

Loss
   
Fair

Value
 
Time deposits
   1,642    —      —      1,642 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total  $1,642   $—     $—     $1,642 
  
 
 
   
 
 
   
 
 
   
 
 
 
Amounts included in:
        
Cash equivalents  $213   $—     $—     $213 
Investments   1,429    —      —      1,429 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total  $1,642   $—     $—     $1,642 
  
 
 
   
 
 
   
 
 
   
 
 
 
The estimated fair value of marketable debt securities by maturity date is as follows (in thousands):
 
   
September 26, 2020
   
December 31, 2019
 
Due in one year or less
  $22,136   $1,642 
  
 
 
   
 
 
 
Total  $22,136   $1,642 
  
 
 
   
 
 
 
 
17

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
4 Inventories
Inventories are classified as follows (in thousands):
 
   
September 26, 2020
   
December 31, 2019
 
Raw materials
  $134,527   $126,850 
Work in progress
   20,183    15,457 
Finished goods
   172,236    178,244 
  
 
 
   
 
 
 
Total inventories  $326,946   $320,551 
  
 
 
   
 
 
 
5 Acquisitions
On January 15, 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively, “Andrew Alliance”), for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration.
Andrew Alliance offers lab workflow automation solutions with the combination of its software platform and smart, connected laboratory equipment and accessories.
The Company allocated $7 million of the purchase price to intangible assets comprised of developed technology, trade name and customer relationships. The developed technology and customer relationships will be amortized over ten years and the trade name will be amortized over 3 years. The Company allocated $72 million of the purchase price to goodwill, which is not deductible for tax purposes. The principal factor that resulted in recognition of goodwill in the acquisition was that the purchase price was based, in part, on cash flow projections assuming the integration of any acquired technology, distribution channels and products with the Company’s products, which are higher than if the acquired companies’ technology, customer access or products were utilized on a stand-alone basis. The goodwill also includes value assigned to assembled workforce, which cannot be recognized as an intangible asset.
In addition, the sellers provided the Company with customary representations, warranties and indemnification, which would be settled in the future if and when a breach of the contractual representation or warranty condition occurs.
The fair values of the assets and liabilities acquired were determined using various income-approach valuation techniques, which use Level 3 inputs. The following table presents the fair values as of the acquisition date, as determined by the Company, of 100% of the assets and liabilities owned and recorded in connection with the acquisition of Andrew Alliance (in thousands):
 
Cash
  $713 
Accounts receivable and current other assets
   806 
Inventory
   669 
Prepaid and other assets
   611 
Property, plant and equipment, net
   757 
Operating lease assets
   847 
Intangible assets
   6,960 
Goodwill
   71,632 
  
 
 
 
Total assets acquired
   82,995 
Accrued expenses and other liabilities
   2,093 
  
 
 
 
Total consideration
   80,902 
  
 
 
 
Fair value of minority investment
   3,525 
  
 
 
 
Cash consideration paid
  $77,377 
  
 
 
 
 
18

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
The impact of the Andrew Alliance acquisition on the Company’s revenues and net income during the quarter was immaterial. The
 
year-to-date
pr
o
 
forma effect on the ongoing operations of the Company as though this acquisition had occurred at the beginning of the periods covered by this report was also immaterial.
6 Goodwill and Other Intangibles
The carrying amount of goodwill was $431 million and $356 million at September 26, 2020 and December 31, 2019, respectively. The acquisition of Andrew Alliance increased goodwill by $72 million while the effect of foreign currency translation decreased goodwill by $3 million.
The Company’s intangible assets included in the consolidated balance sheets are detailed as follows (dollars in thousands):
 
   
September 26, 2020
   
December 31, 2019
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Weighted-
Average
Amortization
Period
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Weighted-
Average
Amortization
Period
 
Capitalized software
  $542,127   $378,999    
5 years
   $481,986   $333,255    
5 years
 
Purchased intangibles
   209,877    159,747    
11 years
    200,523    151,722    
11 years
 
Trademarks and IPR&D
   13,702    —      
—  
    13,782    —      
—  
 
Licenses
   5,600    5,345    
6 years
    5,669    5,298    
6 years
 
Patents and other intangibles
   86,972    59,019    
8 years
    83,035    54,517    
8 years
 
  
 
 
   
 
 
     
 
 
   
 
 
   
Total  $858,278   $603,110    7 years   $784,995   $544,792    
7
years
 
  
 
 
   
 
 
     
 
 
   
 
 
   
The gross carrying value of intangible assets and accumulated amortization for intangible assets increased by $25 million and $17 million, respectively, in the nine months ended September 26, 2020 due to the effects of foreign currency translation. Amortization expense for intangible assets was $15 million and $13 million for the three months ended September 26, 2020 and September 28, 2019, respectively. Amortization expense for intangible assets was $
42
 million and $
38
 million for the nine months ended September 26, 2020 and September 28, 2019, respectively. Amortization expense for intangible assets is estimated to be $55 million per year for each of the next five years.
7 Debt
In November 2017, the Company entered into a credit agreement (the “2017 Credit Agreement”) that provides for a $1.5 billion revolving facility and a $300 million term loan.
As of September 26, 2020 and December 31, 2019, the revolving facility and term loan had a total of $615 million and $625 million, respectively, outstanding and mature on November 30, 2022 and require no scheduled prepayments before that date.
The interest rates applicable to the 2017 Credit Agreement are, at the Company’s option, equal to either the alternate base rate (which is a rate per annum equal to the greatest of (1) the prime rate in effect on such day, (2) the Federal Reserve Bank of New York Rate on such day plus 1/2 of 1% per annum and (3) the adjusted LIBO rate on such day (or if such day is not a business day, the immediately preceding business day) for a deposit in U.S. dollars with a maturity of one month plus 1% per annum) or the applicable 1, 2, 3 or 6 month adjusted LIBO rate or EURIBO rate for Euro-denominated loans, in each case, plus an interest rate margin based upon the Company’s leverage ratio, which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for LIBO rate or EURIBO rate loans. The facility fee on the 2017 Credit Agreement ranges between 7.5 and 25 basis points per annum, based on the leverage ratio, of the amount of the revolving facility commitments and the outstanding term loan. The 2017 Credit Agreement requires that the Company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, the 2017 Credit Agreement includes negative covenants, affirmative covenants, representations and warranties and events of default that are customary for investment grade credit facilities.
 
19

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
As of September 26, 2020 and December 31, 2019, the Company had a total of $960 million and $1.1 billion, respectively, of outstanding senior unsecured notes. Interest on the fixed rate senior unsecured notes is payable semi-annually each year. Interest on the floating rate senior unsecured notes is payable quarterly. The Company may prepay all or some of the senior unsecured notes at any time in an amount not less than 10% of the aggregate principal amount outstanding, plus the applicable make-whole amount or prepayment premium for the Series H senior unsecured note. In the event of a change in control of the Company (as defined in the note purchase agreement), the Company may be required to prepay the senior unsecured notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. These senior unsecured notes require that the Company comply with an interest coverage ratio test of not less than 3.50:1 for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter. In addition, these senior unsecured notes include customary negative covenants, affirmative covenants, representations and warranties and events of default.
In February 2019, certain defined terms related to the subsidiary guarantors were amended in the 2017 Credit Agreement and senior unsecured note agreements. In addition, the Company amended the senior unsecured note agreements to allow the Company to elect an increase in the permitted leverage ratio from 3.50:1 to 4.0:1, for a period of three consecutive quarters, for a material acquisition of $400 million or more. During the period of time where the leverage ratio exceeds 3.50:1, the interest payable on the senior unsecured notes shall increase by 0.50%. The debt covenants in the senior unsecured note agreements were also modified to address the change in accounting guidance for leases.
The Company had the following outstanding debt at September 26, 2020 and December 31, 2019 (in thousands):
 
  
September 26, 2020
  
December 31, 2019
 
Foreign subsidiary lines of credit
  $—    $366 
Senior unsecured notes
 Series B
5.00%, due February 2020
   —     100,000 
Senior unsecured notes
Series E
3.97%, due March 2021
   50,000   —   
Senior unsecured notes
Series F
3.40%, due June 2021
   100,000   —   
  
 
 
  
 
 
 
Total notes payable and debt, current
   150,000   100,366 
Senior unsecured notes
Series E
3.97%, due March 2021
   —     50,000 
Senior unsecured notes
Series F
3.40%, due June 2021
   —     100,000 
Senior unsecured notes
Series G
3.92%, due June 2024
   50,000   50,000 
Senior unsecured notes
Series H
floating rate*, due June 2024
   50,000   50,000 
Senior unsecured notes
Series I
3.13%, due May 2023
   50,000   50,000 
Senior unsecured notes
Series K
3.44%, due May 2026
   160,000   160,000 
Senior unsecured notes
Series L
3.31%, due September 2026
   200,000   200,000 
Senior unsecured notes
Series M
3.53%, due September 2029
   300,000   300,000 
Credit agreement
   615,000   625,000 
Unamortized debt issuance costs
   (3,663  (4,203
  
 
 
  
 
 
 
Total long-term debt   1,421,337   1,580,797 
  
 
 
  
 
 
 
Total debt
  $1,571,337  $1,681,163 
  
 
 
  
 
 
 
 
*
Series H senior unsecured notes bear interest at a
3-month
LIBOR for that floating rate interest period plus 1.25%.
As of both September 26, 2020 and December 31, 2019, 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 2.68% and 3.39% at September 26, 2020 and December 31, 2019, respectively. As of September 26, 2020, the Company was in compliance with all debt covenants.
The Company and its foreign subsidiaries also had available short-term lines of credit totaling $108 million and $105 million at September 26, 2020 and December 31, 2019, respectively, for the purpose of short-term borrowing and issuance of commercial guarantees. The weighted-average interest rate applicable to these short-term borrowings was 1.48% for December 31, 2019. None of the Company’s foreign subsidiaries had outstanding short-term borrowings as of September 26, 2020.
 
20

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
As of September 26, 2020, the Company had entered into three-year interest rate cross-currency swap derivative agreements with an aggregate notional value of $560 million to hedge the variability in the movement of foreign currency exchange rates on a portion of its Euro-denominated net asset investments.
8 Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of September 26, 2020. The Company has a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to meet. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the nine months ended September 26, 2020 and September 28, 2019 by $12 million and $15 million, respectively, and increased the Company’s net income per diluted share by $0.20 and $0.21, respectively.
The Company’s effective tax rate for the three months ended September 26, 2020 and September 28, 2019 was 15.7% and 16.1%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the nine months ended September 26, 2020 and September 28, 2019 was 14.3% and 13.7%, respectively.
 
The effective tax rate for the nine months ended September 26, 2020 includes a $6 million income tax benefit related to certain restructuring charges and a $3 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the nine months ended September 26, 2020. The effective tax rate for the nine months ended September 28, 2019 includes a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act of 2017 and a $7 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 0.7 percentage points and 1.5 percentage points, respectively, for the nine months ended September 28, 2019. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.
The following is a summary of the activity of the Company’s gross unrecognized tax benefits, excluding interest and penalties, for the nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
  
September 26, 2020
  
September 28, 2019
 
Balance at the beginning of the period
  $27,790   $26,108 
Net reductions for lapse of statutes taken during the period
   (427   (173
Net additions for tax positions taken during the current period
   907    1,314 
  
 
 
   
 
 
 
Balance at the end of the period
  $28,270   $27,249 
  
 
 
   
 
 
 
With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2014. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities. As of September 26, 2020, the Company expects to record reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of less than $1 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.

 
21

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
9 Stock-Based Compensation
The Company maintains various stockholder-approved, stock-based compensation plans which allow for the issuance of incentive or
non-qualified
stock options, stock appreciation rights, restricted stock or other types of awards (e.g. restricted stock units and performance stock units).
In May 2020, the Company’s stockholders approved the Company’s 2020 Equity Incentive Plan (“2020 Plan”). As of September 26, 2020, the 2020 Plan had 6.5 million shares available for grant in the form of incentive or
non-qualified
stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units or other types of awards (e.g. restricted stock units and performance stock units). The Company issues new shares of common stock upon exercise of stock options or restricted stock unit conversion. Under the 2020 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. The 2020 Plan is scheduled to terminate on May 13, 2030. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors and generally vest in equal annual installments over a five-year period. A SAR may be granted alone or in conjunction with an option or other award. Shares of restricted stock, restricted stock units and performance stock units may be issued under the 2020 Plan for such consideration as is determined by the Compensation Committee of the Board of Directors. As of September 26, 2020, the Company had stock options, restricted stock, and restricted and performance stock unit awards outstanding under the 2020 Plan.
The Company accounts for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all share-based payments to employees be recognized in the statements of operations, based on their grant date fair values. The Company recognizes the expense using the straight-line attribution method. The stock-based compensation expense recognized in the consolidated statements of operations is based on awards that ultimately are expected to vest; therefore, the amount of expense has been reduced for estimated forfeitures. Forfeitures are estimated based on historical experience. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted. In addition, if the Company employs different assumptions in the application of these standards, the compensation expense that the Company records in the future periods may differ significantly from what the Company has recorded in the current period.
The consolidated statements of operations for the three and nine months ended September 26, 2020 and September 28, 2019 include the following stock-based compensation expense related to stock option awards, restricted stock awards, restricted stock unit awards, performance stock unit awards and the employee stock purchase plan (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Cost of sales
  $645   $531   $1,850   $1,673 
Selling and administrative expenses
   7,747    7,766    22,472    23,293 
Research and development expenses
   1,201    1,365    3,393    3,951 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total stock-based compensation  $9,593   $9,662   $27,715   $28,917 
  
 
 
   
 
 
   
 
 
   
 
 
 
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
 
22

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. The relevant data used to determine the value of the stock options granted during the nine months ended September 26, 2020 and September 28, 2019 are as follows:
 
   
Nine Months Ended
 
Options Issued and Significant Assumptions Used to Estimate Option Fair Values
  
September 26,
2020
  
September 28,
2019
 
Options issued in thousands
   267    139 
Risk-free interest rate
   1.2%   2.5%
Expected life in years
   6    5 
Expected volatility
   27.8%   24.3%
Expected dividends
   —      —   
 
   
Nine Months Ended
 
Weighted-Average Exercise Price and Fair Value of Options on the Date of Grant
  
September 26,
2020
   
September 28,
2019
 
Exercise price
  $215.12   $231.30 
Fair value
  $62.93   $61.85 
The following table summarizes stock option activity for the plans for the nine months ended September 26, 2020 (in thousands, except per share data):
 
   
Number of Shares
   
Exercise Price per Share
   
Weighted-Average

Exercise Price per
Share
 
Outstanding at December 31, 2019
   1,455   $61.63    to   $238.52   $158.61 
Granted
   267   $188.63    to   $235.06   $215.12 
Exercised
   (184  $61.63    to   $208.47   $124.58 
Canceled
   (150  $128.93    to   $238.52   $176.27 
  
 
 
         
Outstanding at September 26, 2020
   1,388   $75.94    to   $238.52   $172.08 
  
 
 
         
Restricted Stock
During the nine months ended September 26, 2020, the Company granted six thousand shares of restricted stock. The weighted-average fair value per share of these awards on the grant date was $229.67.
Restricted Stock Units
The following table summarizes the unvested restricted stock unit award activity for the nine months ended September 26, 2020 (in thousands, except per share data):
 
   
Shares
   
Weighted
-
Average

Grant Date Fair
Value per Share
 
Unvested at December 31, 2019
   260   $184.70 
Granted
   119   $206.99 
Vested
   (87  $162.12 
Forfeited
   (18  $187.90 
  
 
 
   
Unvested at September 26, 2020
   274   $201.34 
  
 
 
   
Restricted stock units are generally granted annually in February and vest in equal annual installments over a five-year period.
 
23

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)

Performance Stock Units
The Company’s performance stock units are equity compensation awards with a market vesting condition based on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the components of the S&P Health Care Index. TSR is the change in value of a stock price over time, including the reinvestment of dividends. The vesting schedule ranges from 0% to 200% of the target shares awarded. Beginning with the grants 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 Company uses implied volatility on its publicly-traded options as the basis for its estimate of expected volatility. The Company believes that implied volatility is the most appropriate indicator of expected volatility because it is generally reflective of historical volatility and expectations of how future volatility will differ from historical volatility. The expected life assumption for grants is based on the performance period of the underlying performance stock units. The risk-free interest rate is the yield currently available on U.S. Treasury
zero-coupon
issues with a remaining term approximating the expected term used as the input to the Monte Carlo simulation model. The correlation coefficient is used to model the way in which each company in the S&P Health Care Index tends to move in relation to each other during the performance period. The relevant data used to determine the value of the performance stock units granted during the nine months ended September 26, 2020 and September 28, 2019 are as follows:
 
   
Nine Months Ended
 
Performance Stock Units Issued and Significant Assumptions Used to Estimate Fair
Values
  
September 26,
2020
  
September 28,
2019
 
Performance stock units issued (in thousands)
   58   13 
Risk-free interest rate
   1.3  2.4
Expected life in years
   2.9   2.8 
Expected volatility
   25.1  23.5
Average volatility of peer companies
   26.1  26.2
Correlation coefficient
   36.6  34.2
Expected dividends
   —     —   
The following table summarizes the unvested performance stock unit award activity for the nine months ended September 26, 2020 (in thousands, except per share data):
 
   
Shares
   
Weighted-Average

Fair Value per
Share
 
Unvested at December 31, 2019
   105   $233.11 
Granted
   58   $190.45 
Vested
   (36  $184.51 
Forfeited
   (25  $231.35 
  
 
 
   
Unvested at September 26, 2020
   102   $226.44 
  
 
 
   
 
24

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
10 Earnings Per Share
Basic and diluted EPS calculations are detailed as follows (in thousands, except per share data):
 
   
Three Months Ended September 26, 2020
 
   
Net Income
   
Weighted-
Average Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $126,769    62,002   $2.04 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      301    (0.01
  
 
 
   
 
 
   
 
 
 
Net income per diluted common share
  $126,769    62,303   $2.03 
  
 
 
   
 
 
   
 
 
 
 
   
Three Months Ended September 28, 2019
 
   
Net Income
   
Weighted-
Average Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $138,133    66,226   $2.09 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      542    (0.02
  
 
 
   
 
 
   
 
 
 
Net income per diluted common share
  $138,133    66,768   $2.07 
  
 
 
   
 
 
   
 
 
 
 
   
Nine Months Ended September 26, 2020
 
   
Net Income
   
Weighted-
Average Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $303,260    62,057   $4.89 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      314    (0.03
  
 
 
   
 
 
   
 
 
 
Net income per diluted common share
  $303,260    62,371   $4.86 
  
 
 
   
 
 
   
 
 
 
 
   
Nine Months Ended September 28, 2019
 
   
Net Income
   
Weighted-
Average Shares
   
Per Share
 
   
(Numerator)
   
(Denominator)
   
Amount
 
Net income per basic common share
  $391,529    68,952   $5.68 
Effect of dilutive stock option, restricted stock, performance stock unit and restricted stock unit securities
   —      581    (0.05
  
 
 
   
 
 
   
 
 
 
Net income per diluted common share
  $391,529    69,533   $5.63 
  
 
 
   
 
 
   
 
 
 
For the three and nine months ended September 26, 2020, the Company had 0.4 million and 0.5 million stock
 
options, respectively,
that were antidilutive due to having higher exercise prices than the Company’s average stock price during the period. For both the three and nine months ended September 28, 2019, the Company had 0.1 million stock options that were antidilutive. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.
 
25

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
11 Accumulated Other Comprehensive Income
The components of accumulated other comprehensive
 
loss
 
are detailed as follows (in thousands):
 
   
Currency Translation
   
Unrealized
 
Loss
 
on Retirement Plans
   
Accumulated Other
Comprehensive Loss
 
Balance at December 31, 2019
  
$
(104,066
  
$
(15,405
  
$
(119,471
Other comprehensive loss, net of tax
  
 
(7,156
  
 
(49
  
 
(7,205
 
  
 
 
 
  
 
 
 
  
 
 
 
Balance at September 26, 2020
  
$
(111,222
  
$
(15,454
  
$
(126,676
 
  
 
 
 
  
 
 
 
  
 
 
 
12 Retirement Plans
The Company sponsors various retirement plans. The components of net periodic benefit cost other than the service cost component are included in other expense in the consolidated statements of operations. The summary of the components of net periodic pension costs for the plans for the three and nine months ended September 26, 2020 and September 28, 2019 is as follows (in thousands):
 
   
Three Months Ended
 
   
September 26, 2020
  
September 28, 2019
 
   
U.S.
   
U.S. Retiree
  
Non-U.S.
  
U.S.
   
U.S. Retiree
  
Non-U.S.
 
   
Pension
   
Healthcare
  
Pension
  
Pension
   
Healthcare
  
Pension
 
   
Plans
   
Plan
  
Plans
  
Plans
   
Plan
  
Plans
 
Service cost
  
$
—  
 
  
$
197
 
 
$
1,140
 
 
$
—  
 
  
$
124
 
 
$
1,081
 
Interest cost
  
 
—  
 
  
 
180
 
 
 
353
 
 
 
—  
 
  
 
194
 
 
 
426
 
Expected return on plan assets
  
 
—  
 
  
 
(214
 
 
(476
 
 
—  
 
  
 
(177
 
 
(535
Net amortization:
         
Prior service credit
  
 
—  
 
  
 
(4
 
 
(41
 
 
—  
 
  
 
(5
 
 
(38
Net actuarial loss
  
 
—  
 
  
 
—  
 
 
 
397
 
 
 
—  
 
  
 
—  
 
 
 
132
 
Net periodic pension cost
  
$
—  
 
  
$
159
 
 
$
1,373
 
 
$
—  
 
  
$
136
 
 
$
1,066
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 

   
Nine Months Ended
 
   
September 26, 2020
  
September 28, 2019
 
   
U.S.
   
U.S. Retiree
  
Non-U.S.
  
U.S.
   
U.S. Retiree
  
Non-U.S.
 
   
Pension
   
Healthcare
  
Pension
  
Pension
   
Healthcare
  
Pension
 
   
Plans
   
Plan
  
Plans
  
Plans
   
Plan
  
Plans
 
Service cost
  
$
—  
 
  
$
499
 
 
$
3,334
 
 
$
—  
 
  
$
374
 
 
$
3,238
 
Interest cost
  
 
—  
 
  
 
533
 
 
 
1,036
 
 
 
23
 
  
 
583
 
 
 
1,291
 
Expected return on plan assets
  
 
—  
 
  
 
(653
 
 
(1,386
 
 
—  
 
  
 
(531
 
 
(1,616
Net amortization:
         
Prior service credit
  
 
—  
 
  
 
(14
 
 
(122
 
 
—  
 
  
 
(15
 
 
(113
Net actuarial loss
  
 
—  
 
  
 
—  
 
 
 
1,164
 
 
 
—  
 
  
 
—  
 
 
 
399
 
Net periodic pension cost
  
$
—  
 
  
$
365
 
 
$
4,026
 
 
$
23
 
  
$
411
 
 
$
3,199
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
In 2019, the Company completed the termination of the Waters Retirement Restoration Plan.
During fiscal year 2020, the Company expects to contribute a total of approximately $3 million to $6 million to the Company’s defined benefit plans.
 
26

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
13 Business Segment Information
The Company’s business activities, for which discrete financial information is available, are regularly reviewed and evaluated by the chief operating decision maker. As a result of this evaluation, the Company determined that it has 2 operating segments: Waters
TM
and TA
TM
.
The Waters operating segment is primarily in the business of designing, manufacturing, selling and servicing LC and MS instruments, columns and other precision chemistry consumables that can be integrated and used along with other analytical instruments. The TA operating segment is primarily in the business of designing, manufacturing, selling and servicing thermal analysis, rheometry and calorimetry instruments. The Company’s two operating segments have similar economic characteristics; product processes; products and services; types and classes of customers; methods of distribution; and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes. Please refer to the consolidated financial statements for financial information regarding the 1 reportable segment of the Company.
Net sales for the Company’s products and services are as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Product net sales:
        
Waters instrument systems
  $225,790   $223,859   $550,018   $647,248 
Chemistry consumables
   108,175    100,256    300,525    299,801 
TA instrument systems
   42,274    46,458    114,799    131,292 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total product sales
   376,239    370,573    965,342    1,078,341 
Service net sales:
        
Waters service
   199,501    188,031    562,843    556,128 
TA service
   18,044    18,674    50,522    55,833 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total service sales
   217,545    206,705    613,365    611,961 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales
  $593,784   $577,278   $1,578,707   $1,690,302 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net sales are attributable to geographic areas based on the region of destination. Geographic sales information is presented below for the three and nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Net Sales:
        
Asia:
        
China
  $115,666   $111,657   $252,713   $314,544 
Japan
   44,779    46,840    131,098    136,302 
Asia Other
   75,737    79,278    219,660    226,276 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Asia
   236,182    237,775    603,471    677,122 
Americas:
        
United States
   172,267    164,164    465,093    487,261 
Americas Other
   27,180    32,294    81,312    97,840 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Americas
   199,447    196,458    546,405    585,101 
Europe
   158,155    143,045    428,831    428,079 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales
  $593,784   $577,278   $1,578,707   $1,690,302 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
27

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
Net sales by customer class are as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Pharmaceutical
  $343,001   $328,227   $926,582   $972,884 
Industrial
   179,128    171,352    474,592    502,679 
Academic and governmental
   71,655    77,699    177,533    214,739 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales
  $593,784   $577,278   $1,578,707   $1,690,302 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net sales for the Company recognized at a point in time versus over time are as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
September 26,
2020
   
September 28,
2019
 
Net sales recognized at a point in time:
        
Instrument systems
  $268,064   $270,317   $664,817   $778,540 
Chemistry consumables
   108,175    100,256    300,525    299,801 
Service sales recognized at a point in time (time & materials)
   92,145    75,240    238,754    232,806 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales recognized at a point in time
   468,384    445,813    1,204,096    1,311,147 
Net sales recognized over time:
        
Service and software maintenance sales recognized over time (contracts)
   125,400    131,465    374,611    379,155 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales
  $593,784   $577,278   $1,578,707   $1,690,302 
  
 
 
   
 
 
   
 
 
   
 
 
 
14 Recent Accounting Standard Changes and Developments
Recently Adopted Accounting Standards
In June 2016, accounting guidance was issued that modifies the recognition of credit losses related to financial assets, such as debt securities, trade receivables, net investments in leases,
off-balance
sheet credit exposures, and other financial assets that have the contractual right to receive cash. Current guidance requires the recognition of a credit loss when it is considered probable that a loss event has occurred. The new guidance requires the measurement of expected credit losses to be based upon relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the asset. As such, expected credit losses may be recognized sooner under the new guidance due to the broader range of information that will be required to determine credit loss estimates. The new guidance also amends the current other-than-temporary impairment model used for debt securities classified as
available-for-sale.
When the fair value of an
available-for-sale
debt security is below its amortized cost, the new guidance requires the total unrealized loss to be bifurcated into its credit and
non-credit
components. Any expected credit losses or subsequent recoveries will be recognized in earnings and any changes not considered credit related will continue to be recognized within other comprehensive income. This guidance is effective for annual and interim periods beginning after December 15, 2019. On January 1, 2020 the Company adopted this new standard using a modified retrospective method for all financial assets measured at amortized cost which only impacted the Company’s allowance on trade accounts receivable. The Company did not have any significant
off-balance
sheet credit exposures which would be impacted by the new guidance. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease of $1 million to stockholders’ deficit as of January 1, 2020 for the cumulative effect of adopting the new standard due to converting to the current expected credit loss model for the allowance recorded against trade accounts receivables. This accounting standard did not have an impact on the Company’s results of operations and cash flows.
 
28

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (Continued)
 
In January 2017, accounting guidance was issued that simplifies the accounting for goodwill impairment. The guidance eliminates step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations and cash flows.
In August 2018, accounting guidance was issued that modifies the disclosure requirements of fair value measurements. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirements identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
Recently Issued Accounting Standards
In August 2018, accounting guidance was issued that modifies the disclosure requirements of retirement benefit plans. The amendments remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosure and add disclosure requirement identified as relevant. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
In December 2019, accounting guidance was issued that simplifies the accounting for income taxes by removing certain exceptions within the current guidance, including the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
In January 2020, accounting guidance was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The update clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which should increase relevance and comparability of financial statement information. This guidance is effective for annual and interim periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect that the adoption of this standard will have a material impact on the Company’s financial position, results of operations and cash flows.
In March 2020, accounting guidance was issued that facilitates the effects of reference rate reform on financial reporting. The amendments in the update provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This temporary guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company may elect to apply this guidance for all contract modifications or eligible hedging relationships during that time period subject to certain criteria. The Company is still evaluating the impact of reference rate reform and whether this guidance will be adopted.
In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the
COVID-19
outbreak which, among other things, contains numerous income tax provisions. While the Company continues to evaluate the impact of the CARES Act, it does not currently believe it will have a material impact on the Company’s consolidated financial statements or related disclosures.
 
29

Item 2:
Management’s Discussion and Analysis of Financial Condition and
 
Results of Operations
 
Business and Financial Overview
The Company has two operating segments: Waters
TM
and TA
TM
. Waters products and services primarily consist of high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC
TM
” and, together with HPLC, referred to as “LC”), mass spectrometry (“MS”) and precision chemistry consumable products and related services. TA products and services primarily consist of thermal analysis, rheometry and calorimetry instrument systems and service sales. The Company’s products are used by pharmaceutical, biochemical, industrial, nutritional safety, environmental, academic and governmental customers. These customers use the Company’s products to detect, identify, monitor and measure the chemical, physical and biological composition of materials and to predict the suitability and stability of fine chemicals, pharmaceuticals, water, polymers, metals and viscous liquids in various industrial, consumer goods and healthcare products.
Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global pandemic of a novel strain of coronavirus
(“COVID-19”)
and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The Company is actively managing its business to respond to the
COVID-19
impact; however, the Company cannot reasonably estimate the length or severity of the
COVID-19
pandemic or the related response, or the extent to which the disruption may materially impact the Company’s business, consolidated financial position, consolidated results of operations or consolidated cash flows in the future.
To date, the
COVID-19
pandemic has not materially impacted our manufacturing facilities or those of the third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers. We have also not seen material disruptions or delays in shipments of certain materials or components of our products.
At every stage of the pandemic, we have taken decisive and appropriate actions, including a mandatory remote work policy for all employees with the exception of those in manufacturing, distribution, and certain laboratory environments, as well as restrictions on
non-essential
travel and visitors into our facilities. We have engaged a medical advisor to guide our policy deployment, and we continue to take proactive measures to guard the health of our global employee base, and the safety of all customer interactions. We have implemented rigorous protocols to promote a safe work environment in all of our locations around the world and during the quarter we began implementation of the second phase of a multi-phase process for the safe return of employees to our physical workplaces as social distancing, governmental requirements and other protocols allow.
The vast majority of the markets we serve, most notably the pharmaceutical, biomedical research, food/environmental and clinical markets, have continued to operate at various levels, and we are working closely with these customers to facilitate their seamless operation. Over the last several years, we have executed on a digital workplace strategy focused on providing modern connectivity and collaboration tools to our employees. Our strategic technology investments have enabled us to swiftly meet remote working needs as the
COVID-19
situation has escalated and evolved. From a customer-facing perspective, we are leveraging digital demand generation activities, including virtual demos across all regions in which we operate, remote instrument installations, virtual sales seminars, online product training, and a rapid acceleration in
one-on-one
communications over emails, phone and video conferencing.
While we initially anticipated that the
COVID-19
pandemic would have the biggest impact on the Company’s financial results in the second quarter of 2020, and future quarters would improve as countries lifted their business restrictions, the new outbreaks of
COVID-19
in the U.S. and elsewhere have demonstrated that the
COVID-19
pandemic continues to be fluid with uncertainties and risks remaining across the global economy. The Company is taking a proactive approach to managing through this unpredictability and has implemented a series of cost reduction actions that include salary reductions, furloughs and reductions in
non-essential
spending and other working capital reductions in order to preserve liquidity and enhance financial flexibility. A significant portion of these cost reduction actions were completed at the end of July 2020, and the Company’s costs of sales and operating expenses are expected to gradually increase to more normal levels as we move through the remainder of 2020. These cost reductions reflect our core assumption that business conditions improve through the remainder of 2020 and into 2021; however, our plan will be adjusted accordingly depending on the pace of the recovery.
 
30

The Company’s operating results are as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (dollars in thousands, except per share data):
 
   
Three Months Ended
  
Nine Months Ended
 
   
September 26,
2020
  
September 28,
2019
  
% change
  
September 26,
2020
  
September 28,
2019
  
% change
 
Revenues:
       
Product sales
  $376,239  $370,573  
 
2%
 
 $965,342  $1,078,341  
 
(10%
Service sales
   217,545   206,705  
 
5%
 
  613,365   611,961  
 
—  
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total net sales
   593,784   577,278  
 
3%
 
  1,578,707   1,690,302  
 
(7%
Costs and operating expenses:
       
Cost of sales
   262,342   241,055  
 
9%
 
  686,120   711,632  
 
(4%
Selling and administrative expenses
   135,430   126,036  
 
7%
 
  400,614   393,583  
 
2%
 
Research and development expenses
   34,971   34,333  
 
2%
 
  101,115   105,883  
 
(5%
Purchased intangibles amortization
   2,657   2,619  
 
1%
 
  7,900   7,164  
 
10%
 
Litigation provision
   —     —    
 
—  
 
  1,180   —    
 
—  
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Operating income
   158,384   173,235  
 
(9%
  381,778   472,040  
 
(19%
Operating income as a % of sales
  
 
26.7%
 
 
 
30.0%
 
  
 
24.2%
 
 
 
27.9%
 
 
Other expense
   (1,039  (496 
 
109%
 
  (2,149  (1,363 
 
58%
 
Interest expense, net
   (6,908  (8,001 
 
(14%
  (25,966  (16,826 
 
54%
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Income before income taxes
   150,437   164,738  
 
(9%
  353,663   453,851  
 
(22%
Provision for income taxes
   23,668   26,605  
 
(11%
  50,403   62,322  
 
(19%
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income
  $126,769  $138,133  
 
(8%
 $303,260  $391,529  
 
(23%
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income per diluted common share
  $2.03  $2.07  
 
(2%
 $4.86  $5.63  
 
(14%
In the third quarter of 2020, the Company’s sales increased 3% as compared to the third quarter of 2019. This increase in sales can be attributed to the increased demand for the Company’s products and services as business conditions improved as the interruption in business activities caused by the
COVID-19
pandemic across the world in 2020 were somewhat alleviated as our customers began to resume laboratory and manufacturing operations. Foreign currency translation increased sales by 1% for the third quarter of 2020.
For the first nine months of 2020, sales decreased by 7% as compared to the first nine months of 2019, as the response to the
COVID-19
pandemic caused interruptions in business activities and uncertainties that resulted in our customers reducing purchases of our products and services. Foreign currency translation decreased sales by 1%
year-to-date
in 2020.
The Company’s
year-to-date
sales in 2020 have one less calendar day as compared to the prior year. The Company will have two more calendar days in the fourth quarter of 2020 as compared to the fourth quarter of 2019. Unless otherwise noted, sales growth or decline percentages are presented as compared with the same period in the prior year. The Company’s acquisition of Andrew Alliance (as defined below) did not have a material impact on sales on either the quarter or
year-to-date
in 2020.
Instrument system sales decreased 1% and 15% for the third quarter and first nine months of 2020, respectively, as a result of weaker demand for our products by our customers due to interruption of business activities and the uncertainty caused by the
COVID-19
pandemic. Foreign currency translation in the third quarter was neutral and decreased instrument system sales by 1% for the first nine months of 2020.
Recurring revenues (combined sales of precision chemistry consumables and services) increased 6% and were flat for the third quarter and first nine months of 2020, respectively, also due to the interruption of business activities and the uncertainty caused by the
COVID-19
pandemic. Chemistry consumable sales increased 8% and were flat in the third quarter and first nine months of 2020, respectively, while service sales increased 5% and were flat in the third quarter and first nine months of 2020, respectively. In the third quarter, both chemistry consumable and service sales benefited from the increased demand for our products and services as our customers began to reopen laboratory and manufacturing operations. Recurring revenues were positively impacted by foreign currency translation, which increased sales by 1% in the third quarter; however, foreign currency translation negatively impacted sales by 1%
year-to-date
in 2020.
31

In the third quarter of 2020, the Company’s sales in Europe increased 11% with foreign currency translation adding 6% to Europe’s sales growth. The Americas’ sales grew 2%, as a 5% sales growth in the U.S. was partially offset by a decline in sales in Americas Other. Asia’s sales declined by 1% as China’s 4% sales growth was offset by declines in Japan as well as the other geographies in Asia.
Year-to-date,
the sales declines were broad-based across the world and were due to the weaker demand and disruption of business activities caused by the
COVID-19
lockdowns, except in Europe where sales were flat as compared to the prior year. Foreign currency translation was neutral to Europe’s sales
year-to-date.
The Americas’ sales declined 7%
year-to-date
and Asia’s sales declined 11% with foreign currency translation negatively impacting sales by 1%.
The
year-to-date
sales decline in Asia was primarily driven by the 20% decrease in sales in China. Sales in China increased 4% in the third quarter of 2020, improving from the 32% decline experienced in the first half of 2020, as the
COVID-19
business restrictions in China were slowly lifted. Excluding China’s sales, the Company’s
year-to-date
sales declined 4% with foreign currency translation negatively impacting sales by 1%.
Sales to our pharmaceutical and industrial customers in the third quarter improved as compared to the first half of 2020, as the demand for our products and services increased as these customers began to resume laboratory and manufacturing operations after the
COVID-19
lockdowns. Sales to pharmaceutical customers increased 5% in the third quarter and decreased 5%
year-to-date,
as the decline was primarily driven by the disruption in business activities caused by
COVID-19,
and the effect of foreign currency translation increasing sales by 1% for the third quarter and decreasing sales by 1%
year-to-date.
Combined sales to industrial customers, which include material characterization, food, environmental and fine chemical markets, increased 5% in the third quarter and declined 6%
year-to-date,
primarily due to lower demand caused by the
COVID-19
pandemic, with the effect of foreign currency translation increasing sales by 2% for the third quarter and being neutral
year-to-date.
In addition, TA’s sales declined 7% and 12% in the third quarter and first nine months of 2020, respectively.
Sales to academic and governmental customers declined by 8% and 17% in the third quarter and first nine months of 2020, respectively, as the demand for our products and services declined as the academic and governmental institutions adjusted their spending to mitigate the effects of the
COVID-19
pandemic. The most significant decline in academic and governmental sales in both the third quarter and
year-to-date
occurred in China where sales declined 32% and 42%, respectively, as the government mandated spending reductions. Foreign currency translation decreased academic and governmental sales by 1% for both the third quarter and first nine months of 2020. Sales to our academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and, as such, sales can vary significantly from period to period.
Operating income decreased 9% and 19% for the third quarter and first nine months of 2020, respectively. The third quarter operating income decrease can be attributed to the change in sales mix, unfavorable manufacturing absorption and unfavorable foreign currency translation. The
year-to-date
decline in operating income can be attributed to the decline in sales volumes caused by the
COVID-19
pandemic, unfavorable manufacturing absorption and unfavorable foreign currency translation. Both the quarter and
year-to-date
operating income declines were somewhat mitigated by a series of cost reduction actions that included salary reductions, furloughs and reductions in
non-essential
spending that increased operating income by approximately $22 million in the third quarter and $81 million
year-to-date
versus our operating plan. Operating income in the third quarter and first nine months of 2020 also included $6 million and $27 million, respectively, of severance-related costs in connection with a reduction in workforce and lease termination and exit costs. The Company’s plan was to reduce its expenses by approximately $100 million during 2020 to improve its financial position and liquidity to mitigate the impact of the decline in sales caused by
COVID-19.
The Company was able to realize approximately 85% of the cost action and restructuring savings
year-to-date
and the Company anticipates the remaining 15% of this savings plan will be achieved in the fourth quarter and the Company expects its spending to gradually return to more normal levels. This plan reflects our core assumption that business conditions improve throughout the remainder of 2020 and into 2021; however, this plan will be adjusted accordingly depending on the pace of recovery.
The Company generated $523 million and $451 million of net cash flows from operations in the first nine months of 2020 and 2019, respectively. This increase in operating cash flow was primarily a result of the $81 million reduction in expense from the cost actions implemented and working capital improvement during the third quarter of 2020.
 
32

Cash flows used in investing activities included capital expenditures related to property, plant, equipment and software capitalization of $125 million and $110 million in the first nine months of 2020 and 2019, respectively. In January of 2020, the Company acquired all of the outstanding stock of Andrew Alliance, S.A. and its two operating subsidiaries, Andrew Alliance USA, Inc. and Andrew Alliance France, SASU (collectively “Andrew Alliance”), for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration. This acquisition is not expected to have a material effect on the Company’s sales and expenses. The cash flows from investing activities in the first nine months of 2020 also included $50 million of capital expenditures related to the expansion of the Company’s precision chemistry consumable operations in the U.S. The Company has incurred $131 million on this facility through the end of the first nine months of 2020 and anticipates spending a total of $215 million to build and equip this new
state-of-the-art
manufacturing facility. Due to the uncertain business conditions caused by the
COVID-19
pandemic, in the second and third quarters of 2020 the Company temporarily slowed down the remaining construction and buildout of this facility.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. During the first nine months of 2020 and 2019, the Company repurchased $167 million and $1.9 billion of the Company’s outstanding common stock, respectively, under authorized share repurchase programs. While the Company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity, as well as to invest in research, technology and business acquisitions to further grow the Company’s sales and profits, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
Results of Operations
Sales by Geography
Geographic sales information is presented below for the three and nine months ended September 26, 2020 and September 28, 2019 (dollars in thousands):
 
   
Three Months Ended
  
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
% change
  
September 26,
2020
   
September 28,
2019
   
% change
 
Net Sales:
           
Asia:
           
China
  $115,666   $111,657   
 
4%
 
 $252,713   $314,544   
 
(20%
Japan
   44,779    46,840   
 
(4%
  131,098    136,302   
 
(4%
Asia Other
   75,737    79,278   
 
(4%
  219,660    226,276   
 
(3%
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
   
 
 
 
Total Asia
   236,182    237,775   
 
(1%
  603,471    677,122   
 
(11%
Americas:
           
United States
   172,267    164,164    5%   465,093    487,261    (5%
Americas Other
   27,180    32,294    (16%  81,312    97,840    (17%
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
   
 
 
 
Total Americas
   199,447    196,458   
 
2%
 
  546,405    585,101   
 
(7%
Europe
   158,155    143,045   
 
11%
 
  428,831    428,079   
 
—  
 
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
   
 
 
 
Total net sales
  $593,784   $577,278   
 
3%
 
 $1,578,707   $1,690,302   
 
(7%
  
 
 
   
 
 
   
 
 
  
 
 
   
 
 
   
 
 
 
In the third quarter of 2020, the Company’s sales increased 3% as compared to the third quarter of 2019. This increase in sales in the third quarter can be attributed to an improvement in business conditions as the interruption in business activities caused by the
COVID-19
pandemic improved as customers began to return from lockdowns. In the third quarter of 2020, the Company’s sales increased 5% in the U.S., 4% in China and 11% in Europe. Foreign currency translation added 6% to Europe’s sales growth in the third quarter of 2020. The Company’s sales decreased 4% in both Asia Other and Japan and 16% in Americas Other as the impact of the
COVID-19
pandemic continued affecting the business activities in these areas of the world.
For the first nine months of 2020, sales decreased 7% as compared to the first nine months of 2019, as the response to the
COVID-19
pandemic caused interruptions in business activities and uncertainties that resulted in our customers reducing purchases of our products and services. Foreign currency translation decreased sales by 1%
year-to-date.
The
year-to-date
sales declines occurred in all geographies and were a result of the weaker demand and disruption of business activities caused by the
COVID-19
lockdowns, except in Europe where sales were flat
year-to-date
as compared to the prior year. The most significant decline in sales
year-to-date
occurred in China, where sales declined 20%, as well as declines of 5% in the U.S., 4% in Japan and 17% in Americas Other.
 
33

Sales by Trade Class
Net sales by customer class are presented below for the three and nine months ended September 26, 2020 and September 28, 2019 (dollars in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 26,
2020
   
September 28,
2019
   
% change
   
September 26,
2020
   
September 28,
2019
   
% change
 
Pharmaceutical
  $343,001   $328,227    
5%
   $926,582   $972,884    
(5%)
 
Industrial
   179,128    171,352    
5%
    474,592    502,679    
(6%)
 
Academic and governmental
   71,655    77,699    
(8%)
    177,533    214,739    
(17%)
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total net sales
  $593,784   $577,278    
3%
   $1,578,707   $1,690,302    
(7%)
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Sales to pharmaceutical customers increased 5% in the third quarter as our customer demand improved during the quarter as customers began to return from the lockdowns.
Year-to-date,
sales declined 5% and can be attributed to the disruption in business activities caused by
COVID-19,
despite increased demand for our products and services from certain pharmaceutical customers who are involved
with COVID-19 diagnostic
testing and the development of new drugs and therapies. Foreign currency translation increased sales to pharmaceutical customers by 1% in the third quarter of 2020 and decreased sales by 1%
year-to-date.
Sales to industrial customers in the third quarter grew 5% as customer demand increased as customers began to resume laboratory and manufacturing operations as the
COVID-19
lockdowns were lifted. Sales to industrial customers
year-to-date
declined 6%. Sales to industrial customers were significantly impacted by the TA sales declines of 7% and 12% for the third quarter and first nine months of 2020, respectively. The decreases in sales to academic and governmental customers were broad-based across all product classes as academic and governmental customers adjusted their spending to mitigate the effects of the
COVID-19
pandemic.
Waters Products and Services Net Sales
Net sales for Waters products and services were as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (dollars in thousands):
 
   
Three Months Ended
 
   
September 26, 2020
   
% of
Total
   
September 28, 2019
   
% of
Total
   
% change
 
Waters instrument systems
  $225,790    
42%
   $223,859    
44%
    
1%
 
Chemistry consumables
   108,175    
21%
    100,256    
19%
    
8%
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Waters product sales
   333,965    
63%
    324,115    
63%
    
3%
 
Waters service
   199,501    
37%
    188,031    
37%
    
6%
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Waters net sales
  $533,466    
100%
   $512,146    
100%
    
4%
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
34

   
Nine Months Ended
 
   
September 26, 2020
   
% of
Total
   
September 28, 2019
   
% of
Total
   
% change
 
Waters instrument systems
  $550,018   
 
39%
 
  $647,248   
 
43%
 
  
 
(15%)
 
Chemistry consumables
   300,525   
 
21%
 
   299,801   
 
20%
 
  
 
—  
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Waters product sales
   850,543   
 
60%
 
   947,049   
 
63%
 
  
 
(10%)
 
Waters service
   562,843   
 
40%
 
   556,128   
 
37%
 
  
 
1%
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Waters net sales
  $1,413,386   
 
100%
 
  $1,503,177   
 
100%
 
  
 
(6%)
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Waters products and service sales increased 4% for the quarter and declined 6%
year-to-date.
Waters instrument system sales (LC and MS technology-based) increased 1% in the quarter as the weaker demand for our products and services by our customers due to the disruption and uncertainty caused by
the COVID-19 pandemic
were partially alleviated as customers began to return to their workplaces as the lockdowns were lifted. Precision chemistry consumables sales increased in the quarter by 8% and were driven by the increase in demand in all geographies with Asia’s chemistry sales increasing 17% for the quarter. Chemistry sales
year-to-date
were flat. Waters service sales increased 6% and 1% in the third quarter and first nine months of 2020, respectively, on an increase in service demand billings as customers began to return to work after business restrictions were lifted. Waters recurring revenues were also negatively impacted by one less calendar day in the first nine months of 2020 and the negative impact of foreign currency translation, which lowered sales by 1%
year-to-date
and increased sales by 1% in the third quarter of 2020.
In the third quarter of 2020, Waters sales increased 13% in Europe, 5% in the U.S. and 2% in China as customer demand improved. Foreign currency translation increased Europe’s sales growth by 5%. All other geographies’ sales declined during the quarter.
Year-to-date,
Waters sales in Europe increased 2% while all other geographies’ sales declined
year-to-date
with the most significant decline in sales occurring in China, which was down 21%
year-to-date.
Year-to-date
the impact of foreign currency on Europe’s sales were neutral.
TA Product and Services Net Sales
Net sales for TA products and services were as follows for the three and nine months ended September 26, 2020 and September 28, 2019 (dollars in thousands):
 
   
Three Months Ended
 
   
September 26, 2020
   
% of
Total
   
September 28, 2019
   
% of
Total
   
% change
 
TA instrument systems
  $42,274   
 
70%
 
  $46,458   
 
71%
 
  
 
(9%
TA service
   18,044   
 
30%
 
   18,674   
 
29%
 
  
 
(3%
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total TA net sales
  $60,318   
 
100%
 
  $65,132   
 
100%
 
  
 
(7%
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
   
Nine Months Ended
 
   
September 26, 2020
   
% of
Total
   
September 28, 2019
   
% of
Total
   
% change
 
TA instrument systems
  $114,799   
 
69%
 
  $131,292   
 
70%
 
  
 
(13%
TA service
   50,522   
 
31%
 
   55,833   
 
30%
 
  
 
(10%
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total TA net sales
  $165,321   
 
100%
 
  $187,125   
 
100%
 
  
 
(12%
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The decline in TA instrument system and service sales in the third quarter and first nine months of 2020 was primarily due to lower customer demand due to the
COVID-19
pandemic. The effect of foreign currency translation had a minimal impact on both the third quarter and the first nine months of 2020.
TA sales declined in all major regions in the third quarter and
year-to-date,
except for the U.S. and China where sales grew 3% and 16%, during the third quarter of 2020, respectively.
 
35

Cost of Sales
Cost of sales for the third quarter of 2020 increased 9% due to the increase in sales volume, change in sales mix, unfavorable manufacturing absorption and unfavorable foreign currency exchange. Cost of sales
year-to-date
decreased 4% on the lower sales volume, change in sales mix, unfavorable manufacturing absorption and unfavorable foreign currency exchange. Cost of sales is affected by many factors, including, but not limited to, foreign currency translation, product mix, product costs of instrument systems and amortization of software platforms. At current foreign currency exchange rates, the Company expects foreign currency translation to be neutral to gross profit for the remainder of 2020. To date, the Company has not had significant issues with its supply chain; however, the prolonged impact of
COVID-19
on businesses could negatively impact our suppliers’ ability to deliver goods to us, as well as possibly increase the cost of those goods used in our manufacturing operations.
Selling and Administrative Expenses
Selling and administrative expenses increased 7% and 2% for the third quarter and first nine months of 2020, respectively. The increase in selling and administrative expenses in these periods 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 $6 million and $27 million for the third quarter and
year-to-date
in 2020, respectively. Offsetting these increases in selling and administrative expenses were $16 million and $54 million of savings, in the third quarter and
year-to-date,
respectively, which includes
COVID-19
and restructuring cost saving actions that reduced planned salaries and
non-essential
spending. In addition, the effect of foreign currency translation increased selling and administrative expenses by 2% for the third quarter and was neutral
year-to-date.
As a percentage of net sales, selling and administrative expenses were 22.8% and 25.4% for the third quarter of 2020 and
year-to-date,
respectively, and 22.3% and 23.7% for the third quarter and first nine months of 2019, respectively.
Research and Development Expenses
Research and development expenses increased 2% in the third quarter and decreased 5%
year-to-date
in 2020. The research and development expenses for the third quarter and
year-to-date
include $5 million and $14 million, respectively, of cost action savings from salary reductions, furloughs and reductions in
non-essential
spending. The
year-to-date
impact of foreign currency exchange was neutral.
Interest Expense, Net
The decrease in net interest expense in the third quarter of 2020 can be attributed to lower interest rates as compared to the prior year. The increase in net interest expense
year-to-date
in 2020 can be attributed to higher debt balances in 2020 compared to 2019.
Provision for Income Taxes
The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of September 26, 2020. The Company has a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income for the nine months of 2020 and 2019 by $12 million and $15 million, respectively, and increased the Company’s net income per diluted share by $0.20 and $0.21, respectively.
The Company’s effective tax rate for the third quarter of 2020 and 2019 was 15.7% and 16.1%, respectively. The decrease in the effective income tax rate can be attributed to differences in the proportionate amounts
of pre-tax income
recognized in jurisdictions with different effective tax rates.
The Company’s effective tax rate for the first nine months of 2020 and 2019 was 14.3% and 13.7%, respectively. The effective tax rate for the first nine months of September 26, 2020 includes a $6 million income tax benefit related to certain restructuring charges and a $3 million tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 1.8 percentage points and 0.9 percentage points, respectively, for the first
 
36

nine months of September 26, 2020. The effective tax rate for the first nine months of September 28, 2019 includes a $3 million income tax benefit related to the finalization of certain regulations relating to the Tax Cuts and Jobs Act of 2017 and a $7 million income tax benefit related to stock-based compensation. These income tax benefits decreased the effective tax rate by 0.7 percentage points and 1.5 percentage points, respectively, for the first nine months of September 28, 2019. The remaining differences between the effective tax rates can primarily be attributed to differences in the proportionate amounts of
pre-tax
income recognized in jurisdictions with different effective tax rates.
 
37

Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):
 
   
Nine Months Ended
 
   
September 26, 2020
   
September 28, 2019
 
Net income
  $303,260   $391,529 
Depreciation and amortization
   91,091    80,319 
Stock-based compensation
   27,715    28,917 
Deferred income taxes
   1,089    1,817 
Change in accounts receivable
   96,955    57,897 
Change in inventories
   (8,139   (83,973
Change in accounts payable and other current liabilities
   46,721    (493
Change in deferred revenue and customer advances
   32,053    34,926 
Effect of the 2017 Tax Cuts & Jobs Act
   —      (3,229
Other changes
   (67,720   (56,518
  
 
 
   
 
 
 
Net cash provided by operating activities
   523,025    451,192 
Net cash (used in) provided by investing activities
   (226,561   825,441 
Net cash used in financing activities
   (267,968   (1,661,541
Effect of exchange rate changes on cash and cash equivalents
   10,723    (6,723
  
 
 
   
 
 
 
Increase (decrease) in cash and cash equivalents
  $39,219   $(391,631
  
 
 
   
 
 
 
Cash Flow from Operating Activities
Net cash provided by operating activities was $523 million and $451 million during the nine months ended September 26, 2020 and September 28, 2019, respectively. This increase in operating cash flow was primarily a result of the $54 million reduction in expense from the cost actions and working capital reductions implemented in 2020. The changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities, aside from the changes in net income:
 
  
The changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales. Days sales outstanding decreased to 76 days at September 26, 2020 as compared to 80 days at September 28, 2019.
 
  
The changes in inventory were primarily attributable to the reduction in the inventory build plan to adjust inventory levels for lower anticipated sales volume due to the
COVID-19
pandemic.
 
  
The changes in accounts payable and other current liabilities were a result of the timing of payments to vendors, as well as the annual payment of management incentive compensation.
 
  
Net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts.
 
  
Other changes were attributable to variation in the timing of various provisions, expenditures, prepaid income taxes and accruals in other current assets, other assets and other liabilities.
Cash Flow from Investing Activities
Net cash used in investing activities totaled $227 million in the nine months ended September 26, 2020 compared to net cash provided by investing activities that totaled $825 million in the nine months ended September 28, 2019. Additions to fixed assets and capitalized software were $125 million and $110 million in the nine months ended September 26, 2020 and September 28, 2019, respectively. In February 2018, the Company’s Board of Directors approved expanding its precision chemistry consumable manufacturing operations in the U.S. The Company anticipates spending an estimated $215 million to build and equip this new
state-of-the-art
manufacturing facility, which will be paid for with existing cash, investments and debt capacity. The Company incurred $50 million of costs associated with the construction of this facility during the nine months ended September 26, 2020. The Company has incurred $131 million on this facility through the end of the third quarter of 2020. Due to the uncertain business conditions caused by the
COVID-19
pandemic, the Company temporarily slowed down the completion of the remaining construction and buildout of this facility.
 
38

During the nine months ended September 26, 2020 and September 28, 2019, the Company purchased $22 million and $36 million of investments, respectively, while $2 million and $978 million of investments matured, respectively, and were used for financing activities described below.
On January 15, 2020, the Company acquired all of the outstanding stock of Andrew Alliance, for $80 million, net of cash acquired. The Company had an equity investment in Andrew Alliance that was valued at $4 million and included as part of the total consideration.
Cash Flow from Financing Activities
During the nine months ended September 26, 2020 and September 28, 2019, the Company’s net debt borrowings increased by $110 million and $210 million, respectively. As of September 26, 2020, the Company had a total of $1.6 billion in outstanding debt, which consisted of $960 million in outstanding senior unsecured notes and $615 million borrowed under a term loan under the credit agreement dated November 2017 (“2017 Credit Agreement”). As of September 26, 2020, the Company had a total amount available to borrow under the 2017 Credit Agreement of $1.2 billion after outstanding letters of credit. As of September 26, 2020, the Company was in compliance with all debt covenants.
In 2018 and 2019, the Company entered into a total of $560 million of
U.S.-to-Euro
interest rate cross-currency swap agreements that hedge the Company’s net investment in its Euro denominated net assets. As a result of entering into these agreements, the Company anticipates lowering net interest expense by approximately $12 million annually over the three-year term of the agreements.
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock over a
two-year
period. This new program replaced the remaining amounts available from the
pre-existing
program. During the first half of 2020 and 2019, the Company repurchased $167 million and $1.9 billion, respectively, of the Company’s outstanding common stock under authorized share repurchase programs. In addition, the Company repurchased $10 million and $8 million of common stock related to the vesting of restricted stock units during both the nine months ended September 26, 2020 and September 28, 2019, respectively.
The Company received $28 million and $34 million of proceeds from the exercise of stock options and the purchase of shares pursuant to the Company’s employee stock purchase plan during the nine months ended September 26, 2020 and September 28, 2019, respectively.
The Company had cash and cash equivalents of $397 million as of September 26, 2020. The majority of the Company’s cash and cash equivalents are generated from foreign operations, with $359 million held by foreign subsidiaries at September 26, 2020, of which $262 million was held in currencies other than U.S. dollars. While the Company believes it has sufficient levels of cash flow and access to its existing cash and cash equivalents, as well as the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, to fund operations and capital expenditures, service debt interest, finance potential acquisitions and continue the authorized stock repurchase program in the U.S., we have temporarily suspended our share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
Management believes, despite the impact of
COVID-19
on our business, as of the date of this report, that the Company’s financial position, along with expected future cash flows from earnings based on historical trends and the ability to raise funds from external sources and the borrowing capacity from existing, committed credit facilities, will be sufficient to service debt and fund working capital and capital spending requirements, authorized share repurchase amounts and potential acquisitions for at least the next twelve months.
Contractual Obligations, Commercial Commitments, Contingent Liabilities and Dividends
A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020. The Company reviewed its contractual obligations and commercial commitments as of September 26, 2020 and determined that there were no material changes outside the ordinary course of business from the information set forth in the Annual Report on Form
10-K.
 
39

From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes that it has meritorious arguments in its current litigation matters and that any outcome, either individually or in the aggregate, will not be material to the Company’s financial position or results of operations.
During fiscal year 2020, the Company expects to contribute a total of approximately $3 million to $6 million to its defined benefit plans, excluding the U.S. defined benefit pension plans.
The Company has not paid any dividends and has no plans, at this time, to pay any dividends in the future.
Off-Balance
Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or
off-balance
sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated (to the extent of the Company’s ownership interest therein) into the consolidated financial statements. The Company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests, derivative instruments or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.
The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to its current products, as well as claims relating to property damage or personal injury resulting from the performance of services by the Company or its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, the Company’s costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and management accordingly believes the estimated fair value of these agreements is immaterial.
Critical Accounting Policies and Estimates
In the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of long-lived assets, intangible assets and goodwill, income taxes, uncertain tax positions, warranty, litigation, pension and other postretirement benefit obligations, stock-based compensation and business combinations and asset acquisitions. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the nine months ended September 26, 2020. The Company did not make any changes in those policies during the nine months ended September 26, 2020.
New Accounting Pronouncements
Please refer to Note 14, Recent Accounting Standard Changes and Developments, in the Condensed Notes to Consolidated Financial Statements.
Special Note Regarding Forward-Looking Statements
Certain of the statements in this Quarterly Report on Form
10-Q,
including the information incorporated by reference herein, may contain forward-looking statements with respect to future results and events, including any statements regarding, among other items, anticipated trends or growth in the Company’s business, including, but not limited to, the impact of the ongoing
COVID-19
pandemic; the impact of new or proposed tariff or trade regulations or changes in the interpretation or enforcement of existing regulations; the impact of foreign currency translation on financial results; development of products by acquired businesses; the growth rate of sales and research and development expenses; the impact of costs associated with developing new technologies and bringing these new technologies to market; the impact of new product launches and the associated costs, such as the amortization expense related to
 
40

software platforms; geographic sales mix of business; development of products by acquired businesses and the amount of contingent payments to the sellers of an acquired business; anticipated expenses, including interest expense, capitalized software costs and effective tax rates; the impact of the 2017 Tax Act in the U.S.; the impact and outcome of the Company’s various ongoing tax audit examinations; the achievement of contractual milestones to preserve foreign tax rates; the impact and outcome of litigation matters; the impact of the loss of intellectual property protection; the impact of new accounting standards and pronouncements; the adequacy of the Company’s supply chain and manufacturing capabilities and facilities; the impact of regulatory compliance; the Company’s expected cash flow, borrowing capacity, debt repayment and refinancing; the Company’s ability to fund working capital, capital expenditures, service debt, repay outstanding lines of credit, make authorized share repurchases, fund potential acquisitions and pay any adverse litigation or tax audit liabilities, particularly in the U.S.; future impairment charges; the Company’s contributions to defined benefit plans; the Company’s expectations regarding changes to its financial position; compliance with applicable environmental laws; and the impact of recent acquisitions on sales and earnings.
Many of these statements appear, in particular, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form
10-Q.
Statements that are not statements of historical fact may be deemed forward-looking statements. You can identify these forward-looking statements by the use of the words “feels”, “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “suggests”, “appears”, “estimates”, “projects”, “should” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including, and without limitation:
 
  
Risks related to the effects of the
COVID-19
pandemic on our business, including: portions of our global workforce being unable to work fully and/or effectively due to working remotely, illness, quarantines, government actions, facility closures or other reasons related to the pandemic, increased risks of cyber attacks resulting from our temporary remote working model, disruptions in our manufacturing capabilities or to our supply chain, volatility and uncertainty in global capital markets limiting our ability to access capital, customers being unable to make timely payment for purchases and volatility in demand for our products.
 
  
Foreign currency exchange rate fluctuations that could adversely affect translation of the Company’s future sales, financial operating results and the condition of its
non-U.S.
operations, especially when a currency weakens against the U.S. dollar.
 
  
Current global economic, sovereign and political conditions and uncertainties, particularly regarding the effect of the
COVID-19
pandemic; new or proposed tariffs or trade regulations or changes in the interpretation or enforcement of existing regulations; the U.K. voting to exit the European Union as well as the Chinese government’s ongoing tightening of restrictions on procurement by government-funded customers; the Company’s ability to access capital and maintain liquidity in volatile market conditions; changes in timing and demand for the Company’s products among the Company’s customers and various market sectors or geographies, particularly if they should reduce capital expenditures or are unable to obtain funding, as in the cases of governmental, academic and research institutions; the effect of mergers and acquisitions on customer demand for the Company’s products; and the Company’s ability to sustain and enhance service.
 
  
Negative industry trends; changes in the competitive landscape as a result of changes in ownership, mergers and continued consolidation among the Company’s competitors; introduction of competing products by other companies and loss of market share; pressures on prices from customers or resulting from competition; regulatory, economic and competitive obstacles to new product introductions; lack of acceptance of new products; expansion of our business in developing markets; spending by certain
end-markets;
ability to obtain alternative sources for components and modules; and the possibility that future sales of new products related to acquisitions, which trigger contingent purchase payments, may exceed the Company’s expectations.
 
  
Increased regulatory burdens as the Company’s business evolves, especially with respect to the United States Food and Drug Administration and the United States Environmental Protection Agency, among others, as well as regulatory, environmental and logistical obstacles affecting the distribution of the Company’s products, completion of purchase order documentation by our customers and ability of customers to obtain letters of credit or other financing alternatives.
 
  
Risks associated with lawsuits, particularly involving claims for infringement of patents and other intellectual property rights.
 
41

  
The impact and costs incurred from changes in accounting principles and practices; the impact and costs of changes in statutory or contractual tax rates in jurisdictions in which the Company operates, specifically as it relates to the 2017 Tax Act in the U.S.; shifts in taxable income among jurisdictions with different effective tax rates; and the outcome of and costs associated with ongoing and future tax audit examinations or changes in respective country legislation affecting the Company’s effective rates.
Certain of these and other factors are discussed under the heading “Risk Factors” under Part I, Item 1A of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements, whether because of these factors or for other reasons. All forward-looking statements speak only as of the date of this Quarterly Report on Form
10-Q
and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by law, the Company does not assume any obligation to update any forward-looking statements.
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. Investments with maturities greater than 90 days are classified as investments, and are held primarily in U.S. dollar-denominated treasury bills and commercial paper, bank deposits and corporate debt securities. As of September 26, 2020, the Company estimates that a hypothetical adverse change of 100 basis points across all maturities would not have a material effect on the fair market value of its portfolio.
The Company is also exposed to the risk of exchange rate fluctuations. The Company maintains cash balances in various operating accounts in excess of federally insured limits, and in foreign subsidiary accounts in currencies other than the U.S. dollar. As of September 26, 2020 and December 31, 2019, $359 million out of $397 million and $249 million out of $337 million, respectively, of the Company’s total cash, cash equivalents and investments were held by foreign subsidiaries. In addition, $262 million out of $397 million and $176 million out of $337 million of cash, cash equivalents and investments were held in currencies other than the U.S. dollar at September 26, 2020 and December 31, 2019, respectively. As of September 26, 2020, the Company had no holdings in auction rate securities or commercial paper issued by structured investment vehicles.
Assuming a hypothetical adverse change of 10% in
year-end
exchange rates (a strengthening of the U.S. dollar), the fair market value of the Company’s cash, cash equivalents and investments held in currencies other than the U.S. dollar as of September 26, 2020 would decrease by approximately $18 million, of which the majority would be recorded to foreign currency translation in other comprehensive income within stockholders’ (deficit) equity.
There have been no other material changes in the Company’s market risk during the nine months ended September 26, 2020. For information regarding the Company’s market risk, refer to Item 7A of Part II of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.
Item 4:
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s chief executive officer and chief financial officer (principal executive officer and principal financial officer), with the participation of management, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form
10-Q.
Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 26, 2020 (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.
Changes in Internal Control Over Financial Reporting
No change was identified in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended September 26, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
42

Part II: 
Other Information
Item 1:
 Legal Proceedings
There have been no material changes in the Company’s legal proceedings during the three months ended September 26, 2020 as described in Item 3 of Part I of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.
Item 1A:
 Risk Factors
Information regarding risk factors of the Company is set forth under the heading “Risk Factors” under Part I, Item 1A in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2019, as filed with the SEC on February 25, 2020. The Company reviewed its risk factors as of September 26, 2020 and determined that there were no material changes from the ones set forth in the Form
10-K,
other than those included below. Note, however, the discussion under the subheading “Special Note Regarding Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form
10-Q.
These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.
The Company’s business has been and may continue to be negatively affected by outbreaks of disease, such as epidemics or pandemics, including the ongoing
COVID-19
pandemic
.
Outbreaks of disease, such as epidemics or pandemics, have and could continue to negatively affect the Company’s business. Both the Company’s domestic and international operations have been and continue to be adversely affected by the ongoing global
COVID-19
pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. In March 2020, the World Health Organization declared
COVID-19
a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, President Trump announced a National Emergency relating to the disease. Since then,
COVID-19
has continued to spread throughout the U.S. and globally. The
COVID-19
pandemic has caused significant volatility and uncertainty in U.S. and international markets, which has disrupted and is expected to continue to disrupt the Company’s business and could result in a prolonged economic downturn. The Company operates in over 35 countries, including those in the regions most impacted by the
COVID-19
pandemic. Many countries, including the U.S., have implemented measures such as quarantine,
shelter-in-place,
curfew and similar isolation measures, including government orders and other restrictions on the conduct of business operations. Such measures have had and are expected to continue to have adverse impacts on the U.S. and foreign economies of uncertain severity and duration and have had and may continue to have a negative impact on the Company’s operations, including the Company’s sales, supply chain and cash flow. Certain jurisdictions have experienced increased numbers of
COVID-19
infections following the
re-openings
of their economies and easing of restrictions, which, in some cases, has required closings of certain business activity and the imposition of other restrictions in response. It is unclear whether the increases in the number of infections will continue and amplify or whether any
so-called
“second waves” of
COVID-19
infections will be experienced in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy and our business. Additionally, the widespread pandemic has caused and is expected to continue to cause significant disruption of global financial markets, which may reduce the Company’s ability to access capital.
The
COVID-19
pandemic also has the potential to significantly impact our supply chain if our manufacturing facilities or those of third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. We may also see disruptions or delays in shipments of certain materials or components of our products.
As a result of the ongoing
COVID-19
pandemic, the Company has transitioned the majority of its workforce to a temporary remote working model, which may result in the Company experiencing lower workforce efficiency and productivity, which in turn may adversely affect the Company’s business, results of operations and financial condition. As company employees work from home and access the Company’s system remotely, the Company may be subject to heightened security risks, including the risks of cyber attacks. Additionally, if any of the Company’s key management employees are unable to perform their duties for a period of time, including as the result of illness, the Company’s business, results of operations and financial condition could be adversely affected.
 
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The Company cannot reasonably estimate the length or severity of the
COVID-19
pandemic or the related response, or the extent to which the disruption may continue to impact the Company’s business, financial position, results of operations and cash flows. Ultimately, the
COVID-19
pandemic could have a material adverse impact on the Company’s business, financial positions, results of operations and cash flows.
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The following table provides information about purchases by the Company during the three months ended September 26, 2020 of equity securities registered by the Company under the Exchange Act (in thousands, except per share data):
 
Period
  
Total Number
of Shares
Purchased (1)
   
Average

Price Paid
per Share
   
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs
   
Maximum Dollar
Value of Shares that

May Yet Be
Purchased Under
the Programs (2)
 
June 28, 2020 to July 25, 2020
   —     $—      —     $1,524,905 
July 26, 2020 to August 22, 2020
   —     $—      —     $1,524,905 
August 23, 2020 to September 26, 2020
   —     $—      —     $1,524,905 
  
 
 
     
 
 
   
Total
   —     $—      —     $1,524,905 
  
 
 
     
 
 
   
 
(1)
The Company repurchased less than one thousand shares of common stock at a cost of less than $1 million related to the vesting of restricted stock during the three months ended September 26, 2020.
(2)
In January 2019, the Company’s Board of Directors authorized the Company to repurchase up to $4 billion of its outstanding common stock in open market or private transactions over a
two-year
period. This new program replaced the remaining amounts available under the
pre-existing
authorization. During the second quarter of 2020, the Company has temporarily suspended its share repurchases due to the uncertain business conditions caused by the
COVID-19
pandemic.
 
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Item 6:
Exhibits
 
Exhibit
Number
  
Description of Document
10.1  President and Chief Executive Employment Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2020 (File No. 001-14010)).
10.2  Change of Control/Severance Agreement, dated July 14, 2020 between Waters Corporation and Udit Batra (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2020 (File No. 001-14010)).
31.1  Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2  Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1  Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
32.2  Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(*)
101  The following materials from Waters Corporation’s Quarterly Report on Form
10-Q
for the quarter ended September 26, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Operations (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Cash Flows (unaudited) and (vi) Condensed Notes to Consolidated Financial Statements (unaudited).
104  Cover Page Interactive Date File (formatted in iXBRL and contained in Exhibit 101).
 
(*)
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing, except to the extent the Company specifically incorporates it by reference.
 
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
WATERS CORPORATION
/s/ Sherry L. Buck
Sherry L. Buck
Senior Vice President and
Chief Financial Officer
Date: October 28, 2020
 
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